Equity Compensation

The Company’s Common Shares have a $.25 stated value. The Common Shares and the Class B Common Shares generally have identical rights, terms and conditions and vote together as a single class on most issues, except that the Class B Common Shares have ten votes per share, carry a 10% lower cash dividend rate and, in general, can only be transferred to family members. Holders of Class B Common Shares are entitled to convert their shares into Common Shares at any time on a share-for-share basis.

On May 16, 2013 shareholders approved the Invacare Corporation 2013 Equity Compensation Plan (the “2013 Plan”), which was adopted on March 27, 2013 by the Company's Board of Directors (the “Board”). The Board adopted the 2013 Plan to replace the Company's prior equity plan, the Invacare Corporation Amended and Restated 2003 Performance Plan (the “2003 Plan”), which expired on May 21, 2013. Due to its expiration, no new awards may be granted under the 2003 Plan; however, awards granted prior to its expiration will remain in effect under their original terms.

The 2013 Plan uses a fungible share-counting method, under which each common share underlying an award of stock options or stock appreciation rights ("SAR") will count against the number of total shares available under the 2013 Plan as one share; and each common share underlying any award other than a stock option or a SAR will count against the number of total shares available under the 2013 Plan as two shares. Any common shares that are added back to the 2013 Plan as the result of the cancellation or forfeiture of an award granted under the 2013 Plan will be added back in the same manner such shares were originally counted against the total number of shares available under the 2013 Plan. Each common share that is added back to the 2013 Plan due to a cancellation or forfeiture of an award granted under the 2003 Plan will be added back as one common share.

The Compensation and Management Development Committee of the Board (the “Compensation Committee”), in its discretion, may grant an award under the 2013 Plan to any director or employee of the Company or an affiliate. The 2013 Plan initially allows the Compensation Committee to grant up to 4,460,337 common shares in connection with the following types of awards with respect to shares of the Company's common shares: incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, unrestricted stock and performance shares. The Compensation Committee also may grant performance units that are payable in cash. The Compensation Committee has the authority to determine which participants will receive awards, the amount of the awards and the other terms and conditions of the awards.

The 2013 Plan provides that shares granted come from the Company’s authorized but unissued common shares or treasury shares. In addition, the Company’s stock-based compensation plans allow participants to exchange mature shares for minimum withholding taxes, which results in the Company acquiring treasury shares. Under these provisions, the Company acquired approximately 29,000 treasury shares for $471,000 in 2014, 23,000 shares for $532,000 in 2013 and 35,000 shares for $459,000 in 2012.

The amounts of equity-based compensation expense recognized as part of selling, general and administrative expenses were as follows (in thousands):



	2014		2013		2012
Non-Qualified stock options	$	3,356	$	3,926	$	4,304
Restricted stock and restricted stock units	2,270		2,031		2,241
Performance shares and performance share units	—		—		—
Total stock-based compensation expense	$	5,626	$	5,957	$	6,545

As of December 31, 2014, unrecognized compensation expense related to equity-based compensation arrangements granted under the Company's 2013 Plan and previous plans, which is related to non-vested options and shares, was as follows (in thousands):



	2014		2013		2012
Non-Qualified stock options	$	2,600	$	8,270	$	7,381
Restricted stock and restricted stock units	4,461		3,705		4,323
Performance shares and performance share units	—		—		—
Total stock-based compensation expense	$	7,061	$	11,975	$	11,704

Total unrecognized compensation cost will be adjusted for future changes in actual and estimated forfeitures and for updated vesting assumptions for the performance share awards (see "Performance Shares and Performance Share Units" below). No tax benefit for share-based compensation was realized during 2014, 2013 and 2012 as a result of a valuation allowance against deferred tax assets. In accordance with ASC 718, any tax benefits resulting from tax deductions in excess of the compensation expense recognized is classified as a component of financing cash flows.

Stock Options

Generally, non-qualified stock option awards typically have a term of ten years and are granted at the fair market value of the Company’s common shares on the date of grant. The Company expects the compensation expense to be recognized over a weighted-average period of approximately 2 years.

The following table summarizes information about stock option activity for the three years ended 2014, 2013 and 2012:



	2014			Weighted Average Exercise Price		2013			Weighted Average Exercise Price		2012			Weighted Average Exercise Price
Options outstanding at January 1	4,533,782			$	23.86	4,664,634			$	26.21	4,455,365			$	28.99
Granted	8,977			16.71		756,700			14.47		761,892			13.44
Exercised	(33,810		)	14.16		(30,166		)	16.94		(9,417		)	10.70
Canceled	(908,817		)	28.57		(857,386		)	28.63		(543,206		)	31.52
Options outstanding at December 31	3,600,132			$	22.74	4,533,782			$	23.86	4,664,634			$	26.21
Options exercise price range at December 31	13.37 to					13.35 to					13.37 to
	$	47.80				$	47.80				$	47.80
Options exercisable at December 31	2,954,082					2,985,175					3,074,275
Shares available for grant at December 31*	3,654,426					4,460,337					1,248,033

________________________


*	Shares available for grant as of December 31, 2014 reduced by net restricted stock / unit and performance share / unit award activity of 369,690 shares and 427,244 shares, respectively.

The following table summarizes information about stock options outstanding at December 31, 2014:



	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding At 12/31/14	Weighted Average Remaining Contractual Life Years	Weighted Average Exercise Price		Number Exercisable At 12/31/14	Weighted Average Exercise Price
$ 13.37 – $15.00	956,736	7.8	$	13.91	415,042	$	13.78
$ 15.01 – $25.00	1,464,900	4.3	22.43		1,362,980	22.35
$ 25.01 – $35.00	851,471	4.5	25.73		849,035	25.71
$ 35.01 – $47.80	327,025	0.7	42.22		327,025	42.22
Total	3,600,132	5.0	$	22.74	2,954,082	$	24.32

Pursuant to the Plans, the Committee has established that the 2014 grants may not be exercised within one year from the date granted and options must be exercised within ten years from the date granted. Accordingly, for the stock options issued in 2014, 2013 and 2012, 25% of such options vested in the year following issuance. The stock options awarded during such years provided a four-year vesting period whereby options vest equally in each year. Options granted with graded vesting are accounted for as single options. The 2014, 2013 and 2012 expense has been adjusted for estimated forfeitures of awards that will not vest because service or employment requirements have not been met.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	2014		2013		2012
Expected dividend yield	0.3	%	0.4	%	0.04	%
Expected stock price volatility	36.8	%	38.2	%	41.0	%
Risk-free interest rate	1.76	%	0.82	%	0.94	%
Expected life in years	6.1		6.1		6.0
Forfeiture percentage	13.0	%	9.2	%	7.6	%

Expected dividend yields are based on historical dividends as the Company has no current intention of changing its dividend policy. Expected stock price volatility percentages are calculated at each date of grant based on historical stock prices for a period of time commensurate with the expected life of the option. The assumed expected lives and forfeiture percentages are based on the Company's historical analysis of option history.

The weighted-average fair value of options granted during 2014, 2013 and 2012 was $6.23, $5.33 and $5.14, respectively. The weighted-average remaining contractual life of options outstanding at December 31, 2014, 2013 and 2012 was 5.0, 5.8 and 5.8 years, respectively. The weighted-average contractual life of options exercisable at December 31, 2014 was 4.4 years. The total intrinsic value of stock awards exercised in 2014, 2013 and 2012 was $101,000, $158,000 and $41,000, respectively. As of December 31, 2014, the intrinsic value of all options outstanding and of all options exercisable was $2,731,000 and $1,240,000, respectively.

The exercise of stock awards in 2014, 2013 and 2012 resulted in cash received by the Company totaling $480,000, $512,000 and $0 for each period, respectively with no tax benefits for any period. The total fair value of awards vested during 2014, 2013 and 2012 was $3,436,000, $3,778,000 and $4,398,000, respectively.

Restricted Stock and Restricted Stock Units

The following table summarizes information about restricted shares and restricted share units (for non-U.S. recipients):



	2014		Weighted Average Fair Value		2013		Weighted Average Fair Value		2012		Weighted Average Fair Value
Stock / Units unvested at January 1	264,878		$	16.69	260,548		$	19.15	249,499		$	23.76
Granted	218,276		19.36		114,700		14.49		118,200		13.41
Vested	(93,140	)	17.62		(97,445	)	20.33		(96,520	)	23.59
Canceled	(77,591	)	17.58		(12,925	)	19.23		(10,631	)	23.36
Stock / Units unvested at December 31	312,423		$	17.91	264,878		$	16.69	260,548		$	19.15

The restricted stock awards vest ratably over the three years after the award date, except for those awards granted in 2014, which vest after a three-year period. Unearned restricted stock compensation, determined as the market value of the shares at the date of grant, is being amortized on a straight-line basis over the vesting period.

Performance Shares and Performance Share Units

The following table summarizes information about performance shares and performance share units (for non-U.S. recipients):



	2014		Weighted Average Fair Value
Shares / Units unvested at January 1	—		$	—
Granted	152,800		20.05
Vested	—		—
Canceled	(31,156	)	20.05
Shares / Units unvested at December 31	121,644		$	20.05

During 2014, the performance shares and performance share units (for non-U.S. recipients) were granted as performance awards with a 3 year performance period with payouts based on achievement of certain performance goals. The awards are classified as equity awards as they will be settled in common shares upon vesting. The number of shares earned will be determined at the end of the performance period based on achievement of performance criteria for January 1, 2016 through December 31, 2016 established by the Compensation Committee at the time of grant. Recipients will be entitled to receive a number of common shares equal to the number of performance shares that vest based upon the levels of achievement which may range between 0% and 150% of the target number of shares with the target being 100% of the initial grant.

The fair value of the performance awards is based on the stock price on the date of grant discounted for the estimated value of dividends foregone as the awards are not eligible for dividends except to the extent vested. The Company assesses the probability that the performance targets will be met with expense recognized whenever it is probable that at least the minimum performance criteria will be achieved. Depending upon the Company's assessment of the probability of achievement of the goals, the Company may not recognize any expense associated with performance awards in a given period, may reverse prior expense recorded or record additional expense to make up for expense not recorded in a prior period. Performance award compensation expense is generally expected to be recognized over 3 years. However, for the year ended December 31, 2014, the Company concluded that it was not probable that the performance goals, as defined in the agreements, would be achieved and thus no performance award expense was recognized in 2014.

Rights Agreement

Effective July 8, 2005, the Company adopted a new Rights Agreement to replace the Company’s previous shareholder rights plan, which expired on July 7, 2005. In order to implement the new Rights Agreement, the Board of Directors declared a dividend of one Right for each outstanding share of the Company’s Common Shares and Class B Common Shares to shareholders of record at the close of business on July 19, 2005. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a Series A Participating Serial Preferred Share, without par value, at a Purchase Price of $180.00 in cash, subject to adjustment. The Rights will not become exercisable until after a person (an “Acquiring ”) has acquired, or obtained the right to acquire, or commences a tender offer to acquire, shares representing 30% or more of the Company’s outstanding voting power, subject to deferral by the Board of Directors. After the Rights become exercisable, under certain circumstances, the Rights may be exercisable to purchase Common Shares of the Company, or common shares of an acquiring Company, at a price equal to the exercise price of the Right divided by 50% of the then current market price per Common Share or acquiring Company common share, as the case may be. The Rights will expire on July 18, 2015 unless previously redeemed or exchanged by the Company. The Company may redeem and terminate the Rights in whole, but not in part, at a price of $0.001 per Right at any time prior to 10 days following a public announcement that an Acquiring Party has acquired beneficial ownership of shares representing 30% or more of the Company’s outstanding voting power, and in certain other circumstances described in the Rights Agreement. The Company's Board of Directors has determined that the Rights Agreement will not be renewed upon expiration on July 18, 2015.