##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 
 (Mark one)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 30, 2006
 o
    
    TRANSITION REPORT UNDER 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
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Title of Each Class
    
    Name of Each Exchange of which RegisteredCommon Stock, no par value per share
    
    NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Exchange Act: None
 o þ
 o þ
 þ o
 þ
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
  Vectra




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    16Item 1B. Unresolved Staff Comments
    
    
    26Item 2. Properties
    
    
    26Item 3. Legal Proceedings
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    28Item 6. Selected Consolidated Financial Data
    
    
    30Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    70Item 9A. Controls and Procedures
    
    
    70Item 9B. Other Information
    
    
    72PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    72Item 11. Executive Compensation
    
    
    72Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    72Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    72Item 14. Principal Accounting Fees and Services
    
    
    72PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    72Exhibit Index
    
    
    75EXHIBIT 10.33EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I
 FORWARD-LOOKING STATEMENTS
  
 Item 1. Business
 OVERVIEW
       
    
    Circulatory Support Products.Our circulatory support products include the PVAD, IVAD,
HeartMate XVE and HeartMate II for short, intermediate and long-term treatment of advanced
HF. In addition, in August 2006 we began marketing the CentriMag Blood Pumping System
(CentriMag) for acute HF. CentriMag is manufactured by Levitronix LLC (Levitronix) and
distributed by us in the U.S. under a distribution agreement with Levitronix. We also
manufacture and sell small diameter grafts using our proprietary materials to address the
vascular access market for hemodialysis.
  
    
    Point-of-Care Diagnostics. Our point-of-care products include diagnostic test systems
that monitor blood coagulation while a patient is being administered certain
anticoagulants, as well as monitor blood gas/electrolyte, oxygenation and chemistry status,
including total hemoglobin.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
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4




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OUR MARKETS
 CARDIOVASCULAR SEGMENT
 Circulatory Support and Graft Products
     Bridge-to-Transplantation 
 Destination
Therapy 
 Therapeutic Recovery 
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Post-Cardiotomy Myocardial Recovery Following Cardiac Surgery 
 Cardiac Surgery Support  ,
 Vascular Graft Products  Vectra Vectr
 ITC SEGMENT
 Point-of-Care Diagnostics Products 
 Incision Products 
 OUR STRATEGY
  Offer a broad range of products.
 Focus on and partner with leading heart centers
 Increase penetration of existing markets
 
    
    Destination Therapy Market. In November 2002, we
received approval for a HeartMate
VAD for Destination Therapy in the treatment of late-stage HF patients who are not
candidates for heart transplants. While the initial CMS reimbursement approval was limited
to sixty-nine centers in 2004, we estimate the market penetration for this indication could
eventually
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comprise of a meaningful portion of the 100,000 patients annually diagnosed with late-stage HF, as we introduce new technologies that increase the useful life of our VAD and improve the outcome of procedures.
 Increase our presence in Cardiovascular and ITC market segments
 
    
    Acute Market.In August 2006, we entered into a distribution agreement with Levitronix
to distribute the CentriMag in the U.S. This agreement allows us to expand more broadly
beyond transplant centers and enables us to better address opportunities in short-term
patient recovery. The CentriMag device currently has FDA 510(k) approval for use in patients
requiring short-term extracorporeal circulatory support during cardiac surgery. Levitronix
is currently in discussion with the FDA regarding an IDE to begin a pivotal trial to
demonstrate safety and effectiveness of the CentriMag for any cardiac condition resulting in
ventricular failure where there is an opportunity for recovery.
    
    Point-of-Care Market. On October 3, 2006, we acquired A-VOX Systems, Inc., (Avox) a
point-of-care company that develops and manufactures portable, bedside CO-oximetry systems
to assist clinicians in assessing a patients oxygenation status. These systems are used in
hospitals in the cardiac catherization lab, the intensive care unit (ICU), the neonatal
intensive care unit (NICU) and the emergency department. Our strategy is to sell these
systems along with our Hemochron and IRMA point-of-care products and our data management
system that connects all of these systems together.
 Obtain approval for new products.
  Increase cost effectiveness of the therapies that employ our products
 OUR PRODUCTS
 Cardiovascular Segment
  
    
    The PVAD is an external device for short to mid-term cardiac support. The device, which
is sold worldwide, is approved to assist left, right and biventricular support and is worn
outside of the body. The PVAD is approved by the FDA for use as a bridge to transplantation
and for post-cardiotomy myocardial recovery.
    
    The IVAD is the only implantable blood pump approved for both bridge-to-transplantation
and post-cardiotomy myocardial recovery that can be used for left, right, or biventricular
support. The IVAD utilizes the same internal working components as the PVAD, but has an
outer housing made of a titanium alloy that makes it more suitable for implantation.
    
    The HeartMate XVE, is an implantable device for mid to longer-term cardiac support and is
the only device approved in the U.S., Europe and Canada for permanent support for those
patients ineligible for heart transplantation. This device is designed
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to assist the pumping function of the hearts left ventricle and features a unique, textured blood-contacting
surface that eliminates the need for systemic anticoagulation.
 
    
    The HeartMate II is an implantable device consisting of a miniature rotary blood pump
designed to provide long-term support. Its design is intended to be not only smaller, but
also simpler, quieter, and longer lasting than the current generation of ventricular assist
device. The HeartMate II is CE Mark approved for distribution in Europe, but is currently
only approved in the U.S. for investigational use.
    
    CentriMag is an external device for short-term circulatory support consisting of a
single-use blood pump, a motor and a device console. This device is 510(k) approved by the
FDA for patients requiring short-term extra corporeal circulatory support during cardiac
surgery.
  Circulatory Support and Graft Products
   The Paracorporeal Ventricular Assist Device
    The Implantable Ventricular Assist Device
  The HeartMate XVE
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The HeartMate II
  The CentriMag
  VAD Products Under Development
  Vascular Graft Products
 Vectra
 ITC Segment
  Point-of-Care Diagnostics
  
    
    Hemochron point-of-care coagulation system;
    
    Immediate Response Mobile Analysis (IRMA), point-of-care blood gas/electrolyte and chemistry system;
    
    Avox point-of-care CO-oximetry systems;
    
    ProTime coagulation monitoring system; and
    
    Hemoglobin Pro system.
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Hospital point-of-care
     Alternate site point-of-care
     Incision Products
  Product Segments
  SALES AND MARKETING
 Circulatory Support Products
  10




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Vascular Graft Products
 Vectra
 Point-of-Care Diagnostics
   Incision Products
  COMPETITION
  11




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
    
    New competitors might enter the market with broader test menus. To address this risk, in
late 2003 we acquired the IRMA product line of blood gas/electrolyte and chemistry tests,
and in the fourth quarter of 2006, we acquired Avox, which has significantly increased our
test menu offering, and also offers us the opportunity to develop the next generation system
that combines blood gas, electrolyte and oxygenation testing in one machine.
    
    New drug therapies under development may not require the intense monitoring of a
patients coagulation necessary with the current anti-coagulation drug of choice, Heparin.
To try to mitigate this risk, we participate in clinical trials with key pharmaceutical
companies to provide the hemostasis monitoring that will ultimately be required for new drug
therapies.
 PATENTS AND PROPRIETARY RIGHTS
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Our inability to protect our proprietary technologies or an infringement of others
patents could harm our competitive positions
  GOVERNMENT REGULATIONS
  U.S. Regulations
 Vectra
    13




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International Regulations
  Vectra
 Other Regulations
  THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT
  14




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MANUFACTURING
      RESEARCH AND DEVELOPMENT
  15




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MAJOR CUSTOMERS AND FOREIGN SALES
   EMPLOYEES
  ADDITIONAL INFORMATION
  
 Item 1A. Risk Factors
 Our businesses face many risks. These risks include those related to the development of new
products and markets including Destination Therapy, the growth of existing markets for our
products, customer and physician acceptance of our products ,and changes in the mix of our product
sales, and the related gross margin for such product sales, the results of clinical trials,
including those for the HeartMate II, the ability to improve financial performance, regulatory
approval processes, the effect of healthcare reimbursement and coverage policies, the effects of
price competition from any of our competitors and the effects of any merger and acquisition related
activities. The risks described below are what we believe to be the material risks facing our
company, however, they may not be the only risks we face. Additional risks that we do not yet know
of or that we currently believe are immaterial may also impair our business operations. If any of
the events or circumstances described in the following risk factors actually occur, our business,
financial condition or results of operations could suffer, and the trading price of our common
stock could decline significantly. Investors should consider the following risks, as well as the
other information included in this Annual Report on Form 10-K , and other documents we file from
time to time with the SEC, such as our quarterly reports on Form 10-Q , our current reports on Form
8-K and any public announcements we make from time to time.
 If we fail to obtain approval from the FDA and from foreign regulatory authorities, we cannot
market and sell our products under development in the U.S. and in other countries, and if we fail
to adhere to ongoing FDA Quality System Regulations, the FDA may withdraw our market clearance or
take other action.
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If hospitals do not conduct Destination Therapy procedures using our VADs, market opportunities for
our product will be diminished.
   
    
    the number of CMS sites approved for Destination Therapy;
    
    the clinical outcomes of Destination Therapy procedures;
    
    cardiologists and referring physicians education regarding, and their commitment to, Destination Therapy;
    
    the economics of the Destination Therapy procedure for individual hospitals, which
include the costs of the VAD and related pre- and post-operative procedures and their
reimbursement;
    
    the impact of changes in reimbursement rates on the timing of purchases of VADs for
Destination Therapy; and
    
    the economics for individual hospitals of not conducting a Destination Therapy procedure,
including the costs and related reimbursements of long-term hospitalization.
  Physicians may not accept or continue to accept our current products and products under
development.
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We rely on specialized suppliers for certain components and materials in our products and
alternative suppliers may not be available.
     
    
    pay premium prices to our suppliers to keep their production lines open or to obtain
alternative suppliers;
    
    buy substantial inventory to last through the scheduled end of life of our product, or
through such time that we will have a replacement product developed and approved by the FDA;
or
    
    stop shipping the product in which the legacy component is used once our inventory of the
discontinued component is exhausted.
  We may encounter problems manufacturing our products.
  Identified quality problems can result in substantial costs and write-downs.
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If we fail to successfully introduce new products, our future growth may suffer.
  Our inability to protect our proprietary technologies or an infringement of others patents could
harm our competitive position.
     Our future Cardiovascular product sales will be affected by the number of heart transplants
conducted.
  Our future disposable cuvette test product sales by ITC could be affected by changes in monitoring
requirements for medical procedures.
  Since we depend upon distributors, if we lose a distributor or a distributor fails to perform, our
operations may be harmed.
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If we fail to compete successfully against our existing or potential competitors, our product sales
or operating results may be harmed.
 Vectra
  
    
    develop products;
    
    complete clinical testing;
    
    receive regulatory approvals;
    
    achieve market acceptance; and
    
    manufacture and sell commercial quantities of products.
  
    
    New drug therapies under development may not require the intense monitoring of a
patients coagulation that the current anti-coagulation drug of choice (Heparin) requires.
    
    New competitors might enter the market with broader test menus.
  Our non-U.S. sales present special risks.
  
    
    we sell some of our products at a lower price outside the U.S.;
    
    sales agreements may be difficult to enforce;
    
    receivables may be difficult to collect through a foreign countrys legal system;
    
    foreign customers may have longer payment cycles;
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
    
    foreign countries may impose additional withholding taxes or otherwise tax our foreign
income, impose tariffs or adopt other restrictions on foreign trade;
    
    U.S. export licenses may be difficult to obtain;
    
    intellectual property rights may be (and often are) more difficult to enforce in foreign countries;
    
    terrorist activity or war may interrupt distribution channels or adversely impact our customers or employees; and
    
    fluctuations in exchange rates may affect product demand and adversely affect the
profitability, in U.S. dollars, of products sold in foreign markets where payments are made
in local currencies.
  Fluctuations in foreign currency exchange rates could result in declines in our reported sales and
earnings.
  The long and variable sales and deployment cycles for our VAD systems may cause our product sales
and operating results to vary significantly, which increases the risk of an operating loss for any
given fiscal period.
  Since our physician and hospital customers depend on third party reimbursement, if third party
payors fail to provide appropriate levels of reimbursement for our products, our results of
operations will be harmed.
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Our debt obligations expose us to risks that could adversely affect our business, operating results
and financial condition.
  
    
    make it difficult for us to make payments on our debt;
    
    make it difficult for us to obtain any necessary financing in the future for working
capital, capital expenditures, debt service, acquisitions or general corporate purposes;
    
    limit our flexibility in planning for or reacting to changes in our business;
    
    reduce funds available for use in our operations;
    
    impair our ability to incur additional debt because of financial and other restrictive
covenants proposed for any such additional debt;
    
    make us more vulnerable in the event of a downturn in our business or an increase in
interest rates; or
    
    place us at a possible competitive disadvantage relative to less leveraged competitors
and competitors that have better access to capital resources.
  We may be unable to repay or repurchase our senior subordinated convertible notes or our other
indebtedness.
  Conversion of the senior subordinated convertible notes or other future issuances of our stock will
dilute the ownership interests of existing shareholders.
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Amortization of our intangible assets, which represent a significant portion of our total assets,
will adversely affect our net income and we may never realize the full value of our intangible
assets.
  Product liability claims could damage our reputation and hurt our financial results.
  The competition for qualified personnel is particularly intense in our industry. If we are unable
to retain or hire key personnel, we may not be able to sustain or grow our business.
  The price of our common stock may fluctuate significantly.
  
    
    future announcements concerning us or our competitors;
    
    regulatory developments, enforcement actions bearing on advertising, marketing or sales,
and disclosure regarding completed/ ongoing or future clinical trials;
    
    quarterly variations in operating results, which we have experienced in the past and expect to experience in the future;
    
    introduction of new products or changes in product pricing policies by us or our competitors;
    
    acquisition or loss of significant customers, distributors or suppliers;
    
    reaction to estimates of business operations, product development or financial
performance made public by our management;
    
    business acquisitions or divestitures;
    
    changes in earnings estimates by analysts;
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
    
    changes in third party reimbursement practices;
    
    charges, amortization and other financial effects relating to our merger with TCA; and
    
    fluctuations in the economy, world political events or general market conditions.
   If we make acquisitions or divestitures, we could encounter difficulties that harm our business.
  The occurrence of a catastrophic disaster or other similar events could cause damage to our
facilities and equipment, which would require us to cease or curtail operations.
  We have a history of net losses.
  We have experienced rapid growth and changes in our business, and our failure to manage this and
any future growth could harm our business.
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Revisions to accounting standards, financial reporting and corporate governance requirements and
tax laws could result in changes to our standard practices and could require a significant
expenditure of time, attention and resources, especially by senior management.
   
    
    accounting for stock-based compensation;
    
    accounting for income taxes; and
    
    accounting for business combinations and related goodwill.
   We are subject to taxation in a number of jurisdictions and changes to the corporate tax rate and
laws of any of these jurisdictions could increase the amount of corporate taxes we have to pay.
    Any claims relating to improper handling, storage or disposal of hazardous chemicals and
biomaterials could be time consuming and costly.
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Anti-takeover defenses in our governing documents could prevent an acquisition of our company or
limit the price that investors might be willing to pay for our common stock.
  
    
    Our Articles of Incorporation allow our Board of Directors to issue, at any time and
without shareholder approval, preferred stock with such terms as it may determine. No shares
of preferred stock are currently outstanding. However, the rights of holders of any of our
preferred stock that may be issued in the future may be superior to the rights of holders of
our common stock.
    
    We have a rights plan, commonly known as a poison pill, which would make it difficult
for someone to acquire us without the approval of our Board of Directors.
  
 Item 1B. Unresolved Staff Comments
 None.
 
 Item 2. Properties
  
    
    Approximately 11,000 square feet of office and research facilities in Rancho Cordova,
California, expiring in 2007.
    
    Approximately 45,000 square feet of office, manufacturing, warehouse and research
facilities in Edison, New Jersey, expiring through 2017.
    
    Approximately 37,000 square feet of office and research facilities in Piscataway, New
Jersey, expiring in 2010.
    
    Approximately 35,000 square feet of office, manufacturing and research facilities in
Roseville, Minnesota, expiring in 2008.
    
    Approximately 39,000 square feet of office and research facilities in Burlington,
Massachusetts, expiring in 2011.
    
    Approximately 5,000 square feet of office, manufacturing and warehouse facilities and
approximately 2,000 square feet of warehouse facilities in San Antonio, Texas, expiring in
2007 and 2010, respectively.
    
    Approximately 3,000 square feet of office facilities in the United Kingdom expiring in
2008.
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Item 3. Legal Proceedings
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman
   
 Item 4. Submission of Matters to a Vote of Security Holders
  Our Executive Officers
 Gerhard
F. Burbach, 45, President, Chief Executive Officer and Director,
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Lawrence Cohen, 57, President of ITC,
 Jeffrey W. Nelson, 42, President  Cardiovascular Division,
 David V. Smith, 47, Executive Vice President and Chief Financial Officer,
 David
A. Lehman, 46, Senior Vice President, General Counsel and Secretary
 
 PART II
 
 Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
  High
    
    LowFiscal Year 2005First Quarter
    
    $
    12.49
    
    
    $
    9.39Second Quarter
    
    
    15.60
    
    
    
    11.45Third Quarter
    
    
    17.82
    
    
    
    15.20Fourth Quarter
    
    
    22.36
    
    
    
    16.38Fiscal Year 2006First Quarter
    
    $
    25.30
    
    
    $
    18.56Second Quarter
    
    
    18.93
    
    
    
    12.21Third Quarter
    
    
    15.65
    
    
    
    11.79Fourth Quarter
    
    
    17.76
    
    
    
    14.69
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Stock Price Performance Graph
   COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 
 *
    
    $100 invested on 12/31/01 in stock or index-including reinvestment of dividends.
Fiscal year ending December 30. Cumulative Return Total12/01
    
    12/02
    
    12/03
    
    12/04
    
    12/05
    
    12/06Thoratec Corporation
    
    
    100.00
    
    
    
    44.88
    
    
    
    76.06
    
    
    
    61.29
    
    
    
    121.71
    
    
    
    103.41NASDAQ Composite
    
    
    100.00
    
    
    
    69.66
    
    
    
    99.71
    
    
    
    113.79
    
    
    
    114.47
    
    
    
    124.20NASDAQ Medical Equipment
    
    
    100.00
    
    
    
    84.83
    
    
    
    123.84
    
    
    
    150.14
    
    
    
    162.67
    
    
    
    173.54
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Issuer Purchases of Equity Securities
  Total number
    
    
    Approximateof shares
    
    
    value of sharespurchased
    
    
    authorized to beunder
    
    
    purchased underTotal number
    
    
    
    
    
    
    publicly
    
    
    publiclyof shares
    
    
    Average price
    
    
    announced
    
    
    announcedpurchased
    
    

    paid per share
    
    
    programs (1)
    
    
    programs(in thousands, except per share data)October 2, 2006 through October 23, 2006
    
    
    0.4
    
    
    $
    15.38
    
    
    
    
    
    
    $
    October 28, 2006 through November 20, 2006
    
    
    1.0
    
    
    
    15.00November 27, 2006 through December 26, 2006
    
    
    0.7
    
    
    
    15.58Total
    
    
    2.1
    (2)
    
    $
    15.27
    
    
    
    
    
    
    $
    
 
 (1)
    
    Our share repurchase programs, which authorized us to repurchase up to a total of $130
million of the Companys common shares, were announced on February 11, 2004 as a $25 million
program, on May 12, 2004 as a $60 million program, on July 29, 2004 as a $25 million program
and on February 2, 2006 as a $20 million program. These programs authorize us to acquire
shares in the open market or in privately negotiated transactions and do not have an
expiration date. No shares were repurchased under these programs during the three months
ended December 30, 2006.(2)
    
    Shares purchased that were not part of our publicly announced repurchase programs represent
the surrender value of shares of restricted stock used to pay income taxes due upon vesting,
and do not reduce the dollar value that may yet be purchased under our publicly announced
repurchase programs. 
 Item 6. Selected Consolidated Financial Data
   Fiscal Year2006(1)
    
    2005
    
    2004
    
    2003
    
    2002(In thousands, except per share data)Statement of Operations:Product sales
    
    $
    214,133
    
    
    $
    201,712
    
    
    $
    172,341
    
    
    $
    149,916
    
    
    $
    130,844Gross profit
    
    
    125,485
    
    
    
    123,340
    
    
    
    100,222
    
    
    
    88,748
    
    
    
    75,720Amortization of goodwill and purchased intangible assets
    
    
    12,055
    
    
    
    11,204
    
    
    
    11,724
    
    
    
    12,333
    
    
    
    12,384In-process research and development
    
    
    1,120
    
    
    
    
    
    
    
    
    
    
    
    220
    
    
    
    Impairment of intangible asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,987
    
    
    
    Litigation, merger, restructuring and other costs
    
    
    447
    
    
    
    95
    
    
    
    733
    
    
    
    2,132
    
    
    
    1,409Net income (loss)
    
    $
    3,973
    
    
    $
    13,198
    
    
    $
    3,564
    
    
    $
    (2,182
    )
    
    $
    511Basic net income (loss) per share
    
    $
    0.08
    
    
    $
    0.27
    
    
    $
    0.07
    
    
    $
    (0.04
    )
    
    $
    0.01Diluted net income (loss) per share
    
    $
    0.07
    
    
    $
    0.26
    
    
    $
    0.07
    
    
    $
    (0.04
    )
    
    $
    0.01Balance Sheet Data:Cash and cash equivalents and short term
available-for-sale investments
    
    $
    194,478
    
    
    $
    210,936
    
    
    $
    145,859
    
    
    $
    62,020
    
    
    $
    45,483Working capital
    
    
    265,690
    
    
    
    269,293
    
    
    
    206,250
    
    
    
    116,430
    
    
    
    107,972Total assets
    
    
    591,135
    
    
    
    573,918
    
    
    
    518,034
    
    
    
    471,335
    
    
    
    463,188Subordinated convertible debentures
    
    
    143,750
    
    
    
    143,750
    
    
    
    143,750
    
    
    
    
    
    
    
    Long-term deferred tax liability (2)
    
    
    46,421
    
    
    
    48,765
    
    
    
    62,016
    
    
    
    65,845
    
    
    
    74,081Total shareholders equity
    
    $
    365,073
    
    
    $
    348,147
    
    
    $
    292,108
    
    
    $
    386,236
    
    
    $
    374,340
 
 (1)
    
    On January 1, 2006, we adopted SFAS No. 123 (R) and included share-based compensation
in our results of operation.(2)
    
    The comparative years have been restated to include long-term deferred tax liability only. 30




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our consolidated financial statements
included in this Form 10-K .
 Review of Historic Equity-Based Compensation Practices
   Overview
  Our Business Model
   
    
    Circulatory Support Products.Our circulatory support products include VADs for the
short, intermediate and long-term treatment of advanced HF. In addition,we have developed
small diameter grafts using our proprietary materials to address the vascular access market
for hemodialysis.
  
    
    Point-of-Care Diagnostics. Our point-of-care products include diagnostic test systems
that monitor blood coagulation for a patient while being administered certain
anticoagulants, blood gas/electrolyte, oxygenation and chemistry status, including total
hemoglobin.
    
    Incision. Our incision products include devices used to obtain a patients blood sample
for diagnostic testing and screening for platelet function.
 Acquisitions
  31




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Critical Accounting Policies and Estimates
  Revenue Recognition
    Reserves
     32




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Income Taxes
    Evaluation of Purchased Intangibles and Goodwill for Impairment
   Valuation of Share-Based Awards
  Make-Whole Premium
   33




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Results of Operations
  For the Fiscal Years Ended2006
    
    2005
    
    2004Product sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of product sales
    
    
    41
    
    
    
    39
    
    
    
    42Gross profit
    
    
    59
    
    
    
    61
    
    
    
    58Operating expenses:Selling,
general and administrative
    
    
    35
    
    
    
    30
    
    
    
    31Research and development
    
    
    19
    
    
    
    16
    
    
    
    17Amortization of purchased intangible assets
    
    
    6
    
    
    
    6
    
    
    
    7In-process research and development
    
    
    1
    
    
    
    
    
    
    
    Total operating expenses
    
    
    61
    
    
    
    52
    
    
    
    55Income (loss) from operations
    
    
    (2
    )
    
    
    9
    
    
    
    3Other income and (expense):Interest expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (1
    )Interest income and other
    
    
    4
    
    
    
    2
    
    
    
    1Income before taxes
    
    
    0
    
    
    
    9
    
    
    
    3Income tax expense (benefit)
    
    
    (1
    )
    
    
    2
    
    
    
    1Net income
    
    
    1
    %
    
    
    7
    %
    
    
    2
    %
 For the Fiscal Years Ended 2006 and 2005
 Product Sales
  
    
    VAD product sales increased by $8.8 million. The increase came from higher sales of our
HeartMate II product line, partially offset by a reduction in sales of our VAD product
lines.
    
    Other ancillary revenue (drivers, cannulae, service, rentals and spares) increased $3.2
million, including higher driver rental revenue and accessory sales associated with the
HeartMate product lines.
    
    Graft product sales decreased by $3.3 million, principally due to the recognition in 2005
of a payment related to the modification of our distribution agreement with C.R. Bard
Corporation of $1.9 million.
    
    Point-of-care diagnostic product sales increased $3.9 million, due primarily to increases
in sales of our Protime, and Hemochron products, as well as sales of Avox products in the
fourth quarter of 2006. These increases were partially offset by a decrease in sales of our
IRMA product year over year.
    
    Incision product sales decreased $0.2 million in 2006 as compared to 2005.
  Gross Profit
  
    
    Costs related to share-based compensation of $1.0 million were recorded in 2006 and not
in 2005.
 34




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
    
    The Cardiovascular segment gross profit decreased by 1% primarily due to recognition in
2005 of the payment received from the C.R. Bard Corporation for the modification of our
distribution agreement as well as an unfavorable product mix in 2006. These decreases were
partially offset by increased average selling prices.
    
    The ITC segment gross profit decreased by 5%, due to unfavorable product mix and
manufacturing variances as well as increased freight costs.
 Selling, General and Administrative
  
    
    Costs related to share-based compensation of $5.9 million were recorded in 2006 and not
in 2005.
    
    Cardiovascular costs increased by $3.7 million in 2006 as compared to 2005, primarily due
to an increase in personnel expenses in 2006 related to the expansion of our sales force and
marketing organization, marketing initiatives and management consulting services.
    
    ITC costs increased by $2.1 million in 2006 as compared to 2005, primarily due to higher
personnel costs, rent, Group Purchasing Organization fees and consulting costs related to
the implementation of a new enterprise resource planning software (ERP) system.
    
    Corporate costs increased by $0.2 million in 2006 as compared to 2005 because of higher
consulting and personnel costs, partially offset by lower CEO transition costs.
 Research and Development
  Amortization of Purchased Intangible Assets
  Purchased In-Process Research and Development
  Litigation Costs
  Interest Expense
  35




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##### Table of Contents



Interest Income and Other
  Income Taxes
   For the Fiscal Years Ended 2005 and 2004
 Product Sales
  
    
    VAD product sales increased $16.7 million. The increase resulted from higher sales of our
HeartMate II and IVAD products, partially offset by a reduction in sales of our PVAD and HeartMate XVE
product lines.
    
    Other ancillary revenue (drivers, cannulae, service, rentals and spares) increased $2.6
million, including increases in driver rental revenue and cannulae sales associated with the
IVAD product line.
    
    Graft product sales increased by $2.9 million, principally due to the recognition in 2005
of a payment related to the modification of our distribution agreement with C.R. Bard
Corporation as well as a higher average selling price.
    
    Point-of-care diagnostic product sales increased $8.5 million, due primarily to increases
in our sales of Protime, IRMA, and Hemochron products partially offset by a modest decrease
in sales of our Hgb Pro products year over year.
    
    Incision product sales were down $1.3 million year over year.
  Gross Profit
  
    
    The Cardiovascular segment increased gross profit by 4% due to increased sales of higher
margin VAD products, coupled with a decrease in manufacturing costs.
    
    The ITC segment increased gross profit by 1%, due to higher margin sales in the
point-of-care product line and reduced manufacturing costs.
 36




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Selling, General and Administrative
  
    
    Increased personnel costs of $3.7 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 higher product sales and overall headcount
increases in the Cardiovascular segment of $2.5 million, partially offset by a $0.3 million
decrease in personnel costs for the ITC segment.
    
    Higher spending on marketing and related activities primarily associated with Destination
Therapy, and increased costs associated with training efforts in the Cardiovascular segment
totaling $1.2 million, in addition to a $0.8 million increase in spending by the ITC segment
related to increased Group Purchasing Organization and consulting fees, partially offset by
a decrease of $0.2 million related to travel and supplies.
 Research and Development
  Amortization of Purchased Intangible Assets
  Litigation Costs
  Interest Expense
  Interest Income and Other
  Income Taxes
  37




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Liquidity and Capital Resources
        Off Balance Sheet Arrangements
 Letter of Credit 
 Contractual Obligations
  Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter(in millions)Long-Term Debt Obligations (a)
    
    $
    262.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    3.4
    
    
    $
    245.4Operating Lease Obligations (b)
    
    
    15.6
    
    
    
    2.8
    
    
    
    2.6
    
    
    
    2.3
    
    
    
    2.3
    
    
    
    2.2
    
    
    
    3.4Purchase Obligations (c)
    
    
    15.4
    
    
    
    2.2
    
    
    
    2.2
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    5.6Total
    
    $
    293.4
    
    
    $
    8.4
    
    
    $
    8.2
    
    
    $
    7.5
    
    
    $
    7.5
    
    
    $
    7.4
    
    
    $
    254.4
 
 (a)
    
    Includes interest of $14.9 million and original issue discount of $103.7 million. See
note 10 to our consolidated financial statements included in this
Annual Report on Form 10-K related to our long-term debt.(b)
    
    Our operating lease obligations of $15.6 million were comprised of our various leased
facilities and office equipment.(c)
    
    Our purchase obligations of $15.4 million were comprised of supply agreements in
effect at December 30, 2006.(d)
    
    We have not declared or paid any dividends on our common stock and we do not anticipate doing so in the foreseeable future. 38




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Accounting Pronouncements
       39




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
   Foreign Currency Rate Fluctuations
     40




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Item 8. Financial Statements and Supplementary Data
 THORATEC CORPORATION AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageFinancial Statements:Management
Report on Internal Control Over Financial ReportingReports
of Independent Registered Public Accounting Firm
    
    
    42Consolidated
Balance Sheets
    
    
    44Consolidated
Statements of Operations
    
    
    45Consolidated
Statements of Comprehensive Income (Loss)
    
    
    46Consolidated
Statements of Shareholders Equity
    
    
    47Consolidated
Statements of Cash Flows
    
    
    48Notes
to Consolidated Financial Statements
    
    
    49
 41




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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
     Share-Based-Payments
 Internal
ControlIntegrated Framework
 DELOITTE
& TOUCHE LLP
 
 42




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Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal ControlIntegrated Framework
 Share-Based Payment.
 DELOITTE
& TOUCHE LLP
 
 43




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THORATEC CORPORATION AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 As of Fiscal Years Ended2006
    
    
    2005(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    67,453
    
    
    $
    35,109Short-term available-for-sale investments
    
    
    127,025
    
    
    
    175,827Restricted short-term investments
    
    
    1,681
    
    
    
    3,330Receivables, net of allowances of $491 in 2006 and $634 in 2005
    
    
    43,718
    
    
    
    35,904Inventories
    
    
    49,666
    
    
    
    41,671Deferred tax asset
    
    
    6,623
    
    
    
    5,461Prepaid expenses and other assets
    
    
    2,986
    
    
    
    3,582Total current assets
    
    
    299,152
    
    
    
    300,884Property, plant and equipment, net
    
    
    45,808
    
    
    
    28,906Restricted long-term investments
    
    
    
    
    
    
    1,610Goodwill
    
    
    98,494
    
    
    
    94,097Purchased intangible assets, net
    
    
    134,349
    
    
    
    141,938Deferred tax asset
    
    
    1,006
    
    
    
    Other
    
    
    12,326
    
    
    
    6,483Total Assets
    
    $
    591,135
    
    
    $
    573,918LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    13,591
    
    
    $
    8,421Accrued compensation
    
    
    12,043
    
    
    
    15,707Accrued liabilities for legal, audit and warranty
    
    
    2,086
    
    
    
    1,602Accrued income taxes
    
    
    3,691
    
    
    
    3,659Other accrued liabilities
    
    
    2,050
    
    
    
    2,202Total current liabilities
    
    
    33,461
    
    
    
    31,591Senior subordinated convertible notes
    
    
    143,750
    
    
    
    143,750Long-term deferred tax liability
    
    
    46,421
    
    
    
    48,765Other
    
    
    2,430
    
    
    
    1,665Total Liabilities
    
    
    226,062
    
    
    
    225,771Shareholders equity:Common shares: authorized 100,000; issued and outstanding 52,329 in 2006 and 51,737 in 2005
    
    
    427,941
    
    
    
    407,531Deferred compensation
    
    
    
    
    
    
    (184
    )Accumulated deficit
    
    
    (63,675
    )
    
    
    (58,801
    )Accumulated other comprehensive income (loss):Unrealized loss on investments
    
    
    (16
    )
    
    
    (258
    )Cumulative translation adjustments
    
    
    823
    
    
    
    (141
    )Total accumulated other comprehensive income (loss)
    
    
    807
    
    
    
    (399
    )Total Shareholders Equity
    
    
    365,073
    
    
    
    348,147Total Liabilities and Shareholders Equity
    
    $
    591,135
    
    
    $
    573,918
  44




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THORATEC CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands, except per share data)Product sales
    
    $
    214,133
    
    
    $
    201,712
    
    
    $
    172,341Cost of product sales
    
    
    88,648
    
    
    
    78,372
    
    
    
    72,119Gross profit
    
    
    125,485
    
    
    
    123,340
    
    
    
    100,222Operating expenses:Selling, general and administrative
    
    
    73,687
    
    
    
    61,804
    
    
    
    54,134Research and development
    
    
    39,841
    
    
    
    32,331
    
    
    
    28,657Amortization of purchased intangible assets
    
    
    12,055
    
    
    
    11,204
    
    
    
    11,724In-process research and development
    
    
    1,120
    
    
    
    
    
    
    
    Litigation costs
    
    
    447
    
    
    
    95
    
    
    
    733Total operating expenses
    
    
    127,150
    
    
    
    105,434
    
    
    
    95,248Income (loss) from operations
    
    
    (1,665
    )
    
    
    17,906
    
    
    
    4,974Other income and (expense):Interest expense
    
    
    (4,276
    )
    
    
    (4,090
    )
    
    
    (2,460
    )Interest income and other
    
    
    8,451
    
    
    
    4,237
    
    
    
    2,176Income before taxes
    
    
    2,510
    
    
    
    18,053
    
    
    
    4,690Income tax expense (benefit)
    
    
    (1,463
    )
    
    
    4,855
    
    
    
    1,126Net income
    
    $
    3,973
    
    
    $
    13,198
    
    
    $
    3,564Net income per shareBasic
    
    $
    0.08
    
    
    $
    0.27
    
    
    $
    0.07Diluted
    
    $
    0.07
    
    
    $
    0.26
    
    
    $
    0.07Shares used to compute net income per share:Basic
    
    
    52,155
    
    
    
    49,359
    
    
    
    52,187Diluted
    
    
    53,270
    
    
    
    51,008
    
    
    
    53,160
  45




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THORATEC CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Net income
    
    $
    3,973
    
    
    $
    13,198
    
    
    $
    3,564Other net comprehensive income (loss):Unrealized gain (loss) on
available-for-sale investments
(net of taxes of $161, $(75), and
$(130) in 2006, 2005, and 2004,
respectively)
    
    
    242
    
    
    
    67
    
    
    
    (376
    )Foreign currency translation
adjustments (net of taxes of $0,
$(256) and $0 in 2006, 2005 and
2004, respectively)
    
    
    964
    
    
    
    (899
    )
    
    
    394Comprehensive income
    
    $
    5,179
    
    
    $
    12,366
    
    
    $
    3,582
  46




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THORATEC CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Retained
    
    
    
    
    
    
    AccumulatedEarnings
    
    
    
    
    
    
    Other
    
    
    TotalCommon
    
    
    Stock
    
    
    (Accumulated
    
    
    Deferred
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    $
    
    
    Deficit)
    
    
    Compensation
    
    
    Income (Loss)
    
    
    Equity(in thousands)BALANCE, JANUARY 3, 2004
    
    
    56,242
    
    
    $
    423,045
    
    
    $
    (34,594
    )
    
    $
    (2,630
    )
    
    $
    415
    
    
    $
    386,236Exercise of common stock options for cash
    
    
    266
    
    
    
    2,432
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,432Issuance of common shares under Employee Stock Purchase Plan
    
    
    147
    
    
    
    1,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,341Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485Repurchase of common stock, net
    
    
    (8,255
    )
    
    
    (62,200
    )
    
    
    (40,484
    )
    
    
    
    
    
    
    
    
    
    
    (102,684
    )Restricted stock forfeiture
    
    
    (25
    )
    
    
    (328
    )
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    (194
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    910
    
    
    
    
    
    
    
    910Other comprehensive income:Unrealized loss on available-for-sale investments (net of
taxes of $(130))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (376
    )
    
    
    (376
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    394
    
    
    
    394Net income
    
    
    
    
    
    
    
    
    
    
    3,564
    
    
    
    
    
    
    
    
    
    
    
    3,564BALANCE, JANUARY 1, 2005
    
    
    48,375
    
    
    $
    364,775
    
    
    $
    (71,514
    )
    
    $
    (1,586
    )
    
    $
    433
    
    
    $
    292,108Exercise of common stock options for cash
    
    
    3,509
    
    
    
    36,671
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,671Issuance of common shares under Employee Stock Purchase Plan
    
    
    143
    
    
    
    1,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,219Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    7,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,346Repurchase of common stock, net
    
    
    (290
    )
    
    
    (3,012
    )
    
    
    (485
    )
    
    
    
    
    
    
    
    
    
    
    (3,497
    )Amortization of deferred compensation
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    1,402
    
    
    
    
    
    
    
    1,759Expense of deferred compensation
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175Other comprehensive income:Unrealized loss on available-for-sale investments (net of
taxes of $(75))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    67Foreign currency translation adjustment (net of taxes of
$(256))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (899
    )
    
    
    (899
    )Net income
    
    
    
    
    
    
    
    
    
    
    13,198
    
    
    
    
    
    
    
    
    
    
    
    13,198BALANCE, DECEMBER 31, 2005
    
    
    51,737
    
    
    $
    407,531
    
    
    $
    (58,801
    )
    
    $
    (184
    )
    
    $
    (399
    )
    
    $
    348,147Exercise of common stock options for cash
    
    
    1,079
    
    
    
    13,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,380Issuance of common shares under Employee Stock Purchase Plan
    
    
    118
    
    
    
    1,692
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,692Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    2,811
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,811Repurchase of common stock, net
    
    
    (605
    )
    
    
    (7,385
    )
    
    
    (8,847
    )
    
    
    
    
    
    
    
    
    
    
    (16,232
    )Share-based compensation
    
    
    
    
    
    
    9,912
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    10,096Other comprehensive income:Unrealized loss on available-for-sale investments (net of
taxes of $161)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    242Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    964
    
    
    
    964Net income
    
    
    
    
    
    
    
    
    
    
    3,973
    
    
    
    
    
    
    
    
    
    
    
    3,973BALANCE, DECEMBER 30, 2006
    
    
    52,329
    
    
    $
    427,941
    
    
    $
    (63,675
    )
    
    $
    
    
    
    $
    807
    
    
    $
    365,073
  47




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THORATEC CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Cash flows from operating activities:Net income
    
    $
    3,973
    
    
    $
    13,198
    
    
    $
    3,564Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    20,292
    
    
    
    18,888
    
    
    
    18,782In process research and development
    
    
    1,120
    
    
    
    
    
    
    
    Investment premium amortization (net)
    
    
    65
    
    
    
    374
    
    
    
    1,078Non-cash interest and other expenses
    
    
    986
    
    
    
    588
    
    
    
    778Write-down of capitalized costs
    
    
    1,588
    
    
    
    
    
    
    
    Tax benefit related to stock options
    
    
    2,812
    
    
    
    7,346
    
    
    
    485Share-based compensation expense
    
    
    9,558
    
    
    
    
    
    
    
    Excess tax benefits from share-based compensation
    
    
    (1,777
    )
    
    
    
    
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    1,934
    
    
    
    715Loss on disposal of asset
    
    
    14
    
    
    
    242
    
    
    
    122Change in net deferred tax liability
    
    
    (6,438
    )
    
    
    (5,862
    )
    
    
    (2,178
    )Changes in assets and liabilities:Receivables
    
    
    (7,389
    )
    
    
    (2,853
    )
    
    
    (5,082
    )Inventories
    
    
    (8,271
    )
    
    
    (3,813
    )
    
    
    (3,116
    )Prepaid expenses and other assets
    
    
    (388
    )
    
    
    (257
    )
    
    
    (30
    )Accounts payable and other liabilities
    
    
    1,013
    
    
    
    6,806
    
    
    
    3,372Other
    
    
    (358
    )
    
    
    73
    
    
    
    (255
    )Net cash provided by operating activities
    
    
    16,800
    
    
    
    36,664
    
    
    
    18,235Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (354,970
    )
    
    
    (181,500
    )
    
    
    (197,015
    )Sales of available-for-sale investments
    
    
    340,379
    
    
    
    94,016
    
    
    
    119,782Maturities of available-for-sale and restricted investments
    
    
    66,990
    
    
    
    44,385
    
    
    
    21,620Investment in convertible debenture
    
    
    (5,000
    )
    
    
    
    
    
    
    Purchases of property, plant and equipment, net
    
    
    (24,498
    )
    
    
    (7,967
    )
    
    
    (5,812
    )Acquisition of Avox, net of cash acquired
    
    
    (8,786
    )
    
    
    
    
    
    
    Other
    
    
    (152
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    13,963
    
    
    
    (51,066
    )
    
    
    (61,425
    )Cash flows from financing activities:Net proceeds from issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    139,454Proceeds from stock option exercises, net
    
    
    13,380
    
    
    
    36,671
    
    
    
    2,432Proceeds from stock issued under employee stock purchase plan
    
    
    1,692
    
    
    
    1,219
    
    
    
    1,341Excess tax benefits from share-based compensation
    
    
    1,777
    
    
    
    
    
    
    
    Repurchase and retirement of common shares
    
    
    (16,232
    )
    
    
    (3,497
    )
    
    
    (102,684
    )Net cash provided by financing activities
    
    
    617
    
    
    
    34,393
    
    
    
    40,543Effect of exchange rate changes on cash and cash equivalents
    
    
    964
    
    
    
    (899
    )
    
    
    394Net increase (decrease) in cash and cash equivalents
    
    
    32,344
    
    
    
    19,092
    
    
    
    (2,253
    )Cash and cash equivalents at beginning of fiscal year
    
    
    35,109
    
    
    
    16,017
    
    
    
    18,270Cash and cash equivalents at end of fiscal year
    
    $
    67,453
    
    
    $
    35,109
    
    
    $
    16,017Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    2,053
    
    
    $
    3,176
    
    
    $
    1,114Cash paid for interest
    
    $
    3,414
    
    
    $
    3,485
    
    
    $
    1,631Supplemental disclosure of Non-cash investing and financing activities:Transfers of equipment from inventory to property, plant and equipment
    
    $
    1,917
    
    
    $
    1,283
    
    
    $
    392Cancellation of restricted stock
    
    $
    
    
    
    $
    
    
    
    $
    (328
    )
  48




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Operations and Significant Accounting Policies
 The Company and Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Major Customers and Concentration of Credit Risk
    Certain Risks and Uncertainties
  49




---



##### Table of Contents



Cash and Cash Equivalents
  Investments
    Fair Value of Financial Instruments
  Inventories
  Property, Plant and Equipment
   50




---



##### Table of Contents



Capitalized Software Costs for Internal Use
  Valuation of Long-Lived Assets
  Purchased Intangible Assets and Goodwill
  Sick Leave Accruals
  Debt Issuance Costs
  Foreign Currency Translation
  Repurchases of Common Stock
  51




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##### Table of Contents



Revenue Recognition and Product Warranty
   Vectra
   Balance
    
    Charges to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Warranty
    
    Endof Year
    
    Expenses
    
    Expenditures
    
    of Year( in thousands)Fiscal year ended 2006
    
    $
    1,073
    
    
    $
    756
    
    
    $
    (797
    )
    
    $
    1,032Fiscal year ended 2005
    
    $
    618
    
    
    $
    772
    
    
    $
    (317
    )
    
    $
    1,073Fiscal year ended 2004
    
    $
    829
    
    
    $
    173
    
    
    $
    (384
    )
    
    $
    618
 Research and Development Expense
    52




---



##### Table of Contents



Purchased In-Process Research and Development
   Share-Based Compensation
      Net Income Per Share
  Other Comprehensive Income
  Letter of Credit
  53




---



##### Table of Contents



Recently Issued Accounting Standards
       2. Acquisition
   54




---



##### Table of Contents



AmortizationPeriod(in thousands)Purchase price allocation:Tangible assets acquired
    
    $
    2,460Liabilities assumed
    
    
    (1,235
    )Deferred tax liability
    
    
    (1,894
    )Intangible assets acquired:Patents and trademarks
    
    
    700
    
    
    6-11 yrsDeveloped technology
    
    
    2,960
    
    
    6-12 yrsCustomer and distribution relationships and other
    
    
    820
    
    
    8-16 yrsNon-compete agreements
    
    
    90
    
    
    3 yrsIn-process research and development
    
    
    1,120
    
    
    ExpensedInventory backlog
    
    
    100
    
    
    ExpensedGoodwill
    
    
    4,397
    
    
    IndefiniteTotal purchase consideration
    
    $
    9,518
      3. Investments
    55




---



##### Table of Contents



GrossAmortized
    
    
    Unrealized
    
    
    FairCost
    
    
    Losses
    
    
    Value(in thousands)As of Fiscal Year End 2006:Short-term investments:Municipal bonds and auction rate securities
    
    $
    122,047
    
    
    $
    (13
    )
    
    $
    122,034Commercial paper
    
    
    4,991
    
    
    
    
    
    
    
    4,991Restricted investments in U.S. Government obligations
    
    
    1,694
    
    
    
    (13
    )
    
    
    1,681$
    128,732
    
    
    $
    (26
    )
    
    $
    128,706As of Fiscal Year End 2005:Short-term investments:Municipal bonds and auction rate securities
    
    $
    167,694
    
    
    $
    (323
    )
    
    $
    167,371U.S. government obligations
    
    
    8,500
    
    
    
    (45
    )
    
    
    8,456Restricted investments in U.S. Government obligations
    
    
    3,363
    
    
    
    (33
    )
    
    
    3,330179,557
    
    
    
    (401
    )
    
    
    179,157Long-term investments:Restricted Investments in U.S. Government obligations
    
    
    1,639
    
    
    
    (29
    )
    
    
    1,610$
    181,196
    
    
    $
    (430
    )
    
    $
    180,767
  Amortized
    
    
    FairCost
    
    
    Value(in thousands)As of Fiscal Year End 2006:Maturing within one year
    
    $
    111,761
    
    
    $
    111,748Due after one year through two years
    
    
    16,971
    
    
    
    16,958$
    128,732
    
    
    $
    128,706As of Fiscal Year End 2005:Maturing within one year
    
    $
    117,768
    
    
    $
    117,759Maturing after one year through two years
    
    
    60,121
    
    
    
    59,753Maturing after two years through three years
    
    
    3,307
    
    
    
    3,255$
    181,196
    
    
    $
    180,767
  4. Financial Instruments
   56




---



##### Table of Contents



5. Inventories
  As of Fiscal Years End2006
    
    
    2005(in thousands)Finished goods
    
    $
    22,527
    
    
    $
    19,952Work-in-process
    
    
    7,008
    
    
    
    6,303Raw materials
    
    
    20,131
    
    
    
    15,416Total
    
    $
    49,666
    
    
    $
    41,671
 6. Purchased Intangible Assets and Goodwill
  As of Fiscal Years Ended2006
    
    
    2005(in thousands)Balance at the beginning of the fiscal year
    
    $
    94,097
    
    
    $
    94,097Addition for Avox acquisition
    
    
    4,397
    
    
    
    Balance as of the end of the fiscal year
    
    $
    98,494
    
    
    $
    94,097
   57




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##### Table of Contents



As of Fiscal Year Ended 2006Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net Carrying Amount(in thousands)Patents and trademarks
    
    $
    38,515
    
    
    $
    (21,350
    )
    
    $
    17,165Core technology
    
    
    37,485
    
    
    
    (10,275
    )
    
    
    27,210Developed technology
    
    
    125,742
    
    
    
    (36,564
    )
    
    
    89,178Customer and distributor relationships and other
    
    
    897
    
    
    
    (101
    )
    
    
    796Total purchased intangible assets
    
    $
    202,639
    
    
    $
    (68,290
    )
    
    $
    134,349
 As of Fiscal Year Ended 2005Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net Carrying 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 agreements
    
    
    90
    
    
    
    (30
    )
    
    
    60Total purchased intangible assets
    
    $
    198,172
    
    
    $
    (56,234
    )
    
    $
    141,938
  7. Property, Plant and Equipment
  As of Fiscal Years Ended2006
    
    
    2005(in thousands)Land
    
    $
    4,096
    
    
    $
    341Building
    
    
    12,038
    
    
    
    2,445Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    47,904
    
    
    
    44,067Rental equipment
    
    
    8,612
    
    
    
    7,334Improvements
    
    
    16,258
    
    
    
    11,526Total
    
    
    91,193
    
    
    
    67,998Accumulated depreciation and amortization
    
    
    (45,385
    )
    
    
    (39,092
    )$
    45,808
    
    
    $
    28,906
   58




---



##### Table of Contents



8. Other Assets
   9. Commitments and Contingencies
 Leases
  (in thousands)Fiscal year:2007
    
    $
    2,7822008
    
    
    2,5802009
    
    
    2,2882010
    
    
    2,2572011
    
    
    2,115Thereafter
    
    
    3,573Total
    
    $
    15,595
  Commitments
   10. Long-Term Debt
    59




---



##### Table of Contents



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
      11. Share-Based Compensation
   60




---



##### Table of Contents



For the Fiscal Years Ended2005
    
    
    2004(in thousands, except per share data)Net income (loss):As reported
    
    $
    13,198
    
    
    $
    3,564Add: Share-based compensation
expense included in reported net
income, net of related tax effects
    
    
    1,412
    
    
    
    793Deduct: Total share-based
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    (6,793
    )
    
    
    (12,524
    )Pro forma net income (loss)
    
    $
    7,817
    
    
    $
    (8,167
    )Basic and Diluted net income per share:As reportedBasic
    
    $
    0.27
    
    
    $
    0.07Diluted
    
    $
    0.26
    
    
    $
    0.07Pro forma net income (loss)Basic
    
    $
    0.16
    
    
    $
    (0.16
    )Diluted
    
    $
    0.15
    
    
    $
    (0.16
    )
 Equity Plans
   61




---



##### Table of Contents



Stock Options
    For the Fiscal Years Ended2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.54
    %
    
    
    4.20
    %
    
    
    4.36
    %Expected volatility
    
    
    40
    %
    
    
    45
    %
    
    
    62
    %Expected option life
    
    3.855.24 years
    
    3.74 years
    
    3.36 yearsDividends
    
    None
    
    None
    
    None
  62




---



##### Table of Contents



Number of
    
    
    Weighted
    
    
    Weighted AverageOptions
    
    
    Average Exercise
    
    
    Remaining Contract(in thousands)
    
    
    Price Per Share
    
    
    Life (years)Outstanding at
fiscal year end 2004
(5,111 exercisable at
$11.38 weighted average
price per share)
    
    
    10,276
    
    
    $
    11.97
    
    
    
    5.26Granted
    
    
    609
    
    
    
    14.65Cancelled and expired
    
    
    (931
    )
    
    
    13.77Exercised
    
    
    (3,509
    )
    
    
    10.44Outstanding at fiscal
year end 2005 (3,574
exercisable at $12.64
weighted average price
per share)
    
    
    6,445
    
    
    $
    12.80
    
    
    
    5.91Granted
    
    
    1,625
    
    
    
    20.72Cancelled and expired
    
    
    (406
    )
    
    
    15.50Exercised
    
    
    (1,079
    )
    
    
    12.46Outstanding at fiscal
year end 2006 (4,064
exercisable at $12.75
weighted average price
per share)
    
    
    6,585
    
    
    $
    14.65
    
    
    
    6.74
 Restricted Stock
    63




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##### Table of Contents



Number of
    
    
    Weighted AverageShares
    
    
    Grant Date Fair(in thousands)
    
    
    ValueOutstanding unvested restricted stock at January 1, 2005
    
    
    275
    
    
    $
    15.65Granted
    
    
    
    
    
    
    Vested
    
    
    (125
    )
    
    
    16.56Forfeited or expired
    
    
    
    
    
    
    Outstanding unvested restricted stock at December 31, 2005
    
    
    150
    
    
    
    14.89Granted
    
    
    448
    
    
    
    18.03Vested
    
    
    (157
    )
    
    
    15.89Forfeited or expired
    
    
    (19
    )
    
    
    19.90Outstanding unvested restricted stock at December 30, 2006
    
    
    422
    
    
    $
    17.63
 Restricted Stock Units
  Number of
    
    
    Weighted Average
    
    
    Weighted AverageUnits
    
    
    Grant Date Fair
    
    
    Remaining Contract(in thousands)
    
    
    Value
    
    
    (in years)Outstanding units at December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    10
    
    
    
    19.08Released
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Outstanding units at December 30, 2006
    
    
    10
    
    
    $
    19.08
    
    
    
    1.74
 Employee Stock Purchase Plan
   For
the Fiscal Years Ended2006
    
    2005
    
    2004Risk-free interest rate
    
    
    4.83
    %
    
    
    3.09
    %
    
    
    1.32
    %Expected volatility
    
    
    40
    %
    
    
    48
    %
    
    
    61
    %Expected option life
    
    0.50 years
    
    0.50 years
    
    0.50 yearsDividends
    
    None
    
    None
    
    None
  64




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##### Table of Contents



12. Common and Preferred Stock
      13. Retirement Savings Plan
   65




---



##### Table of Contents



14. Taxes on Income
  For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Current:Federal
    
    $
    116
    
    
    $
    2,647
    
    
    $
    401State
    
    
    747
    
    
    
    1,687
    
    
    
    529Foreign
    
    
    1,069
    
    
    
    980
    
    
    
    1,1261,932
    
    
    
    5,314
    
    
    
    2,056Deferred:Federal
    
    $
    (2,095
    )
    
    $
    1,631
    
    
    $
    (112
    )State
    
    
    (1,350
    )
    
    
    (2,090
    )
    
    
    (818
    )Foreign
    
    
    50
    
    
    
    
    
    
    
    (3,395
    )
    
    
    (459
    )
    
    
    (930
    )Total income tax provision (benefit)
    
    $
    (1,463
    )
    
    $
    4,855
    
    
    $
    1,126
  For
the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Domestic
    
    $
    (2,072
    )
    
    $
    14,857
    
    
    $
    1,470Foreign
    
    
    4,582
    
    
    
    3,196
    
    
    
    3,220Income before income taxes
    
    $
    2,510
    
    
    $
    18,053
    
    
    $
    4,690
  For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands, except percentages)U.S. federal statutory income tax expense
    
    $
    878
    
    
    
    35.0
    %
    
    $
    6,318
    
    
    
    35.0
    %
    
    $
    1,641
    
    
    
    35.0
    %State income tax benefit, net of federal tax
expense
    
    
    (258
    )
    
    
    (10.3
    )
    
    
    (421
    )
    
    
    (2.3
    )
    
    
    (5
    )
    
    
    (.1
    )Non-deductible expenses
    
    
    1,915
    
    
    
    76.3
    
    
    
    594
    
    
    
    3.2
    
    
    
    547
    
    
    
    11.5Research and development and other credit carryforwards
    
    
    (399
    )
    
    
    (15.9
    )
    
    
    (432
    )
    
    
    (2.3
    )
    
    
    (798
    )
    
    
    (16.9
    )Foreign earnings permanently reinvested
    
    
    (483
    )
    
    
    (19.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax advantaged investment income
    
    
    (1,606
    )
    
    
    (64.0
    )
    
    
    (1,204
    )
    
    
    (6.7
    )
    
    
    (259
    )
    
    
    (5.5
    )Return-to-provision true-up
    
    
    (1,059
    )
    
    
    (42.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ARB 51 true-up
    
    
    (336
    )
    
    
    (13.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    In process research and development
    
    
    392
    
    
    
    15.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Extraterritorial income exclusion,
    
    
    (315
    )
    
    
    (12.5
    )


    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Domestic production activities
    
    
    (50
    )
    
    
    (2.1
    )


    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax reserves
    
    
    (142
    )
    
    
    (5.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,463
    )
    
    
    (58.3
    )%
    
    $
    4,855
    
    
    
    26.9
    %
    
    $
    1,126
    
    
    
    24.0
    %
 66




---



##### Table of Contents



As of Fiscal Year2006
    
    
    2005(in thousands)Deferred tax assets:Write-off of acquired technology
    
    $
    628
    
    
    $
    775Reserves and accruals
    
    
    2,990
    
    
    
    2,540Depreciation and amortization
    
    
    1,066
    
    
    
    Inventory basis difference
    
    
    2,721
    
    
    
    2,394Research and development and other credit carryforwards
    
    
    6,501
    
    
    
    7,351Net operating loss carryovers
    
    
    
    
    
    
    901Other, net
    
    
    117
    
    
    
    30Total deferred tax assets
    
    
    14,023
    
    
    
    13,991Deferred tax liabilities:Purchased intangibles
    
    
    (52,765
    )
    
    
    (55,985
    )Depreciation and amortization
    
    
    
    
    
    
    (1,264
    )Other, net
    
    
    (50
    )
    
    
    (46
    )Total deferred tax liabilities
    
    
    (52,815
    )
    
    
    (57,296
    )Net deferred tax liabilities
    
    $
    (38,792
    )
    
    $
    (43,304
    )
  
    
    Federal alternative minimum tax credits of approximately $0.5 million which may be
carried forward indefinitely;
    
    Research and development tax credits for federal and state income tax purposes of
approximately $2 million and $5 million, respectively. Federal research and
development tax credit carryforwards expire from 2010 through 2026. State research
and development tax credits generally carry-over indefinitely; and
    
    Foreign tax credit carryforwards of approximately $0.8 million will expire in 2015
if not utilized.
       15. Enterprise and Related Geographic Information
  67




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Business segments:
 For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Product sales:Cardiovascular
    
    $
    133,710
    
    
    $
    125,181
    
    
    $
    103,002ITC
    
    
    80,423
    
    
    
    76,531
    
    
    
    69,339Total product sales
    
    $
    214,133
    
    
    $
    201,712
    
    
    $
    172,341Income (loss) before taxes:Cardiovascular(a) (d)
    
    $
    5,326
    
    
    $
    15,103
    
    
    $
    2,129ITC(a)(b)(d)
    
    
    5,733
    
    
    
    13,657
    
    
    
    9,940Corporate (c) (d)
    
    
    (12,277
    )
    
    
    (10,759
    )
    
    
    (6,362
    )Litigation costs (e)
    
    
    (447
    )
    
    
    (95
    )
    
    
    (733
    )Total operating income (loss)
    
    
    (1,665
    )
    
    
    17,906
    
    
    
    4,974Other income and (expense):Interest expense
    
    
    (4,276
    )
    
    
    (4,090
    )
    
    
    (2,460
    )Interest income and other
    
    
    8,451
    
    
    
    4,237
    
    
    
    2,176Total income before taxes
    
    $
    2,510
    
    
    $
    18,053
    
    
    $
    4,690Total assets:Cardiovascular
    
    $
    319,604
    
    
    $
    307,043
    
    
    $
    314,636ITC
    
    
    58,030
    
    
    
    41,701
    
    
    
    38,437Corporate (c)
    
    
    213,501
    
    
    
    225,174
    
    
    
    164,961Total assets
    
    $
    591,135
    
    
    $
    573,918
    
    
    $
    518,034Depreciation and amortization(f):Cardiovascular
    
    $
    17,051
    
    
    $
    16,728
    
    
    $
    16,854ITC
    
    
    2,991
    
    
    
    2,160
    
    
    
    1,928Corporate (c)
    
    
    250
    
    
    
    
    
    
    
    Total depreciation and amortization
    
    $
    20,292
    
    
    $
    18,888
    
    
    $
    18,782Capital expenditures (f) (g):Cardiovascular
    
    $
    15,911
    
    
    $
    5,692
    
    
    $
    3,734ITC(d)
    
    
    3,976
    
    
    
    3,724
    
    
    
    2,477Corporate (c)
    
    
    6,554
    
    
    
    
    
    
    
    Total capital expenditures
    
    $
    26,441
    
    
    $
    9,416
    
    
    $
    6,211
 
 (a)
    
    Amortization expense of $11.8 million, $11.0 million and $11.6 million for the fiscal years
ended 2006, 2005 and 2004 respectively, related to the Cardiovascular segment. The ITC segment
had amortization expense of $0.3 million, $0.2 million and $0.2 million for 2006, 2005 and
2004 respectively.(b)
    
    ITC includes in-process research and development expenses
of $1.1 million.(c)
    
    Represents unallocated costs, not specifically identified to any particular business
segment.(d)
    
    Includes additional share-based compensation expense of $5.5 million, $2.7 million and $1.4
million for Cardiovascular, ITC and Corporate, respectively, for the fiscal year ended 2006.(e)
    
    Relates to litigation expenses not specifically identified to a particular business segment.(f)
    
    Capital expenditures for the fiscal year ended 2006 include
acquisition of an office building in
Pleasanton, California allocated to the Cardiovascular segment of $10.2 million, net of
depreciation expense of $0.4 million and Corporate of $6.7 million, net of depreciation
expense of $0.2 million.(g)
    
    Capital expenditures include inventory
transfers of $1.9 million, $1.3 million and
$0.4 million for 2006, 2005 and 2004 respectively. Geographic
Areas:
 For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Product sales:Domestic
    
    $
    162,089
    
    
    $
    154,711
    
    
    $
    133,081International
    
    
    52,044
    
    
    
    47,001
    
    
    
    39,260Total
    
    $
    214,133
    
    
    $
    201,712
    
    
    $
    172,341
 68




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16. Litigation
  For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands)Litigation
    
    $
    447
    
    
    $
    95
    
    
    $
    733
 Johnson v. Thoratec
Corporation, et al. Johnson In re
Thoratec Corp. Securities Litigation
 Wong v. Grossman
   17. Net Income Per Share
  69




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For the Fiscal Years Ended2006
    
    
    2005
    
    
    2004(in thousands, except per share data)Net income
    
    $
    3,973
    
    
    $
    13,198
    
    
    $
    3,564Weighted average number of common shares-Basic
    
    
    52,155
    
    
    
    49,359
    
    
    
    52,187Dilutive effect of stock-based compensation plans
    
    
    1,115
    
    
    
    1,649
    
    
    
    973Weighted average number of common shares-Diluted
    
    
    53,270
    
    
    
    51,008
    
    
    
    53,160Net income per shareBasic
    
    $
    0.08
    
    
    $
    0.27
    
    
    $
    0.07Diluted
    
    $
    0.07
    
    
    $
    0.26
    
    
    $
    0.07
 18. Quarterly Results of Operations (Unaudited)
  First
    
    Second
    
    Third
    
    Fourth(in thousands, except per share data)Fiscal Year 2006Product sales
    
    $
    48,755
    
    
    $
    54,783
    
    
    $
    51,747
    
    
    $
    58,848Gross profit
    
    
    28,647
    
    
    
    32,129
    
    
    
    29,669
    
    
    
    35,040Net income (loss)
    
    
    (930
    )
    
    
    337
    
    
    
    1,490
    
    
    
    3,076Net income (loss) per shareBasic
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.06Diluted
    
    $
    (0.02
    )
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.05Fiscal Year 2005Product sales
    
    $
    50,488
    
    
    $
    47,588
    
    
    $
    48,841
    
    
    $
    54,795Gross profit
    
    
    30,440
    
    
    
    29,201
    
    
    
    30,231
    
    
    
    33,468Net income
    
    
    3,135
    
    
    
    2,421
    
    
    
    3,102
    
    
    
    4,540Net income per shareBasic
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    0.06
    
    
    $
    0.09Diluted (a)
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.06
    
    
    $
    0.08
 
 (a)
    
    The total of net income per share, diluted, for the quarters is not equal to the full year due
to the inclusion of the 7.3 million shares available upon conversion of our convertible notes as
they were dilutive for the fourth quarter of 2005 but not for the full year. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  70




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Disclosure Controls and Procedures
   Managements Report on Internal Control Over Financial Reporting
  "
   Changes to Internal Controls
  Inherent Limitations on Controls and Procedures
  71




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Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  
 PART IV
 
 Item 15. Exhibit and Financial Statement Schedules
 (a)
    
    List of documents filed as part of this report:
 1.
    
    Financial Statements and Reports of Independent Registered Public Accounting Firm.Reference is made to the Index to Financial Statements under Item 8 of Part II of this Annual
Report on Form 10-K, where these documents are included.
 72




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##### Table of Contents



2.
    
    Financial Statement Schedules
 Schedule II  Valuation and Qualifying Accounts and Reserves for each of the three fiscal years
ended December 30, 2006, December 31, 2005 and January 1, 2005.Other financial statement schedules are not included either because they are not required or the
information is otherwise shown in our audited consolidated financial statements or the notes
thereto.
   73




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THORATEC CORPORATION AND SUBSIDIARIES
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For Each of the Three Fiscal Years Ended December 30, 2006
 Balance
    
    Additions
    
    
    
    
    
    BalanceBeginning
    
    (charges
    
    
    
    
    
    End ofof Year
    
    to expense)
    
    Deductions
    
    Year(in thousands)Year Ended December 30, 2006:Allowance for doubtful accounts
    
    $
    634
    
    
    $
    14
    
    
    $
    (157
    )(1)
    
    $
    491Accrued product warranty
    
    $
    1,073
    
    
    $
    756
    
    
    $
    (797
    )(2)
    
    $
    1,032Year Ended December 31, 2005:Allowance for doubtful accounts
    
    $
    708
    
    
    $
    96
    
    
    $
    (170
    )(1)
    
    $
    634Accrued product warranty
    
    $
    618
    
    
    $
    772
    
    
    $
    (317
    )(2)
    
    $
    1,073Year Ended January 1, 2005:Allowance for doubtful accounts
    
    $
    486
    
    
    $
    417
    
    
    $
    (195
    )(1)
    
    $
    708Accrued product warranty
    
    $
    829
    
    
    $
    173
    
    
    $
    (384
    )(2)
    
    $
    618
 
 (1)
    
    Accounts written off, net of recoveries.(2)
    
    Warranty expenditures incurred. 74




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EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit3.1
    
    Thoratecs Articles of Incorporation, as amended.(1)3.2
    
    Thoratecs By-Laws, as amended February 25, 2005.(2)4.1
    
    Rights Agreement between Thoratec Corporation and Computershare Trust Company, Inc. as Rights Agent dated as of May 2, 2002.(3)4.2
    
    Indenture, dated as of May 24, 2004, by and between Thoratec Corporation and U.S. Bank, National Association, as Trustee. (4)4.3
    
    Form of Senior Subordinated Convertible Note due 2034.(5)4.4
    
    Pledge Agreement, dated as of May 24, 2004, between Thoratec Corporation and U.S. Bank, National Association, and Pledge Agreement Supplement, dated as
of June 7, 2004.(4)4.5
    
    Control Agreement, dated as of May 24, 2004, between Thoratec Corporation and U.S. Bank, National Association, and Control Agreement Amendment, dated
as of June 7, 2004.(4)4.6
    
    Registration Rights Agreement, dated May 24, 2004, by and among Thoratec Corporation and Merrill Lynch Pierce Fenner & Smith Incorporated as Initial
Purchaser of the Senior Subordinated Convertible Notes due 2034. (4)10.1
    
    Intellectual Property Cross-license Agreement between Thermedics and the Thoratec Cardiosystems dated August 19, 1988.(6)10.2
    
    Form of Indemnification Agreement between Thoratec Cardiosystems and its officers and directors.(6)10.3
    
    Thoratecs 1993 Stock Option Plan.(7)10.4
    
    Agreement dated May 26, 1993, between The Polymer Technology Group. Incorporated and the Thoratec Cardiosystems.(8)10.5
    
    Thoratecs 1996 Stock Option Plan.(9)10.6
    
    Thoratecs 1996 Nonemployee Directors Stock Option Plan, as amended.(10)10.7
    
    Lease Agreement dated July 25, 1996, between Main Street Associates and Thoratec, as amended.(11)10.8
    
    First Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated July 25, 1996.(12)10.9
    
    Second Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated July 25, 1996.(13)10.10
    
    Thoratecs 1997 Stock Option Plan, as amended.(14)
 75




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.11
    
    Amended and Restated Directors Stock Option Plan of Thoratec Cardiosystems.(15)10.12
    
    Amended and Restated Nonqualified Stock Option Plan of Thoratec Cardiosystems.(15)10.13
    
    Agreement and Plan of Merger by and among Thoratec, Lightning Acquisition Corporation, Thermo Cardiosystems Inc, and Thermo Electron Corporation dated
October 3, 2000.(16)10.14
    
    Registration Rights Agreement by and between Thoratec and Thermo Electron dated October 3, 2000.(16)10.15
    
    Shareholder Agreement by and between Thoratec and Thermo Electron dated October 3, 2000.(16)10.16
    
    Lease agreement dated August 16, 1995, between International Technidyne Corporation and BHBMC, as amended.(17)10.17
    
    Amended and Restated Employment Agreement by and between Thoratec and D. Keith Grossman, dated
August 15, 2005.(18)*10.18
    
    Thoratecs 2002 Employee Stock Purchase Plan.(19)10.19
    
    Thoratecs Deferred Compensation Plan effective as of January 1, 2004. (10)10.20
    
    Grantor Trust Agreement between Thoratec and Wachovia Bank, National Association effective as
of November 21, 2003.(10)10.21
    
    Commercial Lease between International Technidyne Corporation and Roseville Properties
Management Company dated September 26, 2003. (10)10.22
    
    Lease Agreement between International Technidyne Corporation and NJ Mortgage Association dated
February 21, 2003. (21)10.23
    
    Description of the Executive Disability Income Protection Program.(20)10.24
    
    Employment Agreement by and between Thoratec and Jeffrey Nelson, dated August 15, 2005.(18)*10.25
    
    Employment Agreement by and between Thoratec and Lawrence Cohen, dated August 15, 2005.(18)*10.26
    
    Purchase and Sale Agreement and Escrow Instructions dated September 2, 2005, by and between
Thoratec and Aegis I, LLC.(22)10.27
    
    Employment Agreement by and between Thoratec and Gerhard F. Burbach dated January 13, 2006.(23)*10.28
    
    Offer Letter Agreement by and between Thoratec and Cynthia Lucchese dated August 1, 2005. (24)*10.29
    
    First Amendment to Employment Agreement by and between Thoratec and Gerhard F. Burbach, dated
May 12, 2006. (25)*
 76




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.30
    
    First Amendment to Offer Letter Agreement by and between Thoratec and Cynthia Lucchese, dated
March 12, 2006. (25)*10.31
    
    Amended and restated Thoratec Corporation 2006 Incentive Stock Plan.(26)10.32
    
    Offer Letter Agreement by and between Thoratec and David V. Smith dated November 22, 2006.(27)*10.33
    
    Second Amendment to Offer Letter Agreement by and between Thoratec and Cynthia Lucchese, dated
December 1, 2006.*21
    
    Subsidiaries of Thoratec.(17)23.1
    
    Consent of Independent Registered Public Accounting Firm  Deloitte & Touche LLP.24
    
    Power of Attorney  Reference
is made to page 80 hereof.31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer
 
 (1)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
December 28, 2002 filed with the SEC on March 20, 2003 and incorporated herein by reference.(2)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on March 3, 2005.(3)
    
    Filed as an Exhibit to Thoratecs Form 8-A12G filed with the SEC on May 3, 2002 (Registration
No. 000-49798), and incorporated herein by reference.(4)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
July 3, 2004 filed with the SEC on August 12, 2004, and incorporated herein by reference.(5)
    
    Included as an exhibit to Exhibit 4.2.(6)
    
    Filed as an Exhibit to Thoratec Cardiosystems Registration Statement on Form S-1
(Registration No. 33-25144) and incorporated herein by reference.(7)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
January 1, 1994 filed with the SEC on March 22, 1994, and incorporated herein by reference.(8)
    
    Filed as an Exhibit to Thoratec Cardiosystems Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 1993 and incorporated herein by reference.(9)
    
    Filed as an Exhibit to Thoratecs Registration Statement on Form S-8 filed with the SEC on
September 12, 1996, (Registration No. 333-11883) and incorporated herein by reference. 77




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##### Table of Contents



(10)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
January 3, 2004 filed with the SEC on March 17, 2004 and incorporated herein by reference.(11)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
June 29, 1996, filed with the SEC on August 13, 1996, and incorporated herein by reference.(12)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
June 28, 1997, filed with the SEC on July 30, 1997, and incorporated herein by reference.(13)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
September 27, 1997 filed with the SEC on November 12, 1997, and incorporated herein by
reference.(14)
    
    Filed as an Exhibit to Thoratecs Registration Statement on Form S-8 filed with the SEC on
June 18, 2003 (Registration No. 333-106238), and incorporated herein by reference.(15)
    
    Filed as an Exhibit to Thoratec Cardiosystems Quarterly Report on Form 10-Q for the fiscal
quarter ended July 3, 1999 filed with the SEC on August 5, 1999, and incorporated herein by
reference.(16)
    
    Filed as an Annex to Thoratecs Registration Statement on Form S-4/A, filed with the SEC on
December 29, 2000 (Registration No. 333-72128), and incorporated herein by reference.(17)
    
    Filed as an Exhibit to Thoratecs Form 10-K405 filed with the SEC on March 15, 2002
(Registration No. 033-72502), and incorporated herein by reference.(18)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on August 19, 2005.(19)
    
    Filed as an Exhibit to Thoratecs Form S-8 POS filed with the SEC on July 1, 2002
(Registration No. 333-90768), and incorporated herein by reference.(20)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
January 1, 2005 filed with the SEC on March 16, 2005 and incorporated herein by reference.(21)
    
    Filed as an Exhibit to Thoratecs Quarterly Report on Form 10-Q for the fiscal quarter ended
March 29, 2003 filed with the SEC on May 13, 2003, and incorporated herein by reference.(22)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on September 8, 2005.(23)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on January 18, 2006.(24)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the fiscal year ended
December 31, 2005 filed with the SEC on March 16, 2006 and incorporated herein by reference.(25)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on May 16, 2006.(26)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on June 1, 2006.(27)
    
    Filed as an Exhibit to Thoratecs form 8-K filed with the SEC on December 4, 2006.*
    
    Indicates a management contract or compensatory plan. 78




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SIGNATURES
  THORATEC CORPORATIONBy:
    /s/ Gerhard F. BurbachGerhard F. BurbachPresident and Chief Executive Officer  79




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POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Gerhard F. Burbach

Gerhard F. Burbach
    
    Chief Executive Officer, President
and Director
    
    March 30, 2007/s/ David V. Smith

David V. Smith
    
    Executive Vice President and Chief
Financial Officer
    
    March 30, 2007/s/ J. Donald Hill

J. Donald Hill
    
    Director and Chairman of the Board
of Directors
    
    March 30, 2007/s/ Howard E. Chase

Howard E. Chase
    
    Director
    
    March 30, 2007/s/ J. Daniel Cole

J. Daniel Cole
    
    Director
    
    March 30, 2007/s/ Neil F. Dimick

Neil F. Dimick
    
    Director
    
    March 30, 2007/s/ D. Keith Grossman

D. Keith Grossman
    
    Director
    
    March 30, 2007/s/ William M. Hitchcock

William M. Hitchcock
    
    Director
    
    March 30, 2007/s/ George W. Holbrook, Jr.

George W. Holbrook, Jr.
    
    Director
    
    March 30, 2007/s/ Daniel M. Mulvena

Daniel M. Mulvena
    
    Director
    
    March 30, 2007
 80