SHARE CAPITAL

6 Months Ended

Jun. 30, 2012

SHARE CAPITAL

SHARE CAPITAL

15.SHARE CAPITAL

a) Common Shares

During the three and six months ended June 30, 2012, the Successor Company issued 26,702 common shares upon the vesting of Restricted Stock awards. The Company issues new shares to satisfy stock option and award exercises.

As described under Note 3 “Reorganization and Fresh-Start Reporting”, upon consummation of the CCAA Plan, Angiotech’s Articles and Notice of Articles were amended on May 12, 2011 to: (a) eliminate the existing class of common shares from the authorized capital of the Predecessor Company; and (b) create an unlimited number of authorized no-par value new common shares for the Successor Company with similar rights, privileges, restrictions and conditions as were attached to the previous class of common shares. Accordingly and in connection with the implementation of the CCAA Plan, 12,500,000 new common shares were issued to holders of the Successor Company’s Subordinated Notes in consideration and settlement for the irrevocable and final cancellation and elimination of such noteholders’ Subordinated Notes.

b) Stock Incentive Plans

(i) Successor company

Upon completion of the Recapitalization Transaction described in Note 3, the Successor Company established and implemented a new equity compensation plan — the 2011 Stock Incentive Plan (“2011 SIP”). The 2011 SIP provides for the granting of Restricted Stock, RSUs, stock options, stock appreciation rights, and deferred share units (collectively referred to as “Awards”) and is available to certain eligible employees, directors, consultants and advisors as determined by the Governance, Nominating and Compensation Committee of the Board of Directors. The 2011 SIP allows for a maximum of 2,130,150 shares with respect to the number of Awards that may be granted.

(1) Restricted Stock

The terms of the Restricted Stock provide that a holder shall generally have the same rights and privileges as a common shareholder as to such Restricted Stock, including the right to vote such Restricted Stock. The Restricted Stock vests 1/3rd on each of the first, second and third anniversaries from the date of grant. During the three months ended June 30, 2012, 43,403 commons shares were issued to executives upon the vesting of units of Restricted Stock (nil for the two months ended June 30, 2011), at which time Angiotech repurchased 16,701 units from the executives in consideration of withholding taxes owing on the vested units.

A summary of Restricted Stock activity for the Successor Company is as follows:

	Number outstanding	Weighted average grant date fair value
Outstanding at May 1, 2011	—	$	—
Granted	221,354	15.17
Outstanding at June 30, 2011	221,354	$	15.17
Outstanding and Exercisable at June 30, 2011	—	—

	Number outstanding		Weighted average grant date fair value
Outstanding at December 31, 2011	130,208		$	15.17
Outstanding at March 31, 2012	130,208		$	15.17
Vested and exchanged for common shares	(43,403	)
Outstanding at June 30, 2012	86,805		$	15.17
Outstanding and Exercisable at June 30, 2012	—		—

A summary of the status of nonvested restricted stock awards as of June 30, 2012 and changes during the three months ended June 30, 2012, is presented below:

	No. of awards	Weighted average grant- date fair value
Nonvested at May 1, 2011	—
Granted	221,354	$	15.17
Nonvested at June 30, 2011	221,354	$	15.17

	No. of awards		Weighted average grant- date fair value
Nonvested at December 31, 2011	130,208		$	15.17
Nonvested at March 31, 2012	130,208		$	15.17
Vested and exchanged for common shares	(43,403	)
Nonvested at June 30, 2012	86,805		$	15.17

Stock-based compensation expense related to Restricted Stock for the three months ended June 30, 2012 was $0.2 million.

(2) Restricted Stock Units

Restricted Stock Units (“RSUs”) allow the holder to acquire one common share for each unit held upon vesting. The majority of the outstanding RSUs vest 1/3rd on each of the first, second and third anniversaries from the date of grant with the exception of 35,500 of the RSUs, which vest upon the consummation of a change of control (as defined) that occurs on or before December 31, 2012. There is no expiry date on vested RSUs.

A summary of RSU activity for the Successor Company is as follows:

	No. of RSUs	Weighted average grant date fair value
Outstanding at May 1, 2011	—
Granted	299,479	$	15.17
Outstanding at June 30, 2011	299,479	$	15.17
Outstanding and Exercisable at June 30, 2011	—

	No. of RSUs		Weighted average grant date fair value
Outstanding at December 31, 2011	415,479		$	14.48
Forfeited	(14,500	)
Outstanding at March 31, 2012	400,979		$	14.60
Granted	189,500		$	12.02	(a)
Exercised	—
Forfeited	—
Outstanding at June 30, 2012	590,479		$	13.38
Outstanding and Exercisable at June 30, 2012	291,097		$	15.17

(a)The fair value of these RSU grants was determined by a third party valuation based on market inputs.

A summary of the status of nonvested RSU awards as of June 30, 2012 and changes during the three months ended June 30, 2012, is presented below:

	No. of awards	Weighted average grant- date fair value
Nonvested at May 1, 2011	—	$	—
Granted	299,479	15.17
Nonvested at June 30, 2011	299,479	$	15.17

	No. of awards		Weighted average grant- date fair value
Nonvested at December 31, 2011	161,573		$	13.38
Forfeited	(14,500	)
Nonvested at March 31, 2012	147,073		$	13.38
Granted	189,500		12.02
Vested	(37,191	)	15.17
Nonvested at June 30, 2012	329,382		$	11.75

Stock-based compensation expense related to RSUs for the three months ended June 30, 2012 was $0.3 million. The aggregate intrinsic value of RSUs outstanding and exercisable is $4.4 million.

(3) Stock Options

Outstanding stock options expire on May 12, 2018. Options to acquire an additional 5% of the new common shares have been reserved for issuance at a later date at the discretion of the new board of directors put in place upon implementation of the Recapitalization Transaction. Stock-based compensation expense related to stock options for the three months ended June 30, 2012 was $0.2 million.

A summary of stock option and award activity for the Successor Company is as follows:

	No. of Stock Options	Weighted average exercise price		Weighted average remaining contractual term (years)	Weighted average grant date fair value
Outstanding at May 1, 2011	—
Granted	708,023	$	20.00	7.00	$	9.40
Outstanding at June 30, 2011	708,023	$	20.00	6.87	$	9.00
Outstanding and Exercisable at June 30, 2011	—

	No. of Stock Options	Weighted average exercise price		Weighted average remaining contractual term (years)	Weighted average grant date fair value
Outstanding at March 31, 2012	645,323	$	20.00	6.17	$	9.50
Granted	—
Exercised	—
Forfeited	—
Outstanding at June 30, 2012	645,323	$	20.00	5.87	$	9.50
Outstanding and Exercisable at June 30, 2012	434,559	$	20.00	5.87	$	9.64

A summary of the status of nonvested stock option awards as of June 30, 2012 and changes during the three months ended June 30, 2012, is presented below:

		Weighted		Weighted
		average		average
		grant-date		exercise
	No.of awards	fair value		price
Nonvested at May 1, 2011	—
Granted	708,023	$	9.40	$	20.00
Nonvested at June 30, 2011	708,023	$	9.40	$	20.00

			Weighted		Weighted
			average		average
			grant-date		exercise
	No.of awards		fair value		price
Nonvested at March 31, 2012	316,146		$	9.62	$	20.00
Granted	—
Vested	(105,382	)	$	8.42	$	20.00
Forfeited	—
Nonvested at June 30, 2012	210,764		$	9.22	$	20.00

(ii)Predecessor Company

The Predecessor Company’s stock option plan provided for the issuance of non-transferable stock options and stock-based awards to purchase up to 13,937,756 common shares to employees, officers, directors of the Predecessor Company, and persons providing ongoing management or consulting services to the Company. The plan also provided for the granting of tandem stock appreciation rights that at the option of the holder may have been exercised instead of the underlying option. The exercise price of the options and awards was fixed by the Board of Directors, but was generally at least equal to the market price of the common shares at the date of grant. The term of the options and awards was between five and ten years. Options and awards generally vested monthly over varying terms from two to four years.

During the one and four months ended April 30, 2011, the Predecessor Company issued 5,120 common shares respectively upon exercise of awards.

A summary of Canadian dollar stock option and award activity for the Predecessor Company is as follows:

	No. of stock options and awards		Weighted average exercise price (in CDN$)		Weighted average remaining contractual term (years)	Aggregate intrinsic value (in CDN$)
Outstanding at December 31, 2010	5,275,184		$	3.83	2.75	$	132
Granted	—		—
Exercised	—		—
Forfeited	(1,439,834	)	3.86
Outstanding at March 31, 2011	3,835,350		3.81		2.54	—
Forfeited	(3,835,350	)	3.81
Outstanding at April 30, 2011	—		—		—	—
Exercisable at April 30, 2011	—		—		—	—
Exercisable and expected to vest at April 30, 2011	—		$	—	—	$	—

A summary of the status of Canadian dollar nonvested stock option awards as of April 30, 2011 and changes during the one and four months ended April 30, 2011, is presented below:

Nonvested CDN$ awards	No. of awards		Weighted average grant-date fair value (in CDN$)
Nonvested at December 31, 2010	2,225,194		$	0.46
Vested	(239,215	)	1.67
Forfeited	(560,223	)	0.57
Nonvested at March 31, 2011	1,425,756		$	0.59
Vested	(55,362	)	0.57
Nonvested at April 30, 2011	1,370,394		$	0.59

A summary of U.S. dollar award activity for the Predecessor Company is as follows:

	No. of Awards		Weighted average exercise price (in U.S.$)			Weighted average remaining contractual term (years)	Aggregate intrinsic value (in U.S.$)
Outstanding at December 31, 2010	3,890,999		$	1.51		3.14	$	179
Granted	—		—
Exercised	(20,833	)	(0.26		)
Forfeited	(148,541	)	1.38
Outstanding at March 31, 2011	3,721,625		$	1.52		2.89	—
Forfeited	(3,721,625	)	1.52
Exercisable at April 30, 2011	—		$	—		—	—
Exercisable and expected to vest at April 30, 2011	—		$	—		—	—

A summary of the status of U.S. dollar nonvested stock option awards as of March 31, 2011 and changes during the three months ended March 31, 2011, is presented below:

Nonvested U.S. $ awards	No. of awards		Weighted average grant-date fair value (in U.S.$)
Nonvested at December 31, 2010	2,044,339		$	0.48
Vested	(370,174	)	1.19
Forfeited	(74,890	)	0.64
Nonvested at March 31, 2011	1,659,275		$	.0.63
Vested	(61,572	)	0.59
Nonvested at April 30, 2011	1,597,703		$	0.64

American Medical Instruments Holdings, Inc. (“AMI”)

On March 9, 2006, AMI granted 304 stock options under AMI’s 2003 Stock Option Plan (the “AMI Stock Option Plan”), each of which was exercisable for approximately 3,852 of the Predecessor Company’s common shares. All outstanding options and warrants granted prior to the March 9, 2006 grant were settled and cancelled upon the acquisition of AMI. No further options to acquire common shares can be issued pursuant to the AMI Stock Option Plan. Approximately 1,171,092 of the Predecessor Company’s common shares were reserved in March 2006 to accommodate future exercises of the AMI options.

	No. of Shares Underlying Options		Weighted average exercise price (in U.S.$)	Weighted average remaining contractual term (years)	Aggregate intrinsic value (in U.S.$)
Outstanding at December 31, 2010	300,480		15.44	6.19	—
Outstanding at March 31, 2011	300,480		15.44	4.94
Forfeited	(300,480	)	15.44
Outstanding at April 30, 2011	—
Exercisable at April 30, 2011	—
Exercisable and expected to vest at April 30, 2011	—

A summary of the status of the Predecessor Company’s AMI nonvested stock option awards as of April 30, 2011 and changes during the one and four months ended April 30, 2011, is presented below:

Nonvested AMI options	No. of shares underlying options		Weighted average grant-date fair value (in U.S.$)
Nonvested at December 31, 2010	112,683		$	6.51
Vested	(75,124	)	6.51
Nonvested at March 31, 2011	37,599		$	6.51
Nonvested at April 30, 2011	37,599		$	6.51

As described under note 1 upon implementation of the CCAA Plan on May 12, 2011, all stock options, warrants and other rights or entitlements to acquire or purchase common shares of the Predecessor Company under existing stock option plans were cancelled and terminated without any liability, payment or other compensation in respect thereof. In conjunction with the cancellation of all awards and other rights or entitlements to purchase common shares in accordance with the implementation of the CCAA Plan; $1.1 million and $0.3 million of these costs related to the nonvested awards granted under the 2006 Plan and AMI stock options, respectively, was charged to restructuring items in April 2011.

(c) Stock-based compensation expense

The Successor Company recorded stock-based compensation expense of $0.7 million for the three months ended June 30, 2012, and the Predecessor Company recorded $0.1 million and $0.4 million for the one and four months ended April 30, 2011, respectively. The Successor Company recorded stock-based compensation expense of $1.3 million for the six months ended June 30, 2012 and nil for the two months ended June 30, 2011. The Predecessor Company recorded stock-based compensation expense of $0.1 million and $0.4 million for the one and four months ended April 30, 2011, respectively. The stock based compensation expense relates to awards granted under the Company’s stock option plan that was modified or settled subsequent to October 1, 2002.

The Company expenses the compensation cost of stock-based payments using the straight-line method over the vesting period. The total unrecognized compensation cost of non-vested awards was $6.4 million as at June 30, 2012. The Successor Company granted 189,500 RSU awards during the three months ended June 30, 2012. The Predecessor Company did not grant any awards during the one and four months ended April 30, 2011.

During the one and four months ended April 30, 2011 the following activity occurred for the Predecessor Company:

(in thousands)	One and Four months ended April 30, 2011
Total intrinsic value of awards exercised
CDN dollar awards	$	n/a
U.S. dollar awards	$	0.4
Total fair value of awards vested	$	.04

Cash received from award exercises was $nil for the one and four months ended April 30, 2011.

During the three months ended June 30, 2012 the following activity occurred for the Successor Company:

	Successor Company
(in thousands)	Three months ended June 30, 2012
Total intrinsic value of awards exercised
Restricted Stock	$	522
Restricted Stock Units	$	n/a
Stock Options	$	n/a
Total fair value of awards vested	$	2,110