##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended April 1, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 for the transition period from                              to
 COMMISSION
FILE NUMBER: 000-49798
 THORATEC CORPORATION
 (Exact name of registrant as specified in its charter)
 California
(State or other jurisdiction of incorporation or
organization)
    
    94-2340464
(I.R.S. Employer Identification No.)6035 Stoneridge Drive, Pleasanton, California
(Address of principal executive offices)
    
    94588
(Zip Code)
 Registrants telephone number, including area code: (925) 847-8600
 Indicate by check mark whether the registrant: þ o
 Indicate by check mark whether the registrant is, a large accelerated filer, an accelerated
filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
 Large-accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): o þ




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##### 



THORATEC CORPORATION AND SUBSIDIARIES
 TABLE OF CONTENTS
 Part I. Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of April 1, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended April 1, 2006 and April 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2006 and April 2, 2005
    
    
    5Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended April 1, 2006 and
April 2, 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosure of Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24Part II. Other Information
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 6. Exhibits
    
    
    26SignaturesExhibitsEXHIBIT 10.30EXHIBIT 10.31EXHIBIT 10.32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
(in thousands)
 April 1,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,027
    
    
    $
    35,109Short-term available-for-sale investments
    
    
    178,028
    
    
    
    175,827Restricted short-term investments
    
    
    3,361
    
    
    
    3,330Receivables, net of allowances of $533 and $634, respectively
    
    
    35,490
    
    
    
    35,904Inventories
    
    
    41,870
    
    
    
    41,671Deferred tax asset
    
    
    5,461
    
    
    
    5,461Prepaid expenses and other assets
    
    
    4,956
    
    
    
    3,582Total current assets
    
    
    292,193
    
    
    
    300,884Property, plant and equipment, net
    
    
    42,577
    
    
    
    28,906Restricted long-term investments
    
    
    1,619
    
    
    
    1,610Goodwill
    
    
    94,097
    
    
    
    94,097Purchased intangible assets, net
    
    
    138,964
    
    
    
    141,938Other assets
    
    
    6,486
    
    
    
    6,483Total Assets
    
    $
    575,936
    
    
    $
    573,918LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,744
    
    
    $
    8,421Accrued compensation
    
    
    8,900
    
    
    
    15,707Accrued income taxes
    
    
    2,063
    
    
    
    3,659Other accrued liabilities
    
    
    4,676
    
    
    
    3,804Total current liabilities
    
    
    22,383
    
    
    
    31,591Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability and other
    
    
    49,783
    
    
    
    50,430Total Liabilities
    
    
    215,916
    
    
    
    225,771Shareholders equity:Common shares: authorized 100,000; issued and outstanding 52,626 and 51,737, respectively
    
    
    420,053
    
    
    
    407,531Deferred compensation
    
    
    
    
    
    
    (184
    )Accumulated deficit
    
    
    (59,731
    )
    
    
    (58,801
    )Accumulated other comprehensive loss:Unrealized loss on investments
    
    
    (200
    )
    
    
    (258
    )Cumulative translation adjustments
    
    
    (102
    )
    
    
    (141
    )Total accumulated other comprehensive loss
    
    
    (302
    )
    
    
    (399
    )Total Shareholders Equity
    
    
    360,020
    
    
    
    348,147Total Liabilities and Shareholders Equity
    
    $
    575,936
    
    
    $
    573,918
  3




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except per share data)
 Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Product sales
    
    $
    48,755
    
    
    $
    50,488Cost of product sales
    
    
    20,108
    
    
    
    20,048Gross profit
    
    
    28,647
    
    
    
    30,440Operating expenses:Selling, general and administrative
    
    
    18,060
    
    
    
    14,817Research and development
    
    
    9,585
    
    
    
    7,719Amortization of purchased intangible assets
    
    
    2,974
    
    
    
    2,804Litigation
    
    
    57
    
    
    
    178Total operating expenses
    
    
    30,676
    
    
    
    25,518Income (loss) from operations
    
    
    (2,029
    )
    
    
    4,922Other income and (expense):Interest expense
    
    
    (1,103
    )
    
    
    (1,008
    )Interest income and other
    
    
    1,701
    
    
    
    836Income (loss) before income tax benefit (expense)
    
    
    (1,431
    )
    
    
    4,750Income tax benefit (expense)
    
    
    501
    
    
    
    (1,615
    )Net income (loss)
    
    $
    (930
    )
    
    $
    3,135Net income (loss) per share:Basic
    
    $
    (0.02
    )
    
    $
    0.07Diluted
    
    $
    (0.02
    )
    
    $
    0.06Shares used to compute net income per share:Basic
    
    
    52,218
    
    
    
    48,202Diluted
    
    
    52,218
    
    
    
    49,009
  4




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
(in thousands)
 Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (930
    )
    
    $
    3,135Adjustments to reconcile net income to net cash provided (used) by operating activities:Depreciation and amortization
    
    
    4,875
    
    
    
    4,453Investment discount (premium) amortization
    
    
    134
    
    
    
    132Non-cash interest and other expenses
    
    
    1,103
    
    
    
    1,008Tax benefit related to stock options
    
    
    1,896
    
    
    
    90Stock-based compensation expense
    
    
    2,649
    
    
    
    232Excess tax benefits from stock-based compensation
    
    
    (1,761
    )
    
    
    Change in net deferred tax liability
    
    
    (1,151
    )
    
    
    (1,183
    )Changes in assets and liabilities:Receivables
    
    
    414
    
    
    
    1,757Inventories
    
    
    (358
    )
    
    
    1,250Prepaid expenses and other assets
    
    
    (1,374
    )
    
    
    (690
    )Accounts payable and other liabilities
    
    
    (9,717
    )
    
    
    (512
    )Other
    
    
    (126
    )
    
    
    119Net cash provided (used) by operating activities
    
    
    (4,346
    )
    
    
    9,791Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (38,900
    )
    
    
    (15,370
    )Sales of available-for-sale investments
    
    
    21,700
    
    
    
    8,900Maturities of available-for-sale investments and restricted investments
    
    
    14,920
    
    
    
    3,070Purchases of property, plant and equipment, net
    
    
    (15,329
    )
    
    
    (1,104
    )Net cash used in investing activities
    
    
    (17,609
    )
    
    
    (4,504
    )Cash flows from financing activities:Proceeds from stock option exercises, net
    
    
    9,173
    
    
    
    541Restricted stock forfeiture
    
    
    (1,100
    )
    
    
    Excess tax benefits from stock-based compensation
    
    
    1,761
    
    
    
    Repurchase of common stock
    
    
    
    
    
    
    (2,238
    )Net cash provided by financing activities
    
    
    9,834
    
    
    
    (1,697
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    39
    
    
    
    (108
    )Net increase (decrease) in cash and cash equivalents
    
    
    (12,082
    )
    
    
    3,482Cash and cash equivalents at beginning of period
    
    
    35,109
    
    
    
    16,017Cash and cash equivalents at end of period
    
    $
    23,027
    
    
    $
    19,499Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    379
    
    
    $
    427Supplemental disclosure of non-cash investing and financing activities:Transfers of equipment from inventory
    
    $
    246
    
    
    $
    502
  5




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THORATEC CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (unaudited)
(in thousands)
 Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Net income (loss)
    
    $
    (930
    )
    
    $
    3,135Other net comprehensive income (loss):Unrealized gain (loss) on
investments (net of taxes of $38
and $(108) for the three months
ended April 1, 2006 and April 2,
2005, respectively)
    
    
    58
    
    
    
    (57
    )Foreign currency translation
adjustments (net of taxes of $11
and $(33) for the three months
ended April 1, 2006 and April 2,
2005, respectively)
    
    
    39
    
    
    
    (132
    )Comprehensive income (loss)
    
    $
    (833
    )
    
    $
    2,946
  6




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THORATEC CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
(in thousands, unless otherwise stated)
 1. Basis of Presentation
   2. Stock Based Compensation
       7




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Three Months EndedApril 2, 2005Net income:As reported
    
    $
    3,135Add: Stock-based compensation expense included in
reported net income, net of related tax effects
    
    
    153Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (2,023
    )Pro forma net income
    
    $
    1,265Basic and Diluted earnings per share:As reportedBasic
    
    $
    0.07Diluted
    
    $
    0.03Pro forma incomeBasic
    
    $
    0.06Diluted
    
    $
    0.03
 Stock Option Plans
      8




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Three Months EndedApril 1, 2006
    
    April 2, 2005Risk-free interest rate (weighted average)
    
    
    4.49
    %
    
    
    4.22
    %Expected volatility
    
    
    40
    %
    
    
    50
    %Expected option life (in years)
    
    
    3.88  5.25
    
    
    
    3.67Dividends
    
    None
    
    None
   Number of
    
    Weighted
    
    Weighted AverageOptions
    
    Average
    
    Remaining Contract(in thousands)
    
    Exercise Price
    
    LifeOutstanding options at January 1, 2006
    
    
    6,445
    
    
    $
    12.80Granted
    
    
    1,392
    
    
    
    21.51Exercised
    
    
    (686
    )
    
    
    12.89Forfeited or expired
    
    
    (66
    )
    
    
    14.02Outstanding options at April 1, 2006
    
    
    7,085
    
    
    $
    14.49
    
    
    7.33yrs.Outstanding options exercisable at April 1, 2006
    
    
    3,484
    
    
    
    12.82
    
    
    5.92yrs.
 Restricted Stock Units
   Number of
    
    Weighted Average
    
    Weighted AverageUnits
    
    Grant Date Fair
    
    Remaining Contract(in thousands)
    
    Value
    
    LifeOutstanding units at January 1, 2006
    
    
    
    
    
    
    Granted
    
    
    8
    
    
    $
    20.34Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding units at April 1, 2006
    
    
    8
    
    
    $
    20.34
    
    
    
    2.40Outstanding units vested at April 1, 2006
    
    
    
    
    
    
    
    
    
    
    
 9




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Employee Stock Purchase Plan
   Three Months EndedApril 1, 2006
    
    April 2, 2005Risk-free interest rate
    
    
    4.25
    %
    
    
    2.20
    %Expected volatility
    
    
    40
    %
    
    
    50
    %Expected option life
    
    0.5 yrs
    
    0.5yrsDividends
    
    None
    
    None
  Restricted Stock
     10




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Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding non-vested restricted stock at January 1, 2006
    
    
    150
    
    
    $
    14.89Granted
    
    
    260
    
    
    
    20.34Vested
    
    
    (133
    )
    
    
    15.94Forfeited or expired
    
    
    
    
    
    
    Outstanding non-vested restricted stock at April 1, 2006
    
    
    277
    
    
    $
    19.51
 3. New Accounting Pronouncements
  4. Cash and cash equivalents
  5. Investments
    6. Financial Instruments
   11




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7. Inventories
  As ofApril 1,
    
    
    December 31,2006
    
    
    2005(in thousands)Finished goods
    
    $
    20,854
    
    
    $
    19,952Work in process
    
    
    6,402
    
    
    
    6,303Raw materials
    
    
    14,614
    
    
    
    15,416Total
    
    $
    41,870
    
    
    $
    41,671
 8. Property, Plant and Equipment, net
  As ofApril 1,
    
    
    December 31,2006
    
    
    2005(in thousands)Land
    
    $
    4,096
    
    
    $
    341Building
    
    
    12,040
    
    
    
    2,445Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    44,859
    
    
    
    44,067Rental equipment
    
    
    7,544
    
    
    
    7,334Improvements
    
    
    12,663
    
    
    
    11,526Total
    
    
    83,487
    
    
    
    67,998Accumulated depreciation and amortization
    
    
    (40,910
    )
    
    
    (39,092
    )$
    42,577
    
    
    $
    28,906
 9. Goodwill and Purchased Intangible Assets
   As of April 1, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and Trademarks
    
    $
    37,815
    
    
    $
    (18,602
    )
    
    $
    19,213Core Technology
    
    
    37,485
    
    
    
    (9,143
    )
    
    
    28,342Developed Technology
    
    
    122,782
    
    
    
    (31,430
    )
    
    
    91,352Non-compete Agreement
    
    
    90
    
    
    
    (33
    )
    
    
    57Total Purchased Intangible Assets, net
    
    $
    198,172
    
    
    $
    (59,208
    )
    
    $
    138,964
 As of December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount(in thousands)Patents and Trademarks
    
    $
    37,815
    
    
    $
    (17,692
    )
    
    $
    20,123Core Technology
    
    
    37,485
    
    
    
    (8,762
    )
    
    
    28,723Developed Technology
    
    
    122,782
    
    
    
    (29,750
    )
    
    
    93,032Non-compete Agreement
    
    
    90
    
    
    
    (30
    )
    
    
    60Total Purchased Intangible Assets
    
    $
    198,172
    
    
    $
    (56,234
    )
    
    $
    141,938
  12




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10. Long-Term Debt
    Fiscal Year2004(in millions)Long Term Debt Offering Proceeds:Principal amount of convertible notes at maturity
    
    $
    247.4Original issue discount
    
    
    (103.7
    )Debt issuance costs
    
    
    (4.3
    )Net proceeds
    
    $
    139.4
  13




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11. Litigation
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman Wong v. Grossman
 Wong
   14




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12. Income Taxes
   13. Net Income (Loss) Per Share
  Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Net income (loss)
    
    $
    (930
    )
    
    $
    3,135Weighted average number of common shares-basic
    
    
    52,218
    
    
    
    48,202Dilutive effect of stock options and Employee
Stock Purchase Plan shares
    
    
    
    
    
    
    807Weighted average number of common shares-diluted
    
    
    52,218
    
    
    
    49,009Net income (loss) per common share
Basic
    
    $
    (0.02
    )
    
    $
    0.07Diluted
    
    $
    (0.02
    )
    
    $
    0.06
  14. Business Segment and Geographical Data
   Three Months EndedApril 1,
    
    
    April 22006
    
    
    2005Product sales:Cardiovascular
    
    $
    29,816
    
    
    $
    32,066ITC
    
    
    18,939
    
    
    
    18,422Total product sales
    
    $
    48,755
    
    
    $
    50,488Income before income taxes:Cardiovascular (a)(d)
    
    $
    2,257
    
    
    $
    6,128ITC(a)(d)
    
    
    690
    
    
    
    3,151Corporate (b)(d)
    
    
    (4,919
    )
    
    
    (4,179
    )Litigation (c)
    
    
    (57
    )
    
    
    (178
    )Income (loss) from operations
    
    
    (2,029
    )
    
    
    4,922
 15




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Three Months EndedApril 1,
    
    
    April 22006
    
    
    2005Other income and (expense):Interest expense
    
    
    (1,103
    )
    
    
    (1,008
    )Interest income and other
    
    
    1,701
    
    
    
    836Income (loss) before income tax benefit (expense)
    
    $
    (1,431
    )
    
    $
    4,750
 
 (a)
    
    Includes amortization expense of $2.9 million and $2.8 million for the three months ended
April 1, 2006 and April 2, 2005, respectively, related to the Cardiovascular segment. The ITC
segment also includes amortization expense of $40,000 for each of the three months ended April
1, 2006 and April 2, 2005.(b)
    
    Represents primarily general and administrative items not specifically identified to a
particular business segment.(c)
    
    Relates to expenses not specifically identified to a particular business segment.(d)
    
    Includes additional SFAS No. 123(R) expense of $1.0 million, $0.7 million and $0.8 million
for Cardiovascular, ITC and Corporate, respectively, for the three months ended April 1, 2006.   Three Months EndedApril 1,
    
    
    April 2,2006
    
    
    2005Domestic
    
    $
    36,646
    
    
    $
    39,204International
    
    
    12,109
    
    
    
    11,284Total product sales
    
    $
    48,755
    
    
    $
    50,488
 15. Subsequent Events
  16




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
 This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements can be identified by the words expects, projects, hopes,
believes, intends, should, estimate, will, would, may, anticipates, plans,
could and other similar words. Actual results, events or performance could differ materially from
these forward-looking statements based on a variety of factors, many of which are beyond our
control. Therefore, readers are cautioned not to put undue reliance on these statements. Factors
that could cause actual results or conditions to differ from those anticipated by these and other
forward-looking statements include those more fully described in the Risk Factors section of our
2005 Annual Report on Form 10-K and in other documents we file with the Securities and Exchange
Commission. These forward-looking statements speak only as of the date hereof. We undertake no
obligation to publicly release the results of any revisions to these forward-looking statements
that may be made to reflect events or circumstances after the date hereof, or to reflect the
occurrence of unanticipated events.
 The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our condensed consolidated financial
statements included in this Form 10-Q .
 Overview
  Our Business Model
   
    
    Circulatory Support Products.Our circulatory support products include VADs for the
short, intermediate and long-term treatment of advanced heart failure. In addition,we
have developed small diameter grafts using our proprietary materials to address the
vascular access market. Our grafts are used for hemodialysis.
  
    
    Point-of-Care Diagnostics. Our point-of-care products include coagulation diagnostic
test systems that monitor blood coagulation for a patient while being administered certain
anticoagulants, blood gas/electrolyte and chemistry status, or anemia.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 Cardiovascular segment
  
    
    The Thoratec Ventricular Assist Device System is an external device for short to
mid-term cardiac support, which is sold worldwide. The device is approved to assist left,
right and biventricular support and is worn outside of the body. The Thoratec VAD is
approved for use in bridge-to-transplantation, or BTT, and for post-cardiotomy myocardial
recovery.
 17




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##### Table of Contents




    
    The Thoratec IVAD is the only implantable blood pump approved for both BTT and
post-cardiotomy myocardial recovery. It can be used for left, right, or biventricular
support. The IVAD utilizes the same internal working components as the Thoratec VAD System,
but has an outer housing made of a titanium alloy that makes it more suitable for
implantation.
    
    The HeartMate XVE Left Ventricular Assist System, or LVAS, is an implantable device for
mid to long-term cardiac support and the only device approved in the U.S., Europe and
Canada for permanent support, or Destination Therapy, of those patients ineligible for
heart transplantation. The HeartMate XVE is also approved for use in BTT.
    
    The HeartMate II, which is currently in clinical trials for BTT and Destination
Therapy, is an implantable device consisting of a miniature rotary blood pump designed to
provide long-term cardiac support. Its design is intended to be not only smaller, but also
simpler, quieter, and longer lasting than the current generation of ventricular assist
devices.
     ITC Segment
  
    
    The Hemochron POC coagulation system, which is used to monitor a patients coagulation
while being administered anticoagulants in various settings, including in the
cardiovascular operating room and cardiac catheterization lab to monitor the drug Heparin
and in an anticoagulation clinic to monitor the drug Coumadin. Hemochron is considered a
moderately complex device and must be used by professionally trained personnel. The system
consists of a small, portable analytical instrument and disposable test cuvettes.
    
    The IRMA POC blood gas/electrolyte and chemistry system, which is used to monitor a
patients blood gas/electrolyte and chemistry status. It is considered moderately complex
and its use requires supervision by professionally trained personnel. The system consists
of a small, portable analytical instrument and disposable test cartridges.
    
    The ProTime coagulation monitoring system, which is used to monitor patients
coagulation while they are taking oral anticoagulants such as Warfarin, and can be
prescribed for use by patients at home or can be used in the physicians office or clinic.
The system consists of a small, portable, analytical instrument and disposable test
cuvettes.
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
    
    The Hemoglobin Pro, or Hgb Pro, which is used by professionals, mainly in the doctors
office to test for anemia. It provides quick results from a very small blood sample. The
system consists of a small, hand held test meter and disposable test strips.
    
    Tenderfoot, Tenderlett and Surgicutt incision products, which are used by professionals
to obtain a patients blood sample for diagnostic testing. The Tenderfoot is a heel stick
used for infant testing, the Tenderlett is used for finger incisions and the Surgicutt is
used to perform screening tests to determine platelet function. All products feature
permanently retracting blades for safe, virtually pain-free incision.
   Critical Accounting Policies and Estimates
  Make-Whole Premium
   Revenue Recognition
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Reserves
     Evaluation of Purchased Intangibles and Goodwill for Impairment
   Valuation of stock-based awards
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Results of Operations
  Three Months EndedApril 1,
    
    April 2,2006
    
    2005Product sales
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    41
    
    
    
    40Gross profit
    
    
    59
    
    
    
    60Operating expenses:Selling, general and administrative
    
    
    37
    
    
    
    30Research and development
    
    
    20
    
    
    
    15Amortization of purchased intangible assets
    
    
    6
    
    
    
    6Litigation
    
    
    
    
    
    
    Total operating expenses
    
    
    63
    
    
    
    51Income (loss) from operations
    
    
    (4
    )
    
    
    9Other income and (expense):Interest expense
    
    
    (2
    )
    
    
    (2
    )Interest income and other
    
    
    3
    
    
    
    2Income (loss) before income tax benefit (expense)
    
    
    (3
    )
    
    
    9Income tax benefit (expense)
    
    
    1
    
    
    
    (3
    )Net income (loss)
    
    
    (2
    )%
    
    
    6
    %
   Three months ended April 1, 2006 and April 2, 2005
 Product Sales
  
    
    VAD product sales decreased $1.0 million. The decrease came from lower sales of our
Thoratec product line, partially offset by an increase in sales of our HeartMate product
line.
    
    Other ancillary revenue (drivers, cannulae, service, rentals and spares) decreased $0.8
million, including decreases in cannulae and driver sales associated with the Thoratec
product line, partially offset by increased driver rental revenue.
    
    Graft product sales decreased by $0.4 million.
    
    Point-of-care diagnostic product sales increased $0.4 million, due primarily to
increases in our sales of Protime products, partially offset by decreases in IRMA,
Hemochron and Hgb Pro products quarter over quarter.
    
    Incision product sales increased by $0.1 million quarter over quarter.
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Gross Profit
  
    
    Cardiovascular segment gross profit increased by 3.3% due to decreased manufacturing
costs related to favorable manufacturing variances.
    
    ITC segment gross profit decreased by 6.4%, due to higher manufacturing, shipping and
labor costs.
 Selling, General and Administrative
  
    
    Costs related to stock based compensation of $1.4 million that were incurred in 2006
but not in 2005.
    
    Increased personnel costs of $0.6 million associated with CEO transition, CFO
recruitment, and other bonus and retention programs not specifically identified to any
particular business segment.
    
    Increased personnel costs associated with the addition of the Heart Failure Specialists
in our Cardiovascular segment of $0.3 million and a $0.4 million increase in personnel
costs in our ITC segment.
    
    Higher spending on marketing and training related activities primarily associated with
HeartMate II in the Cardiovascular segment totaling $0.5 million, in addition to a $0.1
million increase in spending by the ITC segment related to increased administrative fees
due to Group Purchasing Organizations.
 Research and Development
  Amortization of Purchased Intangible Assets
  Interest Expense
  Interest Income and Other
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Income Taxes
    Liquidity and Capital Resources
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Contractual Obligations
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
   
 ITEM 4. CONTROLS AND PROCEDURES
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Disclosure Controls and Procedures
   Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  10.30
    
    Thoratec Corporation Corporate Executive Incentive Plan FY2006, effective for certain executive officers of
the Company.10.31
    
    Thoratec Corporation Cardiovascular Business Executive Incentive Plan FY2006, effective for certain executive
officers
of the Company.10.32
    
    International Technidyne Corporation Executive Incentive Plan FY2006, effective for certain executive officers of
the Company.31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
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SIGNATURES
  THORATEC CORPORATIONDate: May 11, 2006
    
    /s/  Gerhard F. BurbachGerhard F. BurbachChief Executive OfficerDate: May 11, 2006
    
    /s/  Cynthia LuccheseCynthia LuccheseChief Financial Officer
 27