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Unassociated Document

     

    EXHIBIT 10.2

     

     

    
      CERTIFICATE
OF DESIGNATIONS,

      POWERS,
PREFERENCES AND RIGHTS OF THE SERIES B

       CUMULATIVE
CONVERTIBLE PREFERRED STOCK

       

      OF

       

      PACIFIC
ETHANOL, INC.

       

      Pursuant to Section 151 of
the

      Delaware General Corporation
Law

       

      Pacific
Ethanol, Inc. (the “Corporation”), organized and
existing under the laws of the State of Delaware, does, by its Chief Financial
Officer and under its corporate seal, hereby certify that pursuant to the
authority contained in Article Fourth of its Certificate of Incorporation and in
accordance with the provisions of Section 151 of the Delaware General
Corporation Law, its Board of Directors has adopted the following resolution
creating the following classes and series of the Corporation’s Preferred Stock
and determining the voting powers, designations, powers, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations and restrictions thereof, of such classes and
series:

       

      RESOLVED,
that, pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation of the Corporation (the “Certificate of
Incorporation”), there is hereby created the following series of
Preferred Stock:

       

      
        	
                 
      

              	
                ·

              	
                3,000,000
      shares shall be designated Series B Cumulative Convertible Preferred
      Stock, par value $0.001 per share (the “Series B Preferred
      Stock”).

              

      

       

      The
designations, powers, preferences, and rights and the qualifications,
limitations and restrictions of the Series B Preferred Stock in addition to
those set forth in the Certificate of Incorporation shall be as
follows:

       

      Section
1.       Designation and
Amount.  3,000,000 shares of the unissued preferred stock of
the Corporation shall be designated as Series B Cumulative Convertible Preferred
Stock, par value $.001 per share.  The Series B Preferred Stock shall
be issued in accordance with the Purchase Agreement at a purchase price of
$19.50 per share (the “Series B
Issue Price”).

       

      Section
2.       Rank.  The
Series B Preferred Stock shall rank: (i) subject to the requirements of Section 7, junior to
any other class or series of capital stock of the Corporation hereafter created
specifically ranking as to dividend rights, redemption rights, liquidation
preference and other rights senior to the Series B Preferred Stock (the “Senior Securities”); (ii)
senior to all of the Corporation’s common stock, par value $0.001 per share (the
“Common Stock”); (iii)
senior to any class or series of capital stock of the Corporation hereafter
created not specifically ranking as to dividend rights, redemption rights,
liquidation preference and other rights senior to or on parity with any Series B
Preferred Stock of whatever subdivision (collectively, with the Common Stock,
the “Junior
Securities”); and (iv) pari passu with respect to
dividend and liquidation rights with the Corporation’s Series A Cumulative
Redeemable Convertible Preferred Stock ( the “Series A Preferred Stock”)
and, subject to the requirements of Section 7, pari passu with respect to
any class or series of capital stock of the Corporation hereafter created
specifically ranking on a parity with the Series B Preferred Stock
(collectively, the “Parity
Securities”).

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      Section
3.        Dividends.

       

      (a)           So
long as shares of Series B Preferred Stock remain outstanding, the holders of
each share of the Series B Preferred Stock shall be entitled, from and after the
date of issuance of such share, to receive, and shall be paid quarterly in
arrears (beginning on the last day of the calendar quarter following the date of
the initial issuance of Series B Preferred Stock) in cash out of funds legally
available therefor, on a pari
passu basis with the Holders of Series A Preferred Stock, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of the Common Stock, cumulative dividends, of an amount equal to 7.00%
of the Series B Issue Price per share (as adjusted for any stock dividends,
stock splits, combinations, recapitalizations involving equity securities of the
Corporation, reclassifications or other similar events involving a change with
respect to the Series B Preferred Stock) per annum with respect to each share of
the Series B Preferred Stock; provided, however, that such
dividend may, at the option of the Corporation, be paid to the holders of Series
B Preferred Stock in shares of the Series B Preferred Stock valued at the Series
B Issue Price (as adjusted for any stock dividends, stock splits, combinations,
recapitalizations involving equity securities of the Corporation,
reclassifications or other similar events involving a change with respect to the
Series B Preferred Stock).  The holders of shares of Series B
Preferred Stock shall be entitled to receive such dividends immediately after
the payment of any dividends to Senior Securities required by the Corporation’s
Certificate of Incorporation, as amended or amended and restated and in effect,
including for this purpose any certificate(s) of designation (the “Charter”), prior and in
preference to any dividends paid to Junior Securities but in parity with any
distribution to the holders of Series A Preferred Stock and all other Parity
Securities.

       

      (b)           In
case the Corporation shall at any time or from time to time declare, order, pay
or make a dividend or other distribution (including, without limitation, any
distribution of stock or other securities or property or rights or warrants to
subscribe for securities of the Corporation or any of its subsidiaries by way of
a dividend, distribution or spin-off) on its Common Stock, other than (i) a
distribution made in compliance with the provisions of Section 4 or (ii) a
dividend or distribution made in Common Stock, the holders of the Series B
Preferred Stock shall be entitled to receive from the Corporation with respect
to each share of Series B Preferred Stock held, any dividend or distribution
that would be received by a holder of the number of shares (including fractional
shares) of Common Stock into which such Series B Preferred Stock is convertible
on the record date for such dividend or distribution, with fractional shares of
Common Stock deemed to be entitled to the corresponding fraction of any dividend
or distribution that would be received by a whole share.  Any such
dividend or distribution shall be declared, ordered, paid and made at the same
time such dividend or distribution is declared, ordered, paid and made on the
Common Stock.  No dividend or distribution shall be declared, ordered,
paid or made on the Common Stock unless the dividend or distribution on the
Series B Preferred Stock provided for by this paragraph shall be declared,
ordered, paid or made at the same time.

       

      
        
          
          

        

        
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      Section
4.       Liquidation
Preference.

       

      (a)           In
the event of any liquidation, dissolution or winding up of the Corporation,
either voluntary or involuntary, the holders of Series B Preferred Stock shall
be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, whether from capital, surplus or earnings,
immediately after any distributions to Senior Securities required by the
Charter, and prior and in preference to any distribution to Junior Securities
but pari passu with any
distribution to the holders of Series A Preferred Stock or other Parity
Securities, an amount per share equal to the sum of the Series B Issue Price (as
adjusted for any stock splits, combinations, recapitalizations involving equity
securities of the Corporation, reclassifications of other similar events
involving a change with respect to the Series B Preferred Stock) and any accrued
but unpaid dividends on the Series B Preferred Stock.  If upon the
occurrence of such event, and after the payment in full of the preferential
amounts with respect to the Senior Securities, the assets and funds available to
be distributed among the holders of the Series B Preferred Stock, the Series A
Preferred Stock and any other Parity Securities shall be insufficient to permit
the payment to such holders of the full preferential amounts due to such
holders, respectively, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed among the holders of the
Series B Preferred Stock, Series A Preferred Stock and any other Parity
Securities, pro rata, based on the amount each such holder would receive if such
full preferential amounts were paid unless otherwise provided in the
Charter.

       

      (b)           Upon
the completion of the distributions required by Section 4(a), if
assets remain in the Corporation, they shall be distributed to the holders of
Junior Securities other than Common Stock with respect to any liquidation
preference payable to such holders.

       

      (c)           Upon
the completion of the distributions required by Section 4(a) and
Section 4(b),
if assets remain in the Corporation, they shall be distributed pro rata, on an
as-converted to Common Stock basis, to the holders of Common Stock, Series A
Preferred Stock and Series B Preferred Stock.

       

      (d)           A
sale, lease, conveyance or disposition of all or substantially all of the
capital stock or assets of the Corporation or a merger, consolidation, share
exchange, reorganization or other transaction or series of related transactions
(whether involving the Corporation or a subsidiary thereof) in which the
Corporation’s stockholders immediately prior to such transaction do not retain a
majority of the voting power in the surviving entity (a “Transaction”), shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 4,
unless (i) the holders of 66 2/3% of the then outstanding shares of the Series B
Preferred Stock vote affirmatively or consent in writing that such transaction
shall not be treated as a liquidation, dissolution or winding up within the
meaning of this Section 4 or (ii)
such Transaction shall have resulted in the conversion of the Series B Preferred
Stock in accordance with Section 5(b); provided, however, that each
holder of Series B Preferred Stock shall have the right to elect the conversion
benefits of the provisions of Section 5(a) or other
applicable conversion provisions in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section; and provided, further, that shares
of the surviving entity held by holders of the capital stock of the Corporation
acquired by means of other than the Transaction shall not be used in determining
if the shareholders of the Corporation own a majority of the voting power of the
surviving entity, but shall be used for determining the total outstanding voting
power of such entity.

       

      
        
          
          

        

        
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      (e)           Prior
to the closing of a Transaction described in Section 4(d) which
would constitute a liquidation, dissolution or winding up within the meaning of
this Section 4,
the Corporation shall, at its sole option, either (i) make all distributions of
cash or other property that it is required to make to the holders of Series B
Preferred Stock pursuant to the first sentence of Section 4(a), (ii)
set aside sufficient funds or other property from which the distributions
required to be made to such holders can be made, or (iii) establish an escrow or
other similar arrangement with a third party pursuant to which the proceeds
payable to the Corporation from the Transaction will be used to make the
liquidating payments to such holders immediately after the consummation of the
Transaction.  In the event that the Corporation is unable to fully
comply with any of the foregoing alternatives, the Corporation shall either: (x)
cause such closing to be postponed until the Corporation complies with one of
the foregoing alternatives, or (y) cancel such Transaction, in which event the
rights of the holders of Series B Preferred Stock shall be the same as existing
immediately prior to such proposed Transaction.

       

      Section
5.       Conversion of Series B
Preferred Stock.  The Corporation and the record holders of the
Series B Preferred Stock shall have conversion rights as follows:

       

      (a)           Right to
Convert.  Each record holder of Series B Preferred Stock shall
be entitled to convert whole shares of Series B Preferred Stock for the Common
Stock issuable upon conversion of the Series B Preferred Stock, at any time at
the option of the holder thereof, subject to adjustment and limitations on
conversion prior to obtaining stockholder approval as provided in Section 5(d) hereof,
as follows: Each share of Series B Preferred Stock shall be convertible into
such number of fully paid and nonassessable shares of Common Stock as is
obtained by (I) multiplying the number of shares of Series B Preferred Stock so
to be converted by the Series B Issue Price and (II) dividing the result thereof
by the Conversion Price.  The Conversion Price shall initially be
$6.50 per share of Series B Preferred Stock, subject to adjustment as provided
in Section
5(d).  Accrued but unpaid dividends will be paid in cash upon
any such conversion.

       

      (b)           Forced
Conversion.  (i)  In the event of a Transaction which
will result in an Internal Rate of Return to holders of Series B Preferred Stock
of 25.00% or more, each share of outstanding Series B Preferred Stock shall,
concurrently with the closing of such Transaction, be converted into fully-paid
and non-assessable shares of Common Stock.  Any such conversion shall
be made into the number of shares of Common Stock determined pursuant to Section 5(a) using
the Conversion Price, as last adjusted.  Accrued but unpaid dividends
will be paid in cash on any such conversion.

       

      (ii)           Notwithstanding
anything to the contrary herein, no shares of outstanding Series B Preferred
Stock shall be converted into Common Stock pursuant to this Section 5(b) unless
at the time of such proposed conversion the Corporation shall have on file with
the Securities and Exchange Commission an effective registration statement with
respect to the shares of Common Stock issued or issuable to the holders on
conversion of the Series B Preferred Stock then issued or issuable to such
holders and such shares of Common Stock are eligible for trading on NASDAQ (or
approved by and listed on a stock exchange approved by the holders of 66 2/3% of
the then outstanding shares of Series B Preferred Stock).

       

      
        
          
          

        

        
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      (c)           Mechanics of
Conversion.  In order to convert Series B Preferred Stock into
full shares of Common Stock if (i) such conversion is pursuant to Section 5(a), the
holder shall (A) fax a copy of a fully executed notice of conversion (“Notice of Conversion”) to the
Corporation at the office of the Corporation or to the Corporation’s designated
transfer agent (the “Transfer
Agent”) for the Series B Preferred Stock stating that the holder elects
to convert, which notice shall specify the date of conversion, the number of
shares of Series B Preferred Stock to be converted, the Conversion Price
(together with a copy of the front page of each certificate to be converted) and
(B) surrender to a common courier for either overnight or two (2) day delivery
to the office of the Corporation or its transfer agent, the original
certificates representing the Series B Preferred Stock (the “Preferred Stock
Certificates”) being converted, duly endorsed for transfer, and (ii) such
conversion is pursuant to Section 5(b), the
Corporation shall fax a copy of a Notice of Conversion to the holders of Series
B Preferred Stock stating that the shares of Series B Preferred Stock shall be
converted into Common Stock, which notice shall describe the Transaction and the
calculation of the Internal Rate of Return and specify the date of such
conversion, the number of shares of Series B Preferred Stock that are being
converted, the Conversion Price and a calculation of the number of shares of
Common Stock issuable upon such conversion (together with a copy of the front
page of each certificate to be converted); provided, however, that the
Corporation’s failure to deliver a Notice of Conversion to each holder shall not
affect the conversion of such shares of Series B Preferred Stock on the date of
the closing of the Transaction and the cancellation of the certificates
representing such shares of Series B Preferred Stock.  In the event of
a conversion pursuant to Section 5(b), the
outstanding shares of Series B Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent and the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless
either the Preferred Stock Certificates are delivered to the Corporation or the
Transfer Agent as provided above, or the holder notifies the Corporation or its
Transfer Agent that such certificates have been lost, stolen or destroyed
(subject to the requirements of Section 5(c)(i)
below).

       

      (i)           Lost or Stolen
Certificates.  Upon receipt by the Corporation of evidence of
the loss, theft, destruction or mutilation of any Preferred Stock Certificates
representing shares of Series B Preferred Stock, and (in the case of loss, theft
or destruction) of indemnity or security reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Preferred Stock
Certificates, if mutilated, the Corporation shall execute and deliver new
Preferred Stock Certificates of like tenor and date; provided that the
Corporation shall pay all costs of delivery (including insurance against loss
and theft until delivered in an amount satisfactory to the holders of Series B
Preferred Stock).  However, the Corporation shall not be obligated to
reissue such lost or stolen Preferred Stock Certificates if the holder
contemporaneously requests the Corporation to convert such Series B Preferred
Stock into Common Stock or if such shares of Series B Preferred Stock have been
otherwise converted into Common Stock.

       

      (ii)           Delivery of Common Stock
Upon Conversion.  The Corporation no later than 6:00 p.m.
(Pacific time) on the third (3rd) business day after receipt by the Corporation
or its transfer agent of all necessary documentation duly executed and in proper
form required for conversion, including the original Preferred Stock
Certificates to be converted (or after provision for security or indemnification
in the case of lost, stolen or destroyed certificates, if required), shall issue
and surrender to a common courier for either overnight or (if delivery is
outside the United States) two (2) day delivery to the holder as shown on the
stock records of the Corporation a certificate for the number of shares of
Common Stock to which the holder shall be entitled as aforesaid.

       

      
        
          
          

        

        
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      (iii)           Date of
Conversion.  The date on which a voluntary conversion pursuant
to Section 5(a)
occurs (the “Date of Voluntary
Conversion”) shall be deemed to be the date the applicable Notice of
Conversion is faxed to the Corporation or the Transfer Agent, as the case may
be, provided that the copy of the Notice of Conversion is faxed to the
Corporation on or prior to 6:00 p.m. (Pacific time) on the Date of
Conversion.  A forced conversion pursuant to Section 5(b) shall
occur on the date on which such forced conversion is deemed to occur pursuant to
Section 5(b)
(the “Date of
Forced Conversion”, and together with
the Date of Voluntary Conversion, the “Date of
Conversion”).  The original Preferred Stock Certificates
representing the shares of Series B Preferred Stock to be converted shall be
surrendered by depositing such certificates with a common courier for either
overnight or two (2) day delivery, as soon as practicable following the Date of
Voluntary Conversion or as soon as practicable following the date such holder
receives notice of the Date of Forced Conversion. The person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Date of Conversion.

       

      (iv)           No Fractional Shares on
Conversion.  No fractional shares of Common Stock shall be
issued upon conversion of the Series B Preferred Stock.  In lieu of
any fractional share to which the holder would otherwise be entitled, the
Corporation shall (after aggregating all shares into which shares of Series B
Preferred held by each holder could be converted) pay cash equal to such
fraction multiplied by the Market Price per share of Common Stock on the Date of
Conversion.

       

      (d)           Adjustment of Conversion
Price.

       

      (i)           Adjustments of Conversion
Price Upon Issuance of Common Stock.  If at any time after the
first filing of this Certificate of Designations, the Corporation shall issue or
sell, or is, in accordance with Section 5(d)(i)(A)
through (G)
below, deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than the Conversion Price in effect immediately
prior to the time of such issue or sale or deemed issue or sale, then, forthwith
upon such issue or sale or deemed issue or sale, the Conversion Price shall be
reduced to the price determined by dividing (x) an amount equal to the sum of
(a) the number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Conversion Price and (b) the
consideration, if any, received by the Corporation upon such issue or sale, by
(y) the total number of shares of Common Stock outstanding immediately after
such issue or sale.  For purposes of determining the number of shares
of Common Stock outstanding as provided in clauses (x) and (y) above, the number
of shares of Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock and Series B Preferred Stock, exercise of all
outstanding Options (as defined below) and conversion of all outstanding
Convertible Securities (as defined below) shall be deemed to be outstanding.
Notwithstanding any other provision in this subsection to the contrary, if an
adjustment to the Conversion Price pursuant to this Section 5(d) would
require the Corporation, (I) to issue any shares of Common Stock upon conversion
of the Series B Preferred Stock in excess of 19.99% of the total number of
shares of Common Stock outstanding immediately prior to the closing (the “Closing”) of the transactions
contemplated by the Purchase Agreement (when aggregated with all shares of
Common Stock issued or issuable to such holders upon conversion of the Series B
Preferred Stock or upon the payment of a dividend on the Series B Preferred
Stock) at a price
less than the greater of the Market Price per share immediately prior to the
Closing or the Corporation’s book value per share at December 31, 2007 as
reflected in the Corporation’s Form 8-K filed with the Securities and Exchange
Commission immediately after the Closing (the “Conversion Limitation”), or
(II) to otherwise obtain stockholder approval of the transactions contemplated
by the Purchase Agreement pursuant to NASDAQ Marketplace Rule 4350(i), and such
stockholder approval has not been obtained, (1) the Conversion Price shall not
be reduced below the maximum extent that would not require shareholder approval
under NASDAQ Marketplace Rule 4350(i), and (2) the Corporation shall use its
commercially best efforts to obtain such stockholder approval as soon as
reasonably practicable, including by calling a special meeting of the
stockholders to vote on such Conversion Price adjustment.  In no event
shall the Corporation be obligated to issue any shares of Common Stock upon
conversion of the Series B Preferred Stock in excess of the Conversion
Limitation until stockholder approval has been obtained. Once stockholder
approval of the transactions contemplated by the Purchase Agreement has been
obtained, the Conversion Limitation shall be of no further force or
effect.

       

      
        
          
          

        

        
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      For
purposes of this Section 5(d)(i), the
following subparagraphs (A) to (G) of this Section 5(d)(i) shall
also be applicable:

       

      (A)           Issuance of Rights or
Options.  In case at any time the Corporation shall in any
manner grant (whether directly or by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any options for the
purchase of, Common Stock or any stock or security convertible into or
exchangeable for Common Stock (such warrants, rights or options being called
“Options” and such
convertible or exchangeable stock or securities being called “Convertible Securities”)
whether or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share for
which Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof (in all cases excluding
the effect of a net issue election), by (ii) the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options) shall be less than the Conversion Price in effect
immediately prior to the time of the granting of such Options, then the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of granting
of such Options and thereafter shall be deemed to be
outstanding.  Except as otherwise provided in Section 5(d)(i)(C),
no adjustment of the Conversion Price shall be made upon the actual issue of
such Common Stock or of such Convertible Securities upon exercise of such
Options or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.

       

      
        
          
          

        

        
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      (B)           Issuance of Convertible
Securities.  In case the Corporation shall in any manner issue
(whether directly or by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert any
such Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon such conversion or exchange (determined
by dividing (i) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus the
aggregate amount of additional consideration, if any, payable to the Corporation
upon the conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall be deemed to have been issued for such price
per share as of the date of the issue or sale of such Convertible Securities and
thereafter shall be deemed to be outstanding; provided that (a)
except as otherwise provided in Section 5(d)(i)(C),
no adjustment of the Conversion Price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible Securities and
(b) if any such issue or sale of such Convertible Securities is made upon
exercise of any Options to purchase any such Convertible Securities for which
adjustments of the Conversion Price have been or are to be made pursuant to
other provisions of this Section 5(d)(i), no
further adjustment of the Conversion Price shall be made by reason of such issue
or sale.

       

      (C)           Change in Option Price or
Conversion Rate.  Upon the happening of any of the following
events, namely, if (1) the purchase price or exercise price provided for in any
Option referred to in Section 5(d)(i)(A),
(2) the number of shares into which the Option is exercisable, (3) the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in Section 5(d)(i)(A) or
(B), or (4) the
rate at which Convertible Securities referred to in Section 5(d)(i)(A) or
(B) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Conversion Price in effect at the
time of such event shall forthwith be readjusted to the Conversion Price which
would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold.

       

      (D)           Stock
Dividends.  In case the Corporation shall declare a dividend or
make any other distribution upon any stock of the Corporation (other than Common
Stock, Series A Preferred Stock or Series B Preferred Stock) payable in Common
Stock, then any Common Stock issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold for $.001 per share,
unless the holders of at least 66 2/3% of the then outstanding Series B
Preferred Stock shall have consented to such dividend or
distribution.

       

      
        
          
          

        

        
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      (E)           Consideration for
Stock.  In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for cash, the consideration
received therefor shall be deemed to be the amount received by the Corporation
therefor, without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation in
connection therewith.  In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board, without deduction of any expenses
incurred or any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith.  In case any Options shall be
issued in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued for such consideration as determined in good
faith by the Board.

       

      (F)           Record
Date.  In case the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in Common Stock, Options or Convertible
Securities or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.

       

      (G)           Treasury
Shares.  The number of shares of Common Stock outstanding at
any given time shall not include shares owned or held by or for the account of
the Corporation, and the disposition of any such shares shall be considered an
issue or sale of Common Stock for the purpose of this Section
5(d)(i).

       

      (ii)           Certain Issues
Excepted.  Anything herein to the contrary notwithstanding, the
Corporation shall not be required to make any adjustment of the Conversion Price
in the case of the issuance or sale from and after the date of filing of this
Certificate of Designations of Anti-Dilution Excluded Securities (as defined
below).

       

      (iii)           Adjustments for
Subdivisions, Common Stock Dividends, Combinations or Consolidations of Common
Stock.  If the outstanding shares of Common Stock shall be
subdivided or increased, by stock split, stock dividend or otherwise, into a
greater number of shares of Common Stock, the Conversion Price shall
concurrently with the effectiveness of such subdivision or payment of such stock
dividend, be proportionately decreased.  If the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
shall, concurrently with the effectiveness of such combination or consolidation,
be proportionately increased.

       

      (iv)           Adjustments for
Reclassification, Exchange and Substitution. If the Common Stock issuable
upon conversion of the Series B Preferred Stock shall be changed into the same
or a different number of shares of any other class or classes of stock, whether
by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares provided for above), the Conversion Price
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series B Preferred
Stock shall be convertible into, in lieu of the number of shares of Common Stock
which the holders would otherwise have been entitled to receive, a number of
shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series B Preferred Stock immediately before that
change.

       

      
        
          
          

        

        
          -9-

          
            

          

        

        
          
          

        

      

      (v)           Adjustments for Merger,
Sale, Lease or Conveyance.  In case of any share exchange,
reorganization, consolidation with or merger of the Corporation with or into
another corporation, or in case of any sale, lease, conveyance or disposition to
another Corporation of the assets of the Corporation as an entirety or
substantially as an entirety, which is not treated as a liquidation, dissolution
or winding up pursuant to Section 4(d) above,
the Series B Preferred Stock shall after the date of such share exchange,
reorganization, consolidation, merger, sale, lease, conveyance or disposition be
convertible into the number of shares of stock or other securities or property
(including cash) to which the Common Stock issuable (at the time of such
consolidation, merger, sale, lease, conveyance or disposition) upon conversion
of the Series B Preferred Stock would have been entitled upon such share
exchange, reorganization, consolidation, merger, sale, lease, conveyance or
disposition; and in any such case, if necessary, the provisions set forth herein
with respect to the rights and interests thereafter of the holders of the Series
B Preferred Stock shall be appropriately adjusted so as to be applicable, as
nearly as may reasonably be, to any shares of stock or other securities or
property thereafter deliverable on the conversion of the shares of Series B
Preferred Stock.

       

      (vi)           Fractional
Shares.  If any adjustment under this Section 5(d) would
create a fractional share of Common Stock or a right to acquire a fractional
share of Common Stock, such fractional share shall be rounded to the nearest
whole number of shares with one-half share being rounded up.

       

      (vii)           Notice of
Adjustment.  Concurrent with any adjustment pursuant to this
Section 5(d),
the Corporation shall provide prompt notice to the holders of Series B Preferred
Stock notifying such holders of any such adjustment.

       

      Section
6.     Voting
Rights.  Except to the extent otherwise expressly provided by
law and in Section
7, the Series B Preferred Stock shall vote together with all other
classes and series of voting stock of the Corporation as a single class on all
actions to be taken by the stockholders of the Corporation.  Each
share of Series B Preferred Stock shall entitle the holder thereof to the number
of votes equal to the number of shares of Common Stock into which each share of
Series B Preferred Stock is convertible (determined without regard to Section 5(c)(iv)) on
all matters to be voted on by the stockholders of the Corporation; provided, however, that solely
for purposes of this Section 6, the number
of votes for each share of Series B Preferred Stock shall not exceed the number
of shares of Common Stock into which each share of Series B Preferred Stock
would be convertible if the applicable Conversion Price were $6.50 (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
similar recapitalizations affecting such shares).

       

      
        
          
          

        

        
          -10-

          
            

          

        

        
          
          

        

      

      Section
7.     Protective
Provisions.  The Corporation shall not, without first obtaining
the written consent of the holders of at least a majority of the then
outstanding shares of Series B Preferred Stock voting as a separate
class:

       

      (i)           increase
or decrease the total number of authorized shares of Series B Preferred Stock or
the authorized shares of Common Stock reserved for issuance upon conversion of
the Series B Preferred Stock (except as otherwise required by the Charter or
this Certificate of Designations);

       

      (ii)           increase
or decrease the number of authorized shares of Preferred Stock or Common Stock
(except any increase or decrease in the number of authorized shares of Series A
Preferred Stock and the shares of Common Stock into which they are convertible,
and as otherwise required by the Charter and this Certificate of
Designations);

       

      (iii)           alter,
amend, repeal, substitute or waive any provision of the Charter or the
Corporation’s bylaws, so as to affect adversely the voting powers, preferences
or other rights, including, without limitation, the liquidation preferences,
dividend rights, conversion rights, redemption rights or any reduction in the
stated value of the Series B Preferred Stock, whether by merger, consolidation
or otherwise;

       

      (iv)           authorize,
create, issue or sell any Senior Securities or any Parity Securities (other than
additional shares of Series A Preferred Stock that may be issued as a dividend
on the Series A Preferred Stock pursuant to Section 3(a) of the Certificate of
Designations, Powers, Preferences and Rights of the Series A Preferred Stock
(the “Series A Preferred
Certificate of Designations”)) or securities that are convertible into
Senior Securities or Parity Securities with respect to voting, dividend,
liquidation or redemption rights, including subordinated debt;

       

      (v)           authorize,
create, issue or sell any Junior Securities other than Common Stock or
securities that are convertible into Junior Securities other than Common Stock
with respect to voting, dividend, liquidation or redemption rights, including
subordinated debt;

       

      (vi)           authorize,
create, issue or sell any Series B Preferred Stock other than the Series B
Preferred Stock authorized, created, issued and sold pursuant to the Purchase
Agreement and Series B Preferred Stock issued in replacement or exchange
therefore;

       

      (vii)          engage
in a Transaction which would result in an Internal Rate of Return to holders of
Series B Preferred Stock of less than 25.00%;

       

      (viii)         declare
or pay any dividends or distributions on the capital stock of the Corporation in
a cumulative amount in excess of the dividends and distributions paid on the
Series A Preferred Stock and the Series B Preferred Stock in accordance with
their respective Certificates of Designations;

       

      (ix)           authorize
or effect the voluntary liquidation, dissolution, recapitalization,
reorganization or winding up of the business of the Corporation;

       

      
        
          
          

        

        
          -11-

          
            

          

        

        
          
          

        

      

      (x)           purchase,
redeem or otherwise acquire any capital stock of the Corporation other than
Series A Preferred Stock or Series B Preferred Stock, or any warrants or other
rights to subscribe for or to purchase, or any options for the purchase of,
capital stock of the Corporation or securities convertible into or exchangeable
for capital stock of the Corporation; or

       

      (xi)           unless
the Corporation has obtained stockholder approval of the transactions
contemplated by the Purchase Agreement pursuant to NASDAQ Marketplace Rule
4350(i), issue or sell, or engage in any transaction wherein the Corporation
shall have been deemed to have issued or sold, any shares of Common Stock or
securities convertible into Common Stock for a consideration per share that, as
a result of the provisions of Section 5(d)(i),
would result in the issuance of Common Stock upon conversion of the Series B
Preferred Stock in excess of the Conversion Limitation.

       

       

      Section
8.      Status of Converted
Stock.  In the event any shares of Series B Preferred Stock
shall be converted pursuant to Section 5 hereof, the
shares so converted shall be canceled, shall return to the status of authorized
but unissued Preferred Stock of no designated series, and shall not be issuable
by the Corporation as Series B Preferred Stock.

       

      Section
9.       Preemptive
Rights.

       

      (a)           So
long as at least 50% of the shares of Series B Preferred Stock remain
outstanding, the Corporation shall not issue, sell or exchange, agree to issue,
sell or exchange, or reserve or set aside for issuance, sale or exchange, (i)
any shares of the capital stock of the Corporation (excluding any shares of
Series A Preferred Stock and any shares of Common Stock issuable upon conversion
of Series A Preferred Stock), (ii) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any capital stock of the
Corporation, or (iii) any securities convertible into capital stock of the
Corporation (collectively, but not including any Series A Preemptive Rights
Securities (as defined below), the “Offered Securities”), unless
in each such case the Corporation shall have first complied with this Section 9; provided, however, that (x) the
preemptive rights of any holder of Series B Preferred Stock shall not include
rights with respect to any securities of the Corporation as to which any holder
of Series A Preferred Stock has exercised its rights (the “Series A Preemptive Rights
Securities”) and (y) the preemptive rights of the holder of Series B
Preferred Stock shall not arise or be exercisable until after all holders of
Series A Preferred Stock have exercised their preemptive rights, in whole or in
part, or declined to exercise such rights.  The Corporation shall
deliver to each holder of the Series B Preferred Stock a written notice of any
proposed, intended or potential (i.e., in the event the holders of the Series A
Preemptive Rights Securities elect not to exercise any or all of their
preemptive rights with respect to the Series A Preemptive Rights Securities)
issuance, sale or exchange of Offered Securities (the “Offer”), which Offer shall
(i) identify and describe the Offered Securities, (ii) describe the price and
other terms upon which they are to be issued, sold or exchanged, and the number
or amount of the Offered Securities to be issued, sold or exchanged, (iii)
identify the persons or entities (if known) to which or with which the Offered
Securities are to be offered, issued, sold or exchanged, and (iv) offer to issue
and sell to or exchange with such holder of the Series B Preferred Stock (A) a
pro rata portion of the Offered Securities determined by dividing (x) the
aggregate number of shares of Common Stock then held by such holder of the
Series B Preferred Stock (giving effect to the conversion of all shares of
convertible preferred stock then held by such holder) by (y) the total number of
shares of Common Stock then held by all holders of the Series B Preferred Stock
(giving effect to the conversion of all outstanding shares of convertible
preferred stock then held by such holders) (such pro rata portion of the Offered
Securities, the “Basic
Amount”), and (B) any additional portion of the Offered Securities
attributable to the Basic Amounts of other holders of the Series B Preferred
Stock as such holder shall indicate it will purchase or acquire should the other
holders subscribe for less than their Basic Amounts (the “Undersubscription
Amount”).

       

      
        
          
          

        

        
          -12-

          
            

          

        

        
          
          

        

      

      (b)           To
accept an Offer, in whole or in part, a holder of the Series B Preferred Stock
must deliver a written notice to the Corporation prior to the end of the 30-day
period of the Offer, setting forth the portion of the holder’s Basic Amount that
such holder elects to purchase and, if such holder shall elect to purchase all
of its Basic Amount, the Undersubscription Amount (if any) that such holder
elects to purchase (the “Notice
of Acceptance”).  If the Basic Amounts subscribed for by all
holders of the Series B Preferred Stock are less than the total of all of the
Basic Amounts available for purchase, then each holder who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the Undersubscription
Amounts subscribed for exceeds the difference between the total of all of the
Basic Amounts available for purchase and the Basic Amounts subscribed for (the
“Available Undersubscription
Amount”) each holder of Series B Preferred Stock who has subscribed for
any Undersubscription Amount shall be entitled to purchase only that portion of
the Available Undersubscription Amount as the Undersubscription Amounts
subscribed for by such holder bears to the total Undersubscription Amounts
subscribed for by all holders of the Series B Preferred Stock, subject to
rounding by the Board to the extent it deems reasonably necessary.

       

      (c)           The
Corporation shall have 90 days from the expiration of the period set forth in
Section 9(b) to
issue, sell or exchange all or any part of such Offered Securities as to which a
Notice of Acceptance has not been given by the holders of the Series B Preferred
Stock (the “Refused
Securities”), but only to the offerees or purchasers described in the
Offer (if so described therein) and only upon terms and conditions (including,
without limitation, unit prices and interest rates) which are not more
favorable, in the aggregate, to the acquiring person or persons or less
favorable to the Corporation than those set forth in the Offer.

       

      (d)           In
the event the Corporation shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 9(c)),
then each holder of the Series B Preferred Stock may, at its sole option and in
its sole discretion, reduce the number or amount of the Offered Securities
specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of the Offered Securities that the holder of the Series B
Preferred Stock elected to purchase pursuant to Section 9(b)
multiplied by a fraction, (i) the numerator of which shall be the number or
amount of Offered Securities the Corporation actually proposes to issue, sell or
exchange (including Offered Securities to be issued or sold to Purchasers
pursuant to Section
9(b) prior to such reduction), plus the number or amount of the Series A
Preemptive Rights Securities, if any, and (ii) the denominator of which shall be
the original amount of the Offered Securities plus the number or amount of the
Series A Preemptive Rights Securities, if any.  In the event that any
holder of the Series B Preferred Stock so elects to reduce the number or amount
of Offered Securities specified in its Notice of Acceptance, the Corporation may
not issue, sell or exchange more than the reduced number or amount of the
Offered Securities unless and until such securities have again been offered to
the Purchasers in accordance with Section
9(a).

       

      
        
          
          

        

        
          -13-

          
            

          

        

        
          
          

        

      

      (e)           Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the holders of the Series B Preferred Stock shall acquire
from the Corporation, and the Corporation shall issue to the holders of the
Series B Preferred Stock, the number or amount of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 9(d) if the
holders have so elected, upon the terms and conditions specified in the
Offer.  The purchase by the holders of the Series B Preferred Stock of
any Offered Securities is subject in all cases to the preparation, execution and
delivery by the Corporation and the holders of a purchase agreement relating to
such Offered Securities satisfactory in form and substance to the holders of the
Series B Preferred Stock and their respective counsel.

       

      (f)           Any
Offered Securities not acquired by the holders of the Series B Preferred Stock
or other persons in accordance with Section 9(c) may not
be issued, sold or exchanged until they are again offered to the holders of the
Series B Preferred Stock under the procedures specified in this Section
9.

       

      (g)           The
rights of the holders of the Series B Preferred Stock under this Section 9 shall not
apply to Preemptive Rights Excluded Securities.

       

      (h)           The
failure of any holder of Series B Preferred Stock to exercise its rights under
this Section 9
shall not be deemed to be a waiver of its rights hereunder in connection with
any subsequent issuance, sale or exchange, agreement to issue, sell or exchange,
or reservation or setting aside for issuance, sale or exchange of Offered
Securities.

       

      Section
10.        Reservation of
Stock.  The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, for the
purpose of effecting the conversion of shares of Series B Preferred Stock issued
or issuable to the holders, such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
Series B Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of Series B Preferred Stock, in addition to such
other remedies as shall be available to the holder of Series B Preferred Stock,
the Corporation shall take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number as shall be sufficient for such purposes, including,
without limitation, using best efforts to obtain stockholder approval of any
necessary amendment to the Charter.

       

      Section
11.         Definitions.  As
used in this Certificate, the following capitalized terms have the following
meanings.

       

      “Anti-Dilution Excluded
Securities” mean any of the following securities:
(1)  securities issued to employees, officers or directors of the
Corporation or options to purchase Common Stock granted by the Corporation to
employees, officers or directors of the Corporation pursuant to any option plan,
agreement or other arrangement duly adopted by the Corporation and the grant of
which is approved by the compensation committee of the Board; (2) any Series A
Preferred Stock issued as a dividend on shares of Series A Preferred Stock, (3)
any Common Stock issued upon conversion of the Series A Preferred Stock; (4) the
Series B Preferred Stock and any Common Stock issued upon conversion of the
Series B Preferred Stock; (5) for the avoidance of doubt, securities issued on
the conversion of any Convertible Securities or the exercise of any Options, in
each case, outstanding on the date of the first filing of this Certificate of
Designations; and (6) for the avoidance of doubt, securities issued in
connection with a stock split, stock dividend, combination, reorganization,
recapitalization or other similar event for which adjustment is made in
accordance with Section 5(d)(iii) or
(iv).

       

      
        
          
          

        

        
          -14-

          
            

          

        

        
          
          

        

      

      “Internal Rate of Return”
means the discount rate that makes the net present value of all cash payments
equal zero.  In determining the Internal Rate of Return, the initial
investment of the holders of the Series B Preferred Stock shall include all
transaction costs and expenses incurred by the initial holder of the Series B
Preferred Stock in connection with the transactions contemplated by the Purchase
Agreement and all additional costs and expenses of the holders of Series B
Preferred Stock in respect of the investment incurred through the date of the
determination shall be treated as cash expenditures when made.  For
purposes of determining the Internal Rate of Return, any dividends,
distributions or payments other than in cash shall be deemed to have no
value.  In determining the Internal Rate of Return in respect of a
Transaction, the final payment for purposes of such determination shall be the
cash, if any, distributable or payable to holders of the Series B Preferred
Stock upon the closing of the Transaction assuming that the holders had
converted all of the outstanding Series B Preferred Stock to Common Stock
immediately prior to the closing of the Transaction.

       

      “Market Price” shall be the
closing sale price (on the applicable Trading Market) per share of Common Stock
on any specified date, or, if such date does not fall on a Trading Day, then the
closing sale price per share of Common Stock on the first Trading Day preceding
such date which shall also constitute the “market price” for purposes of the
Series A Preferred Certificate of Designations.

       

      “Purchase Agreement” means
that certain Securities Purchase Agreement, dated March 18, 2008, between the
Corporation and Lyles United, LLC.

       

      “Preemptive Rights Excluded
Securities” mean any of the following securities:  (1)
securities issued to employees, officers or directors of the Corporation or
options to purchase Common Stock granted by the Corporation to employees,
officers or directors of the Corporation pursuant to any option plan, agreement
or other arrangement duly adopted by the Corporation and the grant of which is
approved by the compensation committee of the Board; (2) any Series A Preferred
Stock issued as a dividend on shares of Series A Preferred Stock and any Common
Stock issued on conversion of any shares of Series A Preferred Stock or as a
dividend to any holder of Series A Preferred Stock; (3) the Series B Preferred
Stock and any Common Stock issued on conversion of the Series B Preferred Stock
or issued as a dividend on the Series B Preferred Stock; (4) for the avoidance
of doubt, securities issued on the conversion of any Convertible Securities or
the exercise of any Options, in each case, outstanding on the date of the first
filing of this Certificate of Designations; (5) for the avoidance of doubt,
securities issued in connection with a stock split, stock dividend, combination,
reorganization, recapitalization or other similar event for which adjustment is
made in accordance with Section 5(d)(iii),
(iv) or (v); and (6) the
issuance of securities of the Corporation issued for consideration other than
cash pursuant to a merger, consolidation, acquisition or similar business
combination by the Corporation approved by the Board.

       

      
        
          
          

        

        
          -15-

          
            

          

        

        
          
          

        

      

      “Trading Day” means any day on
which the Common Stock is listed or quoted and traded on the applicable Trading
Market.

       

      “Trading Market” means the
NASDAQ Global Market or, if the Common Stock is not then traded on the NASDAQ
Global Market, any national securities exchange, market or trading or quotation
facility on which the Common Stock is then listed or quoted.

       

       

      
        
          
          

        

        
          -16-

          
            

          

        

        
          
          

        

      

      IN
WITNESS WHEREOF, the Corporation has caused this Certificate to be duly executed
on its behalf by its Chief Financial Officer this 26th day of March,
2008.

       

      PACIFIC
ETHANOL, INC.

       

      By:           /s/ JOSEPH W.
HANSEN                                                                

      Name:      Joseph
W. Hansen

      Title:        Chief
Financial Officer

       

       

      -17-paceth_8k-ex1003.htm

     

    EXHIBIT
10.3

    
      

       

      NEITHER
THESE SECURITIES NOR THE SECURITIES FOR WHICH THESE SECURITIES ARE EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.

       

      PACIFIC
ETHANOL, INC.

       

      WARRANT

      
      

       

      
        	Warrant No.
    W7-1	
                Dated:  March 27,
      2008

              

      

       

      Pacific
Ethanol, Inc., a Delaware corporation (the “Company”), hereby certifies
that, for value received, LYLES UNITED, LLC or its registered assigns (the
“Holder”), is entitled
to purchase from the Company up to a total of 3,076,923 shares of common stock,
$0.001 par value per share (the “Common Stock”), of the Company
(each such share, a “Warrant
Share” and all such shares, the “Warrant Shares”) at an
exercise price equal to $7.00 per share (as adjusted from time to time as
provided in Section 8, the
“Exercise Price”),
subject to the terms and conditions contained herein. This Warrant (this “Warrant”) is issued in
connection with the purchase by Lyles United, LLC of shares of the Company’s
Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”)
pursuant to the terms and conditions of that certain Securities Purchase
Agreement dated March 18, 2008 between the Company and Lyles United, LLC (the
“Purchase
Agreement”).  Capitalized terms not otherwise defined herein
shall have their respective meanings as set forth in the Purchase
Agreement.

       

      1.           Registration
of Warrant.  The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the “Warrant Register”), in the
name of the record Holder hereof from time to time.  The Company may
deem and treat the registered Holder of this Warrant as the absolute owner
hereof for the purpose of any exercise hereof or any distribution to the Holder,
and for all other purposes, absent actual notice to the contrary.

       

      2.           Registration
of Transfers.  The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this Warrant,
with the Form of Assignment attached hereto duly completed and signed, to the
Company at its address specified herein.  Upon any such registration
or transfer, a new warrant to purchase Common Stock, in substantially the form
of this Warrant (any such new warrant, a “New Warrant”), evidencing the
portion of this Warrant so transferred shall be issued to the transferee and a
New Warrant evidencing the remaining portion of this Warrant not so transferred,
if any, shall be issued to the transferring Holder.  The acceptance of
the New Warrant by the transferee thereof shall be deemed the acceptance by such
transferee of all of the rights and obligations of a holder of a
Warrant.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      3.           Exercise
and Duration of Warrants.

       

      (a)           This
Warrant shall be exercisable by the registered Holder from time to time during
the term commencing on the date that is six (6) months and one (1) day from the
date hereof and ending on the date that is ten (10) years from the date hereof
(the “Expiration Date”).
At 5:00 P.M., California time on the Expiration Date, the portion of this
Warrant not exercised prior thereto shall be and become void and of no
value.

       

      (b)           A
Holder may exercise this Warrant by delivering to the Company (i) an exercise
notice, in the form attached hereto (the “Exercise Notice”),
appropriately completed and duly signed, and (ii) payment of the Exercise
Price for the number of Warrant Shares as to which this Warrant is being
exercised, and the date such items are delivered to the Company (as determined
in accordance with the notice provisions hereof) is an “Exercise Date.”  The
Holder shall not be required to deliver the original Warrant in order to effect
an exercise hereunder.  Execution and delivery of the Exercise Notice
shall have the same effect as cancellation of the original Warrant and issuance
of a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares.

       

      4.           Delivery
of Warrant Shares.

       

      (a)           Upon
exercise of this Warrant, the Company shall promptly (but in no event later than
five (5) Business Days after the Exercise Date) issue or cause to be issued and
cause to be delivered to or upon the written order of the Holder and in such
name or names as the Holder may designate, a certificate for the Warrant Shares
issuable upon such exercise.  For purposes of this Warrant, “Business Day” means any day
other than Saturday, Sunday or other day on which commercial banks in the State
of California are authorized or required by law to remain closed.  The
Holder, or any person so designated by the Holder to receive Warrant Shares,
shall be deemed to have become holder of record of such Warrant Shares as of the
Exercise Date.  It is acknowledged and agreed that certificates
evidencing such Warrant Shares may bear a restrictive legend in substantially
the following form:

       

      THESE
SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.

       

      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

        

      

      (b)           This
Warrant is exercisable, either in its entirety or, from time to time, for a
portion of the number of Warrant Shares.  Upon surrender of this
Warrant following one or more partial exercises, the Company shall issue or
cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares.

       

      5.           Charges,
Taxes and Expenses.  Issuance and delivery of certificates for
shares of Common Stock upon exercise of this Warrant shall be made without
charge to the Holder for any issue or transfer tax, transfer agent fee or other
incidental tax or expense in respect of the issuance of such certificates, all
of which taxes and expenses shall be paid by the Company; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Warrant Shares or Warrants in a name other than that of the
Holder.  The Holder shall be responsible for all other tax liability
that may arise as a result of holding or transferring this Warrant or receiving
Warrant Shares upon exercise hereof.

       

      6.           Replacement
of Warrant.  If this Warrant is mutilated, lost, stolen or
destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable bond or indemnity, if requested.  Applicants for a New
Warrant under such circumstances shall also comply with such other reasonable
regulations and procedures and pay such other reasonable third-party costs as
the Company may prescribe.

       

      7.           Reservation
of Warrant Shares.  The Company covenants that it will at all
times reserve and keep available out of the aggregate of its authorized but
unissued and otherwise unreserved Common Stock, solely for the purpose of
enabling it to issue Warrant Shares upon exercise of this Warrant as herein
provided, the number of Warrant Shares which are then issuable and deliverable
upon the exercise of this entire Warrant, free from preemptive rights or any
other contingent purchase rights of persons other than the Holder (after giving
effect to the adjustments and restrictions of Section 8, if
any). The Company covenants that all Warrant Shares so issuable and deliverable
shall, upon the due exercise of this Warrant, and upon issuance of such Warrant
Shares and the payment of the applicable Exercise Price in accordance with the
terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.

       

      8.           Certain
Adjustments.  The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 8.

       

      (a)           Stock
Dividends and Splits.  If the Company, at any time while this
Warrant is outstanding, (i) pays a stock dividend on its Common Stock or
otherwise makes a distribution on any class of capital stock that is payable in
shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, or (iii) combines outstanding shares of Common Stock
into a smaller number of shares, then in each such case the Exercise Price shall
be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event.  Any adjustment made pursuant to clause
(i) of this subsection shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clause (ii) or (iii) of this
subsection shall become effective immediately after the effective date of such
subdivision or combination.

       

      
        
          
          

        

        
          -3-

          
            

          

        

        
          
          

        

      

      (b)           Number of
Warrant Shares.  Simultaneously with any adjustment to the
Exercise Price pursuant to subsection (a) of this Section 8, the
number of Warrant Shares that may be purchased upon exercise of this Warrant
shall be adjusted proportionately, so that after such adjustment the aggregate
Exercise Price payable hereunder for the adjusted number of Warrant Shares shall
be the same as the aggregate Exercise Price in effect immediately prior to such
adjustment.

       

      (c)           Reclassification,
Reorganization and Consolidation.  In case of any merger,
consolidation, share exchange, reclassification, reorganization, or change in
the capital stock of the Company (other than as a result of a subdivision,
combination, or stock dividend provided for in Section 8(a)
above) (each, a “Change of
Control”), then the Company shall make appropriate provisions so that the
Holder of this Warrant shall have the right at any time prior to the expiration
of this Warrant to purchase, at a total price equal to that payable upon the
exercise of this Warrant, the kind and amount of shares of stock and other
securities and property receivable in connection with such Change of Control by
a holder of the same number of Warrant Shares as were purchasable by the Holder
of this Warrant immediately prior to such Change of Control.  In any
such case appropriate provisions shall be made with respect to the rights and
interest of the Holder of this Warrant so that the provisions hereof shall
thereafter be applicable with respect to any shares of stock or other securities
and property deliverable upon exercise hereof, and appropriate adjustments shall
be made to the purchase price per share payable hereunder, provided the
aggregate purchase price shall remain the same.  The Company will use
commercially best efforts, upon the consummation of any such Change of Control,
to ensure that the successor entity, if any (if other than the Company),
resulting from such Change of Control agrees by written instrument, executed and
mailed or delivered to the registered Holder hereof at the last address of such
Holder appearing on the books of the Company, to assume the obligations of the
Company under this Warrant.

       

      (d)           Calculations.  All
calculations under this Section 8 shall
be made to the nearest cent or the nearest 1/100th of a share, as
applicable.  The number of shares of Common Stock outstanding at any
given time shall not include shares owned or held by or for the account of the
Company, and the disposition of any such shares shall be considered an issue or
sale of Common Stock.

       

      (e)           Notice of
Adjustment.  When any adjustment is required to be made in the
number or kind of shares purchasable upon exercise of this Warrant, or in the
Exercise Price, the Company shall promptly notify the Holder of such event and
of the number of Warrant Shares or other securities or property thereafter
purchasable upon exercise of this Warrant.

       

      9.           Payment
of Exercise Price.  The Holder shall pay the Exercise Price in
immediately available funds.

       

      
        
          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

      10.           Fractional
Shares.  The Company shall not be required to issue or cause to
be issued fractional Warrant Shares on the exercise of this
Warrant.  If any fraction of a Warrant Share would, except for the
provisions of this Section 10, be
issuable upon exercise of this Warrant, the number of Warrant Shares to be
issued will be rounded up to the nearest whole share.

       

      11.           Notices.  Any
and all notices or other communications or deliveries hereunder (including
without limitation any Exercise Notice) shall be in writing and shall be deemed
given and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified below prior to 5:00 p.m. (California time) on a Business Day, (ii) the
next Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified below
on a day that is not a Business Day or later than 5:00 p.m. (California time) on
any Business Day, (iii) the Business Day following the date of mailing, if sent
by nationally recognized overnight courier service, or (iv) upon actual receipt
by the party to whom such notice is required to be given.  The address
and facsimile number for such notices or communications shall be as
follows:

       

      
        	
                 
      

              	
                If
      to the Company:

              	
                Pacific
      Ethanol, Inc.

              

      

      
        	
                 
      

              	
                400
      Capitol Mall, Suite 2060

              

      

      
        	
                 
      

              	
                Sacramento,
      California 95814

              

      

      
        	
                 
      

              	
                Fax
      (916) 446-3937

              

      

      
        	
                 
      

              	
                Attn:  Chief
      Financial Officer

              

      

      
        	
                 
      

              	
                AND

              

      

      
        	
                 
      

              	
                Attn:
      General Counsel

              

      

       

      
        	
                 
      

              	
                If
      to Holder:

              	
                Lyles
      United, LLC

              

      

      
        	
                 
      

              	
                1210
      West Olive Ave.

              

      

      
        	
                 
      

              	
                Fresno,
      California 93728

              

      

      
        	
                 
      

              	
                Fax
      (559) 487-7951

              

      

      
        	
                 
      

              	
                Attn:  Will
      Lyles, Vice President

              

      

      

      
        	
                 
      

              	
                With
      a copy to:

              	
                Howard
      Rice Nemerovski Canady Falk & Rabkin, A Professional
      Corporation

              

      

      
        	
                 
      

              	
                Three
      Embarcadero Center

              

      

      
        	
                 
      

              	
                Seventh
      Floor

              

      

      
        	
                 
      

              	
                San
      Francisco, California 94111

              

      

      
        	
                 
      

              	
                Fax
      (415) 217-5910

              

      

      
        	
                 
      

              	
                Attn:
      Gary P. Kaplan

              

      

       

      or such
other address or facsimile number as either party may designate to the other
party hereto in accordance with the aforesaid procedure. Each party shall
provide notice to the other party of any change in address or facsimile
number.

       

      12.           Warrant
Agent.  The Company shall serve as warrant agent under this
Warrant.  Upon thirty (30) days’ prior notice to the Holder, the
Company may appoint a new warrant agent.  Any corporation into which
the Company or any new warrant agent may be merged or any corporation resulting
from any consolidation to which the Company or any new warrant agent shall be a
party or any corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or stockholders services business shall
be a successor warrant agent under this Warrant without any further
act.  Any such successor warrant agent shall promptly cause notice of
its succession as warrant agent to be mailed (by first class mail, postage
prepaid) to the Holder at the Holder's last address as shown on the Warrant
Register.

       

      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

      

      13.           Miscellaneous.

       

      (a)           Subject
to the restrictions on transfer set forth on the first page hereof, this Warrant
may be assigned by the Holder.  This Warrant may not be assigned by
the Company except to a successor.  This Warrant shall be binding on
and inure to the benefit of the parties hereto and their respective successors
and assigns.  Subject to the preceding sentence, nothing in this
Warrant shall be construed to give to any person other than the Company and the
Holder any legal or equitable right, remedy or cause of action under this
Warrant.  This Warrant may be amended only in writing signed by the
Company and the Holder and their successors and assigns.

       

      (b)           The
Company will not, by amendment of its governing documents or through any
reorganization, transfer of assets, consolidation, merger, 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 Warrant, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Holder against impairment.

       

      (c)           Governing Law; Venue; Waiver
Of Jury Trial.  ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.  EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE COUNTY OF FRESNO,
CALIFORNIA, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN
(INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS),
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
IMPROPER.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF
PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR
PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR
OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN
EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL
CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING
CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS
IN ANY MANNER PERMITTED BY LAW.  THE COMPANY HEREBY WAIVES ALL RIGHTS
TO A TRIAL BY JURY.

       

      
        
          
          

        

        
          -6-

          
            

          

        

        
          
          

        

      

      (d)           The
headings herein are for convenience only, do not constitute a part of this
Warrant and shall not be deemed to limit or affect any of the provisions
hereof.

       

      (e)           In
case any one or more of the provisions of this Warrant shall be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Warrant shall not in any way be affected or
impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.

       

      IN
WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its
authorized officer as of the date first indicated above.

       

      
        	
                 
      

              	
                PACIFIC
      ETHANOL, INC.

              

      

       

       

      
        	By: 
    	
                /s/ NEIL M.
      KOEHLER

              

      

      
        	
                 
      

              	
                Name:  Neil
      M. Koehler

              

      

      
        	
                 
      

              	
                Title:  President
      & CEO

              

      

      

       

       

      
        
          
          

        

        
          -7-

          
            

          

        

        
          
          

        

      

      FORM OF
EXERCISE NOTICE

       

       

      (To be
executed by the Holder to exercise the right to purchase shares of Common Stock
under the foregoing Warrant)

       

      To:           PACIFIC
ETHANOL, INC.

       

      The
undersigned is the Holder of Warrant No. W7-1 (the “Warrant”) issued by Pacific
Ethanol, Inc., a Delaware corporation (the “Company”).  Capitalized
terms used herein and not otherwise defined have the respective meanings set
forth in the Warrant.

       

      
        	
                1.

              	
                The
      Warrant is currently exercisable to purchase a total of __________ Warrant
      Shares.

              

      

       

      
        	
                2.

              	
                The
      undersigned Holder hereby exercises its right to purchase __________
      Warrant Shares pursuant to the
Warrant.

              

      

       

      
        	
                3.

              	
                The
      Holder shall pay the sum of $__________ to the Company in accordance with
      the terms of the Warrant.

              

      

       

      
        	
                4.

              	
                Pursuant
      to this exercise, the Company shall deliver to the holder __________
      Warrant Shares in accordance with the terms of the
  Warrant.

              

      

       

      
        	
                5.

              	
                Following
      this exercise, the Warrant shall be exercisable to purchase a total of
      __________ Warrant Shares.

              

      

      

       

      
        	
                Dated:
      _____________________

              	
                Name
      of Holder:

              

      

       

       

      
        	
              	
                (Print)___________________________

              

      

       

      
        	
              	
                By:______________________________

              

      

      
        	
              	
                Name:
      ___________________________

              

      

      
        	
              	
                Title:
      ____________________________

              

      

       

      
        	
                 
      

              	
                (Signature
      must conform in all respects to name of holder as specified on the face of
      the Warrant)

              

      

       

       

      
        
          
          

        

        
          -8-

          
            

          

        

        
          
          

        

      

      FORM OF
ASSIGNMENT

       

      [To be
completed and signed only upon transfer of Warrant]

       

      FOR VALUE
RECEIVED, the undersigned hereby sells, assigns and transfers unto __________
the right represented by the within Warrant to purchase __________ shares of
Common Stock of Pacific Ethanol, Inc. to which the within Warrant relates and
appoints __________ attorney to transfer said right on the books of Pacific
Ethanol, Inc. with full power of substitution in the premises.

       

      
        	
                Dated:
      ___________, ____

              	
                ___________________________________

                 

                By:_________________________________

                (Signature
      must conform in all respects to name 

                of holder as
      specified on the face of the Warrant)

                 

                Print:________________________________

                 

                Address
      of transferee:

                 

                ____________________________________

                ____________________________________

                Fax: (___)
      ____________________________ 

                  Attn:________________________________
      

                     

                    In
      the presence of:

                    _____________________________________

                     

                    Print:_________________________________

                  

                

              

      

       

      
 

       

      -9-

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