(1) | Option vested as to 20% of the shares on the date of grant and will vest as to 20% of the shares on each of the first, second, third and fourth anniversaries of the date of grant. |
(2) | Based on options to purchase 602,500 shares granted to our employees during 2005. |
(3) | Calculated using the potential realizable value of each grant. |
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR ValuesEquity Incentive Compensation
The following table provides information regardingOur 2006 Stock Incentive Plan authorizes the numberissuance of up to 2,000,000 shares of our common stock underlying exercisable and unexercisable in-the-moneypursuant to options, restricted stock, options held by the Named Executive Officers and the values of those options at fiscal year-end. An option is “in-the-money” if the fair market value for the underlying securities exceeds the exercise price of the option. The Named Executive Officers did not hold anyrestricted stock units, stock appreciation rights.
Name
| | Shares
Acquired on
Exercise (#)
| | Value
Realized ($)
| | Number of Securities
Underlying Unexercised
Options/SARs at FY-End (#)
Exercisable/Unexercisable
| | Value of Unexercised
In-the-Money Options/SARs
at FY-End ($)
Exercisable/Unexercisable(1)
|
Neil M. Koehler | | — | | — | | — | | — |
Ryan W. Turner | | — | | — | | — | | — |
William G. Langley | | — | | — | | 85,000/340,000 | | 237,150/948,600 |
Barry Siegel | | 116,667(2)
| | 472,668 | | 0/0 | | — |
(1) | Based on the $10.82 closing price of our common stock on the Nasdaq National Market on December 30, 2005, the last trading day of fiscal 2005, less the exercise price of the options. |
(2) | Mr. Siegel tendered 76,712 shares of our common stock in connection with a cashless exercise of this option. |
Equity Compensation Plan Information
The following table provides information about our commonrights, direct stock that may be issued upon the exercise of options, warrants,issuances and rights under all of our existing equity compensation plans as of December 31, 2005.
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 |
Equity Compensation Plans Approved by Security Holders: | | | | | | |
1995 Plan | | 377,667 | | $5.53 | | 822,333 |
2004 Plan | | 822,500 | | $7.78 | | 1,677,500 |
Stock Option Plans
We currently have two stock option plans governing outstanding options: an Amended 1995 Incentive Stock Plan and a 2004 Stock Option Plan. These plans are administered by our Compensation Committee, which currently consists of Messrs. Stone and Thomas.
On July 19, 2006, our Board terminated our Amended 1995 Incentive Stock Plan, except to the extent of options to purchase up to 76,000 shares of our common stock outstanding as July 21, 2006. We will, therefore, not issue any additional options to purchase shares of our common stock under the Amended 1995 Incentive Stock Plan. On July 19, 2006, subject to the ratification and approval by our stockholders of the 2006 Plan, our Board also terminated our 2004 Stock Option Plan, except to the extent of options to purchase up to 665,000 shares of our common stock outstanding as of July 21, 2006. As of July 21, 2006, an aggregate of 1,705,500 shares remained available for grants under the 2004 Stock Option Plan, but we will not issue any additional options to purchase shares of our common stock under this plan following the ratification and approval by our stockholders of our 2006 Stock Incentive Plan.
The 2004 Stock Option Plan authorizes the issuance of ISOs and NQOsother stock-based awards to our officers, directors or key employees or to consultants that do business with Pacific Ethanol for upus. Our Compensation Committee has the authority to an aggregate of 2,500,000 shares of common stock. Our Board’s adoptionadminister 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 Inventive Plan. Equity awards made to members of the 2004 Stock Option Plan was ratifiedCompensation Committee must be authorized and approved by a disinterested majority of our stockholders at our 2004 annual meeting of stockholders that was initially convened on December 28, 2004, adjourned to February 1, 2004 and further adjourned to and completed on February 28, 2005. The 2004 Stock Option Plan was amended on January 24, 2006 and further amended on April 12, 2006.Board.
The following is a descriptionWe plan to use equity incentive compensation to encourage participants to focus on the long-term performance of some ofPacific Ethanol and to provide an opportunity for the key terms of the 2004 Stock Option Plan.
Shares Subjectnamed executive officers to the 2004 Stock Option Plan
A total of 2,500,000 sharesincrease their ownership stake in Pacific Ethanol through grants of our common stock are authorized for issuance under the 2004 Stock Option Plan. Any shares of common stock that are subject to an award but are not used because the terms and conditions of the award are not met, or any shares that are used by participants to pay all or part of the purchase price of any option, may again be used for awards under the 2004 Stock Option Plan.
Administration
It is the intent of the 2004 Stock Option Plan that it be administered in a manner such that option grants and exercises would be “exempt” under Rule 16b-3 of the Exchange Act.vest over time. The Compensation Committee is empoweredalso plans to select those eligible personscontinue to whom options shall be granted under the 2004 Stock Option Plan;use equity compensation to determine the time or times at which each option shall be granted, whether optionsattract qualified executive officers and to maintain competitive levels of total compensation.
Equity incentive compensation levels will be ISOs or NQOsdetermined based upon our financial performance, the individual performance of the participant and the number of shares to be subject to each option; and to fix the time and manner in which each option may be exercised, including the exercise price and option period, and other terms and conditions of options, all subjectmarket data provided to the terms and conditions of the 2004 Stock Option Plan. The Compensation Committee has sole discretion to interpret and administerby Hewitt Associates. Although equity incentive compensation levels will vary among the 2004 Stock Option Plan, and its decisions regardingparticipants based on their positions with Pacific Ethanol, the 2004 Stock Option Plan are final, except that our Board can act in placegoal 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 administratormarket 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 the 2004 Stock Option Plan at any time or from timeequity incentive compensation paid to time, in its discretion.executives of our peer companies.
Option Terms
ISOs granted underHistorically, we have neither made equity incentive grants in connection with the 2004 Stock Option Plan mustrelease or withholding of material non-public information nor have an exercise pricewe 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 not less than 100% of the fair market value of a share of commonour operations for our latest completed fiscal period are publicly available. Historically, stock on the date the ISO is granted and must be exercised, if at all, within ten years from the date of grant. In the case of an ISOoptions granted to an optionee who owns more than 10% of the total voting securities of Pacific Ethanol on the date of grant, theour directors and executive officers have generally had exercise price may be not less than 110% of fair market value on the date of grant, and the option period may not exceed five years. NQOs granted under the 2004 Stock Option Plan must have an exercise price of not less than 85% of the fair market value of a share of common stock on the date the NQO is granted.
Options may be exercised during a period of time fixed by the committee except that no option may be exercised more than ten years after the date of grant. In the discretion of the committee, payment of the purchase price for the shares of stock acquired through the exercise of an option may be made in cash, shares of our common stock, a combination of cash and shares of our common stock, through net exercise or a combination of cash and net exercise.
Amendment and Termination
The 2004 Stock Option Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time and from time to time by our Board. However, our Board may not materially impair any outstanding options without the express consent of the optionee or materially increase the number of shares subject to the 2004 Stock Option Plan, materially increase the benefits to optionees under the 2004 Stock Option Plan, materially modify the requirements as to eligibility to participate in the 2004 Stock Option Plan or alter the method of determining the option exercise price without stockholder approval. No option may be granted under the 2004 Stock Option Plan after November 4, 2014.
Federal Income Tax Consequences
NQOs. Holders of NQOs do not realize income as a result of a grant or vesting of an option in the event that the stock option is granted at an exercise priceprices at or above the fair market value of the underlying shares of our stock on the date of grant, but realize compensation income upon exercise of an NQO to the extent that the fair market value of the shares of common stock on the date of exercise of the NQO exceeds the exercise price paid. We will be required to withhold taxes on ordinary income realized by an optionee upon the exercise of an NQO.grant.
Perquisites and Other Personal Benefits
InWe expect to provide named executive officers with perquisites and other personal benefits that the event ofCompensation Committee believes are reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. For example, we expect to continue to pay for the grant of an NQO with a per share exercise price that is less than the fair market value per sharecommuting, housing and other living expenses of our underlying common stock onChief Operating Officer and our General Counsel for part of 2007. In addition, we have entered into executive employment agreements with our Chief Executive Officer, Chief Operating 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 is provided under the dateheading “Calculation of grant,Potential Payments upon Termination or Change in Control” below. The Compensation Committee expects to periodically review the grant is treated as deferred compensation. Except in certain limited circumstances, such a grant results in ordinary income,levels of perquisites and other personal benefits provided to the same extent applicable to an option grant with an exercise price at or above fair market value, realized by the optionee at vesting of the option, as opposed to upon its exercise, plus as an additional tax of 20% payable by the optionee.our named executive officers.
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 the case of an optioneeaddition, if we grant restricted stock or restricted stock unit awards that are not subject to performance vesting, they may not be fully deductible by us at the “short-swing” profit recapture provisionstime 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 Section 16(b) ofour previous filings made under the Securities Act or under the Exchange Act that might incorporate future filings made by us under those statutes, the optionee realizes income only upon the lapse of the six-month period under Section 16(b), unless the optionee elects to recognize income immediately upon exercise of his or her option.
ISOs. Holders of ISOsCompensation Committee Report will not be considered to have received taxable income upon either the grant of the optionincorporated by reference into any such prior filings or its exercise. Upon the sale or other taxable disposition of the shares, long-term capital gain will normally be recognized on the full amount of the difference between the amount realized and the option exercise price paid if no disposition of the shares has taken place within either two years from the date of grant of the option or one year from the date of transfer of the shares to the optionee upon exercise. If the shares are sold or otherwise disposed of before the end of the one-year or two-year periods, the holder of the ISO must include the gain realized as ordinary income to the extent of the lesser of the fair market value of the option stock minus the option price, or the amount realized minus the option price. Any gain in excess of these amounts, presumably, will be treated as capital gain. We will be entitled to a tax deduction in regard to an ISO only to the extent the optionee has ordinary income upon the sale or other disposition of the option shares.
Upon the exercise of an ISO, the amountinto any future filings made by which the fair market value of the purchased shares at the time of exercise exceeds the option price will be an “item of tax preference” for purposes of computing the optionee’s alternative minimum tax for the year of exercise. If the shares so acquired are disposed of prior to the expiration of the one-year or two-year periods described above, there should be no “item of tax preference” arising from the option exercise.
Possible Anti-Takeover Effectsus under those statutes.
Although not intended as an anti-takeover measure by our Board, one of the possible effects of the 2004 Stock Option Plan could be to place additional shares, and to increase the percentage of the total number of shares outstanding, in the hands of the directors and officers of Pacific Ethanol. Those persons may be viewed as part of, or friendly to, incumbent management and may, therefore, under some circumstances be expected to make investment and voting decisions in response to a hostile takeover attempt that may serve to discourage or render more difficult the accomplishment of the attempt.
In addition, options may, in the discretion of the committee, contain a provision providing for the acceleration of the exercisability of outstanding, but unexercisable, installments upon the first public announcement of a tender offer, merger, consolidation, sale of all or substantially all of our assets, or other attempted changes in the control of Pacific Ethanol. In the opinion of our Board, this acceleration provision merely ensures that optionees under the 2004 Stock Option Plan will be able to exercise their options as intended by our Board and stockholders prior to any extraordinary corporate transaction which might serve to limit or restrict that right. However, our Board is presently unaware of any threat of hostile takeover involving Pacific Ethanol.
Long-Term Incentive Plan AwardsCompensation Committee Report
In 2005, no awards were givenThe 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 Named Executive Officers under long-term incentive plans.Board that the Compensation Discussion and Analysis be included in the Proxy Statement for the 2007 Annual Meeting of stockholders and incorporated by reference into the Annual Report on Form 10-K for the year ended December 31, 2006.
Report on Repricing of Options and SARs Respectfully submitted,
Compensation Committee
No adjustments to or amendments of the exercise price of stock options or stock appreciation rights previously awarded to the Named Executive Officers occurred in 2005. Robert P. Thomas
Terry L. Stone
John L. Prince
Employment Contracts and Termination of Employment and Change-in-Control ArrangementsSummary 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, 2006, 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 year ended December 31, 2006.
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($)(1) | | Option Awards ($)(2) | | Non-Equity Incentive Plan Compensation ($) | | All Other Compen-sation ($)(3) | | Total ($) | |
Neil M. Koehler Chief Executive Officer and President | | | 2006 | | $ | 200,000 | | $ | ― | | $ | 349,917 | | $ | ― | | $ | 300,000(4) | | $ | ― | | $ | 849,917 | |
John T. Miller Chief Operating Officer and Acting Chief Financial Officer | | | 2006 | | | 88,349 | | | ― | | | 262,437 | | | ― | | | ― | | | ― | | | 350,786 | |
Christopher W. Wright Vice President, General Counsel and Secretary | | | 2006 | | | 88,349 | | | ― | | | 262,437 | | | ― | | | ― | | | 13,995(5) | | | 364,781 | |
William G. Langley Former Chief Financial Officer | | | 2006 | | | 177,885 | | | ― | | | ― | | | 611,697 | | | ― | | | 37,372(6) | | | 826,954 | |
_______________
(1) | The amounts shown are the compensation costs recognized in our financial statements for 2006 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 amounts shown are the compensation costs recognized in our financial statements for 2006 related to grants of stock options to certain named executive officers in 2006 and prior years, to the extent we recognized compensation cost in 2006 for such awards in accordance with the provisions of SFAS No. 123R. For a discussion of valuation assumptions used in the SFAS No. 123R calculations, see Note 14 of Notes to Consolidated Financial Statements included in Part IV, Item 15 of our 2006 Form 10-K. The options were issued under our 2004 Stock Option Plan. Information regarding the vesting schedule for Mr. Langley is included in the footnotes to the “Outstanding Equity Awards at Fiscal Year-End” table below. Mr. Langley vested as to an additional 42,500 shares on December 15, 2006, the effective date of our Consulting Agreement with Mr. Langley. See “Executive Employment Agreements—William G. Langley” below. |
(3) | The value of perquisites and other personal benefits was less than $10,000 in aggregate for each executive other than Messrs. Wright and Langley. |
(4) | 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. |
(5) | 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. |
(6) | Includes $22,757 in perquisites or personal benefits relating to payment of or reimbursement for commuting expenses from Mr. Langley’s home to our corporate office locations in Fresno and Sacramento, California, and housing and other living expenses. Also includes $7,115 of vacation accrual that was paid out to Mr. Langley in connection with his retirement as our Chief Financial Officer on December 15, 2006 and includes $7,500 in consulting fees earned from December 15, 2006 through December 31, 2006 in connection with our consulting arrangement with Mr. Langley. Mr. Langley entered into a Separation and Consulting Agreement with us in connection with his retirement in December 2006. See “Executive Employment Agreements—William G. Langley” below. |
Executive Employment Agreements dated March 23, 2005 with each of Neil M. Koehler and Ryan W. Turner
On April 19, 2006, Ryan W. Turner resigned from all positions with Pacific Ethanol and all of its direct and indirect subsidiaries, including as Chief Operating Officer and Secretary of Pacific Ethanol. Mr. Turner’s Executive Employment Agreement, described below as of December 31, 2005, the end of our most recently-completed fiscal year, was terminated on that date.Neil M. Koehler
The Executive Employment Agreement with Neil M. Koehler dated March 23, 2005 provides for a three-year term and automatic one-year renewals thereafter, unless either the employeeMr. Koehler or Pacific Ethanol provides written notice to the other at least 90 days prior to the expiration of the then-current term. The Executive Employment Agreement with Ryan W. Turner provided for a one-year term and automatic one-year renewals thereafter, unless either the employee or Pacific Ethanol provided written notice to the other at least 90 days prior to the expiration of the then-current term.
Mr. Koehler is to receive a base salary of $200,000 per year and is entitled to receive a cash bonus not to exceed 50% of his base salary to be paid based upon performance criteria setestablished by the Board on an annual basis and an additional cash bonus not to exceed 50% of the net free cash flow of Kinergy (defined as revenues of Kinergy, less his salary and performance bonus, less capital expenditures and all expenses incurred specific to Kinergy), subject to a maximum of $300,000 in any given year; provided, that such bonus will be reduced by ten percentage points each year, such that 2009 will be the final year of such bonus at 10% of net free cash flow.
Mr. Turner was initially to receive a base salary of $125,000 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 set by the Board on an annual basis. Effective as of October 1, 2005, our Compensation Committee increased Mr. Turner’s base salary to $175,000 per year.
We are also required to provide an office and administrative support to each of Messrs.Mr. Koehler and Turner and certain benefits, including medical insurance, (or, if inadequate due to location of permanent residence, reimbursement of up to $1,000 per month for obtaining health insurance coverage), three weeks of paid vacation per year participation in the stock option plan to be developed in relative proportion to the position in the organization, and participation in benefit plans on the same basis and to the same extent as other executives or employees.
Each of Messrs. Mr. Koehler and Turner areis also entitled to reimbursement for all reasonable business expenses incurred in promoting or on behalf of the business of Pacific Ethanol, including expenditures for entertainment, gifts and travel. Upon termination
In the event that Mr. Koehler is terminated by the company without cause, except upon our timely written notice prior to automatic renewal at the end of the initial term of his agreement or resignationupon his death or disability, or in the event that Mr. Koehler voluntarily resigns for “goodgood reason,” the terminated employee he is entitled to receive severance equal to three months of base salary during the first year after termination or resignation and six months of base salarysalary. Also, in such event, Mr. Koehler is entitled to a prorated inventive bonus, if any, for the fiscal year during which termination occurs, and we are required to maintain, at our expense, in full force and effect, for Mr. Koehler’s continued benefit, all medical and life insurance to which Mr. Koehler was entitled immediately prior to the second year afterdate of termination unless he(or at the election of Mr. Koehler in the event of a change in control, immediately prior to the date of the change in control) until the earliest of (i) 12 months or (ii) the date or dates that Mr. Koehler’s continued participation in our medical and/or life insurance plans, as applicable, is not possible under the terms of the plans (the earliest of (i) and (ii) is referred to herein as the “Benefits Date”). If our medical and/or life insurance plans do not allow Mr. Koehler’s continued participation in the plan or plans, then we will pay to Mr. Koehler, in monthly installments, from the date on which Mr. Koehler’s participation in the medical and/or life insurance, as applicable, is prohibited until the Benefits Date, the monthly premium or premiums which had been payable by us with respect to Mr. Koehler for the discontinued medical and/or life insurance, as applicable. In addition, if Mr. Koehler is terminated for cause or voluntarily terminates his employment without providing the required written notice. If the employee is terminated (otherother than for cause)cause or terminates for good reason following, or within the 90 days preceding, any change in control, in lieu of further salary payments to the employee,Mr. Koehler, we may elect to pay a lump sum severance payment equal to the amount of his annual base salary.
The term “for good reason” is defined in each of the Executive Employment AgreementsAgreement as (i) a general assignment by us for the benefit of creditors or filing by us of a voluntary bankruptcy petition or the filing against us of any involuntary bankruptcy which remains undismissedun-dismissed for 30 days or more or if a trustee, receiver or liquidator is appointed, (ii) any material changes in the employee’sMr. Koehler’s titles, duties or responsibilities without his express written consent, or (iii) the employeeMr. Koehler is not paid the compensation and benefits required under the Executive Employment Agreement.
The term “for cause” is defined in each of the Executive Employment Agreements as (i) any intentional misapplication by the employeeMr. Koehler of Pacific Ethanol funds or other material assets, or any other act of dishonesty injurious to Pacific Ethanol committed by the employee; orMr. Koehler, (ii) the employee’sMr. Koehler’s conviction of (a) a felony, or (b) a crime involving moral turpitude; orturpitude, (iii) the employee’sMr. Koehler’s use or possession of any controlled substance or chronic abuse of alcoholic beverages, which use or possession our Board reasonably determines renders the employeeMr. Koehler unfit to serve in his capacity as a senior executive of Pacific Ethanol;Ethanol, or (iv) the employee’sMr. Koehler’s breach, nonperformance or nonobservance of any of the terms of his Executive Employment Agreement with us, including but not limited to the employee’shis failure to adequately perform his duties or comply with the reasonable directions of our Board. However, we may not terminate the employeeMr. Koehler unless our Board first provides the employeehim with a written memorandum describing in detail how his performance is not satisfactory and the employeeMr. Koehler is given a reasonable period of time, (notbut not less than 30 days)days, to remedy the unsatisfactory performance related by our Board to the employeedescribed in that memorandum. A determination of whether the employeeMr. Koehler has satisfactorily remedied the unsatisfactory performance shall be promptly made by a majority of the disinterested directors of our Board, (oror our entire Board, but not including the employee,Mr. Koehler, if there are no disinterested directors)directors, at the end of the period provided to the employeeMr. Koehler for remedy, and our Board’s determination shall be final.
A “change in control” of Pacific Ethanol iswill be 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, other than a trustee or fiduciary holding securities under an employment 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 51% or more of the combined voting power of Pacific Ethanol, (ii) there is a merger (other than a reincorporation merger) or consolidation in which Pacific Ethanol does not survive as an independent company, or (iii) the business of Pacific Ethanol is disposed of pursuant to a sale of assets.
Executive Employment Agreement dated August 10, 2005 with William G. Langley
Effective December 15, 2006, William G. Langley retired from all positions with Pacific Ethanol and all of its direct and indirect subsidiaries, including as Chief Financial Officer of Pacific Ethanol. Mr. Langley’s Executive Employment Agreement was terminated on that date.
The Executive Employment Agreement with William G.Mr. Langley providesdated August 10, 2005 provided for a four-year term and automatic one-year renewals thereafter, unless either Mr. Langley or Pacific Ethanol provided written notice to the employeeother at least 90 days prior to the expiration of the then-current term. Mr. Langley received a base salary of $185,000 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 set by the Board on an annual basis. All other terms and conditions of Mr. Langley’s Executive Employment Agreement were substantially the same as those contained in Mr. Koehler’s Executive Employment Agreement, except that Mr. Langley was not entitled to any bonus based on the net free cash flow of Kinergy and was entitled to reimbursement of his costs associated with his relocation to Fresno, California.
In connection with Mr. Langley’s retirement, Pacific Ethanol and Mr. Langley entered into a Separation and Consulting Agreement, or Consulting Agreement, dated December 14, 2006. The Consulting Agreement provides for a consulting period from December 16, 2006 through August 15, 2007, during which Mr. Langley is to provide consulting services to us. Mr. Langley is to provide consulting services for up to 80 hours per month for the first three months during the consulting period and is to provide consulting services for up to 40 hours per month for the remainder of the consulting period. Mr. Langley is to receive consulting fees in the amount of $15,000 per month. Mr. Langley is also to be reimbursed for his health insurance expenses during the consulting period. Mr. Langley is also to be reimbursed for certain other specified or pre-approved expenses incurred in connection with the performance of his duties under the Consulting Agreement. In addition, Mr. Langley agreed to not work for our competitors during the consulting period and provided a general release of all claims against us.
Under the Consulting Agreement, Mr. Langley’s outstanding stock options remained vested and exercisable as to 85,000 shares, which was the vested and exercisable portion at that time. In addition, Mr. Langley’s outstanding stock option was accelerated and became fully vested and exercisable as to 42,500 shares on December 15, 2006, and, provided Mr. Langley complies with his obligations under the Consulting Agreement, the option shall be fully vested and exercisable as to an additional 42,500 shares on August 15, 2007, the last day of the consulting period. The stock option as to all such fully vested and exercisable shares, other than those vested on August 15, 2007, will be exercisable through the end of the consulting period and for a period of three months thereafter. The stock option as to the shares that may vest on August 15, 2007 will be exercisable from the date of vesting through December 31, 2007. The stock option terminated as to all other shares on December 15, 2006.
John T. Miller
The Executive Employment Agreement with John T. Miller dated June 26, 2006 provides for a one-year term and automatic one-year renewals thereafter, unless either Mr. Miller or Pacific Ethanol provides written notice to the other at least 90 days prior to the expiration of the then-current term. Mr. LangleyMiller is to receive a base salary of $185,000 per year. All other terms and conditions of Mr. Langley’sMiller’s Executive Employment Agreement are substantially the same as those contained in Mr. Turner’sKoehler’s Executive Employment Agreement, except that Mr. LangleyMiller is not entitled to six monthsany bonus based on the net free cash flow of severance pay during the entire term of his agreementKinergy and is also entitled to reimbursement of his costs associated with his relocation to Fresno, California.the city where Pacific Ethanol’s corporate headquarters are located.
Indemnification of Directors and OfficersChristopher W. Wright
Section 145The Executive Employment Agreement with Christopher W. Wright dated June 26, 2006 provides for a four-year term and automatic one-year renewals thereafter, unless either Mr. Wright or Pacific Ethanol provides written notice to the other at least 90 days prior to the expiration of the Delaware General Corporation Law permitsthen-current term. Mr. Wright is to receive a corporationbase salary of $185,000 per year. All other terms and conditions of Mr. Wright’s Executive Employment Agreement are substantially the same as those contained in Mr. Koehler’s Executive Employment Agreement, except that Mr. Wright is not entitled to indemnify its directorsany bonus based on the net free cash flow of Kinergy and officers against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connectionis entitled to reimbursement of his costs associated with a pending or completed action, suit or proceeding ifhis relocation to 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.city where Pacific Ethanol’s corporate headquarters are located.
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 certificateGrants 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.Plan-Based Awards
The limitationfollowing table sets forth summary information regarding all grants of liability and indemnification provisions inplan-based awards made to 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 Commission this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires ournamed 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 Commission. These officers, directors and stockholders are required by the 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, 2005 and thereafter,2006. As of the end of 2006, none of the named executive officers held any performance-based equity 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 2005, except as set forth below, all Section 16(a) filing requirements applicable to our reporting persons were met.non-equity incentive awards.
Name | | Grant Date | | All Other Stock Awards: Number of Shares of Stock or Units (#)(1) | | Grant Date Fair Value of Stock and Option Awards($)(2) |
Neil M. Koehler | | October 4, 2006 | | 93,600 | | $1,222,416 |
John T. Miller | | October 4, 2006 | | 70,200 | | 916,812 |
Christopher W. Wright | | October 4, 2006 | | 70,200 | | 916,812 |
William G. Langley | | ― | | ― | | ― |
__________
(1) | The stock awards reported in the above table represent shares of stock granted under our 2006 Stock Incentive Plan. Mr. Koehler's grant vested immediately as to 23,400 shares and vests as to 14,040 shares on each of the next five anniversaries of the grant date. Messrs. Miller's and Wright's grants each vested immediately as to 17,550 shares and each vests as to 10,530 shares on each of the next five anniversaries of the grant date. |
(2) | The dollar value of grants of common stock shown represents the grant date fair value calculated based on the fair market value of our common stock on the grant date. The actual value that an executive will realize on the award will depend on the price per share of our common stock at the time shares are sold. There is no assurance that the actual value realized by an executive will be at or near the grant date fair value of the shares awarded. |
The following individuals did not timely file the following numbers of Forms 4 to report the following numbers of transactions: John Pimentel — 1 report, 1 transaction; William L. Jones — 2 reports, 2 transactions; Terry L. Stone — 1 report, 1 transaction; Kenneth J. Friedman — 1 report, 1 transaction; Frank P. Greinke — 1 report, 1 transaction; John L. Prince — 1 report, 1 transaction; Charles W. Bader — 1 report, 1 transaction; William G. Langley — 1 report, 1 transaction; Barry Siegel — 7 reports, 31 transactions; Philip Kart — 8 reports, 36 transactions.
The following individuals did not timely file Forms 3 upon becoming directors or executive officers of Pacific Ethanol: William L. Jones, John L. Prince, Charles W. Bader and William G. Langley.
We believe that each of the foregoing persons have prepared and filed all required Forms 3 and 4 to report their respective transactions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions between Accessity and its Related Parties prior to the Share Exchange Transaction
We were a party to an Employment Agreement with Barry Siegel, our former Chairman of the Board, President and Chief Executive Officer, that commenced on January 1, 2002, and initially expired on December 31, 2004 and which expiration date was extended to December 31, 2007. Mr. Siegel’s annual salary was $300,000, and was granted stock options, under our Amended 1995 Incentive Stock Plan, to purchase 60,000 shares of our common stock, in addition to certain other perquisites. The Employment Agreement provided that following a change of control, which included the Share Exchange Transaction, we would be required to pay Mr. Siegel (i) a severance payment of 300% of his average annual salary for the past five years, less $100, (ii) the cash value of his outstanding but unexercised stock options, and (iii) other perquisites should he be terminated for various reasons specified in the agreement. The agreement specified that in no event would any severance payments exceed the amount we could deduct under the provisions of the Internal Revenue Code. In recognition of the sale of one of our divisions, Mr. Siegel was also awarded a $250,000 bonus, which was paid in February 2002, and an additional grant of options to purchase 50,000 shares of our common stock. In connection with the Share Exchange Transaction and the Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement dated March 23, 2005 between us and Mr. Siegel, Mr. Siegel’s Employment Agreement was terminated and he waived the payments that otherwise would have been due to him under the change of control provisions of his Employment Agreement.
We were a party to an Employment Agreement with Philip B. Kart, our former Senior Vice President, Secretary, Treasurer and Chief Financial Officer, that commenced on January 1, 2002, and initially expired on January 1, 2004 and which expiration date, under the amendments referenced above, was extended first to December 31, 2004 and subsequently to December 31, 2005. Mr. Kart’s annual salary was $155,000 per annum and he was granted stock options, under our Amended 1995 Incentive Stock Plan, providing the right to purchase 30,000 shares of the our common stock, in addition to certain other perquisites. The Employment Agreement provided that following a change of control, which included the Share Exchange Transaction, we would be required to pay Mr. Kart a severance payment of 100% of his annual salary. The Employment Agreement also provided that following a change in control, all stock options previously granted to him would immediately become fully exercisable. The amendment to the Employment Agreement dated November 15, 2002 also provided for relocation expense payments that were conditioned upon Mr. Kart’s relocation to our former headquarters in Florida, which occurred in early 2003. In connection with the Share Exchange Transaction and the Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement dated March 23, 2005 between us and Mr. Kart, Mr. Kart’s Employment Agreement was terminated and he waived the payments that otherwise would have been due to him under the change of control provisions of his Employment Agreement.
Under an agreement with our formerly wholly-owned subsidiary, Sentaur Corp., we were party to an employment agreement with Steven DeLisi that commenced on September 3, 2002 and expired on December 31, 2004. Mr. DeLisi’s annual salary was $175,000 per annum and he was granted stock options under our 1995 Incentive Stock Option Plan to purchase up to 50,000 shares of our common stock. Mr. DeLisi also participated in a bonus program that provided a bonus of 50% of his salary upon the achievement of $25,000 in profits for three consecutive months. During the first twelve months of his employment, Mr. DeLisi received an interim bonus of $5,000 for each signed customer contract.
In May 2002, we signed a five and a half year lease to occupy a 7,300 square foot building in Coral Springs, Florida. We terminated this lease on January 14, 2005, and the building was sold, concurrently, by the landlord. This property was owned and operated by B&B Lakeview Realty Corp., one shareholder of which, Barry Siegel, our former Chairman of the Board, President and Chief Executive Officer, another shareholder of which, Kenneth J. Friedman, was formerly a member of our Board and another shareholder of which, Barry Spiegel, was formerly a member of our Board. The terms of the lease required net rentals increasing in annual amounts from $127,000 to $168,000 plus real estate taxes, insurance and other operating expenses. The lease period commenced in October 2002 and was to terminate five years and six months thereafter. We and the landlord each expended approximately $140,000 to complete the interior space. In addition, during July 2002, we pledged $300,000 in an interest bearing account initially as a certificate of deposit, with a Florida bank (the mortgage lender to B&B Lakeview Realty Corp.) as security for our future rental commitments for the benefit of the landlord’s mortgage lender. The certificate of deposit was to decline in $100,000 increments on the 36th month, 48th month, and 60th month, as the balance of the rent commitment declined. These funds, along with unpaid and earned interest, were returned to us in January 2005 upon the consummation of the sale of the building. We also had a security deposit of $22,000 held by the related party which was also repaidOutstanding Equity Awards at that time. At our request, the Landlord agreed to sell the building and permit us to terminate this lease early, in exchange for our reimbursing the Landlord for the prepayment penalty that the Landlord incurred due to the early pay off of its mortgage loan. These fees paid to the Landlord equaled far less than our liabilities pursuant to the lease. During 2004, we paid B&B Lakeview Realty rent payments of $145,000. Operating expenses, insurance and taxes, as required by the lease, were generally paid directly to the providers by us.
In December 2004, we sold certain fully depreciated personal property assets, which we anticipated would be transferred to Mr. Siegel upon consummation of the Share Exchange Transaction. The proceeds, equal to approximately $14,000, were advanced to Mr. Siegel in anticipation of the transaction being completed. Upon learning that this advance was prohibited under Section 402 of the Sarbanes-Oxley Act of 2002, Mr. Siegel repaid the advance in February 2005.
Transactions between our Now-Wholly-Owned Subsidiaries and their Related Parties prior to the Share Exchange Transaction
Please note that the Certain Relationships and Related Transactions set forth below are with regard to PEI California, Kinergy and ReEnergy, which became our wholly-owned subsidiaries in connection with the Share Exchange Transaction.
Transactions between PEI California and its Related Parties
Neil M. Koehler, our President and Chief Executive Officer and a director is also the Chief Executive Officer of PEI California and was the sole manager and sole limited liability company member of Kinergy and a limited liability company member of Kinergy Resources, LLC, which was a member of ReEnergy. Mr. Koehler did not receive compensation from PEI California.
Thomas D. Koehler, our Vice President, Public Policy and Markets, also held the same position with PEI California and was a limited liability company member of ReEnergy. Mr. Koehler is the brother of Neil M. Koehler and received compensation from PEI California (through Celilo Group, LLC) as an independent contractor.
PEI California and ReEnergy are parties to an Option to Purchase Land dated August 28, 2003, pursuant to which ReEnergy has agreed to sell approximately 89 acres of real property in Visalia to PEI California at a price of $12,000 per acre, with respect to which real property ReEnergy has executed an Option Agreement dated as of July 20, 2003 with Kent Kaulfuss, who was a limited liability company member of ReEnergy, and his wife, which Option Agreement grants ReEnergy an option to purchase such real property for a purchase price of $1,071,600 on or before December 15, 2005 and requires ReEnergy to lease the Wood Industries plant (comprising 35 acres) to Wood Industries (which is owned by Kent Kaulfuss and his wife) for an indefinite period of time for a monthly rental of $800. Accordingly, if the real property had been purchased by PEI California pursuant to the terms of the Option to Purchase Land dated August 28, 2003, Kent Kaulfuss and his wife would have realized a gain on sale of approximately $178,600. The option expired on December 15, 2005 without being exercised.
PEI California entered into a consulting agreement with Ryan W. Turner, our Chief Operating Officer and Secretary, and a former director, for consulting services at $6,000 per month. During 2005 and 2004, PEI California paid Mr. Turner a total of $21,000 and $72,000, respectively, pursuant to the consulting contract. This consulting agreement was terminated in connection with Mr. Turner’s entry into an Executive Employment Agreement with us as described above under “Management - Employment Contracts and Termination of Employment and Change-in-Control Arrangements.”
On October 27, 2003, William and Maurine Jones, Ryan and Wendy Turner and Andrea Jones entered into an agreement with Southern Counties Oil Co., a former shareholder of PEI California, of which Frank P. Greinke, one of our directors and a director of PEI California, is the owner and CEO, to sell 1,500,000 shares of common stock of PEI California personally held by them at $1.50 per share for total proceeds of $2,250,000. In connection with the sale of the shares, the parties entered into a Voting Agreement under which William and Maurine Jones, Ryan and Wendy Turner and Andrea Jones agreed to vote a significant number of their existing shares of common stock of PEI California in favor of Mr. Greinke to be elected to the board of directors of PEI California or any successor-in-interest to PEI California, including Pacific Ethanol.
In March 2005, Barry Siegel, on the one hand, and William and Maurine Jones, Ryan and Wendy Turner and Andrea Jones, on the other, entered into a stock purchase agreement that provided for, among other things, the sale of an aggregate of 250,000 shares of common stock of PEI California to Mr. Siegel for an aggregate purchase price of $25.00.
Immediately prior to the closing of the Share Exchange Transaction, William L. Jones sold 200,000 shares of common stock of PEI California to the individual members of ReEnergy at $.01 per share, to compensate them for facilitating the closing of the Share Exchange Transaction.
Immediately prior to the closing of the Share Exchange Transaction, William L. Jones sold 300,000 shares of common stock of PEI California to Neil M. Koehler at $.01 per share to compensate Mr. Koehler for facilitating the closing of the Share Exchange Transaction.
Immediately prior to the closing of the Share Exchange Transaction, William L. Jones sold 100,000 shares of common stock of PEI California to Thomas D. Koehler at $.01 per share to compensate Mr. Koehler for facilitating the closing of the Share Exchange Transaction.
Transactions between Kinergy and its Related Parties
Neil M. Koehler, our President and Chief Executive Officer and one of our directors, is also the Chief Executive Officer of PEI California and was the sole manager and sole limited liability company member of Kinergy and was a limited liability company member of Kinergy Resources, LLC, which was a member of ReEnergy. Mr. Koehler did not receive compensation from PEI California and did not receive compensation in his capacity as the sole manager of Kinergy.
Neil M. Koehler is the brother of Thomas D. Koehler, our Vice President, Public Policy and Markets. Thomas D. Koehler was a limited liability company member of ReEnergy.
One of Kinergy’s larger customers, Southern Counties Oil Co., doing business at SC Fuels, was a principal shareholder of PEI California and is one of our former stockholders. Frank P. Greinke, the Chief Executive Officer of the corporate general partner of Southern Counties Oil Co., is one of our directors and was a director of PEI California. During the years ended December 31, 2005 and 2004, Southern Counties Oil Co. accounted for approximately 10% and 13%, respectively, of the total net sales of Kinergy.
Transactions between ReEnergy and its Related Parties
Thomas D. Koehler, our Vice President, Public Policy and Markets, also held the same position with PEI California and was a limited liability company member of ReEnergy. Mr. Koehler is the brother of Neil M. Koehler and received compensation from PEI California (through Celilo Group, LLC) as an independent contractor.
PEI California and ReEnergy are parties to an Option to Purchase Land dated August 28, 2003, pursuant to which ReEnergy has agreed to sell approximately 89 acres of real property in Visalia to PEI California at a price of $12,000 per acre, with respect to which real property ReEnergy has executed an Option Agreement dated as of July 20, 2003 with Kent Kaulfuss, who was a limited liability company member of ReEnergy, and his wife, which Option Agreement grants ReEnergy an option to purchase such real property for a purchase price of $1,071,600 on or before December 15, 2005 and requires ReEnergy to lease the Wood Industries plant (comprising 35 acres) to Wood Industries (which is owned by Kent Kaulfuss and his wife) for an indefinite period of time for a monthly rental of $800. Accordingly, if the real property had been purchased by PEI California pursuant to the terms of the Option to Purchase Land dated August 28, 2003, Kent Kaulfuss and his wife would have realized a gain on sale of approximately $178,600. The option expired on December 15, 2005 without being exercised.
Transactions between us and our Related Parties at the time of or after the Share Exchange Transaction
On March 23, 2005, we issued to Philip B. Kart, our former Senior Vice President, Secretary, Treasurer and Chief Financial Officer, 200,000 shares of common stock in consideration of Mr. Kart’s obligations under a Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement that was entered into in connection with the Share Exchange Transaction.
On March 23, 2005, we issued to Barry Siegel, our former Chairman of the Board, President and Chief Executive Officer, 400,000 shares of common stock in consideration of Mr. Siegel’s obligations under a Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement that was entered into in connection with the Share Exchange Transaction. We also transferred DriverShield CRM Corp., one of our wholly-owned subsidiaries, to Mr. Siegel in connection with this transaction. In addition we sold Sentaur Corp., another of our wholly-owned subsidiaries, to Mr. Siegel for the cash sum of $5,000.
On March 23, 2005, in connection with the Share Exchange Transaction, we entered into Confidentiality, Non-Competition and Non-Solicitation Agreements with each of Neil M. Koehler, Thomas D. Koehler, William L. Jones and Ryan W. Turner. The agreement is substantially the same for each of the foregoing persons, except as otherwise noted below, and provides for certain standard confidentiality protections in our favor prohibiting each of the foregoing persons, each of whom is a stockholder and our officers and/or directors, from disclosure or use of our confidential information. The agreement also provides that each of the foregoing persons is prohibited from competing with us for a period of five years; however, Neil M. Koehler’s agreement provides that he is prohibited from competing with us for a period of three years. In addition, during the period during which each of the foregoing persons is prohibited from competing, they are also prohibited from soliciting our customers, employees or consultants and are further prohibited from making disparaging comments regarding us, our officers or directors, or our other personnel, products or services.
On March 23, 2005, in connection with the Share Exchange Transaction, we became the sole owner of the membership interests of Kinergy. Neil M. Koehler, our President and Chief Executive Officer and one of our directors and principal stockholders was formerly the sole owner of the membership interests of Kinergy and personally guaranteed certain obligations of Kinergy to Comerica Bank. As part of the consummation of the Share Exchange Transaction, we executed a Letter Agreement dated March 23, 2005 with Mr. Koehler that provides that we will, as soon as reasonably practical, replace Mr. Koehler as guarantor under certain financing agreements between Kinergy and Comerica Bank. Under the Letter Agreement, prior to the time that Mr. Koehler is replaced by us as guarantor under such financing agreements, we will defend and hold harmless Mr. Koehler, his agents and representatives for all losses, claims, liabilities and damages caused or arising from out of (i) our failure to pay our indebtedness under such financing agreements in the event that Mr. Koehler is required to pay such amounts to Comerica Bank pursuant to his guaranty agreement with Comerica Bank, or (ii) a breach of our duties to indemnify and defend as set forth above.
On July 26, 2005, we issued options to purchase up to 50,000 shares of our common stock to William L. Jones, options to purchase up to 20,000 shares of our common stock to Terry L. Stone, options to purchase up to 15,000 shares of our common stock to Frank P. Greinke, options to purchase up to 15,000 shares of our common stock to John Pimentel, who was then a current director and is now a former director, and options to purchase up to 15,000 shares of our common stock to Ken Freidman, who was then a current director and is now a former director. The options have an exercise price of $8.25 per share, which represents the closing price of a share of our common stock on the date of grant. The options have a term of 10-years and vest in full one year from their date of grant.
On July 28, 2005, we issued options to purchase up to 15,000 shares of our common stock to Charles W. Bader, who was then a current director and is now a former director, and options to purchase up to 15,000 shares of our common stock to John L. Prince, a director. The options have an exercise price of $8.30 per share, which represents the closing price of a share of our common stock on the date of grant. The options have a term of 10-years and vest in full one year from their date of grant.
On August 10, 2005, we issued options to purchase up to 425,000 shares of our common stock to William G. Langley, our Chief Financial Officer. The options have an exercise price of $8.03 per share, which represents the closing price of a share of our common stock on the date immediately preceding the date of grant. The options have a term of 10-years. The options vested immediately as to 85,000 shares and vest as to an additional 85,000 shares on each of the first, second, third and fourth anniversaries of the date of grant.
On September 19, 2005, we issued 3,000 shares of common stock to Kenneth J. Friedman, who was then a current director and is now a former director, upon exercise of outstanding options with an exercise price of approximately $5.63 per share for total gross proceeds of approximately $16,875.
On November 3, 2005, William L. Jones, our Chairman, executed a Continuing Guaranty in favor of W.M. Lyles Co. Under the Guaranty, Mr. Jones guarantees to W.M. Lyles Co. the payment obligations of PEI California under a certain Letter Agreement between PEI California and W.M. Lyles Co. The Letter Agreement relates to a Phase 2 Design-Build Agreement between PEI Madera and W.M. Lyles Co. relating to the construction of our ethanol production facility in Madera County. The Letter Agreement provides that, if W.M. Lyles Co. pays performance liquidated damages to PEI Madera as a result of a defect attributable to Delta-T Corporation, the engineer for the ethanol production facility in Madera County, or if W.M. Lyles Co. pays liquidated damages to PEI Madera under the Phase 2 Design-Build Agreement as a result of a delay that is attributable to Delta-T Corporation, then PEI California agrees to reimburse W.M. Lyles Co. for such liquidated damages. However, PEI California is not responsible for the first $2.0 million of reimbursement. In addition, in the event that W.M. Lyles Co. recovers amounts from Delta-T Corporation for such defect or delay, then W.M. Lyles Co. is to not seek reimbursement from PEI California. The aggregate reimbursement obligations of PEI California under the Letter Agreement are not to exceed $8.1 million. Under the Guaranty, W.M. Lyles Co. is to seek payment on a pro rata basis from Mr. Jones and Neil M. Koehler (as described below), but in the event that Mr. Koehler fails to make payment, then Mr. Jones is responsible for any shortfall. However, the full extent of Mr. Jones’ liability under his Guaranty, including for any shortfall for non-payment by Mr. Koehler, is limited to $4.0 million plus any attorneys’ fees, costs and expenses.
On November 3, 2005, Neil M. Koehler, a director and our President and Chief Executive Officer, executed a Continuing Guaranty in favor of W.M. Lyles Co. Under the Guaranty, Mr. Koehler guarantees to W.M. Lyles Co. the payment obligations of PEI California under the Letter Agreement described above. Under the Guaranty, W.M. Lyles Co. is to seek payment on a pro rata basis from William L. Jones (as described above) and Mr. Koehler, but in the event that Mr. Jones fails to make payment, then Mr. Koehler is responsible for any shortfall. However, the full extent of Mr. Koehler’s liability under his Guaranty, including for any shortfall for non-payment by Mr. Jones, is limited to $4.0 million plus any attorneys’ fees, costs and expenses.
On November 10, 2005, we set the compensation and expense reimbursement policies for non-employee members of our Board, which policies were made retroactive to May 18, 2005. The Chairman of our Board receives annual compensation of $80,000. Each member of our Board, including the Chairman, receives $1,500 for each Board meeting attended, whether attended in person or telephonically. The Chairman of our Audit Committee receives an additional $3,500 per quarter. In addition, non-employee directors are reimbursed for certain reasonable and documented expenses in connection with attendance at meetings of our Board and its committees.
On November 14, 2005, William L. Jones, Neil M. Koehler, Ryan W. Turner, Kenneth J. Friedman and Frank P. Greinke, each of whom at the time was a stockholder and one of our directors and/or executive officers, or the Stockholders, and us, entered into a Voting Agreement, or the Voting Agreement, with Cascade (other than Mr. Friedman who was then a current director and is now a former director). The Stockholders collectively hold an aggregate of approximately 9.2 million shares of our common stock. The Voting Agreement provides that the Stockholders may not transfer their shares of our common stock, and must keep their shares free of all liens, proxies, voting trusts or agreements until the Voting Agreement is terminated. The Voting Agreement provides that the Stockholders will each vote or execute a written consent in favor of Cascade’s purchase of 5,250,000 shares of our Series A Preferred Stock for an aggregate purchase price of $84.0 million. In addition, under the Voting Agreement, each Stockholder grants an irrevocable proxy to Neil M. Koehler, a director and our President and Chief Executive Officer, to act as such Stockholder’s proxy and attorney-in-fact to vote or execute a written consent in favor of the sale of the preferred stock. The Voting Agreement is effective until the earlier of the approval of the sale of the preferred stock by our stockholders or the termination of the purchase agreement under which the preferred stock is to be sold in accordance with its terms.
On April 13, 2006 Robert P. Thomas was appointed to our Board. Mr. Thomas has held various positions and is currently a portfolio manager with the William H. Gates III investment group which oversees Mr. Gates’ personal investments through Cascade Investment, L.L.C. and the investment assets of the Bill and Melinda Gates Foundation. Immediately preceding his appointment as a director of Pacific Ethanol, we issued 5,250,000 shares of our Series A Preferred Stock to Cascade Investment, L.L.C.
On June 26, 2006, we entered into executive employment agreements with each of John T. Miller, our Chief Operating Officer, and Christopher W. Wright, our Vice President, General Counsel and Secretary, providing for annual base salaries of $185,000 each. In addition, each of Messrs. Miller and Wright are to be issued 54,000 shares of our common stock pursuant to a restricted stock or restricted stock unit award under an incentive plan to be instituted by us that will vest as to 13,500 shares immediately and as to an additional 10,125 shares on each of the first, second, third and fourth anniversaries of the initial grant. Except as otherwise provided above, our executive employment agreements with Messrs. Miller and Wright are substantially the same as those entered into by us and William G. Langley, our Chief Financial Officers, as described above under the heading “Employment Contracts and Termination of Employment and Change-in-Control Arrangements.”
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 Executive Officers,” “Employment Contracts and Termination of Employment and Change-in-Control Arrangements” and “Compensation of Directors.”
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTFiscal Year-End
The following table sets forth information with respect to the beneficial ownership ofabout outstanding equity awards held by our common stocknamed executive officers as of July 21, 2006, the date of the table, by:December 31, 2006.
| · | each person known by us to beneficially own more than 5% of the outstanding shares of our common stock; |
| · | 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 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 37,223,236 shares of common stock outstanding as of the date of the table.
23 | | Option Awards | | Stock Awards |
Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Option Exercise Price ($) | | Option Expiration Date | | 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 | | ― | | ― | | $ ― | | ― | | 70,200 | | $1,080,378 |
John T. Miller | | ― | | ― | | ― | | ― | | 52,650 | | 810,284 |
Christopher W. Wright | | ― | | ― | | ― | | ― | | 52,650 | | 810,284 |
William G. Langley | | 127,500(3) | | 42,500(3) | | 8.03 | | (3) | | ― | | ― |
___________________Name and Address of Beneficial Owner (1) | | Title of Class | | Amount and Nature of Beneficial Ownership | | Percent of Class |
William L. Jones | | Common | | 2,145,000 | (2) | | 5.75% |
Neil M. Koehler | | Common | | 3,588,139 | | | 9.64% |
John T. Miller. | | Common | | — | | | — |
William G. Langley | | Common | | 85,000 | (3) | | * |
Christopher W. Wright | | Common | | — | | | — |
Frank P. Greinke | | Common | | 115,000 | (4) | | * |
Douglas L. Kieta | | Common | | — | | | — |
John L. Prince | | Common | | 15,000 | (3) | | * |
Terry L. Stone | | Common | | 20,000 | (3) | | * |
Robert P. Thomas | | Common | | — | | | — |
Cascade Investment, L.L.C. | | Common | | 10,500,000 | (5) | | 22.00% |
| | Series A Preferred | | 5,250,000 | (5) | | 100.00% |
All executive officers and directors as a group (10 persons) | | Common | | 5,968,139 | (6) | | 15.95% |
(1) | Messrs. Jones, Koehler, Greinke, Kieta, Prince, Stone and Thomas are directorsThe stock awards reported in the above table represent shares of Pacific Ethanol. Messrs. Koehler, Miller, Langley and Wright are executive officers of Pacific Ethanol. The address ofstock granted under our 2006 Stock Incentive Plan on October 4, 2006. Mr. Koehler's grant vests as to 14,040 shares on each of these persons, unless otherwise indicated below, is c/o Pacific Ethanol, Inc., 5711 N. West Avenue, Fresno, California 93711.the next five anniversaries of the grant date. Messrs. Miller's and Wright's grants each vests as to 10,530 shares on each of the next five anniversaries of the grant date. |
(2) | Includes 50,000 shares of common stock underlying options issued to Mr. Jones and 2,095,000 shares of common stock held by William L. Jones and Maurine Jones, husband and wife, as community property. |
(3) | Represents shares of common stock underlying options. |
(4) | Includes 15,000 shares of common stock underlying options issued to Mr. Greinke and 100,000 shares of common stock held by the Greinke Personal Living Trust. Mr. Greinke is a trustee of the Greinke Personal Living Trust. Mr. Greinke has sole voting and sole investment power over the shares held by the trust. |
(5) | Amount of common stock represents shares of common stock underlying our Series A Preferred Stock. All Series A Preferred Stock held by Cascade may be deemed to be beneficially owned by William H. Gates III as the sole member of Cascade. The address for Cascade Investment, L.L.C is 2365 Carillon Point, Kirkland, Washington 98033. |
(6) | Includes 185,000 shares of common stock underlying options. |
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 Commission of the consolidated audited financial statements in our accompanying annual report on Form 10-KSB for the year ended December 31, 2005, the Audit Committee discussed with management and reviewed our consolidated audited financial statements. In addition, our Board 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 Form 10-KSB with the 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 Form 10-KSB for the year ended December 31, 2005.
Respectfully submitted,
Audit Committee
Terry L. Stone
John L. Prince
Robert P. Thomas
Change in Independent Public Accountants
On March 24, 2005, we dismissed Nussbaum Yates & Wolpow, P.C. as our independent registered public accountant. On March 24, 2005, we engaged Hein & Associates LLP as our new independent registered public accountant. The reports of Nussbaum Yates & Wolpow, P.C. on Accessity’s financial statements for the years ended December 31, 2004 and 2003 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change our independent registered public accountant was authorized and approved by our Audit Committee.
In connection with the audit of the financial statements of Accessity as of and for the years ended December 31, 2004 and 2003 and during the interim period through March 24, 2005, the date of dismissal, Accessity had no disagreement with Nussbaum Yates & Wolpow, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Nussbaum Yates & Wolpow, P.C., would have caused them to make reference thereto in their report on the financial statements for such years. In addition, there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K under the Securities Act.
We had not consulted with Hein & Associates LLP in the past regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on our financial statements or as to any disagreement or reportable event as described in Items 304(a)(1)(iv) and 304(a)(1)(v) of Regulation S-K under the Securities Act.
Principal Accountant Fees and Services
We do not anticipate that a representative of Hein & Associates LLP, our independent registered public accountants for 2005, will be present at our 2006 annual meeting. We do not expect that a representative of Nussbaum Yates & Wolpow, P.C., our independent registered public accountants for 2004, will be present at our 2006 annual meeting.
The following table presents fees for professional audit services rendered by Hein & Associates LLP for the year ended December 31, 2005 and Nussbaum Yates & Wolpow, P.C. for the year ended December 31, 2004.
| | 2005 | | 2004 | |
Audit Fees | | $ | 395,189 | | $ | 67,500 | |
Audit-Related Fees | | | 98,938 | | | — | |
Tax Fees | | | 6,296 | | | — | |
All Other Fees | | | — | | | 40,726 | |
Total | | $ | 500,423 | | $ | 108,226 | |
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-KSB, and reviews of our interim consolidated financial statements included in our Quarterly Reports on Forms 10-QSB and our Registration Statement on Form S-1, including amendments thereto.
Audit-Related Fees. Consist of amounts billed for professional services performed in connection with mergers and acquisitions.
Tax Fees. Consists of amounts billed for professional services rendered for tax return preparation, tax planning and tax advice.
All Other Fees. Consists of amounts billed for services other than those noted above. In 2004, these services were primarily related to assistance and review of our Proxy Statement that was filed with the Commission in the fourth quarter of 2004 and matters related to the review of the Share Exchange Agreement in connection with the Share Exchange Transaction that ultimately occurred in March 2005. In 2005, these services were primarily related to document review.
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.
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 Pacific Ethanol after the beginning of the fiscal year are submitted to the Audit Committee chairman for pre-approval prior to engaging the independent auditor for such services. Such interim pre-approvals are reviewed with the full Audit Committee at its next meeting for ratification. During 2005, all services performed by Hein & Associates LLP were pre-approved by our Audit Committee in accordance with these policies and applicable Commission regulations.
RATIFICATION AND APPROVAL OF ADOPTION OF
2006 STOCK INCENTIVE PLAN
(Proposal 2)
On July 19, 2006, our Board adopted the 2006 Stock Incentive Plan (the “2006 Plan”), subject to stockholder approval. The 2006 Plan is intended to promote our interests by providing eligible persons in our service with the opportunity to acquire a proprietary or economic interest, or otherwise increase their proprietary or economic interest, in us as an incentive for them to remain in such service and render superior performance during such service. The 2006 Plan consists of two equity-based incentive programs, the Discretionary Grant Program and the Stock Issuance Program. Principal features of each program are summarized below.
On July 19, 2006, our Board terminated our Amended 1995 Incentive Stock Plan, except to the extent of options to purchase up to 76,000 shares of our common stock outstanding as of that date. We will, therefore, not issue any additional options to purchase shares of our common stock under the Amended 1995 Incentive Stock Plan. On July 19, 2006, subject to ratification and approval by our stockholders of the 2006 Plan, our Board also terminated our 2004 Stock Option Plan, except to the extent of options to purchase up to 665,000 shares of our common stock outstanding as of that date. We will, therefore, not issue any additional options to purchase shares of our common stock under the 2004 Stock Option Plan upon the ratification and approval by our stockholders of the 2006 Plan.
Administration
The Compensation Committee of our Board has the exclusive authority to administer the Discretionary Grant and Stock Issuance Programs with respect to option grants, restricted stock awards, restricted stock units, stock appreciation rights, direct stock issuances and other stock-based awards (“equity awards”) made to executive officers and non-employee Board members, and also has the authority to make equity awards under those programs to all other eligible individuals. However, the Board may retain, reassume or exercise from time to time the power to administer those programs. Equity awards made to members of the Compensation Committee must be authorized and approved by a disinterested majority of the Board.
The term “plan administrator,” as used in this summary, means the Compensation Committee or the Board, to the extent either entity is acting within the scope of its administrative jurisdiction under the 2006 Plan.
Share Reserve
Initially, 2,000,000 shares of common stock are authorized for issuance under the 2006 Plan. No equity awards have been or will be issued under the 2006 Plan unless and until stockholder approval of the 2006 Plan is obtained on or before July 19, 2007.
No participant in the 2006 Plan may be granted equity awards for more than 250,000 shares of common stock per calendar year. Stockholder approval of this proposal will also constitute approval of the 250,000 share limitation for purposes of Internal Revenue Code Section 162(m). This share-limitation is intended to assure that any deductions to which we would otherwise be entitled, either upon the exercise of stock options or stock appreciation rights granted under the Discretionary Grant Program with an exercise price per share equal to the fair market value per share of our common stock on the grant date or upon the subsequent sale of the shares purchased under those options, will not be subject to the $1.0 million limitation on the income tax deductibility of compensation paid per covered executive officer imposed under Section 162(m). In addition, shares issued under the Stock Issuance Program may qualify as performance-based compensation that is not subject to the Section 162(m) limitation, if the issuance of those shares is approved by the Compensation Committee and the vesting is tied solely to the attainment of the corporate performance milestones discussed below in the summary description of that program.
The shares of common stock issuable under the 2006 Plan may be drawn from shares of our authorized but unissued shares or from shares reacquired by us, including shares repurchased on the open market. Shares subject to any outstanding equity awards under the 2006 Plan that expire or otherwise terminate before those shares are issued will be available for subsequent awards. Unvested shares issued under the 2006 Plan and subsequently repurchased by us at the option exercise or direct issue price paid per share, pursuant to our repurchase rights under the 2006 Plan, will be added back to the number of shares reserved for issuance under the 2006 Plan and will be available for subsequent reissuance.
If the exercise price of an option under the 2006 Plan is paid with shares of common stock, then the authorized reserve of common stock under the 2006 Plan will be reduced only by the net number of new shares issued under the exercised stock option. If shares of common stock otherwise issuable under the 2006 Plan are withheld in satisfaction of the withholding taxes incurred in connection with the issuance, exercise or vesting of an equity award, then the number of shares of common stock available for issuance under the 2006 Plan will be reduced only by the net number of shares issued pursuant to that equity award. The withheld shares will not reduce the share reserve. Upon the exercise of any stock appreciation right granted under the 2006 Plan, the share reserve will only be reduced by the net number of shares actually issued upon exercise, and not by the gross number of shares as to which the stock appreciation right is exercised.
As soon as practicable following stockholder approval of the 2006 Plan, we intend to register the issuance of our securities under the 2006 Plan on Form S-8 under the Securities Act.
Eligibility
Officers, employees, non-employee directors, and consultants and independent advisors who are under written contract and whose securities issued pursuant to the 2006 Plan could be registered on Form S-8, all of whom are in our service or the service of any parent or subsidiary of ours, whether now existing or subsequently established, are eligible to participate in the Discretionary Grant and Stock Issuance Programs.
As of July 21, 2006, four executive officers, twenty-nine other employees, six non-employee members of our Board and an indeterminate number of consultants and advisors were eligible to participate in the 2006 Plan.
Valuation
The fair market value per share of our common stock on any relevant date under the 2006 Plan will be deemed to be equal to the closing selling price per share of our common stock at the close of regular hours trading on the Nasdaq Global Market on that date, as the price is reported by the National Association of Securities Dealers. If there is no closing selling price for our common stock on the date in question, the fair market value will be the closing selling price on the last preceding date for which a quotation exists. On July 21, 2006 the fair market value determined on that basis was $19.25 per share.
Discretionary Grant Program
The plan administrator has complete discretion under the Discretionary Grant Program to determine which eligible individuals are to receive equity awards under that program, the time or times when those equity awards are to be made, the number of shares subject to each award, the time or times when each equity award is to vest and become exercisable, the maximum term for which the equity award is to remain outstanding and the status of any granted option as either an incentive stock option or a non-statutory option under the federal tax laws.
Stock Options. Each granted option will have an exercise price per share determined by the plan administrator, provided that the exercise price will not be less than 85% or 100% of the fair market value of a share on the grant date in the case of non-statutory or incentive options, respectively. No granted option will have a term in excess of ten years. Incentive options granted to an employee who beneficially owns more than 10% of our outstanding common stock must have exercise prices not less than 110% of the fair market value of a share on the grant date and a term of not more than five years measured from the grant date. Options generally will become exercisable in one or more installments over a specified period of service measured from the grant date. However, options may be structured so that they will be immediately exercisable for any or all of the option shares. Any unvested shares acquired under immediately exercisable options will be subject to repurchase, at the exercise price paid per share, if the optionee ceases service with us prior to vesting in those shares.
An optionee who ceases service with us other than due to misconduct will have a limited time within which to exercise outstanding options for any shares for which those options are vested and exercisable at the time of cessation of service. The plan administrator has complete discretion to extend the period following the optionee’s cessation of service during which outstanding options may be exercised (but not beyond the expiration date) and/or to accelerate the exercisability or vesting of options in whole or in part. Discretion may be exercised at any time while the options remain outstanding, whether before or after the optionee’s actual cessation of service.
Stock Appreciation Rights. The plan administrator has the authority to issue the following three types of stock appreciation rights under the Discretionary Grant Program:
| · | Tandem stock appreciation rights, which provide the holders with the right, upon approval of the plan administrator, to surrender their options for an appreciation distribution in an amount equal to the excess of the fair market value of the vested shares of common stock subject to the surrendered option over the aggregate exercise price payable for those shares. |
| · | Standalone stock appreciation rights, which allow the holders to exercise those rights as to a specific number of shares of common stock and receive in exchange an appreciation distribution in an amount equal to the excess of the fair market value on the exercise date of the shares of common stock as to which those rights are exercised over the aggregate base price in effect for those shares. The base price per share may not be less than the fair market value per share of our common stock on December 31, 2006, which was $15.39, multiplied by the number of shares that had not vested as of December 31, 2006. |
(3) | The option is vested and exercisable as to 127,500 shares and will expire as to such shares on November 15, 2007. The option is unvested and unexercisable as to an additional 42,500 shares, will vest as to such shares on August 15, 2007 and will expire as to such shares on December 31, 2007. See “Executive Employment Agreements—William G. Langley” above. |
Option Exercises and Stock Vested
The following table summarizes the option exercises and vesting of stock awards for each of our named executive officers for the year ended December 31, 2006:
| | Option Awards | | Stock Awards |
Name | | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | | Number of Shares Acquired on Vesting (#)(2) | Value Realized on Vesting ($)(3) |
Neil M. Koehler | | ― | $ ― | | 23,400 | $ 305,604 |
John T. Miller | | ― | ― | | 17,550 | 229,203 |
Christopher W. Wright | | ― | ― | | 17,550 | 229,203 |
William G. Langley | | 85,000 | 1,859,050 | | ― | ― |
___________________
(1) | Based on the difference between the market price of a share of our common stock on the dates of exercise and the exercise price per share so exercised. |
(2) | Amounts for Messrs. Miller and Wright include 6,235 shares each that were withheld by us to satisfy minimum employment withholding taxes. Accordingly, Messrs. Miller and Wright each received a net amount of 11,315 shares. Mr. Koehler paid his minimum employment withholding taxes to us in cash. |
(3) | Represents the closing price of a share of our common stock on the date of vesting multiplied by the standalone stock appreciation right is granted, and the right may not have a term in excessnumber of ten years.shares that vested on such date, including any shares that were withheld by us to satisfy minimum employment withholding taxes. |
| · | Limited stock appreciation rights, which may be included in one or more option grants made under the Discretionary Grant Program to executive officers or directors who are subject to the short-swing profit liability provisions of Section 16 of the Exchange Act. Upon the successful completion of a hostile takeover for more than 50% of our outstanding voting securities or a change in a majority of our Board as a result of one or more contested elections for Board membership over a period of up to 36 consecutive months, each outstanding option with a limited stock appreciation right may be surrendered in return for a cash distribution per surrendered option share equal to the excess of the fair market value per share at the time the option is surrendered or, if greater and the option is a non-statutory option, the highest price paid per share in the transaction, over the exercise price payable per share under the option. |
Payments with respect to exercised tandem or standalone stock appreciation rights may, at the discretion of the plan administrator, be made in cash or in shares of common stock. All payments with respect to exercised limited stock appreciation rights will be made in cash. Upon cessation of service with us, the holder of one or more stock appreciation rights will have a limited period within which to exercise those rights as to any shares as to which those stock appreciation rights are vested and exercisable at the time of cessation of service. The plan administrator will have complete discretion to extend the period following the holder’s cessation of service during which his or her outstanding stock appreciation rights may be exercised and/or to accelerate the exercisability or vesting of the stock appreciation rights in whole or in part. Discretion may be exercised at any time while the stock appreciation rights remain outstanding, whether before or after the holder’s actual cessation of service.
Repricing. The plan administrator has the authority, with the consent of the affected holders, to effect the cancellation of any or all outstanding options or stock appreciation rights under the Discretionary Grant Program and to grant in exchange one or more of the following: (i) new options or stock appreciation rights covering the same or a different number of shares of common stock but with an exercise or base price per share not less than the fair market value per share of common stock on the new grant date or (ii) cash or shares of common stock, whether vested or unvested, equal in value to the value of the cancelled options or stock appreciation rights. The plan administrator also has the authority with or, if the affected holder is not subject to the short-swing profit liability of Section 16, then without, the consent of the affected holders, to reduce the exercise or base price of one or more outstanding stock options or stock appreciation rights to the then current fair market value per share of common stock or to issue new stock options or stock appreciation rights with a lower exercise or base price in immediate cancellation of outstanding stock options or stock appreciation rights with a higher exercise or base price.
Stock Issuance Program
Shares of common stock may be issued under the Stock Issuance Program for valid consideration under the Delaware General Corporation Law as the plan administrator deems appropriate, including cash, past services or other property. In addition, restricted shares of common stock may be issued pursuant to restricted stock awards that vest in one or more installments over the recipient’s period of service or upon attainment of specified performance objectives. Shares of common stock may also be issued under the program pursuant to restricted stock units or other stock-based awards that entitle the recipients to receive the shares underlying those awards upon the attainment of designated performance goals, the satisfaction of specified service requirements and/or upon the expiration of a designated time period following the vesting of those awards or units, including without limitation, a deferred distribution date following the termination of the recipient’s service with us.
The plan administrator will have complete discretion under the Stock Issuance Program to determine which eligible individuals are to receive equity awards under the program, the time or times when those equity awards are to be made, the number of shares subject to each equity award, the vesting schedule to be in effect for the equity award and the consideration, if any, payable per share. The shares issued pursuant to an equity award may be fully vested upon issuance or may vest upon the completion of a designated service period and/or the attainment of pre-established performance goals.
To assure that the compensation attributable to one or more equity awards under the Stock Issuance Program will qualify as performance-based compensation that will not be subject to the $1.0 million limitation on the income tax deductibility of the compensation paid per covered executive officer imposed under Section 162(m), the Compensation Committee will also have the discretionary authority to structure one or more equity awards under the Stock Issuance Program so that the shares subject to those particular awards will vest only upon the achievement of certain pre-established corporate performance goals. Goals may be based on one or more of the following criteria: (i) return on total stockholders’ equity; (ii) net income per share; (iii) net income or operating income; (iv) earnings before interest, taxes, depreciation, amortization and stock-based compensation costs, or operating income before depreciation and amortization; (v) sales or revenue targets; (vi) return on assets, capital or investment; (vii) cash flow; (viii) market share; (ix) cost reduction goals; (x) budget comparisons; (xi) implementation or completion of projects or processes strategic or critical to our business operations; (xii) measures of customer satisfaction; (xiii) any combination of, or a specified increase in, any of the foregoing; and (xiv) the formation of joint ventures, research and development collaborations, marketing or customer service collaborations, or the completion of other corporate transactions intended to enhance our revenue or profitability or expand our customer base; provided, however, that for purposes of items (ii), (iii) and (vii) above, the Compensation Committee may, at the time the equity awards are made, specify certain adjustments to those items as reported in accordance with generally accepted accounting principles in the U.S. (“GAAP”), which will exclude from the calculation of those performance goals one or more of the following: certain charges related to acquisitions, stock-based compensation, employer payroll tax expense on certain stock option exercises, settlement costs, restructuring costs, gains or losses on strategic investments, non-operating gains, certain other non-cash charges, valuation allowance on deferred tax assets, and the related income tax effects, purchases of property and equipment, and any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 or its successor, provided that those adjustments are in conformity with those reported by us on a non-GAAP basis. In addition, performance goals may be based upon the attainment of specified levels of our performance under one or more of the measures described above relative to the performance of other entities and may also be based on the performance of any of our business groups or divisions thereof or any parent or subsidiary. Performance goals may include a minimum threshold level of performance below which no award will be earned, levels of performance at which specified portions of an award will be earned, and a maximum level of performance at which an award will be fully earned. The Compensation Committee may provide that, if the actual level of attainment for any performance objective is between two specified levels, the amount of the award attributable to that performance objective shall be interpolated on a straight-line basis.
The plan administrator will have the discretionary authority at any time to accelerate the vesting of any and all shares of restricted stock or other unvested shares outstanding under the Stock Issuance Program. However, no vesting requirements tied to the attainment of performance objectives may be waived with respect to shares that were intended at the time of issuance to qualify as performance-based compensation under Internal Revenue Code Section 162(m), except in the event of certain involuntary terminations or changes in control or ownership.
Outstanding restricted stock units or other stock-based awards under the Stock Issuance Program will automatically terminate, and no shares of common stock will actually be issued in satisfaction of those awards, if the performance goals or service requirements established for those awards are not attained. The plan administrator, however, will have the discretionary authority to issue shares of common stock in satisfaction of one or more outstanding restricted stock units or other stock-based awards as to which the designated performance goals or service requirements are not attained. However, no vesting requirements tied to the attainment of performance objectives may be waived with respect to awards that were intended at the time of issuance to qualify as performance-based compensation under Internal Revenue Code Section 162(m), except in the event of certain involuntary terminations or changes in control or ownership.
General ProvisionsPotential Payments upon Termination or Change in Control
AccelerationExecutive Employment Agreements. IfWe 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.”
2006 Stock Incentive Plan. Under our 2006 Stock Incentive Plan, if a change in control occurs, each outstanding equity award under the Discretionary Grant Programdiscretionary 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 Grantdiscretionary grant and Stock Issuance Programsstock 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 Programstock 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 Programdiscretionary 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 Grantdiscretionary grant and Stock Issuance Programsstock 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.
A change in control under our 2006 Stock Incentive Plan will be deemed to have occurred if, in a single transaction or series of related transactions:
(i)any person (as that term is used in Section 13(d) and 14(d) of the 1934Exchange Act), or persons acting as a group, other than a trustee or fiduciary holding securities under an employment benefit program, is or becomes a beneficial owner (as defined in Rule 13-3 under the 1934Exchange Act), directly or indirectly of securities representing 51% or more of the combined voting power of our company, or
Pacific Ethanol, (ii)there is a merger, consolidation, or other business combination transaction of us with or into an other corporation, entity or person, other than a transaction in which the holders of at least a majority of the shares of our voting capital stock 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 our companyPacific Ethanol (or the surviving entity) outstanding immediately after the transaction, or
(iii)all or substantially all of our assets are sold.
Stockholder Rights2004 Stock Option Plan. Under our 2004 Stock Option Plan and Option Transferability. The holder of anin accordance with our stock option or stock appreciation right will have no stockholder rightsagreement with respect to the shares subject to that option or stock appreciation right unless and until the holder exercises the option or stock appreciation right and becomes a holder of record of shares of common stock distributed upon exercise of the award. Incentive options are not assignable or transferable other than by will or the laws of inheritance following the optionee’s death, and during the optionee’s lifetime, may only be exercised by the optionee. However, non-statutory options and stock appreciation rights may be transferred or assigned during the holder’s lifetime to one or more members of the holder’s family or to a trust established for the benefit of the holder and/or one or more family members or to the holder’s former spouse,William G. Langley, to the extent then-unvested, Mr. Langley’s option will fully vest and become exercisable immediately prior to a change of control.
A change in control under our stock option agreement with Mr. Langley will be 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 transferExchange Act), other than a trustee or fiduciary holding securities under an employment benefit program is or becomes a beneficial owner (as defined in connection withRule 13-3 under the holder’s estate planExchange Act), directly or indirectly of our securities representing 51% or more of our combined voting power, (ii) there is a merger (other than a reincorporation merger) or consolidation in which we do not survive as an independent company, or (iii) our business is disposed of pursuant to a domestic relations order.sale of assets.
A participant will have certain stockholder rights with respect to sharesCalculation of common stock issued to the participant under the Stock Issuance Program, whetherPotential Payments upon Termination or not the participant’s interestChange in those shares is vested. Accordingly, the participant will have the right to vote the shares and to receive any regular cash dividends paid on the shares, but will not have the right to transfer the shares prior to vesting. A participant will not have any stockholder rights with respect to the shares of common stock subject to restricted stock units or other stock-based awards until the awards vest and the shares of common stock are actually issued. However, dividend-equivalent units may be paid or credited, either in cash or in actual or phantom shares of common stock, on outstanding restricted stock units or other stock-based awards, subject to terms and conditions the plan administrator deems appropriate.
Changes in Capitalization.Control If any change is made to the outstanding shares of common stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without our receipt of consideration, appropriate adjustments will be made to (i) the maximum number and/or class of securities issuable under the 2006 Plan, (ii) the maximum number and/or class of securities for which any one person may be granted equity awards under the 2006 Plan per calendar year, (iii) the number and/or class of securities and the exercise price or base price per share in effect under each outstanding option or stock appreciation right, and (iv) the number and/or class of securities subject to each outstanding restricted stock unit or other stock-based award under the 2006 Plan and the cash consideration, if any, payable per share. All adjustments will be designed to preclude any dilution or enlargement of benefits under the 2006 Plan and the outstanding equity awards thereunder.
Special Tax Election. SubjectIn accordance with the rules of the Securities and Exchange Commission, the following table presents our estimate of the benefits payable to applicable laws, rulesthe named executive officers under our 2006 Stock Incentive Plan and regulations,their executive employment agreements assuming that (i) for Messrs. Koehler, Miller and Wright (A) a change in control occurred on December 29, 2006, the plan administrator may permit any or all holderslast business day of 2006 and none of their equity awards were assumed by the successor corporation or replaced with a cash retention program, (B) a qualifying termination occurred on December 29, 2006, which is a termination by the executive for “good reason” or by us without “cause,” or (C) a non-qualifying termination occurred on December 29, 2006, which is a voluntary termination by the executive for other than “good reason,” by us for “cause,” by us prior to utilize anyrenewal as provided in the executive employment agreements or allby us upon the executive’s death or disability; and (ii) for Mr. Langley, (A) a change in control occurred on December 29, 2006 and his equity awards were not assumed by the successor corporation or replaced with a cash retention program. See “Executive Employment Agreements” above for definitions of “good reason” and for “cause” terminations and the following methods to satisfy all or partdiscussion of the federal and state income andour Consulting Agreement with Mr. Langley entered into upon his termination of employment withholding taxes to which they may become subject in connection with the issuance, exercise or vesting of those equity awards:effective December 15, 2006.
Name | | Trigger | | Salary and Bonus(1) | | Continuation of Benefits(2) | | Value of Option Acceleration(3) | | Value of Stock Acceleration(3) | | Total Value(4) | |
| | | | | | | | | | | | | |
Neil M. Koehler | | Change in Control | | $ | ― | | $ | ― | | $ | ― | | $ | 1,080,378 | | $ | 1,080,378 | |
| | Qualifying Termination | | | 100,000 | | | 15,863 | | | ― | | | ― | | | | |
| | Non-Qualifying Termination | | | ― | | | ― | | | ― | | | ― | | | ― | |
| | | | | | | | | | | | | | | | | | |
John T. Miller | | Change in Control | | | ― | | | ― | | | ― | | | 810,284 | | | 810,284 | |
| | Qualifying Termination | | | 92,500 | | | 11,613 | | | ― | | | ― | | | | |
| | Non-Qualifying Termination | | | ― | | | ― | | | ― | | | ― | | | ― | |
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Christopher W. Wright | | Change in Control | | | ― | | | ― | | | ― | | | 810,284 | | | 810,284 | |
| | Qualifying Termination | | | 92,500 | | | 15,669 | | | ― | | | ― | | | | |
| | Non-Qualifying Termination | | | ― | | | ― | | | ― | | | ― | | | ― | |
| | | | | | | | | | | | | | | | | | |
William G. Langley | | Change in Control | | | ― | | | ― | | | 312,800 | | | ― | | | 312,800 | |
__________(1) | ·Represents six months additional salary based on the executive’s salary in 2006. |
(2) | Stock Withholding: The electionRepresents the aggregate value of the continuation of certain employee health benefits for up to have us withhold, fromone year after the shares otherwise issuable upondate of termination.
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(3) | Represents the issuance, exercise oraggregate value of the accelerated vesting of an equity award, a portion of those shares with an aggregate fair marketthe executive officer’s unvested stock options and restricted stock grants. The amounts shown as the value equal to the percentage of the withholding taxes (not to exceed 100%) designatedaccelerated stock options and restricted stock grants in connection with a change in control without a qualifying termination are based solely on the intrinsic value of the options and restricted stock grants as of December 29, 2006. For options, this was calculated by multiplying (a) the holder and make a cash payment equal todifference between the fair market value directlyof our common stock on December 29, 2006, which was $15.39, and the applicable exercise price by (b) the assumed number of option shares vesting on an accelerated basis on December 29, 2006. For restricted stock grants, this was calculated by multiplying (i) the fair market value of our common stock on December 29, 2006 by (ii) the assumed number of shares vesting on an accelerated basis on December 29, 2006. |
(4) | Excludes the value to the appropriate taxing authorities onexecutive of the individual’s behalf.continuing right to indemnification and continuing coverage under our directors’ and officers’ liability insurance, if applicable. |
| · | Stock Delivery: The election to deliver to us certain shares of common stock previously acquired by the holder (other than in connection with the issuance, exercise or vesting that triggered the withholding taxes) with an aggregate fair market value equal to the percentage of the withholding taxes (not to exceed 100%) designated by the holder.
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| · | Sale and Remittance: The election to deliver to us, to the extent the award is issued or exercised for vested shares, through a special sale and remittance procedure pursuant to which the optionee or participant will concurrently provide irrevocable instructions to a brokerage firm to effect the immediate sale of the purchased or issued shares and remit to us, out of the sale proceeds available on the settlement date, sufficient funds to cover the withholding taxes we are required to withhold by reason of the issuance, exercise or vesting.
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Amendment, Suspension and Termination
Our Board may suspend or terminate the 2006 Plan at any time. Our Board may amend or modify the 2006 Plan, subject to any required stockholder approval. Stockholder approval will be required for any amendment that materially increases the number of shares available for issuance under the 2006 Plan, materially expands the class of individuals eligible to receive equity awards under the 2006 Plan, materially increases the benefits accruing to optionees and other participants under the 2006 Plan or materially reduces the price at which shares of common stock may be issued or purchased under the 2006 Plan, materially extends the term of the 2006 Plan, expands the types of awards available for issuance under the 2006 Plan, or as to which stockholder approval is required by applicable laws, rules or regulations.
Unless sooner terminated byCompensation Committee Interlocks and Insider Participation
No member of our Board the 2006 Plan will terminate on the earliest to occur of: July 19, 2007, if stockholder approvalhas a relationship that would constitute an interlocking relationship with executive officers or directors of the 2006 Plan has not yet been obtained; July 19, 2016; the date on which all shares available for issuance under the 2006 Plan have been issued as fully-vested shares; and the termination of all outstanding equity awards in connection with certain changes in control or ownership. If the 2006 Plan terminates on July 19, 2006, then all equity awards outstanding at that time will continue to have force and effect in accordance with the provisions of the documents evidencing those awards.another entity.
Federal Income Tax ConsequencesCERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following discussion summarizes income tax consequences of the 2006 Plan under current federal income tax lawPolicies and is intendedProcedures for general information only. In addition, the tax consequences described below are subject to the limitations of Section 162(m), as discussed in further detail below. Other federal taxes and foreign, state and local income taxes are not discussed, and may vary depending upon individual circumstances and from locality to locality.
Option Grants. Options granted under the 2006 Plan may be either incentive stock options, which satisfy the requirements of Section 422 of the Internal Revenue Code, or non-statutory stock options, which are not intended to meet those requirements. The federal income tax treatment for the two types of options differs as follows:
Incentive Stock Options. No taxable income is recognized by the optionee at the time of the option grant, and, if there is no disqualifying disposition at the time of exercise, no taxable income is recognized for regular tax purposes at the time the option is exercised, although taxable income may arise at that time for alternative minimum tax purposes equal to the excess of the fair market value of the purchased shares at the time over the exercise price paid for those shares.
The optionee will recognize taxable income in the year in which the purchased shares are sold or otherwise made the subject of certain dispositions. For federal tax purposes, dispositions are divided into two categories: qualifying and disqualifying. A qualifying disposition occurs if the sale or other disposition is made more than two years after the date the option for the shares involved in the sale or disposition was granted and more than one year after the date the option was exercised for those shares. If either of these two requirements is not satisfied, a disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize long-term capital gain in an amount equal to the excess of the amount realized upon the sale or other disposition of the purchased shares over the exercise price paid for the shares. If there is a disqualifying disposition of the shares, the excess of the fair market value of those shares on the exercise date over the exercise price paid for the shares will be taxable as ordinary income to the optionee. Any additional gain or any loss recognized upon the disposition will be taxable as a capital gain or capital loss.
If the optionee makes a disqualifying disposition of the purchased shares, we will be entitled to an income tax deduction, for our taxable year in which the disposition occurs, equal to the excess of the fair market value of the shares on the option exercise date over the exercise price paid for the shares. If the optionee makes a qualifying disposition, we will not be entitled to any income tax deduction.
Non-Statutory Stock Options. No taxable income is recognized by an optionee upon the grant of a non-statutory option. The optionee will, in general, recognize ordinary income, in the year in which the option is exercised, equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares, and we will be required to collect certain withholding taxes applicable to the income from the optionee.
We will be entitled to an income tax deduction equal to the amount of any ordinary income recognized by the optionee with respect to an exercised non-statutory option. The deduction will in general be allowed for our taxable year in which the ordinary income is recognized by the optionee.
If the shares acquired upon exercise of the non-statutory option are unvested and subject to repurchase in the event of the optionee’s cessation of service prior to vesting in those shares, the optionee will not recognize any taxable income at the time of exercise but will have to report as ordinary income, as and when our repurchase right lapses, an amount equal to the excess of the fair market value of the shares on the date the repurchase right lapses over the exercise price paid for the shares. The optionee may elect under Section 83(b) of the Internal Revenue Code to include as ordinary income in the year of exercise of the option an amount equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for the shares. If a timely Section 83(b) election is made, the optionee will not recognize any additional income as and when the repurchase right lapses.
Stock Appreciation Rights. No taxable income is recognized upon receipt of a stock appreciation right. The holder will recognize ordinary income in the year in which the stock appreciation right is exercised, in an amount equal to the excess of the fair market value of the underlying shares of common stock on the exercise date over the base price in effect for the exercised right, and we will be required to collect certain withholding taxes applicable to the income from the holder.
We will be entitled to an income tax deduction equal to the amount of any ordinary income recognized by the holder in connection with the exercise of a stock appreciation right. The deduction will in general be allowed for our taxable year in which the ordinary income is recognized by the holder.
Direct Stock Issuances.Stock granted under the 2006 Plan may include issuances such as unrestricted stock grants, restricted stock grants and restricted stock units. The federal income tax treatment for such stock issuances are as follows:
Unrestricted Stock Grants. The holder will recognize ordinary income in the year in which shares are actually issued to the holder. The amount of that income will be equal to the fair market value of the shares on the date of issuance, and we will be required to collect certain withholding taxes applicable to the income from the holder.
We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time the shares are issued. The deduction will in general be allowed for our taxable year in which the ordinary income is recognized by the holder.
Restricted Stock Grants. No taxable income is recognized upon receipt of stock that qualifies as performance-based compensation unless the recipient elects to have the value of the stock (without consideration of any effect of the vesting conditions) included in income on the date of receipt. The recipient may elect under Section 83(b) of the Internal Revenue Code to include as ordinary income in the year the shares are actually issued an amount equal to the fair market value of the shares. If a timely Section 83(b) election is made, the holder will not recognize any additional income when the vesting conditions lapse and will not be entitled to a deduction in the event the stock is forfeited as a result of failure to vest.
If the holder does not file an election under Section 83(b), he will not recognize income until the shares vest. At that time, the holder will recognize ordinary income in an amount equal to the fair market value of the shares on the date the shares vest. We will be required to collect certain withholding taxes applicable to the income of the holder at that time.
We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time the shares are issued, if the holder elects to file an election under Section 83(b), or we will be entitled to an income tax deduction at the time the vesting conditions occur, if the holder does not elect to file an election under Section 83(b).
Restricted Stock Units. No taxable income is recognized upon receipt of a restricted stock unit award. The holder will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the holder. The amount of that income will be equal to the fair market value of the shares on the date of issuance, and we will be required to collect certain withholding taxes applicable to the income from the holder.
We will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the holder at the time the shares are issued. The deduction will in general be allowed for our taxable year in which the ordinary income is recognized by the holder.
Deductibility of Executive Compensation
We anticipate that any compensation deemed paid by us in connection with disqualifying dispositions of incentive stock option shares or the exercise of non-statutory stock options or stock appreciation rights with exercise prices or base prices equal to or greater than the fair market value of the underlying shares on the grant date will qualify as performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code and will not have to be taken into account for purposes of the $1.0 million limitation per covered individual on the deductibility of the compensation paid to certain executive officers. Accordingly, all compensation deemed paid with respect to those options or stock appreciation rights should remain deductible without limitation under Section 162(m). However, any compensation deemed paid by us in connection with shares issued under the Stock Issuance Program will be subject to the $1.0 million limitation on deductibility per covered individual, except to the extent the vesting of those shares is based solely on one or more of the performance milestones specified above in the summary of the terms of the Stock Issuance Program.
Accounting Treatment
Pursuant to the accounting standards established by Statement of Financial Accounting Standards No. 123R, Share-Based Payment, or SFAS 123R, we are required to recognize all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, in our financial statements effective January 1, 2006. Accordingly, stock options that are granted to our employees and non-employee Board members will have to be valued at fair value as of the grant date under an appropriate valuation formula, and that value will have to be charged as stock-based compensation expense against our reported GAAP earnings over the designated vesting period of the award. Similar option expensing will be required for any unvested options outstanding on January 1, 2006, with the grant date fair value of those unvested options to be expensed against our reported earnings over the remaining vesting period. For shares issuable upon the vesting of restricted stock units awarded under the 2006 Plan, we will be required to expense over the vesting period a compensation cost equal to the fair market value of the underlying shares on the date of the award. If any other shares are unvested at the time of their direct issuance, the fair market value of those shares at that time will be charged to our reported earnings ratably over the vesting period. This accounting treatment for restricted stock units and direct stock issuances will be applicable whether vesting is tied to service periods or performance goals. The issuance of a fully-vested stock bonus will result in an immediate charge to our earnings equal to the fair market value of the bonus shares on the issuance date.
Stock options and stock appreciation rights granted to non-employee consultants will result in a direct charge to our reported earnings based on the fair value of the grant measured on the vesting date of each installment of the underlying shares. Accordingly, the charge will take into account the appreciation in the fair value of the grant over the period between the grant date and the vesting date of each installment comprising that grant.
New Plan Benefits
Because awards under the 2006 Plan are discretionary and no specific awards have been approved by the plan administrator, no awards under the 2006 Plan are determinable at this time; provided, that, under their executive employment agreements, each of John T. Miller, our Chief Operating Officer, and Christopher W. Wright, our Vice President, General Counsel and Secretary are to be issued 54,000 shares of our common stock pursuant to a restricted stock or restricted stock unit award under an incentive plan to be instituted by us that will vest as to 13,500 shares immediately and as to an additional 10,125 shares on each of the first, second, third and fourth anniversaries of the initial grant. We expect that these awards will be issued under the 2006 Plan once it is approved by our stockholders.
Other Arrangements Not Subject to Stockholder Action
Information regarding our other equity compensation plan arrangements that existed as of the end of 2005 is included in this Proxy Statement under the heading “Equity Compensation Plan Information” and “Stock Option Plans.”
InterestsApproval of Related Parties
The 2006 Plan provides that our officers, employees, non-employee directors, and certain consultants and independent advisors will be eligible to receive awards under the 2006 Plan. However, if this proposal is not approved by our stockholders, then no awards will be made under the 2006 Plan unless stockholder approval is otherwise obtained by July 19, 2007.
As discussed above, if stockholders approve this proposal, we may be eligible in certain circumstances to receive a tax deduction for certain executive compensation resulting from awards under the 2006 Plan that would otherwise be disallowed under Section 162(m) of the Internal Revenue Code.
Possible Anti-Takeover Effects
Although not intended as an anti-takeover measure by our Board, one of the possible effects of the 2006 Plan could be to place additional shares, and to increase the percentage of the total number of shares outstanding, or to place other incentive compensation, in the hands of the directors and officers of Pacific Ethanol. Those persons may be viewed as part of, or friendly to, incumbent management and may, therefore, under some circumstances be expected to make investment and voting decisions in response to a hostile takeover attempt that may serve to discourage or render more difficult the accomplishment of the attempt.
In addition, options or other incentive compensation may, in the discretion of the plan administrator, contain a provision providing for the acceleration of the exercisability of outstanding, but unexercisable, installments upon the first public announcement of a tender offer, merger, consolidation, sale of all or substantially all of our assets, or other attempted changes in the control of Pacific Ethanol. In the opinion of our Board, this acceleration provision merely ensures that optionees under the 2006 Plan will be able to exercise their options or obtain their incentive compensation as intended by our Board and stockholders prior to any extraordinary corporate transaction which might serve to limit or restrict that right. Our Board is, however, presently unaware of any threat of hostile takeover involving Pacific Ethanol.
Required Vote of Stockholders and Board Recommendation
Nasdaq Market Place Rule 4350(i)(1)(A) generally requires us to obtain stockholder approval of compensation plans pursuant to which our stock may be acquired by officers, directors, employees or consultants. The ratification and approval of the adoption of the 2006 Plan requires the affirmative votes of a majority of the votes of the shares of our common stock and Series A Preferred Stock, voting together as a single class, present at the 2006 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.
OUR BOARD RECOMMENDS A VOTE “FOR” RATIFICATION AND APPROVAL OF THE ADOPTION OF THE 2006 PLAN.
RATIFICATION OF SELECTION AND APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
(Proposal 3)Party Transactions
Our Board has selectedthe responsibility to review and appointeddiscuss 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 or approval of the Board or an independent registered public accounting firmcommittee of Hein & Associates LLPthe Board pursuant to auditapplicable 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 commentour stockholders.
Other than as described below or elsewhere in this proxy statement, since January 1, 2006 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. None of the below transactions, except for our sale of our Series A Preferred Stock to Cascade Investment, L.L.C., were separately approved by our Board as they occurred prior to our adoption of our policies and procedures for approval of related party transactions.
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 $175,000. Paul P. Koehler’s annual salary for 2006 was $150,000. The general terms and conditions of Paul P. Koehler’s Employment Agreement, which was entered into as of June 23, 2005, are substantially the same as those contained in Neil M. Koehler’s Executive Employment Agreement, except that Paul P. Koehler is not entitled to any bonus based on the net free cash flow of Kinergy. See “Executive Employment Agreements—Neil M. Koehler” above.
On October 4, 2006, we granted to Paul P. Koehler an aggregate of 64,350 shares of our financial statementscommon stock having an aggregate value of $840,411 based on the closing market price of $13.06 for a share of our common stock on that date. The common stock vested immediately as to 20,475 shares and will vest as to an additional 8,775 shares on each of the year ending Decembernext five anniversaries of the grant date starting on October 4, 2007. As a condition to subsequent vesting of the shares, Paul P. Koehler must remain continuously employed by us on a full time basis from the grant date through each subsequent vesting date.
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, is employed by us as Vice President, Public Policy and Markets, at an annual salary of $175,000. Thomas D. Koehler’s annual salary for 2006 was $150,000. The general terms and conditions of Thomas D. Koehler’s Employment Agreement, which was entered into as of March 23, 2005, are substantially the same as those contained in Neil M. Koehler’s Executive Employment Agreement, except that Thomas D. Koehler is not entitled to any bonus based on the net free cash flow of Kinergy. See “Executive Employment Agreements—Neil M. Koehler” above.
On October 4, 2006, we granted to Thomas D. Koehler an aggregate of 58,500 shares of our common stock having an aggregate value of $764,010 based on the closing market price of $13.06 for a share of our common stock on that date. The common stock vested immediately as to 14,625 shares and will vest as to an additional 8,775 shares on each of the next five anniversaries of the grant date starting on October 4, 2007. As a condition to subsequent vesting of the shares, Thomas D. Koehler must remain continuously employed by us on a full time basis from the grant date through each subsequent vesting date.
Southern Counties Oil Co. - Frank P. Greinke
On August 10, 2005, we entered into a six-month sales contract with Southern Counties Oil Co., an entity owned by Frank P. Greinke, one of our former directors who resigned that position in October 2006. The contract period was from October 1, 2005 through March 31, 2006 for 5,544,000 gallons of fuel grade ethanol to be delivered ratably at approximately 924,000 gallons per month at varying prices based on delivery destinations in Arizona, Nevada and California. On January 14, 2006, we entered into another six-month sales contract with Southern Counties Oil Co. The contract period was from April 1, 2006 through September 30, 2006 for 2,100,000 gallons of fuel-grade ethanol to conduct whatever audit functions are deemed necessary. Hein & Associates LLP audited our financial statementsbe delivered ratably at approximately 350,000 gallons per month at varying prices based on delivery destinations in California. On June 13, 2006, we entered into an additional six-month sales contract with Southern Counties Oil Co. The contract period was from October 1, 2006 through March 31, 2007 for 6,300,000 gallons of fuel-grade ethanol to be delivered ratably at approximately 1,050,000 gallons per month at varying prices based on delivery destinations in California, Nevada, and Arizona.
During the year ended December 31, 2005 that were included in2006, our most recent annual report on Form 10-KSB.sales to Southern Counties Oil Co. totaled $16,985,000 and accounts receivable from Southern Counties Oil Co. at December 31, 2006 totaled $1,188,000.
Required Vote of Stockholders and Board RecommendationFront Range Energy, LLC - Daniel A. Sanders
Although a voteOn October 17, 2006, we acquired approximately 42% of stockholders is not required on this proposal, our Board is asking our stockholders to ratify the appointmentoutstanding 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 independent registered public accountants.Directors, is the majority owner of Front Range Energy, LLC.
On August 9, 2006, Kinergy entered into an Amended and Restated Ethanol Purchase and Sale Agreement dated as of August 9, 2006 with Front Range Energy, LLC. The ratificationagreement 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 selectionoriginal or renewal term. Under the agreement, Kinergy is to provide denatured fuel ethanol marketing services for Front Range Energy, LLC. Kinergy is to have the exclusive right to market and appointment of our independent registered public accountants requires the affirmative votes of a majoritysell all of the votesethanol from the ethanol production facility owned by Front Range Energy, LLC, an estimated 40 million gallons per year. Pursuant to the terms of the shares of our common stock and Series A Preferred Stock, voting together as a single class, present atagreement, the 2006 annual meeting in person or by proxy and entitled to vote, which shares voting affirmatively must also constitute at least a majoritypurchase price of the voting power requiredethanol may be negotiated from time to constitute a quorum.
OUR BOARD RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE RATIFICATION OF THE SELECTION AND APPOINTMENT OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS.
OTHER MATTERS
Our Board knowstime between Kinergy and Front Range Energy, LLC without regard to the price at which Kinergy will re-sell the ethanol to its customers. Alternatively, Kinergy may pay to Front Range Energy, LLC the gross payments received by Kinergy from third parties for forward sales of no other mattersethanol, referred to be brought beforeas the 2006 annual meeting. However, if other matters should come beforepurchase price, less certain transaction costs and fees. From the 2006 annual meeting, it ispurchase price, Kinergy may deduct all reasonable out-of-pocket and documented costs and expenses incurred by or on behalf of Kinergy in connection with the intentionmarketing of ethanol pursuant to the agreement, including truck, rail and terminal costs for the transportation and storage of the person namedfacility’s ethanol to third parties and reasonable, documented out-of-pocket expenses incurred in connection with the proxynegotiation and documentation of sales agreements between Kinergy and third parties, collectively referred to vote such proxy in accordanceas the transaction costs. From the purchase price, Kinergy 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 is to split the profit from any logistical arbitrage associated with his or her judgment on such matters.ethanol supplied by Front Range Energy, LLC.
From October 17, 2006 through December 31, 2006, the period in 2006 during which Mr. Sanders was a member of our Board and a related party, purchases by us from Front Range Energy, LLC totaled $19,531,035. Accounts receivable from Front Range Energy, LLC totaled $344,226 at December 31, 2006. Accounts payable to Front Range Energy, LLC totaled $1,566,374 at December 31, 2006.
Cascade Investment, L.L.C.
On April 13, 2006, we issued to Cascade Investment, L.L.C., who at that time became a beneficial owner of more than 5% of our common stock, 5,250,000 shares of our Series A Preferred Stock at a price of $16.00 per share, for an aggregate purchase price of $84.0 million. For the year ended December 31, 2006, we paid an aggregate of $2,998,000 in cash dividends to Cascade Investment, L.L.C. in respect of our Series A Preferred Stock.
STOCKHOLDER PROPOSALSOTHER 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 INFORMATIONAvailable 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 NasdaqNASDAQ Global Market under the symbol “PEIX.”
ANNUAL REPORTAnnual Report
A copy of our annual reportAnnual Report for the year ended December 31, 20052006 accompanies this Proxy Statement. The annual reportAnnual 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 reportAnnual Report on Form 10-KSB10-K (without exhibits) for the year ended December 31, 20052006 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., 5711 N. West Avenue, Fresno,400 Capitol Mall, Suite 2060, Sacramento, California 93711,95814, Attention: Investor Relations, telephone (559) 435-1771.(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,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.
PROXY FOR 20062007 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, with the power to appoint his substitute, 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 2006 annual meeting2007 Annual Meeting of stockholders of the Company to be held at 9:008:30 a.m., local time, on September 7, 2006June 21, 2007 at Pardini’s located at 2257 W. Shaw Avenue , Fresno,the Sheraton Grand Sacramento, 1230 J Street, Sacramento, California 9371195814, 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 seven directors to the Company’s Board of Directors as follows:
1. | To elect seven 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 | £ 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
Frank P. GreinkeTerry L. Stone
John L. Prince
Douglas L. Kieta
John L. Prince
Terry L. Stone
Robert P. Thomas
Daniel A. Sanders
2. | To ratify and approve the adoption of our 2006 Stock Incentive Plan. |
£ FOR approval£ AGAINST approval£ ABSTAIN
3. | To consider and vote upon a proposal to ratify the appointment of Hein & Associates LLP as the Company’s independent registered public accountants of the Companyaccounting firm for the year ending December 31, 2006.2007. |
| £ FOR approval | | £ AGAINST approval | | £ ABSTAIN |
£ FOR approval£ AGAINST approval£ ABSTAIN
4.3. | To vote in his or her discretion ontransact such other business as may properly come before the meeting,Annual Meeting or any adjournmentadjournment(s) or adjournmentspostponement(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.
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(Signature of Stockholder(s)) |
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| (Print Name(s) Here) |
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| £ PLEASE CHECK IF YOU ARE PLANNING |
| TO ATTEND THE ANNUAL MEETING. |
DATED:_______________________________
(Signature of Stockholder(s))
(Print Name(s) Here)
£PLEASE CHECK IF YOU ARE PLANNING
TO ATTEND THE 2006 ANNUAL MEETING.
APPENDIX A
Title: | AUDIT COMMITTEE CHARTER |
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Policy: | This charter defines the membership and responsibilities of the Audit Committee of the Board of Directors of Pacific Ethanol. |
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Purpose: | The primary function of the Audit Committee of the Board of Directors of Pacific Ethanol, Inc is to, 1) assist the Board in fulfilling its responsibilities by reviewing the financial reports provided by the Company to the Securities and Exchange Commission, the Company’s shareholders or to the general public, and by reviewing the Company’s internal financial and accounting controls; 2) oversee the appointment, compensation, retention and oversight of the work performed by any independent public accountants engaged by the Company; 3) recommend, establish and monitor procedures designed to improve the quality and reliability of the disclosure of the Company’s financial condition and results of operations; and 4) monitor the implementation and effectiveness of PEI-II-030 Code of Ethics and the compliance programs under the Code of Ethics policy. |
2006 STOCK INCENTIVE PLANProcedures:
ARTICLE ONE1.0
GENERAL PROVISIONSCommittee Membership
I. | PurposeThe Audit Committee shall be comprised of a minimum of three or more Directors as appointed by the Board of Directors, who shall meet the independence, audit committee composition requirements promulgated by the Securities and Exchange Commission, the NASDAQ National Market, any exchange upon which securities of the Plan. Company are traded or any governmental or regulatory body exercising authority over the Company. In addition, each member of the Audit Committee shall be free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of his or her independent judgment as a member of the Audit Committee. |
This 2006 Stock Incentive Plan is intended to promote the interests of Pacific Ethanol, Inc. by providing eligible persons in the Corporation’s service with the opportunity to acquire a proprietary or economic interest, or otherwise increase their proprietary or economic interest, in the Corporation as an incentive for them to remain in such service and render superior performance during such service. Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the attached Appendix. | At the time of his or her appointment to the Audit Committee, each member of the Committee shall be able to read and understand fundamental financial statements, including a balance sheet, cash flow statement and income statement. At least one member of the Audit Committee shall have employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. Further, at least one member of the Audit Committee shall qualify as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. |
II. | StructureThe members of the Plan.
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A.The Plan is divided into two equity-based incentive programs:
| · | Audit Committee shall be elected by the Discretionary Grant Program, under which eligible persons may,Board of Directors at the discretionmeeting of the Plan Administrator,Board of Directors following each annual meeting of stockholders and shall serve until their successors shall be granted options to purchase sharesduly elected and qualified or until their earlier resignation or removal. Unless a Chair is elected by the full Board of Common Stock or stock appreciation rights tied toDirectors, the value of such Common Stock; and |
| · | the Stock Issuance Program, under which eligible persons may be issued shares of Common Stock pursuant to restricted stock or restricted stock unit awards or other stock-based awards, made by and at the discretionmembers of the Plan Administrator, that vest upon the completion ofAudit Committee may designate a designated service period and/or the attainment of pre-established performance milestones, or under which shares of Common Stock may be issued through direct purchase or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). |
B.The provisions of Articles One and Four shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan.
III. | AdministrationChair by majority vote of the Plan. full Committee membership. |
A. The Compensation Committee shall have sole and exclusive authority to administer the Discretionary Grant and Stock Issuance Programs, provided, however, that the Board may retain, reassume or exercise from time to time the power to administer those programs with respect to all persons. However, any discretionary Awards to members of the Compensation Committee must be authorized and approved by a disinterested majority of the Board.
B. The Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of those programs and any outstanding Awards thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Grant and Stock Issuance Programs under its jurisdiction or any Award thereunder.
C.2.0 Service on the Compensation Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Compensation Committee shall be liable for any act or omission made in good faith with respect to the Plan or any Award under the Plan.Meetings
IV. | Eligibility. The Audit Committee shall meet as often as it determines, but not less frequently than quarterly. The Audit Committee shall meet periodically with management, the internal auditors and the independent auditor in separate executive sessions. The Audit Committee may request any officer or employee of Pacific Ethanol or their outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Audit Committee. |
A.The persons eligible to participate in the Discretionary Grant3.0 Authority and Stock Issuance Programs are as follows:
(i)ResponsibilitiesEmployees;
(ii)non-employee members of the Board or the board of directors of any Parent or Subsidiary; and
(iii)Consultants.
B. The Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine (i) with respect to Awards made under the Discretionary Grant Program, which eligible persons are to receive such Awards, the time or times when those Awards are to be made, the number of shares to be covered by each such Award, the status of any awarded option as either an Incentive Option or a Non-Statutory Option, the exercise price per share in effect for each Award (subject to the limitations set forth in Article Two), the time or times when each Award is to vest and become exercisable and the maximum term for which the Award is to remain outstanding, and (ii) with respect to Awards under the Stock Issuance Program, which eligible persons are to receive such Awards, the time or times when the Awards are to be made, the number of shares subject to each such Award, the vesting schedule (if any) applicable to the shares subject to such Award, and the cash consideration (if any) payable for such shares.
C. The Plan Administrator shall have the absolute discretion to grant options or stock appreciation rights in accordance with the Discretionary Grant Program and to effect stock issuances or other stock-based awards in accordance with the Stock Issuance Program.
V. | Stock Subject toTo fulfill its responsibilities and duties, the Plan. Audit Committee shall carry out the following specific activities: |
A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. Subject to any additional shares authorized by the vote of the Board and approved by the stockholders, as of July 19, 2006, the number of shares of Common Stock reserved for issuance over the term of the Plan shall not exceed 2,000,000 shares. Any or all of the shares of Common Stock reserved for issuance under the Plan shall be authorized for issuance pursuant to Incentive Options or other Awards.3.1 Document Review
B. No one person participating in the Plan may be granted Awards for more than 250,000 shares of Common Stock in the aggregate per calendar year. | · | Review and reassess the adequacy of this Charter periodically as conditions dictate, but at least annually, and recommend any proposed changes to the Board of Directors for approval. |
| · | Review with representatives of management and representatives of the independent accounting firm Pacific Ethanol’s audited annual financial statements prior to their filing as part of the Annual Report on Form 10-KSB. After such review and discussion, the Audit Committee shall recommend to the Board of Directors whether such audited financial statements should be published in the Company’s Annual Report on Form 10-KSB. The Audit Committee shall also review the Company’s quarterly financial statements prior to their inclusion in Pacific Ethanol’s quarterly Securities and Exchange Commission filings on Form 10-QSB. |
| · | Take steps designed to insure that the independent accounting firm reviews Pacific Ethanol’s interim financial statements prior to their inclusion in the Company’s quarterly reports on Form 10-QSB. |
| · | Review and discuss with management and the independent accountants any material financial or non-financial arrangements of Pacific Ethanol that do not appear on the financial statements of the Company. |
C. Shares of Common Stock subject to outstanding Awards under the Plan shall be available for subsequent issuance under the Plan to the extent (i) those Awards expire or terminate for any reason prior to the issuance of the shares of Common Stock subject to those Awards or (ii) the Awards are cancelled in accordance with the cancellation-regrant provisions of 3.2 Article TwoIndependent Accounting Firm. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation at the original exercise or issue price paid per share pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for subsequent reissuance under the Plan. In addition, should the exercise price of an option under the Plan be paid with shares of Common Stock, the authorized reserve of Common Stock under the Plan shall be reduced only by the net number of shares issued under the exercised stock option. Should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the issuance, exercise or vesting of an Award under the Plan, the number of shares of Common Stock available for issuance under the Plan shall be reduced only by the net number of shares issued with respect to that Award.
| · | The Audit Committee shall be directly responsible for the appointment, compensation, retention and oversight of the work of any independent accounting firm engaged by Pacific Ethanol for the purpose of preparing or issuing an audit report or related work. The Audit Committee shall have the ultimate authority and responsibility to appoint, evaluate and, when warranted, replace such independent accounting firm (or to recommend such replacement for shareholder ratification in any proxy statement). |
| · | Resolve any disagreements between management and the independent accounting firm as to financial reporting matters. |
| · | Instruct the independent accounting firm that it should report directly to the Audit Committee on matters pertaining to the work performed during its engagement and on matters required by applicable regulatory body rules and regulations. |
D. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one person may be granted Awards under the Plan per calendar year, (iii) the number and/or class of securities and the exercise or base price per share (or any other cash consideration payable per share) in effect under each outstanding Award under the Discretionary Grant Program, and (iv) the number and/or class of securities subject to each outstanding Award under the Stock Issuance Program and the cash consideration (if any) payable per share thereunder. To the extent such adjustments are to be made to outstanding Awards, those adjustments shall be effected in a manner that shall preclude the enlargement or dilution of rights and benefits under those Awards. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.
| · | On an annual basis, receive from the independent accounting firm a formal written statement identifying all relationships between the independent accounting firm and Pacific Ethanol consistent with Independence Standards Board Standard 1. The Audit Committee shall actively engage in a dialogue with the independent accounting firm as to any disclosed relationships or services that may impact its independence. The Audit Committee shall take appropriate action to oversee the independence of the independent accounting firm. |
| · | On an annual basis, discuss with representatives of the independent accounting firm the matters required to be discussed by Statement on Auditing Standards 61, as it may be modified or supplemented. |
| · | Meet with the independent accounting firm prior to the audit to review the planning and staffing of the audit and consider whether or not to approve the auditing services proposed to be provided. |
| · | Evaluate the performance of the independent accounting firm and consider the discharge of the independent accounting firm when circumstances warrant. The independent accounting firm shall be ultimately accountable to the Board of Directors and the Audit Committee. |
| · | Consider in advance whether or not to approve any non-audit services to be performed by the independent accounting firm required to be approved by the Audit Committee pursuant to the rules and regulations of any applicable regulatory body. |
| · | The Audit Committee shall have the authority to oversee and determine the compensation of any independent accounting firm engaged by the Company. |
| · | Ensure the rotation of the audit partners as required by Section 10A(j) of the Securities Exchange Act of 1934, as amended, and consider whether, in order to assure continuing auditor independence, it is appropriate to adopt a policy of rotating the independent auditing firm on a regular basis. |
| · | Recommend to the Board of Directors policies for the Company’s hiring of employees or former employees of the independent auditor consistent with Section 10A(l) of the Securities Exchange Act of 1934. |
| · | At least annually, obtain written confirmation from the independent accountants that, in the independent accountants’ professional judgment, the independent accountants are “independent” of the Company within the meaning of the federal securities laws. |
| · | Periodically consult with the independent accountants out of the presence of management about internal controls and the fullness and accuracy of the Company’s financial statements. |
ARTICLE TWO3.3
DISCRETIONARY GRANT PROGRAMFinancial Reporting Processes
I. | Option Terms. · | In consultation with the independent accounting firm and management, review annually the adequacy of the Company’s internal financial and accounting controls. |
Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.
A. Exercise Price.
1.The exercise price per share shall be fixed by the Plan Administrator but shall not be less than 85% of the Fair Market Value per share of Common Stock on the option grant date.
2.The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the following forms that the Plan Administrator may deem appropriate in each individual instance:
(i)cash or check made payable to the Corporation;
(ii)shares of Common Stock valued at Fair Market Value on the Exercise Date and held for the period (if any) necessary to avoid any additional charges to the Corporation’s earnings for financial reporting purposes; or
(iii)to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm to complete the sale.
Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.
| · | Review disclosures made to the Audit Committee by Pacific Ethanol’s Chief Executive Officer and Chief Financial Officer in connection with their certifications of the Company’s reports on Form 10-KSB and Form 10-QSB, including disclosures concerning; 1) evaluations of the design and operation of the Company’s internal financial and accounting controls; 2) any significant deficiencies discovered in the design and operation of the Company’s internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data; and 3) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls. The Audit Committee shall direct the actions to be taken and/or make recommendations to the Board of Directors of actions to be taken to the extent such disclosures indicate the finding of any significant deficiencies in internal controls or fraud. |
B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten years measured from the option grant date. | · | Regularly review Pacific Ethanol’s critical accounting policies and accounting estimates resulting from the application of these policies and inquire at least annually of both the Company’s internal auditors and the independent accounting firm as to whether either has any concerns relative to the quality or aggressiveness of management’s accounting policies. |
C. Effect of Termination of Service. | · | Consider the independent accountant’s judgments about the quality and appropriateness of the Company’s accounting principles as applied in its financial reporting. |
1.The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: | · | Consider and approve, if appropriate, major changes to Pacific Ethanol’s auditing and accounting principles and practices as suggested by the independent accountants or management. |
(i)Any option outstanding at the time of the Optionee’s cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option or as otherwise specifically authorized by the Plan Administrator in its sole discretion pursuant to an express written agreement with Optionee, but no such option shall be exercisable after the expiration of the option term. | · | Establish regular and separate reporting to the Audit Committee by each of management and the independent accountants regarding any significant judgments made in management’s preparation of the financial statements and the view of each as to appropriateness of such judgments. |
(ii)Any option held by the Optionee at the time of death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or by the Optionee’s designated beneficiary or beneficiaries of that option. | · | Following completion of the annual audit, review separately with each of management and the independent accountants any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information. |
(iii)During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which that option is at the time exercisable. No additional shares shall vest under the option following the Optionee’s cessation of Service, except to the extent (if any) specifically authorized by the Plan Administrator in its sole discretion pursuant to an express written agreement with Optionee. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any shares for which the option has not been exercised. | · | Review and resolve any significant disagreement among management and the independent accountants in connection with the preparation of the financial statements. |
2.The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: | · | Review with the independent accountants and management the extent to which changes or improvements in financial or accounting practices, as approved by the Audit Committee, have been implemented. |
(i)extend the period of time for which the option is to remain exercisable following the Optionee’s cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or | · | Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters. |
(ii)permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. | · | Establish procedures for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters. |
| · | Prepare, in accordance with the rules of the Securities and Exchange Commission as modified or supplemented from time to time, a written report of the audit committee to be included in the Company’s annual proxy statement for each annual meeting of stockholders. |
D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares.
| · | To the extent required by any regulatory body, instruct the Company’s management to disclose in its Form 10-KSB and Form 10-QSB’s the approval by the Audit Committee of any non-audit services performed by the independent accounting firm, and review the substance of any such disclosure. |
E. 3.4 Repurchase Rights. The Plan Administrator shall have the discretion to grant options that are exercisable for unvested sharesOversight of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right.
F. Transferability of OptionsPacific Ethanol’s Internal Audit Function. The transferability of options granted under the Plan shall be governed by the following provisions:
(i) Incentive Options. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or the laws of inheritance following the Optionee’s death.
(ii) Non-Statutory Options. Non-Statutory Options shall be subject to the same limitation on transfer as Incentive Options, except that the Plan Administrator may structure one or more Non-Statutory Options so that the option may be assigned in whole or in part during the Optionee’s lifetime to one or more Family Members of the Optionee or to a trust established exclusively for the Optionee and/or one or more such Family Members, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate.
(iii) Beneficiary Designations. Notwithstanding the foregoing, the Optionee may designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Two (whether Incentive Options or Non-Statutory Options), and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.
II. | · | Discuss with the independent auditor and management the internal audit department responsibilities, budget and staffing and any recommended changes in the planned scope of the internal audit. |
Incentive Options.
| · | Review the significant reports to management prepared by the internal auditing department and management’s responses. |