U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

þ		Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended July 4, 2009

or

o		Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                       to                     

THORATEC CORPORATION

California		94-2340464
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)
6035 Stoneridge Drive, Pleasanton, California		94588
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o      No þ

As of August 1, 2009, the registrant had 56,579,136 shares of common stock outstanding.

 

 

THORATEC CORPORATION

TABLE OF CONTENTS

Part I. Financial Information			3
Item 1. Condensed Consolidated Financial Statements (unaudited)			3
Condensed Consolidated Balance Sheets as of July 4, 2009 and January 3, 2009			3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 4, 2009 and June 28, 2008			4
Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended July 4, 2009 and June 28,2008			5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 4, 2009 and June 28, 2008			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
Part II. Other Information			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			42
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 6. Exhibits			44
Signatures			45
Exhibits
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Thoratec, the Thoratec logo, Thoralon, HeartMate, and HeartMate II are registered trademarks of Thoratec Corporation, and IVAD is a trademark of Thoratec Corporation.

CentriMag is a registered trademark of Levitronix LLC.

ITC, A-VOX Systems, AVOXimeter, HEMOCHRON, ProTime, Surgicutt, Tenderlett, Tenderfoot, and IRMA are registered trademarks of International Technidyne Corporation, Thoratec Corporation’s wholly-owned subsidiary.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THORATEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
(in thousands)

		July 4, 2009				January 3, 2009
						As adjusted (1)
ASSETS
Current assets:
Cash and cash equivalents		$	81,474			$	107,053
Restricted cash and cash equivalents			20,036				—
Short-term available-for-sale investments			169,038				141,598
Receivables, net of allowances of $1,321 and $947, respectively			56,195				55,065
Inventories			66,418				61,373
Deferred tax assets			8,397				8,397
Prepaid expenses and other assets			7,690				7,415
Total current assets			409,248				380,901
Property, plant and equipment, net			52,220				50,138
Goodwill			99,287				99,287
Purchased intangible assets, net			103,085				108,584
Long-term available-for-sale investments			24,682				29,959
Other long-term assets			15,039				15,216
Total Assets		$	703,561			$	684,085
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	15,538			$	10,563
Accrued compensation			14,802				25,550
Other accrued liabilities			14,511				12,410
Total current liabilities			44,851				48,523
Senior subordinated convertible notes			127,936				124,115
Long-term deferred tax liability			35,425				38,842
Other			7,378				6,326
Total Liabilities			215,590				217,806
Shareholders’ equity:
Common shares: no par, authorized 100,000; issued and outstanding 56,551 and 56,395 as of July 4, 2009 and January 3, 2009, respectively			—				—
Additional paid-in capital			541,326				528,657
Accumulated deficit			(51,184	)			(56,634	)
Accumulated other comprehensive loss:
Unrealized loss on investments			(1,040	)			(3,337	)
Cumulative translation adjustments			(1,131	)			(2,407	)
Total accumulated other comprehensive loss			(2,171	)			(5,744	)
Total Shareholders’ Equity			487,971				466,279
Total Liabilities and Shareholders’ Equity		$	703,561			$	684,085

See notes to condensed consolidated financial statements.

THORATEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)
(in thousands, except per share data)

		Three Months Ended								Six Months Ended
		July 4,				June 28,				July 4,				June 28,
		2009				2008				2009				2008
						As adjusted(1)								As adjusted(1)
Product sales		$	92,059			$	82,648			$	181,525			$	147,075
Cost of product sales			41,304				31,825				76,743				60,415
Gross profit			50,755				50,823				104,782				86,660
Operating expenses:
Selling, general and administrative			30,776				23,857				58,231				44,493
Research and development			13,426				12,839				27,512				25,358
Amortization of purchased intangible assets			2,568				3,296				5,499				6,592
Total operating expenses			46,770				39,992				91,242				76,443
Income from operations			3,985				10,831				13,540				10,217
Other income and (expense):
Interest expense and other			(3,040	)			(2,828	)			(5,906	)			(5,415	)
Interest income and other			1,637				2,281				2,625				4,459
Income before income taxes			2,582				10,284				10,259				9,261
Income tax expense			(750	)			(2,660	)			(2,800	)			(2,315	)
Net income		$	1,832			$	7,624			$	7,459			$	6,946
Net income per share:
Basic and diluted		$	0.03			$	0.14			$	0.13			$	0.13
Shares used to compute net income per share:
Basic			56,468				54,556				56,426				54,389
Diluted			57,840				55,334				57,782				55,105

See notes to condensed consolidated financial statements.

THORATEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
(in thousands)

														Accumulated
														Other				Total				Total
		Common				Additional				Accumulated				Comprehensive				Shareholders’				Comprehensive
		Shares				Paid-in Capital				Deficit				Income (Loss)				Equity				Income (loss)
BALANCE, DECEMBER 29, 2007, as previously reported			54,108			$	458,383			$	(61,577	)		$	1,223			$	398,029
Retrospective application of FSP APB 14-1, net of taxes							28,462				(12,682	)							15,780
BALANCE, DECEMBER 29, 2007, as adjusted (1)			54,108				486,845				(74,259	)			1,223				413,809
Exercise of common stock options for cash			78				871												871
Issuance of common shares under Employee Stock Purchase Plan			77				1,050												1,050
Excess income tax deficiency on stock option exercises							(111	)											(111	)
Repurchase of common shares, net			370				(598	)			(494	)							(1,092	)
Share-based compensation							5,305												5,305
Comprehensive income (loss):
Unrealized loss on available-for-sale investments (net of taxes of $2,104)															(3,155	)			(3,155	)		$	(3,155	)
Foreign currency translation adjustment															(26	)			(26	)			(26	)
Net income (1)											6,946								6,946				6,946
Total comprehensive income																						$	3,765
BALANCE, JUNE 28, 2008 (1)			54,633			$	493,362			$	(67,807	)		$	(1,958	)		$	423,597
BALANCE, JANUARY 3, 2009, as previously reported			56,395			$	500,195			$	(39,751	)		$	(5,744	)		$	454,700
Retrospective application of FSP APB 14-1, net of taxes							28,462				(16,883	)							11,579
BALANCE, JANUARY 3, 2009, as adjusted (1)			56,395				528,657				(56,634	)			(5,744	)			466,279
Exercise of common stock options for cash			203				2,925												2,925
Issuance of common shares under Employee Stock Purchase Plan			76				1,628												1,628
Tax deduction related to employees’ and directors’ stock plans							1,832												1,832
Repurchase and retirement of common shares, net			(123	)			(1,091	)			(2,009	)							(3,100	)
Share-based compensation							7,375												7,375
Comprehensive income (loss):
Unrealized gain on available-for-sale investments (net of taxes of $1,531)															2,297				2,297			$	2,297
Foreign currency translation adjustment															1,276				1,276				1,276
Net income											7,459								7,459				7,459
Total comprehensive income																						$	11,032
BALANCE, JULY 4, 2009			56,551			$	541,326			$	(51,184	)		$	(2,171	)		$	487,971

See notes to condensed consolidated financial statements.

THORATEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(in thousands)

		Six Months Ended
		July 4,				June 28,
		2009				2008
						As adjusted (1)
Cash flows from operating activities:
Net income		$	7,459			$	6,946
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			10,944				11,565
Investment premium amortization, net			1,329				634
Non-cash expenses, net			547				60
Non-cash interest on convertible subordinated debt			3,820				3,500
Tax benefit related to stock options			1,832				—
Share-based compensation expense			7,365				5,493
Excess tax benefits from share-based compensation			(1,594	)			(68	)
Loss on disposal of assets			104				384
Change in net deferred tax liability			(4,504	)			(3,753	)
Changes in assets and liabilities:
Receivables			(556	)			(11,028	)
Inventories			(5,752	)			(2,950	)
Prepaid expenses and other assets			(512	)			(793	)
Accounts payable and other liabilities			(4,260	)			4,933
Accrued income taxes, net			854				3,045
Net cash provided by operating activities			17,076				17,968
Cash flows from investing activities:
Purchases of available-for-sale investments			(90,237	)			(98,548	)
Sales of available-for-sale investments			25,808				78,670
Maturities of available-for-sale investments			44,773				44,765
Restricted cash and equivalents			(20,000	)			—
Purchases of property, plant and equipment			(5,955	)			(3,251	)
Net cash (used in) provided by investing activities			(45,611	)			21,636
Cash flows from financing activities:
Excess income tax deficiency on stock option exercises			—				(111	)
Excess tax benefits from share-based compensation			1,594				68
Proceeds from stock option exercises			2,925				871
Proceeds from stock issued under employee stock purchase plan			1,628				1,050
Repurchase and retirement of common shares			(3,100	)			(1,092	)
Net cash provided by financing activities			3,047				786
Effect of exchange rate changes on cash and cash equivalents			(91	)			27
Net (decrease) increase in cash and cash equivalents			(25,579	)			40,417
Cash and cash equivalents at beginning of period			107,053				20,689
Cash and cash equivalents at end of period		$	81,474			$	61,106
Supplemental disclosure of cash flow information:
Cash paid for taxes		$	4,852			$	3,507
Cash paid for interest		$	1,707			$	1,707
Supplemental disclosure of non-cash investing and financing activities:
Transfers of equipment from inventory		$	1,120			$	1,685

See notes to condensed consolidated financial statements.

THORATEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Operations and Significant Accounting Policies

Basis of Presentation

     The interim condensed consolidated financial statements of Thoratec Corporation (“Thoratec” or the “Company”) have been prepared and presented in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (“SEC”), without audit, and reflect all adjustments necessary (consisting only of normal recurring adjustments) to present fairly the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in the Company’s annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. The accompanying financial statements should be read in conjunction with the Company’s fiscal 2008 consolidated financial statements, and the accompanying notes thereto, filed with the SEC in the Company’s Annual Report on Form 10-K as updated by the Current Report on Form 8-K dated June 11, 2009 (the “2008 Annual Report”). The operating results for any interim period are not necessarily indicative of the results that may be expected for any future period. The financial statements of the prior periods presented in this Quarterly Report on Form 10-Q have been adjusted for the retrospective adoption of FSP APB 14-1 on January 4, 2009. See Note 12, “Long-Term Debt” to these unaudited condensed consolidated financial statements for further discussion.

     The preparation of the Company’s condensed consolidated financial statements necessarily requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented.

     The Company has evaluated subsequent events for the period from July 4, 2009, the date of these financial statements, through August 12, 2009, which represents the date these financial statements are being filed with the SEC. Pursuant to the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events, other than as described in Note 17, “Subsequent Events,” there were no events or transactions occuring during this subsequent event reporting period, which require recognition or disclosure in these condensed consolidated financial statements.

Revenue Recognition and Product Warranty

     The Company recognizes revenue from product sales of its Cardiovascular and ITC segments when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured. Sales to distributors are recorded when title transfers. One distributor has certain limited product return rights. Other distributors have certain rights of return upon termination of their distribution agreement. A reserve for sales returns is recorded for these customers applying reasonable estimates of product returns based upon historical experience in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. No other direct sales customers or distributors have return rights.

     Cardiovascular segment sales of certain products to first-time customers are recognized when it has been determined that the customer has the ability to use such products. These sales frequently include the sale of products and training services under multiple element arrangements. Training is not essential to the functionality of the products. Revenue under these arrangements is allocated to training at fair value, which is typically performed on behalf of the Company by third party providers. The balance of the revenue from the multiple arrangement is recorded to product sales.

     The majority of the Company’s products are covered by up to a two-year limited manufacturer’s warranty. Estimated contractual warranty obligations are recorded when related sales are recognized and any additional amounts are recorded when such costs are probable and can be reasonably estimated and are included in “Cost of product sales.” The change in accrued warranty expense is summarized in the following table:

		Balance at				Accruals for								Balance at
		Beginning of Period				Warranties Issued				Settlements Made				End of Period
		(in thousands)
Six months ended July 4, 2009		$	1,071			$	2,305			$	(1,614	)		$	1,762
Six months ended June 28, 2008		$	1,006			$	888			$	(527	)		$	1,367

2. Recently Issued Accounting Standards

     Effective July 1, 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“ASC”) which became the single official source of authoritative, nongovernmental GAAP. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the SEC. All other literature became non-authoritative. ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company is assessing what impact, if any, the adoption of this standard may have on our condensed consolidated financial statements, and expects any references to legacy standards contained in our condensed consolidated financial statements to be revised to reflect updated referencing under the ASC.

     In May 2009, the FASB issued SFAS No. 165, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS No. 165 sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.

     In April 2009, the FASB issued FSP FAS No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), to modify the existing impairment model with respect to debt securities falling within its scope. Under FSP FAS 115-2 and FSP FAS 124-2, an other-than-temporary impairment (“OTTI”) will have occurred when either: (i) an entity has the intent to sell an impaired security; (ii) it is more likely than not that an entity will be required to sell an impaired security prior to its anticipated recovery in value; or (iii) an entity does not expect to recover the entire cost basis of an impaired security. In addition, FSP FAS 115-2 and FAS 124-2 modifies the manner in which an OTTI is measured and presented on the statement of operations and requires expanded disclosures. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements, but resulted in additional disclosure requirements about the Company’s investments. See Note 5, “Investments in Available-for-Sale Securities” for further discussion.

     In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed. FSP FAS 157-4 is effective for financial reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.

     In April 2009, the FASB issued FSP FAS 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The Company adopted this standard in the second quarter of 2009, which was applied prospectively. See Note 6, “Fair Value Measurements” for further discussion.

     In May 2008, the FASB issued FSP ABP 14-1 which alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements upon conversion. FSP APB 14-1 will impact the accounting associated with the Company’s senior subordinated convertible notes recorded at a book value of $143.8 million. FSP APB 14-1 requires the issuer to recognize additional (non-cash) interest expense based on the market rate for similar debt instruments without the conversion feature. The Company adopted this standard on January 4, 2009. See Note 12, “Long-Term Debt” for further discussion.

     In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which is intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The main requirement is to disclose the objectives and strategies for using derivative instruments by their underlying risk as well as a tabular format of the fair values of the derivative instruments and their gains and losses. The Company adopted this standard on January 4, 2009. See Note 7, “Foreign Exchange Instruments” for further discussion.

     In February 2008, the FASB issued SFAS No. 157-2, Effective Date of FASB Statement No. 157. With the issuance of SFAS No. 157-2, the FASB agreed to: (i) defer the effective date of SFAS No. 157, Fair Value Measurements, for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), and (ii) remove certain leasing transactions from the scope of SFAS No. 157. The Company’s adoption of fair value measurement for nonfinancial assets and nonfinancial liabilities on January 4, 2009 did not have an impact on the Company’s unaudited condensed consolidated financial position, results of operations or cash flows.

     In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141 and establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. In addition, SFAS No. 141(R) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS No. 141(R) also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. In April 2009, FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies, which amends and clarifies SFAS No. 141(R) on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The Company adopted this accounting guidance on January 4, 2009. During the six months ended July 4, 2009, the Company recorded approximately $11.3 million of transaction costs was included in “Selling, general and administrative” expenses on the Company’s unaudited condensed consolidated statements of operations related to the intended acquisition of HeartWare International Inc. (“HeartWare”). The Company and HeartWare mutually agreed effective July 31, 2009 to terminate the definitive merger agreement pursuant to which the Company would have acquired HeartWare. See Note 17, “Subsequent Events” for further discussion.

3. Cash and Cash Equivalents

     Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase.

4. Restricted Cash and Cash Equivalents

      On February 12, 2009, the Company entered into a definitive merger agreement with HeartWare, pursuant to which the Company intended to acquire HeartWare. The Company and HeartWare mutually agreed effective July 31, 2009 to terminate the definitive merger agreement pursuant to which the Company would have acquired HeartWare. As announced on July 29, 2009, the U.S. Federal Trade Commission (“FTC”) informed the Company and HeartWare that it would file a complaint in U.S. Federal District Court to challenge the Company’s proposed acquisition of HeartWare. HeartWare and the Company’s decision to terminate the definitive merger agreement was in response to the FTC’s determination to challenge the proposed acquisition of HeartWare by the Company. See Note 17, “Subsequent Events” for further discussion.

     Pursuant to the loan agreement entered into concurrently with the execution and delivery of the merger agreement, the Company deposited $20.0 million (the “Loan Amount”) into an escrow account on February 13, 2009 and agreed to loan such funds to HeartWare. Despite the mutual termination of the definitive merger agreement by the Company and HeartWare, the Loan Amount continues to remain available for borrowing by HeartWare at any time prior to the earlier of (i) November 1, 2011, (ii) the date on which the outstanding portion of the Loan Amount borrowed by HeartWare, including any accrued and unpaid interest, as well as the portion of the Loan Amount remaining in the escrow account that have not been loaned to HeartWare, are converted into shares of HeartWare’s common stock, as further described below, or (iii) the date on which the outstanding principal of the Loan Amount borrowed by HeartWare becomes due and payable in full, whether by acceleration or otherwise, pursuant to the terms of the loan agreement. Beginning as of May 1, 2009, HeartWare may borrow up to an aggregate of $12.0 million and beginning as of July 31, 2009, HeartWare may borrow up to an aggregate of $20.0 million, under certain conditions provided in the loan agreement. The loan to HeartWare bears interest at a rate per annum equal to 10%. The principal amount, together with any accrued and unpaid interest on the principal amount, will be due and payable in full in cash on the earlier of (i) November 1, 2011 or (ii) the date on which the outstanding principal of the Loan Amount borrowed by HeartWare becomes due and payable in full, whether by acceleration or otherwise, pursuant to the terms of the loan agreement,

     As of August 12, 2009, the Company has loaned $4.0 million to HeartWare pursuant to the loan agreement. Pursuant to the terms of the loan agreement, the Company may convert the aggregate Loan Amount outstanding or available for borrowing under the loan agreement (including any portion of the Loan Amount held in the escrow account and any outstanding portion of the Loan Amount borrowed by HeartWare) into shares of HeartWare’s common stock, at Thoratec’s option. The Loan Amount is convertible into shares of HeartWare’s common stock at a conversion price equal to $35.00 Australian dollars per share of HeartWare common stock. The conversion rate will be adjusted in the event of any stock split, dividend, distribution or other subdivision or other reclassification of HeartWare’s common stock.

5. Investments in Available-for-Sale Securities

     The Company’s investment portfolio consists of short-term and long-term investments. Investments classified as short-term available-for-sale consist primarily of municipal bonds, variable demand notes and corporate bonds. Investments classified as long-term available-for-sale consist of auction rate securities, whose underlying assets are student loans.

     The Company’s investments in available-for-sale securities are recorded at estimated fair value on its financial statements, and the temporary differences between cost and estimated fair value are presented as a separate component of accumulated other comprehensive income.

     As of July 4, 2009, the Company had gross unrealized gains from the Company’s investment in municipal bonds of $1.4 million and gross unrealized losses from its auction rate securities of $3.1 million.

     The aggregate market value, cost basis and gross unrealized gains and losses of available-for-sale investments as of July 4, 2009 and as of January 3, 2009 by major security type are as follows:

						Gross
		Amortized				unrealized				Fair
		cost				gains (losses)				value
		(in thousands)
July 4, 2009:
Short-term investments:
Municipal bonds, variable demand notes and corporate bonds		$	167,658			$	1,380			$	169,038
Long-term investments:
Auction rate securities		$	27,800			$	(3,118	)		$	24,682
January 3, 2009:
Short-term investments:
Municipal bonds		$	139,931			$	1,667			$	141,598
Long-term investments:
Auction rate securities		$	37,200			$	(7,241	)		$	29,959

     As of July 4, 2009, the Company owned approximately $27.8 million face amount of auction rate securities. The assets underlying these investments are student loans predominantly backed by the U.S. government under the Federal Family Education Loan Program or by private insurers and are rated between A- and AAA. Historically, these securities have provided liquidity through a Dutch auction process that resets the applicable interest rate periodically every seven to 365 days. Beginning in February of 2008, these auctions began to fail. The principal amount of these auction rate securities will not be accessible until future auctions for these securities are successful, a secondary market is established, these securities are called for redemption, or they are paid at maturity. Therefore, the Company’s auction rate securities are classified as long-term and are valued at $24.7 million using significant unobservable inputs.

     As a result of these auction failures, these auction rate securities do not have a readily determinable market value. Consistent with January 3, 2009, the Company estimated fair values at July 4, 2009, using a discounted cash flow model based on estimated interest rates, the present value of future principal and interest payments discounted at rates considered to reflect current market conditions, and the credit quality of the underlying securities. Specifically, the Company’s management estimated the future cash flows over a five-year period, and applied a credit default rate to reflect the risk in the marketplace for these investments that has arisen due to the lack of an active market. As a result of feedback from outside consultants, and government activities including recent settlement agreements, management’s assumption on the expected recovery was modified to five years beginning at January 3, 2009 and this assumption continues to be applicable at July 4, 2009. Because of the inherent subjectivity in valuing these securities, the Company’s management also considered independent valuations obtained for each of the Company’s auction rate securities in estimating fair values.

     The Company has recorded an estimated cumulative unrealized loss of $3.1 million ($1.9 million, net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive gain/loss within shareholders’ equity. On April 5, 2009 the Company adopted FSP FAS 115-2 and FAS 124-2 which required the Company’s management to review impairments and credit loss associated with its investments, including auction rate securities to determine the classification of the impairment as “temporary” or “other-than-temporary” and to birfurcate the credit and non-credit component of an other-than-temporary impairment event. The Company (i) does not intend to sell any of the auction rate securities prior to maturity at an amount below the original purchase value; (ii) intends hold the investment to recovery and based on a more-likely-than-not probability assessment will not be required to sell the security before recovery; and (iii)deems that it is not probable that it will receive less than 100% of the principal and accrued interest from the issuer. Therefore, 100% of the impairment was charged to other comprehensive income. Further, the Company continues to liquidate investments in auction rate securities as opportunities arise. During the six months ended July 4, 2009, $9.4 million in auction rate securities were liquidated at par in connection with issuer calls.

     If the issuers of the auction rate securities are unable to successfully complete future auctions and their credit ratings deteriorate, the Company may in the future be required to record an impairment charge to earnings on these investments. It could conceivably take until the final maturity of the underlying notes (up to 30 years) to realize the investments’ recorded value.

6. Fair Value Measurements

     The Company adopted the provisions of SFAS No. 157, Fair Value Measurements, on December 30, 2007. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various approaches, including market, income and/or cost approaches, and each of these approaches requires certain inputs. SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions as compared to the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

     The Company valued its financial and nonfinancial assets and liabilities based on the observability of inputs used in the valuation of such assets and liabilities, using the following fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial and nonfinancial assets and liabilities carried or disclosed at fair value were classified and disclosed in one of the following three categories:

Level 1:		Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:		Directly or indirectly observable market based inputs used in models or other valuation methodologies.
Level 3:		Unobservable inputs that are not corroborated by market data which require significant management judgment or estimation.

     The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities measured at fair value on a recurring basis:

		July 4, 2009
		Assets and												Significant
		liabilities								Quoted prices in				other				Significant
		at carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Short-term investments — municipal bonds, variable demand notes and corporate bonds		$	169,038			$	169,038			$	—			$	169,038			$	—
Long-term investments — auction rate securities			24,682				24,682				—				—				24,682
Mark to market on foreign exchange instruments (Note 7)			44				44				—				44				—
Convertible debenture with Levitronix LLC			5,874				6,000				—				—				6,000
Liabilities
Make-whole provision (Note 12)			51				51				—				—				51
Senior subordinated convertible notes (fair value for purposes of disclosure in Note 12)			127,936				197,942				—				197,942				—

		January 3, 2009
		Assets and												Significant
		liabilities at								Quoted prices in				other				Significant
		carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Short-term investments — municipal bonds		$	141,598			$	141,598			$	—			$	141,598			$	—
Long-term investments — auction rate securities			29,959				29,959				—				—				29,959
Convertible debenture with Levitronix LLC			5,711				4,200				—				—				4,200
Liabilities
Mark to market on foreign exchange instruments (Note 7)			73				73				—				73				—
Make-whole provision (Note 12)			46				46				—				—				46
Senior subordinated convertible notes (fair value for purposes of disclosure in Note 12)			124,115				215,880				—				215,880				—

     Assets measured at fair value on a recurring basis using significant unobservable Level 3 inputs consist of securities with an auction reset feature (“auction rate securities”) whose underlying assets are student loans issued by various tax-exempt state agencies, most of which are supported by federal government guarantees and some of which are supported by private insurers. In addition, the Company is using significant unobservable Level 3 inputs for its disclosure of the fair value of its convertible debenture with Levitronix LLC (“Levitronix”) disclosed in Note 11 “Other Assets.”

     The following table provides a reconciliation of the beginning and ending balances for the assets and liabilities measured at fair value using significant unobservable inputs (Level 3):

		Fair Value Measurement Using Significant
		Unobservable Inputs (Level 3)
		Auction
		Rate
		Securities				Assets				Liabilities
		(in thousands)
Balance at January 3, 2009		$	29,959			$	4,200			$	46
Settlement at par			(100	)			—				—
Unrealized holding loss, included in interest income and other			—				—				25
Unrealized holding gain, included in other comprehensive income			69				—				—
Balance at April 4, 2009		$	29,928			$	4,200			$	71
Settlements at par			(9,300	)			—				—
Unrealized holding gain, included in interest income and other			—				—				(20	)
Unrealized holding gain, included in other comprehensive income			4,054				—				—
Unrealized holding gain, for disclosure purposes (Note 11)			—				1,800				—
Balance at July 4, 2009		$	24,682			$	6,000			$	51

     The Company’s management will continue to monitor the market for auction rate securities and consider its impact (if any) on the fair value of the Company’s investments. If the current market conditions deteriorate further, or the anticipated recovery in fair values does not occur, the Company may be required to record additional unrealized losses in other comprehensive income or other-than-temporary impairment charges to the condensed consolidated statements of operations in future periods.

7. Foreign Exchange Instruments

     The Company utilizes foreign currency forward exchange contracts and options to mitigate against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions (primarily assets and liabilities on its U.K. subsidiary’s consolidated balance sheet that are not denominated in U.K. pounds). The Company does not use derivative financial instruments for speculative or trading purposes. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. If a financial counterparty to any of the Company’s hedging arrangements experience financial difficulties or is otherwise unable to honor the terms of the foreign currency forward contract, the Company may experience material financial losses.

     On January 4, 2009, the Company adopted SFAS No. 161, which requires the disclosure about the Company’s objective of using derivative instruments for its forward foreign currency contracts, which qualify as derivatives under SFAS No. 133, Accounting for Derivative Instrument and Hedging Activities, and do not qualify for hedge accounting. The impacts of the outstanding foreign currency contracts, with a maximum maturity of three months were as follows:

		Notional Amounts
		July 4,				June 28,
		2009				2008
		(in thousands)
Purchases		$	8,414			$	9,863
Sales			11,973				11,051

     As of July 4, 2009, the Company had forward contracts to sell euros with a notional value of €8.5 million and to purchase U.K. pounds with a notional value of £5.1 million, and as of June 28, 2008, the Company had forward contracts to sell euros with a notional value of €7.1 million and to purchase U.K. pounds with a notional value of £5.0 million. As of July 4, 2009, the Company’s forward contracts had an average exchange rate of one U.S. dollar to 0.7135 euros and one U.S. dollar to 0.6062 U.K. pounds. The forward contracts are valued based on exchange rates derived from an independent source of market participant assumptions and compiled from the information available. As of July 4, 2009, the estimated fair of value of these foreign currency contracts was $44,000, which was recorded in “Prepaid expenses and other assets.”

     The following represents the Company’s realized fair value of the forward currency contracts and offsets to the foreign currency exchange gains and losses which were included in “Interest income and other” in the unaudited condensed consolidated statements of operations.

		Three Months Ended								Six Months Ended
		July 4,				June 28,				July 4,				June 28,
		2009				2008				2009				2008
		(in thousands)
Foreign currency exchange gain (loss) on foreign currency contracts		$	487			$	(107	)		$	935			$	(1,147	)
Foreign currency exchange (loss) gain on foreign translation adjustments			(498	)			122				(1,448	)			1,230

8. Inventories

     Inventories consisted of the following:

		July 4,				January 3,
		2009				2009
		(in thousands)
Finished goods		$	20,853			$	24,373
Work in process			11,090				9,174
Raw materials			34,475				27,826
Total		$	66,418			$	61,373

9. Property, Plant and Equipment, net

     Property, plant and equipment, net, consisted of the following:

		July 4,				January 3,
		2009				2009
		(in thousands)
Land, building and improvements		$	16,135			$	16,135
Equipment and capitalized software			71,017				68,029
Furniture and leasehold improvements			30,224				27,424
Total			117,376				111,588
Less accumulated depreciation			(65,156	)			(61,450	)
Total		$	52,220			$	50,138

     Depreciation expense for the three months ended July 4, 2009 and June 28, 2008 was $2.8 million and $2.6 million, respectively, and for the six months ended July 4, 2009 and June 28, 2008 was $5.4 million and $5.0 million, respectively.

10. Goodwill and Purchased Intangible Assets

     The carrying amount of goodwill was $99.3 million as of July 4, 2009 and as of January 3, 2009. The components of goodwill at July 4, 2009 were $95.0 million attributable to the Cardiovascular division and $4.3 million attributable to the ITC acquisition of the outstanding common shares of privately held A-VOX Systems, Inc. (“Avox”).

     The changes in the carrying amount of goodwill were as follows:

		July 4, 2009				January 3, 2009
		(in thousands)
Balance at the beginning of the fiscal period		$	99,287			$	98,368
Adjustment for the acquisition related to the Cardiovascular division			—				919
Balance at the end of the fiscal period		$	99,287			$	99,287

     In February 2001, the Company merged with Thermo Cardiosystems, Inc. (“TCA”). Prior to the merger with TCA (the “Merger”), TCA was a subsidiary of Thermo Electron Corporation (“TCI”). The components of identifiable intangible assets related to the Merger include: patents and trademarks, core technology (Thoralon, the Company’s proprietary bio-material), and developed technology (patent technology, other than core technology, acquired in the Merger). The components of intangible assets related to the October 2006 Avox acquisition includes: patents and trademarks, developed technology and customer and distributor relationships and other. The combined components are included in purchased intangibles on the unaudited condensed consolidated balance sheets as follows:

		July 4, 2009
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	38,515			$	(29,570	)		$	8,945
Core technology			37,485				(14,750	)			22,735
Developed technology			125,742				(54,772	)			70,970
Customer and distributor relationships and other			897				(462	)			435
Total purchased intangible assets		$	202,639			$	(99,554	)		$	103,085

		January 3, 2009
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	38,515			$	(28,803	)		$	9,712
Core technology			37,485				(13,765	)			23,720
Developed technology			125,742				(51,098	)			74,644
Customer and distributor relationships and other			897				(389	)			508
Total purchased intangible assets		$	202,639			$	(94,055	)		$	108,584

     Amortization expense related to purchased intangible assets for the three months ended July 4, 2009 and June 28, 2008 was $2.6 million and $3.3 million, respectively and for the six months ended July 4, 2009 and June 28, 2008 was $5.5 million and $6.6 million, respectively. The Company’s amortization expense is expected to be approximately $10.6 million in 2009, declining to $8.7 million by 2013. This decline in amortization expense is due to the change in our estimated useful lives of our core technology and developed technology assets. Patents and trademarks have useful lives ranging from one to fifteen years, core and developed technology assets have useful lives ranging from two to thirteen years and customer and distributor relationships and other have useful lives ranging from one to six years.

11. Other Assets

     On August 23, 2006, the Company purchased a $5.0 million convertible debenture from Levitronix, a company with which it has a distribution arrangement to sell Levitronix products. The convertible debenture is a long-term note receivable with an annual interest rate of 5.7%, to be accrued monthly and at the option of Levitronix, paid in cash or in-kind semi-annually on February 23 and August 23 until its maturity on August 23, 2013. The Company may convert the debenture at any time at its option into membership interests of Levitronix at a conversion price of $4.2857, which may be adjusted as a result of certain corporate events. This conversion feature is not an embedded derivative under SFAS No. 133 because the membership interests of the issuer are not readily convertible to cash. If the Company had converted the debenture as of July 4, 2009, its ownership in Levitronix would have been less than 5%.

     As of July 4, 2009, the convertible debenture of $5.0 million plus accrued interest of $0.9 million was included in “Other long-term assets” on the Company’s unaudited condensed consolidated balance sheets. The fair value of the convertible debenture, based on a discounted cash flows valuation approach, was $6.0 million.

12. Long-Term Debt

     In 2004, the Company completed the sale of $143.8 million initial principal amount of senior subordinated convertible notes due in 2034. The convertible notes were sold to Qualified Institutional Buyers pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 144A thereunder. A portion of the proceeds was used to repurchase 4.2 million shares of the Company’s outstanding common stock for $60 million. The balance of the proceeds has been and will be used for general corporate purposes, which may include additional stock repurchases, strategic investments or acquisitions. The principal amount of the convertible notes at maturity is $247.4 million offset by the original issue discount of $103.7 million and net debt issuance costs of $4.3 million, equaling net proceeds of $139.4 million.

     The senior subordinated convertible notes were issued at an issue price of $580.98 per note, which is 58.098% of the principal amount at maturity of the notes. The senior subordinated convertible notes bear interest at a rate of 1.3798% per year on the principal amount at maturity, payable semi-annually in arrears in cash on May 16 and November 16 of each year, from November 16, 2004 until May 16, 2011. Beginning on May 16, 2011, the original issue discount will accrue daily at a rate of 2.375% per year on a semi-annual bond equivalent basis and, on the maturity date, a holder will receive $1,000 per note. As a result, the aggregate principal amount of the notes at maturity will be $247.4 million.

     Holders of the senior subordinated convertible notes may convert their convertible notes into shares of the Company’s common stock at a conversion rate of 29.4652 shares per $1,000 principal amount of senior subordinated convertible notes, which represents a conversion price of $19.72 per share, subject to adjustments upon the occurrence of certain events as set forth in the indenture. Holders have been and are able to convert their convertible notes at any point after the close of business on September 30, 2004 if, as of the last day of the preceding calendar quarter, the closing price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 120% of the accreted conversion price per share of its common stock. Commencing October 1, 2008, this market price conversion feature was satisfied, such that holders of the senior subordinated convertible notes may convert their notes through the final maturity date of the notes into shares of the Company’s common stock at a conversion rate of 29.462 shares per $1,000 principal amount of senior subordinated convertible notes, subject to adjustments as provided in the indenture. If holders elect conversion, the Company may, at its option, deliver shares of common stock, pay a holder in cash, or deliver a combination of shares and cash, as determined pursuant to the terms of the notes. As of July 4, 2009, no notes had been converted.

     Holders may require the Company to repurchase all or a portion of their senior subordinated convertible notes on each of May 16, 2011, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of the issue price, plus accrued original issue discount, if any. In addition, if the Company experiences a change in control or a termination of trading of its common stock each holder may require the Company to purchase all or a portion of such holder’s notes at the same price, plus, in certain circumstances, to pay a make-whole premium. This premium is considered an embedded derivative under SFAS No. 133 and has been bifurcated from the senior subordinated convertible notes and recorded at its estimated fair value, $51,000 at July 4, 2009. There are significant variables and assumptions used in valuing the make-whole provision including, but not limited to, the Company’s stock price, volatility of the Company’s stock, the probability of the Company being acquired and the probability of the type of consideration used by a potential acquirer.

     The senior subordinated convertible notes are subordinated to all of the Company’s senior indebtedness and structurally subordinated to all indebtedness of its subsidiaries. Therefore, in the event of a bankruptcy, liquidation or dissolution of the Company or one or more of its subsidiaries and acceleration of or payment default on its senior indebtedness, holders of the convertible notes will not receive any payment until holders of any senior indebtedness the Company may have outstanding have been paid in full.

     On January 4, 2009, the Company adopted FSP APB 14-1, which applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion. The senior subordinated convertible notes fall within the scope of FSP APB 14-1 because their terms include partial cash settlement. Pursuant to FSP APB 14-1, the Company is required to account for the liability and equity components of the senior subordinated convertible notes separately in a manner that reflects the Company’s nonconvertible debt borrowing rate when interest expense is subsequently recognized. FSP APB 14-1 requires retrospective application as of May 16, 2004. Accordingly, the accompanying prior period condensed consolidated financial statements have been adjusted to reflect the adoption of FSP APB 14-1. The Company estimated the fair value of the senior subordinated convertible notes without the conversion feature as of the date of issuance (“liability component”). The estimated fair value of the liability component was approximately $95.1 million and was determined using a discounted cash flow approach. Key inputs used to estimate the fair value of the liability component included the following:

	•		The Company’s estimated non-convertible borrowing rate as of May 16, 2004 — the date the senior subordinated convertible notes were issued;
	•		The amount and timing of cash flows; and
	•		The expected life.

     The excess of the proceeds received over the estimated fair value of the liability component totaling $48.5 million was allocated to the conversion feature (“equity component”) and a corresponding offset was recognized as a discount to reduce the net carrying value of the senior subordinated convertible notes. The discount is being amortized to interest expense over a seven-year period ending May 16, 2011 (the expected life of the liability component) using the effective interest method. Additionally, FSP APB 14-1 requires transaction costs to be allocated on the same percentage as the liability and equity components. The adoption of FSP APB 14-1 will result in a portion of the deferred debt issuance costs allocated to the liability component to be amortized using the effective interest method until May 16, 2011, and the equity component to be included in additional paid-in capital. The deferred debt issuance costs are amortized using the effective interest method until May 16, 2011 at which point the Company may redeem the debt.

     The adoption of FSP APB 14-1 increased interest expense associated with the Company’s senior subordinated convertible notes by adding a non-cash component to amortize a debt discount calculated based on the difference between the cash coupon rate (2.375% per year) of the senior subordinated convertible notes and the effective interest rate on debt borrowing (9% per year). The impact of the adoption of FSP ABP 14-1 on the results of operations for the three and six months ended July 4, 2009 and June 28, 2008 consisted of the following:

		Three Months Ended July 4, 2009												Six Months Ended July 4, 2009
		Excluding				Incremental impact								Excluding				Incremental impact
		impact of FSP				of adoption of								impact of FSP				of adoption of
		APB 14-1				FSP APB 14-1				As reported				APB 14-1				FSP APB 14-1				As reported
		(in thousands, except per share amounts)
Net income before interest and amortization expense (net of tax)		$	3,566							$	3,566			$	10,927							$	10,927
Interest and amortization expense (net of tax):
Interest expense			(853	)		$	(1,910	)			(2,763	)			(1,706	)		$	(3,820	)			(5,526	)
Amortization of debt issuance costs			(155	)			52				(103	)			(310	)			104				(206	)
Income tax benefit			398				734				1,132				796				1,468				2,264
Impact on net income			(610	)		$	(1,124	)			(1,734	)			(1,220	)		$	(2,248	)			(3,468	)
Net income		$	2,956							$	1,832			$	9,707							$	7,459
Net income per share:
Basic and diluted		$	0.05							$	0.03			$	0.17							$	0.13

		Three Months Ended June 28, 2008												Six Months Ended June 28, 2008
		Excluding				Incremental impact								Excluding				Incremental impact
		impact of FSP				of adoption of								impact of FSP				of adoption of
		APB 14-1				FSP APB 14-1				As adjusted				APB 14-1				FSP APB 14-1				As adjusted
		(in thousands, except per share amounts)
Net income before interest and amortization expense (net of tax)		$	9,262							$	9,262			$	10,220							$	10,220
Interest and amortization expense (net of tax):
Interest expense			(853	)		$	(1,750	)			(2,603	)			(1,706	)		$	(3,500	)			(5,206	)
Amortization of debt issuance costs			(155	)			52				(103	)			(310	)			104				(206	)
Income tax benefit			398				670				1,068				796				1,342				2,138
Impact on net income			(610	)		$	(1,028	)			(1,638	)			(1,220	)		$	(2,054	)			(3,274	)
Net income		$	8,652							$	7,624			$	9,000							$	6,946
Net income per share:
Basic		$	0.16							$	0.14			$	0.17							$	0.13
Diluted		$	0.16							$	0.14			$	0.16							$	0.13

     The impact of the adoption of FSP ABP 14-1 on the opening balance sheets consisted of the following:

		Net Increase (Decrease)
														Additional
		Long-term				Debt issuance				Deferred tax				paid-in
		debt				costs				liability				capital				Deficit
		(in thousands)
Allocation of long-term debt proceeds and issuance costs to equity component on issuance date		$	(48,508	)		$	(1,462	)		$	18,584			$	28,462			$	—
Cumulative retrospective impact from amortization of discount on liability component and debt issuance costs			21,718				754				(8,282	)			—				12,682
Cumulative retrospective impact as of December 29, 2007			(26,790	)			(708	)			10,302				28,462				12,682
Retrospective impact from amortization of discount on liability component and debt issuance costs during the period			7,155				209				(2,745	)			—				4,201
Cumulative retrospective impact as of January 3, 2009		$	(19,635	)		$	(499	)		$	7,557			$	28,462			$	16,883

														Additional
		Long-term				Debt issuance				Deferred tax				paid-in
		debt				costs				liability				capital				Deficit
		(in thousands)
January 3, 2009, balance as previously reported		$	143,750			$	1,475			$	31,285			$	500,195			$	39,751
Cumulative retrospective impact as of January 3, 2009			(19,635	)			(499	)			7,557				28,462				16,883
January 3, 2009, as adjusted		$	124,115			$	976			$	38,842			$	528,657			$	56,634

     As of July 4, 2009 and January 3, 2009, long-term debt and equity component (recorded in additional paid-in-capital, net of income tax benefit) associated with FSP APB 14-1 consisted of the following:

		July 4, 2009				January 3, 2009
		(in thousands)
Long-term debt
Principal amount		$	143,750			$	143,750
Unamortized discount			(15,814	)			(19,635	)
Net carrying amount		$	127,936			$	124,115
Equity component, net of income tax benefit		$	28,462			$	28,462

     The Company may redeem either in whole or in part any of the senior subordinated convertible notes at any time beginning May 16, 2011, by giving the holders at least 30 days notice, at a redemption price equal to the sum of the issue price and the accrued original issue discount. If the holders converted the senior subordinated convertible notes into shares of the Company’s stock as of July 4, 2009, the if-converted value would be $192.9 million, based on the Company’s stock price of $26.46 per share on July 3, 2009, which amount exceeds the original value of $143.8 million by $49.1 million. This if-converted value is $54.5 million less than the $247.4 million face amount at maturity in 2034.

     The aggregate fair value of the senior subordinated convertible notes at July 4, 2009 was $197.9 million.

13. Share-Based Compensation

     Share-based compensation expense is measured based on the grant-date fair value of the share-based awards. The Company recognizes share-based compensation expense for the portion of the award that will ultimately be expected to vest over the requisite service period for those awards with graded vesting and service conditions. The Company develops an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience. The estimated forfeiture rate is reassessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests.

     Share-based compensation included in the condensed consolidated statements of operations consists of the following:

		Three Months Ended								Six Months Ended
		July 4,				June 28,				July 4,				June 28,
		2009				2008				2009				2008
		(in thousands)
Cost of product sales		$	508			$	471			$	1,020			$	913
Selling, general and administrative			2,061				1,562				4,466				3,236
Research and development			780				596				1,899				1,344
Total share-based compensation expense before taxes			3,349				2,629				7,385				5,493
Tax benefit for share-based compensation expense			942				1,153				2,063				1,795
Total share-based compensation (net of taxes)		$	2,407			$	1,476			$	5,322			$	3,698

     For the six months ended July 4, 2009 and June 28, 2008, share-based compensation expense of $0.4 million and $0.5 million, respectively, was capitalized to inventory.

     The Company receives a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of the options at the date of exercise over the exercise prices of the options. Prior to the adoption of SFAS No. 123(R) Share-Based Payment, the Company reported all tax benefits resulting from the exercise of stock options as operating cash flows in its condensed consolidated statements of cash flows. In accordance with SFAS No. 123(R), beginning in 2006, the Company’s unaudited condensed consolidated statements of cash flows presentation reports the excess tax benefits from share-based compensation as financing cash flows. These amounts were $1.6 million and $68,000 for the six months ended July 4, 2009 and June 28, 2008, respectively.

     Cash proceeds from the exercise of stock options were $2.9 million and cash proceeds from the Company’s employee stock purchase plan were $1.6 million for the six months ended July 4, 2009. Cash proceeds from the exercise of stock options were $0.9 million and cash proceeds from the Company’s employee stock purchase plan were $1.1 million for the six months ended June 28, 2008. Additionally, for the six months ended July 4, 2009, the Company purchased $3.1 million of restricted stock for payment of income tax withholding due upon vesting. For the six months ended June 28, 2008, the Company purchased $1.1 million of restricted stock for payment of income tax withholding due upon vesting.

Equity Plan

     In April 2006, the Board of Directors approved the 2006 Incentive Stock Plan (“2006 Plan”). In May 2006 the 2006 Plan was amended by the Board of Directors and such amendment was approved by the Company’s shareholders and in May 2008 the 2006 Plan was amended by the Board of Directors and such amendment was approved by the Company’s shareholders. The 2006 Plan allows the Company to grant to employees and directors of, and consultants to, the Company up to a total of 5.4 million shares of stock awards. Each share issued from and after May 20, 2008 as restricted stock bonuses, restricted stock units, phantom stock units, performance share bonuses, or performance share units reduces the number of shares available for issuance under the 2006 Plan by one and seventy-four hundredths (1.74) shares, and each share issued as stock options, restricted stock purchases or stock appreciation rights reduces the shares available for issuance under the 2006 Plan on a share-for-share basis. During the six months ended July 4, 2009, approximately 336,000 options were granted under the 2006 Plan at an exercise price equal to the fair market value on the date of grant, and approximately 463,000 shares of restricted stock units were granted under the 2006 Plan. As of July 4, 2009, 2.1 million shares remained available for grant under the 2006 Plan.

Stock Options

     Upon approval in May 2006, the 2006 Plan replaced the Company’s previous common stock option plans and equity incentive plans. At July 4, 2009, the Company had options outstanding under the 2006 Plan and the replaced plans. Options under the 2006 Plan may be granted by the Board of Directors at the fair market value on the date of grant and generally become fully exercisable within four years after the grant date and expire between five and ten years from the date of grant. Vesting on options granted to officers will be accelerated in certain circumstances following a change in control of the Company.

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

		Three Months Ended								Six Months Ended
		July 4, 2009				June 28, 2008				July 4, 2009				June 28, 2008
Risk-free interest rate (weighted average)			2.97	%			3.10	%			2.32	%			3.25	%
Expected volatility			53	%			40	%			53	%			40	%
Expected option term (years)			4.91 to 6.02				5.09 to 6.07				4.90 to 6.04				5.09 to 6.07
Dividends		None				None				None				None

     The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant. The expected term of options represents the period of time that options are expected to be outstanding. The Company uses separate assumptions for groups of employees (for example, officers) that have similar historical exercise behavior. The range above reflects the expected option impact of these separate groups. The Company bases the expected volatility on historical trends, because it has determined that the historical volatility trends are reflective of market conditions.

     At July 4, 2009, there was $4.8 million of unrecognized compensation expense related to stock options, which expense the Company expects to recognize over a weighted average period of 1.36 years. The aggregate intrinsic value of in-the-money options outstanding, based on the closing price of the Company’s common stock on July 2, 2009, the last trading day in the six months ended July 4, 2009, of $26.46, was $41.1 million, and the aggregate intrinsic value of options exercisable was $32.7 million. The intrinsic value of options vested and expected to vest was $40.2 million as of July 4, 2009. The intrinsic value of options exercisable was $2.6 million for the six months ended July 4, 2009. The aggregate fair value of the options granted during the six months ended July 4, 2009 was $4.0 million.

     Stock option activity is summarized as follows:

		Number of				Weighted				Weighted Average
		Options				Average Exercise				Remaining Contract
		(in thousands)				Price Per Share				Life (years)
Outstanding options at January 3, 2009			4,259			$	16.37				5.98
Granted			336				23.97
Exercised			(204	)			14.36
Forfeited or expired			(78	)			23.69
Outstanding options at July 4, 2009			4,313			$	16.93				5.84
Outstanding options exercisable at July 4, 2009			3,073			$	15.83				4.92
Outstanding options vested at July 4, 2009 and expected to vest			4,169			$	16.82				5.74

     The weighted average grant-date fair value of options granted during the first six months of 2009 was $12.03 per share.

Restricted Stock

     The 2006 Plan allows for the issuance of restricted stock awards and restricted stock units, which awards or units may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned share-based compensation related to these awards is being amortized to compensation expense over the period of the restrictions, generally four years. The expense for these awards was determined based on the market price of the Company’s shares on the date of grant applied to the total number of shares that were granted.

     Recognized share-based compensation expense related to these restricted stock grants was $3.0 million for the six months ended July 4, 2009. As of July 4, 2009, the Company had $7.6 million of unrecognized compensation expense related to these restricted stock awards, which expense the Company expects to recognize over a weighted average period of 2.08 years. There were no restricted stock awards granted during the first six months of 2009.

     Restricted stock activity is summarized as follows:

		Number of				Weighted Average
		Shares				Grant Date Fair
		(in thousands)				Value
Outstanding unvested restricted stock at January 3, 2009			983			$	16.83
Granted			—				—
Vested			(305	)			17.00
Forfeited or expired			(33	)			17.36
Outstanding unvested restricted stock at July 4, 2009			645			$	16.72

Restricted Stock Units

     As of July 4, 2009, the Company had $8.0 million of unrecognized compensation expense related to restricted stock units, which expense the Company expects to recognize over a weighted average period of 3.6 years. The aggregate intrinsic value of the units outstanding, based on the Company’s stock price on July 4, 2009, was $11.9 million. In the first six months of 2009, the Company issued restricted stock units to U.S and non-U.S. employees.

     Restricted stock unit activity is summarized as follows: