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. )

Filed by the Registrant x
Filed by a Party other than the Registrant o
Check the appropriate box:

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x		Definitive Proxy Statement

o		Definitive Additional Materials

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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x		No fee required.

o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held May 2, 2007

 

To Our Stockholders:

 

The 2007 Annual Meeting of Stockholders of Advanced Energy Industries, Inc. (“Advanced Energy” or the “Company”) will be held on Wednesday, May 2, 2007, at 10:00 a.m., 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 directors.

 

2. Amendment of Amended and Restated 2003 Non-Employee Directors’ Stock Option Plan.

 

3. Amendment of 2003 Stock Option Plan.

 

4. Ratification of the appointment of Grant Thornton LLP as Advanced Energy’s independent registered public accounting firm for 2007.

 

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

 

Each of the matters 1 to 4 is described in detail in the accompanying proxy statement, dated April 2, 2007.

 

If you owned common stock of Advanced Energy at the close of business on March 12, 2007, you are entitled to receive this notice and to vote at the meeting.

 

All stockholders are cordially invited to attend the meeting in person. However, to assure that your voice is heard, you are urged to return the enclosed proxy card as promptly as possible in the postage prepaid envelope provided.

 

By Order of the Board of Directors,

 

John D. Pirnot

Corporate Secretary

 

Fort Collins, Colorado

April 2, 2007

 

 

 

Please come to our 2007 Annual Meeting of Stockholders to learn about Advanced Energy, what we have accomplished in the last year and what we hope to achieve in 2007. The meeting will be held:

 

Wednesday, May 2, 2007

10:00 a.m.

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 at the annual meeting. Accompanying this proxy statement is Advanced Energy’s 2006 Annual Report to Stockholders and a form of proxy. All voting on matters presented at the annual meeting will be by paper proxy or by presence 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 Office and President

 

This proxy statement and the accompanying proxy card are first being sent to stockholders on or about April 2, 2007.

 

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 2007 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, 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 directors.

 

2. Amendment of Amended and Restated 2003 Non-Employee Directors’ Stock Option Plan.

 

3. Amendment of 2003 Stock Option Plan.

 

4. Ratification of the appointment of Grant Thornton LLP as Advanced Energy’s independent registered public accounting firm for 2007.

 

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 12, 2007, 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, 45,021,647 shares of Advanced Energy common stock were issued and outstanding and were held by approximately 657 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 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 which 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, 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 by marking the enclosed proxy card and mailing it to American Stock Transfer & Trust Company in the enclosed postage prepaid envelope. 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 John D. Pirnot, 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 2006 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 2006 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 2006 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 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. 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 Corporate Governance and Nominations 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 2008), 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” by considering Rule 4200(a)(15) of the Marketplace Rules of the Nasdaq National Market. To be considered independent, the Board must affirmatively determine that neither the director nor any immediate family member of the director 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 any relationship with Advanced Energy that would impair their independence. 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 among any of the directors and/or any of the Company’s executive officers. The company’s executive officers serve at the discretion of the Board.

 

Required Vote

 

The eight nominees receiving the highest number of affirmative (FOR) votes at the meeting will be elected as directors. 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 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 eight nominees named above.

 

Director Compensation

 

On July 24, 2006, Advanced Energy Industries, Inc. revised its non-employee director compensation structure, subject to stockholder approval of the amendment to the 2003 Non-Employee Directors’ Stock Option Plan with respect to the issuances of restricted stock units. Compensation for each non-employee director, assuming stockholder approval with respect to the amendment to the 2003 Non-Employee Directors’ Stock Option Plan, will be as follows:

 

 

In addition, each incumbent non-employee director who is re-elected at the 2007 annual meeting of stockholders will be granted 10,000 restricted stock units upon such re-election. Such restricted stock units will vest in equal installments over four years, contingent upon the recipient continuing to be a director of the company.

 

The following table shows director compensation information for 2006:

 

2006 Director Compensation

 

 

 

 

 

 

 

 

 

Board of Directors Meetings

 

The Board of Directors held six meetings in 2006. In 2006, the Board of Directors had an Audit and Finance Committee, a Corporate Governance and Nominations Committee and a Compensation Committee. In 2006, 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.

 

Audit and Finance Committee

 

Composition and Meetings

 

The Audit and Finance Committee consists of Messrs. Bronson (Chairman), Beck and Rohrs. Each of the members of the Audit and Finance Committee is an “independent director” within the meaning of Rule 4200(a)(15) of the Marketplace Rules of the Nasdaq National Market. The Board of Directors has evaluated the credentials of and determined that each of the members of the Audit and Finance Committee is an “audit committee financial expert” within the meaning of Item 401(h) of SEC Regulation S-K and that he is “independent” within the meaning of Section 10-A of the Securities Exchange Act of 1934. The Audit and Finance Committee met thirteen times in 2006.

 

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 and is generally subject to a specified budget. In 2006, 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.advanced-energy.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 Accounting 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 their independence.

 

Based on our 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 2006 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 2007, subject to shareholder approval.

 

The Audit and Finance Committee

Richard P. Beck

Thomas M. Rohrs

 

Corporate Governance and Nominations Committee

 

Composition and Meetings

 

The Corporate Governance and Nominations Committee consists of Messrs. Beck (Chairman), Bronson, Spedden, Doan and Dr. Posner. Each of the members of the Corporate Governance and Nominations Committee is an “independent director” within the meaning of Rule 4200(a)(15) under the Marketplace Rules of the Nasdaq National Market. The Corporate Governance and Nominations Committee met four times in 2006 and all Corporate Governance and Nominations Committee members were present.

 

Corporate Governance and Nominations Committee Charter and Responsibilities

 

The Corporate Governance and Nominations Committee is governed by a written charter and Corporate Governance Guidelines that are available on our website at www.advanced-energy.com.

 

The Corporate Governance and Nominations Committee is responsible for:

 

 

 

Director Nominations

 

The Corporate Governance and Nominating Committee of the Board considers candidates for director nominees proposed by directors and stockholders. This committee may retain recruiting professionals to assist in identifying and evaluating candidates for director nominees. As set forth in the Company’s Guidelines, the Corporate Governance and Nominating Committee strives for a mix of skills and diverse perspectives (functional, cultural and geographic) that is effective for the Board. Every effort is made to complement and supplement skills within the existing Board and strengthen any identified insufficiencies. In selecting the nominees, the Board assesses the independence, character and acumen of candidates and endeavors to collectively establish a number of areas of core competency of the Board, including at a minimum whether a candidate possesses sufficient business judgment, management, accounting and finance, industry and technology knowledge, understanding of manufacturing, leadership, strategic vision, and knowledge of 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 and Nominating Committee of the Board evaluates and interviews potential board candidates. All members of the Board may interview the final candidates. The Corporate Governance and Nominating Committee will consider nominations by stockholders. The same identifying and evaluating procedures apply to all candidates for director nomination, including candidates submitted by stockholders.

 

The Corporate Governance and Nominations Committee will consider any and all director candidates recommended by our stockholders. 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 Corporate Governance and Nominations Committee, in care of the 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 37 of this proxy statement.

 

The Corporate Governance and Nominations 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.

 

Compensation Committee

 

Composition and Meetings

 

From January 2006 until July 2006, the Compensation Committee consisted of Mr. Spedden (Chairman), Messrs. Bronson and Doan, and Dr. Posner. In July 2006, Mr. Rohrs replaced Mr. Bronson 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 Rule 4200(a)(15) of the Marketplace Rules of the Nasdaq National Market. The Compensation Committee met five times in 2006.

 

Committee Charter and Responsibilities

 

The Compensation Committee is governed by a written charter, which is available on our website at www.advanced-energy.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.

 

The Compensation Committee

Trung T. Doan

Barry Z. Posner

Thomas M. Rohrs

 

PROPOSAL NO. 2

 

AMENDMENT OF AMENDED AND RESTATED 2003 NON-EMPLOYEE DIRECTORS’ STOCK OPTION PLAN

 

The Board of Directors of Advanced Energy is submitting for stockholder approval an amendment of the Amended and Restated 2003 Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”). We currently are authorized to issue up to 250,000 shares of common stock under the Directors’ Plan. As of December 31, 2006, 105,000 of such shares remained available for issuance. On February 21, 2007, the Board of Directors approved, subject to approval by the stockholders of Advanced Energy, an increase in the number of common shares reserved for issuance under the plan from 250,000 shares to 750,000 shares. On July 24, 2006, the Board of Directors of Advanced Energy approved, subject to shareholder approval, the non-employee director compensation structure as described on page 8 which increases the number of restricted stock units awarded to directors upon initial election or appointment to the Board of Directors and annually on the date of re-election at the annual meeting; and awards to each non-employee director re-elected at the 2007 annual meeting of stockholders a one-time grant of 10,000 restricted stock units upon such re-election.

 

General Nature of the Directors’ Plan

 

The principal purposes of the Directors’ Plan are to provide incentives for independent directors to further the growth, development and financial success of Advanced Energy by personally benefiting through the ownership of Advanced Energy’s common stock, and to obtain and retain the services of such individuals who are considered essential to the long term success of Advanced Energy through the grant or issuance of restricted stock, restricted stock units, and/or stock appreciation rights. Prior to the 2006 Amendment to the Directors’ Plan, grants of nonqualified stock options (NSOs) were included as part of the Directors’ Plan.

 

The principal features of the Directors’ Plan are summarized below, but the summary is qualified in its entirety by reference to the Directors’ Plan itself, which is included as Appendix A to this proxy statement.

 

Shares Reserved

 

Under the Directors’ Plan, the aggregate number of shares of common stock that may be issued through restricted stock, restricted stock units, and/or upon the exercise of NSOs is 250,000 shares.

 

On March 12, 2007, the closing price of Advanced Energy’s common stock on the Nasdaq Stock Market was $21.10 per share.

 

The shares of common stock available for issuance under the Directors’ Plan are previously authorized and unissued shares. The Directors’ Plan provides for appropriate adjustments in the number of shares subject to the Directors’ Plan and to outstanding NSOs, restricted stock units, and shares of restricted stock thereunder in the event of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, separation, liquidation or other change in the corporate structure or capitalization affecting Advanced Energy’s shares. Shares subject to expired, surrendered or unexercisable NSOs, restricted stock, or restricted stock units, as applicable, are available for future issuance under the Directors’ Plan.

 

Administration

 

The Directors’ Plan is administered by a committee selected by the Board of Directors, consisting of at least two individuals each of whom is either a member of the board and not a non-employee director, or a senior officer of Advanced Energy who is not a member of the board.

 

The administrator is solely responsible for the interpretation, implementation and application of the Directors’ Plan. With the approval of the Board of Directors, the administrator may suspend or discontinue the plan or revise or amend it in any respect whatsoever; provided, however, that without approval of the Company’s stockholders no revision or amendment shall change the number of shares available for issuance under the plan (except in the event of a change in corporate structure or capitalization affecting the shares), change the designation of the class of individuals eligible to receive options or materially increase the benefits accruing to the Non-Employee Directors under the plan.

 

Awards Under the Directors’ Plan

 

Currently, the Directors’ Plan provides that a non-employee director will automatically receive 5,000 restricted stock units on the first date elected or appointed as a member of the board, and 2,000 restricted stock units on any date re-elected as a member of the board by Advanced Energy’s stockholders. Restricted stock units awarded to non-employee directors 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.

 

The Directors’ Plan also provides that a non-employee director, at the discretion of the administrator, may be awarded stock appreciation rights, which are rights to receive in cash the amount that the fair market value of a share exceeds a stated exercise price.

 

Any options previously granted under the Directors’ Plan are not considered incentive stock options within the meaning of Section 422 of the Internal Revenue Code. Options granted under the Directors’ Plan have an exercise price of at least 100% of fair market value of a share on the date of option grant. Fair market value means the closing sales price of a share on such date as reported on the principal exchange or market on which shares are then listed or admitted for trading.

 

An NSO granted upon the date first elected or appointed as a member of the board was immediately exercisable as to one-third of the shares subject to the grant, then another one-third on each of the next two anniversaries of the date granted. NSOs that were issued upon re-election vested immediately on the date granted.

 

The proposed amendment increases the amount of restricted stock units granted to non-employee directors on the first date elected or appointed as a member of the board from 5,000 to 15,000 restricted stock units; increases the amount of restricted stock units granted to non-employee directors annually on the date of re-election at the annual meeting from 2,000 to 6,000 restricted stock units; and awards to each non-employee director re-elected at the 2007 annual meeting of stockholders a one-time grant of 10,000 restricted stock units upon such re-election, with such award to vest over a period of four years.

 

Terms of Awards

 

Awards of previously issued stock options under the Directors’ Plan generally expire after the earlier of (i) six months after the date the non-employee director ceases to be a member of the board, including by reason of death; (ii) the occurrence of a change in control; and (iii) the 10th anniversary of the date of grant. If a director has served

continuously as a member of the board for at least five years, the period under subsection (i) above is eighteen months.

 

Generally, the exercise price may be paid in cash. At the discretion of the administrator, the exercise price may be paid by tender of shares of Advanced Energy stock having a fair market value not less than the exercise price, provided that these shares were owned by the non-employee director for a period of at least six months, or not acquired directly or indirectly from Advanced Energy.

 

Certain change of control transactions, such as a sale of Advanced Energy, may cause awards granted under the Directors’ Plan to vest, unless the awards are continued or substituted for in connection with the change of control transaction. In the event of a change of control, options will become fully exercisable as of the date which is seven days before the change in control transaction. Options that are not exercised by the date of the change of control transaction shall terminate and cease to be outstanding. Restricted stock and restricted stock units shall vest upon consummation of the change in control transaction.

 

In the event of any change in corporate structure or capitalization affecting shares, such as stock splits and other similar events, the Compensation Committee will make appropriate adjustments in outstanding awards and the number of shares available for issuance under the Directors’ Plan.

 

Certain Federal Income Tax Consequences

 

The federal income tax consequences of the Directors’ Plan under current federal income tax law are summarized in the following discussion which deals with the general tax principles applicable to the Directors’ Plan, 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, there are no immediate tax consequences of receiving an award of restricted stock units under the Directors Plan. A grantee who is awarded restricted 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 Advanced Energy complies with applicable reporting requirements, it will be entitled to a business expense deduction in the same amount and generally at the same time as the grantee recognizes ordinary income.

 

With respect to NSOs previously granted under the Directors’ Plan, upon exercise the optionee generally will realize ordinary income, and if Advanced Energy complies with applicable reporting requirements, it will be entitled to a business expense deduction in an amount equal to the difference between the option exercise price and the fair market value of the stock at the date of exercise.

 

The foregoing summarizes the principal United States federal income tax consequences to Advanced Energy and to non-employee directors who are residents in the United States. The summary is based on the current provisions of the Internal Revenue 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. Non-employee directors have been advised to obtain independent advice from their own tax advisors.

 

Required Vote

 

Approval of the proposed amendment to the Amended and Restated 2003 Non-Employee Directors’ Stock Option Plan 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 amendment to the Amended and Restated 2003 Non-Employee Directors’ Stock Option Plan.

 

PROPOSAL NO. 3

 

AMENDMENT OF 2003 STOCK OPTION PLAN

 

The Board of Directors of Advanced Energy is submitting for stockholder approval an amendment of the 2003 Stock Option Plan (the “2003 Plan”). We currently are authorized to issue up to 3,250,000 shares of common stock under the 2003 Plan. As of December 31, 2006, 1,125,298 of such shares remained available for issuance. On February 21, 2007, the Board of Directors approved, subject to approval by the stockholders of Advanced Energy, an increase in the number of common shares reserved for issuance under the plan from 3,250,000 shares to 6,750,000 shares. The Board of Directors has also approved, subject to approval by the stockholders of Advanced Energy, an amendment to the 2003 Plan to provide that a participant under the 2003 Plan is granted 90 days from the date of separation, regardless of the reason for separation, to exercise rights under the 2003 Plan. For grants made following the ratification of this amendment, participants will no longer be entitled to 180 days from the date of an involuntary separation without cause to exercise rights under the 2003 Plan.

 

General Nature of the 2003 Plan

 

The principal purposes of the 2003 Plan are to provide incentives for employees to further the growth, development and financial success of Advanced Energy by personally benefiting through the ownership of Advanced Energy’s common stock, and to obtain and retain the services of such individuals who are considered essential to the long term success of Advanced Energy through the grant or issuance of options, restricted stock, restricted stock units and stock appreciation rights (collectively, “Awards”).

 

The principal features of the 2003 Plan are summarized below, but the summary is qualified in its entirety by reference to the 2003 Plan itself, which is included as Appendix B to this proxy statement.

 

Shares Reserved

 

Under the 2003 Plan, the aggregate number of shares of common stock that may be issued upon the exercise of options or any other Award is 3,250,000 shares.

 

On March 12, 2007, the average of the high and low price for a share of Advanced Energy’s common stock on the NASDAQ Stock Market was $21.23.

 

The shares of common stock available for issuance under the 2003 Plan are previously authorized and unissued shares. The 2003 Plan provides for appropriate adjustments in the number of shares subject to the 2003 Plan and to outstanding Awards thereunder in the event of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, separation, liquidation or other change in the corporate structure or capitalization affecting Advanced Energy’s shares. Available for future issuance under the 2003 Plan are (i) shares subject to expired, surrendered or unexercisable awards; (ii) shares which are forfeited; and (iii) shares retained by Advanced Energy upon the exercise of an option to satisfy the related withholding taxes.

 

Administration

 

The 2003 Plan is administered by the Compensation Committee, consisting of at least two members of the Board of Directors who are independent directors as defined by Rule 4200(a)(14) of the National Association of Securities Dealers’ listing standards.

 

The administrator is authorized to determine the individuals who will receive Awards (the Participants), fix the number of shares that each Participant may purchase, to determine the exercise price of the awards, whether options are to be incentive stock options (ISOs) or non-qualified stock options (NSOs), and to set the terms and conditions of each option, including the period over which the Award becomes exercisable, and all other matters relating to the administration and operation of the 2003 Plan. The administrator is also authorized to suspend or discontinue the 2003 Plan 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 issuable, or effectively reduce the exercise price of any outstanding option under the 2003 Plan.

 

Awards Under the 2003 Plan

 

The 2003 Plan provides that the administrator may grant options, both ISOs within the meaning of Section of 422 of the Internal Revenue Code and options which do not qualify as ISOs within the meaning of Section 422 of the Internal Revenue Code or NSOs, restricted stock, restricted stock units, and stock appreciation rights. Each award will be set forth in a separate written agreement.

 

Fair market value means the closing sale price of a share on such date as reported on the principal exchange or market on which shares are then listed or admitted for trading.

 

The exercise price of a NSO granted under the 2003 Plan may not be less than the fair market value of a share on the date of the option grant, and usually will become exercisable (at the discretion of the administrator) in one or more installments after the grant date. NSOs may not be granted for any term exceeding 10 years after the grant date.

 

ISOs will be designed to comply with the provisions of the Internal Revenue Code and will be subject to certain restrictions contained in the Internal Revenue Code. Among such restrictions, ISOs must have an exercise price not less than the fair market value of a share on the date of the option grant, may only be granted to employees, must expire within a specified period of time following the optionee’s termination of employment, and must be exercised within 10 years after the date of grant; but may be subsequently modified to disqualify them from treatment as ISOs. In the case of an ISO granted to an individual who owns stock possessing at least 10% of the combined voting power of all classes of Advanced Energy, the 2003 Plan provides that the exercise price must be at least 110% of the fair market value of a share on the date of grant and the ISO must expire no later than the fifth anniversary of the date of its grant. The aggregate fair market value determined at the time of grant of shares with respect to which an ISO is first exercisable by a Participant during any calendar year cannot exceed $100,000.

 

Restricted stock may be awarded to a person meeting the eligibility requirements discussed above. In general, restricted stock may not be sold, or otherwise transferred until vested. Holders of restricted stock, unlike recipients of options, will have voting rights and will receive dividends if declared by Advanced Energy, prior to vesting. The terms of all stock appreciation rights are determined by the 2003 Plan administrator.

 

Restricted stock units may be awarded to a person meeting the eligibility requirements discussed above. In general, restricted stock units are subject to the transferability restrictions applicable to options and will be forfeited upon termination of a Participant’s service if they have not vested. Holders of restricted stock units will have no voting rights or rights to receive dividends until the date of issuance of restricted stock shares.

 

Stock appreciation rights may be awarded to a person meeting the eligibility requirements discussed above. In general, stock appreciation rights award a Participant the right to receive in cash the amount that the fair market value of a share exceeds a stated exercise price. The terms of all stock appreciation rights are determined by the 2003 Plan administrator.

 

Terms of Awards

 

The dates on which Awards under the 2003 Plan first become exercisable and on which they expire will be set forth in individual Award agreements. These agreements generally will provide that Awards expire upon termination of the Participant’s employment, although the administrator may provide that such Awards continue to be exercisable following a termination, or because of the Participant’s death, disability or otherwise.

 

Generally, the exercise price may be paid in cash, by check, or in cash equivalent. At the discretion of the administrator, the exercise price may be paid by tender of shares of Advanced Energy stock having a fair market value not less than the exercise price.

 

At the time of certain change of control transactions, such as a sale of Advanced Energy, the surviving, continuing, successor, or purchasing corporation (the “Acquirer”) may either assume Advanced Energy’s rights and obligations with respect to outstanding options or substitute for outstanding options substantially equivalent options for the Acquirer’s stock. In the case of restricted stock and restricted stock units, an Acquirer has no obligation to assume or substitute an award of unvested shares, and any such shares will be forfeited.

 

In the event of any change in corporate structure or capitalization affecting shares, such as stock splits and other similar events, the Compensation Committee will make appropriate adjustments in outstanding awards and the number of shares available for issuance under the 2003 Plan, including the individual limitations on awards.

 

Certain Federal Income Tax Consequences

 

The federal income tax consequences of the 2003 Plan under current federal income tax law are summarized in the following discussion which deals with the general tax principles applicable to the 2003 Plan, and is intended for general information only. In addition, the tax consequences described below are subject to the limitations of Internal Revenue Code Section 162(m), as discussed in further detail below. 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, the recipient of NSOs granted under the 2003 Plan will not have taxable income upon the grant of the option, nor will Advanced Energy then be entitled to any deduction. Generally, upon exercise of NSOs the optionee will realize ordinary income, and Advanced Energy will be entitled to a deduction, in an amount equal to the difference between the option exercise price and the fair market value of the stock at the date of exercise.

 

An optionee generally will not recognize taxable income upon either the grant or exercise of an ISO. However, the amount by which the fair market value of the shares at the time of exercise exceeds the exercise price will be an “item of tax preference” for the optionee for purposes of the alternative minimum tax. Generally, upon the sale or other taxable disposition of the shares of common stock acquired upon exercise of an ISO, the optionee will recognize income taxable as capital gains in an amount equal to the excess, if any, of the amount realized in such disposition over the option exercise price, provided that no disposition of the shares has taken place within either (a) two years from the date of grant of the ISO or (b) one year from the date of exercise. If the shares of stock are sold or otherwise disposed of before the end of the one-year and two-year periods specified above, the difference between the ISO exercise price and the fair market value of the shares on the date of exercise generally will be taxable as ordinary income; the balance of the amount realized from such disposition, if any, generally will be taxed as capital gain. If the shares of stock are disposed of before the expiration of the one-year and two-year periods and the amount realized is less than the fair market value of the shares at the date of exercise, the optionee’s ordinary income generally is limited to the excess, if any, of the amount realized in such disposition over the option exercise price paid. Advanced Energy (or other employer corporation) generally will be entitled to a tax deduction with respect to an ISO only to the extent the optionee has ordinary income upon sale or other disposition of the shares of stock.

 

An option will only qualify as an ISO to the extent that the aggregate fair market value of the shares with respect to which the option becomes exercisable for the first time in any calendar year is equal to or less than $100,000. For purposes of this rule, the fair market value of shares shall be determined as of the date the ISO is granted. To the extent an ISO is exercisable for shares in excess of this $100,000 limitation, the excess shares shall be taxable under the rules for NSOs described above.

 

A Participant to whom restricted stock is issued will not have taxable income upon issuance and Advanced Energy will not then be entitled to a deduction, unless an election is made under Section 83(b) of the Internal Revenue Code. However, when restrictions on shares of restricted stock lapse, such that the shares are no longer subject to repurchase by us, the Participant will realize ordinary income and we will be entitled to a deduction in an amount equal to the fair market value of the shares at the date such restrictions lapse, less the purchase price. If an election is made under Section 83(b) with respect to restricted stock, the Participant will realize ordinary income at the date of issuance equal to the difference between the fair market value of the shares at that date less the purchase price therefore and Advanced Energy will be entitled to a deduction in the same amount.

 

There are no immediate tax consequences of receiving an award of restricted stock units under the 2003 Plan. A Participant who is awarded restricted 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 Advanced Energy complies with applicable reporting requirements and with the restrictions of

Section 162(m) of the Internal Revenue Code, it will be entitled to a business expense deduction in the same amount and generally at the same time as the Participant recognizes ordinary income.

 

No taxable income is generally recognized by the Participant upon the receipt of a stock appreciation right, but upon exercise of the stock appreciation right, the cash received generally will be taxable as ordinary income to the Participant in the year of such exercise. Advanced Energy generally will be entitled to a compensation deduction for the same amount that the Participant recognizes as ordinary income.

 

Under Internal Revenue Code Section 162(m), in general, income tax deductions of publicly-traded companies may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and nonqualified benefits paid in 1994 and thereafter) for certain executive officers exceeds $1 million in any one taxable year. However, under Internal Revenue Code Section 162(m), the deduction limit does not apply to certain “performance-based” compensation established by an independent compensation committee which conforms to certain restrictive conditions stated under the Internal Revenue Code and related regulations. The 2003 Plan has been structured with the intent that Awards granted under the 2003 Plan may meet the requirements for “performance-based” compensation and Internal Revenue Code Section 162(m), at the administrator’s discretion. Restricted stock granted under the 2003 Plan may qualify as “performance-based” under Internal Revenue Code Section if it vests based solely upon the performance criteria.

 

The foregoing summarizes the principal United States federal income tax consequences to Advanced Energy and to optionees who are residents in the United States. The summary is based on the current provisions of the Internal Revenue 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 the proposed amendment to the 2003 Stock Option Plan 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 amendment to the 2003 Stock Option Plan.

 

PROPOSAL NO. 4

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

On February 2, 2007, the Audit and Finance Committee approved the continued appointment of Grant Thornton LLP for 2007 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.

 

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

 

For the fiscal years ended December 31, 2006 and 2005, fees billed by Grant Thornton LLP for professional services consisted of audit fees and were $1,024,339 and $1,327,041, respectively. Audit fees were for professional services rendered for the audit of Advanced Energy’s consolidated financial statements and internal controls over financial reporting, review of interim financial statements and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements.

 

The Audit and Finance Committee approved all services provided by Grant Thornton LLP during 2006 and 2005.

 

Required Vote

 

Ratification of the appointment of Grant Thornton LLP as the independent registered public accounting firm for Advanced Energy for 2007 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.

 

OWNERSHIP

 

The following table sets forth the beneficial ownership of Advanced Energy common stock as of March 12, 2007 by:

 

 

 

 

 

 

 

 

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 shareholders. To achieve these goals, it is critical that we be 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 programs are based on the same objectives that guide the Company in establishing all of its compensation programs:

 

 

Overview of Compensation Program

 

The Compensation Committee

 

The Compensation Committee of the Board has responsibility for establishing, implementing and continually monitoring adherence with the Company’s compensation philosophy. The Compensation Committee strives to develop and maintain competitive, progressive programs that attract, retain and motivate high-caliber executives, foster teamwork and maximize the long-term success of Advanced Energy by appropriately rewarding individuals for their achievements. We believe that the total compensation of executives should be based on both individual performance and the Company’s operating results. As a result, our executive compensation program includes cash bonuses and equity-based incentives in addition to base salary.

 

From January 2006 until July 2006, the Compensation Committee consisted of Mr. Spedden (Chairman), Messrs. Bronson and Doan, and Dr. Posner. In July 2006, Mr. Rohrs replaced Mr. Bronson 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

Rule 4200(a)(15) of the Marketplace Rules of the Nasdaq National Market. The Compensation Committee met five times in 2006.

 

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 executives with those of the stockholders by rewarding performance above established goals, with the ultimate objectives of exceeding corporate expectations and improving stockholder value. The Compensation Committee evaluates both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that each element of compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies.

 

On occasion, 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. With support from market compensation data, management makes recommendations to the Compensation Committee on the base salaries, bonus targets and equity compensation for the executive team and other employees. The Compensation Committee considers, but is not bound to and does not always accept, 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 for the executive officers and approves recommendations regarding equity awards to all officers of the Company. The Chief Executive Officer annually reviews the performance of each executive officer (other than Chief Executive Officer himself, whose performance is reviewed by the Compensation Committee in executive session). The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual stock options or other equity award amounts, are presented to the Compensation Committee. The Compensation Committee can exercise its discretion in modifying those recommended options.

 

The Compensation Committee has the authority to engage its own independent advisors to assist in making determinations with respect to the compensation of executives and other employees. The Compensation Committee engaged Compensation Strategies in 2006 to provide updated market data regarding the compensation practices of Advanced Energy’s peer companies along with comparisons of the Company’s practices with respect to best practices within the industry. Compensation Strategies, Inc. has not provided any other services to the Company and has received no compensation other than with respect to the services provided to the Compensation Committee.

 

Benchmarking

 

In making compensation decisions, the Compensation Committee compares compensation paid to executives of a peer group of companies. The peer group typically includes a range of companies with which the Compensation Committee believes the Company competes for talent or from which the Company is likely to recruit talent. For 2006, the Compensation Committee considered major high technology competitors for executive talent and companies of a size and scope at least similar to that of Advanced Energy as measured by market capitalization, revenue, net income and total shareholder return, and as appropriately size-adjusted. For 2006, the companies comprising this group of peer companies (the “Compensation Peer Group”) were:

 

To assist in the benchmarking process, the Compensation Committee in 2006 specifically requested that Compensation Strategies conduct reviews of the Company’s total compensation program for officers and directors of the Company as well as for other senior managers and executives as compared to the Compensation Peer Group. Compensation Strategies provided the Compensation Committee with relevant market data, competitive assessments of the of the Company’s compensation practices compared to those of the Compensation Peer Group, and alternatives to consider when making compensation decisions for the executive officers of the Company.

 

Components of Executive Compensation

 

For the fiscal year ended December 31, 2006, 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 Perquisites, and (5) Other Compensation.

 

Base Salary

 

The Company provides executive officers and other employees with a base salary to compensate for services rendered during the fiscal year. Base salaries are set at levels sufficient to attract and retain highly talented executives capable of fulfilling the Company’s key objectives while encouraging the executives to strive for performance-based and long-term incentives in addition to their base salaries. Salary levels are typically considered annually as part of the Company’s performance review process as well as upon a promotion or other change in job responsibility.

 

2006 base salaries for the executive officers as shown on the Summary Compensation Table were set between the 40th and 60th percentile of the salaries paid to executive officers in comparable positions as reported by the Compensation Peer Group. In fixing the base salary of each executive, including any merit increase awarded over the prior year, the Compensation Committee also considered individual performance of the executive, including the executive’s future potential and the scope of his or her responsibilities and experience; an internal review of the executive’s current total compensation, both individually and relative to other executive officers; and financial performance of the Company during the prior year.

 

Performance-Based Incentive Compensation

 

The Company provides executive officers and other employees with annual cash incentive bonuses linked to specific, near-term goals. The Company provides this element of compensation to executives to motivate superior performance and results during the fiscal year, including the achievement of key strategic initiatives and operating results beyond normal and acceptable expectations.

 

In 2006, the executive officers, including the Chief Executive Officer, were eligible to participate in incentive awards to be distributed from a bonus pool based upon the company’s operating results in 2006. Under the bonus plan, the company funded a bonus pool equal to 10% of the company’s 2006 operating income, plus stock-based compensation expense, provided that 2006 annual revenue was at least $320 million and post-bonus operating income was at least 10%. Based on this formula, the funded bonus pool amount for 2006 was $8.6 million.

 

Individual participants were eligible for bonuses under the plan based upon each participant’s pre-established target bonus, accomplishment of specific individual performance objectives determined by management, overall individual performance, and consideration of the total size of the bonus pool. While base salaries are set to be centered at the 50th percentile as compared to those for comparable positions as reported by the Compensation Peer Group, the Compensation Committee targets incentive compensation at approximately the 65th percentile in order to provide higher incentive compensation opportunity and reward exceptional goal achievement, thereby allowing total compensation to be more competitive as a whole while taking into account business cyclicality. Target bonuses for executives in 2006 were:

 

 

 

Individual performance objectives applicable to the participants were set based upon profitability, growth, quality or other goals that would exceed performance expectations under the Company’s 2006 annual operating plan. Individual performance objectives were set to reward exceptional individual performance with bonus modifiers based on the individual’s performance above target amounts, up to a maximum of 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 incentive bonus plan.

 

In February 2007, the Compensation Committee awarded full year 2006 cash bonuses to the Executive Officers and to eligible employees based upon results of operations that exceeded expectations in the full year 2006. For the year ending 2006, the Compensation Committee awarded to Dr. Betz an individual performance modifier of 1.45 to his target bonus amount of 70% of base salary in recognition of Dr. Betz’s accomplishments in completing the business turnaround of the Company and in positioning the Company for growth in new markets. With the performance modifier of 1.45, Dr. Betz’s incentive award earned under the bonus plan was $542,923. The Compensation Committee approved management’s recommendation that Mr. Rhoades be awarded an individual performance modifier of 1.50 in recognition of his accomplishments in substantially improving operating margins, inventory management, and below-the-line costs which contributed directly to the Company’s exceptional operating results for 2006. With the performance modifier of 1.50 to his target bonus amount of 50% of base salary, Mr. Rhoades’ incentive award earned under the bonus plan was $254,025. The Compensation Committee also approved management’s recommendation that Mr. Firestone be awarded an individual performance modifier of 1.40 in recognition of his accomplishments in implementing significant improvements in governance processes and in building relationships within the investor community. With the performance modifier of 1.40 to his target bonus amount of 50% of base salary, Mr. Firestone’s incentive award earned under the bonus plan (as prorated for term of service) was $77,501.

 

Certain of the executive officers and other key leaders were also eligible in 2006 for additional incentive bonuses relating to two specific Company growth objectives. Under this plan, additional bonus pool fundings of $500,000 each were available for achievement of target goals relating to (a) increasing revenue or achieving design wins with respect to a specified customer in the company’s core markets, and (b) penetrating emerging and new markets using the company’s core technology. In February 2007, the Compensation Committee authorized the payment of $500,000 of the additional incentive bonus based upon achievement of the second of the two objectives, to be shared among 11 participants deemed by the Compensation Committee to have contributed directly to the achievement of the objective. Dr. Betz, Mr. Rhoades, and Mr. Guilmart were each awarded an equal share of $45,596 of the additional incentive bonus, while Mr. Firestone was awarded a prorated share of $20,481 based on their time in service during 2006.

 

Long-Term Equity Incentive Compensation

 

The Company provides executive officers and other employees with long-term equity incentives. In 2006, these incentives were provided in the form of stock options and restricted stock units that vest over a period of time, typically four years. The Company provides this element of compensation to executives in order to align their interests with those of the Company’s shareholders and focus their attention on the long-term performance of the company.

 

Equity-based incentives are granted under the Company’s stockholder-approved 2003 Stock Option Plan, as amended January 31, 2005. The Compensation Committee has granted equity awards at its scheduled meetings or by unanimous written consent, and the grants become effective and are priced based on the closing price on the date of such approval. All stock option grants have a per share exercise price equal to the fair market value of the Company’s common stock on the grant date. The grant dates of equity compensation awards to executives are not set in anticipation of the release of material non-public information that is likely to result in changes to the price of the Company’s stock.

 

In 2006, the Company continued its practice of awarding a portion of executive officers’ equity-based incentives in the form of time-vested restricted stock units. The number of options and restricted stock units granted to each executive officer in 2006 as shown on the Summary Compensation Table was based upon a review by the

Compensation Committee of each executive officer’s base salary, bonus potential, and individual performance and accomplishments, with the result in each case aimed at achieving total equity compensation between the 40th and 60th percentile of the total equity compensation paid to executive officers in comparable positions as reported by the Compensation Peer Group, based upon data contained in market research commissioned by the Compensation Committee in 2004.

 

Following presentation of the supplemental compensation study in 2006 by Compensation Strategies, the Compensation Committee determined that equity-based incentives awarded to executives for 2006 had trailed market trends for the Compensation Peer Group. No adjustments to 2006 equity awards were made by the Compensation Committee. In approving equity awards to executives for 2007, however, the Compensation Committee took into account the revised market data. The Compensation Committee also determined that the practice of awarding a portion of equity compensation to executives in the form of restricted stock units should be discontinued, and that future awards would be in the form of stock options only. The Compensation Committee also determined that the amount of total executive equity-based compensation should be raised beginning in 2007 to target at approximately between the 60th to 70th percentile of that awarded for comparable positions as reported by the Compensation Peer Group, in order to place greater emphasis on the goals of retention and growth and to ensure stronger alignment between executive performance and shareholder interests.

 

Personal Benefits and Perquisites

 

As U.S. employees, the executives were eligible to participate in health, welfare, and paid time off benefits, as offered to our U.S. workforce, designed to attract and retain its 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.

 

All U.S. employees of the Company, including the executive officers, are eligible to participate in the Company’s 401(k) savings plan and are eligible to receive matching contributions by the Company 25 percent of the first 6 percent of compensation contributed to the plan by the employee.

 

In 2006, each of Dr. Betz, Mr. Rhoades, Mr. Firestone, and Mr. Guilmart were paid car allowances of $15,750, $6,825, $1,802, and $6,825, respectively, in accordance with historical practices. As of fiscal year 2007, these allowances have been eliminated as a component of executive compensation.

 

Other Compensation

 

The Company is a party to a Change in Control (“CIC”) Agreement with each of the Chief Executive Officer, Chief Operating Officer, and the Chief Financial Officer. The CIC agreements provide each of these executives with severance payments and certain benefits in the event of a termination without Cause or other involuntary termination. 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.

 

In the event of an executive’s termination without cause in the absence of an actual or 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, (c) continuation of insurance and other benefits for 12 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 12 months following the date of termination, and (e) reimbursement, up to $15,000, for outplacement services.

 

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 1.75 times (i) the executive’s then current annual base salary plus (ii) his or her target bonus for the year in which the termination is

effected, (c) continuation of insurance and other benefits for 21 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 21 months following the date of termination, and (e) reimbursement, up to $15,000, for outplacement services. In addition, all stock options and other equity awards then held by the executive so terminated become fully vested and exercisable.

 

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 Board of Directors and the Compensation Committee has carefully considered the potential impact of this limitation on executive compensation and has determined 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.

 

Compensation Committee Interlocks and Insider Participation

 

The current members of the Compensation Committee are Mr. Spedden (Chairman), Messrs. Doan and Rohrs, and Dr. Posner. None of such directors is or has been an officer or employee of Advanced Energy, nor has any of such persons had a direct or indirect interest in any business transaction with Advanced Energy involving an amount in excess of $120,000 or any other interlock relationship required to be reported under the rules of the Securities and Exchange Commission.

 

During 2006, 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 2006. 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 is 2007 Annual Meeting of Stockholders.

 

This report is submitted by the Compensation Committee.

 

Elwood Spedden, Chairman

Trung T. Doan

Barry Z. Posner

Thomas M. Rohrs

 

Management

 

Summary Compensation

 

The following table shows compensation information for 2006 for the named executive officers.

 

2006 Summary Compensation Table

 

 

 

 

Grants of Plan-Based Awards

 

The following table shows all plan-based awards granted to the named executive officers during 2006. 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 2006 Year-End Table on the following page.

 

2006 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 2006. 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 2006 Year-End