UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. )

 

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Filed by a Party other than the Registrant o

 

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o  Preliminary Proxy Statement

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þ  Definitive Proxy Statement

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o  Soliciting Material Pursuant to §240.14a-12

 

 

ADVANCED ENERGY INDUSTRIES, 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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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 4, 2010

 

To Our Stockholders:

 

The 2010 Annual Meeting of Stockholders of Advanced Energy Industries, Inc. (“Advanced Energy” or the “Company”) will be held on Tuesday, May 4, 2010, at 10:00 a.m. Mountain Daylight Time, at Advanced Energy’s corporate offices, 1625 Sharp Point Drive, Fort Collins, Colorado 80525. At the meeting, you will be asked to vote on the following matters:

 

1. Election of eight (8) directors.

 

2. Ratification of the appointment of Grant Thornton LLP as Advanced Energy’s independent registered public accounting firm for 2010.

 

3. Approval of an increase in the number of shares authorized for issuance under the 2008 Omnibus Incentive Plan from 3,500,000 shares to 7,500,000 shares.

 

4. Approval of an increase in the total number of shares of common stock authorized for issuance under the Employee Stock Purchase Plan from 500,000 shares to 1,000,000 shares.

 

5. Any other matters of business properly brought before the meeting.

 

Each of the matters 1 through 4 is described in detail in the accompanying proxy statement, dated March 15, 2010.

 

If you owned common stock of Advanced Energy at the close of business on March 8, 2010, you are entitled to receive this notice and to vote at the meeting.

 

All stockholders are cordially invited to attend the meeting in person. If you do not plan to attend the meeting and vote your shares of common stock in person, please authorize a proxy to vote your shares in one of the following ways:

 

 

Any proxy may be revoked at any time prior to its exercise at the annual meeting.

 

By Order of the Board of Directors,

 

Thomas O. McGimpsey
Vice President, General Counsel & Corporate Secretary

 

Fort Collins, Colorado

March 15, 2010

 

 

 

 

Please come to our 2010 Annual Meeting of Stockholders to learn about Advanced Energy, what we have accomplished in the last year and our plans for 2010. The meeting will be held:

 

Tuesday, May 4, 2010
10:00 a.m. Mountain Daylight Time
Advanced Energy’s Corporate Offices
1625 Sharp Point Drive
Fort Collins, Colorado 80525

 

This proxy statement describes the matters that management of Advanced Energy intends to present to the stockholders for approval at the annual meeting. Accompanying this proxy statement are Advanced Energy’s 2009 Annual Report to Stockholders and a form of proxy. All voting on matters presented at the annual meeting will be by proxy or by ballot in person, in accordance with the procedures described in this proxy statement. Instructions for voting are included in the proxy statement. Your proxy may be revoked at any time prior to the meeting in the manner described in this proxy statement.

 

I look forward to seeing you at the meeting.

 

 

Hans Georg Betz
Chief Executive Officer

 

This proxy statement and the accompanying proxy card are first being sent to stockholders on or about March 15, 2010.

 

GENERAL

 

This proxy statement and the accompanying materials are being sent to stockholders of Advanced Energy as part of a solicitation for proxies for use at the 2010 Annual Meeting of Stockholders. The Board of Directors of Advanced Energy (the “Board of Directors” or the “Board”) is making this solicitation for proxies. By delivering the enclosed proxy card by any of the methods described on the card, you will appoint each of Hans Georg Betz and Lawrence D. Firestone as your agent and proxy to vote your shares of common stock at the meeting. In this proxy statement, “proxy holders” refers to Dr. Betz and Mr. Firestone in their capacities as your agents and proxies.

 

Advanced Energy’s principal executive offices are located at 1625 Sharp Point Drive, Fort Collins, Colorado 80525. The telephone number is (970) 221-4670.

 

Proposals

 

We intend to present four proposals to the stockholders at the meeting:

 

1. Election of eight (8) directors.

 

2. Ratification of the appointment of Grant Thornton LLP as Advanced Energy’s independent registered public accounting firm for 2010.

 

3. Approval of an increase in the number of shares authorized for issuance under the 2008 Omnibus Incentive Plan from 3,500,000 shares to 7,500,000 shares.

 

4. Approval of an increase in the total number of shares of common stock authorized for issuance under the Employee Stock Purchase Plan from 500,000 shares to 1,000,000 shares.

 

We do not know of any other matters to be submitted to the stockholders at the meeting. If any other matters properly come before the meeting, the proxy holders intend to vote the shares they represent as the Board of Directors may recommend.

 

Record Date and Share Ownership

 

If you owned shares of Advanced Energy common stock in your name as of the close of business on Monday, March 8, 2010, you are entitled to vote on the proposals that are presented at the meeting. On that date, which is referred to as the “record date” for the meeting, 42,103,081 shares of Advanced Energy common stock were issued and outstanding and were held by approximately 533 stockholders of record, according to the records of American Stock Transfer & Trust Company, Advanced Energy’s transfer agent.

 

Voting Procedures

 

Each share of Advanced Energy common stock that you hold entitles you to one vote on each of the proposals that are presented at the annual meeting. The inspector of the election will determine whether or not a quorum is present at the annual meeting. A quorum will be present at the meeting if a majority of the shares of common stock entitled to vote at the meeting are represented at the meeting, either by proxy or by the person who owns the shares. Advanced Energy’s transfer agent will deliver a report to the inspector of election in advance of the annual meeting, tabulating the votes cast by proxies returned to the transfer agent. The inspector of election will tabulate the final vote count, including the votes cast in person and by proxy at the meeting.

 

If a broker holds your shares, this proxy statement and a proxy card have been sent to the broker. You may have received this proxy statement directly from your broker, together with instructions as to how to direct the broker concerning how to vote your shares. Under the rules for Nasdaq-quoted companies, brokers cannot vote on certain matters without instructions from you. If you do not give your broker instructions or discretionary authority to vote your shares on such matters and your broker returns the proxy card without voting on a proposal, your shares will be recorded as “broker non-votes” with respect to the proposals on which the broker does not vote.

 

Broker non-votes and abstentions will be counted as present for purposes of determining whether a quorum is present. If a quorum is present, directors will be elected by a plurality of the votes present and each of the other

matters described in this proxy statement will be approved by a majority of the votes cast on the proposal. Broker non-votes and abstentions will have no effect on the outcome of any of the matters described in this proxy statement.

 

The following table reflects the vote required for each proposal and the effect of broker non-votes and abstentions on the vote, assuming a quorum is present at the meeting:

 

 

If any other proposals are properly presented to the stockholders at the meeting, the number of votes required for approval will depend on the nature of the proposal. Generally, under Delaware law and the by-laws of Advanced Energy, the number of votes that may be required to approve a proposal is either a majority of the shares of common stock represented at the meeting and entitled to vote, or a majority of the shares of common stock represented at the meeting and casting votes either for or against the matter being considered. The enclosed proxy card gives discretionary authority to the proxy holders to vote on any matter not included in this proxy statement that is properly presented to the stockholders at the annual meeting.

 

Costs of Solicitation

 

Advanced Energy will bear the costs of soliciting proxies in connection with the annual meeting. In addition to soliciting your proxy by this mailing, proxies may be solicited personally or by telephone or facsimile by some of Advanced Energy’s directors, officers and employees, without additional compensation. We may reimburse our transfer agent, American Stock Transfer & Trust Company, our proxy agent, Mediant Communications, brokerage firms and other persons representing beneficial owners of Advanced Energy common stock for their expenses in sending proxies to the beneficial owners.

 

Delivery and Revocability of Proxies

 

You may vote your shares either by (i) marking the enclosed proxy card and mailing it in the enclosed postage prepaid envelope, (ii) voting online at www.proxypush.com/aeis, or (iii) voting by telephone at (866) 390-9955. If you mail your proxy, please allow sufficient time for it to be received in advance of the annual meeting.

 

If you deliver your proxy and change your mind before the meeting, you may revoke your proxy by delivering notice to our Corporate Secretary at Advanced Energy Industries, Inc., 1625 Sharp Point Drive, Fort Collins, Colorado 80525, stating that you wish to revoke your proxy or by delivering another proxy with a later date. You may vote your shares by attending the meeting in person but, if you have delivered a proxy before the meeting, you

must revoke it before the meeting begins. Attending the meeting will not automatically revoke your previously-delivered proxy.

 

Delivery of Documents to Stockholders Sharing an Address

 

If two or more stockholders share an address, Advanced Energy may send a single copy of this proxy statement and other soliciting materials, as well as the 2009 Annual Report to Stockholders, to the shared address, unless Advanced Energy has received contrary instructions from one or more of the stockholders sharing the address. If a single copy has been sent to multiple stockholders at a shared address, Advanced Energy will deliver a separate proxy card for each stockholder entitled to vote. Additionally, Advanced Energy will send an additional copy of this proxy statement, other soliciting materials and the 2009 Annual Report to Stockholders, promptly upon oral or written request by any stockholder to Investor Relations, Advanced Energy Industries, Inc., 1625 Sharp Point Drive, Fort Collins, Colorado 80525; telephone number (970) 221-4670. If any stockholders sharing an address receive multiple copies of this proxy statement, other soliciting materials and the 2009 Annual Report to Stockholders and would prefer in the future to receive only one copy, such stockholders may make such request to Investor Relations at the same address or telephone number.

 

PROPOSAL NO. 1

 

ELECTION OF DIRECTORS

 

A board of eight (8) directors is to be elected at the annual meeting. The Board of Directors has nominated for election the persons listed below. Each of the nominees is currently a director of Advanced Energy, except Terry Hudgens. In the event that any nominee is unable to or declines to serve as a director at the time of the meeting, the proxy holders will vote in favor of a nominee designated by the Board of Directors, on recommendation by the Nominating and Governance Committee to fill the vacancy. We are not aware of any nominee who will be unable or who will decline to serve as a director. The term of office of each person elected as a director at the meeting will continue from the end of the meeting until the next Annual Meeting of Stockholders (expected to be held in the year 2011), or until a successor has been elected and qualified or until such director’s earlier resignation or removal.

 

NOMINEES

 

 

 

 

The Board of Directors has determined that each of the nominees, other than Douglas S. Schatz and Hans Georg Betz, is an “independent director” within the meaning of the Nasdaq Stock Market rules. To be considered independent, the Board must affirmatively determine, among other things, that neither the director nor any immediate family member of the director has had any direct or indirect material relationship with the Company within the last three years. The Board of Directors has made an affirmative determination that none of the independent directors has had any relationship with Advanced Energy or with another director that would interfere with the exercise of his independent judgment in carrying out his responsibilities as a director. In making this independence determination, the Board considered the potential effects of two of our directors concurrently providing management and consulting services to a company other than Advanced Energy, two of our directors concurrently serving on the board of directors of a company other than Advanced Energy and a proposed joint research effort between a company affiliated with one of our directors and Advanced Energy. The independent directors, if all of them are elected at the annual meeting, will constitute a majority of the Board of Directors. There is no family relationship amongst any of the directors and executive officers of the Company. The Company’s executive officers serve at the discretion of the Board.

 

Qualifications

 

The Board respects its responsibility to provide oversight, counseling and direction to the management of the company in the interest and for the benefit of the stockholders. Accordingly, it seeks to be comprised of directors with diverse skills, experience, qualifications and characteristics. It is critical that directors understand the markets in which the company operates, particularly in the semiconductor capital equipment and solar equipment industries. It is equally important that, collectively, the directors have successful experience in each of the primary aspects of

our business, including engineering, research and development, finance and audit, product strategy and development, customer relations, supply chain management and sales and marketing.

 

Douglas S. Schatz, our chairman, co-founder and former chief executive officer, brings to the Board significant experience in and a deep understanding of the thin-film equipment markets and of the Company itself. Additionally, his more recent involvement in the solar equipment industry provides the Board with insight to this market and the technologies being developed. The Board and senior management also benefit from Mr. Schatz’s technological and engineering perspective and understanding.

 

Hans Betz, our chief executive officer, brings to the Board an extensive technical background, as well as broad experience in senior management and as a venture capitalist in the electronics and other technology industries. Dr. Betz also has particular skills and experience in engineering, research and development, product strategy and development, customer relations and doing business in Europe.

 

Fred Ball brings to the board his extensive experience in senior management, operations, finance and auditing. He also serves on another public company board and its audit committee. Mr. Ball’s balance of experience enables him to work very productively with both the board and senior management, particularly on strategic, finance and audit and executive compensation matters.

 

Richard Beck has been with the Company for 18 years, serving initially as our chief financial officer and remaining as a director following his retirement. Mr. Beck also has significant experience serving on other public company boards, as chairman of one as well as audit committee chair and nominations and corporate governance committees. Within the past several years, Mr. Beck has attended a number of corporate governance conferences and other educational programs. He has led the Board in establishing policies and procedures that have greatly improved the organization and functioning of the committees and the Board.

 

Trung Doan brings to the Board managerial experience in both start-up companies and leading, established technology companies. He shares with the Board and senior management his deep understanding of technology and engineering and how they relate to product strategy and development. Mr. Doan also has extensive experience doing business in Asia, which has been and continues to be important to the Company’s transition of high volume manufacturing to, and increasing supply chain and customer base in, Asia.

 

Edward Grady brings to the Board his knowledge and experience in both the semiconductor capital equipment and solar equipment industries. He shares with the Board and senior management the insight and understanding he has developed from his leadership at several companies, including in the areas of product strategy and development, service and organizational development. Mr. Grady also has significant experience serving on other public company boards.

 

Thomas Rohrs brings to the Board executive management and operations experience in the semiconductor capital equipment industry, particularly in the areas of research and development, supply chain management and product development. The Board and senior management benefit from his strategic thinking and continued involvement in the semiconductor capital equipment and solar equipment industries. Mr. Rohrs also has significant experience serving on other public company boards.

 

Terry Hudgens, if elected, will bring to the Board a wealth of experience in the renewable energy and utility industries. He will be able to provide the Board and senior management with insight in respect of these industries, including doing business with regulated entities in the U.S. and Europe. Mr. Hudgens also brings executive experience.

 

Required Vote

 

The eight (8) nominees will be elected to the Board upon receipt of a favorable vote (FOR) of a plurality of the votes cast at the meeting. Stockholders do not have the right to cumulate their votes for the election of directors. Unless otherwise instructed, the proxy holders will vote the proxies received by them FOR each of the eight (8) nominees. Votes withheld from a nominee will be counted for purposes of determining whether a quorum is present, but will not be counted as an affirmative vote for such nominee.

 

The Board of Directors recommends a vote “FOR” the election of each of the nominees named above.

Director Compensation

 

Director compensation for the fiscal year ended December 31, 2009 was as follows:

 

 

Restricted stock units awarded to non-employee directors will vest as to 25% of the underlying shares on each annual anniversary of the grant date until fully vested on the fourth anniversary of the grant date.

 

In December 2008, the Company approved a 10% reduction in Board of Director fees which extended throughout 2009. This reduction was reversed effective January 1, 2010. The following table shows director compensation information for 2009:

 

2009 Director Compensation

 

 

 

 

Board of Directors Meetings

 

The Board of Directors held 8 meetings in 2009. In 2009, the Board of Directors had an Audit and Finance Committee, a Nominating and Governance Committee and a Compensation Committee. In 2009, each incumbent

director attended at least 75% of the aggregate number of meetings of the Board of Directors (held during the period for which he was a director) and the committees (held during the period for which he served on such committees) on which he served.

 

Members of the Board of Directors are welcomed and encouraged, but not required, to attend the Company’s annual stockholder meetings. The annual meeting of the Company’s stockholders held on May 6, 2009 was attended by 3 members of the Board, Messrs. Betz, Doan and Grady.

 

Audit and Finance Committee

 

Composition and Meetings

 

The Company has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934. In 2009, the Audit and Finance Committee consisted of Messrs. Ball (Chairman), Beck, Doan and Rohrs. On February 19, 2009, Mr. Ball was added as a member of the Audit and Finance Committee by appointment of the Board of Directors and he became Chairman of the Audit and Finance Committee on July 21, 2009, replacing Mr. Beck as Chairman. The Board determined that each of the members of the Audit and Finance Committee is “independent” in accordance with the Nasdaq Stock Market rules and the Securities Exchange Act of 1934. The Board of Directors has evaluated the credentials of Messrs. Beck and Ball and determined that they are “audit committee financial experts” as defined under the SEC rules.. The Audit and Finance Committee met 7 times in 2009.

 

Policy on Audit and Finance Committee Approval of Audit and Permissible Non-Audit Services of the Independent Registered Public Accounting Firm

 

The Audit and Finance Committee approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit related services, tax services and other services. Approval is provided on a service-by-service basis. In 2009, the Audit and Finance Committee approved all of the audit and non-audit services provided by Advanced Energy’s independent registered public accounting firm.

 

Audit and Finance Committee Charter and Responsibilities

 

The Audit and Finance Committee is governed by a written charter, which is available on our website at www.advancedenergy.com. The Audit and Finance Committee is responsible for, among other things:

 

 

The Audit and Finance Committee also conducts financial reviews with Advanced Energy’s independent registered public accounting firm prior to the release of financial information in the Company’s Forms 10-K and 10-Q.

 

Management has primary responsibility for Advanced Energy’s financial statements and the overall reporting process, including systems of internal controls. The independent registered public accounting firm audits the annual financial statements prepared by management, expresses an opinion as to whether those financial statements fairly present the financial position, results of operations and cash flows of Advanced Energy in conformity with accounting principles generally accepted in the United States and discusses with the Audit and Finance Committee any issues they believe should be raised.

 

Report of the Audit and Finance Committee

 

The Audit and Finance Committee has reviewed Advanced Energy’s audited financial statements, and met together and separately with both management and Grant Thornton LLP, the Company’s current independent registered public accounting firm to discuss Advanced Energy’s quarterly and annual financial statements and reports prior to issuance. In addition, the Audit and Finance Committee has discussed with the independent registered public accounting firm the matters outlined in Statement on Auditing Standards No. 61 (Communication with Audit Committees) to the extent applicable and received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). The Audit and Finance Committee has also discussed with the independent registered public accounting firm the independent accountant’s independence.

 

Based on its review and discussion of the foregoing matters and information, the Audit and Finance Committee recommended to the Board of Directors that the audited financial statements be included in Advanced Energy’s 2009 Annual Report on Form 10-K. The Audit and Finance Committee has recommended the appointment of Grant Thornton LLP as the Company’s independent registered public accounting firm for 2010, subject to stockholder approval.

 

The Audit and Finance Committee

Frederick A. Ball, Chairman
Richard P. Beck
Trung T. Doan

Thomas M. Rohrs

 

Nominating and Governance Committee

 

Composition and Meetings

 

The Nominating and Governance Committee consists of Messrs. Beck (Chairman), Grady and Spedden. Each of the members of the Nominating and Governance Committee was and is an “independent director” within the meaning of the Nasdaq Stock Market rules. The Nominating and Governance Committee met 3 times in 2009.

 

Nominating and Governance Committee Charter and Responsibilities

 

The Nominating and Governance Committee is governed by a written charter and Corporate Governance Guidelines that are available on our website at www.advancedenergy.com.

 

The Nominating and Governance Committee is responsible for:

 

 

 

Director Nominations

 

The Nominating and Governance Committee evaluates and interviews potential director candidates. All members of the Board may interview the final candidates. The Nominating and Governance Committee of the Board considers candidates for director nominees proposed by directors and stockholders, as described in more detail below. This committee may retain recruiting professionals to assist in identifying and evaluating candidates for director nominees. The Nominating and Governance Committee has no stated specific or minimum qualifications that must be met by a Board candidate. However, as set forth in the Company’s Board Governance Guidelines, the Nominating and Governance Committee strives for a mix of skills and diverse perspectives (functional, cultural and geographic) that is effective for the Board. In selecting nominees, the Board assesses the independence, character and acumen of candidates. The Board also endeavors to establish a number of areas of collective core competency of the Board. Therefore, the Board assesses whether a candidate possesses skills including business judgment, leadership, strategic vision and knowledge of management, accounting, finance, industry, technology, manufacturing, international markets and marketing. Additional criteria include a candidate’s personal and professional ethics, integrity and values, as well as his or her willingness to devote sufficient time to prepare for and attend meetings and participate effectively on the Board.

 

The Corporate Governance Guidelines provide that the Nominating and Governance Committee is responsible for reviewing with the Board from time to time the appropriate skills and characteristics required of Board members in the context of the current make-up of the Board. This assessment should include issues of diversity in numerous factors such as age; understanding of and experience in manufacturing, technology, finance and marketing; and international experience. These factors, and others as considered useful by the Board, are reviewed in the context of an assessment of the perceived needs of the Board at a particular point in time.

 

The Nominating and Governance Committee will consider any and all director candidates recommended by our stockholders. The Nominating and Governance Committee will apply the same processes and criteria in evaluating director candidates recommended by stockholders as it applies in evaluating director candidates recommended by directors, members of management or any other person. If you are a stockholder and wish to recommend a candidate for nomination to the Board of Directors, you should submit your recommendation in writing to the Nominating and Governance Committee, in care of the Corporate Secretary of Advanced Energy at 1625 Sharp Point Drive, Fort Collins, Colorado 80525. Your recommendation should include your name and address, the number of shares of Advanced Energy common stock that you own, the name of the person you recommend for nomination, the reasons for your recommendation, a summary of the person’s business history and other qualifications as a director of Advanced Energy and whether such person has agreed to serve, if elected, as a director of Advanced Energy. Please also see the information under “Proposals of Stockholders” on page 39 of this proxy statement.

Compensation Committee

 

Composition and Meetings

 

The Compensation Committee consists of Messrs. Rohrs (Chairman), Doan, Grady and Spedden. Mr. Rohrs was appointed Chairman of the Compensation Committee on July 21, 2009, replacing Mr. Spedden who continues as a member of the Compensation Committee. Each of the members of the Compensation Committee is a “non-employee director” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, an “outside director” within the meaning of Section 162(m) under the Internal Revenue Code and an “independent director” within the meaning of the Nasdaq Stock Market rules. The Compensation Committee met 5 times in 2009.

 

Committee Charter and Responsibilities

 

The Compensation Committee is governed by a written charter, which is available on our website at www.advancedenergy.com. The Compensation Committee is responsible for recommending salaries, incentives and other compensation for directors and officers of Advanced Energy, administering Advanced Energy’s incentive compensation and benefit plans and recommending to the Board of Directors policies relating to such compensation and benefit plans. The Compensation Committee has also, from time to time, retained an independent compensation consultant to assist and advise the Compensation Committee in fulfilling these responsibilities.

 

Board Governance Structure

 

The Corporate Governance Guidelines set forth the Board’s policy that the positions of Chairman of the Board and Chief Executive Officer should be held by separate persons as an aid in the Board’s oversight of management. The Company believes this board leadership structure is most appropriate for the Company because it provides the Board with increased independence.

 

Senior management manages material risks and reports directly to the Board. As part of its general oversight role, the Board reviews business reports from management that routinely outlines operational risks that may exist from time to time. In addition, for risks related more specifically to the financial operations of the Company, such as credit risk and liquidity risk, the Audit Committee examines reports from management and reviews such risks in light of the Company’s business operations.

PROPOSAL NO. 2

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

On February 12, 2010, the Audit and Finance Committee approved the continued appointment of Grant Thornton LLP for 2010 as the Company’s independent registered public accounting firm. If the stockholders fail to ratify the appointment of Grant Thornton LLP, the Audit and Finance Committee will reconsider its selection. Even if the selection is ratified, the Audit and Finance 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 and Finance Committee feels that such a change would be in the best interests of Advanced Energy and our stockholders.

 

A representative of Grant Thornton LLP is expected to be present at the meeting and will have an opportunity to make a statement if he or she so desires. Moreover, the representative is expected to be available to respond to appropriate questions from the stockholders.

 

Audit Fees

 

The following table presents fees paid by Advanced Energy for professional services rendered by Grant Thornton, LLP for 2008 and 2009. We did not pay any fees to Grant Thornton, LLP for tax compliance, tax advice, tax planning or other services during 2008 or 2009. All of the fees in the following table were approved by the Audit Committee in conformity with its pre-approval process.

 

 

Audit Fees consisted of fees for (a) professional services rendered for the annual audit of Advanced Energy’s consolidated financial statements and internal controls over financial reporting, (b) review of the interim consolidated financial statements included in quarterly reports, and (c) services that are typically provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements.

 

Audit-Related Fees consisted of fees for assurance and related services that were reasonably related to the performance of the audit or review of Advanced Energy’s consolidated financial statements and are not reported under “Audit Fees.”

 

Required Vote

 

Ratification of the appointment of Grant Thornton LLP as the independent registered public accounting firm for Advanced Energy for 2010 requires the affirmative (FOR) vote of a majority of the shares of common stock cast on the matter. For purposes of determining the number of votes cast on the matter, only those cast “For” or “Against” are included. Abstentions and broker non-votes are not included.

 

The Board of Directors recommends a vote “FOR” the ratification of the appointment of Grant Thornton LLP as Advanced Energy’s independent registered public accounting firm.

PROPOSAL NO. 3

 

APPROVAL OF AN INCREASE IN THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE 2008 OMNIBUS INCENTIVE PLAN FROM 3,500,000 SHARES TO 7,500,000 SHARES

 

This section provides a summary of the terms of the 2008 Omnibus Incentive Plan and the proposal to increase the number of shares available for issuance under the plan.

 

On February 16, 2010, the Board authorized an amendment to the 2008 Omnibus Incentive Plan to increase the number of shares of common stock authorized for issuance under the 2008 Omnibus Incentive Plan from 3,500,000 shares to 7,500,000 shares in the aggregate, subject to approval by the stockholders of Advanced Energy.

 

The purpose of this amendment is to ensure that Advanced Energy has a sufficient reserve of common stock available under the 2008 Omnibus Incentive Plan to continue to grant stock options and other awards at levels determined appropriate by the Board. The purpose of the 2008 Omnibus Incentive Plan is to attract and to encourage the continued employment and service of, and maximum efforts by, officers, key employees and other key individuals by offering those persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. In the judgment of the Board of Directors, an initial or increased grant under the 2008 Omnibus Incentive Plan will be a valuable incentive and will serve to the ultimate benefit of shareholders by aligning more closely the interests of 2008 Omnibus Incentive Plan participants with those of our shareholders.

 

The Board of Directors approved the 2008 Omnibus Incentive Plan on February 15, 2008 and the 2008 Omnibus Incentive Plan was approved by our shareholders at the 2008 Annual Meeting.

 

On the Record Date, stock awards (net of cancelled or expired awards) covering an aggregate of 2,583,420 shares were outstanding under the 2008 Omnibus Incentive Plan and 878,317 shares remained available for future grant under the 2008 Omnibus Incentive Plan. Included in the number of shares subject to outstanding grants are 2,309,730 shares subject to options with a weighted average exercise price of $11.17 and a weighted average remaining term of 6.24 years.

 

On the Record Date, the closing price of our Common Stock was $14.64 per share. On the Record Date, there were approximately 3 executive officers, 252 employees and 6 directors of the Company and its subsidiaries who were eligible to participate in the 2008 Omnibus Incentive Plan. Because participation and the types of awards under the Plan are subject to the discretion of the Compensation Committee of the Board of Directors, the benefits or amounts that will be received by any participant or groups of participants if the amendment of the Plan and the material terms under the plan for performance-based compensation are approved are not currently determinable.

 

The Common Stock issued or to be issued under the 2008 Omnibus Incentive Plan consists of authorized but unissued shares and treasury shares. Shares covered by awards under the Company’s 2003 Stock Option Plan or the Amended and Restated 2003 Non-Employee Directors’ Stock Option Plan, (collectively the Prior Plans) that are not purchased or are forfeited or expire, or otherwise terminate without delivery of any shares subject thereto will be available under the 2008 Omnibus Incentive Plan to the extent such shares would again be available for issuance under the applicable Prior Plan. If any shares covered by an award are not purchased or are forfeited, or if an award otherwise terminates without delivery of any Common Stock, then the number of shares of Common Stock counted against the aggregate number of shares available under the plan with respect to the award will, to the extent of any such forfeiture or termination, again be available for making awards under the 2008 Omnibus Incentive Plan.

 

Effect of Failure to Receive Shareholder Approval

 

If shareholders do not approve this proposal, the amendment will not become effective and the plan as currently in effect will remain in full force and effect in accordance with its existing terms.

 

2008 Omnibus Incentive Plan

 

A description of the provisions of the 2008 Omnibus Incentive Plan is set forth below. This summary is qualified in its entirety by the detailed provisions of the 2008 Omnibus Incentive Plan, a copy of which, as proposed to be amended, is attached as Appendix A to this proxy statement. A copy of the current 2008 Omnibus Incentive

Plan is available at Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File No. 000-26966), filed August 7, 2008.

 

Administration.  The 2008 Omnibus Incentive Plan is administered by the Compensation Committee of the Board of Directors. Subject to the terms of the plan, the Compensation Committee may select participants to receive awards, determine the types of awards and terms and conditions of awards, and interpret provisions of the plan. Members of the Compensation Committee serve at the pleasure of the Board of Directors.

 

Eligibility.  Awards may be made under the 2008 Omnibus Incentive Plan to employees of or consultants to the Company or any of our affiliates, including any such employee who is an officer or director of us or of any affiliate, and to any other individual whose participation in the plan is determined to be in the best interests of the Company by the Board of Directors.

 

Amendment or Termination of the Plan.  The Board of Directors may terminate or amend the plan at any time and for any reason. The 2008 Omnibus Incentive Plan shall terminate in any event ten years after its effective date. Amendments will be submitted for shareholder approval to the extent required by the Internal Revenue Code or other applicable laws, rules or regulations. No amendment may adversely impair the rights of grantees with respect to outstanding awards without the grantee’s consent.

 

Awards.  The Compensation Committee may award:

 

 

Options.  The 2008 Omnibus Incentive Plan permits the granting of options to purchase shares of Common Stock intended to qualify as incentive stock options under the Internal Revenue Code and stock options that do not qualify as incentive stock options.

 

The exercise price of each stock option may not be less than 100% of the fair market value of our Common Stock on the date of grant. The fair market value is generally determined as the closing price of the Common Stock on the grant date or other determination date. In the case of certain 10% shareholders who receive incentive stock options, the exercise price may not be less than 110% of the fair market value of the Common Stock on the date of grant. An exception to these requirements is made for options that the Company grants in substitution for options held by employees of companies that the Company acquires. In such a case the exercise price is adjusted to preserve the economic value of the employee’s stock option from his or her former employer.

 

The term of each stock option is fixed by the Compensation Committee and may not exceed 10 years from the date of grant. The Compensation Committee determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised. Options may be made exercisable in installments. The exercisability of options may be accelerated by the Compensation Committee.

 

In general, an optionee may pay the exercise price of an option by cash, by tendering shares of Common Stock, or by means of a broker-assisted cashless exercise.

Stock options granted under the 2008 Omnibus Incentive Plan may not be sold, transferred, pledged or assigned other than by will or under applicable laws of descent and distribution. However, the Company may permit limited transfers of non-qualified options for the benefit of immediate family members of grantees to help with estate planning concerns.

 

Adjustments for Stock Dividends and Similar Events.  The Compensation Committee will make appropriate adjustments in outstanding awards and the number of shares available for issuance under the 2008 Omnibus Incentive Plan, including the individual limitations on awards, to reflect stock splits and other similar events.

 

Section 162(m) of the Internal Revenue Code.

 

Section 162(m) generally provides that no federal income tax business expense deduction is allowed for annual compensation in excess of $1 million paid by a publicly traded corporation to its principal executive officer or any of the three other most highly compensated officers (excluding the principal financial officer), as determined in accordance with the applicable rules under the Securities Exchange Act of 1934. Under the Internal Revenue Code, however, there is no limitation on the deductibility of compensation that represents qualified performance-based compensation as determined under the Internal Revenue Code. To constitute qualified performance-based compensation, the compensation paid by the Company to its covered executive officers must be paid solely on account of the attainment of one or more objective performance goals. Those performance goals must be established in writing by the Compensation Committee while the attainment of such goals is substantially uncertain. Performance goals may be based on one or more performance measures consisting of business criteria that apply to an individual, a business unit or the Company on a consolidated basis, but need not be based on an increase or positive result under the business criteria selected. The Compensation Committee is prohibited from increasing the amount of compensation payable if a performance goal is met, but may reduce or eliminate compensation even if the performance goal is attained. Under section 162(m), the Company’s shareholders must approve at least every five years (1) the persons eligible to receive performance-based compensation, (2) the types of performance measures and (3) the maximum amount that may be paid to the covered executive officers or the formula used to calculate this amount.

 

Under the 2008 Omnibus Incentive Plan, one or more of the following business criteria, on a consolidated basis, and/or with respect to specified subsidiaries or business units (except with respect to the total shareholder return and earnings per share criteria), are used exclusively by the Compensation Committee in establishing performance goals for awards intended to comply with Section 162(m) of the Internal Revenue Code:

 

 

 

The maximum number of shares of Common Stock subject to options or stock appreciation rights that can be awarded under the 2008 Omnibus Incentive Plan to any person is five hundred twenty-five thousand (525,000) per year. The maximum number of shares of Common Stock that can be awarded under the 2008 Omnibus Incentive Plan to any person, other than pursuant to an option or stock appreciation rights, is five hundred twenty-five thousand (525,000). The maximum annual share limits described are subject to adjustment upon the occurrence of specified corporate transactions or events in order to prevent dilution or enlargement of the rights of such eligible persons under the plan.

 

Federal Income Tax Consequences

 

Incentive Stock Options.  The grant of an option will not be a taxable event for the grantee or for the Company. A grantee will not recognize taxable income upon exercise of an incentive stock option (except that the alternative minimum tax may apply), and any gain realized upon a disposition of our Common Stock received pursuant to the exercise of an incentive stock option will be taxed as long-term capital gain if the grantee holds the shares of Common Stock for at least two years after the date of grant and for one year after the date of exercise (the “holding period requirement”). We will not be entitled to any business expense deduction with respect to the exercise of an incentive stock option, except as discussed below.

 

For the exercise of an option to qualify for the foregoing tax treatment, the grantee generally must be our employee or an employee of our subsidiary from the date the option is granted through a date within three months before the date of exercise of the option.

 

If all of the foregoing requirements are met except the holding period requirement mentioned above, the grantee will recognize ordinary income upon the disposition of the Common Stock in an amount generally equal to the excess of the fair market value of the Common Stock at the time the option was exercised over the option exercise price (but not in excess of the gain realized on the sale). The balance of the realized gain, if any, will be capital gain. We will be allowed a business expense deduction to the extent the grantee recognizes ordinary income, subject to our compliance with Section 162(m) of the Internal Revenue Code and to certain reporting requirements.

 

Non-Qualified Options.  The grant of an option will not be a taxable event for the grantee or the Company. Upon exercising a non-qualified option, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the Common Stock on the date of exercise. Upon a subsequent sale or exchange of shares acquired pursuant to the exercise of a non-qualified option, the grantee will have taxable capital gain or loss, measured by the difference between the amount realized on the disposition and the tax basis of the shares of Common Stock (generally, the amount paid for the shares plus the amount treated as ordinary income at the time the option was exercised).

 

If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time the grantee recognizes ordinary income.

 

A grantee who has transferred a non-qualified stock option to a family member by gift will realize taxable income at the time the non-qualified stock option is exercised by the family member. The grantee will be subject to withholding of income and employment taxes at that time. The family member’s tax basis in the shares of Common Stock will be the fair market value of the shares of Common Stock on the date the option is exercised. The transfer of vested non-qualified stock options will be treated as a completed gift for gift and estate tax purposes. Once the gift is completed, neither the transferred options nor the shares acquired on exercise of the transferred options will be includable in the grantee’s estate for estate tax purposes.

In the event a grantee transfers a non-qualified stock option to his or her ex-spouse incident to the grantee’s divorce, neither the grantee nor the ex-spouse will recognize any taxable income at the time of the transfer. In general, a transfer is made “incident to divorce” if the transfer occurs within one year after the marriage ends or if it is related to the end of the marriage (for example, if the transfer is made pursuant to a divorce order or settlement agreement). Upon the subsequent exercise of such option by the ex-spouse, the ex-spouse will recognize taxable income in an amount equal to the difference between the exercise price and the fair market value of the shares of Common Stock at the time of exercise. Any distribution to the ex-spouse as a result of the exercise of the option will be subject to employment and income tax withholding at this time.

 

Restricted Stock.  A grantee who is awarded restricted stock will not recognize any taxable income for federal income tax purposes in the year of the award, provided that the shares of Common Stock are subject to restrictions (that is, the restricted stock is nontransferable and subject to a substantial risk of forfeiture). However, the grantee may elect under Section 83(b) of the Internal Revenue Code to recognize compensation income in the year of the award in an amount equal to the fair market value of the Common Stock on the date of the award (less the purchase price, if any), determined without regard to the restrictions. If the grantee does not make such a Section 83(b) election, the fair market value of the Common Stock on the date the restrictions lapse (less the purchase price, if any) will be treated as compensation income to the grantee and will be taxable in the year the restrictions lapse and dividends paid while the Common Stock is subject to restrictions will be subject to withholding taxes. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

 

Stock Units.  There are no immediate tax consequences of receiving an award of stock units under the 2008 Omnibus Incentive Plan. A grantee who is awarded stock units will be required to recognize ordinary income in an amount equal to the fair market value of shares issued to such grantee at the end of the restriction period or, if later, the payment date. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

 

Dividend Equivalent Rights.  Participants who receive dividend equivalent rights will be required to recognize ordinary income in an amount distributed to the grantee pursuant to the award. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

 

Stock Appreciation Rights.  There are no immediate tax consequences of receiving an award of stock appreciation rights that is settled in Common Stock under the 2008 Omnibus Incentive Plan. Upon exercising a stock appreciation right that is settled in Common Stock, a grantee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the Common Stock on the date of exercise. The Company does not currently intend to grant cash-settled stock appreciation rights. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

 

Performance and Annual Incentive Awards.  The award of a performance or annual incentive award will have no federal income tax consequences for us or for the grantee. The payment of the award is taxable to a grantee as ordinary income. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

 

Unrestricted Common Stock.  Participants who are awarded unrestricted Common Stock will be required to recognize ordinary income in an amount equal to the fair market value of the shares of Common Stock on the date of the award, reduced by the amount, if any, paid for such shares. If we comply with applicable reporting requirements and with the restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

Section 280(G).  To the extent payments which are contingent on a change in control are determined to exceed certain Code limitations, they may be subject to a 20% nondeductible excise tax and the Company’s deduction with respect to the associated compensation expense may be disallowed in whole or in part.

 

Section 409A.  The Company intends for awards granted under the plan to comply with Section 409A of the Code. To the extent a grantee would be subject to the additional 20% excise tax imposed on certain nonqualified deferred compensation plans as a result of a provision of an award under the plan, the provision will be deemed amended to the minimum extent necessary to avoid application of the 20% excise tax.

 

Required Vote

 

Approval of an increase in the number of shares of common stock authorized for issuance under the 2008 Omnibus Incentive Plan from 3,500,000 shares to 7,500,000 shares requires the affirmative (FOR) vote of a majority of the shares of common stock cast on the matter. For purposes of determining the number of votes cast on the matter, only those cast “For” or “Against” are included. Abstentions and broker non-votes are not included.

 

Unless otherwise indicated, properly executed proxies will be voted in favor of Proposal No. 3 to increase the number of shares of common stock authorized for issuance under the 2008 Omnibus Incentive Plan from 3,500,000 shares to 7,500,000 shares.

 

The Board of Directors recommends a vote “FOR” the Approval of an increase in the number of shares of common stock authorized for issuance under the 2008 Omnibus Incentive Plan from 3,500,000 shares to 7,500,000 shares.

PROPOSAL NO. 4

 

APPROVAL OF AN INCREASE IN THE TOTAL NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE UNDER THE EMPLOYEE STOCK PURCHASE PLAN FROM 500,000 SHARES TO 1,000,000 SHARES.

 

The Board of Directors of Advanced Energy is submitting for stockholder approval an amendment of the Employee Stock Purchase Plan (the “ESPP”). We currently are authorized to issue up to 500,000 shares of common stock under the ESPP. At the Record Date, 32,112 shares of common stock remained eligible for issuance under the ESPP. On February 16, 2010, the Board of Directors approved, subject to approval by the stockholders of Advanced Energy, an amendment to the Plan to increase the number of shares of common stock authorized for issuance under the Plan from 500,000 shares to 1,000,000 shares in the aggregate.

 

General Nature of the ESPP

 

The principal purpose of the ESPP is to provide a means by which employees of Advanced Energy may be given an opportunity to purchase stock in Advanced Energy. The ESPP is intended to qualify as an “employee stock purchase plan” under section 423 of the Internal Revenue Code.

 

The principal features of the ESPP are summarized below, but the summary is qualified in its entirety by reference to the ESPP itself, which is included, as proposed to be amended, as Appendix B to this proxy statement. A copy of the existing ESPP is available at Appendix A to the Company’s Proxy Statement on Schedule 14a (File No. 000-26966), filed April 7, 2005.

 

Shares Reserved

 

Under the ESPP, as amended, the aggregate number of shares of common stock reserved for issuance is 500,000. Subject to stockholder approval, the Board has amended the ESPP to increase the share reserve to 1,000,000 shares.

 

On the Record Date, the closing price of Advanced Energy’s common stock on the Nasdaq National Market was $14.64 per share.

 

The shares of common stock available for issuance under the ESPP are previously authorized and unissued shares. The ESPP provides for appropriate adjustments in the number of shares subject to the ESPP in the event of a merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares or other change in the corporate structure or capitalization affecting Advanced Energy’s shares. Shares reacquired or bought on the market are available for future issuance under the ESPP.

 

Administration

 

The ESPP is administered by a committee composed of not fewer than two members of the Board of Directors, or the board itself. The administrator is solely responsible for the interpretation, implementation and application of the ESPP. The Board of Directors is authorized to suspend or terminate the ESPP or revise and amend it in any respect whatsoever, provided, however that without approval of Advanced Energy’s stockholders no revision or amendment shall change the number of shares available for issuance under the ESPP, or modify the ESPP in any way if such modification requires stockholder approval in order for the ESPP to obtain employee stock purchase plan treatment under section 423 of the Internal Revenue Code, or to comply with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934.

 

Eligibility

 

Rights under the ESPP may be granted to any employee of Advanced Energy, provided that on the offering date, such employee has been in the employ of Advanced Energy for such continuous period preceding such grant as the administrator may require. In no event shall the required period of continuous employment be greater than two years. In addition, no employee shall be eligible to be granted rights under the ESPP, unless, on the offering date, such employee’s customary employment with Advanced Energy is for at least twenty hours per week and at least

five months per year. No employee shall be eligible for the grant of any rights under the ESPP if, immediately after such rights are granted, such employee owns stock possessing five percent (5%) or greater of the combined voting power of all classes of stock of Advanced Energy.

 

Awards Under the Purchase Plan

 

The ESPP provides that the administrator may grant or provide for the grant of rights to purchase common stock of Advanced Energy under the ESPP to eligible employees on a date or dates selected by the administrator. The administrator is authorized to determine the form, terms and conditions as the administrator deems appropriate, subject to the requirement under section 423(b)(5) of the Internal Revenue Code, stating that all employees granted rights to purchase stock under the ESPP shall have the same rights and privileges. The period during which an offering shall be effective cannot exceed 27 months beginning on the offering date.

 

Purchase Price

 

On each offering date, each eligible employee shall be granted the right to purchase up to the number of shares of Advanced Energy common stock purchasable with a percentage designated by the administrator not exceeding fifteen percent (15%) of such employee’s earnings and currently limited to a maximum of $2,500 per year. The administrator may also specify a maximum number of shares which may be purchased by any employee as well as a maximum aggregate number of shares which may be purchased by all eligible employees pursuant to such offering.

 

The purchase price of stock acquired pursuant to rights granted under the ESPP shall not be less than the lesser of (i) an amount equal to eighty five percent (85%) of the fair market value of the stock on the offering date; or (ii) an amount equal to eighty five percent (85%) of the fair market value of the stock on the purchase date.

 

Certain Federal Income Tax Consequences

 

The federal income tax consequences of the ESPP under current federal income tax law are summarized in the following discussion which deals with the general tax principles applicable to the ESPP, and is intended for general information only. Alternative minimum tax and other federal taxes and foreign, state and local income taxes are not discussed, and may vary depending on individual circumstances and from locality to locality.

 

For federal income tax purposes, a participant in the ESPP will not have taxable income upon the grant of a right or purchasing shares of stock under the terms of the ESPP.

 

If the participant disposes of shares purchased under the ESPP within two years from the first day of the applicable offering period or within one year from the purchase date, known as a disqualifying disposition, the participant will realize ordinary income in the year of such disposition equal to the amount by which the fair market value of the shares on the purchase date exceeds the purchase price, and Advanced Energy will receive a similar deduction. The amount of ordinary income will be added to the participant’s basis in the shares, and any additional gain or resulting loss recognized on the disposition of the shares will be a capital gain or loss if the participant’s holding period is greater than 365 days.

 

If the participant disposes of shares purchased under the ESPP at least two years after the first day of the applicable offering period and at least one year after the purchase date, the participant will realize ordinary income in the year of disposition equal to the lesser of (i) the excess of fair market value of the shares on the date of disposition over the purchase price, or (ii) the fair market value of the shares on the first day of the applicable offering period multiplied by the discount percentage (if any) for stock purchases under the ESPP. The amount of any ordinary income will be added to the participant’s basis in the shares, and any additional gain recognized upon the disposition after such basis adjustment will be a long-term capital gain. If the fair market value of the shares on the date of disposition is less than the purchase price, there will be no ordinary income and any loss recognized will be a long-term capital loss. Advanced Energy will not be entitled to a tax deduction for the amount of ordinary income realized by the participant.

 

The foregoing summarizes the principal United States federal income tax consequences to Advanced Energy and to participants who are residents of the United States. The summary is based on the current provisions of the Tax Code and the regulations thereunder and on Advanced Energy’s understanding, in consultation with its legal

counsel, of the current administrative practices of the Internal Revenue Service. Participants have been advised to obtain independent advice from their own tax advisors.

 

Required Vote

 

Approval of an increase in the number of shares reserved for issuance under the ESPP from 500,000 shares to 1,000,000 shares requires the affirmative (FOR) vote of a majority of the shares of common stock cast on the matter. For purposes of determining the number of votes cast on the matter, only those cast “For” or “Against” are included. Abstentions and broker non-votes are not included.

 

Unless otherwise indicated, properly executed proxies will be voted in favor of Proposal No. 4 to increase in the number of shares reserved for issuance under the ESPP from 500,000 shares to 1,000,000 shares.

 

The Board of Directors recommends a vote “FOR” an increase in the number of shares reserved for issuance under the ESPP from 500,000 shares to 1,000,000 shares.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth the beneficial ownership of Advanced Energy common stock as of February 23, 2010 by:

 

 

 

 

 

 

 

 

Pledged Shares

 

In November 2002, Douglas S. Schatz, our Chairman of the Board, his wife and the family trust of Mr. Schatz and his wife entered into a revolving line of credit with Silicon Valley Bank. The family trust pledged Advanced Energy common stock under a pledge and security agreement as collateral for the line of credit. Since November 2002, the credit limit on the line of credit has fluctuated and has been secured by the same pledge and security agreement. The number of shares subject to the pledge and security agreement has fluctuated from 4.97 million to 9.08 million and other affiliates of Mr. Schatz have pledged certain real estate assets as additional collateral. By March 11, 2010 the number of shares subject to the pledge and security agreement is 4.97 million shares, approximately 11.78% of the Advanced Energy common stock currently outstanding. The credit line, currently outstanding in the amount of $6.5 million, is renewable from year to year.

 

On May 8, 2009, The Douglas S. Schatz and Jill E. Schatz family trust entered into a series of variable prepaid forward contracts with a securities broker, in order to monetize 1,000,000 shares of common stock of the Company. Upon fulfillment of each of 6 orders under the variable prepaid forward contracts, the trust received a cash payment equal to approximately 84% of the market value of the shares subject to such orders and pledged such shares to the securities broker. Pending settlement of such contracts, between May 11, 2010 and December 13, 2010, the trust will retain all of its voting rights in respect of the pledged shares.

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Compensation Philosophy and Objectives

 

Our Company’s long-term success depends on our ability to fulfill the expectations of our customers in a competitive environment and deliver value to stockholders. To achieve these goals, it is critical that we are able to attract, motivate, and retain highly talented individuals at all levels of the organization who are committed to the Company’s values and objectives.

 

The Company’s executive compensation program is based on the same objectives that guide the Company in establishing all of its compensation programs:

 

 

Overview of Executive Compensation Program

 

The Compensation Committee

 

In 2009, the Compensation Committee consisted of Messrs. Rohrs (Chairman from July 2009), Spedden (stepped down as Chairman July 2009), Doan and Grady. Each of the members of the Compensation Committee was and is a “non-employee director” within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, an “outside director” within the meaning of Section 162(m) under the Internal Revenue Code and an “independent director” within the meaning of the Nasdaq Stock Market rules. The Compensation Committee met 6 times in 2009.

 

The Compensation Committee has responsibility for establishing, implementing and monitoring adherence with the Company’s compensation philosophy. Accordingly, the Compensation Committee strives to develop and maintain competitive, progressive programs that attract, retain and motivate high-caliber employees, foster teamwork, and maximize the long-term success of Advanced Energy by appropriately rewarding our employees for their achievements.

The Compensation Committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company, and that aligns interests of our executive officers with those of the stockholders by rewarding performance that meets or exceeds established goals, with the ultimate objective of exceeding corporate expectations and improving stockholder value. Pursuant to the Compensation Committee Charter, the Compensation Committee may form and delegate authority to subcommittees when appropriate.

 

The Compensation Committee has the authority to engage independent advisors to assist in making determinations with respect to the compensation of executives and other employees. The Compensation Committee engaged Compensation Strategies Inc. in 2008 to conduct a competitive review of executive compensation, analyzing the primary elements of compensation for the officers of the Company, as well as to advise the Compensation Committee in respect of the compensation practices of other technology companies, including with respect to change in control agreements. Information regarding the competitive review conducted by Compensation Strategies is provided below under the heading “Benchmarking Against Peer Companies.” Compensation Strategies has not provided any other services to the Company or the Compensation Committee and has received no compensation other than with respect to the services provided to the Compensation Committee. Compensation Strategies was not engaged by the Compensation Committee or the Company in 2009.

 

Role of Executive Officers in Compensation Decisions

 

The Compensation Committee meets with the Company’s Chief Executive Officer and other senior executives in order to obtain recommendations with respect to the Company’s compensation programs and practices for executives and other employees.

 

The Chief Executive Officer annually reviews the performance of each executive officer, other than himself. The Chief Executive Officer’s performance is reviewed by the full Board or the Compensation Committee in executive session.

 

With support from market compensation data, performance reviews and other information, management makes recommendations to the Compensation Committee on the base salaries, bonus targets and equity compensation for the executive officers and other employees. The Compensation Committee takes management’s recommendations into consideration, but is not bound by management’s recommendations with respect to executive compensation.

 

While management attends certain meetings of the Compensation Committee, the Compensation Committee also regularly holds executive sessions not attended by any members of management or by non-independent directors. The Compensation Committee makes all compensation decisions in respect of the executive officers and approves recommendations regarding equity awards to all employees of the Company.

 

Benchmarking Against Peer Companies

 

One factor that the Compensation Committee considers when making compensation decisions is the compensation paid to executives of a peer group of companies. The Compensation Committee also considers, and generally relies more heavily upon, other factors discussed below under the heading “Components of Executive Compensation.” Because the comparative compensation information is just one of several factors used to determine executive compensation, and such information is not collected every year, the Compensation Committee has broad discretion as to the extent to which it uses such information.

 

In setting 2009 compensation for our executive officers, the Compensation Committee reviewed the comparative review provided by Compensation Strategies in October 2008 to confirm that the compensation to our executive officers would be within a reasonable range of the following targets in respect of compensation paid to executive officers in comparable positions at companies that the Compensation Committee, in consultation with Compensation Strategies, considered to be our peers: base salary — 40^th to 60^th percentile; performance-based incentive compensation — 65^th percentile; long-term equity incentive compensation — 60^th to 70^th percentile.

 

The peer companies utilized for the comparative review were chosen to represent direct competitors of Advanced Energy, companies in the semiconductor and electronic equipment industries, and companies with which

Advanced Energy competes for executive talent. The peer companies consist of the following 20 publicly traded companies from the semiconductor and electronic equipment industries of roughly similar size to Advanced Energy:

 

 

Components of Executive Compensation

 

For 2009, the principal components of compensation for named executive officers were: (1) Base Salary, (2) Performance-Based Incentive Compensation, (3) Long-Term Equity Incentive Compensation, (4) Personal Benefits, and (5) Other Compensation. In determining the amount and relative allocation among each component of compensation for each named executive officer, the Compensation Committee considered, among other factors, the Company’s and each executive officer’s performance during 2008, historical rates of executive compensation, data obtained from management’s recruitment activities, the comparative review provided by Compensation Strategies and alignment with the Company’s overall compensation philosophy.

 

Base Salary

 

Base salaries are set at levels that the Compensation Committee deems to be sufficient to attract and retain highly talented executive officers capable of fulfilling the Company’s key objectives. Base salaries are also set with the goal of rewarding executive officers on a day-to-day basis for their time and services while encouraging them to strive for performance-based and long-term incentives.

 

In October 2008, as a result of declining global economic conditions and the company’s internal business forecasts, management recommended and the Compensation Committee approved temporary ten (10%) percent reductions in the base salaries of the Company’s executive officers. In December 2008, management recommended and the Compensation Committee approved continuation of the ten percent (10%) base salary reduction into 2009, provided that such salaries would be restored to original levels in the event that the Company’s sustainable revenue exceeded by at least five percent (5%) the revenue level forecasted in the Company’s internal operating plan. Further, in February 2009, management recommended and the Compensation Committee approved an additional five percent (5%) base salary reduction effective April 1, 2009. In October 2009, the Company approved the restoration of salaries, which took effect as of January 1, 2010.

 

The 2009 base salary for each of our executive officers was determined based upon such officer’s historical compensation, individual performance, the scope of his responsibilities and experience, an internal review of the executive’s current total compensation, both individually and relative to other executive officers; and the financial performance of the Company during the prior year.

 

Accordingly, as of January 1, 2009, each executive officer’s base salary was equal to his 2008 base salary minus ten percent. Such base salaries were, on average, at approximately the 30th percentile in relation to the peer companies. The Compensation Committee approved an increase in Mr. Wasserman’s base salary in April 2009, in connection with his promotion to Executive Vice President and Chief Operating Officer; however, such increase did not take effect in 2009 as the 10% base salary reduction was still in effect.

 

Annual Performance-Based Incentive Compensation

 

In 2009, the executive officers were eligible to participate in the Leadership Corporate Incentive Plan (“LCIP”), under which incentive awards would have been distributed from a bonus pool based upon the Company’s operating results in 2009 and each executive officer’s individual performance. Under the LCIP, the Company would have funded a bonus pool equal to ten percent (10%) of the Company’s 2009 operating income, if 2009 annual

revenue and operating income thresholds had been met. In February 2010, the Compensation Committee determined that such thresholds had not been met. As a result, no bonuses were awarded to the executive officers for 2009.

 

In order to provide relatively high incentive compensation opportunities that reward goal achievement but that also take into consideration business cyclicality, the Compensation Committee aims to set each executive officer’s annual target bonus at approximately the 65th percentile of the annual target bonus potentials for similarly situated officers at the peer companies. After considering that incentive compensation targets for Advanced Energy’s executive officers in 2008 were below the 50th percentile in relation to the peer companies, according to the comparative review, and considering the proposed amounts of base salary, equity incentive and other compensation as well as the stockholder value that would be created upon achievement of the performance targets of the LCIP, the Compensation Committee determined to increase the target bonuses for the executive officers in 2009 as follows:

 

 

If the bonus pool had been funded, individual performance objectives applicable to each participant would have been considered to determine the amount of the bonus payable to each executive officer. Individual performance objectives are set to reward exceptional individual performance with bonus modifiers based on the individual’s performance above target amounts, up to a maximum of one hundred fifty percent (150%) of such participant’s target bonus. In accordance with the goal of retaining key talent, an executive was required to remain an employee for the entire fiscal year to be eligible for any award under the LCIP.

 

Individual performance objectives for the Company’s executive officers are set by the Compensation Committee based upon the perceived needs and goals of the Company. The individual performance objectives for the Company’s executive officers generally are based upon each officer’s individual contributions to the Company’s overall performance in the categories of (1) long-term strategic planning and execution, (2) organizational development, (3) business process development, (4) reputation and quality of critical customer and investor relationships, and (5) improving efficiencies and decreasing costs. The Compensation Committee maintained the discretion to evaluate each executive officer’s performance against these objectives and did not set specific metrics against these objectives for 2009. In addition, for 2009, the Chief Executive Officer had individual performance objectives with respect to year-over-year revenue growth, broadening of the Company’s solar inverter product line, generation of cash from operations and executive succession planning. The Chief Executive Officer’s revenue growth performance objective exceeded the revenue growth anticipated in the 2009 annual operating plan and, accordingly, was deemed to be very difficult to meet, particularly in light of general economic circumstances in 2009. The Board believed the Chief Executive Officer’s other performance objectives to be difficult to meet, with some of the obstacles being at least in part beyond the Chief Executive Officer’s control, but potentially achievable.

 

Long-Term Equity Incentive Compensation

 

The Company grants stock options and restricted stock units to the executive officers under the Company’s 2008 Omnibus Incentive Plan, as long-term incentives in order to align the executive officers’ performance with the interests of the Company’s stockholders and also encourage retention. At the beginning of 2009, the Compensation Committee determined an equity incentive compensation target for each executive officer, with equity awards granted in equal quarterly installments. The Compensation Committee retains the discretion to change the amount of any installment, based upon any factors it deems to be appropriate, including the Company’s or individual officer’s performance.

 

The Compensation Committee aims to set the executive officers’ equity incentive compensation targets between the 60th and 70th percentile of the equity incentive compensation for similarly situated officers at the peer companies. Once the amount of equity incentive compensation targets are determined, the Compensation Committee generally awards approximately 70% of such equity in the form of stock options and approximately 30% of such equity in the form of restricted stock units.

 

For 2009 awards, the Compensation Committee considered the proposed amounts of base salary, annual incentive compensation potential and other compensation for each executive officer, his individual performance and

accomplishments and that the 2008 equity incentive compensation for the Chief Executive Officer was below the 50th percentile in relation to chief executive officers at peer companies. Based upon such considerations, the Compensation Committee increased the equity incentive compensation of the Chief Executive Officer and left the equity incentive compensation of the other executive officers unchanged from 2008. Accordingly, in 2009, the Chief Executive Officer was awarded 15,000 restricted stock units and 105,000 options in respect of shares of common stock; and each of the other executive officers was awarded 7,500 restricted stock units and 52,500 options in respect of shares of common stock. Such awards were, on average, at approximately the 67th percentile in relation to the peer companies.

 

Personal Benefits

 

As U.S. employees, the executives were eligible to participate in health and welfare benefits, as offered to our U.S. workforce, designed to attract and retain a skilled workforce in a competitive marketplace. These benefits help ensure that the Company has a healthy and focused workforce through reliable and competitive health and other personal benefits. These benefits were considered in relation to the total compensation package, but did not materially impact decisions regarding other elements of executive officer compensation.

 

All U.S. employees of the Company, including the executive officers, are eligible to participate in the Company’s 401(k) savings plan and were previously eligible to receive matching contributions by the Company of fifty percent (50%) of the first six percent (6%) of compensation contributed to the plan by the employee. In January 2009, the Compensation Committee determined to discontinue the Company’s matching contributions under the 401(k) savings plan as a cost reduction initiative as a result of declining global economic conditions and the Company’s internal business forecast.

 

All U.S. employees of the Company, including the executive officers, are eligible to participate in the Company’s Employee Stock Purchase Plan (“ESPP”), which allows for employees to purchase shares of the Company’s common stock with funds withheld directly from their pay. The ESPP previously provided participants with a right to purchase a limited number of shares of common stock of the Company at a purchase price equal to the lesser of eighty five percent (85%) of the fair market value of the stock on either the opening or closing date of an offering period under the plan. In February 2009, the Compensation Committee determined to discontinue the Company’s discount and look-back under the ESPP as a further cost reduction initiative. Currently, shares purchased pursuant to the ESPP are purchased at the fair market value on the closing date of the offering period under the plan.

 

Other Compensation

 

In 2008, the Company became a party to a change in control (“CIC”) agreement with each of the executive officers. The CIC agreements provide each of the executive officers with severance payments and certain benefits in the event of a termination without Cause (as defined in the CIC agreements) or other involuntary termination following an actual or during a pending change in control. The Company entered into the CIC agreements in order to keep management focused on the Company’s stated corporate objectives irrespective of whether the achievement of such objectives makes the Company attractive for acquisition, and to avoid the distraction and loss of key management that could occur in connection with a rumored or actual change in corporate control.

 

Under the CIC agreements, effective March 29, 2008, in the event of an executive’s termination without cause following an actual or during a pending change in control, the executive is entitled to receive: (a) all then accrued compensation and a pro-rata portion of executive’s target bonus for the year in which the termination is effected, (b) a lump sum payment equal to the executive’s then current annual base salary plus his or her target bonus for the year in which the termination is effected (or in the case of the Chief Executive Officer, two times such amount), (c) continuation of insurance and other benefits for 18 months following the date of termination, (d) an amount equal to the contributions that would have been made to the company’s retirement plans on behalf of executive, if the executive had continued to be employed for twelve (12) months following the date of termination, (e) reimbursement, up to $15,000, for outplacement services, and (f) full vesting and right to exercise all stock options and other equity awards then held by the executive so terminated. The terms of the CIC agreements were determined by

the Compensation Committee based on consideration of marketplace benchmark data and the Company’s retention objectives.

 

Tax and Accounting Implications

 

Section 162(m) of the Internal Revenue Code of 1986 generally limits to $1 million the corporate deduction for compensation paid to certain executive officers, unless the compensation is “performance-based” (as defined in Section 162(m)). Each of the members of the Board of Directors and the Compensation Committee carefully considers the potential impact of the limitation on executive compensation and considers it to be in the best interests of Advanced Energy and the stockholders to seek to qualify as tax deductible virtually all executive compensation. The Board of Directors and the Compensation Committee also recognize the need to consider factors other than tax deductibility in making compensation decisions and thus reserve the flexibility to award compensation that is not necessarily performance-based. During 2009, none of the executive officers of the Company had non-performance-based compensation in excess of $1,000,000.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the Compensation Committee are Messrs. Rohrs (Chairman), Doan, Grady and Spedden. None of such directors is or has been an officer or employee of Advanced Energy. There are no interlocking relationships as defined in the applicable SEC rules.

 

During 2009, no executive officer of Advanced Energy served as a member of the board of directors or compensation committee of another company that has any executive officers or directors serving on Advanced Energy’s Board of Directors or its Compensation Committee.

 

Compensation Committee Report

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically incorporates such information by reference in a document filed under the Securities Act or the Exchange Act

 

The Compensation Committee of the Board has reviewed and discussed with management the Compensation Discussion and Analysis for fiscal year 2009. Based upon the review and discussions, the Compensation Committee recommended to the Board, and the Board has approved, that the Compensation Discussion and Analysis be included in the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders.

 

This report is submitted by the Compensation Committee.

 

Thomas M. Rohrs, Chairman
Trung T. Doan
Edward C. Grady
Elwood Spedden

 

Management

 

Summary Compensation

 

The following table shows compensation information for fiscal 2007, 2008 and 2009 for the named executive officers.

 

 

 

 

Grants of Plan-Based Awards

 

The following table shows all plan-based awards granted to the named executive officers during 2009. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the Outstanding Equity Awards at 2009 Year-End Table on the following page.

 

2009 Grants of Plan-Based Awards

 

 

 

 

Outstanding Equity Awards

 

The following table shows all outstanding equity awards held by the named executive officers at the end of 2009. The following awards identified in the table below are also reported in the Grants of Plan-Based Awards Table on the previous page.

 

Outstanding Equity Awards at 2009 Year-End

 

 

 

 

Option Exercises and Stock Vested

 

The following table shows all stock options exercised and value realized upon exercise, as well as all stock awards vested and value realized upon vesting, by the named executive officers during 2009.

 

Option Exercises and Stock Vested for 2009

 

 

 

 

Pension Benefits

 

Advanced Energy’s named executive officers received no benefits in 2009 from the Company under defined pension or defined contribution plans other than the tax-qualified 401(k) Plan.

 

Nonqualified Deferred Compensation

 

Advanced Energy does not maintain a non-qualified deferred compensation plan.

 

Potential Payments upon Termination or Change in Control

 

The following table describes the potential payments and benefits under the Company’s compensation and benefit plans and arrangements to which the named executive officers would be entitled upon termination of employment.

 

 

 

 

Policies and Procedures with Respect to Related Party Transactions

 

The Board is committed to upholding the highest legal and ethical standards of conduct in fulfilling its responsibilities and recognizes that transactions with the Company involving related parties can present a heightened risk of potential or actual conflicts of interest. Accordingly, as a general matter, it is the policy of the Company to avoid related party transactions.

 

The Company’s policy in respect of related party transactions is evidenced in the charters and guidelines of the committees of the Board referenced in our proxy statement and Code of Ethical Conduct. The types of transactions covered by the policy are (1) those transactions as described under SFAS No. 57 or required to be disclosed in the Company’s financial statements or periodic filings with the SEC, (2) any monetary engagement between a Board member and the Company or an officer and the Company and (3) business or personal relationships between Board members. As a general matter, it is the policy of the Company to avoid related party transactions. Any related party transaction that does arise must be reviewed and approved by the both the Nominating and Governance and Audit and Finance Committees. All of the members of these committees are independent directors. Such committees, in determining whether to approve the transaction, review the facts and circumstances in respect of the transaction for conflicts of interest, any anticipated effect on a Board member’s independent decision-making or judgment in respect of matters affecting the

Company, any anticipated effect on a Board member’s ability to commit sufficient time and attention to the Board and other standards deemed appropriate by the committee members in light of the particular transaction being reviewed.

 

In addition, the Audit and Finance Committee is responsible for reviewing and investigating any matters pertaining to the integrity of management, including conflicts of interests and adherence to the Company’s Code of Ethical Conduct. Under the Code of Ethical Conduct, directors, officers and all other members of the workforce are expected to avoid any relationships, influence or activity that would cause or even appear to cause a conflict of interest.

 

Certain Relationships and Related Transactions

 

Advanced Energy leases its executive offices and certain manufacturing facilities in Fort Collins, Colorado from Prospect Park East Partnership and Sharp Point Properties, LLC. Aggregate payments under such leases for 2009 totaled approximately $3.1 million. Douglas S. Schatz, Chairman of the Board of Advanced Energy, holds a 26.67% membership interest in each of these leasing entities. Mr. Schatz did not participate in the negotiations of these leases. Future minimum lease payments related to these properties is $8.7 million.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires Advanced Energy’s executive officers and directors and persons who own more than ten percent of the outstanding common stock (“reporting persons”) to file with the Securities and Exchange Commission an initial report of ownership on Form 3 and changes in ownership on Forms 4 and 5. The reporting persons are also required to furnish Advanced Energy with copies of all forms they file. Based solely on its review of the copies of forms received by it and written representations from the reporting persons, Advanced Energy believes that each of the reporting persons timely filed all reports required to be filed in 2009 or with respect to transactions in 2009.

CORPORATE GOVERNANCE MATTERS