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Exhibit 10.2
 
[FORM OF SENIOR CONVERTIBLE NOTE]
 
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a)
HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE
SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET
FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.
 
Pacific Ethanol, Inc.
 
Senior Convertible Note
 
Issuance Date:  September  __, 2010
Original Principal Amount: U.S. $[         ]

FOR VALUE RECEIVED, Pacific Ethanol, Inc., a Delaware corporation (the
“Company”), hereby promises to pay to the order of [HUDSON BAY MASTER FUND,
LTD.], [OTHER BUYERS] or its registered assigns (“Holder”) the amount set out
above as the Original Principal Amount (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the “Principal”) when due,
whether upon the Maturity Date, on any Installment Date with respect to the
Installment Amount due on such Installment Date (each as defined below),
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest (“Interest”) on any outstanding Principal (as
defined below) at the applicable Interest Rate (as defined below) from the date
set out above as the Issuance Date (the “Issuance Date”) until the same becomes
due and payable, whether upon the Maturity Date, on any Installment Date with
respect to the Installment Amount due on such Installment Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof). This Senior Convertible Note (including all Senior Convertible Notes
issued in exchange, transfer or replacement hereof, this “Note”) is one of an
issue of Senior Convertible Notes issued pursuant to the Securities Purchase
Agreement (as defined below) on the Closing Date (as defined below)
(collectively, the “Notes” and such other Senior Convertible Notes, the “Other
Notes”). Certain capitalized terms used herein are defined in Section 31.
 
 
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1. PAYMENTS OF PRINCIPAL. On each Installment Date (which includes the Maturity
Date), the Company shall pay to the Holder an amount equal to the Installment
Amount due on such Installment Date in accordance with Section 8.  On the
Maturity Date, the Company shall pay to the Holder an amount in cash
representing all outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges on such Principal and Interest.  Other than as
specifically permitted by this Note, the Company may not prepay any portion of
the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges on Principal and Interest, if any.
 
2. INTEREST; INTEREST RATE.  Interest on this Note shall accrue at the Interest
Rate and shall commence accruing on the Issuance Date and Interest shall be
computed on the basis of a 360-day year and twelve 30-day months and shall be
payable in arrears on each Installment Date and shall compound each calendar
month and shall be payable in accordance with the terms of this Note.  From and
after the occurrence and during the continuance of any Event of Default, the
Interest Rate shall automatically be increased to fifteen percent (15%). In the
event that such Event of Default is subsequently cured, the adjustment referred
to in the preceding sentence shall cease to be effective as of the date of such
cure, provided that the Interest as calculated and unpaid at such increased rate
during the continuance of such Event of Default shall continue to apply to the
extent relating to the days after the occurrence of such Event of Default
through and including the date of such cure of such Event of Default.
 
3. CONVERSION OF NOTES. This Note shall be convertible into shares of Common
Stock (as defined below), on the terms and conditions set forth in this Section
3.
 
(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or
times on or after the Issuance Date, the Holder shall be entitled to convert any
portion of the outstanding and unpaid Conversion Amount (as defined below) into
fully paid and nonassessable shares of Common Stock in accordance with Section
3(c), at the Conversion Rate (as defined below).  The Company shall not issue
any fraction of a share of Common Stock upon any conversion.  If the issuance
would result in the issuance of a fraction of a share of Common Stock, the
Company shall round such fraction of a share of Common Stock up to the nearest
whole share. The Company shall pay any and all transfer, stamp, issuance and
similar taxes that may be payable with respect to the issuance and delivery of
Common Stock upon conversion of any Conversion Amount.
 
(b) Conversion Rate. The number of shares of Common Stock issuable upon
conversion of any Conversion Amount pursuant to Section 3(a) shall be determined
by dividing (x) such Conversion Amount by (y) the Conversion Price (the
“Conversion Rate”).
 
(i) "Conversion Price" means, for any Conversion Date, the lesser of (x) the
Fixed Conversion Price and (y) solely to the extent either (I) an Event of
Default has occurred and is continuing or (II) the Company has elected (or is
deemed to have elected) a Company Conversion (as defined below) of the
Installment Amount payable on the Installment Date of the thirty day period in
which the applicable Conversion Date occurs, the Installment Period Conversion
Price.
 
 
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(ii) “Conversion Amount” means the sum of (x) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, (y) all accrued and unpaid Interest with respect to such portion of
the Principal amount and accrued and unpaid Late Charges with respect to such
portion of such Principal and such Interest and (z) except with respect to a
Company Conversion (as defined in Section 8 hereof) or a Company Redemption (as
defined in Section 8 hereof), the applicable Make-Whole Amount.
 
(iii) “Fixed Conversion Price” means, as of any Conversion Date or other
applicable date of determination, $0.85, subject to adjustment as provided
herein.
 
(iv) “Installment Period Conversion Price” means, for any Conversion Date
occurring (i) during any Installment Market Price Period, the Installment Market
Price then in effect for such Installment Market Price Period and (ii) during
any Installment Variable Price Period, the Installment Variable Price then in
effect for such Conversion Date.
 
(v) “Installment Market Price Period” means the fifteen calendar day period
following (and inclusive of) an Installment Date.
 
(vi) “Installment Market Price” means with respect to any Installment Market
Price Period, the Market Price as of the Installment Date in such Installment
Market Price Period.  All such determinations to be appropriately adjusted for
any share dividend, share split, share combination or other similar transaction
during the applicable Installment Market Price Period.
 
(vii) “Installment Variable Price Period” means the period commencing on the
calendar day immediately following the end of an Installment Market Price Period
and ending (x) on the calendar day immediately prior to the next Installment
Date or (y) on and including the Maturity Date, as applicable.
 
(viii) “Installment Variable Price” means, with respect to any Conversion Date
during the applicable Installment Variable Price Period or at any time an Event
of Default has occurred and is continuing, the Closing Bid Price on the Trading
Day immediately preceding the applicable Conversion Date.  All such
determinations to be appropriately adjusted for any share dividend, share split,
share combination or other similar transaction during the period commencing on
the close of trading on the Trading Day immediately preceding the applicable
Conversion Date ending at the time of conversion on such Conversion Date.
 
 
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(c) Mechanics of Conversion.
 
(i) Optional Conversion. To convert any Conversion Amount into shares of Common
Stock on any date (a “Conversion Date”), the Holder shall (A) deliver (whether
via facsimile or otherwise), for receipt on or prior to 11:59 p.m., New York
time, on such date, a copy of an executed notice of conversion in the form
attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if
required by Section 3(c)(iii), surrender this Note to a nationally recognized
overnight delivery service for delivery to the Company (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or
destruction as contemplated by Section 18(b)). On or before the first (1st)
Trading Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile an acknowledgment of confirmation of receipt of such
Conversion Notice to the Holder and the Company’s transfer agent (the “Transfer
Agent”). On or before the third (3rd) Trading Day following the date of receipt
of a Conversion Notice (the “Share Delivery Date”), the Company shall (1)
provided that the Transfer Agent is participating in The Depository Trust
Company’s (“DTC”) Fast Automated Securities Transfer Program, credit such
aggregate number of shares of Common Stock to which the Holder shall be entitled
to the Holder’s or its designee’s balance account with DTC through its Deposit
Withdrawal at Custodian system or (2) if the Transfer Agent is not participating
in the DTC Fast Automated Securities Transfer Program, issue and deliver (via
reputable overnight courier) to the address as specified in the Conversion
Notice, a certificate, registered in the name of the Holder or its designee, for
the number of shares of Common Stock to which the Holder shall be entitled. If
this Note is physically surrendered for conversion as required by Section
3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Trading Days
after receipt of this Note and at its own expense, issue and deliver to the
Holder (or its designee) a new Note (in accordance with Section 18(d))
representing the outstanding Principal not converted. The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.  In the event of a partial
conversion of this Note pursuant hereto, the Principal amount converted shall be
deducted from the Installment Amount(s) relating to the Installment Date(s) as
set forth in the applicable Conversion Notice.
 
(ii) Company’s Failure to Timely Convert. If the Company shall fail, for any
reason or for no reason, to issue to the Holder within three (3) Trading Days
after the Company’s receipt of a Conversion Notice (whether via facsimile or
otherwise), a certificate for the number of shares of Common Stock to which the
Holder is entitled and register such shares of Common Stock on the Company’s
share register or to credit the Holder’s or its designee’s balance account with
DTC for such number of shares of Common Stock to which the Holder is entitled
upon the Holder’s conversion of any Conversion Amount (as the case may be) (a
“Conversion Failure”) and if on or after such third (3rd) Trading Day the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Holder of shares of Common Stock
issuable upon such conversion that the Holder anticipated receiving from the
Company, then, in addition to all other remedies available to the Holder, the
Company shall, within three (3) Trading Days after the Holder’s request and in
the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to
the Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the Company’s obligation to deliver such
certificate (and to issue such shares of Common Stock) shall terminate, or (ii)
promptly honor its obligation to deliver to the Holder a certificate or
certificates representing such shares of Common Stock or credit the Holder’s
balance account with DTC for the number of shares of Common Stock to which the
Holder is entitled upon the Holder’s conversion hereunder (as the case may be)
and pay cash to the Holder in an amount equal to the excess (if any) of the
Buy-In Price over the product of (A) such number of shares of Common Stock
multiplied by (B) the Closing Sale Price of the Common Stock on the Trading Day
immediately preceding the Conversion Date.
 
 
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(iii) Registration; Book-Entry.  The Company shall maintain a register (the
“Register”) for the recordation of the names and addresses of the holders of
each Note and the principal amount of the Notes held by such holders (the
“Registered Notes”).  The entries in the Register shall be conclusive and
binding for all purposes absent manifest error.  The Company and the holders of
the Notes shall treat each Person whose name is recorded in the Register as the
owner of a Note for all purposes, including, without limitation, the right to
receive payments of Principal and Interest hereunder, notwithstanding notice to
the contrary.  A Registered Note may be assigned or sold in whole or in part
only by registration of such assignment or sale on the Register.  Upon its
receipt of a request to assign or sell all or part of any Registered Note by a
Holder, the Company shall record the information contained therein in the
Register and issue one or more new Registered Notes in the same aggregate
principal amount as the principal amount of the surrendered Registered Note to
the designated assignee or transferee pursuant to Section 18.  Notwithstanding
anything to the contrary set forth herein, upon conversion of any portion of
this Note in accordance with the terms hereof, the Holder shall not be required
to physically surrender this Note to the Company unless (A) the full Conversion
Amount represented by this Note is being converted or (B) the Holder has
provided the Company with prior written notice (which notice may be included in
a Conversion Notice) requesting reissuance of this Note upon physical surrender
of this Note.  The Holder and the Company shall maintain records showing the
Principal, Interest and Late Charges, if any, converted and/or paid (as the case
may be) the dates of such conversions and/or payments (as the case may be) or
shall use such other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon conversion
 
 
 
 
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(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes submitted for conversion, the Company, subject to Section 3(d), shall
convert from each holder of Notes electing to have Notes converted on such date
a pro rata amount of such holder’s portion of its Notes submitted for conversion
based on the principal amount of Notes submitted for conversion on such date by
such holder relative to the aggregate principal amount of all Notes submitted
for conversion on such date. In the event of a dispute as to the number of
shares of Common Stock issuable to the Holder in connection with a conversion of
this Note, the Company shall issue to the Holder the number of shares of Common
Stock not in dispute and resolve such dispute in accordance with Section 23.
 
(d) Limitations on Exercises.
 
(i) Beneficial Ownership. Notwithstanding anything to the contrary contained in
this Note, this Note shall not be convertible by the Holder hereof, and the
Company shall not effect any conversion of this Note or otherwise issue any
shares of Common Stock pursuant hereto, to the extent (but only to the extent)
that after giving effect to such conversion or other share issuance hereunder
the Holder (together with its affiliates and joint actors) would beneficially
own in excess of  [4.99%][9.99%]1 (the “Maximum Percentage”) of the
Common Stock.  To the extent the above limitation applies, the determination of
whether this Note shall be convertible (vis-à-vis other convertible, exercisable
or exchangeable securities owned by the Holder or any of its affiliates) and of
which such securities shall be convertible (as among all such securities owned
by the Holder) shall, subject to such Maximum Percentage limitation, be made on
the basis of the first submission to the Company for conversion, exercise or
exchange (as the case may be).  For purposes of the first sentence of this
paragraph, the aggregate number of shares of Common Stock beneficially owned by
such Person and its affiliates and joint actors shall include the number of
shares of Common Stock issuable upon conversion of this Note with respect to
which the determination of such sentence is being made, but shall exclude shares
of Common Stock which would be issuable upon (i) conversion of the remaining,
unconverted portion of this Note beneficially owned by such Person and its
affiliates or joint actors and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company beneficially owned by
such Person and its affiliates or joint actors (including, without limitation,
the Warrants, any Other Notes, any other convertible notes or convertible
preferred shares), which in each case is subject to a limitation on conversion
or exercise analogous to the limitation contained herein.  For the purposes of
this paragraph, beneficial ownership and all determinations and calculations
(including, without limitation, with respect to calculations of percentage
ownership) shall be determined in accordance with Section 13(d) of the 1934 Act
(as defined in the Securities Purchase Agreement) and the rules and regulations
promulgated thereunder except as set forth in the preceding sentence.  No prior
inability to convert this Note pursuant to this paragraph shall have any effect
on the applicability of the provisions of this paragraph with respect to any
subsequent determination of convertibility.  The provisions of this paragraph
shall be implemented in a manner otherwise than in strict conformity with the
terms of this paragraph to correct this paragraph (or any portion hereof) which
may be defective or inconsistent with the intended Maximum Percentage beneficial
ownership limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such Maximum Percentage
limitation. The limitations contained in this paragraph shall apply to a
successor Holder of this Note.  The holders of Common Stock shall be third party
beneficiaries of this paragraph and the Company may not waive this paragraph
without the consent of holders of a majority of its Common Stock.  For any
reason at any time, upon the written or oral request of the Holder, the Company
shall within one (1) Business Day confirm orally and in writing to the Holder
the number of shares of Common Stock then outstanding, including by virtue of
any prior conversion or exercise of convertible or exercisable securities into
Common Stock, including, without limitation, pursuant to this Note or securities
issued pursuant to the Securities Purchase Agreement.  By written notice to the
Company, any Holder may increase or decrease the Maximum Percentage to any other
percentage not in excess of 9.99% or less than 4.99% as specified in such
notice; provided that (i) any such increase will not be effective until the 61st
day after such notice is delivered to the Company, and (ii) any such increase or
decrease will apply only to the Holder sending such notice and not to any other
holder of Notes.
 

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1 Insert percentage elected by such Buyer on or prior to the Closing Date
 
 
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(ii) [Intentionally Omitted].
 
4. RIGHTS UPON EVENT OF DEFAULT.
 
(a) Event of Default.  Each of the following events shall constitute an “Event
of Default”:
 
(i) at any time following the Eligibility Date, if (x) a Current Public
Information Failure has occurred and (y) a Registration Statement (or the
prospectus contained therein) is unavailable to any holder of Registrable
Securities (as defined in the Registration Rights Agreement) for sale of all of
such holder’s Registrable Securities required to be registered on such
Registration Statement in accordance with the terms of the Registration Rights
Agreement (i.e., subject to the provisions contained in the Registration Rights
Agreement pertaining to Cut-Back Shares, as such term is defined therein, to the
extent such Cut-Back Shares are not required to be registered on such
Registration Statement), and such Current Public Information Failure, lapse or
unavailability continues for a period of five (5) consecutive days or for more
than an aggregate of ten (10) days in any 365-day period (excluding days during
an Allowable Grace Period (as defined in the Registration Rights Agreement));
 
(ii) the suspension from trading or the failure of the Common Stock to be
trading or listed (as applicable) on an Eligible Market for a period of five (5)
consecutive days;
 
 
 
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(iii) the Company’s (A) failure to cure a Conversion Failure or a Delivery
Failure (as defined in the Warrants) by delivery of the required number of
shares of Common Stock within five (5) Trading Days after the applicable
Conversion Date or exercise date (as the case may be) or (B) notice, written or
oral, to any holder of the Notes or Warrants, including, without limitation, by
way of public announcement or through any of its agents, at any time, of its
intention not to comply, as required, with a request for conversion of any Notes
into shares of Common Stock that is requested in accordance with the provisions
of the Notes, other than pursuant to Section 3(d), or a request for exercise of
any Warrants for Warrant Shares in accordance with the provisions of the
Warrants;
 
(iv) the Company’s or any Subsidiary’s failure to pay to the Holder any amount
of Principal, Interest, Late Charges or other amounts when and as due under this
Note (including, without limitation, the Company’s or any Subsidiary’s failure
to pay any redemption payments or amounts hereunder) or any other Transaction
Document (as defined in the Securities Purchase Agreement) or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated hereby and thereby, except, in the case of a
failure to pay Interest and Late Charges when and as due, in which case only if
such failure remains uncured for a period of at least five (5) days;
 
(v) the Company fails to remove any restrictive legend on any certificate or any
shares of Common Stock issued to the Holder upon conversion or exercise (as the
case may be) of any Securities acquired by the Holder under the Securities
Purchase Agreement (including this Note) as and when required by such Securities
or the Securities Purchase Agreement, unless otherwise then prohibited by
applicable federal securities laws, and any such failure remains uncured for at
least five (5) days;
 
(vi) the occurrence of any default under, redemption of or acceleration prior to
maturity of Indebtedness (as defined in the Securities Purchase Agreement) of
the Company or any of its Subsidiaries other than (x) Indebtedness of New PE
Holdco (as defined in the Securities Purchase Agreement) and (y) Indebtedness of
the Company described in Item 2 of Schedule 3(s) of the Securities Purchase
Agreement, in the aggregate, in excess of $300,000, provided that, to the extent
a default under any Permitted Senior Indebtedness has been waived in writing by
the holders of such Permitted Senior Indebtedness, such default shall not be
deemed to be a default of such Permitted Senior Indebtedness for purposes of
this Section 4(a)(vi) or Section 31(r) and such default shall only be deemed to
be a default of such Indebtedness in the case of (A) a default (other than a
payment default) or breach of a covenant or other term or condition that is
curable, if such default or breach remains uncured for a period of fifteen (15)
consecutive Trading Days and/or (B) a payment default, if such default remains
uncured for a period of ten (10) consecutive Trading Days;
 
(vii) the occurrence of any payment default under, redemption of or acceleration
prior to maturity of (x) any Indebtedness of New PE Holdco and/or (y)
Indebtedness of the Company described in Item 2 of Schedule 3(s) of the
Securities Purchase Agreement, in the aggregate, in excess of $300,000, provided
that, such payment default shall only be deemed to be a payment default of such
Indebtedness of New PE Holdco for purposes of this Section 4(a)(vii) or Section
31(r) if such payment default remains uncured for a period of ten (10)
consecutive Trading Days;
 
 
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(viii) bankruptcy, insolvency, reorganization or liquidation proceedings or
other proceedings for the relief of debtors shall be instituted by or against
the Company or any Subsidiary and, if instituted against the Company or any
Subsidiary by a third party, shall not be dismissed within thirty (30) days of
their initiation;
 
(ix) the commencement by the Company or any Subsidiary of a voluntary case or
proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree, order, judgment or other similar document in respect of
the Company or any Subsidiary in an involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a UCC foreclosure sale or any other similar action under federal, state
or foreign law;
 
(x) the entry by a court of (i) a decree, order, judgment or other similar
document in respect of the Company or any Subsidiary of a voluntary or
involuntary case or proceeding under any applicable federal, state or foreign
bankruptcy, insolvency, reorganization or other similar law or (ii) a decree,
order, judgment or other similar document adjudging the Company or any
Subsidiary as bankrupt or insolvent, or approving as properly filed a petition
seeking liquidation, reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Subsidiary under any applicable federal,
state or foreign law or (iii) a decree, order, judgment or other similar
document appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree, order, judgment or other
similar document or any such other decree, order, judgment or other similar
document unstayed and in effect for a period of thirty (30) consecutive days;
 
 
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(xi) a final judgment, judgments, any arbitration or mediation award or any
settlement of any litigation or any other satisfaction of any claim made by any
Person pursuant to any litigation, as applicable, (each a “Judgment”, and
collectively, the “Judgments”) with respect to the payment of cash, securities
and/or other assets with an aggregate fair value (as determined in accordance
with Section 7(a)(iv) below) in excess of $300,000 are rendered against, agreed
to or otherwise accepted by, the Company and/or any of its Subsidiaries
(including, without limitation any claim against the Company and/or any of its
Subsidiaries by, or on behalf of, or related to, Delta-T Corporation or any of
its subsidiaries, affiliates, successors or assigns, whether pursuant to In re:
Delta-T Corporation v. Pacific Ethanol, Inc., Civil Action Number-3:08CV524
filed in the United States District Court for the Eastern District of Virginia
(Richmond Division) (the “Delta Case”), any Judgment arising out of or relating
to the Delta Case or any claims of any Person incurred in connection therewith
or pursuant to the EPT Agreements (as defined in the Delta Case) or otherwise
arising in connection therewith) and which Judgments are not, within thirty (30)
days after the entry thereof, bonded, discharged or stayed pending appeal, or
are not discharged within thirty (30) days after the expiration of such stay;
provided, however, any Judgment which is covered by insurance or an indemnity
from a credit worthy party shall not be included in calculating the $300,000
amount set forth above so long as the Company provides the Holder a written
statement from such insurer or indemnity provider (which written statement shall
be reasonably satisfactory to the Holder) to the effect that such Judgment is
covered by insurance or an indemnity and the Company or such Subsidiary (as the
case may be) will receive the proceeds of such insurance or indemnity within
thirty (30) days of the issuance of such Judgment;
 
(xii) the Company and/or any Subsidiary, individually or in the aggregate,
either (i) fails to pay, when due, or within any applicable grace period, any
payment with respect to any Indebtedness in excess of $150,000 due to any third
party (other than, with respect to unsecured Indebtedness only, payments
contested by the Company and/or such Subsidiary (as the case may be) in good
faith by proper proceedings and with respect to which adequate reserves have
been set aside for the payment thereof in accordance with GAAP) or is otherwise
in breach or violation of any agreement for monies owed or owing in an amount in
excess of $150,000, which breach or violation permits the other party thereto to
declare a default or otherwise accelerate amounts due thereunder, or (ii) suffer
to exist any other circumstance or event that would, with or without the passage
of time or the giving of notice, result in a default or event of default under
any agreement binding the Company or any Subsidiary, which default or event of
default would or is likely to have a material adverse effect on the business,
assets, operations (including results thereof), liabilities, properties,
condition (including financial condition) or prospects of the Company or any of
its Subsidiaries, individually or in the aggregate;
 
(xiii) other than as specifically set forth in another clause of this
Section 4(a), the Company or any Subsidiary breaches any representation,
warranty, covenant or other term or condition of any Transaction Document (as
defined in the Securities Purchase Agreement), and, only, in the case of a
breach of a covenant or other term or condition that is curable, if such breach
remains uncured for a period of ten (10) consecutive Trading Days;
 
(xiv) any breach or failure in any respect by the Company or any Subsidiary to
comply with any provision of Section 11 or 14 of this Note;
 
 
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(xv) any Material Adverse Effect (as defined in the Securities Purchase
Agreement) occurs (other than with respect to any Excluded Events);
 
(xvi) any provision of any Transaction Document (shall at any time for any
reason (other than pursuant to the express terms thereof) cease to be valid and
binding on or enforceable against the parties thereto, or the validity or
enforceability thereof shall be contested by any party thereto, or a proceeding
shall be commenced by the Company or any Subsidiary or any governmental
authority having jurisdiction over any of them, seeking to establish the
invalidity or unenforceability thereof, or the Company or any Subsidiary shall
deny in writing that it has any liability or obligation purported to be created
under any Transaction Document;
 
(xvii) the Company fails to acquire the Minimum New PE Holdco Share Amount (as
defined in the Securities Purchase Agreement) of the capital stock of New PE
Holdco on or prior to three calendar days after the Closing Date; or
 
(xviii) any Event of Default (as defined in the Other Notes) occurs with respect
to any Other Notes.
 
Upon the occurrence of an Event of Default with respect to this Note or any
Other Note, the Company shall promptly deliver written notice thereof via
facsimile and overnight courier (with next day delivery specified) (an “Event of
Default Notice”) to the Holder.
 
(b) Redemption Right. At any time after the earlier of the Holder’s receipt of
an Event of Default Notice and the Holder becoming aware of an Event of Default
(such earlier date, the “Event of Default Right Commencement Date”) and ending
(such ending date, the “Event of Default Right Expiration Date”) on the tenth
(10th) Trading Day after the later of (x) the date such Event of Default is
cured and (y) the Holder’s receipt of an Event of Default Notice that includes
(I) a reasonable description of the applicable Event of Default, (II) a
certification as to whether, in the opinion of the Company, such Event of
Default is capable of being cured and, if applicable, a reasonable description
of any existing plans of the Company to cure such Event of Default and (III) a
certification as to the date the Event of Default occurred and the applicable
Event of Default Right Expiration Date, the Holder may elect to redeem all or
any portion of this Note by delivering written notice thereof (the “Event of
Default Redemption Notice”) to the Company, which Event of Default Redemption
Notice shall indicate the portion of this Note the Holder is electing to redeem.
If the Company has received notices from holders of Notes electing to redeem at
least 20% of the principal amount of the Notes then outstanding prior to the
applicable Event of Default Expiration Date (the date of the Company’s receipt
of such notice, the “Event of Default Redemption Trigger Date”), each portion of
this Note subject to redemption by the Company pursuant to this Section 4(b)
shall be redeemed by the Company at a price equal to the greater of (i) the
product of (A) the Conversion Amount to be redeemed multiplied by (B) the
Redemption Premium and (ii) the product of (X) the Conversion Rate with respect
to the Conversion Amount in effect at such time as the Holder delivers an Event
of Default Redemption Notice multiplied by (Y) the greatest Closing Sale Price
of the Common Stock during the period beginning on the date immediately
preceding such Event of Default and ending on the Trading Day immediately prior
to the Trading Day during which the Company pays the Event of Default Redemption
Price (as defined below) to the Holder (the “Event of Default Redemption
Price”). Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 12. To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to be
prepayments of this Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section
4, but subject to Section 3(d), until the Event of Default Redemption Price
(together with any Late Charges thereon) is paid in full, the Conversion Amount
submitted for redemption under this Section 4(b) (together with any Late Charges
thereon) may be converted, in whole or in part, by the Holder into Common Stock
pursuant to Section 3. In the event of a partial redemption of this Note
pursuant hereto, the Principal amount redeemed shall be deducted from the
Installment Amount(s) relating to the applicable Installment Date(s) as set
forth in the Event of Default Redemption Notice. In the event of the Company’s
redemption of any portion of this Note under this Section 4(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’
inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any redemption premium due under this Section 4(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.
 
 
 
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5. RIGHTS UPON FUNDAMENTAL TRANSACTION.
 
(a) Assumption. The Company shall not consummate a Fundamental Transaction
unless the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with
the provisions of this Section 5(a) pursuant to written agreements in form and
substance reasonably satisfactory to the Required Holders and approved by the
Required Holders prior to such Fundamental Transaction, including agreements to
deliver to each holder of Notes in exchange for such Notes a security of the
Successor Entity evidenced by a written instrument substantially similar in form
and substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts then outstanding and the
interest rates of the Notes held by such holder, having similar conversion
rights as the Notes and having similar ranking to the Notes, and reasonably
satisfactory to the Holder. Upon the occurrence of any Fundamental Transaction,
the Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Note and
the other Transaction Documents referring to the “Company” shall refer instead
to the Successor Entity), and may exercise every right and power of the Company
and shall assume all of the obligations of the Company under this Note and the
other Transaction Documents with the same effect as if such Successor Entity had
been named as the Company herein. Upon consummation of a Fundamental
Transaction, the Successor Entity shall deliver to the Holder confirmation that
there shall be issued upon conversion or redemption of this Note at any time
after the consummation of such Fundamental Transaction, in lieu of the shares of
the Company’s Common Stock (or other securities, cash, assets or other property
(except such items still issuable under Sections 6 and 15, which shall continue
to be receivable thereafter) issuable upon the conversion or redemption of the
Notes prior to such Fundamental Transaction) such shares of the publicly traded
common stock (or their equivalent) of the Successor Entity (including its Parent
Entity) which the Holder would have been entitled to receive upon the happening
of such Fundamental Transaction had this Note been converted immediately prior
to such Fundamental Transaction (without regard to any limitations on the
conversion of this Note, except to the extent prohibited by the rules and
regulations of the Principal Market), as adjusted in accordance with the
provisions of this Note. Notwithstanding the foregoing, the Holder may elect, at
its sole option, by delivery of written notice to the Company to waive this
Section 5(a) to permit the Fundamental Transaction without the assumption of
this Note.  The provisions of this Section 5 shall apply similarly and equally
to successive Fundamental Transactions and shall be applied without regard to
any limitations on the conversion of this Note.
 
 
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(b) Redemption Right. No sooner than twenty (20) Trading Days nor later than ten
(10) Trading Days prior to the consummation of a Change of Control, but not
prior to the public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile and overnight courier to the Holder
(a “Change of Control Notice”).  At any time and from time to time during the
period commencing on the earlier to occur of (x) any oral or written agreement
by the Company or any of its Subsidiaries, which upon consummation of the
transaction contemplated thereby would reasonably be expected to result in a
Change of Control, (y) the Holder becoming aware of a Change of Control and (z)
the Holder's receipt of a Change of Control Notice and ending on the later of
twenty (20) Trading Days after (A) consummation of such Change of Control or (B)
the date of receipt of such Change of Control Notice, the Holder may require the
Company to redeem all or any portion of this Note by delivering written notice
thereof (“Change of Control Redemption Notice”) to the Company, which Change of
Control Redemption Notice shall indicate the Conversion Amount the Holder is
electing to redeem.  The portion of this Note subject to redemption pursuant to
this Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the product of (x) the Change of Control Redemption Premium
multiplied by (y) the Conversion Amount being redeemed, (ii) the product of (A)
the Conversion Amount being redeemed multiplied by (B) the quotient determined
by dividing (I) the greatest Closing Sale Price of the Common Stock during the
period beginning on the date immediately preceding the earlier to occur of (1)
the consummation of the Change of Control and (2) the public announcement of
such Change of Control and ending on the Trading Day immediately prior to the
Trading Day during which the Company pays the Change of Control Redemption Price
(as defined below) to the Holder by (II) the Conversion Price then in effect and
(iii) the product of (A) the Conversion Amount being redeemed multiplied by (B)
the quotient of (I) the aggregate cash consideration and the aggregate cash
value of any non-cash consideration per share of Common Stock to be paid to the
holders of the shares of Common Stock upon consummation of such Change of
Control (any such non-cash consideration constituting publicly-traded securities
shall be valued at the highest of the Closing Sale Price of such securities as
of the Trading Day immediately prior to the consummation of such Change of
Control, the Closing Sale Price of such securities on the Trading Day
immediately following the public announcement of such proposed Change of Control
and the Closing Sale Price of such securities on the Trading Day immediately
prior to the public announcement of such proposed Change of Control) divided by
(II) the Conversion Price then in effect (the “Change of Control Redemption
Price”). Redemptions required by this Section 5 shall be made in accordance with
the provisions of Section 12 and shall have priority to payments to stockholders
in connection with such Change of Control. To the extent redemptions required by
this Section 5(b) are deemed or determined by a court of competent jurisdiction
to be prepayments of this Note by the Company, such redemptions shall be deemed
to be voluntary prepayments. Notwithstanding anything to the contrary in this
Section 5, but subject to Section 3(d), until the Change of Control Redemption
Price (together with any Late Charges thereon) is paid in full, the Conversion
Amount submitted for redemption under this Section 5(b) (together with any Late
Charges thereon) may be converted, in whole or in part, by the Holder into
Common Stock pursuant to Section 3. In the event of a partial redemption of this
Note pursuant hereto, the Principal amount redeemed shall be deducted from the
Installment Amount(s) relating to the applicable Installment Date(s) as set
forth in the Fundamental Transaction Redemption Notice. In the event of the
Company’s redemption of any portion of this Note under this Section 5(b), the
Holder’s damages would be uncertain and difficult to estimate because of the
parties’ inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any redemption premium due under this Section 5(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.
 
 
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6. RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
 
(a) Purchase Rights. In addition to any adjustments pursuant to Section 7 below,
if at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the terms applicable
to such Purchase Rights, the aggregate Purchase Rights which the Holder could
have acquired if the Holder had held the number of shares of Common Stock
acquirable upon complete conversion of this Note (without taking into account
any limitations or restrictions on the convertibility of this Note) immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights (provided, however, to the extent that the Holder’s
right to participate in any such Purchase Right would result in the Holder
exceeding the Maximum Percentage, then the Holder shall not be entitled to
participate in such Purchase Right to such extent (or beneficial ownership of
such shares of Common Stock as a result of such Purchase Right to such extent)
and such Purchase Right to such extent shall be held in abeyance for the Holder
until such time, if ever, as its right thereto would not result in the Holder
exceeding the Maximum Percentage).
 
 
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(b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction
pursuant to which holders of shares of Common Stock are entitled to receive
securities or other assets with respect to or in exchange for shares of Common
Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, in lieu of the shares of Common Stock otherwise
receivable upon such conversion, such securities or other assets received by the
holders of shares of Common Stock in connection with the consummation of such
Corporate Event in such amounts as the Holder would have been entitled to
receive had this Note initially been issued with conversion rights for the form
of such consideration (as opposed to shares of Common Stock) at a conversion
rate for such consideration commensurate with the Conversion Rate. Provision
made pursuant to the preceding sentence shall be in a form and substance
satisfactory to the Required Holders.  The provisions of this Section 6 shall
apply similarly and equally to successive Corporate Events and shall be applied
without regard to any limitations on the conversion or redemption of this Note.
 
7. RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
 
(a) Adjustment of Fixed Conversion Price upon Issuance of Common Stock.  If and
whenever on or after the Subscription Date the Company issues or sells, or in
accordance with this Section 7(a) is deemed to have issued or sold, any shares
of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company, but excluding any Excluded
Securities issued or sold or deemed to have been issued or sold) for a
consideration per share (the “New Issuance Price”) less than a price equal to
the Fixed Conversion Price in effect immediately prior to such issue or sale or
deemed issuance or sale (such Fixed Conversion Price then in effect is referred
to herein as the “Applicable Price”) (the foregoing a “Dilutive Issuance”),
then, immediately after such Dilutive Issuance, the Fixed Conversion Price then
in effect shall be reduced to an amount equal to the New Issuance Price. For
purposes of determining the adjusted Fixed Conversion Price under this Section
7(a), the following shall be applicable:
 
(i) Issuance of Options.  If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share. For
purposes of this Section 7(a)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option” shall be equal to the lower of (x) the exercise
price set forth in such Option for which one share of Common Stock is issuable
upon the exercise of any such Options or upon conversion, exercise or exchange
of any Convertible Securities issuable upon exercise of any such Option and (y)
the sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to any one share of Common Stock upon the granting
or sale of such Option, upon exercise of such Option and upon conversion,
exercise or exchange of any Convertible Security issuable upon exercise of such
Option. Except as contemplated below, no further adjustment of the Fixed
Conversion Price shall be made upon the actual issuance of such shares of Common
Stock or of such Convertible Securities upon the exercise of any such Option or
upon the actual issuance of such shares of Common Stock upon conversion,
exercise or exchange of such Convertible Securities.  For clarification purposes
and without limiting the foregoing, in calculating the “lowest price per share
for which one share of Common Stock is issuable upon the exercise of any such
Options or upon conversion, exercise or exchange of any Convertible Securities
issuable upon exercise of any such Option” paid or payable to the Company
pursuant to this Section 7(a)(i), any amounts paid or payable to the holder of
such Option (or any other Person) upon such conversion, exercise or exchange of
such Option shall reduce the value of the consideration paid or payable to the
Company in such conversion, exercise or exchange and/or, as the case may be, the
value of any other consideration or benefit conferred.
 
 
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(ii) Issuance of Convertible Securities.  If the Company in any manner issues or
sells any Convertible Securities and the lowest price per share for which one
share of Common Stock is issuable upon the conversion, exercise or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share.  For the purposes of this Section 7(a)(ii), the “lowest price per
share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof” shall be equal to the lower of (x) the conversion
price set forth in such Convertible Security for which one share of Common Stock
is issuable upon the conversion, exercise or exchange thereof and (y) the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of Common Stock upon the issuance or sale of
such Convertible Security and upon conversion, exercise or exchange of such
Convertible Security. Except as contemplated below, no further adjustment of the
Fixed Conversion Price shall be made upon the actual issuance of such shares of
Common Stock upon conversion, exercise or exchange of such Convertible
Securities, and if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the Fixed Conversion Price
has been or is to be made pursuant to other provisions of this Section 7(a),
except as contemplated below, no further adjustment of the Fixed Conversion
Price shall be made by reason of such issue or sale.  For clarification purposes
and without limiting the foregoing, in calculating the “lowest price per share
for which one share of Common Stock is issuable upon the conversion, exercise or
exchange thereof” paid or payable to the Company pursuant to this Section
7(a)(ii), any amounts paid or payable to the holder of such Convertible Security
(or any other Person) upon conversion or exercise (as applicable) of such
Convertible Security shall reduce the value of the consideration paid or payable
to the Company in such conversion, exercise or exchange and/or, as the case may
be, the value of any other consideration or benefit conferred.
 
 
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(iii) Change in Option Price or Rate of Conversion. If the purchase or exercise
price provided for in any Options, the additional consideration, if any, payable
upon the issue, conversion, exercise or exchange of any Convertible Securities,
or the rate at which any Convertible Securities are convertible into or
exercisable or exchangeable for shares of Common Stock increases or decreases at
any time, the Fixed Conversion Price in effect at the time of such increase or
decrease shall be adjusted to the Fixed Conversion Price which would have been
in effect at such time had such Options or Convertible Securities provided for
such increased or decreased purchase price, additional consideration or
increased or decreased conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 7(a)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
Subscription Date are increased or decreased in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and the
shares of Common Stock deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such increase or
decrease. No adjustment pursuant to this Section 7(a) shall be made if such
adjustment would result in an increase of the Fixed Conversion Price then in
effect.
 
(iv) Calculation of Consideration Received. If any Option or Convertible
Security or Adjustment Right is issued in connection with the issuance or sale
or deemed issuance or sale of any other securities of the Company, together
comprising one integrated transaction, (x) such Option or Convertible Security
(as applicable) or Adjustment Right (as applicable) will be deemed to have been
issued for consideration equal to the Black Scholes Consideration Value thereof
and (y) the other securities issued or sold or deemed to have been issued or
sold in such integrated transaction shall be deemed to have been issued for
consideration equal to the difference of (I) the aggregate consideration
received or receivable by the Company minus (II) the Black Scholes Consideration
Value of each such Option or Convertible Security (as applicable) or Adjustment
Right (as applicable).  If any shares of Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the net amount of
consideration received by the Company therefor. If any shares of Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of such consideration received by the Company will be the
fair value of such consideration, except where such consideration consists of
publicly traded securities, in which case the amount of consideration received
by the Company for such securities will be the arithmetic average of the VWAPs
of such security for each of the five (5) Trading Days immediately preceding the
date of receipt. If any shares of Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such shares of Common Stock, Options or Convertible Securities, as the case may
be. The fair value of any consideration other than cash or publicly traded
securities will be determined jointly by the Company and the Holder. If such
parties are unable to reach agreement within ten (10) days after the occurrence
of an event requiring valuation  (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Trading Days after the tenth
(10th) day following such Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the Holder. The determination of such
appraiser shall be final and binding upon all parties absent manifest error and
the fees and expenses of such appraiser shall be borne by the Company.
 
 
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(v) Record Date. If the Company takes a record of the holders of shares of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in shares of Common Stock, Options or in Convertible
Securities or (B) to subscribe for or purchase shares of Common Stock, Options
or Convertible Securities, then such record date will 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).
 
(b) Adjustment of Fixed Conversion Price upon Subdivision or Combination of
Common Stock.  If the Company at any time on or after the Subscription Date
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, the Fixed Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time on or
after the Subscription Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Fixed Conversion Price in effect immediately prior
to such combination will be proportionately increased. Any adjustment pursuant
to this Section 7(b) shall become effective immediately after the effective date
of such subdivision or combination. If any event requiring an adjustment under
this Section 7(b) occurs during the period that a Fixed Conversion Price is
calculated hereunder, then the calculation of such Fixed Conversion Price shall
be adjusted appropriately to reflect such event.
 
(c) Holder's Right of Alternative Fixed Conversion Price Following Issuance of
Certain Options or Convertible Securities.  Subject to Section 4(n) of the
Securities Purchase Agreement, in addition to and not in limitation of the other
provisions of this Section 7, if the Company in any manner issues or sells any
Options or Convertible Securities (any such securities, "Variable Price
Securities") after the Subscription Date that are convertible into or
exchangeable or exercisable for shares of Common Stock at a price which varies
or may vary with the market price of the shares of Common Stock, including by
way of one or more reset(s) to a fixed price, but exclusive of such formulations
reflecting customary anti-dilution provisions (such as share splits, share
combinations, share dividends and similar transactions) (each of the
formulations for such variable price being herein referred to as, the "Variable
Price"), the Company shall provide written notice thereof via facsimile and
overnight courier to the Holder on the date of issuance of such Convertible
Securities or Options.  Subject to Section 4(n) of the Securities Purchase
Agreement, from and after the date the Company issues any such Convertible
Securities or Options with a Variable Price, the Holder shall have the right,
but not the obligation, in its sole discretion to substitute the Variable Price
for the Fixed Conversion Price upon conversion of this Note by designating in
the Conversion Notice delivered upon any conversion of this Note that solely for
purposes of such conversion the Holder is relying on the Variable Price rather
than the Fixed Conversion Price then in effect.  The Holder's election to rely
on a Variable Price for a particular conversion of this Note shall not obligate
the Holder to rely on a Variable Price for any future conversion of this Note.
 
 
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(d) Other Events. In the event that the Company (or any direct or
indirect Subsidiary thereof) shall take any action to which the provisions
hereof are not strictly applicable, or, if applicable, would not operate to
protect the Holder from dilution or if any event occurs of the type contemplated
by the provisions of this Section 7 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company’s board of directors shall in good faith determine and implement an
appropriate adjustment in the Fixed Conversion Price so as to protect the rights
of the Holder, provided that no such adjustment pursuant to this Section 7(b)
will increase the Fixed Conversion Price as otherwise determined pursuant to
this Section 7, provided further that if the Holder does not accept such
adjustments as appropriately protecting its interests hereunder against such
dilution, then the Company’s board of directors and the Holder shall agree, in
good faith, upon an independent investment bank of nationally recognized
standing to make such appropriate adjustments, whose determination shall be
final and binding and whose fees and expenses shall be borne by the Company.
 
8. COMPANY INSTALLMENT CONVERSION OR REDEMPTION.
 
(a) General. On each applicable Installment Date, the Company shall pay to the
Holder of this Note the applicable Installment Amount due on such date by
converting such Installment Amount in accordance with this Section 8 (a “Company
Conversion”); provided, however, the Company may, at its option as described
below, pay all or any part of such Installment Amount by redeeming such
Installment Amount in cash (a “Company Redemption”) or by any combination of a
Company Conversion and a Company Redemption so long as the entire amount of such
Installment Amount due shall be converted and/or redeemed by the Company on the
applicable Installment Date, subject to the provisions of this Section 8,
provided further that the Company shall not be entitled to elect a Company
Conversion with respect to any portion of such Installment Amount and shall be
required to elect and to pay the entire amount of such Installment Amount in
cash pursuant to a Company Redemption if on the applicable Installment Notice
Due Date or on the applicable Installment Date (as the case may be) there is an
Equity Conditions Failure; provided, that, notwithstanding the foregoing, a
Company Conversion may still occur on the applicable Installment Date in
accordance with Section 8(c) with the written consent of the Holder, provided
further that, notwithstanding the foregoing, if (i) the Company has elected to
effect a Company Conversion pursuant to this Section 8 with respect to the
applicable Installment Date, (ii) the Company is permitted pursuant to this
Section 8 to effect such Company Conversion on such Installment Date and (iii)
prior to such Installment Date the Holder has delivered (via facsimile or
otherwise) to the Company a written notice (a “Blocker Notice”) (A) stating that
such Company Conversion would result in a violation of Section 3(d) and (B)
specifying the portion of the applicable Installment Amount with respect to
which such Company Conversion would result in a violation of Section 3(d) if
such Company Conversion were effected (such amount so specified is referred to
herein as the “Designated Specified Amount”), the Installment Amount of the
Holder for such Installment Date shall be automatically reduced by such
Designated Specified Amount and (x) at the Holder’s option, at any time prior to
the applicable Installment Date, (A) the Holder may reduce the Designated
Specified Amount of shares of Common Stock covered by such Blocker Notice, in
whole or in part, by delivery of one or more (but no more than four in any
thirty calendar day period) written notices to the Company (each, a “Withdrawal
Notice”, and each date, “Withdrawal Notice Date”) and elect to convert the
Designated Specified Amount (or such lesser amount as set forth in such
Withdrawal Notice) in accordance with this Section 8 (each, a “Withdrawn
Designated Specified Amount”), (B) the Company shall convert each Withdrawn
Designated Specified Amount into such number of shares of Common Stock equal to
the quotient of (I) the applicable Withdrawn Designated Specified Amount divided
by (II) the Closing Bid Price on the Trading Day immediately preceding the
applicable Withdrawal Notice Date, and deliver such shares of Common Stock to
the Holder’s account with DTC no later than the second (2nd) Trading Day after
the applicable Withdrawal Notice Date, and (C) the Installment Amount with
respect to such Installment Date shall be automatically increased by an amount
equal to the sum of any Withdrawn Designated Specified Amounts set forth in
Withdrawal Notices of the Holder with respect to such Installment Date delivered
to the Company prior to such Installment Date and (y) the Installment Amount of
the immediately subsequent Installment Date (if any) shall be automatically
increased by the Designated Specified Amount (less an amount equal to the sum of
any Withdrawn Designated Specified Amounts set forth in Withdrawal Notices of
the Holder delivered with respect to such Installment Date).
 
 
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(b) Mechanics of Company Installment Payments.  On or prior to the date which is
the twenty-first (21st) Trading Day prior to each Installment Date (each, an
“Installment Notice Due Date”), the Company shall deliver written notice (each,
a “Company Installment Notice” and the date all of the holders receive such
notice is referred to as to the “Company Installment Notice Date”), to each
holder of Notes and such Company Installment Notice shall (i) either (A) confirm
that the applicable Installment Amount of such holder’s Note shall be converted,
in whole or in part, pursuant to a Company Conversion or (B) specify the portion
of the applicable Installment Amount which the Company elects, or is required to
elect and redeem, pursuant to a Company Redemption (“Company Redemption Amount”)
and the portion of the applicable Installment Amount, if any, that the Company
elects, and is permitted, to convert pursuant to a Company Conversion (“Company
Conversion Amount”), which amounts when added together, must equal the entire
applicable Installment Amount and (ii) if the applicable Installment Amount is
to be paid, in whole or in part, pursuant to a Company Conversion, certify that
there is not then an Equity Conditions Failure as of the date of the Company
Installment Notice.  Each Company Installment Notice shall be irrevocable. If
the Company does not timely deliver a Company Installment Notice in accordance
with this Section 8, then the Company shall be deemed to have delivered an
irrevocable Company Installment Notice as of the applicable Installment Notice
Due Date confirming a Company Conversion and shall be deemed to have certified
as of the applicable Installment Notice Due Date that there is not then an
Equity Conditions Failure in connection with such Company Conversion.
 
 
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(c) Mechanics of Company Conversion. Except as expressly provided in this
Section 8(c), no later than two (2) Trading Days after delivery (or deemed
delivery, as applicable) of the applicable Company Installment Notice setting
forth a Company Conversion Amount, the Company shall deliver to the Holder’s
account with DTC such number of shares of Common Stock (the “Pre-Installment
Conversion Shares”) equal to the quotient of (x) such Company Conversion Amount
divided by (y) the Pre-Installment Period Conversion Price, and as to which the
Holder shall be the owner thereof as of such time of delivery or deemed delivery
(as the case may be) of such Company Installment Notice. Except as expressly
provided in this Section 8(c), the Company shall convert and/or redeem the
corresponding Installment Amounts (as defined in the Other Notes) of the Other
Notes in the same ratio of the applicable Installment Amount being converted
and/or redeemed hereunder. The applicable Company Conversion Amount (whether set
forth in the applicable Company Installment Notice or by operation of this
Section 8) shall be converted in accordance with Section 8(c) and the applicable
Company Redemption Amount shall be redeemed in accordance with Section
8(d).  Subject to Section 3(d), if the Company delivers a Company Installment
Notice and elects, or is deemed to have delivered a Company Installment Notice
and deemed to have elected, in whole or in part, a Company Conversion in
accordance with Section 8(b), then the remainder of this Section 8(c) shall
apply.  On each Installment Date, any outstanding Company Conversion Amount
shall be converted as of such Installment Date at the Company Conversion Price
and the Company shall, on the applicable Installment Date, deliver to the
Holder’s account with DTC such shares of Common Stock issued upon such
conversion (subject to the reduction contemplated by the immediately following
sentence and, if applicable, the last sentence of this Section 8(c)), provided
that the Equity Conditions are then satisfied (or waived in writing by the
Holder) on such Installment Date and a Company Conversion is not otherwise
prohibited under any other provision of this Note. The number of shares of
Common Stock to be delivered upon such Company Conversion shall be reduced by
the number of any Pre-Installment Conversion Shares previously delivered in
connection with such Installment Date. If an Event of Default occurs during the
period beginning on the applicable Company Installment Notice Date and ending on
the applicable Installment Date, then either (i) the Holder shall return any
Pre-Installment Conversion Shares delivered in connection with the applicable
Installment Date or (ii) the Conversion Amount used to calculate the Event of
Default Redemption Price shall be reduced by the product of (x) the Company
Conversion Amount applicable to such Installment Date multiplied by (y) the
Conversion Share Ratio (as defined below). If any of the Equity Conditions are
not satisfied (or waived in writing by the Holder) on such Installment Date or a
Company Conversion is not otherwise permitted under any other provision of this
Note, then, at the option of the Holder designated in writing to the Company,
the Holder may require the Company to do any one or more of the following: (i)
the Company shall redeem in cash, as designated by the Holder, all or any part
of the Company Conversion Amount (together with any Designated Specified Amount
specified in a Blocker Notice delivered with respect to any Company Conversion
for such Installment Date) (such designated amount (together with such
Designated Specified Amount, if any) is referred to as the
 
 
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 “Designated Redemption Amount”) and the Company shall pay to the Holder within
three (3) days of such Installment Date, by wire transfer of immediately
available funds, an amount in cash equal to 125% (or in the event of any false
or inaccurate certification (including a false or inaccurate deemed
certification) by the Company that the Equity Conditions are satisfied or that
there has been no Equity Conditions Failure with respect to such Installment
Date, 150%) of such Designated Redemption Amount, and/or (ii) cause the Company
Conversion to be null and void with respect to such Designated Redemption
Amount; provided, however, the Conversion Price for such Designated Redemption
Amount shall thereafter be adjusted to equal the lesser of (A) the Company
Conversion Price as in effect on the date on which the Holder voided the Company
Conversion and (B) the Company Conversion Price that would be in effect on the
date on which the Holder delivers a Conversion Notice relating thereto as if
such date was an Installment Date.  The Holder shall be entitled to all the
rights of a holder of this Note with respect to such Designated Redemption
Amount.  In addition, if any of the Equity Conditions are not satisfied (or
waived in writing by the Holder) on such Installment Date or a Company
Conversion is not otherwise permitted under any other provision of this Note,
then, at the Holder’s option, either (I) the Holder shall return any
Pre-Installment Conversion Shares delivered in connection with the applicable
Installment Date or (II) the applicable Designated Redemption Amount shall be
reduced by the product of (X) the Company Conversion Amount applicable to such
Installment Date multiplied by (Y) the Conversion Share Ratio. If the Company
fails to redeem any Designated Redemption Amount by the third (3rd) day
following the applicable Installment Date by payment of such amount on the
applicable Installment Date, then the Holder shall have the rights set forth in
Section 12(a) as if the Company failed to pay the applicable Company Installment
Redemption Price (as defined below) and all other rights under this Note.
Notwithstanding anything to the contrary in this Section 8(c), but subject to
Section 3(d), until the Company delivers Common Stock representing the Company
Conversion Amount to the Holder, the Company Conversion Amount may be converted,
in whole or in part, by the Holder into Common Stock pursuant to Section 3, in
which event the Company Conversion Amount so converted shall be deducted from
the Installment Amount(s) relating to the applicable Installment Date(s) as set
forth in the applicable Conversion Notice.  If, with respect to an Installment
Date, the number of Pre-Installment Conversion Shares delivered to the Holder
exceeds the number of Post-Installment Conversion Shares, then the excess
Pre-Installment Conversion Shares shall constitute a credit against the number
of shares of Common Stock to be issued to such Holder pursuant to Sections 3 and
8(b) hereof and shall reduce the number of shares of Common Stock required to be
actually issued by the Company to the Holder under such sections on a
share-for-share basis until such time as the number of shares that would have
been issued by the Company to such Holder (not taking account of such credit)
equals the amount of such excess.  For the avoidance of doubt, the delivery by
the Company of the Pre-Installment Shares to the Holder shall not be deemed to
reduce the outstanding Principal amount of this Note except in accordance with
the terms of this Note at such times as provided in this Note.  The Company
shall pay any and all taxes that may be payable with respect to the issuance and
delivery of any shares of Common Stock in any Company Conversion hereunder.
 
 
 
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(d) Mechanics of Company Redemption. If the Company elects, or is required to
elect, a Company Redemption, in whole or in part, in accordance with
Section 8(b), then the Company Redemption Amount, if any, which is to be paid to
the Holder on the applicable Installment Date shall be redeemed by the Company
on such Installment Date, and the Company shall pay to the Holder on such
Installment Date, by wire transfer of immediately available funds, in an amount
in cash (the “Company Installment Redemption Price”) equal to the applicable
Company Redemption Amount. If the Company fails to redeem the applicable Company
Redemption Amount on the applicable Installment Date, then, at the option of the
Holder designated in writing to the Company (any such designation shall be a
“Conversion Notice” for purposes of this Note), the Holder may require the
Company to convert all or any part of the Company Redemption Amount at the
Company Conversion Price (determined as of the date of such designation).
Conversions required by this Section 8(d) shall be made in accordance with the
provisions of Section 3(c).  Notwithstanding anything to the contrary in this
Section 8(d), but subject to Section 3(d), until the Company Installment
Redemption Price (together with any Late Charges thereon) is paid in full, the
Company Redemption Amount (together with any Late Charges thereon) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3. In the event the Holder elects to convert all or any portion of the
Company Redemption Amount prior to the applicable Installment Date as set forth
in the immediately preceding sentence, the portion of the Company Redemption
Amount so converted shall be deducted from the Installment Amounts relating to
the applicable Installment Date(s) as set forth in the applicable Conversion
Notice.
 
(e) Equity Conditions Waivers.  Notwithstanding anything herein to the contrary,
the Holder may, at any time prior to the third (3rd) Trading Day after any
applicable Installment Date, deliver a written notice to the Company (a “Waiver
Notice”) electing to (x) waive the Equity Conditions with respect to all or any
part of any Company Conversion Amount and/or Withdrawn Designated Specified
Amount with respect to such Installment Date (such aggregate amount, a “Waiver
Company Conversion Amount”) and/or (y) cause all or any part of the applicable
Installment Amount as set forth in the Waiver Notice (the “Waiver Company
Deferral Amount”) to be deferred and cause the Installment Amount of the
immediately subsequent Installment Date (if any) to be automatically increased
by such Waiver Company Deferral Amount (less an amount equal to the sum of any
Waiver Company Conversion Amounts set forth in Waivers Notices of the Holder
delivered with respect to such Installment Date).  Unless otherwise specified in
the Waiver Notice, the Waiver Notice shall only apply to the specific Equity
Conditions that the Company has detailed in a notice to the Holder delivered
pursuant to this Section 8 with respect to such Installment Date.  Upon the
Company’s receipt of a Waiver Notice, (i) the Company shall convert the Waiver
Company Conversion Amount specified in such Waiver Notice, if any, into such
number of shares of Common Stock equal to the quotient of (I) such Waiver
Company Conversion Amount divided by (II) the lesser of (x) the lower of either
(1) if such Waiver Notice Date occurs prior to the applicable Installment Date,
the Pre-Installment Period Conversion Price applicable to such Installment Date
or (2) if such Waiver Notice Date occurs on or after the applicable Installment
Date, the Company Conversion Price applicable to such Installment Date and (y)
the Closing Bid Price on the Trading Day immediately preceding the applicable
Waiver Notice Date, and deliver such shares of Common Stock to the Holder’s
account with DTC (or if such shares of Common Stock are required to bear a
restricted legend, by delivering such certificate with respect to such shares of
Common Stock to the Holder), no later than the second (2nd) Trading Day after
the applicable Waiver Notice Date (except as otherwise provided in this Section
8(e) below), and (ii) the Installment Amount with respect to such Installment
Date shall be automatically increased by an amount equal to the sum of any
Waiver Company Conversion Amounts set forth in such Waiver Notices of the Holder
with respect to such Installment Date delivered to the Company on or prior to
such Installment Date.  Notwithstanding the foregoing, if the Company has wired
a cash payment applicable to such Waiver Company Conversion Amount (a “Waiver
Company Conversion Payment”) to the Holder prior to the receipt of such Waiver
Notice, the Company shall not be required to deliver any shares of Common Stock
to the Holder with respect to such Waiver Company Conversion Amount until the
second (2nd) Trading Day after the Company’s receipt of such Waiver Company
Conversion Payment.
 
 
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9. Company Optional Redemption.  If at any time after the thirtieth calendar day
immediately following the initial Effective Date (as defined in the Registration
Rights Agreement) (the “Company Redemption Eligibility Date”), (i) the Closing
Sale Price of the Common Shares listed on the Principal Market exceeds 200% of
the Fixed Conversion Price as of the Issuance Date (as adjusted for stock
splits, stock dividends, stock combinations or other similar transactions) for
fifteen (15) consecutive Trading Days (the “Company Optional Redemption
Measuring Period”), and (ii) no Equity Conditions Failure exists, the Company
shall have the right to redeem all, but not less than all (except in accordance
with a Company Optional Redemption Blocker Notice (as defined below)), of the
Conversion Amount then remaining under this Note (the “Company Optional
Redemption Amount”) on the Company Optional Redemption Date (each as defined
below) (a “Company Optional Redemption”); provided that, notwithstanding the
foregoing, if the Company Optional Redemption Amount for such Company Optional
Redemption exceeds such portion of the Conversion Amount remaining under this
Note that the Holder would be permitted to convert into Common Stock pursuant to
Section 3 on the Company Optional Redemption Notice Date (as defined below)
without violating Section 3(d) (the “Permitted Company Optional Redemption
Amount”), the Holder, at its sole option, may deliver a written notice to the
Company (a “Company Optional Redemption Blocker Notice”) stating that such
Company Optional Redemption Amount set forth in the applicable Company Optional
Redemption Notice (as defined below) exceeds the Permitted Company Optional
Redemption Amount and, thereafter, the applicable Company Optional Redemption
Amount shall be automatically reduced to the Permitted Company Optional
Redemption Amount set forth in the applicable Company Optional Redemption
Blocker Notice.  The portion of this Note subject to redemption pursuant to this
Section 9 shall be redeemed by the Company in cash at a price (the “Company
Optional Redemption Price”) equal to the Conversion Amount being redeemed.  The
Company may exercise its right to require redemption under this Section 9 by
delivering an irrevocable written notice thereof by facsimile and overnight
courier to all, but not less than all, of the holders of Notes (the “Company
Optional Redemption Notice” and the date all of the holders of Notes received
such notice is referred to as the “Company Optional Redemption Notice
Date”).  The Company may deliver only one Company Optional Redemption Notice
during any thirty day period hereunder.  The Company Optional Redemption Notice
shall (x) state the date on which the Company Optional Redemption shall occur
(the “Company Optional Redemption Date”) which date shall not be less than ten
(10) Trading Days nor more than thirty (30) Trading Days following the Company
Optional Redemption Notice Date, (y) certify that there has been no Equity
Conditions Failure, and (z) state the aggregate Conversion Amount of the Notes
which is being redeemed in such Company Optional Redemption from the Holder and
all of the other holders of the Notes pursuant to this Section 9 (and analogous
provisions under the Other Notes) on the Company Optional Redemption
Date.  Notwithstanding anything herein to the contrary, (i) if an Equity
Conditions Failure occurs at any time prior to the Company Optional Redemption
Date, (A) the Company shall provide the Holder a subsequent notice to that
effect and (B) unless the Holder waives the applicable Equity Conditions
Failure, the Company Optional Redemption shall be cancelled and the applicable
Company Optional Redemption Notice shall be null and void and (ii) at any time
prior to the date the Company Optional Redemption Price is paid, in full, the
Company Optional Redemption Amount may be converted, in whole or in part, by the
Holders into Common Shares pursuant to Section 3.  All Conversion Amounts
converted by the Holder after the Company Optional Redemption Notice Date shall
reduce the Company Optional Redemption Amount of this Note required to be
redeemed on the Company Optional Redemption Date.  Redemptions made pursuant to
this Section 9 shall be made in accordance with Section 12.
 
 
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10. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company
will not, by amendment of its Certificate of Incorporation (as defined in the
Securities Purchase Agreement), Bylaws (as defined in the Securities Purchase
Agreement) or through any reorganization, transfer of assets, consolidation,
merger, scheme of arrangement, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Note, and will at all times in good faith carry out all
of the provisions of this Note and take all action as may be required to protect
the rights of the Holder of this Note. Without limiting the generality of the
foregoing, the Company (i) shall not increase the par value of any shares of
Common Stock receivable upon conversion of this Note above the Conversion Price
then in effect, (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the conversion of this Note, and
(iii) shall, so long as any of the Notes are outstanding, take all action
reasonably necessary to reserve and keep available out of its authorized and
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Notes, the maximum number of shares of Common Stock as shall
from time to time be necessary to effect the conversion of the Notes then
outstanding (without regard to any limitations on conversion).
 
11. RESERVATION OF AUTHORIZED SHARES.
 
(a) Reservation. The Company shall initially reserve out of its authorized and
unissued Common Stock a number of shares of Common Stock for each of the Notes
equal to 150% of the entire Conversion Rate (calculated based on the Fixed
Conversion Price calculated as of the Closing Date) with respect to the entire
Conversion Amount (without regard to any limitations on conversions) of each
such Note as of the Issuance Date (the “Initial Reserve Amount”).  So long as
any of the Notes are outstanding, the Company shall take all action reasonably
necessary (including, without limitation, increasing the authorized number of
shares of Common Stock of the Company in accordance with Section 11(b) below) to
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, at least 125%
of the number of shares of Common Stock as shall from time to time be reasonably
necessary to effect the conversion of all of the Notes then outstanding (the
“Required Reserve Amount”).  The Initial Reserve Amount and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Notes based on the original principal amount of the Notes held by each
holder on the Closing Date (the “Authorized Share Allocation”). In the event
that a holder shall sell or otherwise transfer any of such holder’s Notes, each
transferee shall be allocated a pro rata portion of such holder’s Authorized
Share Allocation. Any shares of Common Stock reserved and allocated to any
Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.
 
 
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(b) Insufficient Authorized Shares. If, notwithstanding Section 11(a), and not
in limitation thereof, at any time while any of the Notes remain outstanding the
Company does not have a sufficient number of authorized and otherwise unreserved
shares of Common Stock to satisfy its obligation to reserve for issuance upon
conversion of the Notes at least a number of shares of Common Stock equal to the
Required Reserve Amount (an “Authorized Share Failure”), then the Company shall
immediately take all action reasonably necessary to increase the Company’s
authorized shares of Common Stock to an amount sufficient to allow the Company
to reserve the Required Reserve Amount for the Notes then outstanding. Without
limiting the generality of the foregoing sentence, as soon as practicable after
the date of the occurrence of an Authorized Share Failure, but in no event later
than ninety (90) days after the occurrence of such Authorized Share Failure, the
Company shall hold a meeting of its stockholders for the approval of an increase
in the number of authorized shares of Common Stock.  In connection with such
meeting, the Company shall provide each stockholder with a proxy statement and
shall use its reasonable best efforts to solicit its stockholders’ approval of
such increase in authorized shares of Common Stock and to cause its board of
directors to recommend to the stockholders that they approve such proposal.
 
12. REDEMPTIONS.
 
(a) Mechanics. The Company shall deliver the applicable Event of Default
Redemption Price to the Holder in cash within five (5) Business Days after the
later of (x) the Company’s receipt of the Holder’s Event of Default Redemption
Notice and (y) applicable Event of Default Redemption Trigger Date. If the
Holder has submitted a Change of Control Redemption Notice in accordance with
Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder in cash concurrently with the consummation of
such Change of Control if such notice is received prior to the consummation of
such Change of Control and within five (5) Business Days after the Company’s
receipt of such notice otherwise.  The Company shall deliver the applicable
Company Installment Redemption Price to the Holder in cash on the applicable
Installment Date.  The Company shall deliver the applicable Company Optional
Redemption Price to the Holder in cash on the applicable Company Optional
Redemption Date.  In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company’s receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount and (y) the Company shall immediately return
this Note, or issue a new Note (in accordance with Section 18(d)), to the
Holder, and in each case the principal amount of this Note or such new Note (as
the case may be) shall be increased by an amount equal to the difference between
(1) the applicable Event of Default Redemption Price, Change of Control
Redemption Price, Company Installment Redemption Price (as the case may be)
minus (2) the Conversion Amount submitted for redemption. The Holder’s delivery
of a notice voiding a Redemption Notice and exercise of its rights following
such notice shall not affect the Company’s obligations to make any payments of
Late Charges which have accrued prior to the date of such notice with respect to
the Conversion Amount subject to such notice.
 
 
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(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any
of the holders of the Other Notes that an event or occurrence substantially
similar to the events or occurrences described in Section 4(b) or Section 5(b)
has occurred, the Company shall immediately, but no later than one (1) Business
Day of its receipt thereof, forward to the Holder by facsimile a copy of such
notice (whether or not the Company agrees that such event or occurrence has
occurred and/or is continuing).  Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences described
in Section 4(b) or Section 5(b) (each, an “Other Redemption Notice”), the
Company shall immediately, but no later than one (1) Business Day of its receipt
thereof, forward to the Holder by facsimile a copy of such notice (whether or
not the Company agrees that such event or occurrence has occurred and/or is
continuing). If the Company receives a Redemption Notice and one or more Other
Redemption Notices, during the seven (7) Business Day period beginning on and
including the date which is three (3) Business Days prior to the Company’s
receipt of the Holder’s applicable Redemption Notice and ending on and including
the date which is three (3) Business Days after the Company’s receipt of the
Holder’s applicable Redemption Notice and the Company is unable to redeem all
principal, interest and other amounts designated in such Redemption Notice and
such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven (7) Business Day
period.
 
13. VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including but not limited to the Delaware
General Corporation Law, and as expressly provided in this Note.
 
 
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14. COVENANTS. Until all of the Notes have been converted, redeemed or otherwise
satisfied in accordance with their terms:
 
(a) Rank. All payments due under this Note (a) shall rank pari passu with all
Other Notes and (b) shall be senior to all other Indebtedness of the Company and
its Subsidiaries other than Permitted Senior Indebtedness and Permitted
Subsidiary Indebtedness.
 
(b) Incurrence of Indebtedness. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, incur or
guarantee, assume or suffer to exist any Indebtedness (other than (i) the
Indebtedness evidenced by this Note and the Other Notes and (ii) Permitted
Indebtedness).
 
(c) Existence of Liens. The Company shall not, and the Company shall cause each
of its Subsidiaries to not, directly or indirectly, allow or suffer to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance upon or
in any property or assets owned by the Company or any of its Subsidiaries
(collectively, “Liens”) other than Permitted Liens.
 
(d) Restricted Payments. The Company shall not, and the Company shall cause each
of its Subsidiaries to not, directly or indirectly, redeem, defease, repurchase,
repay or make any payments in respect of, by the payment of cash or cash
equivalents (in whole or in part, whether by way of open market purchases,
tender offers, private transactions or otherwise), all or any portion of any
Indebtedness (other than Permitted Senior Indebtedness and Permitted Subsidiary
Indebtedness), whether by way of payment in respect of principal of (or premium,
if any) or interest on, such Indebtedness if at the time such payment is due or
is otherwise made or, after giving effect to such payment, (i) an event
constituting an Event of Default has occurred and is continuing or (ii) an event
that with the passage of time and without being cured would constitute an Event
of Default has occurred and is continuing.
 
(e) Restriction on Redemption and Cash Dividends. The Company shall not, and the
Company shall cause each of its Subsidiaries to not, directly or indirectly,
redeem, repurchase or pay any cash dividend or distribution on any of its
capital stock (other than dividends by wholly-owned subsidiaries to the Company)
without the prior express written consent of the Holder other than a cash
distribution to be made by Pacific Ethanol California, Inc., a wholly-owned
Subsidiary of the Company, to the Company upon the closing of the sale by
Pacific Ethanol California, Inc. of its ownership interest in Front Range
Energy, LLC.
 
 
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(f) Restriction on Transfer of Assets. The Company shall not, and the Company
shall cause each of its Subsidiaries to not, directly or indirectly, sell,
lease, license, assign, transfer, convey or otherwise dispose of any assets or
rights of the Company or any Subsidiary owned or hereafter acquired whether in a
single transaction or a series of related transactions, other than (i) sales,
leases, licenses, assignments, transfers, conveyances and other dispositions of
such assets or rights by the Company and its Subsidiaries that, in the
aggregate, do not have a fair market value in excess of $250,000 in any twelve
(12) month period, (ii) the transfer, sale or assignment of the assets of
Pacific Ag. Products, LLC in connection with the renewal, extension or
replacement of Kinergy Marketing, LLC’s credit facility with Wachovia Capital
Finance Corporation (Western) and (iii) sales of inventory or receivables in the
ordinary course of business.
 
(g) Maturity of Indebtedness. Except for a prepayment, if any, of (i) the
Company’s outstanding obligation to Campbell-Sevey, Inc. in an aggregate amount
not to exceed $1.5 million and (ii) the Indebtedness described in Schedule 4(d)
to the Securities Purchase Agreement, in an aggregate amount not to exceed $1.0
million, the Company shall not, and the Company shall cause each of its
Subsidiaries to not, directly or indirectly, permit any Indebtedness of the
Company or any of the Subsidiaries to mature or accelerate prior to the Maturity
Date, other than Permitted Senior Indebtedness.
 
(h) Change in Nature of Business. The Company shall not, and the Company shall
cause each of its Subsidiaries to not, directly or indirectly, engage in any
material line of business substantially different from those lines of business
conducted by the Company and each of its Subsidiaries on the Issuance Date or
any business substantially related or incidental thereto.  The Company shall
not, and the Company shall cause each of its Subsidiaries to not, directly or
indirectly, modify its or their corporate structure or purpose.
 
(i) Preservation of Existence, Etc.  The Company shall maintain and preserve,
and cause each of its Subsidiaries to maintain and preserve, its existence,
rights and privileges, and become or remain, and cause each of its Subsidiaries
to become or remain, duly qualified and in good standing in each jurisdiction in
which the character of the properties owned or leased by it or in which the
transaction of its business makes such qualification necessary.
 
(j) Maintenance of Properties, Etc.  The Company shall maintain and preserve,
and cause each of its Subsidiaries to maintain and preserve, all of its
properties which are necessary or useful in the proper conduct of its business
in good working order and condition, ordinary wear and tear excepted, and
comply, and cause each of its Subsidiaries to comply, at all times with the
provisions of all leases to which it is a party as lessee or under which it
occupies property, so as to prevent any loss or forfeiture thereof or
thereunder.
 
(k) Maintenance of Insurance.  The Company shall maintain, and cause each of its
Subsidiaries to maintain, insurance with responsible and reputable insurance
companies or associations (including, without limitation, comprehensive general
liability, hazard, rent and business interruption insurance) with respect to its
properties (including all real properties leased or owned by it) and business,
in such amounts and covering such risks as is required by any governmental
authority having jurisdiction with respect thereto or as is carried generally in
accordance with sound business practice by companies in similar businesses
similarly situated.
 
 
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(l) Delta Securities.  The Company shall not issue any Delta Securities (as
defined in Section 31(u) below) without the prior written consent of the
Required Holders.
 
15. PARTICIPATION. In addition to any adjustments pursuant to Section 7, the
Holder, as the holder of this Note, shall be entitled to receive such dividends
paid and distributions made to the holders of Common Stock to the same extent as
if the Holder had converted this Note into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock (provided, however, to the extent
that the Holder’s right to participate in any such dividend or distribution
would result in the Holder exceeding the Maximum Percentage, then the Holder
shall not be entitled to participate in such dividend or distribution to such
extent (or the beneficial ownership of any such shares of Common Stock as a
result of such dividend or distribution to such extent) and such dividend or
distribution to such extent shall be held in abeyance for the benefit of the
Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Maximum Percentage).
 
16. AMENDING THE TERMS OF THIS NOTE.  No provision of this Note may be modified
or amended without the prior written consent of the Required Holders and the
Company; provided, however, that no such modification or amendment shall,
without the consent of the Holder hereunder, change the stated maturity date of
this Note, or reduce the principal amount hereof, or reduce the rate or extend
the time of payment of any interest hereon, or reduce any amount payable on
redemption or prepayment hereof, or impair or affect the right of the Holder to
receive payment of principal (whether in cash or Common Shares) of, and interest
on, the Notes or to institute suit for payment thereof, or impair or affect the
right of the Holder to receive any other payment (whether in cash or Common
Shares) provided for under this Note, or modify or amend the definition of
“Equity Conditions.”
 
17. TRANSFER. This Note and any shares of Common Stock issued upon conversion of
this Note may be offered, sold, assigned or transferred by the Holder without
the consent of the Company, subject only to the provisions of Section 2(g) of
the Securities Purchase Agreement.
 
18. REISSUANCE OF THIS NOTE.
 
(a) Transfer. If this Note is to be transferred, the Holder shall surrender this
Note to the Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new Note (in accordance with Section 18(d)),
registered as the Holder may request, representing the outstanding Principal
being transferred by the Holder and, if less than the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 18(d)) to
the Holder representing the outstanding Principal not being transferred. The
Holder and any assignee, by acceptance of this Note, acknowledge and agree that,
by reason of the provisions of Section 3(c)(iii) following conversion or
redemption of any portion of this Note, the outstanding Principal represented by
this Note may be less than the Principal stated on the face of this Note.
 
 
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(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note (as to which a written certification and the
indemnification contemplated below shall suffice as such evidence), and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary and reasonable form and, in the case of
mutilation, upon surrender and cancellation of this Note, the Company shall
execute and deliver to the Holder a new Note (in accordance with Section 18(d))
representing the outstanding Principal.
 
(c) Note Exchangeable for Different Denominations. This Note is exchangeable,
upon the surrender hereof by the Holder at the principal office of the Company,
for a new Note or Notes (in accordance with Section 18(d) and in principal
amounts of at least $10,000) representing in the aggregate the outstanding
Principal of this Note, and each such new Note will represent such portion of
such outstanding Principal as is designated by the Holder at the time of such
surrender.
 
(d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor
with this Note, (ii) shall represent, as indicated on the face of such new Note,
the Principal remaining outstanding (or in the case of a new Note being issued
pursuant to Section 18(a) or Section 18(c), the Principal designated by the
Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.
 
19. REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
RELIEF. The remedies provided in this Note shall be cumulative and in addition
to all other remedies available under this Note and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder’s right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note.  The Company covenants to the Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required. The Company shall provide all information and
documentation to the Holder that is requested by the Holder to enable the Holder
to confirm the Company’s compliance with the terms and conditions of this Note
(including, without limitation, compliance with Section 7).
 
 
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20. PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS.  If (a) this Note is
placed in the hands of an attorney for collection or enforcement or is collected
or enforced through any legal proceeding or the Holder otherwise takes action to
collect amounts due under this Note or to enforce the provisions of this Note or
(b) there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, without limitation,
attorneys’ fees and disbursements. The Company expressly acknowledges and agrees
that no amounts due under this Note shall be affected, or limited, by the fact
that the Purchase Price paid for this Note was less than the original Principal
amount hereof.
 
21. CONSTRUCTION; HEADINGS.  This Note shall be deemed to be jointly drafted by
the Company and the Holder and shall not be construed against any Person as the
drafter hereof. The headings of this Note are for convenience of reference and
shall not form part of, or affect the interpretation of, this Note. Terms used
in this Note but defined in the other Transaction Documents shall have the
meanings ascribed to such terms on the Closing Date in such other Transaction
Documents unless otherwise consented to in writing by the Holder.
 
22. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege. No waiver shall be effective unless it is in writing
and signed by an authorized representative of the waiving party.
 
23. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Conversion Price, the Closing Bid Price, the Closing Sale Price or fair market
value (as the case may be) or the arithmetic calculation of the Conversion Rate
or the applicable Redemption Price (as the case may be), the Company or the
Holder (as the case may be) shall submit the disputed determinations or
arithmetic calculations (as the case may be) via facsimile (i) within two (2)
Business Days after receipt of the applicable notice giving rise to such dispute
to the Company or the Holder (as the case may be) or (ii) if no notice gave rise
to such dispute, at any time after the Holder learned of the circumstances
giving rise to such dispute (including, without limitation, as to whether any
issuance or sale or deemed issuance or sale was an issuance or sale or deemed
issuance or sale of Excluded Securities). If the Holder and the Company are
unable to agree upon such determination or calculation within two (2) Business
Days of such disputed determination or arithmetic calculation (as the case may
be) being submitted to the Company or the Holder (as the case may be), then the
Company shall, within two (2) Business Days, submit via facsimile (a) the
disputed determination of the Conversion Price, the Closing Bid Price, the
Closing Sale Price or fair market value (as the case may be) to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate or any Redemption
Price (as the case may be) to the Company’s independent, outside accountant. The
Company shall cause at its expense the investment bank or the accountant (as the
case may be) to perform the determinations or calculations (as the case may be)
and notify the Company and the Holder of the results no later than ten (10)
Business Days from the time it receives such disputed determinations or
calculations (as the case may be). Such investment bank’s or accountant’s
determination or calculation (as the case may be) shall be binding upon all
parties absent demonstrable error.
 
 
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24. NOTICES; CURRENCY; PAYMENTS.
 
(a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section
9(f) of the Securities Purchase Agreement. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Note, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) promptly upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen (15) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any grant, issuances, or
sales of any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property to holders of shares of Common Stock or
(C) for determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.
 
(b) Currency.  All principal, interest and other amounts owing under this Note
or any Transaction Document that, in accordance with their terms, are paid in
cash shall be paid in U.S. dollars.   All amounts denominated in other
currencies shall be converted to the U.S. dollar equivalent amount in accordance
with the Exchange Rate on the date of calculation. “Exchange Rate” means, in
relation to any amount of currency to be converted into U.S. dollars pursuant to
this Note, the U.S. dollar exchange rate as published in the Wall Street Journal
on the relevant date of calculation (it being understood and agreed that where
an amount is calculated with reference to, or over, a period of time, the date
of calculation shall be the final date of such period of time).
 
(c) Payments. Whenever any payment of cash is to be made by the Company to any
Person pursuant to this Note, unless otherwise expressly set forth herein, such
payment shall be made in lawful money of the United States of America by a
certified check drawn on the account of the Company and sent via overnight
courier service to such Person at such address as previously provided to the
Company in writing (which address, in the case of each of the Buyers, shall
initially be as set forth on the Schedule of Buyers attached to the Securities
Purchase Agreement), provided that the Holder may elect to receive a payment of
cash via wire transfer of immediately available funds by providing the Company
with prior written notice setting out such request and the Holder’s wire
transfer instructions. Whenever any amount expressed to be due by the terms of
this Note is due on any day which is not a Business Day, the same shall instead
be due on the next succeeding day which is a Business Day. Any amount of
Principal or other amounts due under the Transaction Documents which is not paid
when due shall result in a late charge being incurred and payable by the Company
in an amount equal to interest on such amount at the rate of fifteen percent
(15%) per annum from the date such amount was due until the same is paid in full
(“Late Charge”).
 
 
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25. DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
non-public information relating to the Company or any of its Subsidiaries (for
the avoidance of doubt, the Company agrees that any notice required delivered by
the Company to the Holder pursuant to Sections 8 or 9 hereof shall be deemed to
include material, non-public information), the Company shall within one (1)
Business Day after any such receipt or delivery publicly disclose such material,
non-public information on a Current Report on Form 8-K or otherwise. In the
event that the Company believes that a notice contains material, non-public
information relating to the Company or any of its Subsidiaries, the Company so
shall indicate to such Holder contemporaneously with delivery of such notice,
and in the absence of any such indication, the Holder shall be allowed to
presume that all matters relating to such notice do not constitute material,
non-public information relating to the Company or its Subsidiaries. Nothing
contained in this Section 25 shall limit any obligations of the Company, or any
rights of the Holder, under Section 4(i) of the Securities Purchase Agreement.
 
26. CANCELLATION. After all Principal, accrued Interest, Late Charges and other
amounts at any time owed on this Note have been paid in full, this Note shall
automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.
 
27. WAIVER OF NOTICE.  To the extent permitted by law, the Company hereby
irrevocably waives demand, notice, presentment, protest and all other demands
and notices in connection with the delivery, acceptance, performance, default or
enforcement of this Note and the Securities Purchase Agreement.
 
28. GOVERNING LAW.  This Note shall be construed and enforced in accor­dance
with, and all questions concerning the construction, validity, interpretation
and performance of this Note shall be governed by, the internal laws of the
State of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York. The Company hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in The City of New York,
Borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  In the event that any
provision of this Note is invalid or unenforceable under any applicable statute
or rule of law, then such provision shall be deemed inoperative to the extent
that it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law.  Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of this Note. Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor of
the Holder.  THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND
AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION
CONTEMPLATED HEREBY.
 
 
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29. JUDGMENT CURRENCY.
 
(a) If for the purpose of obtaining or enforcing judgment against the Company in
any court in any jurisdiction it becomes necessary to convert into any other
currency (such other currency being hereinafter in this Section 29 referred to
as the “Judgment Currency”) an amount due in U.S. dollars under this Note, the
conversion shall be made at the Exchange Rate prevailing on the Trading Day
immediately preceding:
 
(i) the date actual payment of the amount due, in the case of any proceeding in
the courts of New York or in the courts of any other jurisdiction that will give
effect to such conversion being made on such date: or
 
(ii) the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 29(a)(ii) being hereinafter referred
to as the “Judgment Conversion Date”).
 
(b) If in the case of any proceeding in the court of any jurisdiction referred
to in Section 29(a)(ii) above, there is a change in the Exchange Rate prevailing
between the Judgment Conversion Date and the date of actual payment of the
amount due, the applicable party shall pay such adjusted amount as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Exchange Rate prevailing on the date of payment, will produce
the amount of US dollars which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial order at the Exchange
Rate prevailing on the Judgment Conversion Date.
 
(c) Any amount due from the Company under this provision shall be due as a
separate debt and shall not be affected by judgment being obtained for any other
amounts due under or in respect of this Note.
 
30. MAXIMUM PAYMENTS.  Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law.  In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Company to the Holder and thus refunded to the Company.
 
31. CERTAIN DEFINITIONS.  For purposes of this Note, the following terms shall
have the following meanings:
 
 
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(a) “Adjustment Right” means any right granted with respect to any securities
issued in connection with, or with respect to, any issuance or sale (or deemed
issuance or sale in accordance with Section 7) of shares of Common Stock (other
than rights of the type described in Section 6 hereof) that could result in a
decrease in the net consideration received by the Company in connection with, or
with respect to, such securities (including, without limitation, any cash
settlement rights, cash adjustment or other similar rights).
 
(b) “Aggregate Installment Amount” means the quotient of (x) $35,000,000 divided
by (y) the sum of the number of Installment Dates occurring prior to the
Maturity Date.
 
(c) “Approved Stock Plan” means any employee benefit plan which has been
approved by the board of directors of the Company prior to or subsequent to the
date hereof pursuant to which shares of Common Stock and standard options to
purchase Common Stock may be issued to any employee, officer or director for
services provided to the Company in their capacity as such.
 
(d) “Black Scholes Consideration Value” means the value of the applicable Option
or Convertible Security (as the case may be) based on the Black Scholes Option
Pricing Model obtained from the “OV” function on Bloomberg determined as of the
close of business on the Trading Day immediately following the public
announcement of the execution of definitive documents with respect to the
issuance of such Option or Convertible Security (as the case may be) and
reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury rate
for a period equal to the remaining term of such Option or Convertible Security
(as the case may be) as of the date of issuance of such Option or Convertible
Security (as the case may be), (ii) an expected volatility equal to the greater
of 87% and the 100 day volatility obtained from the HVT function on Bloomberg
(using 360 as the input for the annualization factor and the Rogers-Satchell
volatility estimator model) and (iii) the underlying price per share used in
such calculation shall be the highest Closing Bid Price for any Trading Day
during the ten (10) Trading Day period ending on and including the Trading Day
immediately preceding the public announcement of the execution of definitive
documents with respect to the issuance of such Option or Convertible Security
(as the case may be).
 
(e) “Bloomberg” means Bloomberg, L.P.
 
(f) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
 
(g) “Change of Control” means any Fundamental Transaction other than (i) any
merger of the Company or any of its, direct or indirect, wholly-owned
Subsidiaries with or into any of the foregoing Persons, (ii) any reorganization,
recapitalization or reclassification of the shares of Common Stock in which
holders of the Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, are, in all material respects, the holders of the voting
power of the surviving entity (or entities with the authority or voting power to
elect the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities) after such reorganization,
recapitalization or reclassification, or (iii) pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Company or any of its Subsidiaries.
 
 
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(h) “Change of Control Redemption Premium” means 125%.
 
(i) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price (as the case may be)
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the
case may be) of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved in accordance with the procedures in Section 23. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during such period.
 
(j) “Closing Date” shall have the meaning set forth in the Securities Purchase
Agreement, which is the date the Company initially issued the Notes pursuant to
the Securities Purchase Agreement.
 
(k) “Common Stock” means (i) the Company’s shares of common stock, $0.001 par
value per share, and (ii) any capital stock into which such common stock shall
have been changed or any share capital resulting from a reclassification of such
common stock.
 
(l) “Company Conversion Price” means, with respect to a particular date of
determination, the lower of (i) the Conversion Price then in effect and (ii) 85%
of the Market Price.
 
 
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(m) “Conversion Share Ratio” means as to any applicable Installment Date, the
quotient of (i) the number of Pre-Installment Conversion Shares delivered in
connection with such Installment Date divided by (ii) the number of
Post-Installment Conversion Shares applicable to such Installment Date.
 
(n) “Convertible Securities” means any capital stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for shares of Common Stock.
 
(o) “Dollar Failure” means, with respect to a particular date of determination,
that the aggregate dollar trading volume (as reported on Bloomberg) of the
Common Stock on the Eligible Market on which the Common Stock is listed or
designated for quotation as of such date of determination over the five (5)
consecutive Trading Day period ending on the Trading Day immediately preceding
such date of determination is less than $1,000,000 (the “Dollar Failure Limit”);
provided, that, solely with respect to a Company Conversion, a Dollar Failure
shall not be deemed to occur if the applicable Company Conversion Amount does
not exceed the applicable Maximum Dollar Failure Company Conversion Amount).
 
(p) “Eligible Market” means The New York Stock Exchange, the NYSE Amex, the
Nasdaq Global Select Market, the Nasdaq Global Market or the Principal Market.
 
(q) “Eligibility Date” means the earlier to occur of (x) the six month
anniversary of the Issuance Date and (y) the initial Effective Date (as defined
in the Registration Rights Agreement)
 
(r) “Equity Conditions” means: (i) either (x) one or more Registration
Statements filed pursuant to the Registration Rights Agreement shall be
effective and the prospectus contained therein shall be available for the resale
by the Holder of all of the Registrable Securities (which, solely for
clarification purposes, includes all shares of Common Stock issuable upon
conversion of this Note or otherwise pursuant to the terms of this Note and upon
exercise of the Warrants) in accordance with the terms of the Registration
Rights Agreement (i.e., subject to the provisions contained in the Registration
Rights Agreement pertaining to Cut-Back Shares, as such term is defined therein,
to the extent such Cut-Back Shares are not required to be registered on such
Registration Statement) or (y) all Registrable Securities shall be eligible for
sale under Rule 144 (as defined in the Securities Purchase Agreement) and the
Company shall have satisfied the current public information requirement of Rule
144(c)(1) (and 144(i)(2), if applicable) and without the need for registration
under any applicable federal or state securities laws (in each case,
disregarding any limitation on conversion of the Notes, other issuance of
securities with respect to the Notes and exercise of the Warrants); (ii) on each
day during the period beginning thirty calendar days prior to the applicable
date of determination and ending on and including the applicable date of
determination (the “Equity Conditions Measuring Period”), the Common Stock
(including all Registrable Securities) is listed or designated for quotation (as
applicable) on an Eligible Market and shall not have been suspended from trading
on an Eligible Market (other than
 
 
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suspensions of not more than two (2) days and occurring prior to the applicable
date of determination due to business announcements by the Company) nor shall
delisting or suspension by an Eligible Market be pending in writing by such
Eligible Market; (iii) on each day during the Equity Conditions Measuring
Period, the Company shall have delivered all shares of Common Stock issuable
upon conversion of this Note on a timely basis pursuant to the applicable
provisions hereof and all other shares of capital stock required to be delivered
by the Company on a timely basis as set forth in the other Transaction
Documents; (iv) any shares of Common Stock to be issued in connection with the
event requiring determination may be issued in full without violating Section
3(d) hereof; (v) any shares of Common Stock to be issued in connection with the
event requiring determination may be issued in full without violating the rules
or regulations of the Eligible Market on which the Common Stock is then listed
or designated for quotation (as applicable); (vi) on each day during the Equity
Conditions Measuring Period, no public announcement of a pending, proposed or
intended Fundamental Transaction shall have occurred which has not been
abandoned, terminated or consummated; (vii) on each day during the Equity
Conditions Measuring Period, the Company shall have no knowledge of any fact
that would reasonably be expected to cause (1) any effective Registration
Statement required to be filed pursuant to the Registration Rights Agreement to
not be effective or the prospectus contained therein to not be available for the
resale of all of the Registrable Securities required to be registered on such
Registration Statement in accordance with the terms of the Registration Rights
Agreement (i.e., subject to the provisions contained in the Registration Rights
Agreement pertaining to Cut-Back Shares, as such term is defined therein, to the
extent such Cut-Back Shares are not required to be registered on such
Registration Statement) or (2) any Registrable Securities to not be eligible for
sale pursuant to Rule 144 (including, without limitation, by the Company’s
failure to satisfy the current public information requirement of Rule 144(c)(1)
(and/or 144(i)(2), if applicable)) or any applicable federal or state securities
laws (in each case, disregarding any limitation on conversion of the Notes,
other issuance of securities with respect to the Notes and exercise of the
Warrants); (viii) the Holder shall not be in possession of any material,
non-public information provided to any of them by the Company, any of its
affiliates or any of their respective officers, employees, directors,
representatives, agents or the like; (ix) on each day during the Equity
Conditions Measuring Period, there shall not have occurred an Event of Default
or an event that with the passage of time or giving of notice would constitute
an Event of Default, (x) a Price Failure has not occurred and (xi) a Dollar
Failure has not occurred.
 
(s) “Equity Conditions Failure” means that (i) on any day during the period
commencing on the applicable Company Installment Notice Date through the later
of the applicable Installment Date and the date on which the applicable shares
of Common Stock are actually delivered to the Holder, or (ii) on any day during
the period commencing fifteen (15) Trading Days prior to the applicable Company
Optional Redemption Notice Date through the applicable Company Optional
Redemption Date, or, the Equity Conditions have not been satisfied (or waived in
writing by the Holder); provided, that notwithstanding the foregoing and solely
in connection with a Company Conversion hereunder, the Company’s failure to
satisfy clause (viii) of the definition of Equity Conditions shall not be deemed
to be an Equity Conditions Failure if (x) the Company has properly notified the
Holder that it desires to give the Holder material nonpublic information and,
prior to the Holder’s receipt of such material nonpublic information, the Holder
has delivered a written notice to the Company acknowledging its agreement to
receive such material nonpublic information and (y) such Equity Condition is
satisfied during the 72 hour period immediately preceding and including each
Trading Day in which the Company is required to deliver shares of Common Stock
to the Holder (or the Holder’s account with DTC, as applicable) in connection
with such Company Conversion.
 
 
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(t) “Excluded Events” means (i) changes in the national or world economy or
financial markets as a whole, (ii) changes in general economic conditions taken
as a whole that affect the industries in which the Company and its Subsidiaries
conduct their business,  (iii) acts of terrorism or war, including the
engagement by the United States of America or any other country in hostilities,
and whether or not pursuant to the declaration of a national emergency or war,
or any earthquakes, hurricanes or other natural disasters, (iv) any financial
statement impact of either (x) the transactions contemplated by the Transaction
Documents and (y) the sale of the Company’s interest in Front Range Energy, LLC.
 
(u) “Excluded Securities” means (i) any Common Stock issued or issuable to
directors, officers or employees of the Company in their capacity as such
pursuant to an Approved Stock Plan, provided that (A) all such issuances (taking
into account the shares of Common Stock issuable upon exercise of any Options)
after the date hereof pursuant to this clause (i) do not, in the aggregate,
exceed more than 10% of the Common Stock issued and outstanding immediately
prior to the date hereof and (B) the exercise price of any Options is not
lowered, none of such options are amended to increase the number of shares
issuable thereunder and none of the terms or conditions of any such options are
otherwise materially changed in any manner that adversely affects any of the
Buyers; (ii) any Common Stock issued or issuable upon the conversion or exercise
of Convertible Securities (other than standard Options to purchase Common Stock
issued pursuant to an Approved Stock Plan that are covered by clause (i) above)
issued prior to the date hereof, provided that the conversion price of any such
Convertible Securities is not lowered (except in accordance with antidilution
provisions in such Convertible Securities or Options in effect as of the
Subscription Date), none of such Convertible Securities are amended to increase
the number of shares issuable thereunder and none of the terms or conditions of
any such Convertible Securities are otherwise materially changed in any manner
that adversely affects the Holder or any of the Buyers; (iii) the Company’s
Series B Cumulative Convertible Preferred Stock (the “Preferred Stock”) issued
or issuable as an in-kind dividend on any Preferred Stock outstanding, provided
that the dividend rate of such Preferred Stock is not increased and conversion
price of any such Preferred Stock is not lowered (except in accordance with
antidilution provisions in the Company’s Certificate of Designations, Powers,
Preferences and Rights of the Company’s Preferred Stock as in effect as of the
Subscription Date (the “Preferred Certificate of Designations”), the Preferred
Certificate of Designations is not amended to increase the number of Preferred
Stock issuable as in-kind dividends thereunder or shares of Common Stock
issuable thereunder and none of the terms or conditions of set forth in the
Preferred Certificate of Designations are otherwise materially changed in any
manner that adversely affects the Holder or any of the Buyers, (iv) any Common
Stock issued or issuable pursuant to any conversion, amortization payment or
interest payment pursuant to any Note, provided that the conversion price of
such Note is not lowered (other than as provided by the terms of such Note as of
the Issuance Date (as defined in such Note)) and (v) any Common Stock issued or
issuable upon exercise of any Warrant, provided that the exercise price of such
Warrant is not lowered (other than as provided by the terms of such Warrant as
of the Issuance Date (as defined in such Warrant)) and such Warrant is not
amended to increase the number of shares issuable thereunder; provided, that
notwithstanding the foregoing, no Common Stock, Options, Convertible Securities
or other securities issued, directly or indirectly, to any Person in connection
with any claim arising pursuant to the Delta Case or any Judgment or claim
related thereto or related to any EPT Agreement (as defined in the Delta Case)
(collectively, the “Delta Securities”) shall be an Excluded Security pursuant to
any Transaction Document.
 
 
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(v) “Fundamental Transaction” means that (A) the Company or any of its
Subsidiaries shall, directly or indirectly, in one or more related transactions,
(i) consolidate or merge with or into (whether or not the Company or any of its
Subsidiaries is the surviving corporation) another Person or Persons, or (ii)
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of the properties or assets of the Company or any of its Subsidiaries to another
Person, or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than 50% of the outstanding shares
of Voting Stock of the Company (not including any shares of Voting Stock of the
Company held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such purchase, tender or
exchange offer), or (iv) consummate a securities purchase agreement or other
business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Voting
Stock of the Company (not including any shares of Voting Stock of the Company
held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such securities purchase
agreement or other business combination), or (v) reorganize, recapitalize or
reclassify the Voting Stock of the Company or (B) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock
of the Company.
 
(w) “GAAP” means United States generally accepted accounting principles,
consistently applied.
 
(x) “Holder Pro Rata Amount” means a fraction (i) the numerator of which is the
original Principal amount of this Note on the Closing Date and (ii) the
denominator of which is the aggregate original principal amount of all Notes
issued to the initial purchasers pursuant to the Securities Purchase Agreement
on the Closing Date.
 
(y) “Installment Amount” means (i) with respect to any Installment Date other
than the Maturity Date, the lesser of (A) the product of (I) Aggregate
Installment Amount, multiplied by (II) Holder Pro Rata Amount and (B) the
Principal amount under this Note as of such Installment Date, and (ii) with
respect to the Installment Date that is the Maturity Date, the Principal amount
under this Note as of such Installment Date, in each case, as any such
Installment Amount may be reduced pursuant to the terms of this Note, whether
upon conversion, redemption or otherwise, together with, in each case of clauses
(i) and (ii), the sum of any accrued and unpaid Interest as of such Installment
Date under this Note and accrued and unpaid Late Charges, if any, under this
Note as of such Installment Date. In the event the Holder shall sell or
otherwise transfer any portion of this Note, the transferee shall be allocated a
pro rata portion of each unpaid Installment Amount hereunder.
 
 
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(z) “Installment Date” means (i) initially, the twenty-second (22nd) Trading Day
immediately following the Eligibility Date, (ii) then, (x) if the first Trading
Day of the calendar month immediately following the initial Installment Date
occurs less than thirty calendar days after the initial Installment Date, the
first Trading Day of the second calendar month immediately following the initial
Installment Date or (y) otherwise, the first Trading Day of the calendar month
immediately following the initial Installment Date and (iii) thereafter, the
first Trading Day of the calendar month immediately following the previous
Installment Date until the Maturity Date.
 
(aa) “Interest Rate” means eight percent (8%) per annum, subject to adjustment
as set forth in Section 2.
 
(bb) "Make-Whole Amount" means, as to any Conversion Amount on any Conversion
Date, as to any Event of Default Redemption on any Event of Default Redemption
Date, as to any Change of Control Redemption on any Change of Control Redemption
Date, as to any Company Optional Redemption on any Company Optional Redemption
Date or any Redemption on any Redemption Date, the amount of any Interest that,
but for (i) the Holder's exercise of its conversion right pursuant to Section
3(c)(i), (ii) an Event of Default Redemption pursuant to Section 4(b), (iii) a
Change of Control Redemption pursuant to Section 5(b) or (iv) a Company Optional
Redemption pursuant to Section 9, would have accrued with respect to the
Conversion Amount being converted or redeemed under this Note at the Interest
Rate for the period from the applicable Conversion Date, Event of Default
Redemption Date, Change of Control Redemption Date or Company Optional
Redemption Date, as the case may be, through the Maturity Date.
 
(cc) “Market Price” means, for any given date, the quotient of (I) the sum of
the VWAP of the Common Stock for each of the five lowest Trading Days during the
twenty (20) consecutive Trading Day period ending and including the Trading Day
immediately prior to the applicable Installment Date (or other applicable date
of conversion hereunder), divided by (II) five (5) (such period, the “Market
Price Measuring Period”).  All such determinations to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or
similar transaction during such Market Price Measuring Period.
 
 
 
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(dd) “Maturity Date” shall mean [          ]2; provided, however, the Maturity
Date may be extended at the option of the Holder (i) in the event that, and for
so long as, an Event of Default shall have occurred and be continuing or any
event shall have occurred and be continuing that with the passage of time and
the failure to cure would result in an Event of Default or (ii) through the date
that is twenty (20) Business Days after the consummation of a Fundamental
Transaction in the event that a Fundamental Transaction is publicly announced or
a Change of Control Notice is delivered prior to the Maturity Date, provided
further that if a Holder elects to convert some or all of this Note pursuant to
Section 3 hereof, and the Conversion Amount would be limited pursuant to Section
3(d) hereunder, the Maturity Date shall automatically be extended until such
time as such provision shall not limit the conversion of this Note.
 
(ee) “Maximum Dollar Failure Company Conversion Amount” means, with respect to
any Installment Date, the product of (x) the applicable Installment Amount and
(y) the Maximum Dollar Failure Company Conversion Percentage.
 
(ff) “Maximum Dollar Failure Company Conversion Percentage” means, with respect
to a particular date of determination, the quotient of (x) the aggregate dollar
trading volume (as reported on Bloomberg) of the Common Stock on the Eligible
Market on which the Common Stock is listed or designated for quotation as of
such date of determination over the five (5) consecutive Trading Day period
ending on the Trading Day immediately preceding such date of determination,
divided by (y) the Dollar Failure Limit; provided, that, notwithstanding the
foregoing, if a Price Failure has occurred with respect to such Installment
Date, the Maximum Dollar Failure Company Conversion Percentage shall equal zero.
 
(gg) “Options” means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.
 
(hh) “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on an Eligible Market, or, if there is more than
one such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.
 
(ii) “Permitted Indebtedness” means (i) Indebtedness evidenced by this Note and
the Other Notes; (ii) Permitted Senior Indebtedness, (iii) Permitted Subsidiary
Indebtedness and (iv) Indebtedness described in Items 2, 4, 5 and 6 of Schedule
3(s) of the Securities Purchase Agreement as in effect as of the Subscription
Date; provided, that the principal amount of such Indebtedness is not increased,
the terms of such Indebtedness are not modified to impose more burdensome terms
upon the Company or any of its Subsidiaries and the terms of such Indebtedness
are not materially changed in any manner that adversely affects the Holder or
any of the Buyers.
 
 

--------------------------------------------------------------------------------

2   Insert fifteen month anniversary of the Issuance Date
 
 
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(jj) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or
being contested in good faith by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP, (ii) any statutory Lien
arising in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens and other similar liens,
arising in the ordinary course of business with respect to a liability that is
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings, (iv) Liens securing the Company’s obligations under the
Notes; (v) any Lien securing Permitted Senior Indebtedness, (vi) any Lien
securing Permitted Subsidiary Indebtedness and (vii) any Lien in effect on the
Subscription Date relating to the Indebtedness described in Items 2 and 6 of
Schedule 3(s) of the Securities Purchase Agreement.
 
(kk) “Permitted Subsidiary Indebtedness” means the principal of (and premium, if
any), interest on, and all fees and other amounts (including, without
limitation, any reasonable out-of-pocket costs, enforcement expenses (including
reasonable out-of-pocket legal fees and disbursements), collateral protection
expenses and other reimbursement or indemnity obligations relating thereto)
payable by Kinergy Marketing, LLC under that certain Amendment No. 2 to Loan and
Security Agreement, Consent and Waiver dated November 5, 2009 by and between
Wachovia Capital Finance Corporation (Western), Kinergy Marketing, LLC and the
Company; provided, however, that the aggregate outstanding amount of the
Permitted Subsidiary Indebtedness and the Permitted Working Capital Facility
does not at any time exceed $30 million.
 
(ll) “Permitted Senior Indebtedness” means the Permitted Working Capital
Facility.
 
(mm) “Permitted Working Capital Facility” means the principal of (and premium,
if any), interest on, and all fees and other amounts (including, without
limitation, any reasonable out-of-pocket costs, enforcement expenses (including
reasonable out-of-pocket legal fees and disbursements), collateral protection
expenses and other reimbursement or indemnity obligations relating thereto)
payable by Company and/or its Subsidiaries under or in connection with any
credit facility to be entered into by the Company and/or its Subsidiaries with
one or more financial institutions (and on terms and conditions), in form and
substance reasonably satisfactory to the Required Holders; provided, however,
that the aggregate outstanding amount of the Permitted Working Capital Facility
and the Permitted Subsidiary Indebtedness does not at any time exceed $30
million.
 
(nn) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity or a government or any department or agency thereof.
 
(oo) “Post-Installment Conversion Shares” means that number of shares of Common
Stock that would be required to be delivered pursuant to Section 8 on an
applicable Installment Date without taking into account the delivery of any
Pre-Installment Conversion Shares.
 
 
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(pp) “Pre-Installment Period Conversion Price” means, with respect to a
particular date of determination, the lower of (i) the Conversion Price then in
effect and (ii) 85% of the quotient of (I) the sum of the VWAP of the Common
Stock for each of the five lowest Trading Days during the twenty (20)
consecutive Trading Day period ending and including the Trading Day immediately
preceding the delivery or deemed delivery of the applicable Company Installment
Notice, divided by (II) five (5).  All such determinations to be appropriately
adjusted for any stock split, stock dividend, stock combination or other similar
transaction during any such measuring period.
 
(qq) “Price Failure” means, with respect to a particular date of determination,
that the lower of (i) the quotient of (I) the sum of the VWAP of the Common
Stock for each of the five (5) consecutive Trading Day period ending and
including the applicable date of determination, divided by (II) five (5), is
less than $0.20 (as adjusted for stock splits, stock dividends, stock
combinations or other similar transactions).
 
(rr) “Principal Market” means the Nasdaq Capital Market.
 
(ss) “Redemption Notices” means, collectively, the Event of Default Redemption
Notice, the Company Optional Redemption Notice, any Company Installment Notice
with respect to any Company Redemption, and the Change of Control Redemption
Notice and each of the foregoing, individually, a “Redemption Notice.”
 
(tt) “Redemption Premium” means (i) in the case of the Events of Default
described in Section 4(a) (other than Sections 4(a)(viii) through 4(a)(x)), 125%
or (ii) in the case of the Events of Default described in Sections 4(a)(viii)
through 4(a)(x), 100%.
 
(uu) “Redemption Prices” means, collectively, the Event of Default Redemption
Price, the Company Optional Redemption Price, the Change of Control Redemption
Price, the Company Installment Redemption Price, and each of the foregoing,
individually, a “Redemption Price.”
 
(vv) “Registration Rights Agreement” means that certain registration rights
agreement, dated as of the Closing Date, by and among the Company and the
initial holders of the Notes relating to, among other things, the registration
of the resale of the Common Stock issuable upon conversion of the Notes or
otherwise pursuant to the terms of the Notes and exercise of the Warrants, as
may be amended from time to time.
 
(ww) “Required Holders” means the holders of Notes representing at least 75% of
the aggregate principal amount of the Notes then outstanding (excluding any
Notes held by the Company or any of its Subsidiaries).
 
(xx) “SEC” means the United States Securities and Exchange Commission or the
successor thereto.
 
(yy) “Securities Purchase Agreement” means that certain securities purchase
agreement, dated as of the Subscription Date, by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes and
Warrants, as may be amended from time to time.
 
(zz) “Subscription Date” means September 27, 2010.
 
 
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(aaa) “Subsidiary” means any Person in which the Company, directly or
indirectly, (I) owns any of the outstanding capital stock or holds any equity or
similar interest of such Person (other than Front Range Energy, LLC) or (II)
controls or operates all or any part of the business, operations or
administration of such Person; provided, that after the Subscription Date, a
Person (other than Subsidiaries as of the Subscription Date) shall not become a
Subsidiary pursuant to clause (I) unless the Company, directly or indirectly,
owns at least 10% of any of the outstanding capital stock or holds at least 10%
of any equity or similar interest of such Person (other than Front Range Energy,
LLC).
 
(bbb) “Successor Entity” means the Person (or, if so elected by the Holder, the
Parent Entity) formed by, resulting from or surviving any Fundamental
Transaction or the Person (or, if so elected by the Holder, the Parent Entity)
with which such Fundamental Transaction shall have been entered into.
 
(ccc) “Trading Day” means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded, provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time) unless such day is otherwise designated
as a Trading Day in writing by the Holder.
 
(ddd) “VWAP” means, for any security as of any date, the dollar volume-weighted
average price for such security on the Principal Market (or, if the Principal
Market is not the principal trading market for such security, then on the
principal securities exchange or securities market on which such security is
then traded) during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its
“Volume at Price” function or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If the VWAP cannot be calculated
for such security on such date on any of the foregoing bases, the VWAP of such
security on such date shall be the fair market value as mutually determined by
the Company and the Holder. If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be resolved
in accordance with the procedures in Section 23. All such determinations shall
be appropriately adjusted for any stock dividend, stock split, stock combination
or other similar transaction during such period.
 
 
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(eee) “Voting Stock” of a Person means capital stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time capital stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
 
(fff) “Warrants” has the meaning ascribed to such term in the Securities
Purchase Agreement, and shall include all warrants issued in exchange therefor
or replacement thereof.
 
[signature page follows]
 

 
 
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.
 

 
Pacific Ethanol, Inc.
 
By: ________________________________
 
Name:
 
Title:

 
 
 
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EXHIBIT I

 
PACIFIC ETHANOL, INC.
CONVERSION NOTICE
 
Reference is made to the Senior Convertible Note (the “Note”) issued to the
undersigned by Pacific Ethanol, Inc., a Delaware corporation (the
“Company”).  In accordance with and pursuant to the Note, the undersigned hereby
elects to convert the Conversion Amount (as defined in the Note) of the Note
indicated below into shares of Common Stock, $0.001 par value per share (the
“Common Stock”), of the Company, as of the date specified below.
 
Date of Conversion:
 

 
Aggregate Conversion Amount to be converted:
 

 
Please confirm the following information:

 
Conversion Price:
 

 
Number of shares of Common Stock to be issued:
 

 
Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

 
Issue to:
         

 
Facsimile Number:
 

 
Authorization:
 

 
By:
 

 
Title:
 

 
Dated:
 

 
Account Number:
 
  (if electronic book entry transfer)
 

 
Transaction Code Number:
 
  (if electronic book entry transfer)
 

 
Installment Amount(s) to be reduced (and corresponding Installment Date(s)) and
amount of reduction:
 

 
 
 
 
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ACKNOWLEDGMENT
 
The Company hereby acknowledges this Conversion Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated September __, 2010 from
the Company and acknowledged and agreed to by [TRANSFER AGENT].
 

 
Pacific Ethanol, Inc.
 
By:  _________________________________
 
Name:
 
Title:

 
 
 
 
 
 
 
 
 
 
 
 
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