Pacific Ethanol, Inc.
EXHIBIT 10.5
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<TYPE>EX-10.5
<SEQUENCE>5
<FILENAME>paceth_8k-ex1005.htm
<DESCRIPTION>EXHIBIT 10.5
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    <div>Exhibit 10.5</div>
    <div>&#160;</div>
    <div><br><br>&#160;</div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="center"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Pacific
Ethanol, Inc.</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="center"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">400
Capitol Mall, Suite 2060</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="center"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Sacramento,
CA&#160;&#160;95814</font></div>
    <div style="DISPLAY: block; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25"><br></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="center"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">March 27,
2008</font></div>
    <div style="DISPLAY: block; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25"><br></div>
    <div style="DISPLAY: block; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25"><br></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Lyles
United, LLC</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">1210 West
Olive Avenue</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Fresno,
CA&#160;&#160;93728</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div>
      <table align="center" border="0" cellpadding="0" cellspacing="0" id="hangingindent" width="100%">
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              <div><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&#160;
      </font></div>
            </td>
            <td style="WIDTH: 36pt">
              <div style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; MARGIN-RIGHT: 0pt"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Re:</font></div>
            </td>
            <td>
              <div align="justify"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; TEXT-DECORATION: underline">Dividend
      Rights</font></font></div>
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    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Ladies
and Gentlemen:</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">This side
letter agreement (the <font style="DISPLAY: inline; FONT-WEIGHT: bold">&#8220;Letter
Agreement&#8221;</font>) is provided with reference to that certain Securities
Purchase Agreement (the <font style="DISPLAY: inline; FONT-WEIGHT: bold">&#8220;Securities Purchase
Agreement&#8221;</font>) dated <font style="DISPLAY: inline; COLOR: #000000">March 18,
2008, by and between Pacific Ethanol, Inc., a Delaware corporation (the
</font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;</font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">Company</font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">), and Lyles United, LLC, a Delaware
limited liability company (the </font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;</font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">Purchaser</font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">), with reference to the Company&#8217;s
Certificate of Designations, Powers, Preferences, and Rights of the Series B
Cumulative Convertible Preferred Stock (the </font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;Series B Certificate
of Designations&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">) with
respect to its Series B Cumulative Convertible Preferred Stock, $.001 par value
per share (the </font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;Series B Preferred
Stock&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">), and with reference
to the Company&#8217;s Certificate of Designations, Powers, Preferences, and Rights of
the Series A Cumulative Redeemable Convertible Preferred Stock (the </font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;Series A Certificate
of Designations&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">) with
respect to its Series A Cumulative Redeemable Convertible Preferred Stock, $.001
par value per share (the </font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;Series A Preferred
Stock&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">).&#160;&#160;Capitalized terms not
defined herein shall </font>have the respective meanings given to such terms in
the <font style="DISPLAY: inline; COLOR: #000000">Securities Purchase
Agreement</font>.</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">In
connection with the closing of the transactions contemplated by the Securities
Purchase Agreement and in furtherance thereof, the Company desires to waive
certain rights held by the Company and set forth in the Series B Certificate of
Designations in favor of the Purchaser, in its capacity as the sole holder of
all of the Company&#8217;s outstanding shares of Series B Preferred
Stock.</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">In
consideration of the mutual covenants herein contained, and for other valuable
consideration the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">1.</font><font id="TAB2" style="COLOR: black; LETTER-SPACING: 9pt">&#160;</font><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; TEXT-DECORATION: underline">Waiver of
Series B PIK Right</font>.&#160;&#160;The Company hereby expressly waives its
right under Section 3(a) of the Series B Certificate of Designations to pay any
dividends due and payable to the Purchaser as a <font style="DISPLAY: inline; COLOR: #000000">holder of Series B Preferred Stock in
shares of Series B Preferred Stock (the </font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;Series B PIK
Right&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">).&#160;&#160;The
Company hereby covenants that it shall not, without the prior written consent of
the Purchaser, exercise or attempt to exercise the Series B PIK Right provided
for in Section 3(a) of the Series B Certificate of Designations at any time
following the date of this Letter Agreement.&#160;&#160;In connection with
waiving its Series B PIK Right, the Company hereby acknowledges to the Purchaser
that the Company has, concurrently with the execution of this Letter Agreement,
entered into that certain Series A Preferred Stockholder Consent and Waiver
dated the date hereof with Cascade Investment, L.L.C., a Washington limited
liability company (</font><font style="DISPLAY: inline; FONT-WEIGHT: bold; COLOR: #000000">&#8220;Cascade&#8221;</font><font style="DISPLAY: inline; COLOR: #000000">), whereby the Company has agreed, among
other things, to </font>waive its right under Section 3(a) of the Series A
Certificate of Designations to pay any dividends due and payable to Cascade as a
<font style="DISPLAY: inline; COLOR: #000000">holder of Series A Preferred Stock
in shares of Series A Preferred Stock.</font></font></div>
    <div style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt">&#160;</div>
    <div style="MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt">&#160;</div>
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    <div>&#160;</div>
    <div><br><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Lyles
United, LLC</font></div>
    <div>
      <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">March 27,
2008</font></div>
      <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Page
2</font></div><br></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">2.</font><font id="TAB2" style="COLOR: black; LETTER-SPACING: 9pt">&#160;</font><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"><font style="DISPLAY: inline; FONT-WEIGHT: bold; TEXT-DECORATION: underline">Full
Force and Effect</font>.&#160;&#160;Except as otherwise provided herein, the
Series B Certificate of Designations shall remain unchanged and in full force
and effect.&#160;&#160;Except as expressly set forth above, nothing in this
Letter Agreement shall be construed as a waiver of any rights of any of the
parties to this Letter Agreement under the Series B Certificate of
Designations.</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 36pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">In
witness whereof, the parties have executed this Letter Agreement as of March 27,
2008.</font></div>
    <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="justify">&#160;</div>
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    <div>
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            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
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              <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; COLOR: #000000; FONT-FAMILY: times new roman"><font style="DISPLAY: inline; COLOR: #000000">PACIFIC ETHANOL,
      INC.</font></font></div>
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      </font></td>
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            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
      </font></td>
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              <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman"><font style="DISPLAY: inline; COLOR: #000000">By:&#160;&#160;<font style="TEXT-DECORATION: underline">&#160;&#160;&#160; </font></font><font style="DISPLAY: inline; COLOR: #000000; TEXT-DECORATION: underline">/s/
      NEIL M.
      KOEHLER&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
      </font></font></div>
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            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
      </font></td>
            <td align="left" valign="top" width="40%">
              <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; COLOR: #000000; FONT-FAMILY: times new roman"><font style="DISPLAY: inline; COLOR: #000000">&#160;&#160;&#160;Neil M. Koehler,
      President and CEO</font></font></div>
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      </font></td>
            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
      </font></td>
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            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
      </font></td>
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              <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-WEIGHT: bold; FONT-SIZE: 10pt; COLOR: #000000; FONT-FAMILY: times new roman"><font style="DISPLAY: inline; COLOR: #000000">LYLES UNITED,
      LLC</font></font></div>
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      </font></td>
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            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
      </font></td>
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              <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman"><font style="DISPLAY: inline; COLOR: #000000">By:&#160;<font style="TEXT-DECORATION: underline">&#160;&#160;&#160;&#160;
      </font></font><font style="DISPLAY: inline; COLOR: #000000; TEXT-DECORATION: underline">/s/
      WILLIAM M. LYLES
      IV&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;
      </font></font></div>
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            <td valign="top" width="40%"><font style="DISPLAY: inline; FONT-SIZE: 10pt; FONT-FAMILY: times new roman">&#160;
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              <div style="DISPLAY: block; MARGIN-LEFT: 0pt; TEXT-INDENT: 0pt; LINE-HEIGHT: 1.25; MARGIN-RIGHT: 0pt" align="left"><font style="DISPLAY: inline; FONT-SIZE: 10pt; COLOR: #000000; FONT-FAMILY: times new roman"><font style="DISPLAY: inline; COLOR: #000000">&#160;&#160;&#160;William M. Lyles
      IV, Vice President</font></font></div>
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