400
Capitol Mall, Suite 2060
Sacramento,
California 95814
May 9,
2008
Dear
Fellow Stockholders:
We
cordially invite you to attend the 2008 Annual Meeting of stockholders of
Pacific Ethanol, Inc., which will be held at 9:00 a.m., local time, on
Wednesday, June 11, 2008 at the Holiday Inn Capitol Plaza, 300 J Street,
Sacramento, California 95814. All stockholders of record
at the close of business on April 23, 2008 are entitled to vote at the Annual
Meeting. The formal meeting notice and Proxy Statement are
attached.
At this
year’s Annual Meeting, stockholders will be asked to elect six directors,
approve a Series B Cumulative Convertible Preferred Stock transaction and ratify
the appointment of Hein & Associates LLP to serve as our independent
registered public accounting firm for the year ending December 31,
2008. In addition, stockholders will transact any other business that
may properly come before the meeting. A report on the business
operations of Pacific Ethanol will also be presented at the meeting and
stockholders will have an opportunity to ask questions.
We hope
you will be able to attend the Annual Meeting. Whether or not you
plan to attend, it is important that your shares be represented and voted at the
Annual Meeting. We urge you to vote promptly by mailing a completed
proxy card in the enclosed postage-paid envelope or by voting electronically
over the Internet or by telephone. If your shares are held in the
name of a brokerage firm or bank, you will receive a voting instruction form in
lieu of a proxy card and may also be eligible to vote
electronically. Timely voting by any of these methods will ensure
your representation at the Annual Meeting.
We look
forward to seeing you June 11th.
|
Sincerely,
 William
L. Jones,
Chairman
of the Board
|
PACIFIC
ETHANOL, INC.
NOTICE
OF THE 2008 ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD JUNE 11, 2008
__________________________
NOTICE IS
HEREBY GIVEN that the 2008 Annual Meeting of stockholders of Pacific Ethanol,
Inc., a Delaware corporation, will be held at 9:00 a.m., local time, on
Wednesday, June 11, 2008 at the Holiday Inn Capitol Plaza, 300 J Street,
Sacramento, California 95814, for the following purposes, as more
fully described in the Proxy Statement accompanying this notice:
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|
1.
|
To
elect six directors to serve on our Board of Directors until the next
annual meeting of stockholders and/or until their successors are duly
elected and qualified. The nominees for election are William L.
Jones, Neil M. Koehler, Terry L. Stone, John L. Prince, Douglas L. Kieta
and Larry D. Layne.
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|
|
2.
|
To
consider and approve the Securities Purchase Agreement dated March 18,
2008 between Pacific Ethanol, Inc. and Lyles United, LLC (the “Purchase
Agreement”) and the transactions contemplated by the Purchase Agreement,
including the issuance of any dividend shares and the issuance of any
conversion shares as a result of a conversion price adjustment pursuant to
Section 5(d) of the Certificate of Designations, Powers, Preferences and
Rights of the Series B Cumulative Convertible Preferred Stock (the
“Certificate of Designations”). Copies of the Purchase
Agreement and the Certificate of Designations are attached as Appendix A
and Appendix B,
respectively, to the Proxy Statement accompanying this
notice.
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|
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3.
|
To
ratify the appointment of Hein & Associates LLP as our independent
registered public accounting firm for the year ending December 31,
2008.
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|
|
4.
|
To
transact such other business as may properly come before the Annual
Meeting or any adjournment(s) or postponement(s)
thereof.
|
All
stockholders of record at the close of business on April 23, 2008 are entitled
to notice of and to vote at the Annual Meeting and any adjournment(s) or
postponement(s) thereof.
We
cordially invite all stockholders to attend the Annual Meeting in
person. Whether or not you plan to attend, it is important that your
shares be represented and voted at the meeting. You can vote your
shares by completing and returning the enclosed proxy card or by voting
electronically over the Internet or by telephone. If your shares are
held in “street name,” that is, your shares are held in the name of a brokerage
firm, bank or other nominee, in lieu of a proxy card you should receive from
that institution an instruction form for voting by mail, and you may also be
eligible to vote your shares electronically. Should you receive more
than one proxy card or voting instruction form because your shares are held in
multiple accounts or registered in different names or addresses, please sign,
date and return each proxy card or voting instruction form to ensure that all of
your shares are voted.
For
admission to the Annual Meeting, each stockholder may be asked to present valid
picture identification, such as a driver’s license or passport, and proof of
ownership of our capital stock as of the record date, such as the enclosed proxy
card or a brokerage statement reflecting stock ownership.
|
By
Order of the Board of Directors,
William
L. Jones,
Chairman
of the Board
|
Sacramento,
California
May 9,
2008
YOUR
VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE
ANNUAL MEETING, PLEASE SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE. Returning a signed proxy
card will help us secure a quorum and avoid the expense of additional proxy
solicitation. If you later desire to revoke your proxy for any
reason, you may do so in the manner described in the attached Proxy
Statement.
PACIFIC
ETHANOL, INC.
PROXY
STATEMENT
FOR
THE 2008 ANNUAL MEETING OF STOCKHOLDERS
JUNE 11,
2008
__________________________
TABLE
OF CONTENTS
Page
|
Voting
and Proxy
|
2
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|
Proposal
One — Election of Directors
|
3
|
|
Information
About Our Board of Directors, Board Committees and Related
Matters
|
4
|
|
Proposal
Two — Approval of Preferred Stock Transaction
|
13
|
|
Proposal
Three — Ratification of Appointment of Independent Registered Public
Accounting Firm
|
17
|
|
Other
Matters
|
18
|
|
Audit
Matters
|
18
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
20
|
|
Section
16(a) Beneficial Ownership Reporting Compliance
|
21
|
|
Equity
Compensation Plan Information
|
21
|
|
Executive
Compensation and Related Information
|
22
|
|
Executive
Officers
|
22
|
|
Compensation
Discussion and Analysis
|
23
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|
Compensation
Committee Report
|
27
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|
Summary
Compensation Table
|
28
|
|
Grants
of Plan-Based Awards
|
31
|
|
Outstanding
Equity Awards at Fiscal Year-End
|
31
|
|
Option
Exercises and Stock Vested
|
31
|
|
Potential
Payments upon Termination or Change in Control
|
32
|
|
Calculation
of Potential Payments upon Termination or Change in
Control
|
32
|
|
Compensation
Committee Interlocks and Insider Participation
|
33
|
|
Certain
Relationships and Related Transactions
|
34
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|
Other
Information
|
36
|
APPENDICES
| APPENDIX A – | Purchase Agreement dated March 18, 2008 between Pacific Ethanol, Inc. and Lyles United, LLC |
A-1
|
| APPENDIX B – | Certificate of Designations, Powers, Preferences and Rights of the Series B Cumulative Convertible Preferred Stock |
B-1
|
| APPENDIX C – | Warrant dated March 27, 2008 issued by Pacific Ethanol, Inc. to Lyles United, LLC |
C-1
|
| APPENDIX D – | Registration Rights Agreement dated as of March 27, 2008 by and between Pacific Ethanol, Inc. and Lyles United, LLC |
D-1
|
| APPENDIX E – | Letter Agreement dated March 27, 2008 by and between Pacific Ethanol, Inc. and Lyles United, LLC |
E-1
|
PACIFIC
ETHANOL, INC.
PROXY
STATEMENT
FOR
THE 2008 ANNUAL MEETING OF STOCKHOLDERS
JUNE 11,
2008
__________________________
VOTING
AND PROXY
This
Proxy Statement is being furnished in connection with the solicitation of
proxies by our board of directors (“Board”) for use at the 2008 Annual Meeting
of stockholders to be held at 9:00 a.m., local time, on Wednesday, June 11,
2008 at the Holiday Inn Capitol Plaza, 300 J Street, Sacramento,
California 95814, and at any adjournment(s) or postponement(s) of the
Annual Meeting. This Proxy Statement is first being mailed to
stockholders on or about May 9, 2008.
Our
Annual Report on Form 10-K for the year ended December 31, 2007 is being mailed
to stockholders concurrently with this Proxy Statement. The Annual
Report is not to be regarded as proxy soliciting material or as a communication
through which any solicitation of proxies is made. A proxy card is
enclosed for your use. The shares represented by each properly
executed and unrevoked proxy card will be voted as directed by the stockholder
with respect to the matters described in the proxy card. If no
direction is made, the shares represented by each properly executed and
unrevoked proxy card will be voted “for” each of the proposals listed on the
proxy card. Any stockholder giving a proxy has the power to revoke it
at any time before it is voted by providing written notice to our corporate
Secretary, by issuance of a subsequent proxy or by voting in person at the
Annual Meeting. Any stockholder present at the meeting who has given
a proxy may withdraw it and vote his, her or its shares in person if he, she or
it so desires. However, a stockholder who holds shares through a
broker or other nominee must bring a legal proxy to the meeting if that
stockholder desires to vote at the meeting.
At the
close of business on April 23, 2008, the record date for determining
stockholders entitled to notice of and to vote at the Annual Meeting, we had
issued and outstanding 41,771,328 shares of common stock held by 190 holders of
record, 4,750,000 shares of Series A Cumulative Redeemable Convertible
Preferred Stock (“Series A Preferred Stock”) held by one holder of record and
2,051,282 shares of Series B Cumulative Convertible Preferred Stock (“Series B
Preferred Stock”) held by one holder of record. Only stockholders of
record at the close of business on the record date are entitled to notice of and
to vote at the Annual Meeting or at any adjournment(s) or postponement(s) of the
meeting.
Each
share of our common stock issued and outstanding on the record date entitles the
holder of that share to one vote at the Annual Meeting for all matters to be
voted on at the meeting. Each share of our Series A Preferred
Stock issued and outstanding on the record date entitles the holder of that
share to approximately 1.78 votes at the Annual Meeting for all matters to be
voted on at the meeting. Except as to the Preferred Stock Transaction
(as defined below), as to which shares of our Series B Preferred Stock shall not
entitle the holder thereof to any votes at the Annual Meeting, each share of our
Series B Preferred Stock issued and outstanding on the record date entitles the
holder of that share to three votes at the Annual Meeting for all matters to be
voted on at the meeting.
The
holders of a majority of the voting power of our issued and outstanding capital
stock and entitled to vote on a proposal at the Annual Meeting, present in
person or represented by proxy, shall constitute a quorum for purposes of voting
on such proposal. Votes cast at the Annual Meeting will be tabulated
by the person or persons appointed by us to act as inspectors of election for
the meeting. Shares of our common stock, our Series A Preferred
Stock and our Series B Preferred Stock represented in person or by proxy
(regardless of whether the proxy has authority to vote on all matters), as well
as abstentions and broker non-votes, will be counted for purposes of determining
whether a quorum is present at the Annual Meeting.
2
An
“abstention” is the voluntary act of not voting by a stockholder who is present
at a meeting and entitled to vote. “Broker non-votes” are shares of
voting stock held in record name by brokers and nominees concerning which (i)
instructions have not been received from the beneficial owners or persons
entitled to vote, (ii) the broker or nominee does not have discretionary voting
power under applicable rules or the instrument under which it serves in such
capacity, or (iii) the record holder has indicated on the proxy or has executed
a proxy and otherwise notified us that it does not have authority to vote such
shares on that matter.
We will
pay the expenses of soliciting proxies for the Annual Meeting, including the
cost of preparing, assembling and mailing the proxy solicitation
materials. Proxies may be solicited personally, by mail or by
telephone, or by our directors, officers and regular employees who will not be
additionally compensated. We have no present plans to hire special
employees or paid solicitors to assist in obtaining proxies, but we reserve the
option to do so if it appears that a quorum otherwise might not be
obtained. The matters to be considered and acted upon at the Annual
Meeting are referred to in the preceding notice and are discussed below more
fully.
PROPOSAL
ONE —
ELECTION
OF DIRECTORS
Our
bylaws provide for seven directors unless otherwise changed by resolution of our
Board. Directors are elected annually and hold office until the next
annual meeting of stockholders and/or until their respective successors are duly
elected and qualified. We currently have one vacancy on our
Board. Stockholders who desire to nominate any person for election to
our Board must comply with our bylaws, including our advance notice bylaw
provisions relating to the nomination of persons for election to our
Board. See “Information about our Board of Directors, Board
Committees and Related Matters—Board Committees and Meetings, Nominating and
Governance Committee” below. It is intended that the proxies
solicited by our Board will be voted “for” election of the following six
nominees unless a contrary instruction is made on the proxy: William
L. Jones, Neil M. Koehler, Terry L. Stone, John L. Prince, Douglas L. Kieta and
Larry D. Layne. If, for any reason, one or more of the nominees is
unavailable as a candidate for director, an event that is not anticipated, the
person named in the proxy will vote for another candidate or candidates
nominated by our Nominating and Governance Committee. However, under
no circumstances may a proxy be voted in favor of a greater number of persons
than the number of nominees named above. All of the nominees for
director are, at present, directors of Pacific Ethanol and have been nominated
by our Nominating and Governance Committee and ratified by our full
Board.
We are
obligated to cause each person serving from time to time as one of our executive
officers, directors or managers, or having such a position with any of our
subsidiaries, to execute a voting letter that grants an irrevocable proxy to
Cascade Investment, L.L.C., the holder of all of our issued and outstanding
shares of Series A Preferred Stock, with respect to securities held by such
persons to vote to elect two persons to our Board. As of April 23,
2008, all such officers, directors and managers held an aggregate of 4,909,611
shares of our common stock representing approximately 8.5% of all votes entitled
to be cast in connection with the election of members of our
Board. In April 2006, Cascade Investment, L.L.C. identified Robert P.
Thomas and Douglas L. Kieta as its two director designees, and our Board
appointed Messrs. Thomas and Kieta as members of our Board, in connection with
the issuance of our Series A Preferred Stock. Mr. Thomas resigned
from our Board on October 1, 2007 and a replacement has not been designated
by Cascade Investment, L.L.C. Mr. Kieta has been nominated by
our Nominating and Governance Committee for election to our Board at the Annual
Meeting and we expect that Cascade Investment, L.L.C. will utilize its proxy to
vote in favor of his election.
3
Required
Vote of Stockholders
The six
nominees receiving the highest number of affirmative votes of the outstanding
shares of our common stock, Series A Preferred Stock and Series B Preferred
Stock, voting together as a single class, present at the Annual Meeting in
person or by proxy and entitled to vote, will be elected as directors to serve
until the next annual meeting of stockholders and/or until their successors are
duly elected and qualified. Votes against a candidate, abstentions
and broker non-votes will be counted for purposes of determining whether a
quorum is present for this proposal, but will not be included in the vote totals
for this proposal and, therefore, will have no effect on the vote.
Recommendation
of the Board of Directors
OUR BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF THE SIX DIRECTOR NOMINEES
LISTED ABOVE.
INFORMATION
ABOUT OUR BOARD OF DIRECTORS,
BOARD
COMMITTEES AND RELATED MATTERS
Directors
and Director Nominees
The
following table sets forth certain information regarding our current directors
and director nominees as of April 23, 2008:
|
Name
|
Age
|
Positions
Held
|
||
|
William
L.
Jones
|
58
|
Chairman
of the Board, Director and Director Nominee
|
||
|
Neil
M.
Koehler
|
50
|
Chief
Executive Officer, President, Director and Director
Nominee
|
||
|
Terry
L. Stone (1)
|
58
|
Director
and Director Nominee
|
||
|
John
L. Prince (1)
|
65
|
Director
and Director Nominee
|
||
|
Douglas
L. Kieta (2)
|
65
|
Director
and Director Nominee
|
||
|
Larry
D. Layne (3)
|
67
|
Director
and Director Nominee
|
___________
|
(1)
|
Member
of the Audit, Compensation and Nominating and Governance
Committees.
|
|
(2)
|
Member
of the Compensation and Nominating and Governance
Committees.
|
|
(3)
|
Member
of the Audit and Compensation
Committees.
|
Following
is a brief description of the business experience and educational background of
each of the nominees for director, including the capacities in which he has
served during the past five years:
William L.
Jones has served as Chairman of the Board and as a director since March
2005. Mr. Jones is a co-founder of Pacific Ethanol California, Inc.
(“PEI California”), which is now one of our wholly-owned subsidiaries, and
served as Chairman of the Board of PEI California since its formation in January
2003 through March 2004, when he stepped off the board of PEI California to
focus on his candidacy for one of California’s United States Senate
seats. Mr. Jones was California’s Secretary of State from 1995 to
2003. Since May 2002, Mr. Jones has also been the owner of Tri-J Land
& Cattle, a diversified farming and cattle company in Fresno County,
California. Mr. Jones has a B.A. degree in Agribusiness and Plant
Sciences from California State University, Fresno.
4
Neil M.
Koehler has served as Chief Executive Officer, President and as a
director since March 2005. Mr. Koehler served as Chief Executive
Officer of PEI California since its formation in January 2003 and as a member of
its board of directors since March 2004. Prior to his association
with PEI California, Mr. Koehler was the co-founder and General Manager of
Parallel Products, one of the first ethanol production facilities in California,
which was sold to a public company in 1997. Mr. Koehler was also the
sole manager and sole limited liability company member of Kinergy Marketing,
LLC, which he founded in September 2000, and which is now one of our
wholly-owned subsidiaries. Mr. Koehler has over 20 years of
experience in the ethanol production, sales and marketing industry in the
Western United States. Mr. Koehler is the Director of the California
Renewable Fuels Partnership, a Director of the Renewable Fuels Association and
is a nationally-recognized speaker on the production and marketing of renewable
fuels. Mr. Koehler has a B.A. degree in Government from Pomona
College.
Terry L.
Stone has served as a director since March 2005. Mr. Stone is
a Certified Public Accountant with over thirty years of experience in accounting
and taxation. He has been the owner of his own accountancy firm since
1990 and has provided accounting and taxation services to a wide range of
industries, including agriculture, manufacturing, retail, equipment leasing,
professionals and not-for-profit organizations. Mr. Stone has served
as a part-time instructor at California State University, Fresno, teaching
classes in taxation, auditing, and financial and management
accounting. Mr. Stone is also a financial advisor and franchisee of
Ameriprise Financial Services, Inc. Mr. Stone has a B.S. degree in
Accounting from California State University, Fresno.
John L.
Prince has served as a director since July 2005. Mr. Prince is
retired but also works as a consultant to Ruan Transport Corp. and other
companies. Mr. Prince was an Executive Vice President with Land O’
Lakes, Inc. from July 1998 until his retirement in 2004. Prior to
that time, Mr. Prince was President and Chief Executive Officer of Dairyman’s
Cooperative Creamery Association, or the DCCA, located in Tulare, California,
until its merger with Land O’ Lakes, Inc. in July 1998. Land O’
Lakes, Inc. is a farmer-owned, national branded organization based in Minnesota
with annual sales in excess of $6 billion and membership and operations in over
30 states. Prior to joining the DCCA, Mr. Prince was President and
Chief Executive Officer for nine years until 1994, and was Operations Manager
for the preceding ten years commencing in 1975, of the Alto Dairy Cooperative in
Waupun, Wisconsin. Mr. Prince has a B.A. degree in Business
Administration from the University of Northern Iowa.
Douglas L.
Kieta has
served as a director since April 2006. Mr. Kieta is currently
employed by BE&K, Inc., a large engineering and construction company
headquartered in Birmingham, Alabama, where he has served as the Vice President
of Power since May 2006. From April 1999 to April 2006, Mr. Kieta was
employed at Calpine Corporation. At the time of his retirement in
April 2006, Mr. Kieta was the Senior Vice President of Construction and
Engineering with Calpine Corporation. Calpine Corporation is a major
North American power company which leases and operates integrated systems of
fuel-efficient natural gas-fired and renewable geothermal power plants and
delivers clean, reliable and fuel-efficient electricity to customers and
communities in 21 U.S. states and three Canadian provinces. Mr. Kieta
has a B.S. degree in Civil Engineering from Clarkson University and a Master’s
degree in Civil Engineering from Cornell University.
5
Larry D. Layne
has served as a director since December 2007. Mr. Layne joined
First Western Bank in 1963 and served in various capacities with First Western
Bank and its acquiror, Lloyds Bank of California, and Lloyd’s acquiror, Sanwa
Bank, until his retirement in 2000. Sanwa Bank was subsequently
acquired by Bank of the West. From 1999 to 2000, Mr. Layne was Vice
Chairman of Sanwa Bank in charge of its Commercial Banking Group which
encompassed all of Sanwa Bank’s 38 commercial and business banking centers and
12 Pacific Rim branches as well as numerous internal
departments. From 1997 to 2000, Mr. Layne was also Chairman of the
Board of The Eureka Funds, a mutual fund family of five separate investment
funds with total assets of $900 million. From 1996 to 2000, Mr. Layne
was Group Executive Vice President of the Relationship Banking Group of Sanwa
Bank in charge of its 107 branches and 13 commercial banking centers as well as
numerous internal departments. Mr. Layne has also served in various
capacities with many industry and community organizations, including as Director
and Chairman of the Board of the Agricultural Foundation at California State
University, Fresno (“CSUF”); Chairman of the Audit Committee of the Ag.
Foundation at CSUF; board member of the Fresno Metropolitan Flood Control
District; and Chairman of the Ag Lending Committee of the California Banker’s
Association. Mr. Layne has a B.S. degree in Dairy Husbandry from CSUF
and is a graduate of the California Agriculture Leadership Program.
Corporate
Governance
Our Board
believes that good corporate governance is paramount to ensure that Pacific
Ethanol is managed for the long-term benefit of our stockholders. Our
Board has adopted corporate governance guidelines that guide its actions with
respect to, among other things, the composition of the Board and its decision
making processes, Board meetings and involvement of management, the Board’s
standing committees and procedures for appointing members of the committees, and
its performance evaluation of our Chief Executive Officer.
Our Board
has adopted a Code of Business Conduct and Ethics that applies to all of our
directors, officers and employees and an additional Code of Business Ethics that
applies to our Chief Executive Officer and senior financial
officers. The Codes of Ethics, as applied to our principal executive
officer, principal financial officer and principal accounting officer
constitutes our “code of ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and is our “code of conduct” within the meaning of
the listing standards of NASDAQ. We intend to satisfy the disclosure
requirement under Item 5.05 of Form 8-K relating to amendments to or waivers
from provisions of these codes that relate to one or more of the items set forth
in Item 406(b) of Regulation S-K, by describing on our Internet website, located
at http://www.pacificethanol.net,
within four business days following the date of a waiver or a substantive
amendment, the date of the waiver or amendment, the nature of the amendment or
waiver, and the name of the person to whom the waiver was
granted. Information on our Internet website is not, and shall not be
deemed to be, a part of this Proxy Statement or incorporated into any other
filings we make with the Securities and Exchange Commission.
Director
Independence
Our
corporate governance guidelines provide that a majority of the Board and all
members of the Audit, Compensation and Nominating and Governance Committees of
the Board will be independent. On an annual basis, each director and
executive officer is obligated to complete a Director and Officer Questionnaire
that requires disclosure of any transactions with Pacific Ethanol in which a
director or executive officer, or any member of his or her immediate family,
have a direct or indirect material interest. Following completion of
these questionnaires, the Board, with the assistance of the Nominating and
Governance Committee, makes an annual determination as to the independence of
each director using the current standards for “independence” established by the
Securities and Exchange Commission and NASDAQ, additional criteria set forth in
our corporate governance guidelines and consideration of any other material
relationship a director may have with Pacific Ethanol.
6
In April
2008, the Board determined that all of its directors and nominees for election
at the Annual Meeting are independent under these standards, except for (i) Mr.
Jones, who is the father-in-law of Ryan W. Turner, one of our former executive
officers who resigned in April 2006, and (ii) Mr. Koehler, who serves
full-time as our Chief Executive Officer and President. Robert P. Thomas, a
former director who resigned on October 1, 2007, was independent under these
standards during his tenure as a director in 2007. Daniel A. Sanders, a former
director who resigned on October 8, 2007, was not independent under these
standards during his tenure as a director in 2007 as he is the majority owner of
Front Range Energy, LLC, an entity in which we are a minority owner and with
which we conduct significant business. See “Certain Relationships and Related
Transactions” below.
Stockholder
Communications with our Board of Directors
Our Board
has implemented a process by which stockholders may send written communications
directly to the attention of our Board or any individual member of our
Board. Mr. Stone, the Chairman of our Audit Committee, is responsible
for monitoring communications from stockholders and providing copies of such
communications to the other directors as he considers
appropriate. Communications will be forwarded to all directors if
they relate to substantive matters and include suggestions or comments that Mr.
Stone considers to be important for the directors to
consider. Stockholders who wish to communicate with our Board can
write to Terry L. Stone, The Board of Directors, Pacific Ethanol, Inc., 400
Capitol Mall, Suite 2060, Sacramento, California 95814.
Board
Committees and Meetings
Our
business, property and affairs are managed under the direction of our
Board. Our directors are kept informed of our business through
discussions with our executive officers, by reviewing materials provided to them
and by participating in meetings of our Board and its
committees. During 2007, our Board held 15 meetings. All
directors attended at least 75% of the aggregate of the meetings of our Board
and of the committees on which they served or that were held during the period
they were directors or committee members.
Members
of our Board and its committees also consulted informally with management from
time to time and acted at various times by written consent without a meeting
during 2007. Additionally, the independent members of the Board met
in executive session regularly without the presence of management.
It is our
policy to invite and encourage our directors to attend our annual
meetings. At the date of our 2007 annual meeting, we had seven
members on our Board, six of whom were in attendance at our 2007 annual
meeting.
Our Board
has established standing Audit, Compensation and Nominating and Governance
Committees. Each committee operates pursuant to a written charter
that has been approved by our Board and the corresponding committee and that is
reviewed annually and revised as appropriate. Each charter is available at our
website at http://www.pacificethanol.net.
Audit
Committee
Our Audit
Committee selects our independent auditors, reviews the results and scope of the
audit and other services provided by our independent auditors, and reviews our
financial statements for each interim period and for our year
end. Messrs. Stone and Prince served on our Audit Committee for all
of 2007. Mr. Thomas served on our Audit Committee during 2007 until
his resignation on October 1, 2007. Mr. Layne was appointed to our
Audit Committee on December 20, 2007. Our Board has determined that
each member of the Audit Committee is “independent” under the current NASDAQ
listing standards and satisfies the other requirements under NASDAQ listing
standards and Securities and Exchange Commission rules regarding audit committee
membership. Our Board has determined that Mr. Stone (i) qualifies as
an “audit committee financial expert” under applicable Securities and Exchange
Commission rules and regulations governing the composition of the Audit
Committee, and (ii) satisfies the “financial sophistication” requirements of the
NASDAQ listing standards. During 2007, our Audit Committee held seven
meetings. The Audit Committee Report for 2007 can be found on page 20
of this Proxy Statement.
7
Compensation
Committee
Our
Compensation Committee is responsible for establishing and administering our
overall policies on compensation and the compensation to be provided to our
executive officers, including, among other things, annual salaries and bonuses,
stock options, stock grants, other stock-based awards, and other incentive
compensation arrangements. In addition, the Compensation Committee
reviews the philosophy and policies behind the salary, bonus and stock
compensation arrangements for all other employees. Although our
Compensation Committee makes all compensation decisions as to our executive
officers, our Chief Executive Officer makes recommendations to our Compensation
Committee regarding compensation for the other named executive
officers. Our Compensation Committee has the authority to administer
our 2006 Stock Incentive Plan with respect to grants to executive officers and
directors, and also has authority to make equity awards under our 2006 Stock
Incentive Plan to all other eligible individuals. However, our Board
may retain, reassume or exercise from time to time the power to administer our
2006 Stock Incentive Plan. Equity awards made to members of the
Compensation Committee must be authorized and approved by a disinterested
majority of our Board.
The
Compensation Committee evaluates both performance and compensation to ensure
that the total compensation paid to our executive officers is fair, reasonable
and competitive so that we can attract and retain superior employees in key
positions. The Compensation Committee believes that compensation
packages offered to our executives, including the named executive officers,
should include both cash and equity-based compensation that reward performance
as measured against established goals. The Compensation Committee has
the authority to retain consultants, and other advisors and in furtherance of
the foregoing objectives, our Compensation Committee has engaged Hewitt
Associates LLC, a global human resources consulting firm, to conduct an annual
review of our total compensation program for the named executive officers and
other executives. Hewitt Associates has provided our Compensation
Committee with relevant market data and alternatives to consider when making
compensation decisions as to the named executive officers and when making
decisions as to the recommendations being made by our management for other
executives. In making compensation decisions, our Compensation
Committee compares each element of total compensation against market data
obtained by Hewitt Associates. The Compensation Committee generally
expects to set total compensation for the named executive officers at the median
of compensation paid to similarly situated executives of the companies
comprising the market data provided to us by Hewitt Associates.
Additional
information concerning the compensation policies and objectives established by
the Compensation Committee is included under the heading “Executive Compensation
and Related Information — Compensation Discussion and Analysis”
below. The Compensation Committee Report for 2007 can be found on
page 29 of this Proxy Statement.
Messrs.
Stone and Prince served on our Compensation Committee for all of
2007. Mr. Thomas served on our Compensation Committee during 2007
until his resignation on October 1, 2007. Mr. Layne was appointed to
our Compensation Committee on December 20, 2007. Our Board has
determined that each member of the Compensation Committee is “independent” under
the current NASDAQ listing standards. During 2007, our Compensation
Committee held two meetings.
8
Nominating
and Governance Committee
Our
Nominating and Governance Committee selects nominees for our
Board. During 2007, our Nominating and Governance Committee consisted
of Messrs. Stone, Prince and Kieta. Our Board has determined that
each member of the Nominating and Governance Committee is “independent” under
the current NASDAQ listing standards. During 2007, our Nominating and
Governance Committee held two meetings.
The
Nominating and Governance Committee will consider candidates for director
recommended by any stockholder that is the beneficial owner of shares
representing more than 1.0% of the then-outstanding shares of our common stock
and who has beneficially owned those shares for at least one
year. The Nominating and Governance Committee will evaluate those
recommendations by applying its regular nominee criteria and considering the
additional information described in the Nominating and Governance Committee’s
below-referenced charter. Stockholders that desire to recommend
candidates for the Board for evaluation may do so by contacting Pacific Ethanol
in writing, identifying the potential candidate and providing background and
other relevant information. Stockholders must also comply with our
bylaws, including our advance notice bylaw provisions relating to the nomination
of persons for election to our Board that, among other things, require that
nominations of persons for election to our Board at annual meetings be submitted
to our Secretary by the close of business on the 45th day
before the first anniversary of the date on which we first mailed our proxy
materials for the prior year’s annual meeting. We first mailed our proxy
materials for our 2007 annual meeting on or about May 11, 2007 and anticipate
mailing our proxy materials for our 2008 annual meeting on or about May 9,
2008. We have received no stockholder nominations of persons for
election to our Board for our Annual Meeting.
Our
Nominating and Governance Committee utilizes a variety of methods for
identifying and evaluating nominees for director. Candidates may also
come to the attention of the Nominating and Governance Committee through current
Board members, professional search firms and other persons. In
evaluating potential candidates, our Nominating and Governance Committee will
take into account a number of factors, including, among others, the
following:
|
|
·
|
the
candidate’s independence from
management;
|
|
|
·
|
whether
the candidate has relevant business
experience;
|
|
|
·
|
judgment,
skill, integrity and reputation;
|
|
|
·
|
existing
commitments to other businesses;
|
|
|
·
|
corporate
governance background;
|
|
|
·
|
financial
and accounting background, to enable the committee to determine whether
the candidate would be suitable for Audit Committee membership;
and
|
|
|
·
|
the
size and composition of our Board.
|
|
Compensation
of Directors
|
We use a
combination of cash and stock-based incentive compensation to attract and retain
qualified candidates to serve on our Board. In setting the
compensation of directors, we consider the significant amount of time that Board
members spend in fulfilling their duties to Pacific Ethanol as well as the
experience level we require to serve on our Board. The Board, through
its Compensation Committee, annually reviews the compensation and compensation
policies for Board members. In recommending director compensation,
the Compensation Committee is guided by three goals (i) compensation should
fairly pay directors for work required in a company of our size and scope, (ii)
compensation should align directors’ interests with the long-term interests of
our stockholders, and (iii) the structure of the compensation should be clearly
disclosed to our stockholders.
9
Cash
Compensation
Current
Program. On April 8, 2008, and effective as of April 1, 2008,
our Compensation Committee approved a new cash compensation plan for directors
which provides the Chairman of our Board annual compensation of $80,000, the
Chairman of our Audit Committee annual compensation of $42,000, the Chairman of
our Compensation Committee annual compensation of $36,000, the Chairman of our
Nominating and Governance Committee annual compensation of $36,000 and the
Chairman of our Strategic Transactions Committee annual compensation of
$36,000. All other directors, except employee directors, receive
annual compensation of $24,000. These amounts are paid in advance in
monthly installments. In addition, directors are reimbursed for
certain reasonable and documented expenses in connection with attendance at
meetings of our Board and its committees. Employee directors do not
receive director compensation in connection with their service as
directors
Prior Program. Our
cash compensation plan for directors during 2007 and the first quarter of 2008
provided the Chairman of our Board annual compensation of $80,000, the Chairman
of our Audit Committee annual compensation of $22,000 and the Chairman of our
Compensation Committee annual compensation of $20,000. All other
directors, except employee directors, received annual compensation of
$12,000. These amounts were paid in monthly
installments. In addition, directors were reimbursed for certain
reasonable and documented expenses in connection with attendance at meetings of
our Board and its committees. Employee directors did not receive
director compensation in connection with their service as
directors.
Equity
Compensation
Current
Program. We recently implemented a new program for grants of
equity compensation to our directors. Following our annual meeting
each year, our Compensation Committee or our full Board is to grant equity
compensation to our newly elected or reelected directors which is to vest as to
100% of the grants in one year. Vesting is to be subject to continued
service on our Board during the full year.
Prior
Program. During 2007, we did not have a predetermined or
automatic annual or other periodic program for grants of equity compensation to
our directors. Equity compensation was granted as and when determined
appropriate by our Compensation Committee or our full Board.
Compensation
of Employee Director
Mr.
Koehler was compensated as a full-time employee and officer but received no
additional compensation for service as a Board member during
2007. Information regarding the compensation awarded to Mr. Koehler
is included in the “Summary Compensation Table” below.
10
Director
Compensation Table
The
following table summarizes the compensation of our directors for the year ended
December 31, 2007:
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)(1)
|
Stock
Awards
($)(2)
|
Total
($)
|
|||||||||
|
William
L. Jones
|
$ | 80,000 | $ | 61,121 | (3) | $ | 141,121 | |||||
|
Terry
L. Stone
|
$ | 22,000 | $ | 67,912 | (4) | $ | 89,912 | |||||
|
John
L. Prince
|
$ | 12,000 | $ | 67,912 | (5) | $ | 79,912 | |||||
|
Douglas
L. Kieta
|
$ | 12,000 | $ | 67,912 | (6) | $ | 79,912 | |||||
|
Robert
P. Thomas(7)
|
$ | 15,000 | $ | 67,912 | (7) | $ | 82,912 | |||||
|
Daniel
A. Sanders(8)
|
$ | 9,000 | $ | 79,664 | (8) | $ | 88,664 | |||||
|
Larry
D. Layne(9)
|
$ | 1,000 | $ | — | $ | 1,000 | ||||||
__________
|
|
(1)
|
For
a description of annual director fees and fees for chair positions, see
the disclosure above under “Compensation of Directors—Cash Compensation.”
The value of perquisites and other personal benefits was less than $10,000
in aggregate for each director.
|
|
|
(2)
|
The
amounts shown are the compensation costs recognized in our financial
statements for 2007 related to shares of restricted stock awarded to each
director in 2007 or 2006 in accordance with the provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment,” referred to in this Proxy Statement as SFAS No.
123R. The fair values of the shares of restricted stock awarded
were calculated based on the fair market value of our common stock on the
grant date. No grants of restricted stock were made in prior
years.
|
|
|
(3)
|
At
December 31, 2007, Mr. Jones held 31,200 shares from stock awards,
including 18,720 unvested shares, and also held options to purchase an
aggregate of 50,000 shares of common stock. Mr. Jones was
granted 31,200 shares of our common stock on October 4, 2006, having an
aggregate grant date fair value of $407,472, calculated based on the fair
market value of our common stock on the grant
date.
|
|
|
(4)
|
At
December 31, 2007, Mr. Stone held 15,600 shares from stock awards,
including 5,200 unvested shares, and also held options to purchase an
aggregate of 15,000 shares of common stock. Mr. Stone was
granted 15,600 shares of our common stock on October 4, 2006, having an
aggregate grant date fair value of $203,736, calculated based on the fair
market value of our common stock on the grant
date.
|
|
|
(5)
|
At
December 31, 2007, Mr. Prince held 15,600 shares from stock awards,
including 5,200 unvested shares, and also held options to purchase an
aggregate of 15,000 shares of common stock. Mr. Prince was
granted 15,600 shares of our common stock on October 4, 2006, having an
aggregate grant date fair value of $203,736, calculated based on the fair
market value of our common stock on the grant
date.
|
|
|
(6)
|
At
December 31, 2007, Mr. Kieta held 15,600 shares from stock awards,
including 5,200 unvested shares. Mr. Kieta was granted 15,600
shares of our common stock on October 4, 2006, having an aggregate grant
date fair value of $203,736, calculated based on the fair market value of
our common stock on the grant date.
|
|
|
(7)
|
Mr.
Thomas resigned as a director on October 1, 2007. At December
31, 2007, Mr. Thomas held 5,200 shares from stock awards. Mr.
Thomas was granted 15,600 shares of our common stock on October 4, 2006,
having an aggregate grant date fair value of $203,736, calculated based on
the fair market value of our common stock on the grant date, of which
10,400 shares were forfeited upon his resignation on October 1,
2007.
|
|
|
(8)
|
Mr.
Sanders resigned as a director on October 8, 2007. Mr. Sanders
was granted 15,600 shares of our common stock on January 12, 2007, having
an aggregate grant date fair value of $238,992, calculated based on the
fair market value of our common stock on the grant date, of which 10,400
shares were forfeited upon his resignation on October 8,
2007. Mr. Sanders is the majority owner of Front Range Energy,
LLC, an entity of which we are a minority owner and with which we have
entered into an Amended and Restated Ethanol Purchase and Sale Agreement
dated as of August 9, 2006. See “Certain Relationships and
Related Transactions” below.
|
|
|
(9)
|
Mr.
Layne was appointed as a director on December 20,
2007.
|
11
Indemnification
of Directors and Officers
Section
145 of the Delaware General Corporation Law permits a corporation to indemnify
its directors and officers against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with a pending or
completed action, suit or proceeding if the officer or director acted in good
faith and in a manner the officer or director reasonably believed to be in the
best interests of the corporation.
Our
certificate of incorporation provides that, except in certain specified
instances, our directors shall not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as
directors, except liability for the following:
|
|
·
|
any
breach of their duty of loyalty to our company or our
stockholders;
|
|
|
·
|
acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
|
|
|
·
|
unlawful
payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law;
and
|
|
|
·
|
any
transaction from which the director derived an improper personal
benefit.
|
In
addition, our certificate of incorporation and bylaws obligate us to indemnify
our directors and officers against expenses and other amounts reasonably
incurred in connection with any proceeding arising from the fact that such
person is or was an agent of ours. Our bylaws also authorize us to
purchase and maintain insurance on behalf of any of our directors or officers
against any liability asserted against that person in that capacity, whether or
not we would have the power to indemnify that person under the provisions of the
Delaware General Corporation Law. We have entered and expect to
continue to enter into agreements to indemnify our directors and officers as
determined by our Board. These agreements provide for indemnification
of related expenses including attorneys’ fees, judgments, fines and settlement
amounts incurred by any of these individuals in any action or
proceeding. We believe that these bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers. We also maintain directors’ and officers’
liability insurance.
The
limitation of liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty. They may
also reduce the likelihood of derivative litigation against our directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder’s investment may be
adversely affected to the extent that we pay the costs of settlement and damage
awards against directors and officers as required by these indemnification
provisions. At present, there is no pending litigation or proceeding
involving any of our directors, officers or employees regarding which
indemnification is sought, and we are not aware of any threatened litigation
that may result in claims for indemnification.
Insofar
as the provisions of our certificate of incorporation or bylaws provide for
indemnification of directors or officers for liabilities arising under the
Securities Act of 1933, as amended (the “Securities Act”), we have been informed
that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
12
PROPOSAL
TWO —
APPROVAL
OF PREFERRED STOCK TRANSACTION
Preliminary
Note
A vote of
our stockholders is not required by law or other applicable regulations to
approve the Purchase Agreement (as defined below) or the transactions
contemplated by the Purchase Agreement, including the initial issuance and sale
of shares of our Series B Preferred Stock, as described below; provide, however,
that approval by our stockholders of the future issuance of dividend shares
(“Dividend Shares”) or conversion shares (“Conversion Shares”) as a result of a
conversion price adjustment pursuant to the Certificate of Designations (as
defined below), or both, may be required pursuant to NASDAQ Marketplace Rule
4350(i) depending on the amount of Dividend Shares or Conversion Shares to be
issued in the future under the Certificate of Designations. In
addition, under the Purchase Agreement, we have committed to, as soon as
practicable, use our commercially best efforts to hold a meeting of our
stockholders to approve the Purchase Agreement and the transactions contemplated
by the Purchase Agreement, including the future issuance of any Dividend Shares
and Conversion Shares.
Regardless
of the outcome of this proposal, the issuance and sale of shares of our Series B
Preferred Stock, as described below, will remain a duly approved and fully
consummated transaction, except that the future issuance of any Dividend Shares
and the issuance of any Conversion Shares may be limited as provided in the
Certificate of Designations.
If
this proposal is not approved, the Certificate of Designations will, without the
prior written consent of holders of at least a majority of the then outstanding
shares of our Series B Preferred Stock voting as a separate class, limit our
ability to enter into any transaction that may nevertheless be deemed to be in
the best interests of Pacific Ethanol if that transaction would result in the
issuance of Conversion Shares in an amount in excess of the Conversion
Limitation (as defined below). Accordingly, we are seeking stockholder approval
of this proposal to allow us flexibility to enter into such transactions deemed
to be in the best interests of Pacific Ethanol without such prior written
consent.
Series
B Preferred Stock Transaction
On March
18, 2008, we entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with Lyles United, LLC (the “Purchaser”). A copy of the
Purchase Agreement is attached to this Proxy Statement as Appendix A. The
Purchase Agreement provides for the issuance and sale by us to the Purchaser of
(i) 2,051,282 shares of our Series B Preferred Stock, all of which are initially
convertible into an aggregate of 6,153,846 shares of our common stock based on
an initial three-for-one conversion ratio, and (ii) a warrant (the “Warrant”) to
purchase an aggregate of 3,076,923 shares of our common stock at an exercise
price of $7.00 per share, for an aggregate purchase price of $40
million. Subject to certain limitations described below, the proceeds
from the sale of our Series B Preferred Stock and the Warrant are to be used as
working capital, including for payments on our construction projects, and for
other general corporate purposes. The Purchase Agreement includes
customary representations and warranties on the part of both us and the
Purchaser and other customary terms and conditions. In addition, the
Purchase Agreement provides that we shall not undertake any project or series of
projects involving the investment of more than $1.0 million of new capital, for
the acquisition or improvement of a fixed asset which extends the life or
increases the productivity of the asset, individually or in the aggregate, which
is not already contemplated by our cash flow projections until we repay an
aggregate of $30.0 million in debt loaned to us by the Purchaser in an unrelated
prior transaction. We refer to the Purchase Agreement and the transactions
contemplated by the Purchase Agreement, including the future issuance of any
Dividend Shares and any Conversion Shares as the “Preferred Stock
Transaction.”
On March
27, 2008, we closed the transactions contemplated by the Purchase Agreement and
issued and sold the 2,051,282 shares of our Series B Preferred Stock and the
Warrant to the Purchaser.
The
information contained herein is not a complete statement of all provisions of
the Purchase Agreement and the related agreements. Statements made in
this Proxy Statement with respect to the terms of the Purchase Agreement and
such related agreements are qualified in their respective entireties by
reference to the more detailed information set forth in the Purchase Agreement
and such related agreements, which are attached as Appendices A-E
to this Proxy Statement.
13
Effects
on Common Stockholders
The
2,051,282 shares of our Series B Preferred Stock are initially convertible into
an aggregate of 6,153,846 shares of our common stock based on an initial
three-for-one conversion ratio, which amount represented approximately 10.8% of
our shares of common stock outstanding (including shares of our Series A
Preferred Stock and Series B Preferred Stock calculated on an as-converted
basis) as of March 27, 2008, the date we consummated the issuance and sale
of our Series B Preferred Stock. Thus, the issuance of shares of our
Series B Preferred Stock has diluted existing stockholders. Also,
additional dilution to our stockholders may result from the future issuance of
Dividend Shares or Conversion Shares. Dilution may materially and
adversely affect our stockholders and the values of their investments in our
common stock. In addition, if ultimately issued, Dividend Shares or
Conversion Shares could have the effect of delaying, deferring and discouraging
another party from acquiring control of Pacific Ethanol, Inc. and would increase
the Purchaser’s proportion of voting power of all of our issued and outstanding
capital stock. See immediately below for a more detailed description
of the terms and the rights and preferences of the Series B Preferred
Stock.
Certificate
of Designations
A copy of
the Certificate of Designations, Powers, Preferences and Rights of the Series B
Cumulative Convertible Preferred Stock (the “Certificate of Designations”) is
attached to this Proxy Statement as Appendix B. The
Certificate of Designations designates 3,000,000 shares of preferred stock as
Series B Cumulative Convertible Preferred Stock. The Series B
Preferred Stock ranks senior in liquidation and dividend preferences to our
common stock and on parity with respect to dividend and liquidation rights with
our Series A Preferred Stock. Holders of Series B Preferred Stock are
entitled to quarterly cumulative dividends payable in arrears in cash in an
amount equal to 7.0% of the purchase price per share of the Series B Preferred
Stock on a pari passu basis with the holders of Series A Preferred Stock;
however, subject to the consent of the Series B Preferred Stock as set forth in
the Letter Agreement described below, such dividends may, at our option, be paid
in additional shares of Series B Preferred Stock based initially on the value of
the purchase price per share of the Series B Preferred Stock. The
holders of Series B Preferred Stock have a liquidation preference over the
holders of our common stock equivalent to the purchase price per share of the
Series B Preferred Stock plus any accrued and unpaid dividends on the Series B
Preferred Stock but on a pro rata and pari passu basis with the holders of
Series A Preferred Stock. A liquidation will be deemed to occur upon
the happening of customary events, including transfer of all or substantially
all of our capital stock or assets or a merger, consolidation, share exchange,
reorganization or other transaction or series of related transaction, unless
holders of 66 2/3% of the Series B Preferred Stock vote affirmatively in favor
of or otherwise consent that such transaction shall not be treated as a
liquidation.
The
holders of the Series B Preferred Stock have conversion rights initially
equivalent to three shares of common stock for each share of Series B Preferred
Stock. The conversion ratio is subject to customary antidilution
adjustments. In addition, antidilution adjustments are to occur in
the event that we issue equity securities at a price equivalent to less than the
initial conversion price of $6.50 per share, including derivative securities
convertible into equity securities (on an as-converted or as-exercised
basis). If an adjustment to the conversion price would require us (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 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 $6.95, which was our book value per share at December 31, 2007 (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,
(a) the conversion price shall not be reduced below the maximum extent that
would not require stockholder approval under NASDAQ Marketplace Rule 4350(i),
and (b) we are to use our 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 are we 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.
Certain
specified issuances will not result in antidilution adjustments (the
“Anti-Dilution Excluded Securities”), including (i) securities issued to our
employees, officers or directors under any option plan, agreement or other
arrangement duly adopted by us, the issuance of which is approved by the
Compensation Committee of our Board, (ii) any common stock issued upon
conversion of the Series A Preferred Stock or as payment of dividends thereon,
(iii) Series B Preferred Stock and any common stock issued upon conversion of
the Series B Preferred Stock or as payment of dividends thereon, (iv) securities
issued upon conversion or exercise of any derivative securities outstanding on
the date the Certificate of Designations is first filed with the Delaware
Secretary of State, and (v) securities issued in connection with a stock split,
stock dividend, combination, reorganization, recapitalization or other similar
event for which adjustment to the conversion ratio of the Series B Preferred
Stock is already made. The shares of Series B Preferred Stock are
also subject to forced conversion upon the occurrence of a transaction that
would result in an internal rate of return to the holders of the Series B
Preferred Stock of 25% or more. The forced conversion is to be based
upon the conversion ratio as last adjusted. Notwithstanding the
foregoing, no shares of Series B Preferred Stock will be subject to forced
conversion unless the shares of common stock issued or issuable to the holders
upon conversion of the Series B Preferred Stock are registered for resale with
the Securities and Exchange Commission and eligible for trading on The NASDAQ
Stock Market or such other exchange approved by holders of 66 2/3% of the then
outstanding shares of Series B Preferred Stock. Accrued but unpaid
dividends on the Series B Preferred Stock are to be paid in cash upon any
conversion of the Series B Preferred Stock.
14
The
holders of Series B Preferred Stock vote together as a single class with the
holders of our Series A Preferred Stock and common stock on all actions to be
taken by our stockholders. Except as to the Preferred Stock
Transaction, as to which shares of our Series B Preferred Stock shall not
entitle the holder thereof to any votes at the Annual Meeting, each share of
Series B Preferred Stock entitles the holder 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 on all matters to be voted on by our
stockholders. Each share of Series B Preferred Stock is initially
convertible into three shares of our common stock and, except as provided above,
is therefore initially entitled to three votes per share of Series B Preferred
Stock on all matters to be voted on by our
stockholders. Notwithstanding the foregoing, the holders of Series B
Preferred Stock are afforded numerous customary protective provisions with
respect to certain actions that may only be approved by holders of a majority of
the shares of Series B Preferred Stock. These protective provisions include
limitations on (i) the increase or decrease of the number of authorized shares
of Series B Preferred Stock, (ii) the increase or decrease of the number of
authorized shares of other capital stock, (iii) the alteration, amendment,
repeal substitution or waiver of any provision of our charter or 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) the
authorization, creation or sale of any securities senior to or on parity with
the Series B Preferred Stock as to voting, dividend, liquidation or redemption
rights, including subordinated debt, (v) the authorization, creation or sale of
any securities junior to the Series B Preferred Stock as to voting, dividend,
liquidation or redemption rights, including subordinated debt, other than our
common stock, (vi) the authorization, creation or sale of any shares of Series B
Preferred Stock other than the shares of Series B Preferred Stock authorized,
created and sold under the Purchase Agreement, (vii) engaging in a transaction
that would result in an internal rate of return to holders of Series B Preferred
Stock of less than 25%, (viii) the declaration or payment of any dividends or
distributions on our capital stock in a cumulative amount in excess of the
dividends and distributions paid on the Series A Preferred Stock and the Series
B Preferred Stock, (ix) the authorization or effecting our voluntary
liquidation, dissolution, recapitalization, reorganization or winding up of our
business; (x) the purchase, redemption or other acquisition of any of our
capital stock other than Series A Preferred Stock or Series B Preferred Stock,
(xi) unless we have obtained stockholder approval of the transactions
contemplated by the Purchase Agreement pursuant to NASDAQ Marketplace Rule
4350(i), the issuance or sale, or engaging in any transaction wherein we are
deemed to have issued or sold, any shares of common stock or securities
convertible into common stock for a consideration per share that would result in
the issuance of common stock upon conversion of the Series B Preferred Stock in
excess of the Conversion Limitation.
The
holders of the Series B Preferred Stock are afforded preemptive rights with
respect to certain securities offered by us. The preemptive rights of
the holders of the Series B Preferred Stock are subordinate to the preemptive
rights of, and prior exercise thereof by, the holders of the Series A Preferred
Stock. So long as 50% of the shares of Series B Preferred Stock
remain outstanding, and not including any of our securities as to which any
holder of the Series A Preferred Stock has exercised its preemptive rights, each
holder of Series B Preferred Stock has the right to purchase a pro rata portion
of such securities equivalent to the number of shares of common stock then held
by such holder (giving effect to the conversion of all shares of convertible
preferred stock then held by such holder), divided by 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), plus any amounts not purchased by other
holders of Series B Preferred Stock. Notwithstanding the foregoing, certain
proposed securities offerings will not result in preemptive rights in favor of
the holders of the Series B Preferred Stock. These offerings include
offerings of Anti-Dilution Excluded Securities as well as the issuance of
securities other than for cash pursuant to a merger, consolidation, acquisition
or similar business combination by us approved by our Board.
Warrant
On March
27, 2008, we issued a Warrant to the Purchaser that is exercisable for up to
3,076,923 shares of our common stock at an exercise price of $7.00 per share at
any time during the period commencing on the date that is six months and one day
from the date of the Warrant and ending ten years from the date of the
Warrant. The Warrant contains customary anti-dilution provisions for
stock splits, stock dividends and the like and other customary terms and
conditions. A copy of the Warrant is attached to this Proxy Statement
as Appendix C.
15
Registration
Rights Agreement
On March
27, 2008, we entered into a Registration Rights Agreement with the Purchaser. A
copy of the Registration Rights Agreement is attached to this Proxy Statement as
Appendix D. The
Registration Rights Agreement is effective until the holders of the Series B
Preferred Stock, and their affiliates, as a group, own less than 10% of the
Series B Preferred Stock issued under the Purchase Agreement, including common
stock into which such Series B Preferred Stock has been
converted. The Registration Rights Agreement provides that holders of
a majority of the Series B Preferred Stock, including common stock into which
such Series B Preferred Stock has been converted, may demand and cause us, at
any time after the first anniversary of the closing, to register on their behalf
the shares of common stock issued, issuable or that may be issuable upon
conversion of the Series B Preferred Stock and as payment of dividends thereon,
and upon exercise of the Warrant as well as upon exercise of a warrant to
purchase 100,000 shares of our common stock at an exercise price of $8.00 per
share and issued in connection with the extension of the maturity date of an
unrelated loan (collectively, the “Registrable
Securities”). Following such demand, we are required to notify any
other holders of the Series B Preferred Stock or Registrable Securities of our
intent to file a registration statement and, to the extent requested by such
holders, include them in the related registration statement. We are
required to keep the registration statement effective until such time as all of
the Registrable Securities are sold or until such holders may avail themselves
of unlimited Rule 144 for sales of Registrable Securities without registration
under the Securities Act. The holders are entitled to two demand registrations
on Form S-1 and unlimited demand registrations on Form S-3; provided, however,
that we are not obligated to effect more than one demand registration on Form
S-3 in any calendar year.
In
addition to the demand registration rights afforded the holders under the
Registration Rights Agreement, the holders are entitled to “piggyback”
registration rights. These rights entitle the holders who so elect to be
included in registration statements to be filed by us with respect to other
registrations of equity securities. The holders are entitled to unlimited
“piggyback” registration rights.
Certain
customary limitations to our registration obligations are included in the
Registration Rights Agreement. These limitations include our right to, in good
faith, delay or withdrawal registrations requested by the holders under demand
and “piggyback” registration rights, and the right to exclude certain portions
of holders’ Registrable Securities upon the advice of our underwriters.
Following the registration of securities in which the holders’ Registrable
Securities are included, we are obligated to refrain from registering any of our
equity securities or securities convertible into equity securities until the
earlier of the sale of all Registrable Securities subject to such registration
statement and 180-days following the effectiveness of such registration
statement. The Registration Rights Agreement also provides for customary
registration procedures. We are responsible for all costs of registration, plus
the reasonable fees of one legal counsel for the holders, which fees are not to
exceed $25,000 per registration.
The
Registration Rights Agreement includes customary cross-indemnity provisions
under which we are obligated to indemnify the holders and their affiliates as a
result of losses caused by untrue or allegedly untrue statements of material
fact contained or incorporated by reference in any registration statement under
which Registrable Securities are registered, including any prospectuses or
amendments related thereto. Our indemnity obligations also apply to omissions of
material facts and to any failure on our part to comply with any law, rule or
regulation applicable to such registration statement. Each holder is obligated
to indemnify us and our affiliates as a result of losses caused by untrue or
allegedly untrue statements of material fact contained in any registration
statement under which Registrable Securities are registered, including any
prospectuses or amendments related thereto, which statements were furnished in
writing by that holder to us expressly for use in the registration statement,
but only to the extent of the net proceeds received by that holder with respect
to securities sold pursuant to such registration statement. The holders’
indemnity obligations also apply to omissions of material facts on the part of
the holders.
In
addition, the Registration Rights Agreement provides for reasonable access on
the part of the Purchaser to all of our books, records and other information and
the opportunity to discuss the same with our management. The
Registration Rights Agreement includes customary representations and warranties
on the part of both us and the Purchaser and other customary terms and
conditions.
16
Letter
Agreement
On March
27, 2008, we entered into a Letter Agreement with the Purchaser under which we
expressly waived our rights under the Certificate of Designations to make
dividend payments in additional shares of Series B Preferred Stock in lieu of
cash dividend payments without the prior written consent of the
Purchaser. A copy of the Letter Agreement is attached to this Proxy
Statement as Appendix E.
Required
Vote of Stockholders
The
approval of the Preferred Stock Transaction requires the affirmative votes of a
majority of the total votes cast on this proposal of the shares of our
common stock and Series A Preferred Stock, voting together as a single class,
present at the Annual Meeting in person or by proxy and entitled to
vote.
In
accordance with NASDAQ Marketplace Rule 4350(i), shares of our Series B
Preferred Stock shall not entitle the holder thereof to any votes as to the
approval of the Preferred Stock Transaction.
Recommendation
of the Board of Directors
OUR BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE PREFERRED STOCK
TRANSACTION.
PROPOSAL
THREE —
RATIFICATION
OF APPOINTMENT OF
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Our Audit
Committee has appointed the independent registered public accounting firm of
Hein & Associates LLP to audit and comment on our financial statements for
the year ending December 31, 2008, and to conduct whatever audit functions are
deemed necessary. Hein & Associates LLP audited our financial
statements for the year ended December 31, 2007 that were included in our most
recent Annual Report on Form 10-K.
A
representative of Hein & Associates LLP is expected to be present at the
Annual Meeting, will have the opportunity to make a statement if he or she
desires to do so and will be available to respond to appropriate questions from
stockholders.
Required
Vote of Stockholders
Although
a vote of stockholders is not required on this proposal, our Board is asking our
stockholders to ratify the appointment of our independent registered public
accounting firm. The ratification of the appointment of our
independent registered public accounting firm requires the affirmative votes of
a majority of the votes of the shares of our common stock, Series A Preferred
Stock and Series B Preferred Stock, voting together as a single class, present
at the Annual Meeting in person or by proxy and entitled to vote, which shares
voting affirmatively must also constitute at least a majority of the voting
power required to constitute a quorum.
17
In the
event that our stockholders do not ratify the appointment of Hein &
Associates LLP as our independent registered public accounting firm, the
appointment will be reconsidered by our Audit Committee. Even if the
appointment is ratified, our Audit Committee, in its discretion, may direct the
appointment of a different independent registered public accounting firm at any
time during the year if the Audit Committee believes that such a change would be
in our and our stockholders’ best interests.
Recommendation
of the Board of Directors
OUR BOARD
UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF HEIN
& ASSOCIATES LLP TO SERVE AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM FOR THE YEAR ENDING DECEMBER 31, 2008.
OTHER
MATTERS
Our Board
knows of no other matters to be brought before the Annual
Meeting. However, if other matters should come before the Annual
Meeting, it is the intention of the person named in the proxy to vote such proxy
in accordance with his or her judgment on such matters.
AUDIT
MATTERS
Principal
Accountant Fees and Services
The
following table presents fees for professional audit services rendered by
Hein & Associates LLP for the years ended December 31, 2007 and
2006.
|
|
2007
|
2006
|
||||||
|
Audit
Fees
|
$ | 1,201,300 | $ | 1,389,710 | ||||
|
Audit-Related
Fees
|
38,800 | 82,683 | ||||||
|
Tax
Fees
|
2,200 | 48,011 | ||||||
|
All
Other Fees
|
— | — | ||||||
|
Total
|
$ | 1,242,300 | $ | 1,520,404 | ||||
Audit
Fees. Consist of amounts billed for professional services
rendered for the audit of our annual consolidated financial statements included
in our Annual Reports on Forms 10-K and 10-KSB, and reviews of our interim
consolidated financial statements included in our Quarterly Reports on
Forms 10-Q and our Registration Statements on Forms S-1, S-3 and S-8,
including amendments thereto, and the review of our internal accounting and
reporting controls as required under Section 404 of the Sarbanes-Oxley Act of
2002.
Audit-Related
Fees. Audit-Related Fees consist of fees billed for
professional services that are reasonably related to the performance of the
audit or review of our consolidated financial statements but are not reported
under “Audit Fees.” Such fees include amounts billed for professional
services performed in connection with mergers and acquisitions.
Tax Fees. Tax Fees
consist of fees for professional services for tax compliance activities,
including the preparation of federal and state tax returns and related
compliance matters.
All Other
Fees. Consists of amounts billed for services other than those
noted above.
Our Audit
Committee has determined that all non-audit services provided by Hein &
Associates LLP are compatible with maintaining Hein & Associates LLP’s audit
independence.
18
Our Audit
Committee is responsible for approving all audit, audit-related, tax and other
services. The Audit Committee pre-approves all auditing services and
permitted non-audit services, including all fees and terms to be performed for
us by our independent auditor at the beginning of the fiscal
year. Non-audit services are reviewed and pre-approved by project at
the beginning of the fiscal year. Any additional non-audit services
contemplated by us after the beginning of the fiscal year are submitted to the
Audit Committee chairman for pre-approval prior to engaging our independent
auditor for such services. These interim pre-approvals are reviewed
with the full Audit Committee at its next meeting for
ratification. During 2007, all services performed by Hein &
Associates LLP were pre-approved by our Audit Committee in accordance with these
policies and applicable Securities and Exchange Commission
regulations.
The
following Audit Committee Report is not considered proxy solicitation material
and is not deemed filed with the Securities and Exchange
Commission. Notwithstanding anything to the contrary set forth in any
of our previous filings made under the Securities Act or under the Securities
Exchange Act of 1934, as amended (“Exchange Act”) that might incorporate future
filings made by us under those statutes, the Audit Committee Report will not be
incorporated by reference into any such prior filings or into any future filings
made by us under those statutes.
Audit
Committee Report
Our Audit
Committee discussed with our independent auditors all matters required to be
discussed by generally accepted auditing standards, including those described in
Statement on Auditing Standards No. 61, as amended, “Communication with Audit
Committees.” Prior to the inclusion and filing with the Securities and Exchange
Commission of the consolidated audited financial statements in the accompanying
Annual Report on Form 10-K for the year ended December 31, 2007, the Audit
Committee discussed with management and reviewed our consolidated audited
financial statements. In addition, our Audit Committee obtained from
our independent auditors a formal written statement indicating that no
relationships existed between the auditors and Pacific Ethanol that might bear
on the auditors’ independence consistent with Independence Standards Board
Standard No. 1, “Independent Discussions with Audit Committees,” discerned from
discussions with the auditors that no relationships exist that may impact their
objectivity and independence, and satisfied itself as to the auditors’
independence. Prior to the filing of the Annual Report on Form 10-K
with the Securities and Exchange Commission, and based on the review and
discussions referenced above, the Audit Committee recommended to our Board that
the audited financial statements be included in the Annual Report on Form 10-K
for the year ended December 31, 2007.
|
Respectfully
submitted,
Audit
Committee
Terry
L. Stone
John
L. Prince
Larry
D. Layne
|
19
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information with respect to the beneficial ownership
of our common stock as of April 23, 2008, the date of the table,
by:
|
|
·
|
each
person known by us to beneficially own more than 5% of the outstanding
shares of our common stock;
|
|
|
·
|
each
of our directors;
|
|
|
·
|
each
of our current executive officers;
and
|
|
|
·
|
all
of our directors and executive officers as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission, and includes voting or investment power with respect to the
securities. To our knowledge, except as indicated by footnote, and
subject to community property laws where applicable, the persons named in the
table below have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. Shares of common
stock underlying derivative securities, if any, that currently are exercisable
or convertible or are scheduled to become exercisable or convertible for or into
shares of common stock within 60 days after the date of the table are deemed to
be outstanding in calculating the percentage ownership of each listed person or
group but are not deemed to be outstanding as to any other person or
group. Percentage of beneficial ownership is based on 41,771,328
shares of common stock outstanding as of the date of the table.
|
Name and Address of Beneficial
Owner (1)
|
Title
of Class
|
Amount
and Nature
of
Beneficial Ownership
|
Percent
of
Class
|
|||||||
|
William
L. Jones
|
Common
|
1,411,200 | (2) | 3.37 | % | |||||
|
Neil
M. Koehler
|
Common
|
3,238,535 | 7.75 | % | ||||||
|
John
T. Miller.
|
Common
|
84,613 | * | |||||||
|
Joseph
W. Hansen
|
Common
|
75,024 | * | |||||||
|
Christopher
W. Wright
|
Common
|
82,839 | * | |||||||
|
Terry
L. Stone
|
Common
|
35,600 | (3) | * | ||||||
|
John
L. Prince
|
Common
|
30,600 | (4) | * | ||||||
|
Douglas
L. Kieta
|
Common
|
15,600 | * | |||||||
|
Larry
D. Layne
|
Common
|
15,600 | * | |||||||
|
Cascade
Investment, L.L.C.
|
Common
|
10,392,724 | (5) | 20.27 | % | |||||
|
Series
A Preferred
|
4,750,000 | (5) | 100.00 | % | ||||||
|
Lyles
United, LLC
|
Common
|
6,259,846 | (6) | 13.03 | % | |||||
|
Series
B Preferred
|
2,051,282 | (6) | 100.00 | % | ||||||
|
All
executive officers and directors
as
a group (9 persons)
|
Common
|
4,989,611 | (7) | 11.92 | % | |||||
__________
|
*
|
Less
than 1.00%
|
|
(1)
|
Messrs.
Jones, Koehler, Stone, Prince, Kieta and Layne are directors of Pacific
Ethanol. Messrs. Koehler, Miller, Hansen and Wright are
executive officers of Pacific Ethanol. The address of each of
these persons is c/o Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060,
Sacramento,
California 95814.
|
|
(2)
|
Includes
50,000 shares of common stock underlying options issued to Mr. Jones and
1,361,200 shares of common stock held by William L. Jones and Maurine
Jones, husband and wife, as community
property.
|
|
(3)
|
Includes
15,000 shares of common stock underlying
options.
|
|
(4)
|
Includes
15,000 shares of common stock underlying
options.
|
|
(5)
|
Amount
of common stock includes 892,724 shares of common stock held directly and
9,500,000 shares of common stock underlying our Series A Preferred
Stock. All Series A Preferred Stock held by Cascade
Investment, L.L.C. may be deemed to be beneficially owned by
William H. Gates III as the sole member of Cascade Investment,
L.L.C. The address for Cascade Investment, L.L.C. is 2365
Carillon Point, Kirkland, Washington
98033.
|
|
(6)
|
Amount
of common stock includes 6,000 shares of common stock held directly,
100,000 shares of common stock underlying a warrant and 6,153,846 shares
of common stock underlying our Series B Preferred Stock. The
address for Lyles United, LLC is c/o Howard Rice Nemerovski Canady Falk
& Rabkin, Three Embarcadero Center, Suite 700, San Francisco,
California 94111-4024.
|
|
(7)
|
Includes
80,000 shares of common stock underlying
options.
|
20
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Exchange Act requires our executive officers and directors, and
persons who beneficially own more than 10% of a registered class of our common
stock, to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission. These officers,
directors and stockholders are required by Securities and Exchange Commission
regulations to furnish us with copies of all reports that they
file.
Based
solely upon a review of copies of the reports furnished to us during the year
ended December 31, 2007 and thereafter, or any written representations received
by us from directors, officers and beneficial owners of more than 10% of our
common stock (“reporting persons”) that no other reports were required, we
believe that, during 2007, all Section 16(a) filing requirements applicable to
our reporting persons were met.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table provides information about our common stock that may be issued
upon the exercise of options, warrants and rights under all of our existing
equity compensation plans as of December 31, 2007.
|
Plan
Category
|
Number
of
Securities
to be
Issued
Upon Exercise of
Outstanding
Options,
Warrants
or
Stock Rights
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
|
Number
of
Securities
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans(1)(2)
|
|||||||||
|
Equity
Compensation Plans Approved by Security Holders:
|
||||||||||||
|
1995
Plan(1)
|
40,000 | $ | 5.60 | — | ||||||||
|
2004
Plan(2)
|
185,000 | $ | 7.33 | — | ||||||||
|
2006
Plan
|
— | — | 1,130,761 | |||||||||
__________
|
|
(1)
|
Our
Amended 1995 Incentive Stock Plan was terminated effective July 19, 2006,
except to the extent of then-outstanding
options.
|
|
|
(2)
|
Our
2004 Stock Option Plan was terminated effective September 7, 2006, except
to the extent of then-outstanding
options.
|
21
EXECUTIVE
COMPENSATION AND RELATED INFORMATION
Executive
Officers
The
following table sets forth certain information regarding our executive officers
as of April 23, 2008:
|
Name
|
Age
|
Positions
Held
|
||
|
Neil
M.
Koehler
|
50
|
Chief
Executive Officer, President and Director
|
||
|
John
T.
Miller
|
62
|
Chief
Operating Officer
|
||
|
Joseph
W.
Hansen
|
60
|
Chief
Financial Officer
|
||
|
Christopher
W.
Wright
|
55
|
Vice
President, General Counsel and
Secretary
|
Neil M.
Koehler has served as Chief Executive Officer, President and as a
director since March 2005. Mr. Koehler served as Chief Executive
Officer of PEI California since its formation in January 2003 and as a member of
its board of directors since March 2004. Prior to his association
with PEI California, Mr. Koehler was the co-founder and General Manager of
Parallel Products, one of the first ethanol production facilities in California,
which was sold to a public company in 1997. Mr. Koehler was also the
sole manager and sole limited liability company member of Kinergy, which he
founded in September 2000, and which is now one of our wholly-owned
subsidiaries. Mr. Koehler has over 20 years of experience in the
ethanol production, sales and marketing industry in the Western United
States. Mr. Koehler is the Director of the California Renewable Fuels
Partnership, a Director of the Renewable Fuels Association and is a
nationally-recognized speaker on the production and marketing of renewable
fuels. Mr. Koehler has a B.A. degree in Government from Pomona
College.
John T.
Miller has served as Chief Operating Officer since June 2006 and served
as our Acting Chief Financial Officer from December 16, 2006 through June 3,
2007 and from July 19, 2007 through January 1, 2008. Mr. Miller was
employed at Calpine Corporation beginning in 2001 and served as a Senior Vice
President from 2002 to 2006. At Calpine, Mr. Miller held several
roles including managing the build-out of power projects, overseeing human
resources and safety programs and leading Calpine’s strategy to centralize its
power plant and corporate activities. Prior to his tenure at Calpine,
Mr. Miller served from 1998 to 2001 as Vice President of Thermo Ecotek, a
subsidiary of Thermo Electron, and as President of Thermo Ecotek’s Power
Resources Division. Mr. Miller directed Thermo Electron’s expansion
of its independent power business in the United States, Germany and the Czech
Republic. He also represented Thermo Electron in managing the sale of
the Power Resources Division to AES Corporation. Mr. Miller also
served from 1994 to 1998 as President and Chief Executive Officer of Pacific
Generation Company, a subsidiary of PacifiCorp. Prior to that time,
Mr. Miller served from 1990 to 1994 as Pacific Generation Company’s Vice
President of Business Development and from 1987 to 1990 as its Vice President of
Operations. In 1995, Mr. Miller completed Harvard University’s
Managing Global Opportunities, an executive education program. Mr.
Miller has a B.S. degree in Mechanical Engineering from Oregon State University
and an M.B.A. degree from the University of Portland. Mr. Miller
served in the United States Navy from 1967 to 1971 as a Communications
Technician.
Joseph W.
Hansen, has served as Chief Financial Officer since January
2008. Before joining Pacific Ethanol, Mr. Hansen was employed as
Chief Financial Officer at Joseph Scott Properties, Inc. d/b/a Joseph Scott
Financial from December 2005 through June 2007. Prior to that time,
Mr. Hansen was Chief Financial Officer of National RV Holdings, Inc. from April
2004 through May 2005. Prior to joining National RV Holdings, Inc.,
Mr. Hansen served in various capacities, including Chief Financial Officer and
Executive Vice President, at Zacky Farms Company from October 1996 to August
2003. Mr. Hansen received a Certified Public Accountant certificate
from the State of Wisconsin and also holds a Wisconsin bar
license. Mr. Hansen has a B.B.A. degree in Accounting from the
University of Wisconsin, Madison, a J.D. degree from Tulane University School of
Law and an L.L.M. degree in Taxation from the New York University Graduate
School of Law.
22
Christopher W.
Wright has served as Vice President, General Counsel and Secretary since
June 2006. From April 2004 until he joined Pacific Ethanol in June
2006, Mr. Wright operated an independent consulting practice, advising companies
on complex transactions, including acquisitions and financings. Prior
to that time, from January 2003 to April 2004, Mr. Wright was a partner with
Orrick, Herrington & Sutcliffe, LLP, and from July 1998 to December 2002,
Mr. Wright was a partner with Cooley Godward LLP, where he served as
Partner-in-Charge of the Pacific Northwest office. Mr. Wright has
extensive experience advising boards of directors on compliance, securities
matters and strategic transactions, with a particular focus on guiding the
development of rapidly growing companies. He has acted as general
counsel for numerous technology enterprises in all aspects of corporate
development, including fund-raising, business and technology acquisitions,
mergers and strategic alliances. Mr. Wright holds an A.B. in History
from Yale College and a J.D. from the University of Chicago Law
School.
Our
officers are appointed by and serve at the discretion of our
Board. There are no family relationships among our executive officers
and directors.
Compensation
Discussion and Analysis
Overview
of Compensation Program
This
section discusses the principal components of compensation paid to our named
executive officers for 2007. Throughout this Proxy Statement, we
refer to the individuals who served as our principal executive officer and
principal financial officer during 2007, as well as the other individuals
included in the “Summary Compensation Table” below as the “named executive
officers.” However, when we refer to “named executive officers” in
the information under the heading “2008 Compensation Philosophy and Objectives,”
we mean all of the individuals included in the “Summary Compensation Table”
below (other than our former Chief Financial Officer) and any executive officer
of Pacific Ethanol who we expect will be listed in the Summary Compensation
Table for 2008.
Our
Compensation Committee is responsible for establishing, implementing and
administering our overall policies on compensation and the compensation to be
provided to our executive officers. Our Compensation Committee also
has the responsibility for monitoring adherence with our compensation philosophy
and ensuring that the total compensation paid to our executive officers is fair,
reasonable and competitive.
Although
our Compensation Committee makes all compensation decisions as to our executive
officers, our Chief Executive Officer makes recommendations to our Compensation
Committee regarding compensation for the other named executive
officers.
2007
Executive Compensation
For the
year ended December 31, 2007, the principal components of compensation for our
named executive officers were:
|
|
·
|
base
salary;
|
|
|
·
|
equity
incentive compensation; and
|
|
|
·
|
perquisites
and other personal benefits.
|
During
2007, our compensation philosophy was substantially similar to our compensation
philosophy set forth below for 2008. Base salary paid to each of the
named executive officers was specified in their executive employment
agreements. The executive employment agreements with our Chief
Executive Officer, Chief Operating and Acting Chief Financial Officer and our
General Counsel were entered into prior to 2007, and were amended and restated
as of December 11, 2007. Information about the prior executive
employment agreements and the amended and restated executive employment
agreements can be found under the heading “Executive Employment Agreements”
below. The executive employment agreement with our former Chief
Financial Officer was entered into during 2007 but was terminated in connection
with his resignation in July 2007.
In
addition to base salary, our named executive officers vested as to a portion of
their restricted stock grants made in 2006. We did not grant
additional restricted stock to any named executive officer during
2007. Our former Chief Financial Officer would have been entitled to
a restricted stock grant under his executive employment agreement, but his
resignation in July 2007 resulted in the relinquishment of any right to receive
shares of restricted stock.
The
restricted stock grants made in 2006 provided for immediate vesting of 25% of
the shares underlying the grants, with the remaining shares to vest over the
next five years as a retention tool for the relevant service
period. The annual vesting for the named executive officers (other
than our former Chief Financial Officer) occurred on October 4,
2007.
23
We did
not have any program, plan or obligation that required us to grant equity
incentive compensation on specified dates, except that our executive employment
agreement with our former Chief Financial Officer required us to issue a
specified amount of restricted stock. As discussed above, the
executive’s right to this stock was relinquished upon his resignation in July
2007. Information about outstanding equity incentive compensation
awards held by our named executive officers and directors is contained in the
“Outstanding Equity Awards at Fiscal Year-End” table below and in the “Director
Compensation” table above.
During
2007, the Compensation Committee also considered granting discretionary cash
bonuses to each named executive officer based on the personal performance of
each named executive officer during 2007 in an amount up to 50% of each named
executive officer’s base salary. Ultimately, the Compensation
Committee elected not to pay discretionary cash bonuses to any of our named
executive officers because we were not profitable in 2007.
During
2007, we also provided certain of the named executive officers with perquisites
and other personal benefits that the Compensation Committee believed were
reasonable. For example, we paid for the commuting, housing and other
living expenses of our Chief Operating Officer and our General
Counsel. In addition, the executive employment agreements with each
of the named executive officers (other than our former Chief Financial Officer)
provide for certain payments upon a change in control of Pacific
Ethanol. Information regarding applicable payments under these
agreements is provided under the heading “Calculation of Potential Payments upon
Termination or Change in Control” below.
2008
Compensation Philosophy and Objectives
Our
current compensation philosophy is based upon three central
objectives:
|
|
·
|
To
provide an executive compensation structure and system that is both
competitive in the marketplace and also internally equitable based upon
the weight and level of responsibilities of each
executive;
|
|
·
|
To
attract, retain and motivate qualified executives within this structure,
and reward them for outstanding performance-to-objectives and business
results; and
|
|
|
·
|
To
structure our compensation policy so that the compensation of executive
officers is dependent in part on the achievement of our current year
business plan objectives and dependent in part on the long-term increase
in our net worth and the resultant improvement in stockholder value, and
to maintain an appropriate balance between short- and long-range
performance objectives over time.
|
The
Compensation Committee evaluates both performance and compensation to ensure
that the total compensation paid to our executive officers is fair, reasonable
and competitive so that we can attract and retain superior employees in key
positions. The Compensation Committee believes that compensation
packages offered to our executives, including the named executive officers,
should include both cash- and equity-based compensation that reward performance
as measured against established goals.
In
furtherance of these objectives, our Compensation Committee has engaged Hewitt
Associates LLC, a global human resources consulting firm, to conduct an annual
review of our total compensation program for the named executive officers and
other executives. Hewitt Associates has provided our Compensation
Committee with relevant market data and alternatives to consider when making
compensation decisions as to the named executive officers and when making
decisions as to the recommendations being made by our management for other
executives.
In making
compensation decisions, our Compensation Committee compares each element of
total compensation against market data obtained by Hewitt
Associates. The sources of this data include proxy statements for
publicly-traded companies within the ethanol industry and general industry
published surveys that target companies with approximately $350 million, $500
million and $750 million in annual revenues. For 2008, the
Compensation Committee generally expects to set total compensation for the named
executive officers at the median of compensation paid to similarly situated
executives of the companies comprising the market data provided to us by Hewitt
Associates.
Although
there is no pre-established policy or target for the allocation between either
cash and non-cash or short-term and long-term incentive compensation, the
Compensation Committee expects that a significant percentage of total
compensation for 2008 will be allocated to incentives as a result of the
compensation philosophy we adopted in 2007. The level and mix of
incentive compensation will be determined by the Compensation Committee based on
information provided by Hewitt Associates.
For 2008,
we expect that the principal components of compensation for our named executive
officers will be:
|
|
·
|
base
salary;
|
|
|
·
|
discretionary
cash bonuses;
|
|
|
·
|
equity
incentive compensation; and
|
|
|
·
|
perquisites
and other personal benefits.
|
We view
the various components of compensation as related but distinct. Our Compensation
Committee expects to review compensation information provided by Hewitt
Associates and to consider factors such as internal equity and consistency, and
other considerations it deems relevant, such as rewarding extraordinary
performance, to determine the appropriate level and mix of total
compensation.
24
Base
Salary
Base
salary is targeted to recognize each executive officer’s unique value and
historical contributions to our success in light of salary norms in our industry
and the general marketplace and to compensate them for services expected to be
rendered during the fiscal year. Base salary ranges for named
executive officers are determined for each executive based on his or her
position and responsibility by using market data obtained by Hewitt Associates,
with the goal of establishing base salary at the median base salary paid to
similarly situated executives as reflected in the market data. The
Compensation Committee expects to periodically review the base compensation of
the Chief Executive Officer, and the base compensation of all other named
executive officers with the Chief Executive Officer, to ensure that a
competitive position is maintained.
Discretionary
Cash Bonuses
The
Compensation Committee expects to use discretionary cash bonuses to focus our
management on achieving key company financial objectives, to motivate certain
desired individual behaviors and goals and/or to reward substantial achievement
of these company financial objectives and individual behaviors and
goals.
We intend
to use cash bonuses to reward performance achievements generally only as to
years in which we are profitable. The Compensation Committee believes
that as a growth company, we should reward achievement of both personal
objectives and company financial objectives such as net sales, gallons of
ethanol sold, net income and operating cash flows. Individual
performance objectives of the named executive officers based on the
participant’s accountability and impact on our overall operations will be
determined by our Compensation Committee with target award opportunities that
will be established as a percentage of base salary. The Compensation
Committee expects to target the amount of any potential discretionary cash
bonuses at the median level of cash bonuses paid to similarly situated
executives as reflected in the market data provided by Hewitt
Associates. To the extent that our financial performance is less than
or greater than the median financial performance reflected in the market data,
the Compensation Committee expects that discretionary cash bonuses will be less
than or greater than the median level of cash bonuses paid to executives of our
peer companies.
Our
Compensation Committee has not determined whether it would attempt to recover
bonuses paid based on our financial performance where our financial statements
are restated in a downward direction sufficient to reduce the amount of bonus
that should have been paid under applicable bonus criteria.
Equity
Incentive Compensation
Our 2006
Stock Incentive Plan authorizes the issuance of up to 2,000,000 shares of our
common stock pursuant to options, restricted stock, restricted stock units,
stock appreciation rights, direct stock issuances and other stock-based awards
to our officers, directors or key employees or to consultants that do business
with us. Our Compensation Committee has the authority to administer
our 2006 Stock Incentive Plan with respect to grants to executive officers and
directors, and also has authority to make equity awards under our 2006 Stock
Incentive Plan to all other eligible individuals. However, our Board
may retain, reassume or exercise from time to time the power to administer our
2006 Stock Incentive Plan. Equity awards made to members of the
Compensation Committee must be authorized and approved by a disinterested
majority of our Board.
We plan
to use equity incentive compensation to encourage participants to focus on the
long-term performance of Pacific Ethanol and to provide an opportunity for the
named executive officers to increase their ownership stake in Pacific Ethanol
through grants of our common stock that vest over time. The
Compensation Committee also plans to continue to use equity compensation to
attract qualified executive officers and to maintain competitive levels of total
compensation.
25
Equity
incentive compensation levels will be determined based upon our financial
performance, the individual performance of the participant and market data
provided to the Compensation Committee by Hewitt Associates. Although
equity incentive compensation levels will vary among the participants based on
their positions with Pacific Ethanol, the goal of the Compensation Committee is
to provide for equity incentive grants in amounts equal to the median level of
grants made to similarly situated executives as reflected in the market
data. As is the case with discretionary cash bonuses, to the extent
that our financial performance is less than or greater than the median financial
performance reflected in the market data, the Compensation Committee expects
that equity incentive compensation levels will be less than or greater than the
median level of equity incentive compensation paid to executives of our peer
companies.
Historically,
we have neither made equity incentive grants in connection with the release or
withholding of material non-public information nor have we made any grant at a
predetermined time. However, in the future, our Compensation
Committee may establish a focal grant date at which equity-based incentive
compensation would periodically be determined, most likely at times when cash
compensation is being reviewed and the results of our operations for our latest
completed fiscal period are publicly available. Historically, stock
options granted to our directors and executive officers have generally had
exercise prices at or above the fair market value of our common stock on the
date of grant.
On
January 17, 2008, we granted 52,650 shares of restricted stock under our 2006
Stock Inventive Plan to our new Chief Financial Officer. The shares
of restricted stock vested as to 10,530 shares on April 1, 2008 and will vest as
to an additional 10,530 shares on October 4th of each
of the next four years starting on October 4, 2008, subject in each case to
continued employment.
On April
8, 2008, we granted shares of restricted stock under our 2006 Stock Incentive
Plan to various employees, including our executive officers. Our
Chief Executive Officer was granted 79,908 shares of restricted stock, our Chief
Operating Officer was granted 31,963 shares of restricted stock, our new Chief
Financial Officer was granted 22,374 shares of restricted stock and our General
Counsel was granted 22,374 shares of restricted stock. The shares of restricted
stock will vest as to 25% on April 1st of each of the next four years starting
on April 1, 2009, subject in each case to continued employment.
Perquisites
and Other Personal Benefits
We expect
to provide named executive officers with perquisites and other personal benefits
that the Compensation Committee believes are reasonable and consistent with our
overall compensation program to better enable us to attract and retain superior
employees for key positions. In addition, we have entered into
executive employment agreements with our Chief Executive Officer, Chief
Operating Officer, new Chief Financial Officer and our General Counsel that
provide for certain payments upon a change in control of Pacific
Ethanol. Information regarding applicable payments under these
agreements (except as to our new Chief Financial Officer, who began
his tenure in 2008) is provided under the heading “Calculation of Potential
Payments upon Termination or Change in Control” below. The
Compensation Committee expects to periodically review the levels of perquisites
and other personal benefits provided to our named executive
officers.
26
Accounting
and Tax Treatment
We
account for equity compensation paid to our employees under the rules of SFAS
No. 123R, which requires us to estimate and record an expense over the service
period of the award. Accounting rules also require us to record cash
compensation as an expense at the time the obligation is
accrued. Unless and until we achieve sustained profitability, the
availability to us of a tax deduction for compensation expenses will not be
material to our financial position. We structure cash bonus
compensation so that it is taxable to our executives at the time it becomes
available to them.
The
Compensation Committee reviews and considers the deductibility of executive
compensation under Section 162(m) of the Internal Revenue Code, which provides
that we may not deduct compensation of more than $1,000,000 that is paid to
certain individuals. We currently intend that all cash compensation
paid will be tax deductible by us. However, with respect to equity
compensation awards, while any gain recognized by employees from nonqualified
options should be deductible, to the extent that an option constitutes an
incentive stock option, gain recognized by the optionee will not be deductible
if there is a disqualifying disposition by the optionee. In addition,
if we grant awards of restricted stock or restricted stock units that are not
subject to performance vesting, they may not be fully deductible by us at the
time the award is otherwise taxable to the employee.
The
following Compensation Committee Report is not considered proxy solicitation
material and is not deemed filed with the Securities and Exchange
Commission. Notwithstanding anything to the contrary set forth in any
of our previous filings made under the Securities Act or under the Exchange Act
that might incorporate future filings made by us under those statutes, the
Compensation Committee Report will not be incorporated by reference into any
such prior filings or into any future filings made by us under those
statutes.
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the foregoing Compensation
Discussion and Analysis with management, and based on that review and
discussion, the Compensation Committee recommended to the Board that the
Compensation Discussion and Analysis be included in the Proxy Statement for the
2008 Annual Meeting of stockholders and incorporated by reference into the
Annual Report on Form 10-K for the year ended December 31, 2007.
|
Respectfully
submitted,
Compensation
Committee
Larry
D. Layne
John
L. Prince
Douglas
L. Kieta
Terry
L. Stone
|
27
Summary
Compensation Table
The
following table sets forth summary information concerning the compensation of
our principal executive officer, our Chief Operating Officer, who also served as
our acting principal financial officer as of December 31, 2007, our Vice
President, General Counsel and Secretary, and our former principal financial
officer (collectively, the “named executive officers”), for all services
rendered in all capacities to us for the years ended December 31, 2007 and
2006.
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)(1)
|
Non-Equity
Incentive
Plan Compensation
($)
|
All
Other
Compen
-sation
($)(2)
|
Total
($)
|
|||||||||||||||||||
|
Neil
M. Koehler
|
2007
|
$ | 284,615 | $ | — | $ | 183,362 | $ | — | $ | — | $ | 467,977 | |||||||||||||
|
Chief
Executive Officer and President
|
2006
|
$ | 200,000 | $ | — | $ | 349,917 | $ | 300,000 | (3) | $ | — | $ | 849,917 | ||||||||||||
|
John
T. Miller
|
2007
|
$ | 247,500 | $ | — | $ | 137,522 | $ | — | $ | 116,252 | (5) | $ | 501,274 | ||||||||||||
|
Chief
Operating Officer and Acting Chief Financial Officer(4)
|
2006
|
$ | 88,349 | $ | — | $ | 262,437 | $ | — | $ | — | $ | 350,786 | |||||||||||||
|
Christopher
W. Wright
|
2007
|
$ | 223,461 | $ | — | $ | 137,522 | $ | — | $ | 25,917 | (6) | $ | 386,900 | ||||||||||||
|
Vice
President, General Counsel and Secretary
|
2006
|
$ | 88,349 | $ | — | $ | 262,437 | $ | — | $ | 13,995 | (6) | $ | 364,781 | ||||||||||||
|
Douglas
C. Jeffries
|
2007
|
|
$ | 32,593 | $ | — | $ | — | (7) | $ | — | $ | — | $ | 32,593 | |||||||||||
|
Former
Chief Financial Officer(7)
|
|
|||||||||||||||||||||||||
_______________
|
(1)
|
The
amounts shown are the compensation costs recognized in our financial
statements for 2006 and 2007 related to shares of common stock awarded to
certain named executive officers in 2006 in accordance with the provisions
of SFAS No. 123R. The fair values of the shares of common stock were
calculated based on the fair market value of our common stock on the
respective grant dates. The shares of common stock were issued
under our 2006 Stock Incentive Plan. Information regarding the
vesting schedules for Messrs. Koehler, Miller and Wright is included in
the footnotes to the “Outstanding Equity Awards at Fiscal Year-End” table
below.
|
|
(2)
|
The
value of perquisites and other personal benefits was less than $10,000 in
aggregate for each executive other than Messrs. Miller and
Wright.
|
|
(3)
|
Represents
compensation under Mr. Koehler’s Executive Employment Agreement based on
the net free cash flow of Kinergy. See “Executive Employment
Agreements—Neil M. Koehler” below.
|
|
(4)
|
Mr.
Miller was our Acting Chief Financial Officer from December 16, 2006
through June 3, 2007 and from July 19, 2007 through January 1,
2008. Joseph W. Hansen was appointed as our Chief Financial
Officer effective January 2, 2008.
|
|
(5)
|
Amount
represents perquisites or personal benefits relating to payment of or
reimbursement for commuting expenses from Mr. Miller’s home to our
corporate office locations in Fresno and Sacramento, California, and
housing and other living expenses, as well as payment of or reimbursement
for expenses associated with the relocation of Mr. Miller’s residence to
close proximity with our corporate headquarters in Sacramento, California.
Also includes approximately $88,000 in tax gross-up benefits associated
with Mr. Miller’s relocation.
|
|
(6)
|
Amount
represents perquisites or personal benefits relating to payment of or
reimbursement for commuting expenses from Mr. Wright’s home to our
corporate office locations in Fresno and Sacramento, California, and
housing and other living expenses.
|
|
(7)
|
Mr.
Jeffries was appointed as our Chief Financial Officer on June 4, 2007 and
resigned as our Chief Financial Officer on July 18, 2007. Mr. Jeffries was
to receive a grant of 57,500 share of our common stock, of which 7,500
shares were to vest as of Mr. Jeffries’ first day of employment and the
remaining 50,000 shares were to vest at the rate of 10,000 shares each
October 4, beginning on October 4, 2007 and continuing thereafter,
provided that Mr. Jeffries remained in our employ. Mr. Jeffries
relinquished his right to receive any of the 57,500 shares in connection
with his resignation on July 18,
2007.
|
28
Executive
Employment Agreements
Neil
M. Koehler
Prior Executive Employment
Agreement. Our prior Executive Employment Agreement with Neil
M. Koehler dated March 23, 2005 provided for a three-year term and automatic
one-year renewals thereafter, unless either Mr. Koehler or Pacific Ethanol
provided written notice to the other at least ninety days prior to the
expiration of the then-current term. Mr. Koehler was to receive a
base salary of $200,000 per year and was entitled to receive a cash bonus not to
exceed 50% of his base salary to be paid based upon performance criteria
established by the Board on an annual basis and an additional cash bonus not to
exceed 50% of the net free cash flow of Kinergy Marketing, LLC (defined as
revenues of Kinergy Marketing, LLC, less his salary and performance bonus, less
capital expenditures and all expenses incurred specific to Kinergy Marketing,
LLC), subject to a maximum of $300,000 in any given year; provided, that such
bonus was to be reduced by ten percentage points each year, such that 2009 was
to be the final year of such bonus at 10% of net free cash
flow. Kinergy Marketing, LLC is one of our wholly-owned
subsidiaries. Our prior Executive Employment Agreement with Mr.
Koehler also include other customary terms and conditions, including certain
specified employee benefits, payments and entitlements upon termination without
cause or termination by Mr. Koehler for good reason or in the event of a change
in control.
New Executive Employment
Agreement. Our new Executive Employment Agreement with Mr.
Koehler dated as of December 11, 2007 provides for at-will
employment. Mr. Koehler is to receive a base salary of $300,000 per
year and is eligible to receive an annual discretionary cash bonus of up to 70%
of his base salary, to be paid based upon performance criteria set by the Board
and an additional cash bonus not to exceed 50% of the net free cash flow of
Kinergy Marketing, LLC (defined as revenues of Kinergy Marketing, LLC, less Mr.
Koehler’s salary and performance bonus, less capital expenditures and all
expenses incurred specific to Kinergy Marketing, LLC), subject to a maximum of
$300,000 in any given year; provided, that such bonus will be reduced by ten
percentage points each year, commencing in 2005, such that 2009 will be the
final year of such bonus at 10% of net free cash flow.
Upon
termination by Pacific Ethanol without cause, resignation by Mr. Koehler for
good reason or upon Mr. Koehler’s disability, Mr. Koehler is entitled to receive
(i) severance equal to twelve months of base salary, (ii) continued health
insurance coverage for twelve months, and (iii) accelerated vesting of 25% of
all shares or options subject to any equity awards granted to Mr. Koehler prior
to Mr. Koehler’s termination which are unvested as of the date of
termination. Notwithstanding the foregoing, if Mr. Koehler is
terminated without cause or resigns for good reason within three months before
or twelve months after a change in control, Mr. Koehler is entitled to (a)
severance equal to eighteen months of base salary, (b) continued health
insurance coverage for eighteen months, and (c) accelerated vesting of 100% of
all shares or options subject to any equity awards granted to Mr. Koehler prior
to Mr. Koehler’s termination that are unvested as of the date of
termination.
The term
“for good reason” is defined in the new Executive Employment Agreement as (i)
the assignment to Mr. Koehler of any duties or responsibilities that result in
the material diminution of Mr. Koehler’s authority, duties or responsibility,
(ii) a material reduction by Pacific Ethanol in Mr. Koehler’s annual base
salary, except to the extent the base salaries of all other executive officers
of Pacific Ethanol are accordingly reduced, (iii) a relocation of Mr. Koehler’s
place of work, or Pacific Ethanol’s principal executive offices if Mr. Koehler’s
principal office is at such offices, to a location that increases Mr. Koehler’s
daily one-way commute by more than thirty-five miles, or (iv) any material
breach by Pacific Ethanol of any material provision of the new Executive
Employment Agreement.
29
The term
“cause” is defined in the new Executive Employment Agreement as (i) Mr.
Koehler’s indictment or conviction of any felony or of any crime involving
dishonesty, (ii) Mr. Koehler’s participation in any fraud or other act of
willful misconduct against Pacific Ethanol, (iii) Mr. Koehler’s refusal to
comply with any lawful directive of Pacific Ethanol, (iv) Mr. Koehler’s material
breach of his fiduciary, statutory, contractual, or common law duties to Pacific
Ethanol, or (v) conduct by Mr. Koehler which, in the good faith and reasonable
determination of the Board, demonstrates gross unfitness to serve; provided,
however, that in the event that any of the foregoing events is reasonably
capable of being cured, Pacific Ethanol shall, within twenty days after the
discovery of such event, provide written notice to Mr. Koehler describing the
nature of such event and Mr. Koehler shall thereafter have ten business days to
cure such event.
A “change
in control” of Pacific Ethanol is deemed to have occurred if, in a single
transaction or series of related transactions (i) any person (as such term is
used in Section 13(d) and 14(d) of the Exchange Act), or persons acting as a
group, other than a trustee or fiduciary holding securities under an employee
benefit program, is or becomes a “beneficial owner” (as defined in Rule 13-3
under the Exchange Act), directly or indirectly of securities of Pacific Ethanol
representing a majority of the combined voting power of Pacific Ethanol, (ii)
there is a merger, consolidation or other business combination transaction of
Pacific Ethanol with or into another corporation, entity or person, other than a
transaction in which the holders of at least a majority of the shares of voting
capital stock of Pacific Ethanol outstanding immediately prior to such
transaction continue to hold (either by such shares remaining outstanding or by
their being converted into shares of voting capital stock of the surviving
entity) a majority of the total voting power represented by the shares of voting
capital stock of Pacific Ethanol (or the surviving entity) outstanding
immediately after such transaction, or (iii) all or substantially all of our
assets are sold.
John
T. Miller
Prior Executive Employment
Agreement. Our prior Executive Employment Agreement with John
T. Miller dated June 26, 2006 provided for a one-year term and automatic
one-year renewals thereafter, unless either Mr. Miller or Pacific Ethanol
provided written notice to the other at least ninety days prior to the
expiration of the then-current term. Mr. Miller was to receive a base
salary of $185,000 per year. All other terms and conditions of Mr.
Miller’s prior Executive Employment Agreement were substantially the same as
those contained in Mr. Koehler’s prior Executive Employment Agreement, except
that Mr. Miller was not entitled to any bonus based on the net free cash flow of
Kinergy Marketing, LLC and was entitled to reimbursement of his costs associated
with his relocation to the city where Pacific Ethanol’s corporate headquarters
are located.
New Executive Employment
Agreement. Our new Executive Employment Agreement with Mr.
Miller dated as of December 11, 2007 provides for at-will
employment. Mr. Miller is to receive a base salary of $250,000 per
year and is eligible to receive an annual discretionary cash bonus of up to 50%
of his base salary, to be paid based upon performance criteria set by the
Board. All other terms and conditions of Mr. Miller’s new Executive
Employment Agreement are substantially the same as those contained in Mr.
Koehler’s new Executive Employment Agreement, except that Mr. Miller is not
entitled to any bonus based on the net free cash flow of Kinergy Marketing,
LLC.
Christopher
W. Wright
Prior Executive Employment
Agreement. Our prior Executive Employment Agreement with
Christopher W. Wright dated June 26, 2006 provided for a one-year term and
automatic one-year renewals thereafter, unless either Mr. Wright or Pacific
Ethanol provided written notice to the other at least ninety days prior to the
expiration of the then-current term. Mr. Wright was to receive a base
salary of $185,000 per year. All other terms and conditions of Mr.
Wright’s prior Executive Employment Agreement were substantially the same as
those contained in Mr. Koehler’s prior Executive Employment Agreement, except
that Mr. Wright was not entitled to any bonus based on the net free cash flow of
Kinergy Marketing, LLC and was entitled to reimbursement of his costs associated
with his relocation to the city where Pacific Ethanol’s corporate headquarters
are located.
30
New Executive Employment
Agreement. Our new Executive Employment Agreement with Mr.
Wright dated as of December 11, 2007 provides for at-will
employment. Mr. Wright is to receive a base salary of $225,000 per
year and is eligible to receive an annual discretionary cash bonus of up to 50%
of his base salary, to be paid based upon performance criteria set by the
Board. All other terms and conditions of Mr. Wright’s new Executive
Employment Agreement are substantially the same as those contained in Mr.
Koehler’s new Executive Employment Agreement, except that Mr. Wright is not
entitled to any bonus based on the net free cash flow of Kinergy Marketing,
LLC.
Grants
of Plan-Based Awards
There
were no grants of plan-based awards made to our named executive officers during
the year ended December 31, 2007.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information about outstanding equity awards held by
our named executive officers as of December 31, 2007.
|
Stock
Awards
|
||||||||
|
Name
|
Number
of Shares
or
Units of Stock
That
Have Not Vested
(#)(1)
|
Market
Value of Shares
or
Units of Stock
That
Have Not Vested
($)(2)
|
||||||
|
Neil
M. Koehler
|
56,160 | $ | 461,074 | |||||
|
John
T. Miller
|
42,120 | $ | 345,805 | |||||
|
Christopher
W. Wright
|
42,120 | $ | 345,805 | |||||
|
Douglas
C. Jeffries
|
— | $ | — | |||||
___________________
|
|
(1)
|
The
stock awards reported in the above table represent shares of stock granted
under our 2006 Stock Incentive Plan on October 4,
2006. Mr. Koehler’s grant vests as to 14,040 shares on each of
the next four anniversaries of October 4, 2007. Messrs. Miller’s and
Wright’s grants each vest as to 10,530 shares on each of the next four
anniversaries of October 4, 2007.
|
|
|
(2)
|
Represents
the fair market value per share of our common stock on December 31, 2007,
which was $8.21, multiplied by the number of shares that had not vested as
of December 31, 2007.
|
Option
Exercises and Stock Vested
The
following table summarizes the vesting of stock awards for each of our named
executive officers for the year ended December 31, 2007:
|
Stock
Awards
|
||||||||
|
Name
|
Number
of Shares
Acquired
on Vesting
(#)
|
Value
Realized
on
Vesting
($)(1)
|
||||||
|
Neil
M. Koehler
|
14,040 | $ | 130,572 | |||||
|
John
T. Miller
|
10,530 | $ | 97,929 | |||||
|
Christopher
W. Wright
|
10,530 | $ | 97,929 | |||||
|
Douglas
C. Jeffries
|
— | $ | — | |||||
___________________
|
|
(1)
|
Represents
the closing price of a share of our common stock on the date of vesting
multiplied by the number of shares that vested on such date, including any
shares that were withheld by us to satisfy minimum employment withholding
taxes.
|
31
Potential
Payments upon Termination or Change in Control
Executive Employment
Agreements. We have entered into agreements with our named
executive officers that provide certain benefits upon the termination of their
employment under certain prescribed circumstances. Those agreements
are described above under “Executive Employment Agreements” above.
2006 Stock Incentive
Plan. Under our 2006 Stock Incentive Plan, if a change in
control occurs, each outstanding equity award under the discretionary grant
program will automatically accelerate in full, unless (i) that award is assumed
by the successor corporation or otherwise continued in effect, (ii) the award is
replaced with a cash retention program that preserves the spread existing on the
unvested shares subject to that equity award (the excess of the fair market
value of those shares over the exercise or base price in effect for the shares)
and provides for subsequent payout of that spread in accordance with the same
vesting schedule in effect for those shares, or (iii) the acceleration of the
award is subject to other limitations imposed by the plan
administrator. In addition, all unvested shares outstanding under the
discretionary grant and stock issuance programs will immediately vest upon the
change in control, except to the extent our repurchase rights with respect to
those shares are to be assigned to the successor corporation or otherwise
continued in effect or accelerated vesting is precluded by other limitations
imposed by the plan administrator. Each outstanding equity award
under the stock issuance program will vest as to the number of shares of common
stock subject to that award immediately prior to the change in control, unless
that equity award is assumed by the successor corporation or otherwise continued
in effect or replaced with a cash retention program similar to the program
described in clause (ii) above or unless vesting is precluded by its
terms. Immediately following a change in control, all outstanding
awards under the discretionary grant program will terminate and cease to be
outstanding except to the extent assumed by the successor corporation or its
parent or otherwise expressly continued in full force and effect pursuant to the
terms of the change in control transaction.
The plan
administrator will have the discretion to structure one or more equity awards
under the discretionary grant and stock issuance programs so that those equity
awards will vest in full either immediately upon a change in control or in the
event the individual’s service with us or the successor entity is terminated
(actually or constructively) within a designated period following a change in
control transaction, whether or not those equity awards are to be assumed or
otherwise continued in effect or replaced with a cash retention
program.
The
definition of “change in control” under our 2006 Stock Incentive Plan is
substantially the same as provided under “Executive Employment Agreements”
above.
Calculation
of Potential Payments upon Termination or Change in Control
In
accordance with the rules of the Securities and Exchange Commission, the
following table presents our estimate of the benefits payable to the named
executive officers under our 2006 Stock Incentive Plan and their executive
employment agreements assuming that for each of Messrs. Koehler, Miller and
Wright (i) a “change in control” occurred on December 31, 2007, the last
business day of 2007, and (a) there was a termination by the executive “for good
reason,” or by us without “cause” within three months before or twelve months
after the change in control, or (b) none of the executives’ equity awards were
assumed by the successor corporation or replaced with a cash retention program,
(ii) a qualifying termination occurred on December 31, 2007, which is a
termination by the executive “for good reason,” by us without “cause” or upon
the executive’s disability, or (iii) a non-qualifying termination occurred on
December 31, 2007, which is a voluntary termination by the executive other than
“for good reason” or by us for “cause.” See “Executive Employment
Agreements” above for definitions of “for good reason,” “cause” and “change in
control.” Douglas C. Jeffries, our former Chief Financial Officer,
resigned on July 18, 2007 and is therefore excluded from the table
below.
32
|
Name
|
Trigger
|
Salary
and
Bonus(1)
|
Continuation
of
Benefits(2)
|
Value
of
Stock
Acceleration(3)
|
Total
Value(4)
|
||||||||||||
|
Neil
M. Koehler
|
Change
in Control
|
$ | 450,000 | $ | 44,947 | $ | 461,074 | $ | 956,021 | ||||||||
|
Qualifying
Termination
|
$ | 300,000 | $ | 29,965 | $ | 115,268 | $ | 445,233 | |||||||||
|
Non-Qualifying
Termination
|
$ | — | $ | — | $ | — | $ | — | |||||||||
|
John
T. Miller
|
Change
in Control
|
$ | 375,000 | $ | 32,046 | $ | 345,805 | $ | 752,851 | ||||||||
|
Qualifying
Termination
|
$ | 250,000 | $ | 21,364 | $ | 86,451 | $ | 357,815 | |||||||||
|
Non-Qualifying
Termination
|
$ | — | $ | — | $ | — | $ | — | |||||||||
|
Christopher
W. Wright
|
Change
in Control
|
$ | 337,500 | $ | 44,947 | $ | 345,805 | $ | 728,252 | ||||||||
|
Qualifying
Termination
|
$ | 225,000 | $ | 29,965 | $ | 86,451 | $ | 341,416 | |||||||||
|
Non-Qualifying
Termination
|
$ | — | $ | — | $ | — | $ | — | |||||||||
_______________
|
(1)
|
Represents
eighteen months additional salary after the date of termination in the
event of a Change in Control and twelve months additional salary after the
date of termination in the event of a Qualifying Termination based on the
executive’s salary as of December 31,
2007.
|
|
(2)
|
Represents
the aggregate value of the continuation of certain employee health
benefits for up to eighteen months after the date of termination in the
event of a Change in Control and for up to twelve months after the date of
termination in the event of a Qualifying
Termination.
|
|
(3)
|
Represents
the aggregate value of the accelerated vesting of 100% of all of the
executive’s unvested restricted stock grants in the event of a Change in
Control and 25% of all of the executive’s unvested restricted stock grants
in the event of a Qualifying Termination. The amounts shown as
the value of the accelerated restricted stock grants are based solely on
the intrinsic value of the restricted stock grants as of December 31,
2007, which was calculated by multiplying (i) the fair market value of our
common stock on December 31, 2007, which was $8.21, by (ii) the assumed
number of shares vesting on an accelerated basis on December 31,
2007.
|
|
(4)
|
Excludes
the value to the executive of the continuing right to indemnification and
continuing coverage under our directors’ and officers’ liability
insurance, if applicable.
|
Compensation
Committee Interlocks and Insider Participation
During
2007, our Compensation Committee consisted of Messrs. Stone and Prince and,
until his resignation on October 1, 2007, Mr. Thomas. Our Compensation Committee
now consists of Messrs. Layne, Prince, Kieta and Stone. None of these
individuals were officers or employees of Pacific Ethanol at any time during
2007 or at any other time. During 2007, none of our executive
officers served as a member of the board of directors or compensation committee
of any other entity whose executive officer(s) served on our Board or
Compensation Committee.
33
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Policies
and Procedures for Approval of Related Party Transactions
Our Board
has the responsibility to review and discuss with management and approve, and
has adopted written policies and procedures relating to approval or ratification
of, interested transactions with related parties. During this
process, the material facts as to the related party’s interest in a transaction
are disclosed to all Board members or an applicable committee. Under
the policies and procedures, the Board is to review each interested transaction
with a related party that requires approval and either approve or disapprove of
the entry into the interested transaction. An interested transaction
is any transaction in which we are a participant and any related party has or
will have a direct or indirect interest. Transactions that are in the
ordinary course of business and would not require either disclosure pursuant to
Item 404(a) of Regulation S-K under the Securities Act or approval of the Board
or an independent committee of the Board pursuant to applicable NASDAQ rules
would not be deemed interested transactions. No director may
participate in any approval of an interested transaction with respect to which
he or she is a related party. Our Board intends to approve only those
related party transactions that are in the best interests of Pacific Ethanol and
our stockholders.
Other
than as described below or elsewhere in this Proxy Statement, since January 1,
2007, there has not been a transaction or series of related transactions to
which Pacific Ethanol was or is a party involving an amount in excess of
$120,000 and in which any director, executive officer, holder of more than 5% of
any class of our voting securities, or any member of the immediate family of any
of the foregoing persons, had or will have a direct or indirect material
interest. All of the below transactions, except as to Front Range
Energy, LLC, were separately approved by our Board. Our agreement
with Front Range Energy, LLC was entered into prior to Daniel A. Sanders
becoming a member of our Board.
Miscellaneous
We are or
have been a party to employment and compensation arrangements with related
parties, as more particularly described above under the headings “Compensation
of Directors,” “Director Compensation Table,” “Indemnification of Directors and
Officers,” and “Executive Compensation and Related Information.” We
have entered into an indemnification agreement with each of our directors and
executive officers. The indemnification agreements and our
certificate of incorporation and bylaws require us to indemnify our directors
and officers to the fullest extent permitted by Delaware law.
Paul
P. Koehler
Paul P.
Koehler, a brother of Neil M. Koehler, who is our President and Chief Executive
Officer and one of our directors, is employed by us as Vice President of
Business Development, at an annual salary of $190,000. Mr. Koehler’s
annual salary during 2007 was $175,000 and was increased to $190,000 effective
March 1, 2008.
Thomas
D. Koehler
Thomas D.
Koehler, a brother of Neil M. Koehler, who is our President and Chief Executive
Officer and one of our directors, was employed by us as Vice President of Public
Policy and Markets, at an annual salary of $175,000 through March 31, 2008, his
last day of employment with us.
Effective
as of April 1, 2008, we entered into an Independent Contractor Services
Agreement with Thomas D. Koehler for the provision of strategic consulting
services, including in connection with promoting Pacific Ethanol and ethanol as
a fuel additive and transportation fuel with governmental
agencies. Mr. Koehler is to be compensated at a rate of $12,500 per
month.
34
William
L. Jones
During
2007, we began selling corn to Tri-J Land & Cattle, an entity owned by
William L. Jones, our Chairman of the Board and a director. We are not under
contract with Tri-J Land & Cattle, but we sell rolled corn to Tri-J Land
& Cattle on a spot basis as needed. Sales of rolled corn to Tri-J
Land & Cattle totaled $166,000 for the year ended December 31,
2007. Accounts receivable from Tri-J Land & Cattle totaled $7,000
at December 31, 2007.
Front
Range Energy, LLC – Daniel A. Sanders
On
October 17, 2006, we acquired approximately 42% of the outstanding membership
interests of Front Range Energy, LLC, which owns and operates an ethanol
production facility located in Windsor, Colorado. Daniel A. Sanders,
one of our former directors, is the majority owner of Front Range Energy, LLC.
Mr. Sanders resigned as a director on October 8, 2007.
On August
9, 2006, Kinergy Marketing, LLC, one of our wholly-owned subsidiaries, entered
into an Amended and Restated Ethanol Purchase and Sale Agreement dated as of
August 9, 2006 with Front Range Energy, LLC. The agreement amended an
underlying agreement first signed on August 31, 2005. The agreement
is effective for three years with automatic renewals for additional one-year
periods thereafter unless a party to the agreement delivers written notice of
termination at least 60 days prior to the end of the original or renewal
term. Under the agreement, Kinergy Marketing, LLC is to provide
denatured fuel ethanol marketing services for Front Range Energy,
LLC. Kinergy Marketing, LLC is to have the exclusive right to market
and sell all of the ethanol from the ethanol production facility owned by Front
Range Energy, LLC, an estimated 40 million gallons per year. Pursuant
to the terms of the agreement, the purchase price of the ethanol may be
negotiated from time to time between Kinergy Marketing, LLC and Front Range
Energy, LLC without regard to the price at which Kinergy Marketing, LLC will
re-sell the ethanol to its customers. Alternatively, Kinergy
Marketing, LLC may pay to Front Range Energy, LLC the gross payments received by
Kinergy Marketing, LLC from third parties for forward sales of ethanol, referred
to as the purchase price, less certain transaction costs and
fees. From the purchase price, Kinergy Marketing, LLC may deduct all
reasonable out-of-pocket and documented costs and expenses incurred by or on
behalf of Kinergy Marketing, LLC in connection with the marketing of ethanol
pursuant to the agreement, including truck, rail and terminal costs for the
transportation and storage of the facility’s ethanol to third parties and
reasonable, documented out-of-pocket expenses incurred in connection with the
negotiation and documentation of sales agreements between Kinergy Marketing, LLC
and third parties, collectively referred to as the transaction
costs. From the purchase price, Kinergy Marketing, LLC may also
deduct and retain the product of 1.0% multiplied by the difference between the
purchase price and the transaction costs. In addition, Kinergy
Marketing, LLC is to split the profit from any logistical arbitrage associated
with ethanol supplied by Front Range Energy, LLC.
During
2007, purchases by us from Front Range Energy, LLC totaled
$118,471,236. Accounts receivable from Front Range Energy, LLC
totaled $236,041 at December 31, 2007. Accounts payable to Front
Range Energy, LLC totaled $2,765,853 at December 31, 2007.
Cascade
Investment, L.L.C.
For the
year ended December 31, 2007, we declared and paid dividends to Cascade
Investment, L.L.C. in respect of our Series A Preferred Stock in the aggregate
amount of $4,200,000 comprised of cash dividends in the aggregate amount of
$3,150,000 for the first three quarters and a dividend payment-in-kind in the
amount of $1,050,000 that was issued as 65,625 shares of Series A Preferred
Stock for the fourth quarter.
35
OTHER
INFORMATION
Stockholder
Proposals
Pursuant
to Rule 14a–8 under the Exchange Act, proposals by stockholders that are
intended for inclusion in our Proxy Statement and proxy card and to be presented
at our next annual meeting must be received by us no later than 120 calendar
days in advance of the one-year anniversary of the date of this Proxy Statement
in order to be considered for inclusion in our proxy materials relating to the
next annual meeting. Such proposals shall be addressed to our
corporate Secretary at our corporate headquarters and may be included in next
year’s annual meeting proxy materials if they comply with rules and regulations
of the Securities and Exchange Commission governing stockholder
proposals.
Proposals
by stockholders that are not intended for inclusion in our proxy materials may
be made by any stockholder who timely and completely complies with the notice
procedures contained in our bylaws, was a stockholder of record at the time of
giving of notice and is entitled to vote at the meeting, so long as the proposal
is a proper matter for stockholder action and the stockholder otherwise complies
with the provisions of our bylaws and applicable law. However,
stockholder nominations of persons for election to our Board at a special
meeting may only be made if our Board has determined that directors are to be
elected at the special meeting.
To be
timely, a stockholder’s notice regarding a proposal not intended for inclusion
in our proxy materials must be delivered to our secretary at our corporate
headquarters not later than:
|
|
·
|
In
the case of an annual meeting, the close of business on the 45th day
before the first anniversary of the date on which we first mailed our
proxy materials for the prior year’s annual meeting of
stockholders. However, if the date of the meeting has changed
more than 30 days from the date of the prior year’s meeting, then in order
for the stockholder’s notice to be timely it must be delivered to our
corporate Secretary a reasonable time before we mail our proxy materials
for the current year’s meeting. For purposes of the preceding
sentence, a “reasonable time” coincides with any adjusted deadline we
publicly announce.
|
|
|
·
|
In
the case of a special meeting, the close of business on the 7th day
following the day on which we first publicly announce the date of the
special meeting.
|
Except as
otherwise provided by law, if the chairperson of the meeting determines that a
nomination or any business proposed to be brought before a meeting was not made
or proposed in accordance with the procedures set forth in our bylaws and
summarized above, the chairperson may prohibit the nomination or proposal from
being presented at the meeting.
Available
Information
We are
subject to the informational requirements of the Exchange Act. In
accordance with the Exchange Act, we file reports, proxy statements and other
information with the Securities and Exchange Commission. These
materials can be inspected and copied at the Public Reference Room maintained by
the Securities and Exchange Commission at 100 F Street, N.E., Washington,
D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. Our common stock trades on The NASDAQ
Global Market under the symbol “PEIX.”
36
Annual
Report
A copy of
our Annual Report for the year ended December 31, 2007 accompanies this Proxy
Statement. The Annual Report is not incorporated by reference into
this Proxy Statement and is not deemed to be a part of our proxy solicitation
materials.
Copies of
our Annual Report on Form 10-K (without exhibits) for the year ended December
31, 2007 will be furnished by first class mail, without charge, to any person
from whom the accompanying proxy is solicited upon written or oral request to
Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060, Sacramento,
California 95814, Attention: Investor Relations, telephone
(916) 403-2123. If exhibit copies are requested, a copying
charge of $0.20 per page applies. In addition, all of our public
filings, including our Annual Report, can be found free of charge on the website
of the Securities and Exchange Commission at http://www.sec.gov.
ALL
STOCKHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED ENVELOPE.
37
PROXY
FOR 2008 ANNUAL MEETING OF STOCKHOLDERS
PACIFIC
ETHANOL, INC.
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned stockholder of Pacific Ethanol, Inc. (the “Company”) hereby
constitutes and appoints Neil M. Koehler and William L. Jones, with the power to
appoint their substitutes, as attorney and proxy to appear, attend and vote all
of the shares of common stock of the Company standing in the name of the
undersigned on the record date at the 2008 Annual Meeting of stockholders of the
Company to be held at 9:00 a.m., local time, on Wednesday, June 11, 2008 at
the Holiday Inn Capitol Plaza, 300 J Street, Sacramento,
California 95814, and at any adjournment or adjournments thereof,
upon the below proposals. The Company’s Board of Directors recommends
a vote “FOR” each of the following proposals:
|
1.
|
To
elect six directors to serve on the Company’s Board of Directors until the
next annual meeting of stockholders and/or until their successors are duly
elected and qualified, as follows:
|
£ FOR
all nominees listed below,
except £ WITHHOLD
AUTHORITY to
as marked to the contrary
below vote
for all nominees listed below
|
|
(INSTRUCTION:
To withhold authority to vote for any individual nominee, strike a line
through the nominee’s name in the list provided
below.)
|
William
L. Jones
Neil M.
Koehler
Terry L.
Stone
John L.
Prince
Douglas
L. Kieta
Larry D.
Layne
|
2.
|
To
consider and approve the Securities Purchase Agreement dated March 18,
2008 between Pacific Ethanol, Inc. and Lyles United, LLC (the “Purchase
Agreement”) and the transactions contemplated by the Purchase Agreement,
including the issuance of any dividend shares and the issuance of any
conversion shares as a result of a conversion price adjustment pursuant to
Section 5(d) of the Certificate of Designations, Powers, Preferences and
Rights of the Series B Cumulative Convertible Preferred Stock (the
“Certificate of Designations”). Copies of the Purchase
Agreement and the Certificate of Designations are attached as Appendix A
and Appendix B,
respectively, to the Proxy
Statement.
|
£ FOR
approval £ AGAINST
approval £ ABSTAIN
|
3.
|
To
ratify the appointment of Hein & Associates LLP as the Company’s
independent registered public accounting firm for the year ending December
31, 2008.
|
£ FOR
approval £ AGAINST
approval £ ABSTAIN
|
4.
|
To
transact such other business as may properly come before the Annual
Meeting or any adjournment(s) or postponement(s)
thereof.
|
THIS
PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED “FOR” THE PROPOSALS INDICATED AND IN ACCORDANCE WITH THE DISCRETION OF THE
PROXY HOLDER ON ANY OTHER BUSINESS. ALL OTHER PROXIES HERETOFORE
GIVEN BY THE UNDERSIGNED IN CONNECTION WITH THE ACTIONS PROPOSED ON THIS PROXY
CARD ARE HEREBY EXPRESSLY REVOKED. THIS PROXY MAY BE REVOKED AT ANY
TIME BEFORE IT IS VOTED BY WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY
ISSUANCE OF A SUBSEQUENT PROXY OR BY VOTING IN PERSON AT THE ANNUAL
MEETING.
Please
mark, date, sign and return this proxy promptly in the enclosed
envelope. When shares are held by joint tenants, both should
sign. When signing as attorney, as executor, administrator, trustee
or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by
authorized person.
|
DATED:
(Signature of Stockholder(s)) (Print
Name(s) Here)
£ PLEASE
CHECK IF YOU ARE PLANNING
TO
ATTEND THE ANNUAL MEETING.
|
APPENDIX
A
SECURITIES
PURCHASE AGREEMENT
Between
PACIFIC
ETHANOL, INC.
and
LYLES
UNITED, LLC
Dated
March 18, 2008
TABLE OF
CONTENTS
|
Page
|
||
|
ARTICLE
I
|
PURCHASE
AND SALE
|
1
|
|
1.1
|
Issuance,
Sale and Delivery of the Preferred Shares and Warrant at the
Closing
|
1
|
|
1.2
|
Closing.
|
1
|
|
|
||
|
ARTICLE
II
|
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
|
2
|
|
2.1
|
Organization
and Qualifications
|
2
|
|
2.2
|
Certificate
of Incorporation and Bylaws
|
2
|
|
2.3
|
Corporate
Power and Authority
|
2
|
|
2.4
|
Authorization;
Validity
|
2
|
|
2.5
|
No
Conflicts; No Violation
|
2
|
|
2.6
|
Authorized
Capital Stock.
|
3
|
|
2.7
|
Financial
Statements
|
4
|
|
2.8
|
No
Undisclosed Liabilities
|
5
|
|
2.9
|
Changes
|
5
|
|
2.10
|
Litigation;
Compliance with Law.
|
7
|
|
2.11
|
Proprietary
Information of Third Parties
|
7
|
|
2.12
|
Intellectual
Property
|
8
|
|
2.13
|
Assets
|
8
|
|
2.14
|
Employee
Benefit Plans.
|
8
|
|
2.15
|
Title
to Properties; Encumbrances.
|
9
|
|
2.16
|
Insurance
|
9
|
|
2.17
|
Taxes
|
9
|
|
2.18
|
Loans
and Advances
|
10
|
|
2.19
|
Assumptions,
Guaranties, Etc. of Indebtedness of Other Persons
|
10
|
|
2.20
|
Approvals
|
10
|
|
2.21
|
Offering
of the Preferred Shares
|
10
|
|
2.22
|
Offering
Exemption
|
11
|
|
2.23
|
Brokers;
Financial Advisors
|
11
|
|
2.24
|
Transactions
With Affiliates
|
11
|
|
2.25
|
Employees
|
11
|
|
2.26
|
Environmental
and Safety Laws
|
12
|
|
2.27
|
Foreign
Corrupt Practices Act; USA Patriot Act
|
13
|
|
2.28
|
Illegal
or Unauthorized Payments; Political Contributions
|
13
|
|
2.29
|
Pending
Changes
|
13
|
|
2.30
|
Investment
Company Act
|
14
|
|
2.31
|
Registration
Rights
|
14
|
|
2.32
|
Books
and Records
|
14
|
|
2.33
|
Disclosure
|
14
|
|
2.34
|
Permits
|
14
|
|
2.35
|
SEC
and NASDAQ Matters.
|
15
|
|
|
||
|
ARTICLE
III
|
REPRESENTATIONS,
WARRANTIES AND COVENANTS OF THE PURCHASER
|
15
|
|
3.1
|
Representations
and Warranties of the Purchaser
|
15
|
|
3.2
|
Restricted
Securities
|
16
|
|
3.3
|
Legend
|
16
|
A-i
|
Page
|
||
|
ARTICLE
IV
|
CONDITIONS
TO THE OBLIGATIONS OF THE PURCHASER AND THE COMPANY
|
16
|
|
4.1
|
Conditions
to the Purchaser’s Obligations at the Closing
|
16
|
|
4.2
|
Conditions
to the Company’s Obligations at the Closing
|
19
|
|
|
||
|
ARTICLE
V
|
COVENANTS
OF THE COMPANY
|
20
|
|
5.1
|
Reserve
for Conversion Shares and Warrant Shares
|
20
|
|
5.2
|
Corporate
Existence
|
20
|
|
5.3
|
Preservation
of Property and Assets
|
20
|
|
5.4
|
Properties,
Business, Insurance
|
20
|
|
5.5
|
Inspection,
Consultation and Advice
|
20
|
|
5.6
|
Restrictive
Agreements Prohibited
|
21
|
|
5.7
|
Transactions
with Affiliates
|
21
|
|
5.8
|
Payment
of Taxes and Indebtedness
|
21
|
|
5.9
|
Internal
Accounting Controls
|
21
|
|
5.10
|
Change
of Operations
|
21
|
|
5.11
|
Indemnity.
|
21
|
|
5.12
|
Compliance
with Laws
|
22
|
|
5.13
|
Use
of Proceeds
|
22
|
|
5.14
|
HSR
Act Filings
|
22
|
|
5.15
|
Stockholder
Approval
|
22
|
|
5.16
|
New
Capital Expenditures
|
23
|
|
5.17
|
Undertakings
of the Company With Respect to Series A Preferred Stock
Transferees
|
23
|
|
|
||
|
ARTICLE
VI
|
MISCELLANEOUS
|
23
|
|
6.1
|
Expenses
|
23
|
|
6.2
|
Survival
of Agreements
|
23
|
|
6.3
|
Brokerage
|
23
|
|
6.4
|
Parties
in Interest
|
23
|
|
6.5
|
Specific
Performance
|
24
|
|
6.6
|
Further
Assurances
|
24
|
|
6.7
|
Submission
to Jurisdiction; Consent to Service of Process
|
24
|
|
6.8
|
Notices
|
24
|
|
6.9
|
Governing
Law
|
24
|
|
6.10
|
Entire
Agreement
|
24
|
|
6.11
|
Counterparts
|
25
|
|
6.12
|
Amendments
and Waivers
|
25
|
|
6.13
|
Severability
|
25
|
|
6.14
|
Titles
and Subtitles; Interpretive Matters
|
25
|
|
6.15
|
Facsimile
Signatures
|
25
|
|
6.16
|
Other
Remedies
|
25
|
|
6.17
|
Certain
Defined Terms
|
25
|
A-ii
|
INDEX TO
SCHEDULES
|
||
|
SCHEDULE
2.1
|
Organization
|
|
|
SCHEDULE
2.6
|
Authorized
Capital Stock
|
|
|
SCHEDULE
2.7
|
Financial
Statements
|
|
|
SCHEDULE
2.9
|
Changes
|
|
|
SCHEDULE
2.10
|
Litigation
|
|
|
SCHEDULE
2.13
|
Assets
|
|
|
SCHEDULE
2.15
|
Title
to Properties; Encumbrances
|
|
|
SCHEDULE
2.19
|
Assumptions
|
|
|
SCHEDULE
2.26
|
Environmental
Reports
|
|
|
SCHEDULE
2.31
|
Registration
Rights
|
|
|
SCHEDULE
2.33
|
Disclosure
|
|
|
SCHEDULE
2.35
|
SEC
and NASDAQ Matters
|
|
|
INDEX
TO EXHIBITS
|
||
|
EXHIBIT
A
|
Form
of Warrant
|
|
|
EXHIBIT
B
|
Certificate
of Incorporation (including the Series A Certificate of
Designations)
|
|
|
EXHIBIT
C
|
Form
of Series B Certificate of Designations
|
|
|
EXHIBIT
D
|
Form
of Registration Rights Agreement
|
|
|
EXHIBIT
E
|
Form
of Series A Preferred Stockholder Consent and Waiver
|
|
|
EXHIBIT
F
|
Form
of Opinion of Company’s Counsel
|
A-iii
SECURITIES
PURCHASE AGREEMENT
THIS
SECURITIES PURCHASE AGREEMENT is made on the 18th day of
March, 2008 (the “Agreement”), by and between
Pacific Ethanol, Inc., a Delaware corporation (the “Company”), and Lyles United,
LLC, a Delaware limited liability company (the “Purchaser”). Certain
capitalized terms used herein are defined in Section 6.17 of
this Agreement.
WHEREAS,
the Purchaser desires to purchase, and the Company desires to issue and sell,
upon the terms and conditions stated in this Agreement, (i) 2,051,282 shares
(the “Preferred Shares”)
of the Company’s Series B Cumulative Convertible Preferred Stock, par value
$.001 per share (the “Series B
Preferred Stock”), and (ii) a warrant (the “Warrant”) in the form
attached to this Agreement as Exhibit A to
acquire up to 3,076,923 shares (the “Warrant Shares”) of the
Company’s common stock, par value $0.001 per share (the “Common Stock”).
NOW,
THEREFORE, in consideration of the premises, representations, warranties and the
mutual covenants contained in this Agreement, and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE
I
PURCHASE AND
SALE
1.1 Issuance,
Sale and Delivery of the Preferred Shares and Warrant at the
Closing. At the Closing (as defined in Section 1.2), on
the terms and subject to the conditions of this Agreement, the Company shall
issue and sell to the Purchaser, and the Purchaser shall purchase from the
Company, 2,051,282 Preferred Shares and
(ii) a Warrant to purchase 3,076,923 Warrant Shares, for the
aggregate purchase price of $40,000,000.
1.2 Closing.
(a) The
Closing shall take place at 10:00 a.m. at the offices of Rutan & Tucker,
LLP, 611 Anton Blvd., Costa Mesa, California, on the Closing Date. At
the Closing, the Company shall issue and deliver to the Purchaser a stock
certificate or certificates in definitive form, registered in the name of the
Purchaser, representing 2,051,282 Preferred Shares and
(ii) a Warrant in definitive form, registered in the name of the Purchaser
representing the right to purchase 3,076,923 Warrant
Shares. As payment in full for the Preferred Shares and the Warrant
being purchased by it under this Agreement, and against delivery of the stock
certificate or certificates therefor and Warrant as aforesaid, on the Closing
Date, the Purchaser shall pay to the Company by wire transfer or by such other
method as may be reasonably acceptable to the Company, in immediately available
funds in the amount of $40,000,000. Such amount shall be paid to the
account as shall have been designated in writing to the Purchaser at least two
(2) business days prior to the Closing Date by the Company.
(b) The
Company shall reimburse the Purchaser for the costs and expenses described in
Section 6.1 by
wire transfer or by such other method as may be reasonably acceptable to the
Purchaser, in immediately available funds. Such amounts shall be paid
to the account of the Purchaser as shall have been designated in writing to the
Company at least two (2) business days prior to the Closing Date by the
Purchaser.
A-1
ARTICLE
II
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The
Company represents and warrants to the Purchaser that:
2.1 Organization
and Qualifications. The Company and each of its Subsidiaries
is duly organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation or organization as set forth in Schedule 2.1 and
has the requisite power and authority to own, lease and operate its assets,
properties and business and to carry on its business as it is now being
conducted or proposed to be conducted. The Company and each of its
Subsidiaries is duly qualified as a foreign corporation to transact business,
and is in good standing, in each jurisdiction where it owns or leases real
property or maintains employees or where the nature of its activities make such
qualification necessary.
2.2 Certificate
of Incorporation and Bylaws. The Company has delivered to the
Purchaser true, correct, and complete copies of the Company’s Certificate of
Incorporation, including all certificates of amendment and certificates of
designations including the Certificate of Designations, Powers, Preferences and
Rights of the Series A Cumulative Redeemable Convertible Preferred Stock (the
“Series A Certificate of
Designations”), copies of which are attached hereto as Exhibit B, and
the Certificate of Designations, Powers, Preferences and Rights of the Series B
Cumulative Convertible Preferred Stock in the form included in Exhibit C
attached hereto (the “Series B
Certificate of Designations” and, together with the certificate of
incorporation and all certificates of amendment thereof and the Series A
Certificate of Designations, the “Amended Charter”) and the
Company’s Bylaws (the “Bylaws”), in each case, as in
effect on the date hereof.
2.3 Corporate
Power and Authority. The Company has all requisite power and
authority to execute and deliver each of the Transaction Documents to which it
is a party. The Company has all requisite legal and corporate power
and authority to issue, sell and deliver the Preferred Shares and the Warrant to
the Purchaser hereunder, to issue and deliver shares of Series B Preferred Stock
as dividends in accordance with Section 3(a) of the Series B
Certificate of Designations (the “Dividend Shares”), to issue
and deliver the shares of Common Stock issuable upon conversion of the Series B
Preferred Stock (the “Conversion Shares”) and to
issue and deliver the Warrant Shares upon exercise of the
Warrant. The Conversion Shares and Warrant Shares have been duly
reserved for issuance and when issued will be duly and validly issued, fully
paid and nonassessable.
2.4 Authorization;
Validity. The Company’s: (a) execution and delivery of the
Transaction Documents and performance of its obligations thereunder, (b)
execution and filing of the Series B Certificate of Designations, (c) issuance,
sale and delivery of the Preferred Shares and, when declared as a dividend, the
Dividend Shares, (d) issuance and delivery of the Conversion Shares, (e)
issuance and delivery of the Warrant, and (f) issuance and delivery of the
Warrant Shares have been duly authorized by all requisite corporate action or
will have been so authorized prior to the Closing Date and, other than
stockholder approval and approvals of or required by The NASDAQ Stock Market, if
any, no other corporate action on the part of the Company or any Subsidiary or
other approval or authorization is required on the part of the Company, any
Subsidiary or any person by Law or otherwise in order to make the Transaction
Documents the valid, binding and enforceable obligations of the
Company. Each of the Transaction Documents, when executed and
delivered by the Company, will constitute a legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its
respective terms.
2.5 No
Conflicts; No Violation. The Company is not in violation of or
default under any provision of its Amended Charter or Bylaws. No
Subsidiary is in violation of or default under any provision of its articles or
certificate of incorporation or bylaws or, if such Subsidiary is not a
corporation, similar organizational and formation documents. The
execution, delivery, and performance of, and compliance with, the Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby, including the issuance, sale and delivery of the Preferred Shares and
any Dividend Shares and issuance and delivery of the Conversion Shares, issuance
and delivery of the Warrant and issuance and delivery of the Warrant Shares have
not and will not (a) violate any Law or any order, injunction, ruling, writ,
award, judgment or decree of any court or other agency of government or
authority which is applicable to the Company or any Subsidiary or any of their
assets, properties or businesses, or any provision of any indenture, agreement,
contract, license, arrangement, understanding, evidence of indebtedness, note,
lease or other instrument to which the Company or any Subsidiary or any of their
assets, properties or businesses is bound, (b) conflict with, result in a breach
of, or constitute (or, with due notice or lapse of time or both, would
constitute) a default under, or give rise to any right of termination,
acceleration or cancellation under, any such indenture, agreement, contract,
license, arrangement, understanding, evidence of indebtedness, note, lease or
other instrument, or (c) result in the creation or imposition of any lien,
charge, restriction, claim or encumbrance of any nature whatsoever upon the
Company or any Subsidiary or any of their assets, properties or businesses. No
provision of any Transaction Document violates, conflicts with, results in a
breach of or constitutes (or, with due notice or lapse of time or both, would
constitute) a default by any other party under any other indenture, agreement,
contract, license, arrangement, understanding, evidence of indebtedness, note,
lease or other instrument.
A-2
2.6 Authorized
Capital Stock.
(a) The
Company’s authorized capital stock consists of 10,000,000 shares of Preferred
Stock, par value $.001 per share (the “Preferred Stock”), and
100,000,000 shares of Common Stock. Immediately prior to the Closing,
40,674,464 shares of Common Stock are outstanding, 5,315,625 shares of Series A
Cumulative Redeemable convertible Preferred Stock (the “Series A Preferred Stock”)
are outstanding and no shares of Series B Preferred Stock are
outstanding. In addition, there are 225,000 shares of Common Stock
reserved for issuance upon exercise of outstanding options for Common Stock,
1,047,511 additional shares of Common Stock reserved for issuance upon exercise
of options available for grant under the Company’s stock option plans, 100,000
shares of Common Stock reserved for issuance upon exercise of outstanding
warrants for Common Stock, 10,631,250 shares of Common Stock reserved for
issuance upon conversion of the Series A Preferred Stock, 6,153,846 shares of
Common Stock reserved for issuance upon conversion of the Series B Preferred
Stock, and no shares are held in the Company’s treasury. The
stockholders of record and holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other) to purchase or
otherwise acquire equity securities of the Company, and the number of shares of
Common Stock and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each are as set forth in
the attached Schedule 2.6. The
designations, powers, preferences, rights, qualifications, limitations and
restrictions in respect of each class and series of the Company’s authorized
capital stock are as set forth in the Certificate of Incorporation, the Series A
Certificate of Designations and the Series B Certificate of Designations, and
all such designations, powers, preferences, rights, qualifications, limitations
and restrictions are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the attached Schedule 2.6:
(i) no Person owns of record any share of, or is known to the Company to own
beneficially more than 5% of, the Common Stock, (ii) no subscription, warrant,
option, convertible security, or other right (contingent or other) to purchase
or otherwise acquire equity securities of the Company is authorized or
outstanding and (iii) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset. Except as set forth in the attached Schedule 2.6,
the Company has no obligation (contingent or other) to purchase, repurchase,
redeem, retire or otherwise acquire any of its equity securities or any interest
therein or to pay any dividend or make any other distribution in respect
thereof. Except as set forth in the attached Schedule 2.6, no
stock plan, stock purchase, stock option or other agreement or understanding
between the Company and any holder of any equity securities of the Company or
rights to purchase equity securities of the Company provides for acceleration or
other changes in the vesting provisions or other terms of such securities, as
the result of any merger, sale of stock or assets, change in control or other
similar transaction by the Company. Except as set forth in the
attached Schedule 2.6,
there are no voting trusts or agreements, stockholders’ agreements, pledge
agreements, buy-sell agreements, rights of first refusal, preemptive rights or
other similar rights or proxies relating to any of the Company’s securities
(whether or not the Company is a party thereto), or agreements relating to the
issuance, sale, redemption, transfer or other disposition of the Company’s
securities. All of the outstanding shares of Common Stock of the
Company are duly authorized and validly issued, are fully paid and nonassessable
and have been issued in compliance with all applicable federal and state
securities laws.
(b) The
Preferred Shares shall have been duly authorized and the Preferred Shares, when
issued in accordance with this Agreement, and the Dividend Shares, when issued
in payment of any dividend, will be duly and validly issued, fully paid and
nonassessable shares of Series A Preferred Stock and will be free and clear of
all liens, charges, restrictions, claims and encumbrances, other than liens,
charges, restrictions, claims and encumbrances that were created by the
Purchaser and restrictions on transfer imposed by this Agreement, the Securities
Act of 1933, as amended (the “Securities Act”) and
applicable state securities laws. The Conversion Shares shall have
been duly reserved for issuance upon conversion of the Preferred Shares, if any
Dividend Shares shall be issued, the Dividend Shares, and the Warrant Shares
shall have been duly reserved for issuance upon exercise of the Warrant and, in
each case, when so issued, will be duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock and will be free and clear of all
liens, charges, restrictions, claims and encumbrances, other than liens,
charges, restrictions, claims and encumbrances that were created by the
Purchaser and restrictions on transfer imposed by this Agreement the Securities
Act and applicable state securities laws. Except as set forth in
Schedule 2.6,
neither the issuance, sale or delivery of the Preferred Shares or of any
Dividend Shares nor the issuance or delivery of the Conversion Shares or the
Warrant Shares will be subject to any preemptive right of the Company’s
stockholders or to any right of first refusal or other right in favor of any
Person. Except as set forth in Schedule 2.6,
the consummation of the transactions contemplated hereunder will not result in
any anti-dilution adjustment or other similar adjustment to the outstanding
shares of any of the Company’s outstanding convertible, exercisable or
exchangeable securities. Any Person with any right (other than the
Purchaser) to purchase securities of the Company, which would be triggered as a
result of the transactions contemplated under this Agreement, has waived such
rights.
A-3
2.7 Financial
Statements. The Company has delivered or made available to the Purchaser
the audited financial statements of the Company and its Subsidiaries as at and
for the years ended December 31, 2006, unaudited financial statements for
the fiscal quarters ended March 31, 2007, June 30, 2007 and
September 30, 2007 and unaudited draft financial statements as at and for
the year ended December 31, 2007 (collectively, the “Financial
Statements”). Each of the Financial Statements was prepared in
good faith, is complete and correct, and has been prepared in accordance with
United States generally accepted accounting principles (“GAAP”) consistently applied
throughout the periods covered thereby and, except as set forth in Schedule 2.7, fairly
and accurately present the financial condition and operating results of the
Company and its Subsidiaries as of the dates, and for the periods, indicated
therein, and are consistent with the books and records of the Company and each
of its Subsidiaries (which books and records are correct and complete) except
that the unaudited financial statements as at and for the fiscal quarters ended
March 31, 2007, June 30, 2007 and September 30, 2007 are subject
to normal year-end adjustments and the unaudited draft financial statements as
at and for the year ended December 31, 2007 are subject to adjustments and
could be materially different from the audited financial statements for the year
ended December 31, 2007.
2.8 No
Undisclosed Liabilities. None of the Company or its
Subsidiaries has any liabilities (whether accrued, absolute, contingent or
otherwise, and whether due or to become due or asserted or unasserted), except
(a) liabilities provided for in the Financial Statements (other than liabilities
which, in accordance with GAAP, need not be disclosed), and (b) liabilities
(including accounts payable) incurred since the date of the Financial Statements
in the ordinary course of business consistent with past practice. The
Company knows of no basis for the assertion against the Company or any of its
Subsidiaries of any liabilities not adequately reflected or reserved against in
the Financial Statements. Except as disclosed in the Financial
Statements or in Schedule 2.19, none
of the Company or its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other person or entity.
2.9 Changes. Except
as expressly contemplated by the Transaction Documents or as set forth on Schedule 2.9,
since December 31, 2007:
(a) there
has been no Material Adverse Change nor has any event occurred which could
reasonably be expected to result in a Material Adverse Change;
(b) there
has not been any payment of, or declaration, setting a record date, setting
aside or authorizing the payment of, any dividend or other distribution in
respect of any shares of capital stock of the Company or any purchase,
repurchase, retirement, redemption or other acquisition by the Company, of any
of the outstanding shares of capital stock or other securities of, or other
ownership interest in, the Company;
(c) there
has not been any transfer, issue, sale or other disposition by the Company of
any shares of capital stock or other securities of the Company or any grant of
options, warrants, calls or other rights to purchase or otherwise acquire shares
of such capital stock or such other securities;
(d) none
of the Company or its Subsidiaries has materially increased the compensation
payable or to become payable, or awarded or paid any bonuses to employees,
officers, directors, consultants, advisors, agents, stockholders or
representatives of the Company or any Subsidiary nor has the Company or any
Subsidiary either entered into any employment, deferred compensation, severance
or similar agreements (nor amended any such agreement) or agreed to materially
increase the compensation payable or to become payable by it to any of its
employees, officers, directors, consultants, advisors, agents, stockholders or
representatives or agreed to materially increase the coverage or benefits
available under any severance pay, deferred compensation, bonus or other
incentive compensation, pension or other employee benefit plan, payment or
arrangement made to, for or with such employees, officers, directors,
consultants, advisors, agents, stockholders or representatives;
(e) none
of the Company or its Subsidiaries has made any loans, advances, guarantees or
capital contributions to, or investments in, any Person or paid any fees or
expenses to or entered into any arrangement, transaction or agreement with any
Affiliate of the Company or any members of their immediate families other than
ordinary advances for expenses incurred in the ordinary course of
business;
(f) there
has not been satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company or any Subsidiary, except in the
ordinary course of business and that has not resulted in a Material Adverse
Change;
A-4
(g) there
has not been any termination or material change to a material contract or
arrangement by which the Company or any Subsidiary or any of their assets are
bound or subject;
(h) there
has not been any resignation or termination of employment of any key employee,
officer, director, consultant, advisor, agent or representative of the Company
or any of its Subsidiaries;
(i) none
of the Company or its Subsidiaries has transferred any tangible or intangible
assets or granted any rights under any contracts, leases, licenses, agreements
or Intellectual Property (as defined in Section 2.12)
used by the Company or any Subsidiary in its business which could reasonably be
expected to result in a Material Adverse Change;
(j) there
has not been any damage, destruction or loss, whether or not covered by
insurance, with respect to the property or assets of the Company or any
Subsidiary having a replacement cost of more than $10,000 for any single loss or
$25,000 for all such losses in the aggregate;
(k) none
of the Company or its Subsidiaries has mortgaged, pledged or subjected to any
Lien or encumbrance any of its assets (except for Liens that do not,
individually or in the aggregate, have or result in a Material Adverse Change),
acquired any assets, or sold, assigned, transferred, conveyed, leased or
otherwise disposed of any assets, except for assets acquired or sold, assigned,
transferred, conveyed, leased or otherwise disposed of in the ordinary course of
business consistent with the its past practice or liens for taxes not yet due or
payable;
(l) none
of the Company or its Subsidiaries has canceled or compromised any debt or
claim, or amended, canceled, terminated, relinquished, waived or released any
contract or right or settled any claim;
(m) none
of the Company or its Subsidiaries has made, or entered into any binding
commitment to make, any capital expenditures or capital additions or betterments
in excess of $100,000 in the aggregate;
(n) none
of the Company or its Subsidiaries has incurred any debts, obligations or
liabilities, whether due or to become due, except current liabilities incurred
in the usual and ordinary course of business, none of which current liabilities
(individually or in the aggregate) has resulted in, or could reasonably be
expected to result in, a Material Adverse Change;
(o) none
of the Company or its Subsidiaries has entered into any material transaction
except for the Transaction Documents;
(p) none
of the Company or its Subsidiaries has made any change in its accounting
principles, methods or practices or depreciation or amortization policies or
rates theretofore adopted;
(q) none
of the Company or its Subsidiaries has disclosed to any Person any trade secrets
except for disclosures made to Persons subject to valid and enforceable
confidentiality agreements;
(r) none
of the Company or its Subsidiaries has suffered or experienced any change in the
relationship or course of dealings between the Company or such Subsidiary and
any of its suppliers or customers which supply goods or services to the Company
or such Subsidiary or purchase goods or services from the Company or such
Subsidiary, which has resulted in, or could reasonably be expected to result in,
a Material Adverse Change;
(s) none
of the Company or any of its Subsidiaries has made any payment to, or received
any payment from, or made or received any investment in, or entered into any
transaction or series of related transactions (including without limitation, the
purchase, sale, exchange or lease of assets, property or services, or the making
of a loan or guarantee) with any Affiliate; and
(t) none
of the Company or its Subsidiaries has entered into any agreement or commitment
(contingent or otherwise) to do any of the foregoing.
A-5
2.10 Litigation;
Compliance with Law.
(a) Except
as set forth in Schedule 2.10,
there is no (i) action, suit, claim, proceeding or investigation pending or, to
the Company’s knowledge, threatened, against or affecting the Company or any
Subsidiary or any of their properties or assets, at law or in equity, or before
or by any federal, state, municipal or other governmental body, department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii)
arbitration proceeding pending or, to the Company’s knowledge, threatened,
against or affecting the Company or any Subsidiary or any of their properties or
assets or (iii) governmental inquiry pending or, to the Company’s knowledge,
threatened, against or affecting the Company or any Subsidiary or any of their
properties or assets (including without limitation any inquiry as to the
Company’s or any of its Subsidiary’s qualification to hold or receive any
license or permit), that could, individually or in the aggregate, result in a
Material Adverse Change, and to the best of the Company’s knowledge, there is no
basis for any of the foregoing. None of the Company or its
Subsidiaries is in default with respect to any order, writ, judgment, injunction
or decree known to or served upon the Company or such Subsidiary of any court or
of any federal, state, municipal or other governmental body, department,
commission, board, bureau, agency or instrumentality, domestic or
foreign.
(b) Except
as set forth in Schedule 2.10,
neither the Company nor any Subsidiary, except in each case as would not,
individually or in the aggregate, reasonably be expected to have or result in a
Material Adverse Change, (i) is in default under or in violation of (and no
event has occurred that has not been waived that, with notice or lapse of time
or both, would result in a default by the Company or any Subsidiary under), nor
has the Company or any Subsidiary received written notice of a claim that it is
in default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority.
(c) There
is no existing Law, and the Company is not aware of any proposed Law, which
would prohibit or restrict the Company or any Subsidiary from, or otherwise
materially adversely affect the Company or any such Subsidiary in, conducting
its business in any jurisdiction in which it is now conducting business or in
which it proposes to conduct business. None of the Company or its
Subsidiaries has received any notices of violation or alleged violation of any
Law, by any federal, state, municipal or other governmental body, department,
commission, board, bureau, agency or instrumentality, domestic or
foreign.
2.11 Proprietary
Information of Third Parties. No third party has claimed or,
to the best of the Company’s knowledge, has reason to claim, that any Person
employed by or affiliated with the Company or its Subsidiaries has (a) violated
or may be violating any of the terms or conditions of his employment,
non-competition, non-disclosure or similar agreement with such third party, (b)
disclosed or may be disclosing or utilized or may be utilizing any trade secret
or proprietary information or documentation of such third party or (c)
interfered or may be interfering in the employment relationship between such
third party and any of its present or former employees. No third
party has requested information from the Company or any of its Subsidiaries
which suggests that such a claim might be contemplated. To the best
of the Company’s knowledge, no Person employed by or Affiliate of the Company or
any of its Subsidiaries has employed or proposes to employ any trade secret or
any information or documentation proprietary to any former employer, and to the
best of the Company’s knowledge, no Person employed by or Affiliate of the
Company or any of its Subsidiaries has violated any confidential relationship
which such Person may have had with any third party in connection with the
development, manufacture or sale of any product or proposed product or the
development or sale of any service or proposed service of the Company or any of
its Subsidiaries, and the Company has no reason to believe there will be any
such employment or violation. To the best of the Company’s knowledge, neither
the execution or delivery of the Transaction Documents, nor the carrying on of
the businesses of the Company and its Subsidiaries as officers, employees or
agents by any officer, director or key employee of the Company or any of its
Subsidiaries, nor the conduct or proposed conduct of the Company’s or any such
Subsidiary’s business, will conflict with or result in a breach of the terms,
conditions or provisions of or constitute a default under any contract, covenant
or instrument under which any such Person is obligated to a third
party.
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2.12 Intellectual
Property. The Company and its Subsidiaries own, or possess all
rights or licenses to use, all trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
other intellectual property rights (collectively, “Intellectual Property”)
necessary to conduct their respective businesses as now conducted and as
proposed to be conducted. None of the Company’s Intellectual Property
has expired or terminated, or is expected to expire or terminate, within three
years from the date of this Agreement. The Company does not have any
knowledge of any infringement by the Company or its Subsidiaries of Intellectual
Property of others. There is no claim, action or proceeding being
made or brought, or to the knowledge of the Company, being threatened, against
the Company or its Subsidiaries regarding its Intellectual
Property. None of the Company or its Subsidiaries is aware of any
instances where its employees, agents, advisors, consultants or representatives
have transferred Intellectual Property of the Company or any Subsidiary without
the consent of the Company or such Subsidiary.
2.13 Assets. Except
as set forth in Schedule 2.13,
the Company and the Subsidiaries have good and marketable title to all real
property owned by them that is material to the business of the Company and the
Subsidiaries and good and marketable title in all personal property owned by
them that is material to the business of the Company and the Subsidiaries, in
each case free and clear of all Liens, except for Liens that do not,
individually or in the aggregate, have or result in a Material Adverse
Change. Any real property and facilities held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in material
compliance.
2.14 Employee
Benefit Plans.
(a) Neither
the Company nor its Subsidiaries has a formal plan or commitment, whether
legally binding or not, to create any additional “employee benefit plan” (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974
or any successor law, and regulations and rules issued pursuant to that Act or
any successor law (“ERISA”)), practice or
agreement or modify or change any existing plan, practice or agreement that
would affect any of its employees or terminated employees. Benefits
under all employee benefit plans are as represented and have not been and will
not be increased subsequent to the date copies of such plans have been
provided.
(b) Neither
the Company nor its Subsidiaries contributes to or has any obligation to
contribute to, has not at any time contributed to or had an obligation to
contribute to, sponsor or maintain, and has not at any time sponsored or
maintained, a “multi-employer plan” (within the meaning of Section 3(37) of
ERISA) for the benefit of employees or former employees of the Company or the
Subsidiary.
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(c) The
Company and the Subsidiary have, in all material respects, performed all
obligations, whether arising by operation of law, contract, or past custom,
required to be performed under or in connection with the Company’s Employee
Benefit Plans (each, a “Company
Employee Benefit Plan”), and neither the Company nor its Subsidiaries has
knowledge of the default or violation by any other party with respect
thereto.
(d) There
are no Actions, suits or claims (other than routine claims for benefits)
pending, or, to the Company’s knowledge, threatened, against any Company
Employee Benefit Plan or against the assets funding any Company Employee Benefit
Plan.
(e) Neither
the Company nor the Subsidiary maintains nor contributes to any “employee welfare benefit” (as
such term is defined in Section 3(i) of ERISA) plan which provides any
benefits to retirees or former employees of the Company or its
Subsidiaries.
2.15 Title to
Properties; Encumbrances.
(a) The
Company and its Subsidiaries have good and marketable title to all of their
respective properties and assets (real, personal or mixed, tangible or
intangible), including without limitation the Intellectual
Property. None of the Company’s nor its Subsidiaries’ properties or
assets is subject to any Lien, except as set forth on Schedule 2.15, none
of which adversely affects the business or the continued operations of the
Company or its Subsidiaries.
(b) All
material property and assets (real, personal or mixed, tangible or intangible)
used or required by the Company and its Subsidiaries in the conduct of the
business of the Company and its Subsidiaries are fully owned by the Company
and/or its Subsidiaries (except to the extent of any Liens set forth on Schedule
2.15). All such property and assets, or the leases or licenses
thereof, constitute all property, assets and contractual rights necessary for
the conduct of the business of the Company and its Subsidiaries as presently
conducted.
2.16 Insurance. There
is in full force and effect one or more policies of insurance issued by insurers
of recognized responsibility, insuring the Company and its Subsidiaries and
their properties, business and projects against such losses and risks, and in
such amounts, on both a per occurrence and an aggregate basis, as are customary
in the case of corporations of established reputation engaged in the same or
similar business and similarly situated.
2.17 Taxes. The
Company and each of its Subsidiaries has accurately and timely filed all
federal, state, county and local tax returns and reports required to be filed by
it within the applicable period, and the Company and each of its Subsidiaries
has paid all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or
payable. Such returns and reports are true and correct in all
material respects. The Company and each of its Subsidiaries has
established adequate reserves for all taxes accrued but not yet
payable. All tax elections of any type which the Company or its
Subsidiaries has made as of the date hereof are set forth in the Financial
Statements. None of the federal income tax returns of the Company or
its Subsidiaries has ever been audited by the Internal Revenue
Service. No claim or deficiency assessment with respect to or
proposed adjustment of the Company’s or its Subsidiaries’ federal, state, county
or local taxes is currently assessed or pending or threatened, and there is no
basis for any such claim, assessment or adjustment. There is no tax
lien (other than for current taxes not yet due and payable), whether imposed by
any federal, state, county or local taxing authority, outstanding against the
assets, properties or businesses or the Company or its
Subsidiaries. None of the Company or its Subsidiaries has executed
any waiver of the statute of limitations on the assessment or collection of any
tax or governmental charge. None of the Company or its Subsidiaries
is a party to any agreement relating to the sharing, allocation or
indemnification of taxes. The Company and each Subsidiary has
properly charged, collected and paid all applicable sales, use and other similar
taxes.
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2.18 Loans and
Advances. None of the Company or its Subsidiaries has any
outstanding loans or advances to any Person and none of them is obligated to
make any such loans or advances, except, in each case, for ordinary course
advances to employees in respect of reimbursable business expenses anticipated
to be incurred by them in connection with their performance of services for the
Company or such Subsidiary, as applicable.
2.19 Assumptions,
Guaranties, Etc. of Indebtedness of Other Persons. None of the
Company or its Subsidiaries has assumed, guaranteed, endorsed or otherwise
become directly or contingently liable for any indebtedness of any other Person
(including, without limitation, liability by way of agreement, contingent or
otherwise, to purchase, to provide funds for payment, to supply funds to or
otherwise invest in the debtor, or otherwise to assure the creditor against
loss), except for guaranties by endorsement of negotiable instruments for
deposit or collection in the ordinary course of business and except as set forth
on Schedule 2.19.
2.20 Approvals. Subject
to the accuracy of the Purchaser’s representations and warranties set forth in
Article III, no
registration or filing with, or consent or approval of or other action by, any
federal, state or other governmental agency or instrumentality or any third
party is or will be necessary for the Company’s valid execution, delivery and
performance of the Transaction Documents, the issuance, sale and delivery of the
Preferred Shares or Warrant, the issuance and delivery of the Dividend Shares
or, upon conversion of the Preferred Shares or exercise of the Warrant, the
Company’s issuance and delivery of the Conversion Shares and Warrant Shares,
respectively, other than those (i) which have previously been obtained or made,
(ii) which are required to be obtained from stockholders at the stockholder vote
to be held in connection with the approval of the transactions contemplated by
the Transaction Documents, or (iii) which are required to be made under federal
or state securities laws, which will be obtained or made, and will be effective
within the time periods required by law.
2.21 Offering
of the Preferred Shares. Assuming the accuracy of the
Purchaser’s representations and warranties set forth in Article III
hereof, the Company has complied with all applicable federal and state
securities laws in connection with the offer, issuance and sale of the Preferred
Shares, the Warrant and the Dividend Shares and, upon conversion of the
Preferred Shares and exercise of the Warrant, the issuance and delivery of the
Conversion Shares and Warrant Shares, respectively. Neither the
Company nor any Person authorized or employed by the Company as agent, broker,
dealer or otherwise in connection with the offering or sale of the Preferred
Shares, the Dividend Shares, the Warrant, the Conversion Shares and the Warrant
Shares or any security of the Company similar to the Preferred Shares, the
Dividend Shares, the Warrant, the Conversion Shares or the Warrant Shares has
offered the Preferred Shares, the Dividend Shares, the Warrant, the Conversion
Shares, the Warrant Shares or any such similar security for sale to, or
solicited any offer to buy the Preferred Shares, the Dividend Shares, the
Warrant, the Conversion Shares, the Warrant Shares or any such similar security
from, or otherwise approached or negotiated with respect thereto with, any
Person or Persons other than the Purchaser. Neither the Company nor
any Person acting on its behalf has taken or will take any other action
(including, without limitation, any offer, issuance or sale of any security of
the Company under circumstances which might require the integration of such
security with the Preferred Shares, the Dividend Shares, the Warrant, the
Conversion Shares or the Warrant Shares under the Securities Act or the rules
and regulations of the Commission promulgated thereunder), in either case so as
to subject the offering, issuance or sale of the Preferred Shares, the Dividend
Shares, the Warrant, the Conversion Shares and the Warrant Shares to the
registration provisions of the Securities Act. Neither the Company
nor any Person acting on its behalf has offered the Preferred Shares, the
Dividend Shares, the Warrant, the Conversion Shares or the Warrant Shares to any
Person by means of general or public solicitation or general or public
advertising, such as by newspaper or magazine advertisements, by broadcast
media, or at any seminar or meeting whose attendees were solicited by such
means.
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2.22 Offering
Exemption. Assuming the accuracy of the Purchaser’s
representations and warranties set forth in Article III, the
offer, issuance and sale of the Preferred Shares, the Dividend Shares and the
Warrant and, upon conversion of the Preferred Shares and exercise of the
Warrant, the issuance and delivery of the Conversion Shares and the Warrant
Shares, respectively, are exempt from registration under the Securities Act, and
will be registered or qualified (or exempt from registration or qualification)
under applicable state securities and “blue sky” laws, as currently in
effect.
2.23 Brokers;
Financial Advisors. No agent, broker, investment banker,
finder, financial advisor or other Person is or will be entitled to any broker’s
or finder’s fee or any other commission or similar fee from the Company or its
Subsidiaries, directly or indirectly, in connection with the transactions
contemplated by the Transaction Documents, and no Person is entitled to any fee
or commission or like payment from the Company or its Subsidiaries in respect
thereof based in any way on agreements, arrangements or understandings made by
or on behalf of the Company or any Subsidiary.
2.24 Transactions
With Affiliates. No employee, officer, director, consultant,
advisor, agent, stockholder or representative of the Company or any Subsidiary,
or member of the family of any such Person, or any corporation, limited
liability company, partnership, trust or other entity in which any such Person,
or any member of the family of any such Person, has a substantial interest or is
an officer, director, trustee, partner or holder of more than three percent (3%)
of the outstanding capital stock thereof, is a party to any transaction with the
Company or any Subsidiary, including any contract, agreement or other
arrangement providing for the employment of, furnishing of services by, rental
of real or personal property from or otherwise requiring payments to any such
Person, other than employment-at-will arrangements in the ordinary course of
business. To the Company’s knowledge, none of the Persons described
in this Section 2.24 has
any direct or indirect ownership interest in any Person with which the Company
or any Subsidiary is affiliated or with which the Company or any Subsidiary has
a business relationship, or any Person that competes with the Company or any
Subsidiary.
2.25 Employees.
(a) To
the Company’s knowledge, no key employee and no group of the Company’s or any
Subsidiary’s employees or independent contractors has any plans to terminate
his, her or its employment or relationship as an employee or independent
contractor with the Company or any such Subsidiary, nor does the Company or any
Subsidiary have any present intention to terminate the employment of any key
employee, group of employees, or independent contractors.
(b) To
the Company’s knowledge, no employee of the Company or any Subsidiary is a party
to or is otherwise bound by any agreement or arrangement (including, without
limitation, confidentiality agreements, noncompetition agreements, licenses,
covenants or commitments of any nature) or subject to any judgment, decree, or
order of any court or governmental body, (i) that would conflict with such
employee’s obligation to diligently promote and further the Company’s or such
Subsidiary’s interests or perform the duties that have been assigned to such
employee or (ii) that would conflict with the Company’s or such Subsidiary’s
business as now conducted or as proposed to be conducted.
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(c) None
of the Company or its Subsidiaries is delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed through the date hereof or amounts
required to be reimbursed to them through the date hereof. The
Company and its Subsidiaries are in compliance in all material respects with all
applicable federal, state and local laws, rules and regulations respecting
employment, employment practices, labor, terms and conditions of employment and
wages and hours. None of the Company or its Subsidiaries is bound by
or subject to (and none of their assets or properties are bound by or subject
to) any written or oral commitment or arrangement with any labor union, and no
labor union has requested or sought to represent any of the employees,
representatives or agents or the Company or its Subsidiaries. There
is no labor strike, dispute, slowdown or stoppage pending or, to the best of the
Company’s knowledge, threatened against or involving the Company or any
Subsidiary.
(d) To
the best of the Company’s knowledge, no employee of or consultant to the Company
or any Subsidiary is in violation of any material term of any employment
contract or any other contract or agreement relating to the relationship of any
such employee or consultant with the Company or such Subsidiary.
(e) Each
employee and consultant of the Company and its Subsidiaries that has had access
to the Company’s Intellectual Property has entered into an agreement containing
appropriate confidentiality and investment assignment provisions.
2.26 Environmental
and Safety Laws.
(a) The
Company and each Subsidiary, the operations of their businesses, and any real
property that the Company or any Subsidiary owns, leases or otherwise occupies
complies and has at all times complied with all federal, state and local laws,
judgments, decrees, orders, consent agreements, authorizations, permits,
licenses, rules, regulations, common or decision law (including, without
limitation, principles of negligence and strict liability) relating in any way
to the protection, investigation or restoration of the environment (including,
without limitation, natural resources), the generation, use, handling,
transportation or disposal of Hazardous Materials or the health or safety
matters of humans and other living organisms, including the Resource
Conservation and Recovery Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, the Federal Clean Water
Act, as amended, the Federal Clean Air Act, as amended, the Toxic Substances
Control Act, the Emergency Planning and Community Right-to-Know Act or any state
and local analogue (hereinafter “Environmental
Laws”). No expenditures are presently required to comply with
any such applicable Environmental Laws.
(b) None
of the Company or its Subsidiaries has received any notice of a complaint,
order, directive, claim, request for information, citation or other
communication, written or oral, or any notice of any claim, lawsuit or
proceeding raising a claim or potential claim against the Company, any
Subsidiary or any of their predecessors or any of their respective real
properties now or since formerly owned, leased or operated or other assets
indicating or alleging any damage to the environment or any liability or
obligation under or violation of any Environmental Law, and the Company is not
aware of any basis therefor, and (ii) none of the Company or its Subsidiaries is
subject to any order, decree, injunction or other directive of any governmental
body or authority.
(c) None
of the Company or its Subsidiaries has used and, to the Company’s knowledge, no
other person has used any portion of any property currently or previously owned,
operated or leased by the Company or any Subsidiary for the generation,
handling, processing, treatment, transportation storage or disposal of Hazardous
Materials; (ii) none of the Company or its Subsidiaries owns or operates any
underground tank or other underground storage receptacle for Hazardous
Materials, any asbestos-containing materials or polychlorinated biphenyls, and,
to the Company’s knowledge, no underground tank or other underground storage
receptacle for Hazardous Materials, asbestos-containing materials or
polychlorinated biphenyls is located on any portion of any property currently
owned, operated or leased by the Company or any Subsidiary and (iii) to the
Company’s knowledge, none of the Company or its Subsidiaries has caused or
suffered to occur any Releases or threatened Releases of Hazardous Materials on,
at, in, under, above, to, from or about any property currently or owned,
operated or leased by the Company or any Subsidiary.
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(d) The
Company and its Subsidiaries have obtained and are maintaining in full force and
effect all necessary permits, licenses and approvals required by all
Environmental Laws applicable to any owned, operated or leased properties and
the business operations operated thereon, and each of the Company and its
Subsidiaries is in compliance with all such permits, licenses and
approvals. The Company is not aware of any reason why all necessary
permits, licenses and approvals which have not been currently required for
existing activities of the Company and its Subsidiaries but which will be
required by Environmental Laws to construct, own, test or operate the properties
and business operations contemplated by the Company and its Subsidiaries cannot
be obtained in the ordinary course of business without material difficulty or
delay.
(e) The
execution, delivery and performance of this Agreement is not subject to any
Environmental Laws which condition, restrict or prohibit the sale, lease or
other transfer of property or operations, including any so-called “environmental cleanup responsibility
acts” or requirements for the transfer of permits, approvals, or
licenses. To the Company’s knowledge, there have been no
environmentally related audits, studies, reports, analyses (including soil and
groundwater analyses), or investigations of any kind performed with respect to
the currently or previously owned, leased, or operated properties of the Company
or its Subsidiaries except as set forth in Schedule 2.26.
2.27 Foreign
Corrupt Practices Act; USA Patriot Act. None of the Company,
its Subsidiaries or, to the best of the Company’s knowledge, any employees,
officers, directors, consultants, advisors, agents, stockholders or
representatives of the Company or other Person acting on behalf of the Company
or any Subsidiary, has violated, or taken any action which would cause the
Company to be in violation of, the Foreign Corrupt Practices Act of 1977, as
amended (the “FCPA”), or
the USA Patriot Act, or any rules and regulations thereunder. Each of
the Company’s and its Subsidiaries’ internal management and accounting practices
and controls are adequate to ensure compliance with the FCPA and the USA Patriot
Act. There is not now, and there has never been, any employment by
the Company or any Subsidiary of, or beneficial ownership in the Company or any
Subsidiary by, any governmental or political official in any country in the
world.
2.28 Illegal
or Unauthorized Payments; Political Contributions. None of the
Company, its Subsidiaries or, to the best of the Company’s knowledge, any
employees, officers, directors, consultants, advisors, agents, stockholders or
representatives of the Company or other Person acting on behalf of the Company
or any Subsidiary has, directly or indirectly, made or authorized any payment,
contribution or gift of money, property, or services, in contravention of
applicable law: (a) as a kickback or bribe to any Person, or (b) to
any political organization, or the holder of or any aspirant to any elective or
appointive public office, except for personal political contributions not
involving the direct or indirect use of the Company’s or any Subsidiary’s
funds.
2.29 Pending
Changes. To the Company’s knowledge, there is no pending or
threatened change in any Law, rule, regulation or order applicable to its
business, operations, properties, assets, products and services which is likely
to result in a Material Adverse Change. To the best of the Company’s
knowledge, there has been no discovery, change or development in the
development, design, manufacture or marketing of any product or service or
proposed product or service of the Company or any Subsidiary, or any product or
service that is or may be competitive with any such product or service or of any
new or improved materials, products, services or processes useful in the
business or the proposed business of the Company or any Subsidiary, to which an
informed investor in the Company would attach importance in its decision to make
an investment in the Company.
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2.30 Investment
Company Act. The Company is not, nor is it directly or
indirectly controlled by or acting on behalf of, any Person that is an “investment company” within
the meaning of the Investment Company Act of 1940, as amended.
2.31 Registration
Rights. Except for as set forth in Schedule 2.31
and the rights granted to the Purchaser under the Registration Rights Agreement,
no Person has demand or other rights to cause the Company to file any
registration statement under the Securities Act relating to any securities of
the Company or any right to participate in any such registration statement,
including, without limitation, piggyback registration rights.
2.32 Books and
Records. Each of the Company’s and its Subsidiaries’ books of
account, ledgers, order books, records and documents accurately and completely
reflect in accordance with usual and customary prudent business practices all
material information relating to the Company’s or Subsidiary’s, as appropriate,
business, the location and collection of the Company’s or Subsidiary’s, as
appropriate, assets, and the nature of all transactions giving rise to the
Company’s or Subsidiary’s, as appropriate, obligations and accounts
receivable. The Company has previously delivered to the Purchaser and
its counsel complete and correct copies of the Amended Charter and Bylaws and
all amendments thereto, as in effect at the time of the Closing and made
available to the Purchaser all minutes and consents reflecting meetings and
actions taken by the Company’s Board of Directors (the “Board”) and
stockholders. Such minutes and consents constitute complete and
accurate records of all meetings and consents in lieu of meetings of the Board
and its committees, or body performing a similar function and holders of its
securities since its date of incorporation or formation.
2.33 Disclosure. The
Company has disclosed to the Purchaser all facts material to the business,
operations, assets, liabilities, prospects, properties, condition (financial or
otherwise) and results of operations of the Company and each
Subsidiary. None of (i) this Agreement, (ii) any Schedule or Exhibit
to this Agreement, (iii) any other Transaction Documents, or (iv) excepts as set
forth in Schedule
2.33, any document filed by the Company with the Commission pursuant to
the requirements of the Exchange Act (as the information contained in any such
document filed with the Commission is supplemented, updated and/or amended in
light of the disclosures made by the Company to the Purchaser contained in the
documents and materials referenced in subsections (i), (ii) and (iii)
immediately above), contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained herein and
therein not misleading in light of the circumstances under which such statements
were made. None of the statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained therein not
misleading in light of the circumstances under which such statements were made.
2.34 Permits. The
Company has all franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by it, the lack
of which would have a Material Adverse Change, and believes it can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as presently planned to be conducted. The Company is not in
default in any material respect under any of such franchises, permits, licenses
or other similar authority.
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2.35 SEC and
NASDAQ Matters.
(a) The
Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is
listed on the NASDAQ Global Market, and the Company has taken no action designed
to, or likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act or de-listing the Common Stock from NASDAQ, nor has
the Company received any notification that the Commission or NASDAQ is
contemplating terminating or suspending such registration or
listing. The Company is in compliance with all corporate governance
requirements of NASDAQ. The Company shall comply with all
requirements of NASDAQ and the Commission with respect to the issuance of the
Preferred Shares, the Warrant, the Dividend Shares, the Conversion Shares and
the Warrant Shares and the listing of the Dividend Shares, the Conversion Shares
and the Warrant Shares.
(b) Except
as set forth in Schedule 2.35, the
Company has implemented and maintains a system of internal control over
financial reporting and a system of disclosure controls and procedures for the
purpose of meeting the requirements of the Commission and the Sarbanes-Oxley Act
of 2002 as applicable to the Company on the date hereof, except where the
failure to implement or maintain such a system would not result, individually or
in the aggregate, in a Material Adverse Change.
(c) The
Company has filed in a timely manner all documents that the Company was required
to file under the Exchange Act during the 12 months preceding the date of this
Agreement.
(d) The
Company has not taken and will not, in violation of applicable Law, take, any
action designed to or that might reasonably be expected to cause or result in
unlawful manipulation of the price of the Common Stock.
(d) Hein
& Associates LLP, who issued their report with respect to the Company’s
financial statements for the year ended December 31, 2006 and who are reasonably
expected by the Company to issue their report with respect to the financial
statements to be incorporated by reference into the Registration Statement and
the prospectus which forms a part thereof from the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007, is, to the Company’s knowledge,
an independent registered public accounting firm as required by the Securities
Act.
ARTICLE
III
REPRESENTATIONS, WARRANTIES
AND COVENANTS OF THE PURCHASER
3.1 Representations
and Warranties of the Purchaser. The Purchaser represents and
warrants to the Company that:
(a) it
is an entity all of the equity interests of which are owned by “accredited investors” within
the meaning of Rule 501 of Regulation D under the Securities Act, as presently
in effect;
(b) the
Preferred Shares and the Warrant being purchased by it are being acquired for
its own account for the purpose of investment and not with a view to, or for
resale in connection with, any distribution thereof within the meaning of the
Securities Act; and
(c) it
understands that (i) the Preferred Shares, the Dividend Shares, the Conversion
Shares, the Warrant and the Warrant Shares have not been registered under the
Securities Act by reason of their issuance in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof or Rule 505 or 506 promulgated under the Securities Act, (ii) the
Preferred Shares, the Dividend Shares, the Conversion Shares and the Warrant
Shares must be held indefinitely (subject, however, to the Company’s obligation
to effect the registration of registrable securities in accordance with the
Registration Rights Agreement) unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from such registration, and
(iii) the Preferred Shares, the Dividend Shares, the Conversion Shares, the
Warrant and the Warrant Shares will bear the legend to such effect set forth in
Section 3.3.
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3.2 Restricted
Securities. The Purchaser agrees not to make any disposition
of all or any portion of the Preferred Shares, the Dividend Shares, the
Conversion Shares, the Warrant or the Warrant Shares unless and until such
securities are registered under the Securities Act and under any other
applicable securities laws or such sale or transfer is exempt from such
registration.
3.3 Legend. The
Purchaser acknowledges that the certificates evidencing the Preferred Shares,
the Dividend Shares, the Conversion Shares, the Warrant and the Warrant Shares
will bear the legend set forth below:
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.
The
legend set forth above shall be removed by the Company from any certificate
evidencing Preferred Shares, the Dividend Shares, the Conversion Shares or the
Warrant Shares, and the Company shall issue a certificate without such legend to
the holder thereof, upon delivery to the Company of an opinion by counsel (which
may be counsel for the Company) that a registration statement under the
Securities Act is at that time in effect with respect to the legended security
or that such security can be freely transferred in a public sale without such a
registration statement being in effect and that such transfer will not
jeopardize the exemption or exemptions from registration pursuant to which the
Company issued the Preferred Shares, the Dividend Shares, the Conversion Shares
or the Warrant Shares; provided, however, that no opinion shall be required for
dispositions pursuant to Rule 144 under the Securities Act or in any transfer in
compliance with applicable securities laws where the transferee shall receive
securities bearing the legend above.
ARTICLE
IV
CONDITIONS TO THE
OBLIGATIONS OF THE PURCHASER AND THE COMPANY
4.1 Conditions
to the Purchaser’s Obligations at the Closing. The Purchaser’s
obligation to purchase and pay for the Preferred Shares and the Warrant on the
Closing Date is, at its option, subject to the satisfaction, on or before such
Closing Date, of the following conditions, any of which may be waived in whole
or in part by the Purchaser:
(a) Representations
and Warranties to be True and Correct. The representations and
warranties of the Company under this Agreement and in each other Transaction
Document shall be true, complete and correct on and as of the Closing Date, with
the same effect as though such representations and warranties had been made on
and as of such date, and the Company’s Chief Executive Officer shall have
certified to such effect to the Purchaser in writing.
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(b) Performance. The
Company shall have performed and complied with all agreements and covenants
contained herein required to be performed or complied with by it prior to or at
the Closing Date, and the Company’s Chief Executive Officer shall have certified
to the Purchaser in writing to such effect and to the further effect that all of
the conditions set forth in this Article IV have
been satisfied.
(c) All
Proceedings to be Satisfactory. All corporate and other
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to the Purchaser and its counsel, and the Purchaser and its
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they reasonably may request.
(d) Approvals;
No Violation of Law. The Company shall have obtained any and
all consents, waivers, approvals or authorizations, with or by any governmental
body and all consents, waivers, approvals or authorizations of any other Person,
required for the valid execution of this Agreement and each of the other
Transaction Documents and for the consummation of the transactions contemplated
hereby and thereby including, without limitatation, the approval of The NASDAQ
Stock market, and the purchase and payment of the Preferred Shares and the
Warrant at the Closing Date on the terms and conditions as provided herein shall
not violate any Law applicable to the Company or the Purchaser.
(e) Consent
of Holders of Series A Preferred Stock. The Company shall have
received any and all consents, waivers or approvals from the holders of Series A
Preferred Stock necessary to issue and deliver the Preferred Shares, the
Warrant, the Dividend Shares, the Conversion Shares and the Warrant Shares and
to consummate the transactions contemplated under the Series B Certificate of
Designations and the Transaction Documents in the form attached hereto as Exhibit
E.
(f) No
Injunction. No governmental body or any other Person shall
have issued an order, injunction, judgment, decree, ruling or assessment which
shall then be in effect restraining or prohibiting the completion of the
transactions contemplated hereby, nor, to the Company’s knowledge, shall any
such order, injunction, judgment, decree, ruling or assessment be threatened or
pending.
(g) Registration
Rights Agreement. The Company and the Purchaser shall have
executed and delivered the Registration Rights Agreement.
(h) No
Material Adverse Change. No Material Adverse Change shall have
occurred between the date of this Agreement and the Closing Date, and the
Company’s Chief Executive Officer shall have certified to such effect to the
Purchaser in writing.
(i) Qualification
Under State Securities Laws. All registrations,
qualifications, permits and approvals required prior to issuance under
applicable state securities laws shall have been obtained for the lawful
execution, delivery and performance of this Agreement and each of the other
Transaction Documents, including without limitation, the offer, sale, issuance
and delivery of the Preferred Shares and the Warrant to be purchased
hereunder.
(j) Series B
Certificate of Designations. On or prior to the Closing, the
Series B Certificate of Designations shall have been filed with the Secretary of
State of the State of Delaware, and the Amended Charter shall be in full force
and effect on the Closing Date.
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(k) Preemptive
Rights. All Persons having any preemptive, first refusal or
other rights with respect to the issuance of the Preferred Shares, the Warrant,
the Dividend Shares, the Conversion Shares or the Warrant Shares shall have
irrevocably waived the same in writing.
(l) Expenses. The
Company shall have paid the fees and expenses of the Purchaser, including the
fees and disbursements of the Purchaser’s counsel invoiced at the Closing, in
accordance with Section 6.1.
(m) Supporting
Documents. The Purchaser and its counsel shall have received
copies of the following documents:
(i) the
Amended Charter, certified as of a recent date by the Secretary of State of the
State of Delaware, (B) a certificate of said Secretary dated as of a recent date
as to the Company’s due incorporation and good standing and the Company’s
payment of all excise taxes, and listing all documents of the Company on file
with said Secretary, and (C) a certificate of the Secretary of State of the
State of California and a certificate from the Franchise Tax Board of the State
of California, dated as of a recent date, with respect to the good standing of
the Company;
(ii) a
certificate of the Company’s Secretary dated the Closing Date,
certifying: (A) that attached thereto is a true and complete copy of
the Bylaws as in effect on the date of such certification; (B) that attached
thereto is a true and complete copy of all resolutions adopted by the Board
authorizing the Series B Certificate of Designations, the execution, delivery,
and performance of each of the Transaction Documents, the issuance, sale and
delivery of the Preferred Shares, the Dividend Shares and the Warrant and the reservation of
the Conversion Shares and the Warrant Shares, and that all such resolutions are
in full force and effect and are the only resolutions adopted in connection with
the transactions contemplated by the Transaction Documents; (C) that the Amended
Charter has not been amended since the date of the last amendment referred to in
the certificate delivered pursuant to clause (i)(A) above; and (D) to the
incumbency and specimen signature of each officer of the Company executing any
of the Transaction Documents, the stock certificates representing the Preferred
Shares and any certificate or instrument furnished pursuant hereto, and a
certification by another officer of the Company as to the incumbency and
signature of the officer signing the certificate referred to in this clause
(ii); and
(iii) such
additional supporting documents and other information with respect to the
operations and affairs of the Company and its Subsidiaries as the Purchaser or
its counsel reasonably may request.
(n) Cross-Receipt. The
Company and the Purchaser shall have executed and delivered a cross-receipt
acknowledging the Company’s delivery to the Purchaser of the Preferred Shares
and the Warrant and the Purchaser’s payment therefor.
(o) Opinion
of Company’s Counsel. The Purchaser shall have received from
Rutan & Tucker LLP, counsel for the Company, an opinion dated the
Closing Date, in form and scope satisfactory to the Purchaser and its counsel,
in the form set forth in Exhibit
F.
(p) Bank
Waivers. The Borrowers (as defined in the Credit Agreement, as
defined below) shall have obtained waivers from a sufficient number of the
lenders party to that certain Credit Agreement, dated as of February 27, 2007
(as amended, the “Credit
Agreement”), among Pacific Ethanol Madera LLC, Pacific Ethanol Columbia,
LLC, Pacific Ethanol Stockton, LLC, Pacific Ethanol Magic Valley, LLC, Pacific
Ethanol Holding Co. LLC, WestLB AG, New York Branch, as administrative agent,
waiving all defaults under the Credit Agreement existing as of March 17, 2008,
in a form substantially satisfactory to the Purchaser.
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(q) No
Defaults under Loan Agreements. After
giving effect to the waivers described in Section 4.1(p), on
the Closing Date there shall be no Defaults or Events of Default (as defined in
the Credit Agreement) under the Credit Agreement, nor any defaults or events of
default under any other loan agreement to which the Company or any of its
affiliates are party.
(r) 2007 Form
10-K. The Company shall have filed with the Commission its annual report
on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”) on or prior
to March 31, 2008 and the audit opinion of the Company’s independent registered
public accounting firm, Hein & Associates LLP, contained in the 2007 Form
10-K shall not contain a “going concern” qualification.
(s) Restatement
of Prior Period Financial Statements. The Company shall not
have restated any of the Company’s financial statements nor shall the Company
have filed a Form 8-K with the Commission pursuant to Item 4.02 thereunder with
respect to any of the Company’s financial statements filed with the
Commission.
(t) Securities
Litigation. No class action securities litigation shall have
been commenced against the Company.
(u) NASDAQ
Listing. The Company’s common stock shall be listed for
trading on The NASDAQ Global Market.
4.2 Conditions
to the Company’s Obligations at the Closing. The Company’s
obligation to sell and issue the Preferred Shares and the Warrant being sold and
issued by it on the Closing Date is, at its option, subject to the satisfaction,
on or before such Closing Date, of the following conditions, any of which may be
waived in whole or in part by the Company:
(a) Representations
and Warranties to be True and Correct. The representations and
warranties of the Purchaser contained in Article III
shall be true, complete and correct on and as of the Closing Date, with the same
effect as though such representations and warranties had been made on and as of
such date.
(b) Registration
Rights Agreement. The Purchaser shall have executed and
delivered the Registration Rights Agreement.
(c) Cross
Receipt. The Company and the Purchaser shall have executed and
delivered a cross-receipt acknowledging the Company’s delivery to the Purchaser
of the Preferred Shares and the Warrant and the Purchaser’s payment
therefor.
(d) Purchase
Price Paid. The Purchaser shall have paid the purchase price
for the Preferred Shares and the Warrant to the Company as set forth in Section 1.2(a).
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ARTICLE
V
COVENANTS OF THE
COMPANY
The
Company covenants and agrees with the Purchaser that:
5.1 Reserve
for Conversion Shares and Warrant Shares. The Company 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 the Preferred
Shares and effecting the exercise of the Warrant and otherwise complying with
the terms of this Agreement, such number of its duly authorized shares of Common
Stock as shall be sufficient to effect the conversion of the Preferred Shares
and effecting the exercise of the Warrant from time to time outstanding or
otherwise to comply with the terms of this Agreement. If at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of the Preferred Shares and exercise of the Warrant or
otherwise to comply with the terms of this Agreement, the Company will forthwith
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes. The Company will obtain any authorization,
consent, approval or other action by or make any filing with any court or
governmental or administrative body that may be required under applicable
federal and state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares and upon exercise of the
Warrant.
5.2 Corporate
Existence. The Company shall preserve and maintain, and, cause
each Subsidiary to preserve and maintain, its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and qualify
and remain qualified, and cause each subsidiary to qualify and remain qualified,
as a foreign corporation in each jurisdiction in which such qualification is
necessary or desirable in view of its business and operations or the ownership
or lease of its properties.
5.3 Preservation
of Property and Assets. The Company shall, and shall cause
each of its Subsidiaries to (a) maintain or cause to be maintained in good
repair, working order and condition the properties now or hereafter owned,
leased or otherwise possessed by it (and make or cause to be made all needed and
proper repairs, renewals, replacements and improvements thereto) which are
necessary so that the business carried on in connection therewith may be
properly conducted at all times and (b) maintain and hold in full force and
effect all franchises, licenses, permits, certificates, authorizations,
qualification, accreditations and other rights, consents and approvals (whether
issued, made or given by a governmental body or otherwise), necessary to own and
operate its properties and to carry on its business as presently conducted and
as presently planned to be conducted. The Company shall not cause or
permit a Release of any Hazardous Material on, at, in, under, above, to, from or
about any of the property where such Release would violate in any respect, or
form the basis for any claims under, any Environmental Laws.
5.4 Properties,
Business, Insurance. The Company shall obtain and maintain and
cause each of its Subsidiaries to maintain as to its respective properties and
business, with financially sound and reputable insurers, insurance against such
casualties and contingencies and of such types and in such amounts as is
customary for companies similarly situated.
5.5 Inspection,
Consultation and Advice. The Company shall permit, and cause
each of its Subsidiaries to permit, the Purchaser and such persons as it may
designate to visit and inspect any of the properties of the Company or its
Subsidiaries, examine their books and take copies and extracts therefrom,
discuss the affairs, finances and accounts of the Company or its Subsidiaries
with their officers, employees and public accountants (and the Company hereby
authorizes said accountants to discuss with the Purchaser and such designees
such affairs, finances and accounts), and consult with and advise the management
of the Company and its Subsidiaries as to the Company’s and its Subsidiaries’
affairs, finances and accounts.
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5.6 Restrictive
Agreements Prohibited. None of the Company or its Subsidiaries
shall become a party to any agreement which by its terms restricts the Company’s
performance of this Agreement or any of the other Transaction
Documents.
5.7 Transactions
with Affiliates. Except for transactions contemplated by this
Agreement, transactions with Cascade Investment, L.L.C., a Washington limited
liability company, or as otherwise approved by the Board, none of the Company or
its Subsidiaries shall enter into any transaction with any director, officer,
employee or holder of more than three percent (3%) of the outstanding capital
stock of any class or series of capital stock of the Company or any Subsidiary,
member of the family of any such Person, or any corporation, partnership, trust
or other entity in which any such Person, or member of the family of any such
Person, is a director, officer, trustee, partner or holder of more than three
percent (3%) of the outstanding capital stock thereof.
5.8 Payment
of Taxes and Indebtedness. The Company shall pay and
discharge, and cause each Subsidiary to pay and discharge, all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income, profits or business, or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and all lawful claims which, if
unpaid, might become a lien or charge upon any properties of the Company or its
Subsidiaries; provided, however, that neither
the Company nor any Subsidiary shall be required to pay any such tax,
assessment, charge, levy or claim which is being contested or extended in good
faith and by appropriate proceedings if the Company or such Subsidiary shall
have set aside on its books sufficient reserves, if any, with respect
thereto. The Company shall pay and cause any Subsidiary to pay, when
due, or in conformity with customary trade terms, all lease obligations, all
trade debt, and all other indebtedness incident to the operations of the Company
or such Subsidiary, except such as are being contested in good faith and by
proper proceedings if the Company or Subsidiary concerned shall have set aside
on its books sufficient reserves, if any, with respect thereto.
5.9 Internal
Accounting Controls. The Company shall devise and maintain
systems, and shall cause each of its Subsidiaries to make and keep books,
records and accounts which, in reasonable detail, accurately and fairly reflect
its transactions and dispositions of its assets and shall devise and maintain,
and shall cause each of its Subsidiaries to devise and maintain, internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management’s general or specific
authorization, (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP or any other criteria applicable
to such statements, and to maintain accountability for assets, (c) access to
assets is permitted only in accordance with management’s general or specific
authorization, and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
5.10 Change of
Operations. The Company shall not, and shall not permit any of
its Subsidiaries to, change the general character of its business as conducted
on the date hereof or as presently proposed to be conducted, or engage in any
type of business not directly related to such business as presently and normally
conducted or as presently proposed to be conducted.
5.11 Indemnity.
(a) The
Company agrees to indemnify, defend and hold harmless the Purchaser, its
Affiliates and their respective directors, managers, officers, members,
stockholders, employees, Affiliates, agents, trustees, advisors (including,
without limitation, attorneys, accountants and financial advisors),
attorneys-in-fact, successors and assigns (collectively, “Indemnified Parties”) from
and against any and all losses, claims, liabilities, damages, deficiencies,
costs or expenses (including, without limitation, interest, penalties,
reasonable attorneys’ fees, disbursements and related charges and any costs or
expenses that an Indemnified Party incurs to enforce its right to
indemnification) (collectively, “Losses”) based upon, arising
out of or otherwise in respect of any inaccuracy in or breach of any
representations, warranties, covenants or agreements of the Company contained in
this Agreement or any of the other Transaction Documents.
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(b) The
provisions of this Section 5.11
shall not limit or impair any right or remedy arising from breach of this
Agreement or any of the other Transaction Documents. In addition to
any other remedy provided by law, injunctive relief may be obtained to enjoin
the breach, or threatened breach, of any provision of this Agreement and each
party shall be entitled to specific performance by the others of their
obligations hereunder and thereunder. All remedies, either under this
Agreement, by law or as may otherwise be afforded to the Purchaser or the
Company, as the case may be, shall be cumulative.
5.12 Compliance
with Laws. The Company shall comply, and cause each Subsidiary
to comply, with all applicable Laws.
5.13 Use of
Proceeds. The Company agrees to use the net proceeds from the
sale and issuance of the Preferred Shares and the Warrant pursuant to this
Agreement for (a) the payment of outstanding fees in connection with the
construction of certain facilities of the Company, including the Stockton and
Madera facilities, and (b) working capital.
5.14 HSR Act
Filings. To the extent required with respect to the Dividend
Shares, the Conversion Shares and the Warrant Shares after the Closing, the
Company will file, and will provide any and all assistance to the Purchaser
necessary to enable the Purchaser to file, all notices, reports and other
documents required to be filed with governmental entities, including without
limitation the Federal Trade Commission and the U.S. Department of Justice, in
connection with the transactions set forth in the Transaction
Documents. Without limitation, if and as requested by the Purchaser,
the Company shall prepare and file, as promptly as practical, one or more
Notification and Report Forms complying with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the “HSR Act”), and related laws,
rules and regulations. For the avoidance of doubt, after the Closing
no Conversion Shares or Warrant Shares shall be issued to the Purchaser pursuant
to the Transaction Documents until such time as any waiting period required by
the HSR Act in connection with such issuance shall have expired or been
terminated.
5.15 Stockholder
Approval. As soon as practicable after the date hereof, the
Company shall use its commercially best efforts to hold a meeting of the
Company’s stockholders in compliance with the rules of the Commission regarding
proxies, consents and authorizations of stockholders in Section 14 of the
Exchange Act, and the rules and regulations promulgated thereunder, and shall
make all appropriate filings related thereto (including, without limitation, the
filing of any effective proxy statement) with the Commission to give effect
hereto, to approve the Agreement and the transactions contemplated hereby,
including the issuance of any Dividend Shares and the issuance of any Conversion
Shares as a result of a conversion price adjustment pursuant to Section 5(d) of
the Series B Certificate of Designations.
5.16 New
Capital Expenditures. Until such time as the loans represented
by the Secured Promissory Note dated November 28, 2007, and the Secured
Promissory Note dated December 27, 2007, by and between Pacific Ethanol
Imperial, LLC, and the Purchaser (as they have been amended) have been paid in
full, the Company shall not without the written consent of the Purchaser
initiate any New Capital Project, nor shall the Company permit any of its
Subsidiaries to initiate any New Capital Project.
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5.17 Undertakings
of the Company With Respect to Series A Preferred Stock
Transferees. In connection with any transfer of shares of
Series A Preferred Stock, the Company undertakes to (i) provide written
notice to any proposed transferee of such shares of Series A Preferred Stock
prior to the closing of such transfer advising such transferee(s) that the
Series B Preferred Stock is a series of capital stock that ranks pari passu with the Series A
Preferred Stock with respect to dividend and liquidation rights and
(ii) treat any dividend and liquidation distributions with respect to the
Series A Preferred Stock and the Series B Preferred Stock on a pari passu
basis.
ARTICLE
VI
MISCELLANEOUS
6.1 Expenses. At
the Closing the Company shall reimburse the Purchaser for all legal and
accounting fees and expenses incurred by the Purchaser in connection with the
transactions contemplated hereby. The Company agrees that the fees
and expenses incurred by the Purchaser through the Closing Date in connection
with the transactions contemplated hereby may be paid directly by the Purchaser
to such persons and deducted from the purchase price payable at the
Closing. The Company shall pay all costs and expenses that it incurs
in connection with the transactions. The Company further agrees to
reimburse the Purchaser on demand for the Purchaser’s reasonable out of pocket
expenses incurred in connection with any amendment to, or waiver or enforcement
of, this Agreement or the other Transaction Documents. The Company
shall also pay all stamp and other taxes and duties levied in connection with
the issuance of the Preferred Shares and the Dividend Shares or, upon conversion
thereof, the Conversion Shares or upon exercise of the Warrant, the Warrant
Shares.
6.2 Survival
of Agreements. All covenants, agreements, representations and
warranties made in any of the Transaction Documents or any certificate or
instrument delivered to the Purchaser pursuant to or in connection with any of
the Transaction Documents shall survive the execution and delivery of all of the
Transaction Documents, the issuance, sale and delivery of the Preferred Shares
and the Warrant, and the issuance and delivery of the Dividend Shares, the
Conversion Shares and the Warrant Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder or thereunder
or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company.
6.3 Brokerage. Each
party hereto will indemnify and hold harmless the others against and in respect
of any claim for brokerage or other commissions relative to the Transaction
Documents or to the transactions contemplated thereby, based in any way on
agreements, arrangements or understandings made or claimed to have been made by
such party with any third party.
6.4 Parties
in Interest. All representations, warranties, covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without
limiting the generality of the foregoing, all representations, covenants and
agreements benefiting the Purchaser shall inure to the benefit of any and all
subsequent holders from time to time of the Preferred Shares, the Warrant, the
Dividend Shares, the Conversion Shares and the Warrant Shares, as the case may
be. Nothing in this Agreement shall create or be deemed to create any
third-party beneficiary rights in any Person other than the parties to this
Agreement or their respective successors and assigns except as expressly
provided in this Agreement.
6.5 Specific
Performance. Each of the parties hereto acknowledges and
agrees that the breach of this Agreement would cause irreparable damage to the
other party hereto and that the other party hereto will not have an adequate
remedy at law. Therefore, the obligations of each of the parties
hereto under this Agreement shall be enforceable by a decree of specific
performance issued by any court of competent jurisdiction, and appropriate
injunctive relief may be applied for and granted in connection
therewith. Such remedies, however, shall be cumulative and not
exclusive and shall be in addition to any other remedies which any party may
have under this Agreement or otherwise.
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6.6 Further
Assurances. The Company and the Purchaser each agree to
execute and deliver such other documents or agreements as may be necessary or
desirable for the implementation of this Agreement and the other Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby.
6.7 Submission
to Jurisdiction; Consent to Service of Process.
(a) The
parties hereto hereby irrevocably submit to the exclusive jurisdiction of any
federal or state court located within Fresno County, California, over any
dispute arising out of or relating to this Agreement or any of the transactions
contemplated hereby and each party hereby irrevocably agrees that all claims in
respect of such dispute or any suit, action or proceeding related thereto shall
be heard and determined in such courts. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable law, any
objection which they may now or hereafter have to the laying of venue of any
such dispute brought in such court or any defense of inconvenient forum for the
maintenance of such dispute. Each of the parties hereto agrees that a
judgment in any such dispute may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by law.
(b) Each
of the parties hereto hereby consents to process being served by any party to
this Agreement in any suit, action or proceeding by the mailing of a copy
thereof in accordance with the provisions of Section 6.8.
6.8 Notices. Any
notice, request, demand or other communication required or permitted to be given
to a party pursuant to the provisions of this Agreement will be in writing and
will be effective and deemed given under this Agreement on the earliest
of: (a) the date of personal delivery, (b) the date of transmission
by facsimile, with confirmed transmission and receipt, (c) two (2) days after
deposit with a nationally-recognized courier or overnight service and (d) five
(5) days after mailing via first-class mail. All notices not
delivered personally or by facsimile will be sent with postage and other charges
prepaid and properly addressed to the party to be notified at the address set
forth for such party (i) if to the Purchaser, to Lyles United, LLC, 1210 West
Olive Avenue, Fresno, CA, 93728, attention: Will Lyles, Vice
President, with a copy to Howard Rice Nemerovski Canady Falk & Rabkin, A
Professional Corporation, Three Embarcadero Center, Seventh Floor, San
Francisco, CA 94111, attention: Gary P. Kaplan, facsimile (415) 217-5910, and
(ii) if to the Company, to Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060,
Sacramento, CA 95814, attention: Neil Koehler, with a copy to Rutan
& Tucker LLP, 611 Anton Boulevard, 14th Floor, Costa Mesa, CA 92626,
attention: Larry A. Cerutti, facsimile (714) 546-9035. Any
party hereto (and such party’s permitted assigns) may change such party’s
address for receipt of future notices hereunder by giving written notice to the
Company and the Purchaser.
6.9 Governing
Law. This Agreement shall be governed by, and construed,
interpreted and enforced in accordance with, the laws of the State of
California, without giving effect to the principles of conflicts of laws
thereunder which would specify the application of the law of another
jurisdiction.
6.10 Entire
Agreement. This Agreement, including the Schedules and
Exhibits hereto, together with the other Transaction Documents, constitutes the
sole and entire agreement of the parties with respect to the subject matter
hereof. All Schedules and Exhibits hereto are hereby incorporated
herein by reference.
A-23
6.11 Counterparts. This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
6.12 Amendments
and Waivers. This Agreement may not be amended or modified,
and no provisions hereof may be waived, without the written consent of the
Company and the Purchaser. No action taken pursuant to this
Agreement, including without limitation, any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representation, warranty, covenant or agreement
contained herein. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a further or
continuing waiver of such breach or as a waiver of any other or subsequent
breach. No failure on the part of any party to exercise, and no delay
in exercising, any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of such right, power or remedy
by such party preclude any other or further exercise thereof or the exercise of
any other right, power or remedy. All remedies hereunder are
cumulative and are not exclusive of any other remedies provided by
law.
6.13 Severability. If
any provision of this Agreement shall be declared void or unenforceable by any
judicial or administrative authority, the validity of any other provision and of
the entire Agreement shall not be affected thereby.
6.14 Titles
and Subtitles; Interpretive Matters. The titles and subtitles
used in this Agreement are for convenience of reference only and are not to be
considered in construing or interpreting any term or provision of this
Agreement. No provision of this Agreement will be interpreted in
favor of, or against, any of the parties hereto by reason of the extent to which
any such party or its counsel participated in the drafting thereof or by reason
of the extent to which any such provision is inconsistent with any prior draft
hereof or thereof.
6.15 Facsimile
Signatures. Any signature page delivered by a fax machine
shall be binding to the same extent as an original signature page, with regard
to any agreement subject to the terms hereof or any amendment
thereto. Any party who delivers such a signature page agrees to
deliver promptly an original counterpart to each party to whom the faxed
signature page was sent.
6.16 Other
Remedies. In addition to those remedies specifically set forth
herein and in the Transaction Documents, if any, each party may proceed to
protect and enforce its rights under this Agreement and the Transaction
Documents either by suit in equity and/or by action at law, including, but not
limited to, an action for damages as a result of any such breach and/or an
action for specific performance of any such covenant or agreement contained in
this Agreement or in the Transaction Documents. No right or remedy
conferred upon or reserved to any party under this Agreement or the Transaction
Documents is intended to be exclusive of any other right or remedy, and every
right and remedy shall be cumulative and in addition to every other right and
remedy given under this Agreement and the Transaction Documents or now and
hereafter existing under applicable law.
6.17 Certain
Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
A-24
“Affiliate” means, with
respect to any Person, (i) any other Person of which securities or other
ownership interests representing more than fifty percent (50%) of the voting
interests are, at the time such determination is being made, owned, Controlled
or held, directly or indirectly, by such Person, or (ii) any other Person which,
at the time such determination is being made, is Controlling, Controlled by or
under common Control with, such Person. As used herein, “Control”, whether used as a
noun or verb, refers to the possession, directly or indirectly, of the power to
direct, or cause the direction of, the management or policies of a Person,
whether through the ownership of voting securities or otherwise.
“Business Day” means any day
except Saturday, Sunday and any day which is a federal legal holiday or a day on
which banking institutions in the State of California are authorized or required
by law or other governmental action to close.
“Closing” shall mean the
consummation of the transactions contemplated by this Agreement and the
Transaction Documents.
“Closing Date” shall mean the
Business Day immediately following the date on which all of the conditions set
forth in Sections 4.1
and 4.2 are satisfied, or such other date as the parties may agree; provided, however, that if such
conditions are not met (or waived) in full prior to April 30, 2008, the
Purchaser shall not be required to proceed with the Closing and this Agreement
shall terminate and be of no further force or effect.
“Commission” shall mean the U.
S. Securities and Exchange Commission.
“Exchange Act” shall mean the
Securities Exchange Act of 1934, as amended.
“Hazardous Material” shall
mean any element, compound, substance or other material (including, without
limitation, any pollutant, contaminant, hazardous waste, hazardous substance,
chemical substance, or product) that is listed, classified or regulated pursuant
to any Environmental Law, including, without limitation, any petroleum product,
by-product or additive, asbestos, presumed asbestos-containing material,
asbestos-containing material, medical waste, chlorofluorocarbon, hydro
chlorofluorocarbon, lead-containing paint, polychlorinated biphenyls,
radioactive material or radon.
“Law,” with respect to any
Person, shall mean such Person’s certificate of incorporation or other
organizational documents, its by-laws and any foreign, federal, state or local
law, statute, rule, regulation, ordinance, code, directive, writ, injunction,
decree, judgment or order applicable to such Person.
“Lien” or “Liens” shall mean any
mortgage, pledge, security interest, conditional sale or other title retention
agreement, encumbrance, lien, easement, claim, right, covenant, restriction,
right of way, warrant, option or charge of any kind.
“Material Adverse Change”
shall mean a material adverse change in the business, operations, assets,
liabilities, prospects, properties, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, taken as a
whole.
“New Capital Project” means
any project or series of projects involving the investment of more than $1.0
million of new capital for the acquisition or improvement of a fixed asset which
extends the life or increases the productivity of the asset, individually or in
the aggregate, which is not already contemplated by the Company’s cash flow
projections as of February 27, 2008, copies of which have been provided to the
Purchaser.
“Person” shall mean an
individual, corporation, trust, partnership, limited liability company, joint
venture, unincorporated organization, government body or any agency or political
subdivision thereof, or any other entity.
“Registration Rights
Agreement” shall mean the Registration Rights Agreement between the
Company and the Purchaser, in the form attached hereto as Exhibit D.
A-25
“Release” shall mean any past
or present release, spill, leak, leaching, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, disposing or dumping.
“Subsidiary(ies)” shall mean
any other corporation, limited liability company, association, joint stock
company, joint venture or business trust of which, as of the date hereof or
hereafter, (i) more than fifty percent (50%) of the outstanding voting stock,
share capital or other equity interests is owned either directly or indirectly
by any Person or one or more of its Subsidiaries, or (ii) the management of
which is otherwise controlled, directly, or indirectly through one or more
intermediaries, or both, by any Person and/or its
Subsidiaries. Unless otherwise specified to the contrary herein,
Subsidiary(ies) shall refer to the Company’s Subsidiary(ies).
“Transaction Documents” shall
mean this Agreement, the Warrant, the Registration Rights Agreement, and all
other agreements and instruments and any other documents, certificates,
instruments or agreements executed pursuant to or in connection with any such
document or this Agreement, as such documents may be amended from time to
time.
[SIGNATURE
PAGES FOLLOW]
A-26
IN
WITNESS WHEREOF, the Company and the Purchaser have executed this Purchase
Agreement as of the day and year first above written.
|
COMPANY:
|
PACIFIC
ETHANOL, INC.
By:________________________________________
Name:______________________________________
Title:_______________________________________
|
|
| PURCHASER: |
LYLES
UNITED, LLC
By:________________________________________
Gerald V. Lyles,
President
|
A-27
APPENDIX
B
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”).
B-1
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.
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-2
(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.
(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-3
(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).
(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).
B-4
(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.
(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.
B-5
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.
(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.
B-6
(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.
(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.
(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.
B-7
(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).
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;
B-8
(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;
(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”).
B-9
(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).
(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.
B-10
“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).
“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.
“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.
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:______________________________
Name: Joseph
W. Hansen
Title: Chief
Financial Officer
|
B-11
APPENDIX
C
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.
C-1
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.
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.
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.
C-2
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.
(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-3
(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.
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:
C-4
|
|
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.
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-5
(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.
(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:______________________________
Name: Neil
M. Koehler
Title: President
& CEO
|
C-6
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.
|
|
The
Warrant is currently exercisable to purchase a total of __________ Warrant
Shares.
|
|
|
The
undersigned Holder hereby exercises its right to purchase __________
Warrant Shares pursuant to the
Warrant.
|
|
|
The
Holder shall pay the sum of $__________ to the Company in accordance with
the terms of the Warrant.
|
|
|
Pursuant
to this exercise, the Company shall deliver to the holder __________
Warrant Shares in accordance with the terms of the
Warrant.
|
|
|
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)
|
C-7
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:
C-8
APPENDIX
D
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT
(the “Agreement”)
dated as of March 27, 2008, is by and among Pacific Ethanol, Inc., a Delaware
corporation (the “Company”), and Lyles United,
LLC, a Delaware limited liability company (the “Investor”).
WHEREAS, the Company and the
Investor have entered into a Securities Purchase Agreement dated March 18, 2008
(and, as amended from time to time, the “Purchase Agreement”),
providing for the purchase by the Investor of (i) 2,051,282 shares of the
Company’s Series B Cumulative Convertible Preferred Stock (the “Series B Preferred
Stock”) (such shares, together with any additional shares of the
Company’s Series B Preferred Stock issued as a dividend thereon, the “Shares”), and (ii) a
warrant (the “Warrant”)
to acquire up to 3,076,923 shares (the “Warrant Shares”) of the
Company’s common stock, par value $0.001 per share (the “Common Stock”);
and
WHEREAS, simultaneously with,
and as a condition to, the closing of the transactions contemplated in the
Purchase Agreement, the Company and the Investor desire to enter into this
Agreement to provide certain registration and other rights with respect to the
Registrable Securities (as hereinafter defined).
NOW, THEREFORE, in
consideration of the mutual covenants and agreements contained in this Agreement
and the Purchase Agreement, and intending to be legally bound, the parties
hereto agree as follows:
1. Definitions. As
used in this Agreement, the following terms have the meanings indicated below or
in the referenced sections of this Agreement:
“Adjustment Provisions” shall
have the meaning set forth in Section 3(a).
“Affiliate” shall have the
meaning set forth in the Purchase Agreement.
“Agreement” shall have the
meaning set forth in the recitals hereof.
“Business Day shall mean 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.
“Closing” shall have the
meaning set forth in the Purchase Agreement.
“Commission” shall mean the
United States Securities and Exchange Commission.
“Common Stock” shall have the
meaning set forth in the recitals hereof.
“Company” shall have the
meaning set forth in the recitals hereof.
“Conversion Shares” shall have
the meaning set forth in the Purchase Agreement.
“Demand Registration” shall
have the meaning set forth in Section 3(a).
“Exchange Act” shall
mean the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder.
D-1
“FINRA” shall mean the
Financial Industry Regulatory Authority, Inc.
“GAAP” shall mean generally
accepted accounting principals, as in effect in the United States of America
from time to time applied on a consistent basis.
“Investor” shall have the
meaning set forth in the recitals hereof, and its successors, assigns and
transferees.
“Investor Securities” shall
mean the Shares, the Warrant Shares, the Conversion Shares and the Note Warrant
Shares.
“Majority of the Registrable
Securities” shall have the meaning set forth in Section 2(b).
“Note Warrant Shares” shall
mean 100,000 shares of Common Stock acquired upon the exercise of the warrant
issued in connection with that certain Secured Promissory Note by and between
the Company and the Investor, dated November 28, 2007.
“Person” shall have the
meaning set forth in the Purchase Agreement.
“Piggyback Registration” shall
have the meaning set forth in Section 4(a).
“Purchase Agreement” shall
have the meaning set forth in the recitals hereof.
“Registrable Securities” shall
mean: (i) the Conversion Shares; (ii) the Warrant Shares;
(iii) the Note Warrant Shares; and (iv) any securities issued or
issuable with respect to the Conversion Shares, Warrant Shares or Note Warrant
Shares by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization with respect to any of the securities referenced above; provided, however, that a
Registrable Security ceases to be a Registrable Security when (a) it is
registered under the Securities Act and disposed of in accordance with the
registration statement covering it or (b) it is sold or transferred in
accordance with the requirements of Rule 144 (or similar provisions then in
effect) promulgated by the Commission under the Securities Act (“Rule 144”).
“Registration Expenses” shall
have the meaning set forth in Section 6(a).
“Registration Statement” shall
mean any registration statements contemplated by Section 3 and
any additional registration statements contemplated by Section 4,
including (in each case) the prospectus, amendments and supplements to such
registration statement or prospectus, all exhibits attached thereto, and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.
“Representatives” of a Person
means the officers, employees, independent accountants, independent legal
counsel and other representatives of such Person.
“Rule 415” shall mean Rule 415
(or similar provisions then in effect) promulgated by the Commission under the
Securities Act.
“Securities Act” shall mean
the Securities Act of 1933, as amended, and the rules and regulations
thereunder.
“Shares” shall have the
meaning set forth in the recitals hereof.
D-2
“Subsidiary” shall have the
meaning set forth in the Purchase Agreement.
“Termination Date” shall mean
the date that the Investor and its Affiliates, as a group, own less than 10% of
the Investor Securities. For purposes of calculating such percentage
of ownership, each Share shall be deemed to be
equivalent to the number of shares of Common Stock into which they are
convertible.
“Warrant” shall have the
meaning set forth in the Purchase Agreement.
“Warrant Shares” shall have the
meaning set forth in the Purchase Agreement.
2. Securities
Subject to this Agreement.
(a) Holders
of Registrable Securities. A Person is deemed to be a holder
of Registrable Securities whenever that Person owns, directly or beneficially,
or has the right to acquire, Registrable Securities, disregarding any legal
restrictions upon the exercise of that right.
(b) Majority
of the Registrable Securities. As used in this Agreement, the
term “Majority of the Registrable Securities” means more than 50% of the
Registrable Securities being registered or, where the context requires, a
majority in interest of the Registrable Securities.
3. Demand
Registration.
(a) Request
for Registration. Subject to the provisions of
Section 3(b), at any time after the first anniversary of the Closing, (A)
one or more holders of the Registrable Securities representing a Majority of the
Registrable Securities may demand that the Company register all or part of its
Registrable Securities under the Securities Act (a “Demand Registration”) on Form
S-1 (or a similar form then in effect) promulgated by the Commission under the
Securities Act, provided that the Company shall not be obligated to effect a
Demand Registration (i) during the one hundred eighty (180) days period
commencing with the date of any secondary public offering or (ii) if the Company
delivers notice to the holders of Registrable Securities within thirty (30) days
of any registration request of its intent to file a registration statement for a
secondary public offering within sixty (60) days, during the period starting
with the date sixty (60) days prior to the Company’s good faith estimate of the
date of filing of, and ending on a date one hundred eighty (180) days after the
date of such secondary public offering, provided that the Company is actively
employing in good faith commercially best efforts to cause the registration
statement covering such offering to become effective and (B) one or more holders
of Registrable Securities representing a Majority of the Registrable Securities
may request a Demand Registration on Form S-3 (or a similar form then in
effect), provided that the Registrable Securities to be covered by any such Form
S-3 shall be expected to result in aggregate gross proceeds of not less than
$1,000,000. Within ten (10) days after receipt of a demand, the
Company will notify in writing all holders of Registrable Securities of the
demand. Any holder who wants to include its Registrable Securities in
the Demand Registration must notify the Company within ten (10) Business Days of
receiving the notice of the Demand Registration. Except as provided
in this Section 3, the Company will include in all Demand Registrations all
Registrable Securities for which the Company receives the timely written
requests for inclusion. Any such request to be included in a Demand
Registration shall not be counted as a Demand Registration under this
Section 3. All demands or requests made pursuant to this
Section 3(a) must specify the number of Registrable Securities to be
registered and the intended method of disposing of the Registrable
Securities. The Company acknowledges that the plan of distribution
contemplated by any such Registration Statement shall include offers and sales
through underwriters or agents, offers and sales directly to investors, block
trades and such other methods of offer and sale and that offers and sales may be
on a continued or delayed basis under Rule 415. The Company will use its
commercially best efforts to cause such Registration Statement to be declared
effective by the Commission and to remain effective until
such time as all of the shares of Common Stock designated thereunder are sold or
the holders thereof are entitled to rely on Rule 144 for sales of Registrable
Securities without registration under the Securities Act and without compliance
with the public information, sales volume, manner of sale or notice requirements
of Rule 144(c), (e), (f) or (h). The Company acknowledges that at the
time the Company files any Registration Statement pursuant to this
Section 3 the number of Registrable Securities may not be fixed due to the
antidilution and other provisions related to the Shares (“Adjustment
Provisions”). Accordingly, the Company agrees that it will
register the number of Conversion Shares, Warrant Shares and Note Warrant Shares
held by or issuable to the Investor as of the date of the filing of the
Registration Statement and, to the extent permitted under the applicable rules
under the Securities Act, the additional number of shares of Common Stock
issuable pursuant to the Adjustment Provisions. The Company agrees
that, thereafter, it will file, as soon as practicable but in no event later
than thirty (30) days after the issuance of additional Registrable Securities
that are not covered by such Registration Statement (due to the effect of the
Adjustment Provisions) such amendments and/or supplements to the Registration
Statement, and such additional Registration Statements as are necessary in order
to ensure that at least 100% of the Conversion Shares, Warrant Shares and Note
Warrant Shares held by or issuable to the Investor are included in a
Registration Statement, and the Company will use its commercially best efforts
to cause such amendments, supplements and additional Registration Statements to
be declared effective within ninety (90) days following the issuance of such
additional Registrable Securities that are not otherwise covered by an effective
Registration Statement.
D-3
(b) Number of
Demands. The holders of Registrable Securities shall have the
right to two (2) Demand Registrations on Form S-1 (or a similar form then in
effect) and shall have the right to an unlimited number of Demand Registrations
on Form S-3 (or a similar form then in effect); provided, however, that the
Company shall not be obligated to effect more than one (1) Demand Registration
on Form S-3 in any calendar year.
(c) Registration
Expenses. The Company shall pay or reimburse to the holders of
the Registrable Securities included in a Demand Registration all Registration
Expenses of those holders in connection with any Demand Registration (including
the reasonable fees and disbursements of one counsel for such holders in
connection with each such Demand Registration not to exceed $25,000 per
registration, as described in Section 6).
(d) Selection
of Underwriters; Priority on Demand Registrations. If the
holders of Registrable Securities initiating a Demand Registration intend to
distribute Registrable Securities covered by their request by means of an
underwriting, such holders shall, after consultation with the Company, select
the investment banker(s) and manager(s) that will administer the offering;
provided, that the Company shall have given its prior written consent to such
selection (which consent shall be not unreasonably withheld). The
Company and the holders of Registrable Securities whose shares are being
registered shall enter into a customary underwriting agreement with such
investment banker(s) and manager(s).
If the
managing underwriter advises the Company, in writing or otherwise, that an
underwriters’ over-allotment option, not in excess of fifteen percent (15%) of
the total offering to be so effected, is necessary or desirable for the
marketing of such offering, all Registrable Securities which are to be included
in such offering pursuant to this Section 3(d) and
any other securities shall be allocated pro rata to the primary portion of such
offering and the underwriters’ over-allotment portion on the basis of the total
number of Registrable Securities and other securities requested to be included
in the registration.
Notwithstanding
any other provision of this Section 3, if the
managing underwriter advises the Company, in writing or otherwise, that the
total number or dollar amount of securities requested to be included in the
registration exceeds the number or dollar amount of securities that can be sold,
the Company will include the securities in the registration in the following
order of priority: (i) first, among all holders requesting to include
Registrable Securities in the Demand Registration (allocated pro rata among the
holders of Registrable Securities requested to be included in the registration,
on the basis of the dollar amount or number of Registrable Securities requested
to be included, as the case may be); (ii) second, any other securities (provided
they are of the same class as the securities sold by the Company) requested to
be included, allocated among the holders of such securities in such proportions
as the Company and those holders may agree; and (iii) third, to the Company for
its account.
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If any
holder of Registrable Securities (other than the holder making the demand)
disapproves of the terms of the underwriting, such holder may withdraw therefrom
by giving written notice to the Company and the managing
underwriter.
(e) Delay in
Filing. Notwithstanding the foregoing, the Company may delay
in filing a registration statement in connection with a Demand Registration and
may withhold efforts to cause the registration statement to become effective, if
the Company determines in good faith that such registration might involve
initial or continuing disclosure obligations that the Board of Directors of the
Company determines, in good faith, will not be in the best interest of the
Company’s stockholders. The Company may exercise such right to delay
or withhold efforts not more than once in any twelve (12) month period and for
not more than ninety (90) days at a time. If, after a registration
statement becomes effective, the Company advises the holders of registered
shares that the Company considers it appropriate for the registration statement
to be amended, the Company shall use its best efforts to amend such registration
statement, and the holders of such shares shall suspend any further sales of
their registered shares until the Company advises them that the amended
registration statement has been declared effective.
(f) Effective
Demand Registration. A registration shall not constitute a
Demand Registration until it has become effective and remains continuously
effective for the lesser of (i) the period during which all Registrable
Securities registered in the Demand Registration are sold and (ii) three hundred
sixty (360) days; provided, however, that a
registration shall not constitute a Demand Registration if (x) after such Demand
Registration has become effective, such registration or the related offer, sale
or distribution of Registrable Securities thereunder is interfered with by any
stop order, injunction or other order or requirement of the Commission or other
governmental agency or court for any reason not attributable to the holder
requesting the Demand Registration and such interference is not thereafter
eliminated, or (y) the conditions specified in the underwriting agreement, if
any, entered into in connection with such Demand Registration are not satisfied
or waived, other than by reason of a failure on the part of the holder
requesting the Demand Registration.
4. Piggyback
Registrations.
(a) Right to
Piggyback. Whenever the Company proposes to register any of
its securities in an underwritten offering under the Securities Act, whether for
its own account or for the account of another stockholder (except for the
registration of securities to be offered pursuant to an employee benefit plan on
Form S-8, pursuant to a registration made on Form S-4 or any successor forms
then in effect and except for the registration of securities held by Cascade
Investment, L.L.C. (“Cascade”) pursuant to the
terms and conditions of that certain Registration Rights and Stockholders
Agreement dated as of April 13, 2006 between the Company and Cascade) at any
time other than pursuant to a Demand Registration and the registration form to
be used may be used for the registration of the Registrable Securities (a “Piggyback Registration”), it
will so notify in writing all holders of Registrable Securities no later than
the earlier to occur of (i) the tenth (10th) day following the Company’s receipt
of notice of exercise of other demand registration rights, or (ii) forty-five
(45) days prior to the anticipated filing date. Subject to the
provisions of Section 4(c),
the Company will include in the Piggyback Registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion within fifteen (15) days after the issuance of the Company’s
notice. Such Registrable Securities may be made subject to an
underwriters’ over-allotment option, if so requested by the managing
underwriter. The holders of Registrable Securities may withdraw all
or any part of the Registrable Securities from a Piggyback Registration at any
time before ten (10) business days prior to the effective date of the Piggyback
Registration. In any Piggyback Registration, the Company, the holders
of Registrable Securities and any Person who hereafter becomes entitled to
register its securities in a registration initiated by the Company must sell
their securities on the same terms and conditions. A registration of
Registrable Securities pursuant to this Section 4 shall
not be counted as a Demand Registration pursuant to Section 3.
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(b) Piggyback
Expenses. The Company shall pay or reimburse to the holders of
the Registrable Securities included in a Piggyback Registration all Registration
Expenses of those holders in connection with the Piggyback Registration
(including the reasonable fees and disbursements of one counsel for such holders
in connection with each such Piggyback Registration not to exceed $25,000 per
Piggyback Registration, as described in Section 6).
(c) Underwriting;
Priority on Piggyback Registrations. The right of any such
holder to be included in an underwritten registration pursuant to this Section 4 shall
be conditioned upon such holder’s participation in such underwriting and the
inclusion of such holder’s Registrable Securities in the underwriting to the
extent provided herein. All holders proposing to distribute their
Registrable Securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. If the managing
underwriter gives the Company its written opinion that the total number or
dollar amount of securities requested to be included in the registration exceeds
the number or dollar amount of securities that can be sold, the Company will
include the securities in the registration in the following order of priority:
(i) first, subject to the first proviso below, all securities the Company or the
stockholder, if any, on whose account securities are being registered proposes
to sell; (ii) second, subject to the first proviso below, up to the full number
or dollar amount of Registrable Securities requested to be included in the
registration (allocated pro rata among the holders of Registrable Securities
requested to be included in the registration, on the basis of the dollar amount
or number of Registrable Securities requested to be included, as the case may
be); and (iii) third, any other securities (provided they are of the same class
as the securities sold by the Company) requested to be included, allocated among
the holders of such securities in such proportions as the Company and those
holders may agree; provided, however, that at
least twenty percent (20%) of the Registrable Securities requested to be
included in such registration shall be included in the offering; provided, further, that,
(i) the holders of Registrable Securities shall not be subject to any cutback in
the amount of Registrable Securities requested to be included in the
registration unless all other holders of securities requesting to be included in
such registration other than the stockholder, if any, on whose account
securities are being registered have been excluded from such
registration. In the event that the managing underwriter advises the
Company that an underwriters’ over-allotment option is necessary or advisable,
the allocation provided for in this Section 4(c)
shall apply to the determination of which securities are to be included in the
registration of such shares. Except with the prior written consent of
each holder of Registrable Securities, the Company shall not grant to any holder
of the Company’s securities any right to Piggyback Registration which would
reduce the amount of Registrable Securities includable in such
registration.
`(d) Selection
of Underwriters. If any Piggyback Registration is an
underwritten offering, the Company will select as the investment banker(s) and
manager(s) that will administer the offering a nationally recognized investment
banker(s) and manager(s) with demonstrable industry-specific expertise and
experience. The Company and the holders of Registrable Securities
whose shares are being registered shall enter into a customary underwriting
agreement with such investment banker(s) and manager(s), provided, however, that the
liability of any holder of Registrable Securities shall be limited to such
holder’s net proceeds received from the sale of its Registrable Securities in
such offering and such limitation shall not be amended by an underwriting
agreement or arrangement.
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(e) Right to
Terminate Registration. The Company shall have the right to
terminate or withdraw any registration initiated by it under this Section 4 prior
to the effectiveness of such registration whether or not any holder has elected
to include securities in such registration. The Registration Expenses
of such withdrawn registration shall be borne by the Company in accordance with
Section 7.
5. Registration
Procedures.
(a) Obligations
of the Company. Whenever required to register any Registrable
Securities, the Company shall as expeditiously as practicable:
(i) prepare
and file with the Commission to permit a public offering and resale of the
Registrable Securities under the Securities Act which offering may, if so
requested, be on a delayed or continuous basis under Rule 415 a registration
statement on the appropriate form and use commercially best efforts to cause the
registration statement to become effective. At least ten (10) days
before filing a registration statement or prospectus or at least three (3)
Business Days before filing any amendments or supplements thereto, the Company
will furnish to the counsel of the holders of a Majority of the Registrable
Securities being registered copies of all documents proposed to be filed for
that counsel’s review and approval, which approval shall not be unreasonably
withheld or delayed;
(ii) immediately
notify each seller of Registrable Securities of any stop order threatened or
issued by the Commission and take all actions reasonably required to prevent the
entry of a stop order or if entered to have it rescinded or otherwise
removed;
(iii) prepare
and file with the Commission such amendments and supplements to the registration
statement and the corresponding prospectus necessary to keep the registration
statement effective, in the case of the registration required by Section 3 for
the period provided in Section 3 and in
any other case for one hundred twenty (120) days or such shorter period as may
be required to sell all Registrable Securities covered by the registration
statement; and comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by the registration statement during
each period in accordance with the sellers’ intended methods of disposition as
set forth in the registration statement;
(iv) furnish
to each seller of Registrable Securities a sufficient number of copies of the
registration statement, each amendment and supplement thereto (in each case
including all exhibits), the corresponding prospectus (including each
preliminary prospectus), and such other documents as a seller may reasonably
request to facilitate the disposition of the seller’s Registrable
Securities;
(v) use
its commercially best efforts to register or qualify the Registrable Securities
under securities or blue sky laws of jurisdictions in the United States of
America as any seller requests within twenty (20) days following the original
filing of a registration statement and do any and all other reasonable acts and
things that may be necessary or advisable to enable the seller to consummate the
disposition of the seller’s Registrable Securities in such jurisdiction; provided, however, that the
Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any jurisdiction in which it is not then qualified or
to file any general consent to service of process;
D-7
(vi) notify
each seller of Registrable Securities, at any time when a prospectus is required
to be delivered under the Securities Act, of any event as a result of which the
prospectus or any document incorporated therein by reference contains an untrue
statement of a material fact or omits to state any material fact necessary to
make the statements therein not misleading in light of the circumstances under
which such statements were made, and use best efforts to prepare a supplement or
amendment to the prospectus or any such document incorporated therein so that
thereafter the prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading in light of the circumstances under which such statements were
made;
(vii) cause
all registered Registrable Securities to be listed on each securities exchange,
if any, on which similar securities issued by the Company are then
listed;
(viii) provide
an institutional transfer agent and registrar and a CUSIP number for all
Registrable Securities on or before the effective date of the registration
statement;
(ix) enter
into such customary agreements, including an underwriting agreement in customary
form and take all other actions in connection with those agreements as the
holders of a Majority of the Registrable Securities being registered or the
underwriters, if any, reasonably request to expedite or facilitate the
disposition of the Registrable Securities;
(x) make
available for inspection by any seller of Registrable Securities, any
underwriter participating in any disposition pursuant to the registration
statement, and any attorney, accountant, or other agent of any seller or
underwriter, all financial and other records, pertinent corporate documents, and
properties of the Company, and cause the Company’s officers, directors and
employees to supply all information reasonably requested by any seller,
underwriter, attorney, accountant, or other agent in connection with the
registration statement; provided that an appropriate confidentiality agreement
is executed by any such seller, underwriter, attorney, accountant or other
agent;
(xi) in
connection with any underwritten offering, obtain a “comfort” letter from the
Company’s independent public accountants in customary form and covering those
matters customarily covered by “comfort” letters as the
holders of a Majority of the Registrable Securities being registered or the
managing underwriter reasonably requests, addressed to the underwriters and to
the holders of the Registrable Securities being registered;
(xii) in
connection with any underwritten offering, furnish an opinion of counsel
representing the Company for the purposes of the registration, in the form and
substance customarily given to underwriters in an underwritten public offering
and reasonably satisfactory to counsel representing the holders of Registrable
Securities being registered and the underwriter(s) of the offering, addressed to
the underwriters and to the holders of the Registrable Securities being
registered;
(xiii) use
its best efforts to comply with all applicable rules and regulations of the
Commission, and make available to its security holders, as soon as reasonably
practicable, an earnings statement complying with the provisions of
Section 11(a) of the Securities Act and covering the period of at least
twelve (12) months, but not more than eighteen (18) months, beginning with the
first month after the effective date of the Registration Statement;
D-8
(xiv) cooperate
with each seller of Registrable Securities and each underwriter participating in
the disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the FINRA; and
(xv) take
all other steps reasonably necessary to effect the registration of the
Registrable Securities contemplated hereby.
(b) Seller
Information. In the event of any registration by the Company,
from time to time, the Company may require each seller of Registrable Securities
subject to the registration to furnish to the Company information regarding such
seller, the Registrable Securities held by them, and the distribution of the
securities subject to the registration, and such seller shall furnish all such
information reasonably requested by the Company.
(c) Notice to
Discontinue. Each holder of Registrable Securities agrees by
acquisition of such securities that, upon receipt of any notice from the Company
of any event of the kind described in Section 5(a)(vi),
the holder will discontinue disposition of Registrable Securities until the
holder receives copies of the supplemented or amended prospectus contemplated by
Section 5(a)(vi). In
addition, if the Company requests, the holder will deliver to the Company (at
the Company’s expense) all copies, other than permanent file copies then in the
holder’s possession, of the prospectus covering the Registrable Securities
current at the time of receipt of the notice. If the Company gives
any such notice, the time period mentioned in Section 5(a)(iii)
shall be extended by the number of days elapsing between the date of notice and
the date that each seller receives the copies of the supplemented or amended
prospectus contemplated in Section 5(a)(vi).
(d) Notice by
Holders. Whenever the holders of Registrable Securities have
requested that any Registrable Securities be registered pursuant to this
Agreement, those holders shall notify the Company, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event concerning that holder of the Registrable Securities, as
a result of which the prospectus included in the registration statement contains
an untrue statement of a material fact or omits to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
6. Registration
Expenses. All costs and expenses incurred in connection with
the Company’s performance of or compliance with this Agreement (the “Registration Expenses”) shall
be paid by the Company as provided in this Agreement. The term “Registration Expenses”
includes without limitation all registration filing fees, reasonable
professional fees and other reasonable expenses of the Company’s compliance with
federal, state and other securities laws (including fees and disbursements of
counsel for the underwriters in connection with state or other securities law
qualifications and registrations), printing expenses, messenger, telephone and
delivery expenses; reasonable fees and disbursements of counsel for the Company
and for one counsel for the holders of Registrable Securities not to exceed
$25,000 per registration; reasonable fees and disbursement of the independent
certified public accountants selected by the Company (including the expenses of
any audit or “comfort”
letters required by or incident to performance of the obligations contemplated
by this Agreement); fees and expenses of the underwriters (excluding discounts
and commissions); fees and expenses of any special experts retained by the
Company at the request of the managing underwriters in connection with the
registration; and applicable stock exchange and NASDAQ registration and filing
fees. The term “Registration Expenses” does
not include underwriting fees or commissions or transfer taxes, all of which
shall be paid by each of the sellers of Registrable Securities with respect to
the Registrable Securities sold by such seller.
D-9
7. Indemnification.
(a) Indemnification
by Company. In the event of any registration of Registrable
Securities under the Securities Act pursuant to this Agreement, to the full
extent permitted by law, the Company agrees to indemnify and hold harmless each
holder of Registrable Securities, its officers, directors, trustees, partners,
employees, advisors and agents, and each Person who controls the holder (within
the meaning of the Securities Act and the Exchange Act) against any and all
losses, claims, damages, liabilities and expenses arising out of (i) any untrue
or allegedly untrue statement of material fact contained in or incorporated by
reference into any registration statement or any amendment thereof under which
such Registrable Securities were registered under the Securities Act, any
prospectus or preliminary prospectus contained therein or any amendment thereof
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except to the extent the untrue statement or omission resulted from information
that the holder furnished in writing to the Company expressly for use therein,
and (ii) any failure to comply with any law, rule or regulation applicable to
such registration. Such indemnity shall remain in full force and
effect, regardless of any investigation made by such indemnified party, and
shall survive the transfer of such Registrable Securities by such
holder. In connection with a firm or best efforts underwritten
offering, to the extent customarily required by the managing underwriter, the
Company will indemnify the underwriters, their officers and directors and each
Person who controls the underwriters (within the meaning of the Securities Act
and the Exchange Act), to the extent customary in such agreements.
(b) Indemnification
by Holders of Securities. In connection with any registration
statement, each participating holder of Registrable Securities will furnish to
the Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any registration statement or
prospectus. Each participating holder agrees, severally and not
jointly, to indemnify and hold harmless, to the extent permitted by law, the
Company, its directors, officers, trustees, partners, employees, advisors and
agents, and each Person who controls the Company (within the meaning of the
Securities Act and the Exchange Act) against any and all losses, claims,
damages, liabilities and expenses arising out of any untrue or allegedly untrue
statement of a material fact or any omission or alleged omission to state a
material fact required to be stated in the registration statement or prospectus
or any amendment thereof or supplement thereto necessary to make the statements
therein not misleading, but only to the extent that the untrue statement or
omission is contained in or omitted from any information or affidavit the holder
furnished in writing to the Company expressly for use therein and only in an
amount not exceeding the net proceeds received by the holder with respect to
securities sold pursuant to such registration statement. Such
indemnity shall remain in full force and effect, regardless of any investigation
made by the Company, and shall survive the transfer of such Registrable
Securities by such holder. In connection with a firm or best efforts
underwritten offering, to the extent customarily required by the managing
underwriter, each participating holder of Registrable Securities will indemnify
the underwriters, their officers and directors and each Person who controls the
underwriters (within the meaning of the Securities Act and the Exchange Act), to
the same extent as it has indemnified the Company; provided, however, that the
indemnity obligations of any holder contained in such agreement shall be limited
to the amount of such holder’s net proceeds received from the sale of its
Registrable Securities in such offering.
(c) Indemnification
Proceedings. Any Person entitled to indemnification under this
Agreement will (i) give prompt notice to the indemnifying party of any claim
with respect to which it seeks indemnification and (ii) unless in the
indemnified party’s reasonable judgment a conflict of interest may exist between
the indemnified and indemnifying parties with respect to the claim, permit the
indemnifying party to assume the defense of the claim with counsel reasonably
satisfactory to the indemnified party. If the indemnifying party does
not assume the defense, the indemnifying party will not be liable for any
settlement made without its consent (but that consent may not be unreasonably
withheld). No indemnifying party will consent to entry of any
judgment or will enter into any settlement that does not include as an
unconditional term thereof the claimant’s or plaintiff’s release of the
indemnified party from all liability concerning the claim or litigation or which
includes any non-monetary settlement. An indemnifying party who is
not entitled to or elects not to assume the defense of a claim will not be under
an obligation to pay the fees and expenses of more than one counsel for all
parties indemnified by the indemnifying party with respect to the claim, unless
in the reasonable judgment of any indemnified party a conflict of interest may
exist between the indemnified party and any other indemnified party with respect
to the claim, in which event the indemnifying party shall be obligated to pay
the fees and expenses of no more than one additional counsel for the indemnified
parties.
D-10
(d) Contribution. If
the indemnification provided for in Section 7(a) or
(b) is unavailable to an indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
indemnifying party thereunder shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative fault
of the indemnified party and the indemnifying party in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of the indemnified party and the
indemnifying party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnified party and the indemnifying party and the parties’
relative intent and knowledge.
The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 7(d)
were determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding anything herein to
the contrary, no participating holder of Registrable Securities acting as an
indemnifying party shall be required to contribute any amount in excess of the
amount by which the net proceeds of the offering (before deducting expenses, if
any) received by such participating holder exceeds the amount of any damages
that such participating holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The
obligations of the Company and the holders of Registrable Securities under this
Section 7
shall survive the completion of any offering of Registrable Securities in a
registration statement, including the termination of this
Agreement.
8, Rule
144. With a view to making available to the holders the
benefits of certain rules and regulations of the Commission which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its commercially best efforts to:
(a) make
and keep public information available, as those terms are understood and defined
in Commission Rule 144 or any similar or analogous rule promulgated under the
Securities Act, at all times after the date hereof;
(b) file
with the Commission, in a timely manner, all reports and other documents
required of the Company under the Exchange Act; and
(c) so
long as a holder owns any Registrable Securities, furnish to such holder
forthwith upon request: a written statement by the Company as to its compliance
with the reporting requirements of said Rule 144 of the Securities Act, and of
the Exchange Act; a copy of the most recent annual or quarterly report of the
Company; and such other reports and documents as a holder may reasonably request
in availing itself of any rule or regulation of the Commission allowing it to
sell any such securities without registration.
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9. Participation
in Underwritten Registration. No Person may participate in any
underwritten registration without (a) agreeing to sell securities on the basis
provided in underwriting arrangements approved by the Persons entitled hereunder
to approve such arrangements (the holders of Registrable Securities in a Demand
Registration pursuant to Section 3(d) and
the Company in a piggyback registration pursuant to Section 4(d)), and
(b) completing and executing all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required by the
underwriting arrangements.
10. Available
Financial Information. In the event that the Company ceases to
be a reporting issuer under the Exchange Act, then for so long as the Company is
not a reporting issuer or for so long as the Company shall fail to comply with
its reporting obligations under the Exchange Act, the Company shall, to the
extent that the Investor beneficially owns any of the Shares or Common Stock,
deliver, or cause to be delivered, to the Investor:
(a) as
soon as practicable after the end of each fiscal year of the Company, and in any
event within ninety (90) days thereafter, a consolidated and consolidating
balance sheets of the Company as of the end of such fiscal year, and
consolidated and consolidating statements of income, changes in stockholders’
equity and cash flows of the Company for such year, prepared in accordance with
GAAP and setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail and followed promptly thereafter
(to the extent not then available) by such financial statements accompanied by
the audit report with respect thereto of independent public accountants of
recognized national standing selected by the Company; and
(b) as
soon as practicable after the end of the first, second and third quarterly
accounting periods in each fiscal year of the Company, and in any event within
forty-five (45) days after the end of each such period, consolidated balance
sheets of the Company as of the end of each quarterly period, and consolidated
statements of income, changes in stockholders’ equity and cash flows of the
Company for such period and for the current fiscal year to date, prepared in
accordance with GAAP and setting forth in comparative form the figures for the
corresponding periods of the previous fiscal year, subject to changes resulting
form normal year-end audit adjustments, all in reasonable detail and certified
by the principal financial or accounting officer of the Company.
11. Access. During
the period commencing on the date of the Closing and ending on the Termination
Date, the Company shall afford, provide and furnish, and shall cause its
Subsidiaries and the Representatives of the Company and its Subsidiaries to
afford, provide and furnish to the Investor and their
Representatives:
(i) during
normal business hours and upon reasonable advance notice, reasonable access to
the Representatives, properties, plants and other facilities and to all books
and records of the Company and each of its Subsidiaries;
(ii) all
financial, operating and other data and information regarding the Company and
its Subsidiaries as the Investor and its Representatives may reasonably request;
and
(iii) the
opportunity to discuss the affairs, finances, operations and accounts of the
Company and its Subsidiaries with the Company’s officers on a periodic
basis.
D-12
12, Miscellaneous.
(a) Recapitalizations,
Exchanges, etc. The provisions of this Agreement shall apply
to the full extent set forth herein with respect to (i) the Registrable
Securities, (ii) any and all shares of voting common stock of the Company into
which the Registrable Securities are converted, exchanged or substituted in any
recapitalization or other capital reorganization by the Company and (iii) any
and all equity securities of the Company or any successor or assign of the
Company (whether by merger, consolidation, sale of assets or otherwise) which
may be issued in respect of, in conversion of, in exchange for or in
substitution of, or as a dividend upon, the Registrable Securities and shall be
appropriately adjusted for any stock dividends, splits, reverse splits,
combinations, recapitalizations and the like occurring after the date
hereof. The Company shall use its best efforts to cause any successor
or assign (whether by sale, merger or otherwise) to enter into a new
registration rights agreement with the holders of Registrable Securities on
terms substantially the same as this Agreement as a condition of any such
transaction.
(b) Amendment. This
Agreement may be amended or modified only by a written agreement executed by (i)
the Company and (ii) the Investor.
(c) Attorneys’
Fees. In any legal action or proceeding brought to enforce any
provision of this Agreement, the prevailing party shall be entitled to recover
all reasonable expenses, charges, court costs and attorneys’ fees in addition to
any other available remedy at law or in equity.
(d) Benefit
of Parties; Assignment. Subject to the terms and conditions of the
Purchase Agreement and this subsection (d), including, without limitation, the
transfer restrictions contained therein, all of the terms and provisions of this
Agreement shall be binding on and inure to the benefit of the parties and their
respective successors and assigns, including, without limitation, all subsequent
holders of securities entitled to the benefits of this Agreement who agree in
writing to become bound by the terms of this Agreement.
(e) Captions. The
captions of the sections and subsections of this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any provision of this Agreement.
(f) Cooperation. The
parties agree that after execution of this Agreement they will from time to
time, upon the request of any other party and without further consideration,
execute, acknowledge and deliver in proper form any further instruments and take
such other action as any other party may reasonably require to carry out
effectively the intent of this Agreement.
(g) Counterparts;
Facsimile Execution. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
agreement. Facsimile execution and delivery of this Agreement shall
be legal, valid and binding execution and delivery for all
purposes.
(h) Entire
Agreement. Each party hereby acknowledges that no other party
or any other person or entity has made any promises, warranties, understandings
or representations whatsoever, express or implied, not contained in the
Transaction Documents (as defined in the Purchase Agreement) and acknowledges
that it has not executed this Agreement in reliance upon any such promises,
representations, understandings or warranties not contained herein or therein
and that the Transaction Documents supersede all prior agreements and
understandings between the parties with respect thereto. There are no
promises, covenants or undertakings other than those expressly set forth or
provided for in the Transaction Documents.
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(i) Governing
Law. The internal law of the State of California will govern
the interpretation, construction, and enforcement of this Agreement and all
transactions and agreements contemplated hereby, notwithstanding any state’s
choice of law rules to the contrary.
(j) Submission
to Jurisdiction; Consent to Service of Process. The parties
hereto hereby irrevocably submit to the exclusive jurisdiction of any federal or
state court located within Fresno County, California, over any dispute arising
out of or relating to this Agreement or any of the transactions contemplated
hereby and each party hereby irrevocably agrees that all claims in respect of
such dispute or any suit, action or proceeding related thereto shall be heard
and determined in such courts. The parties hereby irrevocably waive,
to the fullest extent permitted by applicable law, any objection which they may
now or hereafter have to the laying of venue of any such dispute brought in such
court or any defense of inconvenient forum for the maintenance of such
dispute. Each of the parties hereto agrees that a judgment in any
such dispute may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law.
(k) No
Inconsistent Agreements. The Company represents and warrants
that, except as disclosed in the Purchase Agreement, it has not granted to any
Person the right to request or require the Company to register any securities
issued by the Company other than the rights contained herein. The
Company shall not, except with the prior written consent of at least a Majority
of the Registrable Securities, enter into any agreement with respect to its
securities that shall grant to any Person registration rights that in any way
conflict with or are prior to or equal in right to the rights provided under
this Agreement.
(l) Notices. All
notices, requests, demands, or other communications that are required or may be
given pursuant to the terms of this Agreement shall be in writing and properly
addressed to the addresses of the parties set forth in the Purchase Agreement or
to such other address(es) as the respective parties hereto shall from time to
time designate to the other(s) in writing. All notices shall be
effective upon receipt.
(m) Specific
Performance. Each of the parties agrees that damages for a
breach of or default under this Agreement would be inadequate and that in
addition to all other remedies available at law or in equity that the parties
and their successors and assigns shall be entitled to specific performance or
injunctive relief, or both, in the event of a breach or a threatened breach of
this Agreement.
(n) Validity
of Provisions. Should any part of this Agreement for any reason be
declared by any court of competent jurisdiction to be invalid, that decision
shall not affect the validity of the remaining portion, which shall continue in
full force and effect as if this Agreement had been executed with the invalid
portion eliminated; provided, however, that this
Agreement shall be interpreted to carry out to the greatest extent possible the
intent of the parties and to provide to each party substantially the same
benefits as such party would have received under this Agreement if such invalid
part of this Agreement had been enforceable. Whenever the words “include” or “including” are used in the
Agreement, they shall be deemed to be followed by the words “without
limitation.”
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date
first above written.
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PACIFIC
ETHANOL, INC.
By:______________________________________
Neil M. Koehler, President and CEO
LYLES
UNITED, LLC
By:______________________________________
William M. Lyles IV, Vice
President
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D-14
APPENDIX
E
Pacific
Ethanol, Inc.
400
Capitol Mall, Suite 2060
Sacramento,
CA 95814
March 27,
2008
Lyles
United, LLC
1210 West
Olive Avenue
Fresno,
CA 93728
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Re:
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Dividend
Rights
|
Ladies
and Gentlemen:
This side
letter agreement (the “Letter
Agreement”) is provided with reference to that certain Securities
Purchase Agreement (the “Securities Purchase
Agreement”) dated March 18, 2008, by and between Pacific Ethanol, Inc., a
Delaware corporation (the “Company”), and Lyles United, LLC, a
Delaware limited liability company (the “Purchaser”), with reference to the
Company’s Certificate of Designations, Powers, Preferences, and Rights of the
Series B Cumulative Convertible Preferred Stock (the “Series B Certificate of
Designations”) with respect to its Series B Cumulative Convertible
Preferred Stock, $.001 par value per share (the “Series B Preferred Stock”),
and with reference to the Company’s Certificate of Designations, Powers,
Preferences, and Rights of the Series A Cumulative Redeemable Convertible
Preferred Stock (the “Series A
Certificate of Designations”) with respect to its Series A Cumulative
Redeemable Convertible Preferred Stock, $.001 par value per share (the “Series A Preferred
Stock”). Capitalized terms not defined herein shall have the
respective meanings given to such terms in the Securities Purchase
Agreement.
In
connection with the closing of the transactions contemplated by the Securities
Purchase Agreement and in furtherance thereof, the Company desires to waive
certain rights held by the Company and set forth in the Series B Certificate of
Designations in favor of the Purchaser, in its capacity as the sole holder of
all of the Company’s outstanding shares of Series B Preferred
Stock.
In
consideration of the mutual covenants herein contained, and for other valuable
consideration the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Waiver of
Series B PIK Right. The Company hereby expressly waives its
right under Section 3(a) of the Series B Certificate of Designations to pay any
dividends due and payable to the Purchaser as a holder of Series B Preferred
Stock in shares of Series B Preferred Stock (the “Series B PIK
Right”). The Company hereby covenants that it shall not,
without the prior written consent of the Purchaser, exercise or attempt to
exercise the Series B PIK Right provided for in Section 3(a) of the Series B
Certificate of Designations at any time following the date of this Letter
Agreement. In connection with waiving its Series B PIK Right, the
Company hereby acknowledges to the Purchaser that the Company has, concurrently
with the execution of this Letter Agreement, entered into that certain Series A
Preferred Stockholder Consent and Waiver dated the date hereof with Cascade
Investment, L.L.C., a Washington limited liability company (“Cascade”), whereby the
Company has agreed, among other things, to waive its right under Section 3(a) of
the Series A Certificate of Designations to pay any dividends due and payable to
Cascade as a holder of Series A Preferred Stock in shares of Series A Preferred
Stock.
E-1
2. Full
Force and Effect. Except as otherwise provided herein, the
Series B Certificate of Designations shall remain unchanged and in full force
and effect. Except as expressly set forth above, nothing in this
Letter Agreement shall be construed as a waiver of any rights of any of the
parties to this Letter Agreement under the Series B Certificate of
Designations.
In
witness whereof, the parties have executed this Letter Agreement as of March 27,
2008.
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|
PACIFIC
ETHANOL, INC.
By:______________________________________
Neil M. Koehler, President and CEO
LYLES
UNITED, LLC
By:______________________________________
William M. Lyles IV, Vice
President
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E-2