SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

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Soliciting Material Pursuant to Section 240.14a-11(c)240.14a-11(c) or Section 240.14a-12


PACIFIC ETHANOL, INC.
(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

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PACIFIC ETHANOL, INC.
5711 N. WEST AVENUE400 Capitol Mall, Suite 2060
FRESNO, CALIFORNIA 93711Sacramento, California 95814
 
August 2, 2006May 11, 2007

To OurDear Fellow Stockholders:
 
You are cordially invited to attend the 2006 annual meeting2007 Annual Meeting of stockholders of Pacific Ethanol, Inc. that will be held at 9:008:30 a.m., local time, on September 7, 2006June 21, 2007 at Pardini’s locatedthe Sheraton Grand Sacramento, 1230 J Street, Sacramento, California 95814. All stockholders of record at 2257 W. Shaw Avenue,Fresno, California 93711. All holders of our outstanding common stock as of the close of business on July 21, 2006April 23, 2007 are entitled to vote at the 2006 annual meeting.Annual Meeting. The formal meeting notice and proxy statement are attached.
 
Enclosed is a copyAt this year’s Annual Meeting, stockholders will be asked to elect seven directors and ratify the appointment of the notice of annual meeting of stockholders, a Proxy Statement and a proxy card. Also enclosed is a copy ofHein & Associates LLP to serve as our annual report on Form 10-KSBindependent registered public accounting firm for the year endedending December 31, 2005.2007. In addition, stockholders will transact any other business that may properly come before the meeting. A current report on the business operations of Pacific Ethanol Inc. will also be presented at the meeting and stockholders will have an opportunity to ask questions.
 
We hope you will be able to attend the 2006 annual meeting.Annual Meeting. Whether or not you expectplan to attend, it is important that your shares be represented and voted at the Annual Meeting. We urge you complete, sign, date and return theto vote promptly by mailing a completed proxy card in the enclosed postage-paid envelope or by voting electronically over the Internet or by telephone. If your shares are held in orderthe name of a brokerage firm or bank, you will receive a voting instruction form in lieu of a proxy card and may also be eligible to make certainvote electronically. Timely voting by any of these methods will ensure your representation at the Annual Meeting.
We look forward to seeing you June 21st.

Sincerely,
 
William L. Jones,
Chairman of the Board
PACIFIC ETHANOL, INC.
NOTICE OF THE 2007 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 21, 2007
__________________________
NOTICE IS HEREBY GIVEN that the 2007 Annual Meeting of stockholders of Pacific Ethanol, Inc., a Delaware corporation, will be held at 8:30 a.m., local time, on June 21, 2007 at the Sheraton Grand Sacramento, 1230 J Street, Sacramento, California 95814, for the following purposes as more fully described in the proxy statement accompanying this notice:
1.To elect seven directors to serve on our Board of Directors until the next annual meeting of stockholders and/or until their successors are duly elected and qualified. The nominees for election are William L. Jones, Neil M. Koehler, Terry L. Stone, John L. Prince, Douglas L. Kieta, Robert P. Thomas and Daniel A. Sanders.
2.To ratify the appointment of Hein & Associates LLP as our independent registered public accounting firm for the year ending December 31, 2007; and
3.To transact such other business as may properly come before the Annual Meeting or any adjournment(s) or postponement(s) thereof.
All stockholders of record at the close of business on April 23, 2007 are entitled to notice of and to vote at the Annual Meeting and any adjournment(s) or postponement(s) thereof.
We cordially invite all stockholders to attend the Annual Meeting in person. Whether or not you plan to attend, it is important that your shares will be represented and voted at the 2006 annual meeting.
Sincerely,
You can vote your shares by completing and returning the enclosed proxy card or by voting electronically over the Internet or by telephone. If your shares are held in “street name,” that is, your shares are held in the name of a brokerage firm, bank or other nominee, in lieu of a proxy card you should receive from that institution an instruction form for voting by mail, and you may also be eligible to vote your shares electronically. Should you receive more than one proxy card or voting instruction form because your shares are held in multiple accounts or registered in different names or addresses, please sign, date and return each proxy card or voting instruction form to ensure that all of your shares are voted.
 
/s/ William L. Jones

William L. Jones,
ChairmanFor admission to the Annual Meeting, each stockholder may be asked to present valid picture identification, such as a driver’s license or passport, and proof of ownership of our capital stock as of the Boardrecord date, such as the enclosed proxy card or a brokerage statement reflecting stock ownership.

By Order of the Board of Directors
 
William L. Jones,
Chairman of the Board

Sacramento, California
May 11, 2007
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. Returning a signed proxy card will help us secure a quorum and avoid the expense of additional proxy solicitation. If you later desire to revoke your proxy for any reason, you may do so in the manner described in the attached proxy statement.


PACIFIC ETHANOL, INC.
5711 N. WEST AVENUEPROXY STATEMENT
FRESNO, CALIFORNIA 93711
NOTICE OF 2006FOR THE 2007 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 7, 2006JUNE 21, 2007
__________________________
 
NOTICE IS HEREBY GIVEN that the 2006 annual meeting of stockholders of Pacific Ethanol, Inc., a Delaware corporation, will be held at 9:00 a.m., local time, on September 7, 2006 at Pardini’s located at 2257 W. Shaw Avenue,Fresno, California 93711, for the following purposes:
1.To elect seven directors to our Board of Directors;
2.To ratify and approve the adoption of our 2006 Stock Incentive Plan;
3.To ratify the selection and appointment of Hein & Associates LLP as our independent registered public accountants to audit the financial statements of Pacific Ethanol, Inc. for the year ending December 31, 2006; and
4.To transact such other business as may properly come before the 2006 annual meeting or any adjournment or adjournments thereof.
Our Board of Directors has fixed the close of business on July 21, 2006 as the record date for the determination of stockholders entitled to notice of and to vote at the 2006 annual meeting and all adjourned meetings thereof.
By Order of the Board of Directors
/s/ William L. Jones
William L. Jones,
Chairman of the Board
Dated: August 2, 2006
PLEASE FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE RETURN ENVELOPE FURNISHED FOR THAT PURPOSE AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU LATER DESIRE TO REVOKE YOUR PROXY FOR ANY REASON, YOU MAY DO SO IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT.
TABLE OF CONTENTS
Page

VOTING AND PROXY
Page
Voting and Proxy1
  
PROPOSAL 1Proposal One - ELECTION OF DIRECTORSElection of Directors2
Information About Our Board of Directors, Board Committees and Related Matters3
  
INFORMATION ABOUT OUR BOARD OF DIRECTORS, BOARD COMMITTEES AND RELATED MATTERSProposal Two - Ratification of Appointment of Independent Registered Public Accounting Firm412
  
EXECUTIVE COMPENSATION AND RELATED INFORMATIONOther Matters913
  
SECTIONAudit Matters13
Security Ownership of Certain Beneficial Owners and Management15
Section 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCEBeneficial Ownership Reporting Compliance16
  
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSEquity Compensation Plan Information1716
  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTExecutive Compensation and Related Information17
Executive Officers17
Compensation Discussion and Analysis18
Compensation Committee Report23
Summary Compensation Table24
Grants of Plan-Based Awards28
Outstanding Equity Awards at Fiscal Year-End29
Option Exercises and Stock Vested29
Potential Payments upon Termination or Change in Control30
Calculation of Potential Payments upon Termination or Change in Control31
Compensation Committee Interlocks and Insider Participation32
  
PROPOSAL 2 - RATIFICATION AND APPROVAL OF ADOPTION OF 2006 STOCK INCENTIVE PLANCertain Relationships and Related Transactions2732
  
PROPOSAL 3 - RATIFICATION OF SELECTION AND APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTSOther Information38
OTHER MATTERS38
STOCKHOLDER PROPOSALS39
AVAILABLE INFORMATION39
ANNUAL REPORT40
APPENDIX A - 2006 STOCK INCENTIVE PLANA-134
 
APPENDICES

Appendix A - Audit Committee CharterA-1
Appendix B - Compensation Committee CharterB-1
Appendix C - Nominating and Governance Committee CharterC-1


i
PACIFIC ETHANOL, INC.
5711 N. WEST AVENUE
FRESNO, CALIFORNIA 93711

PROXY STATEMENT
_____________________
2006FOR THE 2007 ANNUAL MEETING OF STOCKHOLDERS

SEPTEMBER 7, 2006JUNE 21, 2007
_____________________
THESE PROXY MATERIALS ARE FIRST BEING MAILED TO
STOCKHOLDERS ON OR ABOUT AUGUST 2, 2006
_______________________________________________
 
VOTING AND PROXY
 
This Proxy Statement is being furnished in connection with the solicitation of proxies by our board of directors (“Board”) for use at the 2006 annual meeting2007 Annual Meeting of stockholders 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 93711,95814, and at any adjournmentsadjournment(s) or postponement(s) of the 2006 annual meeting. When a proxy is properly executed and returned, the shares it represents will be voted according to directions noted on the proxy. If no specification is indicated, the shares will be voted “for” each of the proposals listed on the proxy. Any stockholder giving a proxy has the power to revoke it at any time before it is voted by providing written notice to our corporate Secretary, by issuance of a subsequent proxy or by voting in person at the 2006 annual meeting.Annual Meeting.
 
Our annual reportAnnual Report on Form 10-KSB10-K for the year ended December 31, 20052006 is being mailed to stockholders concurrently with this Proxy Statement. The annual reportAnnual Report is not to be regarded as proxy soliciting material or as a communication through which any solicitation of proxies is made. A proxy card is enclosed for your use. The shares represented by each properly executed unrevoked proxy card will be voted as directed by the stockholder with respect to the matters described in the proxy card. If no direction is made, the shares represented by each properly executed proxy card will be voted “for” each of the proposals listed on the proxy card. Any stockholder giving a proxy given may be revokedhas the power to revoke it at any time priorbefore it is voted by providing written notice to its exercise by filing with our corporate Secretary, an instrument revoking theby issuance of a subsequent proxy or by filing a duly executed proxy card bearing a later date.voting in person at the Annual Meeting. Any stockholder present at the meeting who has given a proxy may withdraw it and vote his, her or its shares in person if he, she or it so desires. However, a stockholder who holds shares through a broker or other nominee must bring a legal proxy to the meeting if that stockholder desires to vote at the meeting.
 
At the close of business on July 21, 2006,April 23, 2007, the record date for determining stockholders entitled to notice of and to vote at the 2006 annual meeting,Annual Meeting, we had issued and outstanding 37,223,23640,467,478 shares of common stock held by 527209 holders of record and 5,250,000 shares of Series A Cumulative Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) held by one holder of record. Only stockholders of record at the close of business on the record date are entitled to notice of and to vote at the 2006 annual meetingAnnual Meeting or at any adjournmentsadjournment(s) or postponement(s) of the meeting.
 
Each share of our common stock issued and outstanding on the record date entitles the holder of that share to one vote at the 2006 annual meetingAnnual Meeting for all matters to be voted on at the meeting. Each share of our Series A Preferred Stock issued and outstanding on the record date entitles the holder of that share to approximately 1.78 votes at the 2006 annual meetingAnnual Meeting for all matters to be voted on at the meeting. The holders of a majority of the voting power of our issued and outstanding capital stock and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for purposes of voting on the proposals. Votes cast at the 2006 annual meetingAnnual Meeting will be tabulated by the person or persons appointed by us to act as inspectors of election for the meeting. Shares of our common stock and our Series A Preferred Stock represented in person or by proxy (regardless of whether the proxy has authority to vote on all matters), as well as abstentions and broker non-votes, will be counted for purposes of determining whether a quorum is present at the meeting.
 
1
An “abstention” is the voluntary act of not voting by a stockholder who is present at a meeting and entitled to vote. “Broker non-votes” are shares of voting stock held in record name by brokers and nominees concerning which: (i) instructions have not been received from the beneficial owners or persons entitled to vote; (ii) the broker or nominee does not have discretionary voting power under applicable rules or the instrument under which it serves in such capacity; or (iii) the record holder has indicated on the proxy or has executed a proxy and otherwise notified us that it does not have authority to vote such shares on that matter.
 
In any election of directors, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. Votes against a candidate and votes withheld have no legal effect.
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We will pay the expenses of soliciting proxies for the 2006 annual meeting,Annual Meeting, including the cost of preparing, assembling and mailing the proxy solicitation materials. Proxies may be solicited personally, by mail or by telephone, or by our directors, officers and regular employees who will not be additionally compensated. We have no present plans to hire special employees or paid solicitors to assist in obtaining proxies, but we reserve the option to do so if it appears that a quorum otherwise might not be obtained. The matters to be considered and acted upon at the 2006 annual meetingAnnual Meeting are referred to in the preceding notice and are discussed below more fully.
 
Share Exchange TransactionPROPOSAL ONE
On March 23, 2005, we completed a share exchange transaction (the “Share Exchange Transaction”) with the shareholders of Pacific Ethanol California, Inc. (“PEI California”) and the holders of the membership interests of each of Kinergy Marketing, LLC (“Kinergy”) and ReEnergy, LLC (“ReEnergy”), pursuant to which we acquired all of the issued and outstanding shares of capital stock of PEI California and all of the outstanding membership interests of each of Kinergy and ReEnergy. Immediately prior to the consummation of the share exchange, our predecessor, Accessity Corp. (“Accessity”), reincorporated in the State of Delaware under the name “Pacific Ethanol, Inc.” through a merger of Accessity with and into its then-wholly-owned Delaware subsidiary named Pacific Ethanol, Inc., which was formed for the purpose of effecting the reincorporation. We are the surviving entity resulting from the reincorporation merger and Kinergy, PEI California and ReEnergy are three of our wholly-owned subsidiaries.
In connection with the Share Exchange Transaction, we issued an aggregate of 20,610,987 shares of common stock to the shareholders of PEI California, 3,875,000 shares of common stock to the limited liability company member of Kinergy and an aggregate of 125,000 shares of common stock to the limited liability company members of ReEnergy. In addition, holders of options and warrants to acquire an aggregate of 3,157,587 shares of common stock of PEI California were, following the consummation of the Share Exchange Transaction, deemed to hold warrants to acquire an equal number of our shares of common stock. Also, a holder of a promissory note, a portion of which was convertible into an aggregate of 664,879 shares of common stock of PEI California was, following the consummation of the Share Exchange Transaction, entitled to convert the note into an equal number of shares of our common stock.
2
A change in control of Accessity occurred in connection with the Share Exchange Transaction. The persons who acquired control were, collectively, the former shareholders of PEI California and the former members of Kinergy and ReEnergy who, in connection with the Share Exchange Transaction, exchanged their shares and equity interests in such entities for shares of common stock of Pacific Ethanol, Inc. However, to the knowledge of Pacific Ethanol, Inc., no person or group of persons, as such terms are used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is in control of Pacific Ethanol, Inc.
Upon consummation of the Share Exchange Transaction, we ceased all business activities of Accessity and commenced operating the business of Pacific Ethanol, Inc., which is comprised of the ethanol marketing business of Kinergy and the construction of ethanol production facilities through PEI California, including our first ethanol production facility currently under construction in Madera County, California.
ELECTION OF DIRECTORS
(Proposal 1)
 
Our bylaws provide for seven directors unless otherwise changed by resolution of our Board. Directors are elected annually and hold office until the next annual meeting of stockholders and/or until their respective successors are duly elected and qualified or until their earlier death, resignation or removal.qualified. It is intended that the proxies solicited by our Board will be voted “for” election of the following seven nominees unless a contrary instruction is made on the proxy: William L. Jones, Neil M. Koehler, Frank P. Greinke,Terry L. Stone, John L. Prince, Douglas L. Kieta, John L. Prince, Terry L. Stone and Robert P. Thomas.Thomas and Daniel A. Sanders. If, for any reason, one or more of the nominees is unavailable as a candidate for director, an event that is not anticipated, the person named in the proxy will vote for another candidate or candidates nominated by our Nominating and Governance Committee. However, under no circumstances may a proxy be voted in favor of a greater number of persons than the number of nominees named above. As described above, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them, up to the number of directors to be elected by such shares, are elected. All of the nominees for director are, at present, directors of Pacific Ethanol Inc. and have been nominated by our Nominating and Governance Committee.Committee and ratified by our full Board.
 
We are obligated to cause each person serving from time to time as one of our executive officers, directors or managers, or having such a position with any of our subsidiaries, to execute a voting letter that grants an irrevocable proxy to Cascade Investment, L.L.C., the holder of all of our issued and outstanding shares of Series A Preferred Stock, with respect to securities held by such persons to vote to elect two persons to our Board. As of July 21, 2006,April 23, 2007, all such officers, directors and managers held an aggregate of 5,783,1394,990,354 shares of our common stock representing approximately 12%10% of all votes entitled to be cast in connection with the election of members of our Board. In April 2006, Cascade Investment, L.L.C. identified Robert P. Thomas and Douglas L. Kieta as its two director designees, and our Board appointed Messrs. Thomas and Kieta as members of our Board, in connection with the issuance of our Series A Preferred Stock. Both Messrs. Thomas and Kieta have been nominated by our Nominating and Governance Committee for election to our Board at the 2006 annual meetingAnnual Meeting and we expect that Cascade Investment, L.L.C. will utilize its proxy to vote in favor of their election.
 
Required Vote of Stockholders
The seven nominees receiving the highest number of affirmative votes of the outstanding shares of our common stock and Series A Preferred Stock, voting together as a single class, present at the Annual Meeting in person or by proxy and entitled to vote, will be elected as directors to serve until the next annual meeting of stockholders and/or until their successors are duly elected and qualified. Votes against a candidate, abstentions and broker non-votes will be counted for purposes of determining whether a quorum is present for this proposal, but will not be included in the vote totals for this proposal and, therefore, will have no effect on the vote.
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Recommendation of the Board of Directors
OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF THE SEVEN DIRECTOR NOMINEES LISTED ABOVE.
INFORMATION ABOUT OUR BOARD OF DIRECTORS,
BOARD COMMITTEES AND RELATED MATTERS
 
Directors and Director Nominees
The following table sets forth certain information regarding our current directors and executive officers of Pacific Ethanol, Inc., and the director nominees and their ages, positions, business experience and education are as follows:
of April 27, 2007:
Name
Age
Positions Held
William L. Jones
56
57
Chairman of the Board, Director and Director Nominee
Neil M. Koehler
48
49
Chief Executive Officer, President, Director and Director Nominee
John T. Miller
Terry L. Stone (1)
60Chief Operating Officer
William G. Langley
57
56Chief Financial Officer
Christopher W. Wright53Vice President, General Counsel and Secretary
Frank P. Greinke51
Director and Director Nominee
Douglas
John L. Kieta (1)Prince (2)
63
64
Director and Director Nominee
John
Douglas L. Prince (2)Kieta (3)
63
64
Director and Director Nominee
Terry L. Stone (3)
Robert P. Thomas (4)
57
29
Director and Director Nominee
Robert P. Thomas (4)
Daniel A. Sanders
28
55
Director and Director Nominee
___________
(1)Member of the Audit and Compensation Committees.
(1)Member of the Nominating and Governance Committee.
(2)Member of the Audit, Compensation and Nominating and Governance Committees.
(2)Member of the Audit Committee.
(3)Member of the Nominating and Governance Committee.
(3)Member of the Audit, Nominating and Governance, and Compensation Committees.
\(4)Member of the Audit and Compensation Committees.
(4)Member of the Audit and Compensation Committees.
Following is a brief description of the business experience and educational background of each of the nominees for director, including the capacities in which he has served during the past five years:
 
William L. Jones has served as Chairman of the Board and as a director since March 2005. Mr. Jones is a co-founder of Pacific Ethanol California, Inc. (“PEI CaliforniaCalifornia”), which is now one of our wholly-owned subsidiaries, and served as Chairman of the Board of PEI California since its formation in January 2003 through March 2004, when he stepped off the board of PEI California to focus on his candidacy for one of California’s United States Senate seats. Mr. Jones was California’s Secretary of State from 1995 to 2003. Since May 2002, Mr. Jones has also been the owner of Tri-J Land & Cattle, a diversified farming and cattle company in Fresno County, California. Mr. Jones has a B.A. degree in Agribusiness and Plant Sciences from California State University, Fresno.
 
Neil M. Koehler has served as Chief Executive Officer, President and as a director since March 2005. Mr. Koehler served as Chief Executive Officer of PEI California since its formation in January 2003 and as Chairmana member of its board of directors since March 2004. Prior to his association with PEI California, Mr. Koehler was the co-founder and General Manager of Parallel Products, one of the first ethanol production facilities in California, (and one of only two currently existing ethanol production facilities in California), which was sold to a public company in 1997. Mr. Koehler was also the sole manager and sole limited liability company member of Kinergy Marketing, LLC (“Kinergy”), which he founded in September 2000.2000, and which is now one of our wholly-owned subsidiaries. Mr. Koehler has over 20 years of experience in the ethanol production, sales and marketing industry in the Western United States. Mr. Koehler is the Director of the California Renewable Fuels Partnership, a Director of the Renewable Fuels Association and is a nationally-recognized speaker on the issueproduction and marketing of renewable fuels and ethanol production in California.fuels. Mr. Koehler has a B.A. degree in Government from Pomona College.
 
4-3-
Terry L. Stone has served as a director since March 2005. Mr. Stone is a Certified Public Accountant with over thirty years of experience in accounting and taxation. He has been the owner of his own accountancy firm since 1990 and has provided accounting and taxation services to a wide range of industries, including agriculture, manufacturing, retail, equipment leasing, professionals and not-for-profit organizations. Mr. Stone has served as a part-time instructor at California State University, Fresno teaching classes in taxation, auditing, and financial and management accounting. Mr. Stone is also a financial advisor and franchisee of Ameriprise Financial Services, Inc. Mr. Stone has a B.S. degree in Accounting from California State University, Fresno.
John L. Prince has served as a director since July 2005. Mr. Prince is retired but also works as a consultant to Ruan Transport Corp. and other companies. Mr. Prince was an Executive Vice President with Land O’ Lakes, Inc. from July 1998 until his retirement in 2004. Prior to that time, Mr. Prince was President and Chief Executive Officer of Dairyman’s Cooperative Creamery Association, or the DCCA, located in Tulare, California, until its merger with Land O’ Lakes, Inc. in July 1998. Land O’ Lakes, Inc. is a farmer-owned, national branded organization based in Minnesota with annual sales in excess of $6 billion and membership and operations in over 30 states. Prior to joining the DCCA, Mr. Prince was President and Chief Executive Officer for nine years until 1994, and was Operations Manager for the preceding ten years commencing in 1975, of the Alto Dairy Cooperative in Waupun, Wisconsin. Mr. Prince has a B.A. degree in Business Administration from the University of Northern Iowa.
Douglas L. Kietahas served as a director since April 2006. Mr. Kieta is currently employed by BE&K, Inc., a large engineering and construction company headquartered in Birmingham, Alabama, where he has served as the Vice President of Power since May 2006. From April 1999 to April 2006, Mr. Kieta was employed at Calpine Corporation. At the time of his retirement in April 2006, Mr. Kieta was the Senior Vice President of Construction and Engineering with Calpine Corporation. Calpine Corporation is a major North American power company which leases and operates integrated systems of fuel-efficient natural gas-fired and renewable geothermal power plants and delivers clean, reliable and fuel-efficient electricity to customers and communities in 21 U.S. states and three Canadian provinces. Mr. Kieta has a B.S. degree in civil engineering from Clarkson University and a master’s degree in civil engineering from Cornell University.
Robert P. Thomashas served as a director since April 2006. Since July 1999, 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. Mr. Thomas is a graduate of Claremont McKenna College.
Daniel A. Sanders has served as a director since October 2006. In July 2004, Mr. Sanders founded Front Range Energy, LLC, which he currently operates as its sole Manager. From 1999 to July 2004, Mr. Sanders was engaged in the study and development of alternative fuels which lead to the formation of Front Range Energy, LLC in 2004. From the fall of 1996 to 1999, Mr. Sanders was engaged in the cattle feeding business as a sole proprietor. From July 1992 to September 1996, Mr. Sanders managed The Roaring Springs Ranch, a family-owned cattle operation in Oregon. During the same period, and for some years prior to 1992, Mr. Sanders was employed in a variety of positions by RSG Forest Products, a family-owned company. In September 1996, when he sold his interest in RSG Forest Products and The Roaring Springs Ranch, Mr. Sanders was President of Sanders Wood Products, a subsidiary of RSG Forest Products with annual sales of $125 million. From 1998 to 2005, Mr. Sanders served on the Board of Directors of Twin City Bank, Longview, Washington. Mr. Sanders is a Director of the Renewable Fuels Association and has a B.S. degree in liberal arts from Oregon State University.
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Corporate Governance
Our Board believes that good corporate governance is paramount to ensure that Pacific Ethanol is managed for the long-term benefit of our stockholders. Our Board has adopted corporate governance guidelines that guide its actions with respect to, among other things, the composition of the Board and its decision making processes, Board meetings and involvement of management, the Board’s standing committees and procedures for appointing members of the committees, and its performance evaluation for our Chief Executive Officer.
Our Board has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees and an additional Code of Business Ethics that applies to our Chief Executive Officer and senior financial officers. The Codes of Ethics, as applied to our principal executive officer, principal financial officer and principal accounting officer constitutes our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and is our “code of conduct” within the meaning of the listing standards of NASDAQ. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from provisions of these codes that relate to one or more of the items set forth in Item 406(b) of Regulation S-K, by describing on our Internet website, located at http://www.pacificethanol.net, within four business days following the date of a waiver or a substantive amendment, the date of the waiver or amendment, the nature of the amendment or waiver, and the name of the person to whom the waiver was granted. Information on our Internet website is not, and shall not be deemed to be, a part of this Proxy Statement or incorporated into any other filings we make with the Securities and Exchange Commission.
Director Independence
Our corporate governance guidelines provide that a majority of the Board and all members of the Audit, Compensation and Nominating and Governance Committees of the Board will be independent. On an annual basis, each director and executive officer is obligated to complete a Director and Officer Questionnaire that requires disclosure of any transactions with Pacific Ethanol in which a director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. Following completion of these questionnaires, the Board, with the assistance of the Nominating and Governance Committee, makes an annual determination as to the independence of each director using the current standards for “independence” established by the Securities and Exchange Commission and NASDAQ, additional criteria set forth in our corporate governance guidelines and consideration of any other material relationship a director may have with Pacific Ethanol.
In April 2007 the Board determined that all of its directors and nominees for election at the Annual Meeting are independent under these standards, except for (i) Mr. Jones, who is the father-in-law of Ryan W. Turner, one of our former executive officers who resigned in April 2006, (ii) Mr. Koehler, who serves full-time as our Chief Executive Officer and President, and (iii) Mr. Sanders, who is the majority owner of Front Range Energy, LLC, an entity in which we are a minority owner and with which we conduct significant business. See “Certain Relationships and Related Transactions” below.
Stockholder Communications with our Board of Directors
Our Board has implemented a process by which stockholders may send written communications directly to the attention of our Board or any individual member of our Board. Terry L. Stone, the Chairman of our Audit Committee, is responsible for monitoring communications from stockholders and providing copies of such communications to the other directors as he considers appropriate. Communications will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that Mr. Stone considers to be important for the directors to consider. Stockholders who wish to communicate with our Board can write to Terry L. Stone, The Board of Directors, Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060, Sacramento, California 95814.
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Board Committees and Meetings
Our business, property and affairs are managed under the direction of our Board. Our directors are kept informed of our business through discussions with our executive officers, by reviewing materials provided to them and by participating in meetings of our Board and its committees. During 2006, our Board held twelve meetings. All directors attended at least 75% of the aggregate of the meetings of our Board and of the committees on which they served or that were held during the period they were directors or committee members.
Members of our Board and its committees also consulted informally with management from time to time and acted at various times by written consent without a meeting during 2006. Additionally, the independent members of the Board met in executive session regularly without the presence of management.
It is our policy to invite and encourage our directors to attend our annual meetings. At the date of our 2006 annual meeting, we had seven members on our Board, three of whom, namely, Messrs. Jones, Koehler and Stone, were in attendance at our 2006 annual meeting.
Our Board has established standing Audit, Compensation and Nominating and Governance Committees. Each committee has a written charter that is reviewed annually and revised as appropriate.
Audit Committee
Our Audit Committee selects our independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors, and reviews our financial statements for each interim period and for our year end. During 2006 until April 13, 2006, this committee consisted of Terry L. Stone, John L. Prince and Kenneth J. Friedman. Concurrent with Mr. Friedman’s resignation from our Board on April 13, 2006, Mr. Thomas was appointed as a member of our Audit Committee. Our Board has determined that each member of the Audit Committee is “independent” under the current NASDAQ listing standards and satisfies the other requirements under NASDAQ listing standards and Securities and Exchange Commission rules regarding audit committee membership. Our Board has determined that Mr. Stone (i) qualifies as an “audit committee financial expert” under applicable Securities and Exchange Commission rules and regulations governing the composition of the Audit Committee, and (ii) satisfies the “financial sophistication” requirements of the NASDAQ listing standards. Our Audit Committee operates pursuant to a charter approved by our Board and our Audit Committee, according to the rules and regulations of the Securities and Exchange Commission. A copy of the charter of our Audit Committee is attached as Appendix A to this Proxy Statement. During 2006, our Audit Committee held ten meetings. The Audit Committee Report for 2006 can be found on page 14 of this Proxy Statement.
Compensation Committee
Our Compensation Committee is responsible for establishing and administering our overall policies on compensation and the compensation to be provided to our executive officers, including, among other things, annual salaries and bonuses, stock options, stock grants, other stock-based awards, and other incentive compensation arrangements. In addition, the Compensation Committee reviews the philosophy and policies behind the salary, bonus and stock compensation arrangements for all other employees. Although our Compensation Committee makes all compensation decisions as to our executive officers, our Chief Executive Officer makes recommendations to our Compensation Committee regarding compensation for the other named executive officers. Our Compensation Committee has the authority to administer our 2006 Stock Incentive Plan with respect to grants to executive officers and directors, and also has authority to make equity awards under our 2006 Stock Incentive Plan to all other eligible individuals. However, our Board may retain, reassume or exercise from time to time the power to administer our 2006 Stock Inventive Plan. Equity awards made to members of the Compensation Committee must be authorized and approved by a disinterested majority of our Board.
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The Compensation Committee evaluates both performance and compensation to ensure that the total compensation paid to our executive officers is fair, reasonable and competitive so that we can attract and retain superior employees in key positions. The Compensation Committee believes that compensation packages offered to our executives, including the named executive officers, should include both cash and equity-based compensation that reward performance as measured against established goals. The Compensation Committee has the authority to retain consultants, and other advisors and in furtherance of the foregoing objectives, our Compensation Committee has engaged Hewitt Associates LLC, an outside global human resources consulting firm, to conduct an annual review of our total compensation program for the named executive officers and other executives. Hewitt Associates has provided our Compensation Committee with relevant market data and alternatives to consider when making compensation decisions as to the named executive officers and when making decisions as to the recommendations being made by our management for other executives. In making compensation decisions, our Compensation Committee compares each element of total compensation against market data obtained by Hewitt Associates. The Compensation Committee generally expects to set total compensation for the named executive officers at the median of compensation paid to similarly situated executives of the companies comprising the market data provided to us by Hewitt Associates.
Additional information concerning the compensation policies and objectives established by the Compensation Committee is included under the heading “Executive Compensation and Related Information — Compensation Discussion and Analysis” below. The Compensation Committee Report for 2006 can be found on page 23 of this proxy statement.
During 2006 until April 13, 2006, our Compensation Committee consisted of Messrs. Stone and Friedman. Concurrent with Mr. Friedman’s resignation from our Board on April 13, 2006, Mr. Thomas was appointed as a member and as Chairman of our Compensation Committee. In addition, on December 20, 2006, Mr. Prince was appointed as a member of our Compensation Committee. Our Board has determined that each member of the Compensation Committee is “independent” under the current NASDAQ listing standards. Our Compensation Committee operates pursuant to a charter approved by our Board and our Compensation Committee. A copy of the charter of our Compensation Committee is attached as Appendix B to this Proxy Statement. During 2006, our Compensation Committee held five meetings.
Nominating and Governance Committee
Our Nominating and Governance Committee selects nominees for our Board. During 2006 until April 13, 2006, our Nominating and Governance Committee consisted of Messrs. Stone and Friedman. Concurrent with Mr. Friedman’s resignation from our Board on April 13, 2006, Douglas L. Kieta was appointed as a member of our Nominating and Governance Committee. In addition, on December 20, 2006, Mr. Prince was appointed as a member of our Nominating and Governance Committee. Our Board has determined that each member of the Nominating and Governance Committee is “independent” under the current NASDAQ listing standards.
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The Nominating and Governance Committee will consider candidates for director recommended by any stockholder that is the beneficial owner of shares representing more than 1.0% of the then-outstanding shares of our common stock and who has beneficially owned those shares for at least one year. The Nominating and Governance Committee will evaluate those recommendations by applying its regular nominee criteria and considering the additional information described in the Nominating and Governance Committee’s below-referenced charter. Stockholders that desire to recommend candidates for the Board for evaluation may do so by contacting Pacific Ethanol in writing, identifying the potential candidate and providing background and other relevant information. Our Nominating and Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. Candidates may also come to the attention of the Nominating and Governance Committee through current Board members, professional search firms and other persons. In evaluating potential candidates, our Nominating and Governance Committee will take into account a number of factors, including, among others, the following:
·the candidate’s independence from management;
·whether the candidate has relevant business experience;
·judgment, skill, integrity and reputation;
·existing commitments to other businesses;
·corporate governance background;
·financial and accounting background, to enable the committee to determine whether the candidate would be suitable for Audit Committee membership; and
·the size and composition of our Board.
Our Nominating and Governance Committee operates pursuant to a charter approved by our Board and our Nominating and Governance Committee. A copy of the charter of our Nominating and Governance Committee is attached as Appendix C to this Proxy Statement. During 2006, our Nominating and Governance Committee held two meetings.
Compensation of Directors
We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our Board. In setting the compensation of directors, we consider the significant amount of time that the Board members spend in fulfilling their duties to Pacific Ethanol as well as the experience level we require to serve on our Board. The Board, through its Compensation Committee, annually reviews the compensation and compensation policies for Board members. In recommending director compensation, the Compensation Committee is guided by three goals: (i) compensation should fairly pay directors for work required in a company of our size and scope; (ii) compensation should align directors’ interests with the long-term interests of our stockholders; and (iii) the structure of the compensation should be clearly disclosed to our stockholders.
Cash Compensation
Current Program. On October 18, 2006, and effective as of January 1, 2007, our Compensation Committee approved a new cash compensation plan for directors which provides the Chairman of our Board annual compensation of $80,000, the Chairman of our Audit Committee annual compensation of $22,000 and the Chairman of our Compensation Committee annual compensation of $20,000. All other directors, except employee directors, receive annual compensation of $12,000. These amounts are paid in monthly installments. In addition, directors are reimbursed for certain reasonable and documented expenses in connection with attendance at meetings of our Board and its committees. Employee directors do not receive director compensation in connection with their service as directors.
Prior Program. During 2006, our cash compensation plan for directors provided the Chairman of our Board annual compensation of $80,000 and each member of our Board, including the Chairman, $1,500 for each Board meeting attended, whether attended in person or telephonically. The Chairman of our Audit Committee received an additional $3,500 per quarter. In addition, directors were reimbursed for certain reasonable and documented expenses in connection with attendance at meetings of our Board and its committees. Employee directors did not receive director compensation in connection with their service as directors.
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Equity Compensation
We do not have a predetermined or automatic annual or other periodic program for grants of equity compensation to our directors. Equity compensation is granted as and when determined appropriate by our Compensation Committee or our full Board.
Current Program. On October 4, 2006, our Compensation Committee approved restricted stock grants to our directors under our 2006 Stock Incentive Plan. The Chairman of our Board received 31,200 shares of restricted stock, vesting as to 7,800 shares immediately and as to 4,680 shares on each of the next five anniversaries of the initial grant date. Each other director, other than Neil M. Koehler, who received a grant of restricted stock solely in his capacity as an employee, received 15,600 shares of restricted stock, vesting as to 5,200 shares immediately and as to 5,200 shares on each of the next two anniversaries of the initial grant date. Mr. Sanders, who was not a director at the time of the grants, received an equivalent amount of shares of restricted stock in January 2007. A director will not vest as to any shares following the date of his or her cessation of Board service.
Prior Program. On July 26, 2005, our Compensation Committee approved grants of options to our directors under our 2004 Stock Option Plan. Our Chairman of the Board was granted options to purchase up to 50,000 shares of our common stock, the Chairman of our Audit Committee was granted options to purchase up to 20,000 shares of our common stock and each other director, other than Neil M. Koehler who was compensated solely as an employee, was granted options to purchase up to 15,000 shares of our common stock. The options have an exercise price of $8.25 per share, vested as to all shares on July 26, 2006 and have an exercise period of ten years after their date of grant. In addition, on July 28, 2005, our Compensation Committee approved grants of options to two new directors under our 2004 Stock Option Plan. They each were granted options to purchase up to 15,000 shares of our common stock. The options have an exercise price of $8.30 per share, vested as to all shares on July 28, 2006 and have an exercise period of ten years after their date of grant.
Compensation of Employee Director
Mr. Koehler was compensated as a full-time employee and officer but received no additional compensation for service as a Board member during 2006. Information regarding the compensation awarded to Mr. Koehler is included in the “Summary Compensation Table” below.
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Director Compensation Table
The following table summarizes the compensation of our directors for the year ended December 31, 2006:
Name
 
Fees Earned
or Paid
in Cash
($)(1)
 
Stock
Awards
($)(2)
 
Option
Awards
($)(3)
 
Total
($)
 
 
William L. Jones
 
$
93,500
 
$
116,639(4)
 
$
127,886(4)
 
$
338,025
 
Terry L. Stone  33,500  
84,324(5)
  
51,154(5)
  168,978 
John L. Prince  16,500  
84,324(6)
  
38,909(6)
  139,733 
Douglas L. Kieta  12,000  
84,324(7)
  ─  96,324 
Robert P. Thomas  15,000  
84,324(8)
  ─  99,324 
Daniel A. Sanders(9)
  4,500  ─  ─  4,500 
Frank P. Greinke(10)
  9,000  
67,912(10)
  
38,366(10)
  115,278 
Charles W. Bader(11)
  1,500  ─  
38,909(11)
  40,409 
Kenneth J. Friedman(12)
  1,500  ─  
38,366(12)
  39,866 
__________
(1)For a description of annual director fees and fees for chair positions, see the disclosure above under “Cash Compensation.” The value of perquisites and other personal benefits was less than $10,000 in aggregate for each director.
(2)The amounts shown are the compensation costs recognized in our financial statements for 2006 related to shares of restricted stock awarded to each director in 2006 in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” referred to in this proxy statement as SFAS No. 123R. The fair values of the shares of restricted stock awarded were calculated based on the fair market value of our common stock on the grant date. No grants of restricted stock were made in prior years.
(3)The amounts shown are the compensation costs recognized in our financial statements for 2006 related to grants of stock options to each director in 2005, to the extent we recognized compensation cost in 2006 for such awards in accordance with the provisions of SFAS No. 123R.
(4)At December 31, 2006, Mr. Jones held 31,200 shares from stock awards, including 23,400 unvested shares, and also held options to purchase an aggregate of 50,000 shares of common stock. Mr. Jones was granted 31,200 shares of our common stock on October 4, 2006, having an aggregate grant date fair value of $404,472, calculated based on the fair market value of our common stock on the grant date.
(5)At December 31, 2006, Mr. Stone held 15,600 shares from stock awards, including 10,400 unvested shares, and also held options to purchase an aggregate of 20,000 shares of common stock. Mr. Stone was granted 15,600 shares of our common stock on October 4, 2006, having an aggregate grant date fair value of $203,736, calculated based on the fair market value of our common stock on the grant date.
(6)At December 31, 2006, Mr. Prince held 15,600 shares from stock awards, including 10,400 unvested shares, and also held options to purchase an aggregate of 15,000 shares of common stock. Mr. Prince was granted 15,600 shares of our common stock on October 4, 2006, having an aggregate grant date fair value of $203,736, calculated based on the fair market value of our common stock on the grant date.
(7)At December 31, 2006, Mr. Kieta held 15,600 shares from stock awards, including 10,400 unvested shares. Mr. Kieta was granted 15,600 shares of our common stock on October 4, 2006, having an aggregate grant date fair value of $203,736, calculated based on the fair market value of our common stock on the grant date.
(8)At December 31, 2006, Mr. Thomas held 15,600 shares from stock awards, including 10,400 unvested shares. Mr. Thomas was granted 15,600 shares of our common stock on October 4, 2006, having an aggregate grant date fair value of $203,736, calculated based on the fair market value of our common stock on the grant date.
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(9)Mr. Sanders is the majority owner of Front Range Energy, LLC, an entity of which we are a minority owner and with which we have entered into an Amended and Restated Ethanol Purchase and Sale Agreement dated as of August 9, 2006. See “Certain Relationships and Related Transactions” below.
(10)Mr. Greinke is the owner of Southern Counties Oil Co., an entity with which we have entered into a series of a six-month sales contracts. See “Certain Relationships and Related Transactions” below. At December 31, 2006, Mr. Greinke held 5,200 shares from stock awards and also held options to purchase an aggregate of 15,000 shares of common stock. Mr. Greinke was granted 15,600 shares of our common stock on October 4, 2006, having an aggregate grant date fair value of $203,736, calculated based on the fair market value of our common stock on the grant date, of which 10,400 shares were forfeited upon Mr. Greinke’s resignation in October 2006.
(11)At December 31, 2006, Mr. Bader held options to purchase an aggregate of 15,000 shares of common stock. Mr. Bader resigned his directorship in April 2006.
(12)At December 31, 2006, Mr. Friedman held options to purchase an aggregate of 15,000 shares of common stock. Mr. Friedman resigned his directorship in April 2006.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to indemnify its directors and officers against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with a pending or completed action, suit or proceeding if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in the best interests of the corporation.
Our certificate of incorporation provides that, except in certain specified instances, our directors shall not be personally liable to us or our stockholders for monetary damages for breach of their fiduciary duty as directors, except liability for the following:

·any breach of their duty of loyalty to our company or our stockholders;
·acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
·unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; and
·any transaction from which the director derived an improper personal benefit.
In addition, our certificate of incorporation and bylaws obligate us to indemnify our directors and officers against expenses and other amounts reasonably incurred in connection with any proceeding arising from the fact that such person is or was an agent of ours. Our bylaws also authorize us to purchase and maintain insurance on behalf of any of our directors or officers against any liability asserted against that person in that capacity, whether or not we would have the power to indemnify that person under the provisions of the Delaware General Corporation Law. We have entered and expect to continue to enter into agreements to indemnify our directors and officers as determined by our Board. These agreements provide for indemnification of related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.
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The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
Insofar as the provisions of our certificate of incorporation or bylaws provide for indemnification of directors or officers for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), we have been informed that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our Audit Committee has appointed the independent registered public accounting firm of Hein & Associates LLP to audit and comment on our financial statements for the year ending December 31, 2007, and to conduct whatever audit functions are deemed necessary. Hein & Associates LLP audited our financial statements for the year ended December 31, 2006 that were included in our most recent Annual Report on Form 10-K.
A representative of Hein & Associates LLP is expected to be present at the Annual Meeting, will have the opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions from stockholders.
Required Vote of Stockholders
Although a vote of stockholders is not required on this proposal, our Board is asking our stockholders to ratify the appointment of our independent registered public accounting firm. The ratification of the appointment of our independent registered public accounting firm requires the affirmative votes of a majority of the votes of the shares of our common stock and Series A Preferred Stock, voting together as a single class, present at the Annual Meeting in person or by proxy and entitled to vote, which shares voting affirmatively must also constitute at least a majority of the voting power required to constitute a quorum.
In the event that our stockholders do not ratify the appointment of Hein & Associates LLP as our independent registered public accounting firm, the appointment will be reconsidered by our Audit Committee. Even if the appointment is ratified, our Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if the Audit Committee believes that such a change would be in our and our stockholders’ best interests.
Recommendation of the Board of Directors
OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF HEIN & ASSOCIATES LLP TO SERVE AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2007.
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OTHER MATTERS
Our Board knows of no other matters to be brought before the Annual Meeting. However, if other matters should come before the Annual Meeting, it is the intention of the person named in the proxy to vote such proxy in accordance with his or her judgment on such matters.
AUDIT MATTERS
Principal Accountant Fees and Services
The following table presents fees for professional audit services rendered by Hein & Associates LLP for the years ended December 31, 2006 and 2005.
  2006 2005 
Audit Fees $1,389,710 $395,189 
Audit-Related Fees  82,683  98,938 
Tax Fees  48,011  6,296 
All Other Fees  —  — 
Total $1,520,404 $500,423 
Audit Fees. Consist of amounts billed for professional services rendered for the audit of our annual consolidated financial statements included in our Annual Reports on Forms 10-K and 10-KSB, and reviews of our interim consolidated financial statements included in our Quarterly Reports on Forms 10-Q and 10-QSB and our Registration Statements on Forms S-1, S-3 and S-8, including amendments thereto, and the review of our internal accounting and reporting controls as required under Section 404 of the Sarbanes-Oxley Act of 2002.
Audit-Related Fees. Audit-Related Fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements but are not reported under “Audit Fees.” Such fees include amounts billed for professional services performed in connection with mergers and acquisitions.
Tax Fees. Tax Fees consist of fees for professional services for tax compliance activities, including the preparation of federal and state tax returns and related compliance matters.
All Other Fees. Consists of amounts billed for services other than those noted above.
Our Audit Committee has determined that all non-audit services provided by Hein & Associates LLP are compatible with maintaining Hein & Associates LLP’s audit independence.
Our Audit Committee is responsible for approving all audit, audit-related, tax and other services. The Audit Committee pre-approves all auditing services and permitted non-audit services, including all fees and terms to be performed for us by our independent auditor at the beginning of the fiscal year. Non-audit services are reviewed and pre-approved by project at the beginning of the fiscal year. Any additional non-audit services contemplated by us after the beginning of the fiscal year are submitted to the Audit Committee chairman for pre-approval prior to engaging the independent auditor for such services. These interim pre-approvals are reviewed with the full Audit Committee at its next meeting for ratification. During 2006, all services performed by Hein & Associates LLP were pre-approved by our Audit Committee in accordance with these policies and applicable Securities and Exchange Commission regulations.
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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 the financial statements of our predecessor, Accessity Corp. (“Accessity), 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.
The following Audit Committee Report is not considered proxy solicitation material and is not deemed filed with the Securities and Exchange Commission. Notwithstanding anything to the contrary set forth in any of our previous filings made under the Securities Act or under the Securities Exchange Act of 1934, as amended (“Exchange Act”) that might incorporate future filings made by us under those statutes, the Audit Committee Report will not be incorporated by reference into any such prior filings or into any future filings made by us under those statutes.
Audit Committee Report
Our Audit Committee discussed with our independent auditors all matters required to be discussed by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, “Communication with Audit Committees.” Prior to the inclusion and filing with the Securities and Exchange Commission of the consolidated audited financial statements in the accompanying Annual Report on Form 10-K for the year ended December 31, 2006, 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 Annual Report on Form 10-K with the Securities and Exchange Commission, and based on the review and discussions referenced above, the Audit Committee recommended to our Board that the audited financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2006.
                Respectfully submitted,
                Audit Committee
                Terry L. Stone
                John L. Prince
                Robert P. Thomas

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial ownership of our common stock as of April 27, 2007, the date of the table, by:

·each person known by us to beneficially own more than 5% of the outstanding shares of our common stock;
·each of our directors;
·each of our current executive officers; and
·all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to the securities. To our knowledge, except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Shares of common stock underlying derivative securities, if any, that currently are exercisable or convertible or are scheduled to become exercisable or convertible for or into shares of common stock within 60 days after the date of the table are deemed to be outstanding in calculating the percentage ownership of each listed person or group but are not deemed to be outstanding as to any other person or group. Percentage of beneficial ownership is based on 40,467,478 shares of common stock outstanding as of the date of the table.
Name and Address of Beneficial Owner (1)
 
Title of Class
 
Amount and Nature
of Beneficial Ownership
 
Percent
of Class
 
William L. Jones
 
 
Common
 
 
1,636,200(2)
 
 
4.04%
Neil M. Koehler Common 3,201,539    7.91%
John T. Miller. Common 52,650    * 
Christopher W. Wright Common 63,965    * 
Terry L. Stone Common 
35,600(3)
 * 
John L. Prince Common 
30,600(4)
 * 
Douglas L. Kieta Common 15,600    * 
Robert P. Thomas Common 15,600    * 
Daniel A. Sanders Common 18,600    * 
Cascade Investment, L.L.C. Common 
10,500,000(5)
 20.60%
  Series A Preferred 
5,250,000(5)
 100.00%
All executive officers and directors as a group (9 persons) Common 
5,070,354(6)
 12.50%
__________
*Less than 1.00%
(1)Messrs. Jones, Koehler, Stone, Prince, Kieta, Thomas and Sanders are directors of Pacific Ethanol. Messrs. Koehler, Miller and Wright are executive officers of Pacific Ethanol. The address of each of these persons is c/o Pacific Ethanol, Inc., 400 Capitol Mall, Suite 2060, Sacramento, California 95814.
(2)Includes 50,000 shares of common stock underlying options issued to Mr. Jones and 1,586,200 shares of common stock held by William L. Jones and Maurine Jones, husband and wife, as community property.
(3)Includes 15,000 shares of common stock underlying options.
(4)Includes 15,000 shares of common stock underlying options.
(5)Amount of common stock represents shares of common stock underlying our Series A Preferred Stock. All Series A Preferred Stock held by Cascade Investment, L.L.C. may be deemed to be beneficially owned by William H. Gates III as the sole member of Cascade Investment, L.L.C. The address for Cascade Investment, L.L.C. is 2365 Carillon Point, Kirkland, Washington 98033.
(6)Includes 80,000 shares of common stock underlying options.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our common stock, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. These officers, directors and stockholders are required by Securities and Exchange Commission regulations to furnish us with copies of all reports that they file.
Based solely upon a review of copies of the reports furnished to us during the year ended December 31, 2006 and thereafter, or any written representations received by us from directors, officers and beneficial owners of more than 10% of our common stock (“reporting persons”) that no other reports were required, we believe that, during 2006, all Section 16(a) filing requirements applicable to our reporting persons were met.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2006.
Plan Category
 
 
Number of
Securities to be
Issued Upon Exercise of Outstanding,
Options, Warrants
or Stock Rights
 
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
 
Number of
Securities Remaining
Available
for Future Issuance Under
Equity Compensation
Plans(1)(2)
 
Equity Compensation Plans Approved by Security Holders:
      
1995 Plan(1)
 63,000 $  5.83 ─  
2004 Plan(2)
 405,000 $  7.63 ─  
2006 Plan ─ ─ 1,106,997
__________
(1)Our Amended 1995 Incentive Stock Plan was terminated effective July 19, 2006, except to the extent of then-outstanding options.
(2)Our 2004 Stock Option Plan was terminated effective September 7, 2006, except to the extent of then-outstanding options.

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EXECUTIVE COMPENSATION AND RELATED INFORMATION
Executive Officers
The following table sets forth certain information regarding our executive officers as of April 27, 2007:
Name
Age
Positions Held
Neil M. Koehler
49
Chief Executive Officer, President and Director
John T. Miller
61
Chief Operating Officer and Acting Chief Financial Officer
Christopher W. Wright
54
Vice President, General Counsel and Secretary
Neil M. Koehler has served as Chief Executive Officer, President and as a director since March 2005. Mr. Koehler served as Chief Executive Officer of PEI California since its formation in January 2003 and as a member of its board of directors since March 2004. Prior to his association with PEI California, Mr. Koehler was the co-founder and General Manager of Parallel Products, one of the first ethanol production facilities in California, which was sold to a public company in 1997. Mr. Koehler was also the sole manager and sole limited liability company member of Kinergy, which he founded in September 2000, and which is now one of our wholly-owned subsidiaries. Mr. Koehler has over 20 years of experience in the ethanol production, sales and marketing industry in the Western United States. Mr. Koehler is the Director of the California Renewable Fuels Partnership, a Director of the Renewable Fuels Association and is a nationally-recognized speaker on the production and marketing of renewable fuels. Mr. Koehler has a B.A. degree in Government from Pomona College.
John T. Miller has served as Chief Operating Officer since June 2006 and as our Acting Chief Financial Officer since December 2006. Mr. Miller was employed at Calpine Corporation beginning in 2001 and served as a Senior Vice President from 2002 to 2006. At Calpine, Mr. Miller held several roles including managing the build-out of power projects, overseeing human resources and safety programs and leading Calpine’s strategy to centralize its power plant and corporate activities. Prior to his tenure at Calpine, Mr. Miller served from 1998 to 2001 as Vice President of Thermo Ecotek, a subsidiary of Thermo Electron, and as President of Thermo Ecotek’s Power Resources Division. Mr. Miller directed Thermo Electron’s expansion of its independent power business in the United States, Germany and the Czech Republic. He also represented Thermo Electron in managing the sale of the Power Resources Division to AES Corporation. Mr. Miller also served from 1994 to 1998 as President and Chief Executive Officer of Pacific Generation Company, a subsidiary of PacifiCorp. Prior to that time, Mr. Miller served from 1990 to 1994 as Pacific Generation Company’s Vice President of Business Development and from 1987 to 1990 as its Vice President of Operations. In 1995, Mr. Miller completed Harvard University’s Managing Global Opportunities, an executive education program. Mr. Miller has a B.S. degree in Mechanical Engineering from Oregon State University and an M.B.A. degree from the University of Portland. Mr. Miller served in the United States Navy from 1967 to 1971 as a Communications Technician.
 
William G. Langley has served as Chief Financial Officer since April 2005. Mr. Langley has been a partner in Tatum CFO Partners, LLP (“Tatum”), a national partnership of more than 350 professional highly-experienced chief financial officers, since November 2002. During this time, Mr. Langley has acted as the full-time Chief Financial Officer for Ensequence, Inc., an inter-active television software company, Norton Motorsports, Inc., a motorcycle manufacturing and marketing company and Auctionpay, Inc., a software and fundraising management company. From 2001 to 2002, Mr. Langley served as the President, Chief Financial Officer and Chief Operating Officer for Laservia Company, which specializes in advanced laser system technology. From 2000 to 2001, Mr. Langley acted as the Chief Financial Officer of Rulespace, Inc., a developer of artificial intelligence software. Mr. Langley has prior public company experience, is licensed both as an attorney and C.P.A. and will remain a partner in Tatum during his employment with Pacific Ethanol. Mr. Langley has a B.A. degree in accounting and political science from Albertson College, a J.D. degree from Lewis & Clark School of Law and an LL.M. degree from the New York University School of Law.
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Christopher W. Wright has served as Vice President, General Counsel and Secretary since June 2006. Mr. Wright has over 24twenty-four years of experience as a lawyer, including over 18eighteen years as a partner in national or major regional law firms. From April 2004 until he joined Pacific Ethanol in June 2006, Mr. Wright operated an independent consulting practice, advising companies on complex transactions, including acquisitions and financings. Prior to that time, from January 2003 to April 2004, Mr. Wright was a partner with Orrick, Herrington & Sutcliffe, LLP, and from July 1998 to December 2002, Mr. Wright was a partner with Cooley Godward LLP, where he served as Partner-in-chargePartner-in-Charge of the Pacific Northwest office. Mr. Wright has extensive experience advising boards of directors on compliance, securities matters and strategic transactions, with a particular focus on guiding the development of rapidly growing companies. He has acted as general counsel for numerous technology enterprises in all aspects of corporate development, including fund-raising, business and technology acquisitions, mergers and strategic alliances. Mr. Wright holds an A.B. in History from Yale College and a J.D. from the University of Chicago Law School.
 
Frank P. Greinke has served as a director since March 2005. Mr. Greinke served as a director of PEI California commencing in October 2003. Mr. Greinke is currently, and has been for at least the past five years, the CEO and sole owner of Southern Counties Oil Co., a petroleum distribution group. Mr. Greinke is also a director of the Society of Independent Gasoline Marketers of America, the Chairman of the Southern California Chapter of the Young Presidents Organization and serves on the Board of Directors of The Bank of Hemet and on the Advisory Board of Solis Capital Partners, Inc.
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Douglas L. Kietahas served as a director since April 2006. From April 1999 to April 2006, Mr. Kieta was employed at Calpine Corporation. At the time of his retirement in April 2006, Mr. Kieta was the Senior Vice President of Construction and Engineering with Calpine Corporation. Calpine Corporation is a major North American power company which leases and operates integrated systems of fuel-efficient natural gas-fired and renewable geothermal power plants and delivers clean, reliable and fuel-efficient electricity to customers and communities in 21 U.S. states and three Canadian provinces. Mr. Kieta has a B.S. degree in civil engineering from Clarkson University and a master’s degree in civil engineering from Cornell University.
John L. Prince has served as a director since July 2005. Mr. Prince is retired but also works as a consultant to Land O’ Lakes, Inc. and other companies. Mr. Prince was an Executive Vice President with Land O’ Lakes, Inc. from July 1998 until his retirement in 2004. Prior to that time, Mr. Prince was President and Chief Executive Officer of Dairyman’s Cooperative Creamery Association, or the DCCA, located in Tulare, California, until its merger with Land O’ Lakes, Inc. in July 1998. Land O’ Lakes, Inc. is a farmer-owned, national branded organization based in Minnesota with annual sales in excess of $6 billion and membership and operations in over 30 states. Prior to joining the DCCA, Mr. Prince was President and Chief Executive Officer for nine years until 1994, and was Operations Manager for the preceding ten years commencing in 1975, of the Alto Dairy Cooperative in Waupun, Wisconsin. Mr. Prince has a B.A. degree in Business Administration from the University of Northern Iowa.
Terry L. Stone has served as a director since March 2005. Mr. Stone is a Certified Public Accountant with over thirty years of experience in accounting and taxation. He has been the owner of his own accountancy firm since 1990 and has provided accounting and taxation services to a wide range of industries, including agriculture, manufacturing, retail, equipment leasing, professionals and not-for-profit organizations. Mr. Stone has served as a part-time instructor at California State University, Fresno teaching classes in taxation, auditing, and financial and management accounting. Mr. Stone is also a financial advisor and franchisee of Ameriprise Financial Services, Inc. Mr. Stone has a B.S. in Accounting from California State University, Fresno.
Robert P. Thomashas served as a director since April 2006. Since July 1999, 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. Mr. Thomas is a graduate of Claremont McKenna College.
Our officers are appointed by and serve at the discretion of our Board. There are no family relationships among our executive officers and directors.
 
Board of DirectorsCompensation Discussion and CommitteesAnalysis
Our business, property and affairs are managed under the direction of our Board. Our directors are kept informed of our business through discussions with our executive officers, by reviewing materials provided to them and by participating in meetings of our Board and its committees. During 2005, our Board held 9 meetings, and on 11 occasions approved resolutions by unanimous written consent in lieu of a meeting.
Our Board currently has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee. Our Board has determined that Terry L. Stone, John L. Prince, Douglas L. Kieta and Robert P. Thomas, each of whom is a member of one or more of these committees, are “independent” as defined in both Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act and NASD Marketplace Rule 4200(a)(15), and that Messrs. Stone, Thomas and Prince meet the other criteria contained in NASD Marketplace Rule 4350 relating to Audit Committee members.
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Audit Committee. Our Audit Committee selects our independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors, and reviews our financial statements for each interim period and for our year end. From March 23, 2005 to April 13, 2006, this committee consisted of Terry L. Stone, John L. Prince and Kenneth J. Friedman. Concurrent with Mr. Friedman’s resignation from our Board on April 13, 2006, Mr. Thomas was appointed as a member of our Audit Committee. Our Board has determined that Mr. Stone is an “audit committee financial expert.” Our Audit Committee operates pursuant to a charter approved by our Board and our Audit Committee, according to the rules and regulations of the Securities and Exchange Commission (the “Commission”). A copy of the charter of our Audit Committee was attached as Appendix C to our Proxy Statement for our 2005 annual meeting. During 2005, our Audit Committee held four meetings.
 
Overview of Compensation Program
This section discusses the principal components of compensation paid to our named executive officers for 2006. During 2006, we did not have a formal compensation philosophy. However, in 2007, our Compensation Committee. adopted a formal compensation philosophy, thereby commencing our transition toward a more comprehensive and structured compensation program. As a result, this section also provides qualitative information regarding the manner and context in which we anticipate that compensation will be awarded to and earned by our named executive officers during 2007.
Throughout this Proxy Statement, we refer to the individuals who served as our principal executive officer and principal financial officer during 2006, as well as the other individuals included in the “Summary Compensation Table” below as the “named executive officers.” However, when we refer to “named executive officers” in the information under the heading “2007 Compensation Philosophy and Objectives,” we mean all of the individuals included in the “Summary Compensation Table” below, other than our former Chief Financial Officer, and any executive officer of Pacific Ethanol who will be listed on the Summary Compensation Table for 2007.
Our Compensation Committee is responsible for establishing, implementing and administering our overall policies involvingon compensation and the compensation of all ofto be provided to our executive officers. Beginning in 2007, our Compensation Committee also has the responsibility for monitoring adherence with our newly-implemented compensation philosophy and ensuring that the total compensation paid to our executive officers is fair, reasonable and establishing and recommending to our Board the terms and conditions of all employee and consultant compensation and benefit plans. Our entire Board also may perform these functions with respect to our employee stock option plans. From March 23, 2005 to April 13, 2006, this committee consisted of Messrs. Stone and Friedman. Concurrent with Mr. Friedman’s resignation from our Board on April 13, 2006, Mr. Thomas was appointed as a member and as chairman of our Compensation Committee. Our Compensation Committee operates pursuant to a charter approved by our Board and our Compensation Committee. A copy of the charter ofcompetitive.
Although our Compensation Committee was attachedmakes all compensation decisions as Appendix D to our Proxy Statement forexecutive officers, our 2005 annual meeting. During 2005,Chief Executive Officer makes recommendations to our Compensation Committee held three meetings, and on three occasions approved resolutions by unanimous written consent in lieu of a meeting.regarding compensation for the other named executive officers.
 
Nominating and Governance Committee2006 Executive Compensation. Our Nominating and Governance Committee selects nominees
For the year ended December 31, 2006, the principal components of compensation for our Board. From March 23, 2005 to April 13, 2006, our Nominating and Governance Committee has consisted of Messrs. Stone and Friedman. Concurrent with Mr. Friedman’s resignation from our Board on April 13, 2006, Mr. Kieta was appointed a member of our Nominating and Governance Committee. Our Nominating and Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. Candidates may also come to the attention of the Nominating and Governance Committee through current Board members, professional search firms and other persons. In evaluating potential candidates, our Nominating and Governance Committee will take into account a number of factors, including, among others, the following:named executive officers were:
 
 ·the candidate’s independence from management;base salary;
 ·whether the candidate has relevant business experience;
·judgment, skill, integrity and reputation;
·existing commitments to other businesses;
·corporate governance background;
·financial and accounting background, to enable the committee to determine whether the candidate would be suitable for Audit Committee membership;equity incentive compensation; and
 ·the sizeperquisites and composition of our Board.
Our Nominating and Governance Committee operates pursuant to a charter approved by our Board and our Nominating and Governance Committee. A copy of the charter of our Nominating and Governance Committee was attached as Appendix E to our Proxy Statement for our 2005 annual meeting. The director nominees named in our proxy card for our 2006 annual meeting were selected by our Nominating and Governance Committee and ratified by our full Board. Our Nominating and Governance Committee does not, at this time, consider candidates for directorship recommended by our stockholders. During 2005, our Nominating and Governance Committee held one meeting, and on one occasion approved resolutions by unanimous written consent in lieu of a meeting.
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During the period commencing on March 23, 2005, the closing of the Share Exchange Transaction, and ending on December 31, 2005, all directors, other than Messrs. Kieta and Thomas who were appointed as members of our Board on April 13, 2006, attended at least 75% of the aggregate of the meetings of our Board and of the committees on which they served, or that were held during the period they were directors or committee members.
Codes of Ethics
Our Board has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees and an additional Code of Business Ethics that applies to our Chief Executive Officer and senior financial officers.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from provisions of these codes that relate to one or more of the items set forth in Item 406(b) of Regulation S-K, by describing on our Internet website, located at http://www.pacificethanol.net, within four business days following the date of a waiver or a substantive amendment, the date of the waiver or amendment, the nature of the amendment or waiver, and the name of the person to whom the waiver was granted.
Information on our Internet website is not, and shall not be deemed to be, a part of this Proxy Statement or incorporated into any other filings we make with the Commission.
Stockholder Communications with our Board of Directors
Our Board has implemented a process by which stockholders may send written communications directly to the attention of our Board or any individual member of our Board. Terry L. Stone, the Chairman of our Audit Committee, is responsible for monitoring communications from stockholders and providing copies of such communications to the other directors as he considers appropriate. Communications will be forwarded to all directors if they relate to substantive matters and include suggestions or comments that Mr. Stone considers to be important for the directors to consider. Stockholders who wish to communicate with our Board can write to Terry L. Stone, The Board of Directors, Pacific Ethanol, Inc., 5711 N. West Avenue, Fresno, California 93711.
Policy With Regard to Board Members’ Attendance at Annual Meetings
It is our policy to invite and encourage our directors to attend our annual meetings. At the date of our 2005 annual meeting, we had seven members on our Board, three of whom, namely, Messrs. Jones, Koehler and Stone were in attendance at our 2005 annual meeting.
Compensation Committee Interlocks and Insider Participation
No member of our Board has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity.
Compensation of Directors
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.
8
EXECUTIVE COMPENSATION AND RELATED INFORMATION
Compensation of Executive Officers
The following table shows for the period commencing on the closing of the Share Exchange Transaction on March 23, 2005 through December 31, 2005, compensation awarded or paid to, or earned by, our current Chief Executive Officer and each of our other most highly compensated executive officers who earned more than $100,000 in salary during that period, or the Named Executive Officers. Mr. Siegel resigned his positions in connection with the Share Exchange Transaction that was consummated on March 23, 2005. Information for Mr. Siegel is provided for the years ended December 31, 2004 and 2003 and the period from January 1, 2005 through March 23, 2005. Mr. Turner resigned his positions on April 19, 2006.
Summary Compensation Table
     
Long-Term Compensation
 
Annual Compensation
Awards 
Name and Principal Position
Year
Salary ($)
 
Bonus ($)
Restricted
Stock
Awards ($)
 
Securities
Underlying
Options/
SARs (#)
            
Neil M. Koehler 
President and Chief Executive Officer
2005154,615(1) 300,000 —  — 
            
Ryan W. Turner 
Former Chief Operating Officer and Secretary
2005109,135(1)  — —  — 
            
William G. Langley 
Chief Financial Officer
2005149,375(1) — —  425,000 
            
Barry Siegel200567,397(1) 
—
 
3,620,000
(2)
 — 
Former Chairman of the Board,2004300,000  — —  — 
President and Chief Executive Officer2003300,000  — —  — 
(1)Messrs. Koehler, Turner and Langley each became executive officers, and Mr. Siegel ceased to be an executive officer, of Pacific Ethanol on March 23, 2005. Mr. Turner ceased to be an executive officer on April 19, 2006.
(2)On March 23, 2005, we issued 400,000 shares of common stock to Mr. Siegel in connection with his execution of a Confidentiality, Non-Competition, Non-Solicitation and Consulting Agreement dated March 23, 2005. These shares vested immediately and were not subject to forfeiture. Mr. Siegel was eligible to receive dividends on these shares. As of December 31, 2005, Mr. Siegel held none of these shares.other personal benefits.
 
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Option Grants
During 2006, we did not have a formal compensation philosophy nor did we have a pre-established policy or target mix between long-term and currently paid out compensation or between cash and non-cash compensation. Base salary paid to each of the named executive officers was specified in the executive employment agreements we entered into with each named executive officer. The executive employment agreements with our Chief Executive Officer and our former Chief Financial Officer were entered into prior to 2006. The executive employment agreements with our Chief Operating Officer and our General Counsel were entered into during 2006.
In Lastaddition to base salary, we used equity incentive compensation in the form of restricted stock grants to reward past performance by our Chief Executive Officer. We also granted restricted stock to our Chief Operating Officer and our General Counsel for the purpose of attracting them to join Pacific Ethanol and to provide them with additional compensation in light of their relatively low initial base salaries as compared with similarly situated employees at comparable companies. All restricted stock grants provided for immediate vesting of 25% of the shares underlying the grants, with the remaining shares to vest over the next five years as a retention tool for the relevant service period. In determining the type of equity-based incentive compensation to provide to the named executive officers, the Compensation Committee compared the overall costs and benefits attributable to restricted stock grants and stock options and determined that, on balance, because restricted stock grants were less costly and provided a more immediate tangible benefit to participants, the Compensation Committee elected to grant restricted stock rather than stock options.
We did not have any program, plan or obligation that required us to grant equity incentive compensation on specified dates, except that the executive employment agreements that we entered into in June 2006 with John T. Miller, our Chief Operating Officer, and Christopher W. Wright, our General Counsel, required us to issue to each a specified amount of restricted stock. Because of a decline in the price of our common stock between the date each of those executive officers entered into an executive employment agreement with us and the date of the restricted stock grant, the Compensation Committee elected to grant to each of Messrs. Miller and Wright a greater number of shares of restricted stock than was required under the terms of their executive employment agreements in an effort to approximate what each would have received had the grants been made upon entry into the executive employment agreements. The number of shares of restricted stock granted to each of the named executive officers in 2006 is disclosed in the “Grants of Plan-Based Awards” table below. Information about outstanding equity incentive compensation awards held by our named executive officers and directors is contained in the “Outstanding Equity Awards at Fiscal YearYear-End” table below and in the “Director Compensation” table above.
During 2006, the Compensation Committee also considered granting discretionary cash bonuses to each named executive officer based on the personal performance of each named executive officer during 2006 in an amount up to 50% of each named executive officer’s base salary. Ultimately, the Compensation Committee elected not to pay discretionary cash bonuses to any of our named executive officers because we were not profitable in 2006. For 2006, we paid our Chief Executive Officer a bonus in the amount of $300,000 based upon the net free cash flow of Kinergy pursuant to the terms of his executive employment agreement.
During 2006, we also provided certain of the named executive officers with perquisites and other personal benefits that the Compensation Committee believed were reasonable. For example, we paid for the commuting, housing and other living expenses of our Chief Operating Officer and our General Counsel. In addition, the executive employment agreements with each of the named executive officers, except the agreement with our former Chief Financial Officer, provide for certain payments upon a change in control of Pacific Ethanol. Information regarding applicable payments under these agreements is provided under the heading “Calculation of Potential Payments upon Termination or Change in Control” below.
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2007 Compensation Philosophy and Objectives
Our current compensation philosophy is based upon three central objectives:
·To provide an executive compensation structure and system that is both competitive in the marketplace and also internally equitable based upon the weight and level of responsibilities of each executive;
·To attract, retain and motivate qualified executives within this structure, and reward them for outstanding performance-to-objectives and business results; and
·To structure our compensation policy so that the compensation of executive officers is dependent in part on the achievement of our current year business plan objectives and dependent in part on the long-term increase in our net worth and the resultant improvement in stockholder value, and to maintain an appropriate balance between short- and long-range performance objectives over time.
The Compensation Committee evaluates both performance and compensation to ensure that the total compensation paid to our executive officers is fair, reasonable and competitive so that we can attract and retain superior employees in key positions. The Compensation Committee believes that compensation packages offered to our executives, including the named executive officers, should include both cash and equity-based compensation that reward performance as measured against established goals.
In furtherance of these objectives, our Compensation Committee has engaged Hewitt Associates LLC, an outside global human resources consulting firm, to conduct an annual review of our total compensation program for the named executive officers and other executives. Hewitt Associates has provided our Compensation Committee with relevant market data and alternatives to consider when making compensation decisions as to the named executive officers and when making decisions as to the recommendations being made by our management for other executives.
In making compensation decisions, our Compensation Committee compares each element of total compensation against market data obtained by Hewitt Associates. The sources of this data include proxy statements for publicly-traded companies within the ethanol industry and general industry published surveys that target companies with approximately $350 million in annual revenues. For 2007, the Compensation Committee generally expects to set total compensation for the named executive officers at the median of compensation paid to similarly situated executives of the companies comprising the market data provided to us by Hewitt Associates.
Although there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation, the Compensation Committee expects that a significant percentage of total compensation for 2007 will be allocated to incentives as a result of our new compensation philosophy. The level and mix of incentive compensation will be determined by the Compensation Committee based on information provided by Hewitt Associates.
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For 2007, we expect that the principal components of compensation for our named executive officers will be:
·base salary;
·discretionary cash bonuses;
·equity incentive compensation; and
·perquisites and other personal benefits.
We view the various components of compensation as related but distinct. Our Compensation Committee expects to review compensation information provided by Hewitt Associates and to consider factors such as internal equity and consistency, and other considerations it deems relevant, such as rewarding extraordinary performance, to determine the appropriate level and mix of total compensation.
Base Salary
Base salary is targeted to recognize each executive officer’s unique value and historical contributions to our success in light of salary norms in our industry and the general marketplace and to compensate them for services expected to be rendered during the fiscal year. Base salary ranges for named executive officers are determined for each executive based on his or her position and responsibility by using market data obtained by Hewitt Associates, with the goal of establishing base salary at the median base salary paid to similarly situated executives as reflected in the market data. The Compensation Committee expects to periodically review the base compensation of the Chief Executive Officer, and the base compensation of all other named executive officers with the Chief Executive Officer, to ensure that a competitive position is maintained.
Discretionary Cash Bonuses
 
The following table provides information regarding options granted in 2005Compensation Committee expects to the Named Executive Officers. We have never granted any stock appreciation rights. use discretionary cash bonuses to focus our management on achieving key company financial objectives, to motivate certain desired individual behaviors and goals and/or to reward substantial achievement of these company financial objectives and individual behaviors and goals.
 
Named Officer
  
Grant
Date
  
Number of
Securities
Underlying
Options
Granted(1)
  
Percentage of
Total Options
Granted to
Employees in
Fiscal Year(2) 
  
Exercise
Price
Per Share 
  
Expiration
Date 
 
Potential
Realizable Value
at Assumed Rates
of Stock Price
Appreciation for
Option Term(3)
 5%                            10%
Neil M. Koehler  —  —  —  —  —  —  — 
Ryan W. Turner  —  —  —  —  —  —  — 
William G. Langley  8/10/05  425,000  
70.5%
  
$8.03
  8/10/15  
$942,880
  
$2,083,518
 
Barry Siegel  —  —  —  —  —  —  — 
We intend to use cash bonuses to reward performance achievements generally only as to years in which we are profitable. The Compensation Committee believes that as a growth company, we should reward achievement of both personal objectives and company financial objectives such as net sales, gallons of ethanol sold, net income and operating cash flows. Individual performance objectives of the named executive officers based on the participant’s accountability and impact on our overall operations will be determined by our Compensation Committee with target award opportunities that will be established as a percentage of base salary. The Compensation Committee expects to target the amount of any potential discretionary cash bonuses at the median level of cash bonuses paid to similarly situated executives as reflected in the market data provided by Hewitt Associates. To the extent that our financial performance is less than or greater than the median financial performance reflected in the market data, the Compensation Committee expects that discretionary cash bonuses will be less than or greater than the median level of cash bonuses paid to executives of our peer companies.
 
Our Compensation Committee has not determined whether it would attempt to recover bonuses paid based on our financial performance where our financial statements are restated in a downward direction sufficient to reduce the amount of bonus that should have been paid under applicable bonus criteria.
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(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——85,000/340,000237,150/948,600
Barry Siegel
116,667(2)
472,6680/0—
(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.
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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.
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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.
 
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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
 
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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.
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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.
 
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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.
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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:
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·
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.
 
16-28-
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.
17
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.
18
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.
19
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.
20
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.
21
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.
22
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 directors;
·each of our current executive officers; and
·all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the 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%
*Less than 1.00%
(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.
24
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.
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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.
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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.
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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.
28
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 ―― 17,550229,203
Christopher W. Wright ―― 17,550229,203
William G. Langley 85,0001,859,050 ――
___________________
(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.
 
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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.
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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.
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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.
 
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A participant will have certain stockholder rights with respect to shares
Calculation 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  ―  ―  ―  ―  ― 
                   
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.
(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.
·
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.
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.
 
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Unless sooner terminated by
Compensation 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.
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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.
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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.
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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.
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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.
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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.
 
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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.
 
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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.”
 
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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.
 

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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 belowvote 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.

1

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” THE PROPOSALS INDICATED AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXY HOLDER ON ANY OTHER BUSINESS. ALL OTHER PROXIES HERETOFORE GIVEN BY THE UNDERSIGNED IN CONNECTION WITH THE ACTIONS PROPOSED ON THIS PROXY CARD ARE HEREBY EXPRESSLY REVOKED. THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED BY WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY ISSUANCE OF A SUBSEQUENT PROXY OR BY VOTING IN PERSON AT THE ANNUAL MEETING.
 
Please mark, date, sign and return this proxy promptly in the enclosed envelope. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by President or other authorized officer. If a partnership, please sign in partnership name by authorized person.

DATED:
(Signature of Stockholder(s))
(Print Name(s) Here)
£    PLEASE CHECK IF YOU ARE PLANNING
TO ATTEND THE ANNUAL MEETING.

DATED:_______________________________

(Signature of Stockholder(s))

(Print Name(s) Here)

£PLEASE CHECK IF YOU ARE PLANNING
     TO ATTEND THE 2006 ANNUAL MEETING.
 
2

 
APPENDIX A
PACIFIC ETHANOL, INC.
Title:
AUDIT COMMITTEE CHARTER
Policy:
This charter defines the membership and responsibilities of the Audit Committee of the Board of Directors of Pacific Ethanol.
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.
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.
 
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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.
 
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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.
 
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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.
 
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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.
 
The terms specified below, together with any additions, deletions or changes thereto imposed from time3.5          Compliance Oversight Responsibilities
·Obtain from the independent auditor assurance that Section 10A (b) of the Securities Exchange Act of 1934 has not been implicated.
·Obtain reports from management and the independent auditor that the Company and its subsidiaries and affiliated entities are in conformity with applicable legal requirements and the Company’s Code of Business Conduct and Ethics.
·To the extent deemed necessary by the Committee, it shall have the authority to engage outside counsel, independent accounting consultants and/or other experts at the Company’s expense to review any matter under its responsibility.
·Review and approve in advance any proposed related party transactions.
·Perform any other activities consistent with this Charter, the Company’s bylaws and governing law, as the Audit Committee or the Board of Directors deems necessary or appropriate.
·Discuss with management and the independent auditor any correspondence with regulators or governmental agencies and any published reports, which raise material issues regarding Pacific Ethanol’s financial statements or accounting policies.
3.6          Employee Complaint Procedure (Whistle Blower Policy)
·Establish procedures for the receipt, retention and treatment of complaints received by Pacific Ethanol regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
For additional definitions and activities, refer to time pursuant to the provisions of the Code governing Incentive Options, shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Four shall be applicable to Incentive Options. Options that are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II.PEI-II-040 Whistle Blower.
 
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A.Eligibility3.7          . Incentive Options may only be granted to Employees.
B.Exercise PriceEthics Responsibilities. The exercise price per share shall not be less than 100% of the Fair Market Value per share of Common Stock on the option grant date.
C.Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or more such options which become exercisable for the first time in the same calendar year, then for purposes of the foregoing limitation on the exercisability of those options as Incentive Options, such options shall be deemed to become first exercisable in that calendar year on the basis of the chronological order in which they were granted, except to the extent otherwise provided under applicable law or regulation.
D.10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than 110% of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five years measured from the option grant date.
 
III.
Stock Appreciation Rights.
·		Periodically but not less than annually review the Pacific Ethanol Code of Ethics including Insider Trading and Conflict of Interest Policies. Determine their continuing relevance to the Pacific Ethanol business environment. Recommend changes to the full Board of Directors if warranted.
 
A.Authority4.0          . Reporting
The Plan Administrator shall have full powerfollowing reports as required by the SEC will be prepared and authority, exercisablepublished pursuant to the Securities Acts requirements:
·Prepare, in accordance with the rules of the SEC 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.
·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 Committee of any non-audit services performed by the independent accounting firm, and review the substance of any such disclosure.
5.0          Limitation of Audit Committee’s Role
While the Audit Committee has the responsibilities and powers set form in its sole discretion,this Charter, it is not the duty of the Audit Committee to grant stock appreciation rightsplan or conduct audits or to determine that Pacific Ethanol’s financial statements and disclosures are complete and accurate and are in accordance with this Section III to selected Optionees or other individuals eligible to receive option grants undergenerally accepted principles and applicable rules and regulation. These are the Discretionary Grant Program.
B.Types. Three typesresponsibilities of stock appreciation rights shall be authorized for issuance under this Section III: (i) tandem stock appreciation rights (“Tandem Rights”), (ii) standalone stock appreciation rights (“Standalone Rights”)management and (iii) limited stock appreciation rights (“Limited Rights”).
C.Tandem Rights. The following terms and conditions shall govern the grant and exercise of Tandem Rights.independent auditor.
1.One or more Optionees may be granted a Tandem Right, exercisable upon such terms and conditions as the Plan Administrator may establish, to elect between the exercise of the underlying stock option for shares of Common Stock or the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (i) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate exercise price payable for such vested shares.
2.No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall accordingly become entitled under this Section III may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate.
3.If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (i) five business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised more than ten years after the date of the option grant.

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D.Standalone Rights. The following terms and conditions shall govern the grant and exercise of Standalone Rights under this Article Two:Appendix A
 
1.One or more individuals eligible to participate in the Discretionary Grant Program may be granted a Standalone Right not tied to any underlying option under this Discretionary Grant Program. The Standalone Right shall relate to a specified number of shares of Common Stock and shall be exercisable upon such terms and conditions as the Plan Administrator may establish. In no event, however, may the Standalone Right have a maximum term in excess of ten years measured from the grant date. Upon exercise of the Standalone Right, the holder shall be entitled to receive a distribution from the Corporation in an amount equal to the excess of (i) the aggregate Fair Market Value (on the exercise date) of the shares of Common Stock underlying the exercised right over (ii) the aggregate base price in effectAudit Committee Disclosure for those shares.Proxy Statement
 
2.The number of shares of Common Stock underlying each Standalone Right and the base price in effect for those shares shall be determined(Sample)
In accordance with a written charter adopted by the Plan AdministratorCompany’s Board of Directors (which is attached to this Proxy Statement as Appendix _____), the Audit Committee assists the Board in fulfilling its sole discretion at the time the Standalone Right is granted. In no event, however, may the base price per share be less than the Fair Market Value per underlying share of Common Stock on the grant date.
3.Standalone Rights shall be subjectresponsibility to the same transferability restrictions applicable to Non-Statutory Options and may not be transferred during the holder’s lifetime, except to one or more Family Members of the holder or to a trust established exclusively for the holder and/or such Family Members, to the extent such assignment is in connection with the holder’s estate plan or pursuant to a domestic relations order covering the Standalone Right as marital property. In addition, one or more beneficiaries may be designated for an outstanding Standalone Right in accordance with substantially the same terms and provisions as set forth in Section I.F of this Article Two.
4.The distribution with respect to an exercised Standalone Right may be made in shares of Common Stock valued at Fair Market Value on the exercise date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate.
5.The holder of a Standalone Right shall have no stockholder rightsprovide oversight with respect to the shares subjectCompany’s financial statements and reports and other disclosures provided to stockholders, the Standalone Right unlesssystem of internal controls and until such person shall have exercised the Standalone Rightaudit process. Its duties include reviewing the adequacy of the Company’s internal accounting and become a holderfinancial controls, reviewing the scope and results of recordthe audit plans of sharesthe Company’s independent and internal auditors, reviewing the objectivity, effectiveness and resources of Commonthe internal audit function, and assessing the Company’s financial reporting activities and accounting standards and principles. The Audit Committee also selects and engages the Company’s independent auditors and approves their fees. The Audit Committee consists of _____ members, Messrs. ________ and ______s, Ms. _______ and Ms. _________. In 200__, the Committee met ______ times. Our securities are listed on the Nasdaq Exchange and are governed by its listing standards. All members of the Audit Committee meet the independence standards of Section ______ of the Nasdaq Stock issued upon the exercise of such Standalone Right.Exchange Listed Company Manual.
 
E.Limited Rights. The following termsAudit Committee has considered whether the provision of [list or cross-reference material non-audit services performed by the independent auditors] and conditions shall governother non-audit services by is compatible with maintaining the grant and exerciseindependence of Limited Rights under this Article Two:_______________.
1.One or more Section 16 Insiders may, in the Plan Administrator’s sole discretion, be granted Limited Rights with respect to their outstanding options under this Article Two.
2.Upon the occurrence of a Hostile Take-Over, the Section 16 Insider shall have the unconditional right (exercisable for a 30-day period following such Hostile Take-Over) to surrender each option with such a Limited Right to the Corporation. The Section 16 Insider shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate exercise price payable for those vested shares. Such cash distribution shall be made within five days following the option surrender date.

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3.The Plan Administrator shall pre-approve, at the time such Limited Right is granted, the subsequent exercise of that right in accordance with the terms of the grant and the provisions of this Section III. No additional approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. Any unsurrendered portion of the option shall continue to remain outstanding and become exercisable in accordance with the terms of the instrument evidencing such grant.Appendix B
 
F.Post-Service ExerciseSURVEY OF THE AUDIT COMMITTEE’S ANNUAL SELF-EVALUATION. The provisions governing the exercise of Tandem, Standalone and Limited Stock Appreciation Rights following the cessation of the recipient’s Service or the recipient’s death shall be substantially the same as those set forth in Section I.C of this Article Two for the options granted under the Discretionary Grant Program.
G.Net Counting. Upon the exercise of any Tandem, Standalone or Limited Right under this Section III, the share reserve under Section V of Article One shall only be reduced by the net number of shares actually issued by the Corporation upon such exercise, and not by the gross number of shares as to which such Tandem, Standalone or Limited Right is exercised.
 
IV.1.
Change in Control/ Hostile Take-Over.
Did the Committee appoint, oversee and approve the compensation of the independent auditors?
 
A.No Award outstanding under the Discretionary Grant Program at the time of a Change in Control shall vest and become exercisable on an accelerated basis if and to the extent that: (i) such Award is, in connection with the Change in Control, assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction, (ii) such Award is replaced with a cash retention program of the successor corporation that preserves the spread existing at the time of the Change in Control on the shares of Common Stock as to which the Award is not otherwise at that time vested and exercisable and provides for subsequent payout of that spread in accordance with the same exercise/vesting schedule applicable to those shares, or (iii) the acceleration of such Award is subject to other limitations imposed by the Plan Administrator. However, if none of the foregoing conditions are satisfied, each Award outstanding under the Discretionary Grant Program at the time of the Change in Control but not otherwise vested and exercisable as to all the shares at the time subject to that Award shall automatically accelerate so that each such Award shall, immediately prior to the effective date of the Change in Control, vest and become exercisable as to all the shares of Common Stock at the time subject to that Award and may be exercised as to any or all of those shares as fully vested shares of Common Stock.
2.Do the independent auditors report directly to the Committee?
 
B.All outstanding repurchase rights under the Discretionary Grant Program shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue in full force and effect pursuant to the terms of the Change in Control transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator.
3.If there were disagreements between management and the independent auditors regarding financial reporting, was the Committee involved in the resolution of those disagreements?
 
C.Immediately following the consummation of the Change in Control, all outstanding Awards under the Discretionary Grant Program shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise expressly continued in full force and effect pursuant to the terms of the Change in Control transaction.
4.Does the Committee pre-approve all audit, review and attest services and permissible non-audit services by the independent auditors, and related fees and other terms of engagement on these matters?
5.Did the Committee review and discuss the Company’s audited financial statements with management?
6.Did the Committee request and receive from the independent auditors the Critical Accounting Policy Report required in connection with the annual audit relating to (a) all critical accounting policies and practices used, (b) all alternative treatments of financial information within GAAP that have been discussed with management including ramifications of using the alternatives and the treatment preferred by the auditors, and (c) other material written communications between the auditors and management such as any management letter or schedule of unadjusted differences?
7.Did the Committee discuss with the independent auditors the audited financial statements and the matters required to be discussed by SAS 61?
8.Did the Committee review with management and the independent auditors the Company’s intended disclosures under MD&A in the 10-K?
9.Did the Committee receive from the independent auditors a written disclosure and statement of all relationships between the auditors and the Company consistent with ISB No. 1?
10.Did the Committee actively discuss with the independent auditors any disclosed relationships or services that may impact the objectivity or independence of the auditors?
11.Did the Committee obtain from the auditors a statement of the audit fees and other categories of fees billed for the last fiscal year which are required to be disclosed in the Proxy Statement and consider whether the provision of any non-audit services is compatible with maintaining the auditors’ independence?
12.Did the Committee review the quarterly unaudited financial statements and the results of the auditors’ review of those financial statements?
13.In connection with the quarterly financial statements and 10-Q, did the Committee review the Company’s disclosures under MD&A to be included in the 10-Q?
14.Is each member of the Committee financially literate?
 
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D.Each option that is assumed in connection with a Change in Control or otherwise continued in effect shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities that would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. In the event outstanding Standalone Rights are to be assumed in connection with a Change in Control transaction or otherwise continued in effect, the shares of Common Stock underlying each such Standalone Right shall be adjusted immediately after such Change in Control to apply to the number and class of securities into which those shares of Common Stock would have been converted in consummation of such Change in Control had those shares actually been outstanding at that time. Appropriate adjustments to reflect such Change in Control shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the base price per share in effect under each outstanding Standalone Right, provided the aggregate base price shall remain the same, (iii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan, and (iv) the maximum number and/or class of securities for which any one person may be granted Awards under the Plan per calendar year. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption or continuation of the outstanding Awards under the Discretionary Grant Program, substitute, for the securities underlying those assumed Awards, one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control transaction.
15.Are all members of the Committee “independent” as defined in applicable listing standards and applicable law?
 
E.The Plan Administrator shall have the discretionary authority to structure one or more outstanding Awards under the Discretionary Grant Program so that those Awards shall, immediately prior to the effective date of a Change in Control or a Hostile Take-Over, vest and become exercisable as to all the shares at the time subject to those Awards and may be exercised as to any or all of those shares as fully vested shares of Common Stock, whether or not those Awards are to be assumed or otherwise continued in full force and effect pursuant to the express terms of such transaction. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Discretionary Grant Program so that those rights shall immediately terminate at the time of such Change in Control or consummation of such Hostile Take-Over and shall not be assignable to successor corporation (or parent thereof), and the shares subject to those terminated rights shall accordingly vest in full at the time of such Change in Control or consummation of such Hostile Take-Over.
16.Does any member of the Committee serve on more than three audit committees of public companies?
 
F.The Plan Administrator shall have full power and authority to structure one or more outstanding Awards under the Discretionary Grant Program so that those Awards shall immediately vest and become exercisable as to all of the shares at the time subject to those Awards in the event the Optionee’s Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed 18 months) following the effective date of any Change in Control or a Hostile Take-Over in which those Awards do not otherwise vest on an accelerated basis. Any Awards so accelerated shall remain exercisable as to fully vested shares until the expiration or sooner termination of their term. In addition, the Plan Administrator may structure one or more of the Corporation’s repurchase rights under the Discretionary Grant Program so that those rights shall immediately terminate with respect to any shares held by the Optionee at the time of his or her Involuntary Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time.
17.Does the Committee consist of at least three members?
 
G.The portion of any Incentive Option accelerated in connection with a Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the federal tax laws.
18.Did the Committee review its performance for the prior year?




 
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H.Awards outstanding under the Discretionary Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.APPENDIX B

V.Title:
Exchange/ Repricing Programs.COMPENSATION COMMITTEE CHARTER
Policy:
This charter defines the membership and responsibilities of the Compensation Committee of the Board of Directors of Pacific Ethanol.
Purpose:
The purpose of the Compensation Committee of Pacific Ethanol, Inc., established pursuant to this charter, is to 1) act as Administrator of the Pacific Ethanol’s various Stock Option Plans as described in each of the plans; 2) review forms of compensation to be provided to the officers and employees of the Company, including stock compensation; 3) grant options to purchase common stock of the Company to employees and executive officers of the Company; and 4) review and make recommendations to the Board of Directors regarding all forms of compensation to be provided to the Directors of the Company, including stock compensation. The Compensation Committee has the authority to undertake the specific duties and responsibilities listed below and will have the authority to undertake such other specific duties as the Board of Directors from time to time prescribes.
 
A.The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected holders, 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.
B.The Plan Administrator shall also have the authority, exercisable at any time and from time to time, with or, if the affected holder is not a Section 16 Insider, 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 a price not less than the then current Fair Market Value per share of Common Stock or 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.Procedures:
 
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I.
Stock Issuance Terms.
A.Issuances1.0          . Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement that complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to restricted stock awards or restricted stock units, awarded by and at the discretion of the Plan Administrator, that entitle the recipients to receive the shares underlying those awards or units upon the attainment of designated performance goals and/or the satisfaction of specified Service requirements or upon the expiration of a designated time period following the vesting of those awards or units.
B.Issue Price.
1.The price per share at which shares of Common Stock may be issued under the Stock Issuance Program shall be fixed by the Plan Administrator, but shall not be less than 100% of the Fair Market Value per share of Common Stock on the issuance date.
2.Shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration that the Plan Administrator may deem appropriate in each individual instance:
(i)cash or check made payable to the Corporation;
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(ii)past services rendered to the Corporation (or any Parent or Subsidiary); or
(iii)any other valid form of consideration permissible under the Delaware Corporations Code at the time such shares are issued.
C.Vesting Provisions.
1.Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service and/or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to restricted stock awards or restricted stock units that entitle the recipients to receive the shares underlying those awards and/or units upon the attainment of designated performance goals or the satisfaction of specified Service requirements 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 Participant’s Service.
2.The Plan Administrator shall also have the discretionary authority, consistent with Code Section 162(m), to structure one or more Awards under the Stock Issuance Program so that the shares of Common Stock subject to those Awards shall vest (or vest and become issuable) upon the achievement of certain pre-established corporate performance goals based on one or more of the following criteria: (i) return on total stockholders’ equity; (ii) net income per share of Common Stock; (iii) net income or operating income; (iv) earnings before interest, taxes, depreciation, amortization and stock-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 the Corporation’s 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 the Corporation’s revenue or profitability or expand its customer base; provided, however, that for purposes of items (ii), (iii) and (vii) above, the Plan Administrator may, at the time the Awards are made, specify certain adjustments to such 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 or losses, 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 such adjustments are in conformity with those reported by the Corporation on a non-GAAP basis. In addition, such performance goals may be based upon the attainment of specified levels of the Corporation’s 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 the Corporation’s 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 Plan Administrator 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.
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3.Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) that the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, 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 shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
4.The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. The Participant shall not have any stockholder rights with respect to the shares of Common Stock subject to a restricted stock unit or restricted stock award until that award vests and the shares of Common Stock are actually issued thereunder. 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 unit or restricted stock awards, subject to such terms and conditions as the Plan Administrator may deem appropriate.
5.Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then except as set forth in Section I.C.6 of this Article Three, those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash, cash equivalent or otherwise, the Corporation shall repay to the Participant the same amount and form of consideration as the Participant paid for the surrendered shares.
6.The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock that would otherwise occur upon the cessation of the Participant’s Service or the non-attainment of the performance objectives applicable to those shares. Any such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives. 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 Code Section 162(m), except in the event of the Participant’s Involuntary Termination or as otherwise provided in Section II.E of this Article Three.
7.Outstanding restricted stock awards or restricted stock units under the Stock Issuance Program shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of those awards or units, if the performance goals or Service requirements established for such awards or units are not attained or satisfied. The Plan Administrator, however, shall have the discretionary authority to issue vested shares of Common Stock under one or more outstanding restricted stock awards or restricted stock units as to which the designated performance goals or Service requirements have not been attained or satisfied. However, no vesting requirements tied to the attainment of performance goals may be waived with respect to awards or units which were at the time of grant intended to qualify as performance-based compensation under Code Section 162(m), except in the event of the Participant’s Involuntary Termination or as otherwise provided in Section II.E of this Article Three.
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II.
Change in Control/ Hostile Take-Over.
A.All of the Corporation’s outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the express terms of the Change in Control transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement.
B.Each outstanding Award under the Stock Issuance Program that is assumed in connection with a Change in Control or otherwise continued in effect shall be adjusted immediately after the consummation of that Change in Control to apply to the number and class of securities into which the shares of Common Stock subject to the Award immediately prior to the Change in Control would have been converted in consummation of such Change in Control had those shares actually been outstanding at that time, and appropriate adjustments shall also be made to the cash consideration (if any) payable per share thereunder, provided the aggregate amount of such consideration shall remain the same. If any such Award is not so assumed or otherwise continued in effect or replaced with a cash retention program which preserves the Fair Market Value of the shares underlying the Award at the time of the Change in Control and provides for the subsequent payout of that value in accordance with the vesting schedule in effect for the Award at the time of such Change in Control, such Award shall vest, and the shares of Common Stock subject to that Award shall be issued as fully-vested shares, immediately prior to the consummation of the Change in Control.
C.The Plan Administrator shall have the discretionary authority to structure one or more unvested Awards under the Stock Issuance Program so that the shares of Common Stock subject to those Awards shall automatically vest (or vest and become issuable) in whole or in part immediately upon the occurrence of a Change in Control or upon the subsequent termination of the Participant’s Service by reason of an Involuntary Termination within a designated period (not to exceed 18 months) following the effective date of that Change in Control transaction.
D.The Plan Administrator shall also have the discretionary authority to structure one or more unvested Awards under the Stock Issuance Program so that the shares of Common Stock subject to those Awards shall automatically vest (or vest and become issuable) in whole or in part immediately upon the occurrence of a Hostile Take-Over or upon the subsequent termination of the Participant’s Service by reason of an Involuntary Termination within a designated period (not to exceed 18 months) following the effective date of that Hostile Take-Over.
E.The Plan Administrator’s authority under Paragraphs C and D of this Section II shall also extend to any Award intended to qualify as performance-based compensation under Code Section 162(m), even though the automatic vesting of those Awards pursuant to Paragraph C or D of this Section II may result in their loss of performance-based status under Code Section 162(m).
F.Awards outstanding under the Stock Issuance Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
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ARTICLE FOUR
MISCELLANEOUS
I.
Tax Withholding.
A.The Corporation’s obligation to deliver shares of Common Stock upon the issuance, exercise or vesting of Awards under the Plan shall be subject to the satisfaction of all applicable federal, state and local income and employment tax withholding requirements.
B.Subject to applicable laws, rules and regulations and policies of the Corporation, the Plan Administrator may, in its discretion, provide any or all Optionees or Participants to whom Awards are made under the Plan with the right to utilize any or all of the following methods to satisfy all or part of the Withholding Taxes to which those holders may become subject in connection with the issuance, exercise or vesting of those Awards.
(i)Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the issuance, exercise or vesting of those Awards a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed 100%) designated by the Optionee or Participant and make a cash payment equal to such Fair Market Value directly to the appropriate taxing authorities on such individual’s behalf. The shares of Common Stock so withheld shall not reduce the number of shares of Common Stock authorized for issuance under the Plan.
(ii)Stock Delivery: The election to deliver to the Corporation, at the time the Award is issued, exercised or vests, one or more shares of Common Stock previously acquired by such the Optionee or Participant (other than in connection with the issuance, exercise or vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed 100%) designated by such holder. The shares of Common Stock so delivered shall not be added to the shares of Common Stock authorized for issuance under the Plan.
(iii)Sale and Remittance: The election to deliver to the Corporation, 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 shall concurrently provide irrevocable instructions to a brokerage firm to effect the immediate sale of the purchased or issued shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the Withholding Taxes required to be withheld by the Corporation by reason of such issuance, exercise or vesting.
II.
Share Escrow/Legends.
Unvested shares issued under the Plan may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.
III.
Effective Date and Term of the Plan.
A.The Plan was adopted by the Board on July 19, 2006, subject to stockholder approval within twelve months after that date. Should stockholder approval not be obtained within such period, the Plan will be terminated.
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B.The Plan shall become effective on the Plan Effective Date. Awards may be granted under the Discretionary Grant Program and the Stock Issuance Program at any time on or after the Plan Effective Date.
C.The Plan shall terminate upon the earliest to occur of (i) July 19, 2007, if stockholder approval of the Plan has not yet been obtained, (ii) July 19, 2016, (iii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares, (iv) the termination of all outstanding Awards in connection with a Change in Control or (v) such other date as the Board in its sole discretion terminates the Plan. If the Plan terminates on July 19, 2016 or on such other date as the Board terminates the Plan, then all Awards outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such Awards.
IV.
Amendment, Suspension or Termination of the Plan.
The Board may suspend or terminate the Plan at any time, without notice, and in its sole discretion. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall materially impair the rights and obligations with respect to Awards at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, stockholder approval will be required for any amendment to the Plan that (i) materially increases the number of shares of Common Stock available for issuance under the Plan, (ii) materially expands the class of individuals eligible to receive option grants or other awards under the Plan, (iii) materially increases the benefits accruing to the Optionees and Participants under the Plan or materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (iv) materially extends the term of the Plan, (v) expands the types of awards available for issuance under the Plan or (vi) is required under applicable laws, rules or regulations to be approved by stockholders.
V.
Use of Proceeds.
Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.
VI.
Regulatory Approvals.
A.The implementation of the Plan, the grant of any Award and the issuance of shares of Common Stock in connection with the issuance, exercise or vesting of any Award made under the Plan shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the Awards made under the Plan and the shares of Common Stock issuable pursuant to those Awards.
B.No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of the NASDAQ Global Market, if applicable, and any stock exchange or other market on which Common Stock is then quoted or listed for trading.
VII.
No Employment/ Service Rights.
Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.
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VIII.
Non-Exclusivity of the Plan.
Nothing contained in the Plan is intended to amend, modify, or rescind any previously approved compensation plans, programs or options entered into by the Corporation. This Plan shall be construed to be in addition to and independent of any and all other arrangements. Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Corporation for approval shall be construed as creating any limitations on the power or authority of the Board to adopt, with or without stockholder approval, such additional or other compensation arrangements as the Board may from time to time deem desirable.
IX.
Governing Law.
All questions and obligations under the Plan and agreements issued pursuant to the Plan shall be construed and enforced in accordance with the laws of the State of Delaware.
X.
Information to Optionees and Participants.
Optionees and Participants under the Plan who do not otherwise have access to financial statements of the Corporation will receive the Corporation’s financial statements at least annually.

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APPENDIXCommittee Membership
 
The following definitionsCompensation Committee shall be in effect under the Plan:
A.“Award” means anyconsist of a minimum of two (2) “non-employee directors” of the following stock or stock-based awards authorized for issuance or grant under the Plan: stock option, stock appreciation right, direct stock issuance, restricted stock or restricted stock unit award or other stock-based award.
B.“Board” means the Corporation’s board of directors.
C.“Change in Control” shall be deemed to have occurred if, in a single transaction or series of related transactions:
(i)any person (asCompany as such term is used in Section 13(d) and 14(d) of the 1934 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 1934 Act), directly or indirectly of securities16b-3(b)(3)(i) of the Corporation representing 51% or moreSecurities Exchange Act of 1934, as amended. The members of the combined voting powerCompensation Committee will be outside directors within the meaning of the Corporation, or
(ii)there is a merger, consolidation, or other business combination transactionSection 162(m) of the Corporation 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 voting capital stock of the Corporation 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 the Corporation (or surviving entity) outstanding immediately after such transaction, or
(iii)all or substantially all of the Corporation’s assets are sold.
D.“Code” means the Internal Revenue Code of 1986, as amended. The members of the Compensation Committee are appointed by and serve at the discretion of the Board of Directors.
2.0          Authority and Responsibility
 
E.“Common Stock” meansThe responsibilities of the Corporation’s common stock, $0.01 par value per share.Compensation Committee are set forth below:

·The Compensation Committee shall review and make recommendations to the Board of Directors regarding the Compensation policy for executive officers and directors of the Company, and such other officers of the Company as directed by the Board of Directors.
 
F.“Compensation Committee” means a committee of the Board comprised solely of two or more Eligible Directors who are appointed by the Board to administer the Discretionary Grant and Stock Issuance Programs, who are “outside directors” within the meaning of Section 162(m) of the Code and who are “non-employee directors” within the meaning of Rule 16b-3(b)(3)(i).
·The Compensation Committee shall review and approve the company’s compensation policy regarding all forms of compensation (including, to the extent relevant, all “plan” compensation, as such term is defined in Item 402(a)(7) of Regulation S-K promulgated by the Securities and Exchange Commission, and all non-plan compensation) to be provided to the officers and employees of the Company.
 
G.“Consultant” means a consultant or other independent advisor who is under written contract with the Corporation (or any Parent or Subsidiary) to provide consulting or advisory services to the Corporation (or any Parent or Subsidiary) and whose securities issued pursuant to the Plan could be registered on Form S-8.
H.“Corporation” means Pacific Ethanol, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Pacific Ethanol, Inc. that shall by appropriate action adopt the Plan.
I.“Discretionary Grant Program” means the discretionary grant program in effect under Article Two of the Plan pursuant to which stock options and stock appreciation rights may be granted to one or more eligible individuals.
·The Compensation Committee shall review recommendations from the Chief Executive Officer of the Company regarding all forms of compensation (including, to the extent relevant, all “plan” compensation, as such term is defined in Item 402(a)(7) of Regulation S-K promulgated by the Securities and Exchange Commission, and all non-plan compensation) to be provided to the non-employee directors of the Company.
 
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·The Compensation Committee shall review and make recommendations to the Board of Directors regarding general compensation goals and guidelines for Pacific Ethanol’s employees and officers and the criteria by which bonuses to Pacific Ethanol employees and officers are determined.
·The Compensation Committee shall act as Administrator (as described in each of the plans) of the plans within the authority delegated by the Board of Directors. In its administration of the plans, the Compensation Committee may, 1) grant stock options to individuals eligible for such grants (including grants to individuals subject to Section 16 of the Exchange Act in compliance with Rule 16b-3 thereunder, and 2) amend such stock options.
·The Compensation Committee shall review and make recommendations to the Board of Directors with respect to amendments to the plans and changes in the number of shares reserved for issuance thereunder.
·The Compensation Committee shall review and make recommendations to the Board of Directors regarding other plans that are proposed for adoption or adopted by the Company for the provision of compensation to employees of, directors of and consultants to the Company.
·The Compensation Committee shall review and approve on an annual basis the corporate goals and objectives with respect to compensation for the Chief Executive Officer.
·The Compensation Committee shall review and approve on an annual basis the corporate goals and objectives with respect to the compensation structure for Pacific Ethanol’s officers.
·The Compensation Committee shall prepare a report (to be included in the Pacific Ethanol proxy statement) that describes: 1) the criteria against the reviewed and approved annual goals on which compensation paid to the Chief Executive Officer for the last completed fiscal year is based; 2) the relationship of such compensation to the Company’s performance; and 3) the Compensation Committee’s executive compensation recommendation applicable to officers.
·The Compensation Committee shall review and reassess the adequacy of this charter annually and recommend any proposed changes to the Board of Directors for approval.
3.0          Delegation

The committee shall have the authority to delegate any of its responsibilities to subcommittees as the committee may deem appropriate in its sole discretion.

4.0          Retaining Consultant

The committee shall have authority to retain such compensation consultants, outside counsel and other advisors as the committee may deem appropriate in its sole discretion. The committee shall have sole authority to approve related fees and retention terms.
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J.“5.0          Eligible DirectorMeetings” means
It is anticipated that the compensation Committee will meet at least twice each year. However, the Compensation committee may establish its own schedule, which it will provide to the Board of Directors in advance. At a Board member who is not, at the timeminimum of one of such determination, an employeemeetings annually, the Compensation Committee will consider stock plans, performance goals and incentive awards, and the overall coverage and composition of the Corporation (or any Parent or Subsidiary).compensation package.

6.0          Minutes

The Compensation Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board of Directors.

7.0          Reports

The Compensation Committee will provide written reports to the Board of Directors of the Company regarding recommendations of the Compensation Committee submitted to the Board of Directors for Action, and copies of the written minutes of its meetings.


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APPENDIX C

Title:
NOMINATING AND GOVERNANCE COMMITTEE CHARTER
Policy:
This charter defines the membership and responsibilities of the Nominating and Governance Committee of the Board of Directors of Pacific Ethanol.
Purpose:
The purpose of the Nominating and Governance Committee of the Board of Directors of Pacific Ethanol, Inc is to ensure that the Board of Directors is properly constituted to meet the its fiduciary obligations to the stockholders and the Company and that the Company has and follows appropriate governance standards. To carry out this purpose, the Nominating Committee shall: 1) assist the Board of Directors by identifying prospective director nominees and to recommend to the Board of Directors nominees for the next annual meeting of stockholders; 2) develop and recommend to the Board of Directors the governance principles applicable to the Company; 3) oversee the evaluation of the Board of Directors and management; 4) recommend to the Board of Directors nominees for each committee.

Procedures:
 
K.“1.0          Employee” means an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the controlCommittee Membership and direction of the employer entity as to both the work to be performed and the manner and method of performance.Organization
 
·The Nominating Committee shall be comprised of no fewer than two (2) members.
·The members of the Nominating Committee shall meet the independence requirements of the National Association of Securities Dealers.
·The members of the Nominating Committee shall be appointed and replaced by the Board of Directors.
L.“2.0          Exercise DateCommittee Responsibilities and Authority

” means the date on which the Corporation shall have received written noticeThe responsibilities of the option exercise.Compensation Committee are set forth below:
 
M.“Fair Market Value” per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:
·Evaluate the current composition, organization and governance of the Board of Directors and its committees, determine future requirements and make recommendations to the Board of Directors for approval.
 
(i)If the Common Stock is at the time traded on the NASDAQ Global Market, then the Fair Market Value shall be the closing selling price per share of Common Stock at the close of regular hours trading (i.e., before after- hours trading begins) on the NASDAQ Global Market on the date in question, as such price is reported by the National Association of Securities Dealers. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
·Determine on an annual basis desired Board of Director qualifications, expertise and characteristics and conduct searches for potential Board of Directors members with corresponding attributes. Evaluate and propose nominees for election to the Board of Directors. In performing these tasks, the Nominating Committee shall have the sole authority to retain and terminate any search firm to be used to identify director candidates.
 
(ii)If the Common Stock is not traded on the NASDAQ Global Market but is at the time listed or quoted on any other market or exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock at the close of regular hours trading (i.e., before after-hours trading begins) on the date in question on the market or exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
(iii)In the absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Plan Administrator.
In addition, with respect to any Incentive Option, the Fair Market Value shall be determined in a manner consistent with any regulations issued by the Secretary of the Treasury for the purpose of determining fair market value of securities subject to an Incentive Option plan under the Code.
N.“Family Member” means, with respect to a particular Optionee or Participant, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships.
O.“Hostile Take-Over” means either of the following events effecting a change in control or ownership of the Corporation:
(i)the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than 50% of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders that the Board does not recommend such stockholders to accept, or
·Oversee the Board of Directors performance evaluation process including conducting surveys of director observations suggestions and preferences.
 
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·Evaluate and make recommendations to the Board of Directors concerning the appointment of directors to the Board of Directors committees, the selection of board of Directors committee chairs and the proposal of the Board of Directors slate for election.
·Consider shareholder nominees for election to the Board of Directors.
·Evaluate and recommend termination of membership of individual directors in accordance with the Board of Director’s governance principles, for cause or for other appropriate reasons.
·Conduct an annual review on succession planning, report its findings and recommendations to the Board of Directors and work with the Board of Directors in evaluating potential successors to executive management positions.
·Coordinate and approve Board of Directors and committee meeting schedules.
·Review and re-examine this Charter annually and make recommendations to the Board of Directors for any proposed changes.
·Annually review and evaluate its performance.

(ii)3.0          a changeDelegation
The Nominating Committee shall have the authority to delegate any of its responsibilities to subcommittees as the committee may deem appropriate in its sole discretion.

4.0          Retaining Consultant

The Nominating Committee shall have authority to retain such compensation consultants, outside counsel and other advisors as the committee may deem appropriate in its sole discretion. The committee shall have sole authority to approve related fees and retention terms.

5.0          Meetings

It is anticipated that the compositionNominating Committee will meet at least twice each year. However, the Nominating Committee may establish its own schedule, which it will provide to the Board of Directors in advance.

6.0          Minutes

The Nominating Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board over a period of 36 consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be composed of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination.Directors.

7.0          Reports

P.“Incentive Option” means an option that satisfies the requirements of Code Section 422.
Q.“Involuntary Termination” means the termination of the Service of any individual that occurs by reason of:
(i)if such individual is providing services to the Corporation pursuant to a written contract that defines “cause” or “misconduct” or similar reasons such individual could be dismissed or discharged by the Corporation, then such individual’s involuntary dismissal or discharge by the Corporation other than for any of such reasons and other than for Misconduct shall be an Involuntary Termination;
(ii)if such individual is not providing services to the Corporation pursuant to a written contract that defines “cause” or “misconduct” or similar reasons such individual could be dismissed or discharged by the Corporation, then such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct shall be an Involuntary Termination;
(iii)if such individual is providing services to the Corporation pursuant to a written contract that defines “good reason” or similar reasons such individual could voluntarily resign, then such individual’s voluntary resignation for any of such reasons shall be an Involuntary Termination; or
(iv)if such individual is providing services to the Corporation pursuant to a written contract that does not define “good reason” or similar reasons such individual could voluntarily resign, then such individual’s voluntary resignation following (A) a change in his or her position with the Corporation that materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than 15% or (C) a relocation of such individual’s place of employment by more than 50 miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual’s consent, shall be an Involuntary Termination.
R.“Misconduct” means the commission of: any act of fraud, embezzlement or dishonesty by the Optionee or Participant; any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary); any illegal or improper conduct or intentional misconduct, gross negligence or recklessness by such person that has adversely affected or, in the determination of the Plan Administrator, is likely to adversely affect, the business, reputation, goodwill or affairs of the Corporation (or any Parent or Subsidiary) in a material manner; any conduct that provides a basis for the Corporation to terminate for “cause,” “misconduct” or similar reasons the written contract pursuant to which the Optionee or Participant is providing Services to the Corporation; resignation by the Optionee or Participant on fewer than 30 days’ prior written notice and in violation of an agreement to remain in Service of the Corporation, in anticipation of a termination for “cause,” “misconduct” or similar reasons under the agreement, or in lieu of a formal discharge for “cause,” “misconduct” or similar reasons. The foregoing definition shall not in any way preclude or restrict the right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary) for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan, to constitute grounds for termination for Misconduct.
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S.“1934 Act” means the Securities Exchange Act of 1934, as amended.
T.“Non-Statutory Option” means an option not intended to satisfy the requirements of Code Section 422.
U.“Optionee” means any person to whom an option is granted under the Discretionary Grant Program.
V.“Parent” means any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
W.“Participant” means any person who is issued shares of Common Stock or restricted stock units or other stock-based awards under the Stock Issuance Program.
X.“Permanent Disability” or “Permanently Disabled” means the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve months or more.
Y.“Plan” means the Corporation’s 2006 Stock Incentive Plan, as set forth in this document.
Z.“Plan Administrator” means the particular entity, whether the Compensation Committee or the Board, which is authorized to administer the Discretionary Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons then subject to its jurisdiction.
AA.“Plan Effective Date” means the date that stockholder approval of the Plan is obtained in accordance with Section III.A. of Article Four.
BB.“Section 16 Insider” means an officer or director of the Corporation subject to the short-swing profit liability provisions of Section 16 of the 1934 Act.
CC.“Service” means the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, an Eligible Director or a Consultant, except to the extent otherwise specifically provided in the documents evidencing the Award made to such person. For purposes of the Plan, an Optionee or Participant shall be deemed to cease Service immediately upon the occurrence of the either of the following events: (i) the Optionee or Participant no longer performs services in any of the foregoing capacities for the Corporation or any Parent or Subsidiary or (ii) the entity for which the Optionee or Participant is performing such services ceases to remain a Parent or Subsidiary of the Corporation, even though the Optionee or Participant may subsequently continue to perform services for that entity.
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DD.“Stock Issuance Agreement” means the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.
EE.“Stock Issuance Program” means the stock issuance program in effect under Article Three of the Plan.
FF.“Subsidiary” means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
GG.“Take-Over Price” means the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or, if applicable, (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over through the acquisition of such Common Stock. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share.
HH.“10% Stockholder” means the owner of stock (as determined under Code Section 424(d)) possessing more than 10% of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).
II.“Withholding Taxes” means the federal, state and local income and employment taxes to which the Optionee or Participant may become subject in connection with the issuance, exercise or vesting of the Award made to him or her under the Plan.
The Nominating Committee will provide written reports to the Board of Directors of the Company regarding recommendations of the Nominating Committee submitted to the Board of Directors for action and copies of the written minutes of its meetings.
 
 
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