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 or for estate planning purposes. 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, the shareholders of the company 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 outstanding until they are exercised, vest, terminate or expire in accordance with their 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. Shares underlying awards made under the 2003 Plan that are canceled or forfeited may be added back to the 2013 Plan for use in future awards. 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. At March 31, 2017, an aggregate of 2,499,830 common shares underlie awards outstanding under the 2003 Plan, which shares may become available under the 2013 Plan to the extent such awards are forfeited or expire unexercised.

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. As of March 31, 2017, 1,235,259 common shares were available for future issuance under the 2013 Plan 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 employee participants to exchange shares for minimum withholding taxes, which results in the company acquiring treasury shares.

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



	For the Three Months Ended March 31,
	2017		2016
Restricted stock / units	$	442	$	1,641
Performance shares / units	214		113
Non-Qualified and performance stock options	182		335
Total stock-based compensation expense	$	838	$	2,089

As of March 31, 2017, 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):



	March 31, 2017
Restricted stock and restricted stock units	$	13,549
Performance shares and performance share units	8,990
Non-Qualified and performance stock options	4,022
Total unrecognized stock-based compensation expense	$	26,561

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 for the three months ended March 31, 2017 and 2016 as a result of a valuation allowance against deferred tax assets.

Stock Options

Generally, non-qualified stock option awards have a term of ten years and were granted with an exercise price per share equal to the fair market value of one of the company’s Common Shares on the date of grant. Stock option awards granted in 2017 are performance-based awards which will only become exercisable if the performance goals established by the Compensation Committee are achieved over a 3-year period ending in 2019 and subject to the Compensation Committee's exercise of negative discretion to reduce the number of options vested based on the progress towards the company's transformation. The company expects the compensation expense to be recognized over a weighted-average period of approximately two years.

The following table summarizes information about stock option activity for the three months ended March 31, 2017:



	March 31, 2017				Weighted Average Exercise Price
Options outstanding at January 1, 2017	2,542,732				$	21.19
Granted	756,420				12.15
Exercised	—				—
Canceled	(30,725		)		20.46
Options outstanding at March 31, 2017	3,268,427				$	19.12
Options exercise price range at March 31, 2017	$	12.15		to	$	33.36
Options exercisable at March 31, 2017	2,546,100
Shares available for grant at March 31, 2017*	1,235,259

________


*	Shares available for grant as of March 31, 2017 reduced by net restricted stock and restricted stock unit award and performance share and performance share unit award activity of 2,657,112 shares and 2,127,934 shares, respectively.

The following table summarizes information about stock options outstanding at March 31, 2017:



	Options Outstanding				Options Exercisable
Exercise Prices	Number Outstanding At 3/31/17	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable At 3/31/17	Weighted Average Exercise Price
$ 12.15 – $20.00	1,441,916	7.0	$	13.09	735,339	$	14.12
$ 20.01 – $25.00	1,083,377	1.9	22.57		1,070,027	22.55
$ 25.01 – $30.00	738,638	1.7	25.55		736,238	25.55
$ 30.01 – $33.36	4,496	3.4	33.36		4,496	33.36
Total	3,268,427	4.8	$	19.12	2,546,100	$	21.24

Pursuant to the plans, the Compensation Committee has established that grants may not be exercised within one year from the date granted and options must be exercised within ten years from the date granted. All stock options issued in 2017 were performance-based and may vest after the conclusion of the performance period ending December 31, 2019 based on achievement of performance goals established by the Compensation Committee and subject to the Compensation Committee's exercise of negative discretion to reduce the number of options vested based on the progress towards the company's transformation. All other outstanding stock options were issued in 2014 and prior and were not performance-based.

For the stock options issued in 2014 and prior, 25% of such options vested one year following the issuance and provided a four-year vesting period whereby options vest in 25% installments in each year. Options granted with graded vesting were accounted for as single options.

The fair value of options granted is estimated on the date of grant using a Black-Scholes option-pricing model. The calculated fair value of the 2017 performance option awards was $5.38 based on the following assumptions:



	2017
Expected dividend yield	0.4	%
Expected stock price volatility	39.1	%
Risk-free interest rate	2.31	%
Expected life in years	7.8
Forfeiture percentage	5.0	%

Expected dividend yield was based on historical dividends. Expected stock price volatility percentage was calculated at the date of grant based on historical stock prices for a period of time commensurate with the expected life of the option. The assumed expected life and forfeiture percentages were based on the company's historical analysis of option history.

Restricted Stock and Restricted Stock Units

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



	March 31, 2017		Weighted Average Fair Value
Stock / Units unvested at January 1, 2017	878,356		$	15.87
Granted	471,971		12.06
Vested	—		—
Canceled	(27,293	)	15.80
Stock / Units unvested at March 31, 2017	1,323,034		$	14.51

The restricted stock awards generally 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):



	March 31, 2017	Weighted Average Fair Value
Shares / Units unvested at January 1, 2017	309,468	$	14.58
Granted	336,694	12.02
Vested	—	—
Canceled	—	—
Shares / Units unvested at March 31, 2017	646,162	$	13.25

During the three months ended March 31, 2017, performance shares and performance share units (for non-U.S. recipients) were granted as performance awards with a three-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, 2017 through December 31, 2019 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 three years. No performance award expense has been recognized for the 2015 awards as it is not considered probable that the performance goals for those awards will be met, expense is being recognized for the 2016 and 2017 awards.