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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 Form 10-K
 
 (Mark one) [X]
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 3, 2004
 [  ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from
         to         .
 Commission file number: 1-8145 Thoratec Corporation (Exact Name of Registrant as Specified in Its Charter)
 California
    
    94-2340464(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)6035 Stoneridge Drive, Pleasanton, California
    
    94588(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (925) 847-8600 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock Indicate by a 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 [X] No [  ] Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12(b)-2) Yes [X] No [  ] The aggregate market value of the voting stock held by non-affiliates
$655,742,659
computed by reference to the last sale reported of such stock
on June 28, 2003 as listed on The Nasdaq National Stock Market.(1) As
of March 12, 2004, registrant had
55,849,935 shares of common
stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Designated portion of Thoratecs definitive proxy statement for its
2004
annual meeting of shareholders are incorporated by reference into Part III of
this Form 10-K.    (1)
    
    Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to
cause the direction of the management or policies of the issuer, or that
such person is controlled by or under common control with the issuer.




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FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, including the documents incorporated by
reference in this Annual Report, includes forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as believe,
anticipate, expect, intend, plan, will, may, hope and other
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. Forward-looking statements include, but are not
necessarily limited to, those relating to:  
    
    our ability to obtain and maintain regulatory approval of our products in the United States and internationally;
    
    results and timing of our clinical trials;
    
    reimbursement policies and decisions by government agencies and third party payors;
    
    the other competing therapies that may currently, or in the future, be available to heart failure patients;
    
    our plans to develop and market new products; and
    
    our ability to improve our financial performance. Factors that could cause actual results or conditions to differ from
those
anticipated by these and other forward-looking statements include those more
fully described in the Risk Factors section and in other documents we file
with the Securities and Exchange Commission. We are not obligated to update or
revise these forward-looking statements to reflect new events or circumstances. You should assume that the information appearing in this Annual Report on
Form 10-K or incorporated by reference is accurate only as of the date on the
front cover. Our business, financial condition, results of operations and
prospects may have changed since that date. Thoratec, the Thoratec logo, Thoralon, TLC-II, HeartMate, HeartPak and
Vectraare registered trademarks, and Aria is a trademark of Thoratec
Corporation. HEMOCHRON, ProTime, Surgicutt, Tenderlett, tenderfoot and IRMA are
registered trademarks of International Technidyne Corporation, or ITC, our
wholly-owned subsidiary. 2




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TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    4Item 2.
    
    Properties
    
    27Item 3.
    
    Litigation
    
    27Item 4.
    
    Submission of Matters to a Vote of Security
Holders
    
    27PART IIItem 5.
    
    Market for Common Equity and Related Stockholder
Matters
    
    29Item 6.
    
    Selected Consolidated Financial Data
    
    29Item 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
    
    42Item 9.
    
    Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    69Item 9A.
    
    Controls and Procedures
    
    69PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant and Code
of Ethics
    
    70Item 11.
    
    Executive Compensation
    
    70Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management
    
    70Item 13.
    
    Certain Relationships and Related
Transactions
    
    70Item 14.
    
    Principal Accountant Fees and Services
    
    70PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on
Form 8-K
    
    71Exhibit Index
    
    
    
    74EXHIBIT 3.2EXHIBIT 10.9EXHIBIT 10.22EXHIBIT 10.23EXHIBIT 10.24EXHIBIT 10.26EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 3




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PART I 
 Item 1.Business OVERVIEW We are a leading manufacturer of circulatory support products for use by
patients with congestive heart failure, or CHF. According to the American Heart
Association, 4.9 million patients in the United States suffer from CHF and an
additional 550,000 patients are diagnosed with this disease annually. We were
the first company to receive approval from the United States Food and Drug
Administration, or FDA, to commercially market a ventricular assist device, or
VAD, to treat patients with late-stage heart failure, which comprises
approximately 5% to 10% of the CHF patient population. Our VADs are used
primarily by these CHF patients to perform some or all of the pumping function
of the heart and we currently offer the widest range of products to serve this
market. We believe that our long-standing reputation for quality and innovation
and our excellent relationships with leading cardiovascular surgeons worldwide
position us to capture growth opportunities in the expanding congestive heart
failure market. Our three major product groups are:  
    
    Circulatory Support Products.Our circulatory support products
include VADs for the short-term and long-term treatment of congestive
heart failure. Our products address more indications than the products
of any other cardiac assist device company.
    
    Vascular Graft Products.We have developed small diameter grafts
using our proprietary materials to address the vascular access and
coronary bypass surgery markets. Our grafts are sold in the United
States and internationally for use in hemodialysis patients and are
currently in clinical trials for coronary artery bypass applications.
    
    Point-of-Care Diagnostics. We are a leading supplier of point-of-care
blood diagnostics test systems that provide fast, accurate blood test
results to improve patient management, reduce healthcare costs and
improve patient outcomes. Our VADs are regarded as the most versatile and widely used circulatory
support systems for patients with late-stage CHF. We currently market devices
that may be implanted or worn outside the body and that are suitable for
treatments for different durations for patients of varying sizes and ages. We
estimate that our VADs have treated over 6,300 patients worldwide. Our devices
are currently used primarily for patients awaiting a heart transplant or
recovering from open heart surgery. On November 6, 2002, the FDA approved the
HeartMate SNAP-VE VAD as the first heart assist device for Destination Therapy,
or permanent support for patients suffering from end-stage heart failure who
are not eligible for heart transplantation. On April 7, 2003, the FDA approved
the HeartMate XVE, an enhanced version of the HeartMate SNAP-VE, for
Destination Therapy. Thoratec is the only company to have a ventricular assist
device approved for permanent support for end-stage heart failure patients. On February 14, 2001, we completed our merger with Thermo
Cardiosystems,
Inc., (TCA), a Massachusetts-based manufacturer of cardiac assist, blood
coagulation testing and skin incision devices, which we refer to as the Merger.
As a result of the Merger, we substantially increased the size of our company
and became a leading provider of circulatory support products worldwide. We now
sell VADs to virtually every leading heart transplant center worldwide and we
market three out of the four VADs approved by the FDA as a bridge to heart
transplant. Immediately after the Merger the parent company of TCA, Thermo
Electron Corporation, owned approximately 35% of our outstanding stock. As of
the date of this report, Thermo Electron owns approximately 10% of our total
outstanding common stock. Destination Therapy On November 6, 2002, the FDA granted us approval to market our
HeartMate
SNAP-VE VAD for Destination Therapy for CHF patients who are not eligible for a
heart transplant. This approval marks the first time a VAD has been approved as
a long-term, permanent treatment for end-stage congestive heart failure
patients who do not qualify for heart transplantation due to age or extenuating
health circumstances and who have a life expectancy of less than two years.
While our HeartMate VAD has been used since 1998 as a bridge to heart
transplantation, this new approval gives regulatory authority for the medical
communitys expanded use of VADs. The FDAs decision to approve the HeartMate SNAP-VE VAD for
Destination
Therapy was based on data from a clinical trial called REMATCH, or Randomized
Evaluation of Mechanical Assistance for the Treatment of Congestive Heart
Failure, which 4




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showed our HeartMate device nearly doubled and
tripled survival over the
drug therapy group at one and two years, respectively. The results of the trial
were presented at the American Heart Association Scientific Sessions in
November 2001 and the results were published in The New England Journal of
Medicine. The REMATCH trial involved 129 late-stage CHF patients who, because of
their ages or other diseases, were not eligible to receive one of the very
limited supply of donor organs for heart transplantation. The study was
independently coordinated by Columbia University at 21 prestigious transplant
centers in the United States. The overall purpose of the study was to evaluate
the efficacy, safety and cost effectiveness of our HeartMate VAD versus maximum
drug therapy. The REMATCH publication provided a detailed evaluation of
survivability, device safety and impact on patient quality of life. On April 7, 2003, the FDA approved a PMA (PreMarket Approval)
Supplement
allowing the use of our HeartMate XVE for Destination Therapy. The XVE is an
enhanced version of the HeartMate SNAP-VE device and reflects technological
advances based on the experience in the REMATCH trial. The XVE incorporates a
number of significant improvements to earlier versions of the HeartMate VE,
which were designed to ease implantation, provide for longer and more reliable
device life and improve patient outcomes. The Centers for Medicare & Medicaid Services (CMS) issued a
National
Coverage Decision Memorandum for the use of LVAS that are approved by the FDA
for Destination Therapy, effective October 1, 2003. Our HeartMate VAD is
currently the only such device approved for Destination Therapy by the FDA. CMS
also made technical adjustments in 2003 regarding the relative weight and base
level of reimbursement it will provide under DRG (diagnosis-related group) 525
Heart Assist System Implant. This change raised the base payment under DRG
525 nearly 25% from approximately $54,000 to approximately $70,000. In many
cases the actual payments to hospitals under this revised DRG will be higher,
and in some cases as much as double the base payment, based on geographical
location and other factors. In December 2002, Blue Cross/Blue Shield (BC/BS) Technology
Evaluation
Center issued a positive decision on the use of LVADs for Destination Therapy
and since then more than half of the plans around the United States have issued
positive coverage polices for their beneficiaries. Aetna U.S. Healthcare, the
fourth largest health insurer in the U.S. covering more than 21 million people,
issued a Coverage Policy Bulletin in March 2003 indicating that it now covers
the use of ventricular assist devices for FDA-approved indications, including
Destination Therapy. UNICARE, an operating affiliate of WellPoint Health
Networks, one of the nations largest managed care companies serving more than
13 million members and approximately 42 million specialty members, recently
made a national decision to cover LVADs for Destination Therapy. PacifiCare
has also adopted coverage policy for Destination Therapy. PacifiCare insures
more than three million members. We believe that the Destination Therapy application for our HeartMate
device represents a long-term market opportunity of up to 100,000 additional
patients annually in the United States. For these end-stage CHF patients,
maximum drug therapy is currently the only other treatment available and, even
with drug therapy, the 12-month mortality rate for these patients is 75%. We
believe that the HeartMate will provide a significant survival benefit for this
patient population. OUR MARKETS The primary markets for our VAD products are those patients suffering
from
heart failure, and in particular, from CHF. CHF is a chronic disease that
occurs when degeneration of the heart muscle reduces the pumping power of the
heart, causing the heart to become too weak to pump blood at a level sufficient
to meet the bodys demands. CHF can be caused by artery or valve diseases or a
general weakening of the heart muscle itself. In addition, other conditions,
such as high blood pressure or diabetes, can also lead to CHF. According to the American Heart Association, or the AHA, there are 4.9
million CHF patients in the United States and approximately 550,000 new cases
are diagnosed each year. The AHA also estimates that approximately 70% of CHF
patients under age 65 will die within eight years. We believe that the number
of patients suffering from end-stage CHF who could benefit from some form of
cardiac assist could be over 100,000 annually. While the number of treatment
options for earlier stage CHF has increased in recent years, the use of
medication remains the most widely used approach for treatment of the disease.
These drug therapies include ACE inhibitors, anti-coagulants and beta-blockers,
which facilitate blood flow, thin the blood or help the heart work in a more
efficient manner. Other procedures used to treat earlier stage CHF include
angioplasty, biventricular pacing, valve replacement, bypass and left
ventricular reduction surgery. 5




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Despite attempts to manage CHF through drug therapy, there is currently
only one curative treatment for the disease  a heart transplant.
Unfortunately, the number of hearts available for transplant each year can meet
the needs of only a small number of the patients who need a heart transplant.
The United Network for Organ Sharing reported that there were only 2,275 hearts
available for transplant in the United States in 2001. At any given time, there
are approximately 4,000 patients on the U.S. national transplant waiting list
and we believe a comparable number of patients are waiting in Europe. The
median wait for a donor heart by patients on a heart transplant waiting list is
approximately nine months, and many patients have to wait as long as one to two
years before receiving one of the few donor hearts available. In 2001,
approximately 15% of such patients died while waiting for a donor heart. In the United States, there are currently two FDA-approved indications
for
the use of VADs in patients with CHF  as a bridge to heart transplant and as
Destination Therapy. We are currently pursuing one additional indication for
our VAD products  for therapeutic recovery of the heart. Beyond the CHF
markets, VADs are also approved for use during recovery following cardiac
surgery. All four indications are summarized below. Bridge to Transplant Ventricular assist devices provide additional cardiac support for
patients
who are in late-stage heart failure waiting for a donor heart. Of the
approximately 4,000 patients on the waiting list for a heart transplant in the
United States, we estimate that approximately 25% will receive a VAD. We believe that the percentage of patients bridged to transplant
continues
to increase with surgeons level of comfort with the technology, particularly
for longer-term support cases. There are currently four devices approved in the
United States as a bridge to transplant, three of which are manufactured by us.
We estimate that the bridge to transplant indication represents a worldwide
market opportunity of up to 8,000 patients annually. Destination Therapy On November 6, 2002, we received approval to market the HeartMate
SNAP-VE
VAD for Destination Therapy for patients with late-stage CHF who are not
candidates for heart transplantation due to other degenerative illnesses or
advanced age. On April 7, 2003 the FDA also approved the HeartMate XVE VAD for
Destination Therapy. We believe that the success in transitioning this market
from maximum drug therapy to VADs is dependent on the development of VADs, like
our HeartMate, with substantial longevities and proof of clinical efficacy. This is the first VAD approved for Destination Therapy for patients
suffering from late-stage CHF and we believe that the Destination Therapy
application for our HeartMate device represents a market opportunity of up to
100,000 additional patients annually in the United States alone, which would
represent a significant increase over our existing customer base. Therapeutic Recovery We believe that, for most patients, recovery of their own heart is a
better alternative than either heart transplantation or permanent implantation
of a blood pumping device. Based on recently reported cases of recovery in
heart failure patients, we believe that our Thoratec VAD system is a potential
therapy that can reverse the complications of late-stage heart failure in
certain patients. While this therapeutic recovery indication is not yet approved for our
devices, we are actively investigating the worldwide experience with our VAD
systems as a means of therapeutic recovery and the requirements for pursuing
regulatory approval for this indication. Although it is not certain how many
patients with CHF could benefit from this indication, based upon the percentage
of patients with late-stage CHF, we believe that the patient population could
be substantial. We submitted a PMA Supplement to the FDA in December 2000 and
submitted additional information in a PMA amendment in January 2003. We hope to
receive approval to market our product for this indication in the United States
in 2004. We are also formulating a regulatory and clinical strategy for
non-U.S. markets. Recovery Following Cardiac Surgery In addition to CHF, our devices are also used for patients who suffer
from
acute cardiac failure and undergo cardiac surgery. Following cardiac surgery,
some patients have difficulty being weaned off heart/lung machines - a
complication that arises in approximately one percent of the more than 900,000
open-heart procedures performed each year. Many of these patients ultimately
die from heart failure when the heart, weakened by disease and the additional
trauma of surgery, fails to maintain adequate blood 6




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circulation. We believe that only a small portion
of this market is
currently being treated with VADs and this patient population could benefit
substantially from further awareness and use of our VADs in this market. Other In addition to the circulatory support market, we sell a device that
addresses the vascular access graft market, which we market as the Vectra
Vascular Access Graft, or Vectra,for patients undergoing renal hemodialysis. Point-of-Care Diagnostics Our point-of-care (POC) blood diagnostic test systems provide fast,
accurate blood test results to improve patient management, reduce healthcare
costs and improve patient outcomes. These products are sold into the Hospital
POC market, and the Alternate Site POC market comprising physicians offices,
long-term care facilities, clinics, visiting nurse associations, and home
healthcare companies. Market growth for POC diagnostic products is coming from the Alternate
Site POC market, which is being fueled by convenience and ease of use to the
patients and physicians, and the clinical benefits from the more frequent
monitoring it allows patients. Overall, we are planning for sales of our point-of-care diagnostic test
systems business to grow at an annual compound growth rate of up to 10% for the
next several years. The drivers for this growth assume increased patient
testing, better patient outcomes, and increased decentralization of testing
from central laboratories to point-of-care. OUR STRATEGY We are a leading developer and manufacturer of medical devices for the
CHF, cardiac surgery and vascular graft markets. Our key strategies to maintain
and expand this leadership position are to: Offer a broad range of products.We believe that our broad and
diverse
product offering is an important competitive advantage because it allows us to
address the various preferences of surgeons and the clinical needs of a wide
variety of patients, as well as the economic needs and concerns of third party
payers. An important part of our strategy is to further broaden our product
line to meet customer needs by developing new products internally or acquiring
or licensing new products. We intend to further develop a number of new
improved products including next generation versions of both HeartMate and
Thoratec VADs. Increase Cost Effectiveness of our Products. While a recent study
indicates that the cost of implanting a VAD is comparable with that of a heart,
liver and other major organ transplant, cost remains a significant concern of
our customers. In October 2003, CMS issued a favorable National Coverage
decision for the use of left ventricular assist systems that are approved by
the FDA for treating Destination Therapy in end-stage heart failure patients.
We plan to work very closely with approximately 62 centers approved by CMS in
developing the Destination Therapy market. Additionally, we are expanding our
market education and training programs and we continue to implement
improvements that enhance the performance of our products. Increase penetration of existing markets. We plan to treat a
greater
number and variety of patients within our current customer base. To accomplish
this, we are leveraging our existing relationships with leading cardiac
surgeons and hospitals and utilizing our existing sales channels to gain
acceptance and adoption of our products.  
    
    Bridge to Transplant Market.On July 28, 2003, Thoratec received CE
mark certification, providing approval to market the Thoratec IVAD in
countries in the European Union. This makes the IVAD the only currently
approved implantable cardiac assist device that can provide left, right
or biventricular support.
    
    Destination Therapy Market. We recently received approval for the
HeartMate XVE VAD for Destination Therapy in the treatment of late-stage
CHF patients who are not candidates for heart transplants. While the
initial CMS reimbursement approval will be limited to approximately 62
centers in 2004, we estimate the market penetration for this indication
could be between 5,000 and 15,000 patients annually using current
approved technologies and up to 100,000 patients annually in the United
States alone as we introduce new technologies that increase the life of
our VAD and improve the outcome of procedures.
    
    Home Discharge for our TLC-II portable driver. On December 1, 2003,
the FDA approved the TLCII portable driver for home discharge. The TLC
II was already approved for in-hospital use in the United States, and
has been approved for home 7




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discharge in Europe for several years. This approval will enable patients
supported by the device to be discharged to home from the hospital while
awaiting heart transplantation or recovery of the natural heart. It is
the first biventricular device to receive such approval. Obtain approval for new indications or uses of our products.  
    
    Therapeutic recovery. We believe that the use of VADs may lead to
recovery of the natural heart in certain patients. While our recent PMA
submission for our Thoratec VAD for this indication has not yet received
approval, we continue to investigate this market, and believe that the
patient population that could benefit from this use could be
substantial.
    
    Thoratec IVAD submission for the United States. We have filed with
the FDA seeking approval to market the Thoratec IVAD device in the
United States, and we anticipate receiving FDA approval in 2004.
    
    Use of HeartMate II in U.S. clinical trial. We have initiated a
clinical trial of the HeartMate II, a next generation axial flow design
intended for the long-term cardiac support of patients who are in
end-stage heart failure. Focus on and partner with leading heart centers. We have developed
extremely strong, long-standing relationships with leading cardiovascular
surgeons and heart centers worldwide. We believe that no other cardiac assist
company enjoys the same depth of relationship and access to these customers.
Maintaining and expanding these relationships is an important part of our
growth strategy, particularly for the development and introduction of new
products and the pursuit of additional indications for our existing products.
We have launched an important program called the Heart Hope program, designed
to partner with some CMS approved Destination Therapy centers, for the purpose
of building the market for this new indication, and in the process, address
important issues such as reimbursement, clinical outcomes, and building a
strong referral program for Destination Therapy patients. Heart Hope is a
collaboration between Thoratec and leading heart centers to advance clinical,
educational and economical outcomes associated with the treatment of end-stage
heart failure. Underlying the Heart Hope initiative is an educational program
designed to increase acceptance of Destination Therapy among heart failure
cardiologists, generate physician referrals and broaden patient awareness of
this new therapy. Elements of this effort include marketing materials:
newsletters, direct mail pieces, education symposia, web presence, print and
radio advertising and public relations materials. Increase our presence in the heart failure and cardiovascular disease
markets. In addition to increasing our presence in the heart failure and
cardiovascular disease markets through internal growth, we will also be
evaluating strategic alliances, joint ventures and related business development
opportunities. OUR PRODUCTS We offer a broad product portfolio of implanted and external
(paracorporeal) devices:  
    
    The Thoratec Ventricular Assist Device system is an external device
for short to mid-term cardiac support, which is sold worldwide.
Additionally, we sell an implantable version, called the IVAD in Europe
which is the only currently approved implantable cardiac assist device
providing left, right or biventricular support.
    
    The HeartMate Left Ventricular Assist system, also called the
HeartMate XVE, which is an internal device for longer-term cardiac
support and the only device approved in the United States for permanent
support for those patients ineligible for heart transplantation. In addition to our cardiac assist products, we offer vascular access
grafts, used in hemodialysis for patients with end-stage renal disease.
Additionally, we sell point-of-care blood diagnostics test systems and services
that provide fast, accurate blood test results to improve patient management,
reduce healthcare costs and improve patient outcomes. Circulatory Support Products Ventricular assist devices perform some or most of the pumping function
of
the heart in patients with severe heart failure. A cannula connects the left
ventricle of the heart to a blood pump that is driven by a power source, which
can be either electric or pneumatic. Blood flows from the left ventricle to the
pump chamber, via the cannula. An electric or air driven mechanism compresses
the pump chamber and forces the blood through another cannula into the aorta.
From the aorta, the blood then circulates throughout the body. Valves, which
can be mechanical or tissue, enable unidirectional flow. 8




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Certain VADs are implanted internally, while others are placed outside
the
body. Some external devices are placed immediately adjacent to the body
(paracorporeal), while other external VADs are positioned at a distance from
the body (extracorporeal). Between 15% and 20% of assist patients require
biventricular support and therefore require a second pump for the right
ventricle. Currently the power source remains outside the body for all
FDA-approved VADs. The Thoratec VAD The Thoratec VAD has been FDA approved since 1995 and has treated over
2,500 patients worldwide. The Thoratec VAD is a paracorporeal device that
remains outside of the body. The product is less invasive than implantable VADs
since only the cannulae must be implanted. The paracorporeal nature of the
Thoratec VAD has several positive consequences including relatively shorter and
less invasive implantation times (approximately two hours) and the ability to
use the device in smaller patients. A pneumatic power source drives the Thoratec VAD. It is designed for
intermediate duration use of a few weeks to several months, though this device
has supported numerous patients for six to eighteen months. Offering left,
right or biventricular support, the Thoratec VAD is the only biventricular
support system approved for use as a bridge to transplant. This characteristic
is significant since 15% to 20% of bridge to transplant patients require
right-sided ventricular assist. The Thoratec VAD is also the only device
approved for both bridge to transplant and recovery following cardiac surgery.
We are working with the FDA to gain approval for a therapeutic recovery
indication for the Thoratec VAD, which we hope to receive in 2004. The Thoratec
VAD is made with our proprietary biomaterial, Thoralon, which may reduce
clotting. Ambulation with most paracorporeal VADs is possible, but very limited
because of the large size of the typical drive console. In order to improve
patient mobility, we developed the TLC-II, a small portable driver, which
increases portability and ambulation options. The portable driver was approved
in the United States in June 2001 for use in off-site excursions and was
approved December 1, 2003 for home discharge use. The TLC-II has been approved
for use in Europe since 1998. The HeartMate VAD The HeartMate has been used to treat approximately 3,800 patients
worldwide. There are currently two versions of the HeartMate available on the
market. The pneumatic-powered version of the HeartMate, called the HeartMate
IP, was approved in the United States in 1994 and was the first FDA-approved
cardiac assist device for bridge to transplantation. The electric HeartMate,
called the HeartMate VE, received FDA approval in September 1998 for bridge to
transplantation. In November 2002 the product received FDA approval for
long-term, permanent treatment for end-stage congestive heart failure patients
who do not qualify for heart transplantation. The enhanced version of the
product, called the HeartMate XVE, received FDA approval in December 2001 for
bridge to transplantation. In April 2003 the product received FDA approval for
long-term, permanent treatment for end-stage congestive heart failure patients
who do not qualify for heart transplantation. The HeartMate XVE accounts for
over 95% of total HeartMate sales. Compared with the Thoratec VAD, the
HeartMate is designed for longer duration use of several months to up to two or
three years. The HeartMate offers only left ventricular support. This device is
currently approved for the bridge to transplant indication and for home
discharge and, most recently, for Destination Therapy for patients who are not
eligible for a heart transplant. Patients with a HeartMate do not require anti-coagulation, since the
device utilizes proprietary textured surfaces and tissue valves rather than
mechanical valves. As a result, we believe that this device has the lowest rate
of stroke for patients using ventricular support. The implantable nature of
this device enables patient ambulation and home discharge. Implantable VAD We received CE Mark certification to market the Thoratec IVAD in Europe
in July 2003. This makes the IVAD the only currently approved implantable
cardiac assist device that can provide left, right or biventricular support.
We are seeking FDA approval to market the device in the United States and
expect to have approval in 2004. As of December 2003, there have been 34
patients in the U.S. trial, reflecting more than 3,600 days of cumulative
patient support. The IVAD maintains the same blood flow path, valves and
blood pump as the paracorporeal device and is better suited for longer-term
support compared to the Thoratec VAD. The outer covering of the IVAD is made of
a titanium alloy, which facilitates implantation. The device is approximately
half the size of other implantable VADs and weighs less than one pound. The
device can be implanted in patients ranging in weight from 40 kg to over 100
kg. The small blood pump is implanted in the body and is connected to a small,
briefcase size, battery-powered, external control unit. The device can provide
left, right, or biventricular support. The IVAD is being designed as a bridge
to transplant and possibly for therapeutic recovery, but not as an alternative
to transplant. 9




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HeartMate II and HeartMate III The HeartMate II is a next generation device intended for long-term
cardiac support for patients who are in end-stage heart failure. HeartMate II
is an small, implantable, electrically powered device that weighs approximately
12 ounces and is approximately 1.5 inches in diameter and 2.5 inches long. In
addition to being significantly smaller than currently approved devices, with
only one moving part, the HeartMate II is designed to operate more simply and
quietly than other approved devices. As an axial flow device, the HeartMate II is designed to provide blood
flow through the circulatory system on a continual basis and is smaller and
easier to implant than pulsatile devices. A unique feature of the device is its
automatic speed control mode that is designed to regulate pumping activity
based on different levels of patient or cardiac activity. We have enrolled two patients in our U.S. safety and early efficacy
clinical trial of the HeartMate II device as of the end of February 2004. We
are currently in the process of expanding to additional sites and continue to
aggressively seek qualified patients to complete our early safety study and
expand to the pivotal phase. The FDA has approved the evaluation of the
HeartMate II device for an early feasibility trial for a total of seven
patients at four centers and the device will be evaluated for use as a bridge
to transplantation. In addition we have implanted the HeartMate II in one
patient in Europe. In addition, we are developing our third generation device, the HeartMate
III. The HeartMate III is a centrifugal, continuous flow pump that employs a
magnetically levitated rotor that eliminates wear from touching parts. No
bearings are present and the device is completely encased in titanium. The
device is designed for long-term implantation (5-10 years) for patients with
end-stage heart failure including Destination Therapy,
bridge-to-transplantation and therapeutic recovery. The product design is
being finalized and pre-clinical studies are being performed to ready the
device for clinical evaluation. Vascular Graft Products The Vectravascular access graft was approved for sale in the
United
States in December 2000 and in Europe in January 1998. It is designed for use
as a shunt between an artery and a vein, primarily to provide access to the
bloodstream for renal hemodialysis patients requiring frequent needle punctures
during treatment. Other currently available vascular access grafts are commonly
made out of ePTFE, which can lose integrity after repeated punctures and
require a three to six week healing period between implantation and the
initiation of dialysis treatment. We believe that the Vectramay provide
significant advantages over existing synthetic vascular access grafts that may
encourage its use by surgeons who are currently using natural vessels for
vascular access. We currently sell Vectrathrough the Bard Peripheral Vascular
division of C.R. Bard Corporation in the United States, Europe and selected
countries in Scandinavia, the Middle East and Northern Africa and through
Goodman Co. Ltd. in Japan. Point-of-Care Diagnostics Through our ITC subsidiary, we design, develop, manufacture and market
point-of-care diagnostic test systems that provide fast, accurate blood test
results to improve patient management, reduce healthcare costs and improve
patient outcomes. Our major product lines are the following:  
    
    Hemochron POC coagulation system,
    
    IRMA POC blood gas/electrolyte and chemistry system,
    
    ProTime coagulation monitoring system,
    
    Hemoglobin Pro system, and
    
    Tenderfoot, tenderlett and surgicutt incision products. The Hemochron and IRMA products are primarily sold into the Hospital POC
segment of the market, and represent about 50% of ITCs annual business.  
    
    Hemochron is used to monitor a patients coagulation while they are
being administered anticoagulants in various settings, including in the
cardiovascular operating room to monitor Heparin and in an
anticoagulation clinic to monitor Coumadin. It is considered a
moderately complex device and must be used by professionally trained
personnel. The system consists of a small, portable analytical
instrument and disposable test cuvettes. 10




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
    
    IRMA is used to monitor a patients blood gas/electrolyte and
chemistry status. It is considered moderately complex and its use
requires supervision by professionally trained personnel. The system
consists of a small, portable analytical instrument and disposable test
cartridges. The ProTime and Hemoglobin Pro products are sold into the Alternate Site
POC market comprising Physicians offices, long-term care facilities, clinics,
visiting nurse associations, and home healthcare companies. Historically this
segment has represented about 20% of the total ITC business. ProTime is used to
monitor a patients coagulation while they are taking oral anticoagulants such
as Coumadin, and can be prescribed to be used by the patient at home or can be
used in the physicians office or clinic. The system consists of a small,
portable analytical instrument and disposable test cuvettes.  
    
    Hemoglobin Pro (Hgb Pro) is used by professionals, mainly in the
doctors office to test for anemia; providing quick results on a very
small blood sample. The system consists of a small, hand held test meter
and disposable test strips. Growth in the Alternate Site POC market is being fueled by convenience
and
ease of use to the patients and physicians. In addition, in the case of the
ProTime monitoring of oral anticoagulation, clinical studies have shown that
more frequent monitoring results in patients that stay in their therapeutic
range more often. More frequent monitoring is made possible by patients testing
themselves at home in addition to being tested in a doctors office when
appropriate. Approximately 30% of our Hospital POC and the Alternate Site POC revenues
typically relates to sales of equipment, with 70% relating to consumable
products (cuvettes, cassettes, etc.) used in the testing process. The Hospital POC and the Alternate Site POC market segments are both very
competitive, and include the following potential drivers:  
    
    New drug therapies under development may not require the intense
monitoring that the current drug of choice (Heparin) requires. To try to
mitigate this risk, we participate in clinical trials with key
pharmaceutical companies in order to be positioned to provide the
hemostasis monitoring that will ultimately be required for new
therapies.
    
    New competitors that might enter the market with broader test menus.
To address this risk, in late 2003 we acquired the IRMA (Immediate
Response Mobile Analysis) product line of blood gas/electrolyte and
chemistry tests from Diametrics. This has significantly increased our
test menu offering, and also offers us the opportunity to develop the
next generation system, combining the coagulation and blood gas tests
into one platform, which we anticipate will take 3-5 years to complete.
In the interim period, the idms data management and connectivity system,
acquired as part of the IRMA acquisition, will allow the stand-alone
Hemochron and IRMA systems to be interfaced together with a hospitals
laboratory or hospital information system. This project is expected to
be completed in mid-2004. Our Incision products, historically representing about 30% of ITC
revenues, are used to obtain a patients blood sample for diagnostic testing.
These products are sold to both the Hospital POC market and the Alternate Site
POC market. Our products offer certain advantages and command a price premium
over the competition, but they only capture the higher end of the market. Our most successful Incision product is the heel stick used
for infant
testing, which we market based on its high-end features. Long-term, however, we
believe that customers will increasingly make purchasing decisions on these
types of products based on price. Therefore, we expect a gradual erosion of
market share over time through 2007. Overall, we are planning for sales of our point-of-care diagnostic test
systems business to grow at an annual compound growth rate of up to 10% for the
next several years. The drivers for this growth assume increased patient
testing, better patient outcomes, and increased decentralization of testing
from central laboratories to point-of-care. We expect our international sales
to increase from 18% currently to approximately 25% of ITCs total sales by
2007. Other Recent Developments During 2003, we received approval for the following
products and indications by
the FDA:  
    
    TLC-II Portable VAD Driver for Home Discharge.On December 1, 2003,
the FDA approved the TLC-II Portable VAD Driver for home discharge.
The TLC-II is a small, lightweight device that powers the Thoratec VAD
(Paracorporeal VAD) as well as the investigational IVAD
(Implantable/Paracorporeal VAD) The TLC-II was already approved for
in-hospital use in the United States and has been approved for home
discharge in Europe for several years. This approval will enable
patients supported by the device to be discharged home from the
hospital awaiting heart transplantation or recovery of the natural
heart. It is the first biventricular support device to receive such
approval. 11




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
    
    IVAD(Implantable Ventricular Assist Device). On July 28, 2003, we
received CE Mark certification, providing approval to market the
Thoratec IVAD in Europe. This makes the IVAD the only currently
approved implantable cardiac assist device that can provide left,
right or biventricular support.
    
    HeartMate II.We initiated a clinical trial of the HeartMate II, a
next generation axial flow design intended for the long-term cardiac
support of patients who are in end-stage heart failure. SALES AND MARKETING We operate in the Cardiovascular Products and ITC business segments.
Cardiovascular Products include our circulatory support products and vascular
graft products. ITC includes our point-of-care blood diagnostics sales
business. Circulatory Support Products The potential customers for our circulatory support products are
hospitals
that perform open heart surgery procedures and heart transplants. We estimate
that 130 of the approximately 900 hospitals in the United States that perform
open-heart surgery also perform heart transplants. We actively are marketing to
these 130 heart transplant hospitals and large cardiac surgery centers in
addition to the approximately 100 heart transplant hospitals in Europe. We have recruited and trained a direct sales force that, as of
January 3,
2004, comprised 22 experienced cardiovascular sales specialists to sell our
circulatory support systems in the United States, Canada, France, Germany,
Spain, United Kingdom, Austria, Switzerland, Netherlands, Portugal and South
Africa. The sales effort is complemented by 15 direct clinical specialists who
conduct clinical educational seminars, assist with a new open-heart centers
first VAD implant and resolve clinical questions or issues. We also partner
with universities, experienced clinicians and opinion leaders to assist with
expanding clinical educational needs. The sales team focuses on cardiac
surgeons that perform heart transplantation, perfusionists and the transplant
nursing staff. We have launched an important program called the Heart Hope
program, designed to partner with some CMS approved Destination Therapy
centers, for the purpose of building the market for this new indication, and in
the process, address important issues such as reimbursement, clinical outcomes,
and building a strong referral for Destination Therapy patients. Heart Hope is
a collaboration between Thoratec and leading heart centers to advance clinical,
educational and economical outcomes associated with the treatment of end-stage
heart failure. Underlying the Heart Hope initiative is an educational program
designed to increase acceptance of Destination Therapy among heart failure
cardiologists, generate physician referrals and broaden patient awareness of
this new therapy. Elements of this effort include marketing materials:
newsletters, direct mail pieces, education symposia, web presence, print and
radio advertising and public relations materials. In addition to our direct
selling effort, we have established a network of international distributors who
cover those markets that represent the majority of the remaining VAD potential.
We employ sales and marketing tactics commonly found within the cardiovascular
device market such as direct mail, clinical education seminars, symposia,
equipment purchase and lease programs and journal advertisement. We have also
assembled a Medical Advisory Board consisting of opinion leaders who provide
clinical input and direction on product development, marketing and market
issues. Hospitals or other medical institutions that acquire a VAD system
generally purchase VAD pumps, related disposables and training and purchase or
rent two of the associated pump drivers (to ensure that a backup driver is
available). The time from the initial contact with the cardiac surgeon until
purchase is generally between nine and eighteen months, due to the expense of
the product and common hospital capital equipment acquisition procedures. Upon
receipt of a purchase order, we will usually ship the products within thirty
days. The introduction of a VAD system in a new hospital or other medical
institution requires that the surgical and clinical support personnel possess
certain expertise to use our products. For our customers that do not already
have this expertise, we provide initial training for the surgical and clinical
support teams generally after delivery of one of our VAD products. As many of
our customers already possess sufficient experience and expertise to use our
products, training is provided as a best practice to optimize the use and
success of our products. In addition, a variety of training materials accompany
the initial delivery of our VAD products including instructions for use,
patient management manuals and assorted videos. As a follow-up to the initial
training, we provide clinical support at the first implant whenever possible.
We also provide 24-hour access to clinically trained personnel. Our sales force
also helps customers understand and manage reimbursement from third-party
payors. Vascular Graft Products 12




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We market the Vectrathrough Bard in the United States, Europe and
selected countries in Scandinavia, the Middle East and Northern Africa and
through Goodman Co. Ltd. in Japan. Point-of-Care Diagnostics ITC currently maintains a direct sales staff of 39 in the United States,
who sell to hospitals as well as to third party dealers and distributors.
Outside the United States, ITC has three salespeople selling principally to
third party distributors. Substantially all of ITCs revenues have historically
come through our distributor channels. As we integrate our recently acquired IRMA product line of blood gas
analyzers into our current business, an increasing portion of our revenue in
the United States market will be generated by direct sales rather than through
our current distributor model. This will require expanding the sales, technical
service, customer service and shipping headcount at ITC in order to provide our
customers with the support and service that they historically obtained from our
distributors. COMPETITION The following represent what we believe to be our primary competition:  
    
    World Heart Corporation (WorldHeart),which manufactures and markets
an implantable left ventricular assist device approved for bridge to
transplant in the United States. On February 26, 2004 WorldHeart
announced that it had received conditional approval from the FDA to
proceed with a trial to support a PMA Supplement for use of Novacor LVAS
in Destination Therapy. The approval permits enrollment at up to 40
centers and up to 50 patients in the United States. Total enrollment
will be at least 225 patients. The primary end point is two-year patient
survival. Secondary endpoints include health status, neurocognitive
capacity, and incidence of certain adverse events, including device
failure. The trial will randomize patients to receive either a Novacor
LVAS or a HeartMate XVE LVAS on a 2:1 ratio.
    
    ABIOMED Inc., which manufactures and markets biventricular assist
devices approved for temporary circulatory support of patients in
post-heart surgery shock and other recovery indications in the United
States. In September 2003, Abiomed received FDA approval to begin
commercial distribution of the AB5000 Ventricle, which provides
temporary support for one or both sides of a heart that has failed but
has the potential to recover.
    
    MicroMed Technology Inc., which manufactures and markets an axial
flow implantable left ventricular assist device, received approval for
Destination Therapy trials in January 2004.
    
    Arrow International, which produces and markets an implantable left
ventricular assist device principally for Destination Therapy, received
CE Mark certification in November 2003 to market the device in Europe. While these companies represent todays chief competition, at the
recent
International Society for Heart & Lung Transplantation (ISHLT) meeting held in
the fall of 2003, there were more than 20 different technologies presented in
different stages of clinical trial and/or market approval. Any of these
technologies could prove to be clinically superior, easier to implant, and/or
less expensive than the devices currently in the market, and thus could take a
leadership position in the markets in which we operate. PATENTS AND PROPRIETARY RIGHTS We seek to patent certain aspects of our technology. We hold, or have
exclusive rights to, several U.S. and foreign patents. Except for the patents
mentioned below, the Thoratec VAD system is not protected by any patents other
than one patent pertaining to the TLC-II. We do not believe that this lack of
patent protection will have a material adverse effect on our ability to sell
the Thoratec VAD system because of the lengthy regulatory period required to
obtain approval of a VAD. Several patents cover aspects of our HeartMate line
of products. Our patents relating to blood coagulation, blood gas, blood electrolytes,
blood chemistry, and skin incision devices are held by ITC. The rights to the
blood gas, blood electrolytes and blood chemistry patents were transferred to
ITC as part of the acquisition of the Immediate Response Mobile Analysis blood
analysis system business from Diametrics Medical. We own or hold rights in the
remainder of the U.S. patents by virtue of the merger between Thoratec and TCA,
which resulted in the transfer of the ownership of the TCA patents to Thoratec. 13




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Several patents cover aspects of our proprietary biomaterials technology,
some of which were sold to TH Goldschmidt AG, a German chemical manufacturer,
in 1989, but we have retained worldwide, royalty-free, exclusive rights to
these patents for most medical applications. The patent license from
Goldschmidt and Lust Antriebstechnik GmbH will remain in effect for the
duration of the patents sold to Goldschmidt and includes medical uses that we
expect are necessary for our business as now conducted or as proposed to be
conducted in the future. For example, the medical applications include blood
pumps, artificial hearts and cardiac assist devices of all kinds,
cardiovascular products, including heart valves and prosthetic blood vessels
and cannulae and blood tubing of all kinds. Aspects of our vascular graft
products are covered by patents covering materials and graft structure. Aspects
of our blood coagulation, blood gas, blood electrolytes, blood chemistry, and
skin incision device products are covered by patents directed to tube-and
micro-coagulation whole blood analysis, including test methods, reagents and
integral (on-board) controls, thick film electrochemical analysis of blood
gases, blood electrolytes, and blood chemistry, and low trauma skin incision
devices for capillary blood sampling, and methods of manufacturing such
devices. The duration remaining of some of our patents on our HeartMate
products range from 11 to 12 years, on our biomaterials from 6 to 11 years, on
our grafts up to 2 years and on our blood coagulation, blood gas, blood
electrolytes, blood chemistry, and skin incision device products from 2 to 16
years. During the term of our patents, we have the right to prevent third
parties from manufacturing, marketing or distributing products that infringe
upon our patents. In addition, we hold several patents on the HeartMate II axial blood flow
pump and transcutaneous energy transmission technology, the remaining duration
of which range from 8 to 16 years. In August 1998, we obtained a license to
incorporate technology developed by Sulzer Electronics Ltd. and Lust
Antriebstechnik GmbH into the HeartMate III. HeartMate III is a miniature
centrifugal pump featuring a magnetically levitated rotor with a bearingless
motor that has been developed by Levitronix GmbH. The license from Sulzer and
Lust gives us the exclusive right to use in our HeartMate products technology
protected by several U.S. and foreign patents covering implantable bearingless
motors for the duration of those patents, subject to our payment of royalties.
In December 2000, we were informed by Sulzer Electronics that Sulzer had sold
all of their business in the bearingless motor and magnetic bearing fields to
Levitronix and had assigned its portion of the agreements between Sulzer and us
to Levitronix. The license remains in full force and effect. The validity of any of our patents may be challenged by others, and we
could encounter legal and financial difficulties in enforcing our patent rights
against alleged infringements. In addition, others could develop technologies
that avoid infringement of our patents or obtain patents, which would render
our patents obsolete. Although we do not believe patents are the sole
determinant in the commercial success of our products, the loss of a
significant percentage of our patents or the patents relating to our products
could seriously harm our business. We hold, or have exclusive rights to, several international patents,
including several biomaterial patents licensed from Goldschmidt referred to
above. We have developed technical knowledge which, although non-patentable, we
consider to be significant in enabling us to compete. However, the proprietary
nature of such knowledge may be difficult to protect. It is our policy to enter
into confidentiality agreements with each of our employees prohibiting such
employee from disclosing any confidential information or trade secrets. In
addition, these agreements provide that any inventions or discoveries relating
to our business by these individuals will be assigned to us and become our sole
property. However, we cannot guarantee that every person who gets access to our
confidential information or trade secrets will have signed such an agreement,
or that every person who has signed such an agreement will abide by it. If they
do not, or if our confidential information or trade secrets are otherwise
disclosed, there is no guarantee that any legal remedies will prevent the
harmful disclosure or use of our confidential information or trade secrets. Claims by competitors and other third parties that our products allegedly
infringe the patent rights of others could seriously harm our business. The
medical device industry is characterized by frequent and substantial
intellectual property litigation. The cardiovascular and diagnostic device
markets are characterized by extensive patent and other intellectual property
claims. Intellectual property litigation is complex and expensive and the
outcome of this litigation is difficult to predict. Any future litigation,
regardless of outcome, could result in substantial expense and significant
diversion of the efforts of our technical and management personnel. An adverse
determination in any such proceeding could subject us to significant
liabilities or require us to seek licenses from third parties or pay royalties
that may be substantial. Furthermore, we cannot assure you that necessary
licenses would be available on satisfactory terms, or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent us from manufacturing or selling
certain of our products, some of which could seriously harm our business. For
example, in October 2003, a patent infringement claim was filed
against the Company by Bodycote Materials Testing Canada, Inc and
David C. MacGregor, M.D. related to materials used in the HeartMate
LVAS. On February 3, 2004 the Company settled the claim and recorded
a charge of $2.3 million in the fourth quarter of 2003 for the
settlement and related legal costs. 14




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We are not a party to any
other material legal proceedings. GOVERNMENT REGULATIONS Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the manufacture and marketing of our
current and future products and in our ongoing product research and development
activities. All of our proposed products will require regulatory approval prior
to commercialization. In particular, medical devices are subject to rigorous
pre-clinical testing as a condition of approval by the FDA and by similar
authorities in foreign countries. U.S. Regulations In the United States, the FDA regulates the design, manufacture,
distribution and promotion of medical devices pursuant to the Federal Food,
Drug, and Cosmetic Act and the regulations promulgated thereunder, or the FDA
Act and Regulations. Our VAD systems, blood coagulation testing devices, skin
incision devices, and Aria and Vectragraft products are regulated as medical
devices. To obtain FDA approval to market VADs similar to those under
development, the FDA requires proof of safety and efficacy in human clinical
trials performed under an Investigational Device Exemption (IDE). An IDE
application must contain pre-clinical test data supporting the safety of the
product for human investigational use, information on manufacturing processes
and procedures, proposed clinical protocols and other information. If the IDE
application is accepted, human clinical trials may begin. The trials must be
conducted in compliance with FDA regulations and with the approval of one or
more institutional review boards. The results obtained from these trials, if
satisfactory, are accumulated and submitted to the FDA in support of either a
PMA application or a 510(k) premarket notification. Premarket approval from the
FDA is required before commercial distribution of devices similar to those
under development by us is permitted in the United States. The PMA Supplement must be supported by extensive data, including
pre-clinical
and human clinical data, to prove the safety and efficacy of the device with
respect to the modifications disclosed in the supplement. By regulation, the
FDA has 180 days to review a PMA application and during that time an advisory
committee may evaluate the application and provide recommendations to the FDA.
While the FDA has approved PMA applications within the allotted time period,
reviews more often occur over a significantly protracted period, usually 18 to
36 months, and a number of devices have never been cleared for marketing. This
is a lengthy and expensive process and there can be no assurance that such FDA
approval will be obtained. Under the FDAs requirements, if a manufacturer can establish that a
newly
developed device is substantially equivalent to a legally marketed predicate
device, the manufacturer may seek marketing clearance from the FDA to market
the device by filing a 510(k) premarket notification with the FDA. This is the
process that is used to gain FDA market clearance for most of the ITC products.
The 510(k) premarket notification must be supported by data establishing the
claim of substantial equivalence to the satisfaction of the FDA. The process of
obtaining a 510(k) clearance typically can take several months to a year or
longer. If substantial equivalence cannot be established, or if the FDA
determines that the device requires a more rigorous review, the FDA will
require that the manufacturer submit a PMA application that must be approved by
the FDA prior to marketing the device in the United States. Both a 510(k) and a PMA, if approved, may include significant limitations
on the indicated uses for which a product may be marketed. FDA enforcement
policy prohibits the promotion of approved medical devices for unapproved uses.
In addition, product approvals can be withdrawn for failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial marketing. The approval process for each of our products is expensive and time
consuming and we cannot assure you that any regulatory agency will grant its
approval. Our inability to obtain, or delays in obtaining, such approval would
adversely affect our ability to commence marketing our products. We cannot
assure you that we will have sufficient resources to complete the required
testing and regulatory review processes. Furthermore, we are unable to predict
the extent of adverse governmental regulation, which might arise from future
U.S., or foreign legislative or administrative action. On October 26, 2002, the
FDA signed into law The Medical Device User Fee and Modernization Act of 2002
(MDUFMA). This law amends the FDA Act and Regulations to provide, among other
things, the ability for the FDA to impose user fees for medical device reviews.
Our activities require that we make many filings with the FDA that will now be
subject to this new fee structure. Although the precise amount of fees that we
will incur each year will be dependent upon the specific quantity and nature of
our filings, such fees could amount to hundreds of thousands of dollars per
year. 15




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In addition, any products distributed pursuant to the above
authorizations
are subject to pervasive and continuing regulation by the FDA. Products must be
manufactured in registered establishments and must be manufactured in
accordance with Quality System Regulations and adverse events must be reported
to the FDA. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA often
requires post market surveillance (PMS) requirements for significant risk
devices such as VADs that require ongoing collection of clinical data during
commercialization that must be gathered, analyzed and submitted to the FDA
periodically for up to several years. These PMS data collection requirements
are often burdensome and expensive and have an affect on the PMA approval
status. The failure to comply with the FDAs regulations can result in
enforcement action, including seizure, injunction, prosecution, civil
penalties, recall and suspension of FDA approval. The export of devices is also
subject to regulation in certain instances. We are also subject to regulation by various state authorities, which may
inspect us and enforce regulations. Failure to comply with applicable state
regulations may result in seizures, injunctions or other types of enforcement
actions. International Regulations We are also subject to regulation in each of the foreign countries in
which we sell products with regard to product standards, packaging and labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. Many of the regulations applicable to our products in such
countries are similar to those of the FDA. The national health or social
security organizations of certain countries require our products to be
qualified before they can be marketed in those countries. In order to be positioned for access to European
and other international
markets, we sought and obtained certification under the ISO 13485 Series of
Standards. ISO 13485 is a set of integrated requirements, which when
implemented, form the foundation and framework for an effective quality
management system. These standards were developed and published by the ISO, a
worldwide federation of national bodies, founded in Geneva, Switzerland in
1947. ISO has over 90 member countries and ISO certification is widely regarded
as essential to enter Western European markets. We obtained EN ISO 13485:2000
Certification in March 2003. Commencing in mid-1998, all companies are required
to obtain CE Marks for medical devices sold or distributed in the European
Union. The CE Mark is an international symbol of quality. With it, medical
devices can be distributed within the European Union. A prerequisite for
obtaining authority to CE Mark products is to achieve full quality system
certification in accordance with ISO 13485 and European Directives, such as the
Medical Device Directive (MDD), In-Vitro Device Directive (IVDD) and the Active
Implantable Medical Device Directive (AIMD). These are quality standards that
cover design, production, installation and servicing of medical devices
manufactured by us. We have the ISO 13485 and appropriate MDD, IVDD or AIMD
certification and authority to CE Mark all our devices in commercial
distribution including our skin incision, blood coagulation testing devices,
Vectragraft and VAD systems such as the Thoratec PVAD, IVAD and HeartMate
Systems. We are also certified to be in compliance with the requirements of the
Canadian Medical Device Directive (CMDRs) at all Thoratec manufacturing sites,
which is required effective January 1, 2003 to sell medical devices in Canada. Other Regulations We are also subject to various federal, state and local laws and
regulations relating to such matters as safe working conditions, laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with our research and
development work. Specifically, the manufacture of our biomaterials is subject
to compliance with federal environmental regulations and by various state and
local agencies. Although we believe we are in compliance with these laws and
regulations in all material respects, we cannot assure that we will not be
required to incur significant costs to comply with environmental laws or
regulations in the future. THIRD PARTY REIMBURSEMENT AND COST CONTAINMENT Our products are purchased primarily by hospitals and other users, which
then bill various third party payors for the services provided to the patients.
These payors, which include CMS, private health insurance companies and managed
care organizations, reimburse part or all of the reasonable costs and fees
associated with these devices and the procedures performed with these devices. Third party payors are increasingly challenging the prices charged for
medical products and services and may deny reimbursement if they determine that
a device was not used in accordance with cost-effective treatment methods as
determined by the payor, was experimental or was used for an unapproved
application. 16




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To date, a majority of private insurers that we have dealt with and CMS
have determined to reimburse some portion of the costs of our VADs and our
diagnostic and vascular graft products. Effective October 1, 2003, CMS issued a

National Coverage Decision Memorandum for the use of left ventricular assist
systems (LVAS) that are approved by the FDA for treating Destination Therapy in
end-stage heart failure patients. In regard to the reimbursement level, CMS
also made technical adjustments, published in August 2003, regarding the
relative weight and base level of reimbursement it will provide under a revised
DRG (diagnosis-related group) 525 Heart Assist System Implant. This change
raised the base payment under DRG 525 nearly 25% from approximately $54,000 to
approximately $70,000. Since FDA approval of the HeartMate LVAS for Destination
Therapy, several private payors have issued positive coverage decisions as
well. In December 2002, Blue Cross/Blue Shield (BC/BS) Technology Evaluation
Center issued a positive decision on the use of LVADs for Destination Therapy
and since then more than half of the plans around the United States have issued
positive coverage polices for their beneficiaries. Aetna U.S. Healthcare, the
fourth largest insurer in the U.S. covering more than 21 million people, issued
a Coverage Policy Bulletin in March 2003 indicating that it now covers the use
of ventricular assist devices for FDA-approved indications, including
Destination Therapy. UNICARE, an operating affiliate of WellPoint Health
Networks, one of the nations largest managed care companies serving more than
13 million members and approximately 42 million specialty members, recently
made a national decision to cover LVADs for Destination Therapy. PacifiCare has
also adopted coverage policy for Destination Therapy. PacifiCare insures more
than three million members. The reimbursement policies and practices of third party payors are
subject
to changes that might be unfavorable to our VAD systems and such unfavorable
changes could seriously harm sales of our products. MANUFACTURING We manufacture our cardiovascular products at our facility in Pleasanton,
California. This facility has been inspected, approved and licensed by the FDA
and the State of California Department of Health Services, Food and Drug
Section for the manufacture of medical devices and has received the
International Standards Organization (ISO) 9001 certification. Our
manufacturing processes consists of the assembly of standard and custom
component parts, and the testing of completed products. We rely on single
sources of supply for several components of our VAD. We are aware of
alternative suppliers for all single-sourced items. Our blood coagulation testing and skin incision devices are manufactured
in Edison, New Jersey, with the exception of the ProTime instrument
and the hemoglobin monitor, which are
manufactured through third party contract manufacturers. Our blood gas
analyzer devices are manufactured in Roseville, Minnesota. The New Jersey and
Minnesota facilities have been inspected, approved and licensed by the FDA and
applicable State regulators. In addition, these facilities maintain ISO9001,
ISO 13485 and Canadian (CMDCAS) ISO certifications. A significant amount of our manufacturing at these facilities is
vertically integrated, with only limited reliance on third parties to
manufacture printed circuit boards, to sterilize and to test products etc. We
rely on single sources of supply for some components manufactured at out New
Jersey and Minnesota facilities, and use safety stocks where there might be
risk in qualifying a second supplier in a timely manner. We typically are able to fill orders from inventory and do not have
significant order backlogs. Total orders backlogged as of the end of fiscal
2003 and 2002 were approximately $1.6 million and $0.8 million, respectively. RESEARCH AND DEVELOPMENT Thoratecs research and development expenses in 2003, 2002 and 2001
were
$26.1 million, $25.3 million and $22.1 million, respectively. Research and
development costs are largely project driven, and the level of spending depends
on the level of project activity planned and subsequently approved and
conducted. Projects typically include efforts to develop new products such as
the HeartMate II and HeartMate III, efforts to improve the operation and
performance of current products such as efforts to improve the life of various
components of the HeartMate and the Thoratec VAD products. Research and
development costs also include regulatory and clinical costs associated with
our compliance with FDA regulations. EMPLOYEES As of January 3, 2004, we had a total of 802 employees, consisting
of 792
full-time employees and 10 part-time employees, 345 of whom worked in
manufacturing, 113 in engineering, 104 in quality control and regulatory
affairs, 132 in marketing and sales support, 46 in administration and finance
and 62 in other support functions, including human resources, management
information systems, purchasing and facilities. Out of our total employees, 781
are employed in the United States and 21 are employed in the United Kingdom and
other European countries. None of our employees are covered by a collective
bargaining agreement. We consider relations with our employees to be good. 17




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ADDITIONAL INFORMATION You can find additional information about Thoratec on our website at
http://www.thoratec.com. We make filings of our periodic reports to the SEC,
including annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as amendments to those reports, available
free of charge on our website as soon as reasonably practicable following
electronic filing of those reports with the SEC. 18




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RISK FACTORS We make statements in this Annual Report onForm 10-Kand other statements
from time to time that relate to future plans, events or performance that are
forward-looking statements which involve risks and uncertainties. Actual
results, events or performance may differ materially from those anticipated in
any forward-looking statements as a result of a variety of factors, including
those set forth below and elsewhere in this Annual Report onForm 10-K. In
evaluating our company and our business before deciding to invest in our common
stock you should consider each of the risks and uncertainties described in this
section and all of the other information in this Annual Report onForm 10-Kand
other documents we file from time to time with the Securities and Exchange
Commission, such as our quarterly reports onForm 10-Q, our current reports on
Form 8-K and any public announcements we make from time to time. We have a history of net losses. We were founded in 1976 and we have a history of incurring losses from
operations. As of January 3, 2004, our accumulated deficit was approximately
$34.6 million. We anticipate that our expenses will increase as a result of
increased pre-clinical and clinical testing, research and development and
selling, general and administrative expenses. We could also incur significant
additional costs in connection with our business development activities and the
development and marketing of new products and indicated uses for our existing
products. Such costs could prevent us from achieving or maintaining
profitability in future periods. 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 operations will be harmed. Significant uncertainty exists as to the reimbursement status of newly
approved health care products such as VADs and vascular grafts, which in turn
can delay or prevent adoption in volume by hospitals. Government and other
third party payors are increasingly attempting to contain health care costs.
Payors are attempting to contain costs by, for example, limiting coverage and
the level of reimbursement of new therapeutic products. Payors are also
attempting to contain costs by refusing, in some cases, to provide any coverage
of uses of approved products for disease indications other than those for which
the FDA has granted marketing approval. To date, a majority of private insurers that we have dealt with and CMS
have determined to reimburse some portion of the costs of our VADs and our
diagnostic and vascular graft products. Effective October 1, 2003, CMS issued a
National Coverage Decision Memorandum for the use of left ventricular assist
systems (LVAS) that are approved by the FDA for treating Destination Therapy in
end-stage heart failure patients. Thoratecs HeartMate LVAS is currently the
only such device approved for Destination Therapy by the FDA. In regard to the
reimbursement level, CMS also made technical adjustments, published in August
2003, regarding the relative weight and base level of reimbursement it will
provide under a revised DRG (diagnosis-related group) 525 Heart Assist System
Implant. This change raised the base payment under DRG 525 nearly 25% from
approximately $54,000 to approximately $70,000. Since FDA approval of the
HeartMate LVAS for Destination Therapy, several private payors have issued
positive coverage decisions as well. In December 2002, Blue Cross/Blue Shield
(BC/BS) Technology Evaluation Center issued a positive decision on the use of
LVADs for Destination Therapy and since then more than half of the plans around
the United States have issued positive coverage polices for their
beneficiaries. Aetna U.S. Healthcare, the fourth largest insurer in the U.S.
covering more than 21 million people, issued a Coverage Policy Bulletin in
March 2003 indicating that it now covers the use of ventricular assist devices
for FDA-approved indications, including Destination Therapy. UNICARE, an
operating affiliate of WellPoint Health Networks, one of the nations largest
managed care companies serving more than 13 million members and approximately
42 million specialty members, recently made a national decision to cover LVADs
for Destination Therapy. PacifiCare has also adopted coverage policy for
Destination Therapy. PacifiCare insures more than three million members. We
cannot, however, estimate what portion of such costs will be reimbursed and our
products may not continue to be approved for reimbursement. In addition,
changes in the health care system may affect the reimbursability of future
products. If coverage is not expanded or if the reimbursement levels are not
increased or are partially or completely reduced, our revenues would be
reduced. 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
United States and in other countries. Before we can market new products in the United States, we must obtain
clearance from the FDA. This process is lengthy and uncertain. In the United
States, one must obtain clearance from the FDA of a 510(k) premarket
notification or approval of a more extensive submission known as a PMA
application. If the FDA concludes that any of our products does not meet the
requirements to obtain clearance under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act, then we would be required to file a PMA 19




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application. The process for a PMA application is
lengthy, expensive and
typically requires extensive pre-clinical and clinical trial data. Pre-clinical
data may need to be obtained in accordance with FDA good laboratory practices. We may not obtain clearance of a 510(k) notification or approval of a PMA
application with respect to any of our products on a timely basis, if at all.
If we fail to obtain timely clearance or approval for our products, we will not
be able to market and sell our products, harming our ability to generate
revenue. The FDA may also limit the claims that we can make about our products.
We may also be required to obtain clearance of a 510(k) notification or PMA
Supplement from the FDA before we can market products that have been cleared
that we have now modified or for which we wish to use for new indications. The FDA also requires us to adhere to Quality System Regulations, which
include production design controls, testing, quality control, storage and
documentation procedures. The FDA may at any time inspect our facilities to
determine whether we have adequate compliance. Compliance with Quality System
Regulations for medical devices is difficult and costly. In addition, we may
not be found to be compliant as a result of future changes in, or
interpretations of, regulations by the FDA or other regulatory agencies. If we
do not achieve compliance, the FDA may withdraw marketing clearance, require
product recall or take other enforcement action, which in each case would harm
our business. Any change or modification to a device is required to be made in
compliance with Quality System Regulations, which may cause interruptions or
delays in the marketing and sale of our products. The FDA also requires device
manufacturers to submit reports regarding deaths, serious injuries and certain
malfunctions. Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements. The federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations and policies of regulatory agencies. If we fail
to comply with applicable federal, state or foreign laws or regulations, we
could be subject to enforcement actions. Enforcement actions could include
product seizures, recalls, withdrawal of clearances or approvals, and civil and
criminal penalties, which in each case would harm our business. If hospitals do not conduct Destination Therapy
(DT) Procedures using our VAD,
our revenues will be diminished The use of our VADs as long-term therapy (Destination Therapy) in
patients
who are not candidates for heart transplantation was approved by the FDA in
2002, and was approved for reimbursement by the CMS in late 2003. We estimate that the Destination Therapy application for our HeartMate
device represents a market opportunity of up to 100,000 additional patients
annually in the United States alone, of which we believe between 5,000 and
15,000 are treatable using current technologies. The number of DT procedures that actually get performed is dependent on
many factors, most of which are out of our direct control, including:  
    
    the number of CMS sites approved for DT;
    
    the clinical outcomes of DT procedures;
    
    cardiology and referring physician education, and their commitment to DT;
    
    the economics of the DT procedure for individual hospitals, which
includes the costs of the VAD and related pre- and post- operative
procedures and their reimbursement; and
    
    the economics for individual hospitals of not conducting a DT
procedure, including the costs and related reimbursements of long-term
hospitalization. The different outcomes of these and other factors, and their timing, will
have a significant impact on our future results. Physicians may not accept or continue to accept
our products and products under
development. The success of our current and future products will require acceptance or
continued acceptance by cardiovascular and vascular surgeons and other medical
professionals. Such acceptance will depend on clinical results and the
conclusion by these professionals that our products are safe, cost-effective
and acceptable methods of treatment. Even if the safety and efficacy of our
future products are established, physicians may elect not to use them for a
number of reasons. These reasons could include the high cost of our VAD 20




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systems, restrictions on coverage or unfavorable
reimbursement from health
care payors. Also, economic, psychological, ethical and other concerns may
limit general acceptance of our ventricular assist, graft and other products. Our future revenues are impacted by the number
of heart transplants conducted A significant amount of our current revenues derive from our VADs being
implanted temporarily in patients awaiting heart transplants. The number of
heart transplants conducted worldwide is dependent on the number of hearts
available to transplant, which is dependent on the death rate of otherwise
healthy people from events such as automobile accidents. To the extent that
public safety measures and technological improvements, such as automobile air
bags and anti-lock brakes, are successfully implemented, the availability of
these hearts to transplant may not grow significantly, and may trend downward. We have experienced rapid growth and changes in
our business, and our failure
to manage this and any future growth could harm our business. As a result of the Merger in February 2001, the number of our
employees
has increased significantly, from 183 on December 30, 2000 to 802 on January 3,
2004. We expect to continue to grow and we may suffer if we do not manage and
train our new employees effectively. Our revenues may not continue to grow at a
rate sufficient to support the costs associated with an increasing number of
employees. Any future periods of rapid growth may place significant strains on
our managerial, financial and other resources. The rate of any future
expansion, in combination with our complex technologies and products, may
demand an unusually high level of managerial effectiveness in anticipating,
planning, coordinating and meeting our operational needs as well as the needs
of our customers. If we fail to successfully introduce new
products, our future growth may
suffer. As part of our growth strategy, we intend to develop and introduce a
number of new products and product improvements. We also intend to develop new
indications for our existing products. If we do not introduce these new
products, product improvements and new indications on a timely basis, or if
they are not well accepted by the market, our future growth may suffer. Amortization of our intangible assets, which
represent a significant portion of
our total assets, will adversely impact our net income and we may never realize
the full value of our intangible assets. As of January 3, 2004, we had $260.9 million of net intangible
assets,
representing 55% of our total assets and 68% of our shareholders equity. These
intangible assets consist primarily of goodwill and other intangible assets
arising from our Merger and our trademarks and patented technology.
Amortization expense relating to these intangible assets for 2003 was $12.3
million. No amortization of goodwill was recorded in 2003 after we adopted
Statement of Financial Accounting Standards No. 142 at the beginning of 2002.
Ongoing amortization of purchased intangibles will reduce our future earnings
or increase our future losses. We may not receive the recorded value for our intangible assets if we
sell
or liquidate our business or assets. The material concentration of intangible
assets increases the risk of a large charge to earnings in the event that the
revenue from, and recoverability of these intangible assets is impaired, and in
the event of such a charge to earnings, the market price of our common stock
could be adversely affected. For example, subsequent to year-end, the Company
completed its assessment of the final results from its feasibility
clinical trial for the Aria CABG graft, which was ongoing through fiscal 2003.
Based on the clinical trial results, the Company determined that it will not
devote additional resources to the development of the Aria graft. Upon the
decision to discontinue product development, the Company recorded an impairment
charge of $9.0 million as of January 3, 2004 to write off purchased
intangible assets related to the Aria graft, which were recorded as a result of
the Merger. We rely on specialized suppliers and alternative
suppliers may not be
available. We depend on a number of custom-designed components and materials
supplied
by other companies including, in some cases, single source suppliers for
components and materials used in our VAD products and blood testing products.
We do not have long-term written agreements with most of our vendors and
receive components on a purchase order basis. If we need alternative sources
for key raw materials or component parts for any reason, such alternative
sources may not be available and our inventory may not be sufficient to fill
orders before we find alternative suppliers or begin manufacturing such
components or materials ourselves. Cessation or interruption of sales of
circulatory support products would seriously harm our business, financial
condition and results of operations. 21




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Alternative suppliers, if available, may not agree to supply us. In
addition, we may need to obtain FDA approval before using new suppliers or
manufacturing our own components or materials. Existing suppliers could also be
subject to an FDA enforcement action, which could also disrupt our supplies. If
alternative suppliers are not available, we may not have the expertise or
resources necessary to produce such materials or component parts internally. Because of the long product development cycle in our business, suppliers
may discontinue components upon which we rely before the end of life of our
products. In addition, the timing of the discontinuation may not allow us time
to develop and obtain FDA approval for a replacement component before we use up
inventory of the legacy component. If suppliers discontinue components on which we rely, we may have to:  
    
    pay premium prices to our suppliers to keep their production line
open or to alternative suppliers;
    
    buy substantial inventory to take us 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 product in which the legacy component is used once our
inventory of the discontinued component is exhausted. Any of these interruptions in the supply of our materials could result in
substantial reductions in revenue and increases in our production costs. If we fail to compete successfully against our
existing or potential
competitors, our revenues or operating results may be harmed. Competition from medical device companies and medical device subsidiaries
of health care and pharmaceutical companies is intense and is expected to
increase. Competitors for the VAD system include, for example, World Heart
Corporation and ABIOMED, Inc. Principal competitors in the vascular graft
market include W.L. Gore, Inc., C.R. Bard and Boston Scientific Corporation.
The principal competitors in the coagulation monitoring equipment market are
the Cardiac Surgery Division of Metronic, Inc., which markets the HemoTec
product line and Roche Holding AG. The primary competitors in the skin incision
device market are Organon Teknika B.V.; Becton, Dickson and Company; and
Owen-Mumford Ltd. Competitors in the point-of-care diagnostics market include
i-STAT and Radiometer. Many of our competitors have substantially greater financial, technical,
distribution, marketing and manufacturing resources than we do. Accordingly,
our competitors may be able to develop, manufacture and market products more
efficiently and at a lower cost than we can. We expect that the key competitive
factors will include the relative speeds with which we can:  
    
    develop products;
    
    complete clinical testing;
    
    receive regulatory approvals; and
    
    manufacture and sell commercial quantities of products. Additionally, our competitors may succeed in developing and marketing
technologies and products that are more effective than ours. Any such products
may render our technology and products obsolete or noncompetitive. In addition,
new surgical procedures and medications could be developed that replace or
reduce the importance of current procedures that use our products. We may encounter problems manufacturing our
products. We may encounter difficulties manufacturing our products. We do not have
experience in manufacturing some of our products in the commercial quantities
that might be required if we receive FDA approval of several or all of the
products and indications currently under development. We have also recently
transferred the manufacturing operations for the HeartMate to Pleasanton and
received clearance from the FDA to begin manufacturing the HeartMate in this
location in the first half of 2003. If we have difficulties manufacturing our
products, our business will be harmed. Since we depend upon distributors, if we lose a
distributor or a distributor
fails to perform, our operations will be harmed. 22




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With the exception of Canada and the larger countries in Europe, we sell
our VAD and HeartMate systems in foreign markets through distributors. In
addition, we sell our vascular access graft products through the Bard
Peripheral Vascular division of C.R. Bard Corporation, which we refer to as
Bard, in the United States, Europe and selected countries in Scandinavia, the
Middle East and Northern Africa and through Goodman Co. Ltd. in Japan.
Substantially all of the international operations, and a large amount of the
domestic operations of our ITC subsidiary are conducted through distributors.
In 2003, 9% of our total product sales were through Cardinal Healthcare, a
distributor of our blood coagulation testing equipment and skin incision
devices. To the extent we rely on distributors, our success will depend upon the
efforts of others, over which we may have little control. If we lose a
distributor or a distributor fails to perform, our revenues will be harmed. Changes we make to our method of distributing and selling our products
could hurt our relationship with distributors and their customers. As we integrate our recently acquired IRMA product line of blood gas
analyzers into our current business, an increasing portion of our revenue in
the United States market will be generated by direct sales rather than through
our current distributor model. This transition will include expanding the sales, technical service,
customer service and shipping headcount at our ITC subsidiary in order to
provide our customers with the support and service that they historically
obtained from our distributors. This transition and its execution involves
significant risks, including:  
    
    the alienation of distributors;
    
    the promotion by our former distributors of products from competitors;
    
    the potential loss of customers who prefer to deal with a particular distributor; and
    
    difficulties and delays in building an effective direct sales force. Failure to manage this transition could significantly increase our costs
while potentially reducing our revenues. Our inability to protect our proprietary
technologies or an infringement of
others patents could harm our competitive position. We rely on patents, trade secrets, copyrights, know-how, trademarks,
license agreements and contractual provisions to establish our intellectual
property rights and protect our products. These legal means, however, afford
only limited protection and may not adequately protect our rights. In addition,
we cannot assure you that any of our pending patent applications will issue.
The Patent and Trademark Office may deny or significantly narrow claims made
under patent applications and the issued patents, if any, may not provide us
with commercial protection. We could incur substantial costs in proceedings
before the PTO or in any future litigation to enforce our patents in court.
These proceedings could result in adverse decisions as to the validity and/or
enforceability of our patents. In addition, the laws of some of the countries
in which our products are or may be sold may not protect our products and
intellectual property to the same extent as U.S. laws, if at all. We may be
unable to protect our rights in trade secrets and unpatented proprietary
technology in these countries. Aside from our biomaterials patents, which are utilized in the Thoratec
VAD blood pump and cannulae, and one patent covering aspects of our TLC-II, the
Thoratec VAD system is not protected by any patents. We rely principally on
trade secret protection and, to a lesser extent, patents to protect our rights
to the HeartMate. We rely principally on patents to protect our coagulation
testing equipment, skin incision devices, Hemochron disposable cuvettes, IRMA
analyzer, IRMA disposable cartridges, and Hgb Pro disposable test strips. We seek to protect our trade secrets and unpatented proprietary
technology, in part, with confidentiality agreements with our employees and
consultants. Although it is our policy to require that all employees and
consultants sign such agreements, we cannot assure you that every person who
gains access to such information has done so. Moreover, these agreements may be
breached and we may not have an adequate remedy. Our products may be found to infringe prior or future patents owned by
others. We may need to acquire licenses under patents belonging to others for
technology potentially useful or necessary, and such licenses may not be
available to us. We could incur substantial costs in defending suits brought
against us on such patents or in bringing suits to protect our patents or
patents licensed by us against infringement. 23




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For example, in
October 2003, a patent infringement claim was filed against the
Company by Bodycote Materials Testing Canada, Inc. and David C.
MacGregor, M.D. related to materials used in the HeartMate LVAS. On
February 3, 2004 the Company settled the claim and recorded a
charge of $2.3 million in the fourth quarter of 2003 for the
settlement and related legal costs. Product liability claims could damage our
reputation and hurt our financial
results. Our business exposes us to an inherent risk of potential product
liability
claims related to the manufacturing, marketing and sale of human medical
devices. We maintain only a limited amount of product liability insurance. Our
insurance policies generally must be renewed on an annual basis. We may not be
able to maintain or increase such insurance on acceptable terms or at
reasonable costs, and such insurance may not provide us with adequate coverage
against potential liabilities. A successful claim brought against us in excess
of, or outside of, our insurance coverage could seriously harm our financial
condition and results of operations. Claims against us, regardless of their
merit or potential outcome, may also reduce our ability to obtain physician
endorsement of our products or expand our business. Identified quality problems can result in
substantial costs and write-downs. FDA regulations require us to track materials used in the manufacture of
our products, so that any problems identified in a finished product can easily
be traced back to other finished product containing the defective materials. In
some instances, identified quality issues require scrapping or expensive rework
of the affected lot(s), not just the tested defective product and could also
require us to stop shipments. In addition, since some of our products are used in situations where a
malfunction can be life threatening, identified quality issues can result in
the recall and replacement, generally free of charge, of substantial amounts of
product in the field. Any quality issue identified can therefore result in substantial costs
and
write offs, which could materially impact our financial results. If we make acquisitions or divestitures, we
could encounter difficulties that
harm our business. We may acquire companies, products or technologies that we believe to be
complementary to our business. If we do so, we may have difficulty integrating
the acquired personnel, operations, products or technologies. Acquisitions may
dilute our earnings per share, disrupt our ongoing business, distract our
management and employees and increase our expenses, which could harm our
business. We may also sell businesses or assets as part of our strategy or if
we receive offers from third parties. If we do so, we may sell an asset or
business for less than its full value. The long and variable sales and deployment
cycles for our VAD systems may cause
our revenue and operating results to vary significantly, which increases the
risk of an operating loss for any given fiscal quarter. Our VAD systems have lengthy sales cycles and we may incur substantial
sales and marketing expenses and expend significant effort without making a
sale. Even after making the decision to purchase our VAD systems, our customers
often deploy our products slowly. For example, the length of time between
initial contact with cardiac surgeons and the purchase of our VAD systems is
generally between nine and eighteen months. In addition, the cardiac centers
that buy the majority of our products are usually led by cardiac surgeons who
are heavily recruited by competing centers or by centers looking to increase
their profiles. When one of these surgeons moves between centers we sometimes
experience a temporary but significant reduction in purchases by the departed
center while it replaces its lead surgeon. As a result, it is difficult for us
to predict the quarter in which our customers may purchase our VAD systems and
our revenue and operating results may vary significantly from quarter to
quarter, which increases the risk of an operating loss for us for any given
quarter. Our non-U.S. sales present special risks. During both 2003 and 2002, sales originating outside the United States
and
U.S. export sales accounted for approximately 19% of our total revenues. We
anticipate that sales outside the United States and U.S. export sales will
continue to account for a significant percentage of our revenues and we intend
to continue to expand our presence in international markets. Non-U.S. sales are
subject to a number of special risks. For example:  
    
    we generally sell many of our products at a lower price outside the United States; 24




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
    
    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;
    
    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 may be more difficult to enforce in foreign countries;
    
    terrorist activity may interrupt distribution channels or 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. Any of these events could harm our operations. Any claims relating to improper handling,
storage or disposal of hazardous
chemicals and biomaterials could be time consuming and costly. Producing our products requires the use of hazardous materials, including
chemicals and biomaterials. We cannot eliminate the risk of accidental
contamination or discharge and any resultant injury from these materials. We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, claimants may sue us for injury or contamination that results from
our use or the use by third parties of these materials, and our liability may
exceed our total assets. Compliance with environmental laws and regulations may
be expensive, and current or future environmental regulations may impair our
research, development or production efforts. Our stock price has been volatile and is likely
to continue to be volatile. The price of our common stock has been, and is likely to continue to be,
highly volatile, which means that it could decline substantially within a short
period of time. The price of our common stock could fluctuate significantly for
many reasons, including the following:  
    
    future announcements concerning us or our competitors;
    
    timing and reaction to the publication of clinical trial results;
    
    quarterly variations in operating results;
    
    charges, amortization and other financial effects relating to our Merger;
    
    introduction of new products or changes in product pricing policies by us or our competitors;
    
    acquisition or loss of significant customers, distributors or suppliers;
    
    business acquisitions or divestitures;
    
    changes in earnings estimates by analysts;
    
    changes in third party reimbursement practices; 25




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
    
    regulatory developments, enforcement actions bearing on advertising,
marketing or sales, and disclosure regarding completed ongoing or future
clinical trials; or
    
    fluctuations in the economy, world political events or general market
conditions. In addition, stock markets in general, and the market for shares of
health
care stocks in particular, have experienced extreme price and volume
fluctuations in recent years which have frequently been unrelated to the
operating performance of the affected companies. These broad market
fluctuations may adversely affect the market price of our common stock. The
market price of our common stock could decline below its current price and the
market price of our stock may fluctuate significantly in the future. These
fluctuations may be unrelated to our performance. In the past, shareholders have often instituted securities class action
litigation after periods of volatility in the market price of a companys
securities. If a shareholder files a securities class action suit against us,
we would incur substantial legal fees and our managements attention and
resources would be diverted from operating our business in order to respond to
the litigation. Future issuances and sales of our stock could
dilute shareholder ownership and
cause our stock price to decline. Future sales of substantial amounts of our stock in the public market, or
the perception that such sales could occur, could adversely affect the market
price of our stock. Sale of our shares and the potential for such sales could
cause our stock price to decline. 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 are vulnerable to damage from various types of disasters, including
earthquake, fire, terrorist acts, flood, power loss, communications failures
and similar events. For example, in October 1989, a major earthquake that
caused significant property damage and a number of fatalities struck near the
area in which our Pleasanton facility is located. If any disaster were to
occur, we may not be able to operate our business at our facilities, which
could seriously harm our business and operations, in particular because our
premises require FDA approval, which could result in significant delays before
we can manufacture product from a replacement facility. The insurance we
maintain may not be adequate to cover our losses resulting from disasters or
other business interruptions. Fluctuations in foreign currency exchange rates
could result in declines in our
reported sales and earnings. Because some of our international sales are denominated in local
currencies and not in U.S. dollars, our reported sales and earnings are subject
to fluctuations in foreign exchange rates. At present, we use forward foreign
currency contracts to hedge the gains and losses created by the remeasurement
of non-functional currency denominated assets and liabilities. However, we do
not currently engage in hedging exposures that will arise from future sales.
As a result, sales occurring in the future that are denominated in foreign
currencies may be translated to U.S. dollars at a less favorable rate than our
current exchange rate environment resulting in reduced revenues and earnings. 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. Our ability to operate successfully and manage our potential future
growth
depends significantly upon retaining key research, technical, sales, marketing,
managerial and financial personnel, and attracting and retaining additional
highly qualified personnel in these areas. We face intense competition for such
personnel, and we may not be able to attract and retain these individuals. We
compete with numerous companies, as well as universities and nonprofit research
organizations throughout all our locations. The loss of key personnel for any
reason or our inability to hire and retain additional qualified personnel in
the future could prevent us from sustaining or growing our business. Our
success will depend in large part on the continued services of our research,
managerial and manufacturing personnel. We cannot assure you that we will
continue to be able to attract and retain sufficient qualified personnel. Arthur Andersen LLP audited certain financial
information included or
incorporated in this report. In the event such financial information is later
determined to contain false statements, you may be unable to recover damages
from Arthur Andersen LLP. Our consolidated statements of income, comprehensive income,
shareholders
equity and cash flows and associated information contained in the footnotes to
these financial statements for the 2000 fiscal year were audited by Arthur
Andersen LLP. In 2002, Arthur 26




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##### Table of Contents



Andersen ceased operations and we are unable to
obtain their consent to
the incorporation by reference of its report on such financial statements,
dated February 5, 2001, into this Form 10-K. As a result, you may be limited in
your ability to recover damages from Arthur Andersen under Section 11 of the
Securities Act of 1933 if it is later determined that there are false
statements contained in or incorporated by reference into any portions of this
report that have been prepared in reliance on financial statements audited by
Arthur Andersen. 
 Item 2.Properties We are headquartered in Pleasanton, California, where we lease
approximately 71,000 square feet of office, manufacturing and research
facilities and 4,000 square feet of warehouse space. Our leases for these
facilities expire through 2012. Additionally, we lease the following
facilities:  
    
    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 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 3,800 square feet of office facilities in the United Kingdom expiring in 2008. We also own approximately 66,000 square feet of office, manufacturing and
research facilities in Edison, New Jersey. Each of our manufacturing areas have been inspected, approved and
licensed
for the manufacture of medical devices by the FDA. Additionally, the Pleasanton
facility is subject to inspections, approvals and licensing by the State of
California Department of Health Services (Food and Drug Section). The Edison
facility is subject to inspections, approvals and licensing by State of New
Jersey Department of Health. We believe our facilities will be sufficient for at least the next year
and that additional space will be available at a reasonable price to satisfy
space needs thereafter. 
 Item 3.Litigation In
October 2003, a patent infringement claim was filed against the
Company by Bodycote Materials Testing Canada, Inc. and David C.
MacGregor, M.D. related to materials used in the HeartMate LVAS. On
February 3, 2004 the Company settled the claim and recorded a
charge of $2.3 million in the fourth quarter of 2003 for the
settlement and related legal costs. We are not a party to any other material
legal proceedings. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the
quarter
ended January 3, 2004. Our Officers D. Keith Grossman, President, Chief Executive Officer and
Director,joined
our company as President and Chief Executive Officer in January 1996. He was
elected to the Board of Directors in February 1996. Prior to joining us, Mr.
Grossman was a Division President of Major Pharmaceuticals, Inc., from June
1992 to September 1995, at which time it was sold. From July 1988 to June 1992,
Mr. Grossman served as the Vice President of Sales and Marketing for Calcitek,
Inc., a manufacturer of implantable medical devices, and division of
SulzerMedica formerly Intermedics, Inc. Prior to 1988, Mr. Grossman held
various other sales and marketing management positions within the McGaw
Laboratories Division of American Hospital Supply Corporation. M. Wayne Boylston, Senior Vice President, Chief Financial Officer
and
Secretary,became our Senior Vice President, Chief Financial Officer and
Secretary in August 2001. Prior to joining us, Mr. Boylston was Chief Financial
Officer at Flashcom, Inc., a provider of broadband communications services.
Flashcom filed for bankruptcy protection in December 2000. From July 1998 until 27




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##### Table of Contents



March 2000, Mr. Boylston served as Executive Vice President,
Chief
Financial Officer, Treasurer and Assistant Secretary of iXL Enterprises, Inc.,
an Internet consulting service provider. From 1995 until 1998, Mr. Boylston
served as Vice President - Finance, Chief Financial Officer and Treasurer of
Healthdyne Technologies, Inc., a medical device manufacturer. Prior to 1995,
Mr. Boylston held a variety of financial management positions with Healthdyne,
Inc., a diversified health care products and services company. Mr. Boylston is
a Certified Public Accountant. Lawrence Cohen, President of ITC,joined our company in
May 2001 as
President of ITC. Prior to joining ITC, Mr. Cohen served as CEO of HemoSense,
Inc., a developer of medical diagnostic products, from August 1998 to April
2000. From October 1989 to March 1998, Mr. Cohen held the positions of Vice
President Marketing and Sales, Vice President International and Worldwide
Executive Vice President at Ortho-Clinical Diagnostics, a Johnson & Johnson
company. From 1980 to 1989, Mr. Cohen has also held executive management
positions at Instrumentation Laboratory and Beckman Coulter Corporation. He is
a past president of the Biomedical Marketing Association and is currently on
the Board of Trustees of the National Blood Foundation. Jeffrey
W. Nelson, President - Cardiovascular Division,joined our company
as President - Cardiovascular Division in August 2002. Prior to joining us, Mr.
Nelson was at Philips Medical Systems (formerly ADAC Laboratories) where he
spent the past eight years, most recently as general manager of the companys
nuclear medicine division. He also served as a senior vice president of North
American sales and general manager of ADAC Radiology Solutions and held
business unit and regional sales and marketing positions at the company. Before
that, he was a marketing manager for Syncor International Corporation, an
associate at Cerulean Venture Fund and was in sales with Baxter Healthcare
International. 28




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##### Table of Contents



PART II 
 Item 5.Market for Common Equity and Related Stockholder Matters Our common stock is traded on the NASDAQ National Market under the symbol
THOR. The following table sets forth, for the periods indicated, the high and
low closing sales price per share of our common stock, as reported by the
NASDAQ National Market. As of March 12, there were
55,849,935
 shares of our common stock outstanding with approximately
850 holders
of record, including multiple beneficial holders at depositories, banks, and
brokerages listed as a single holder in the street name of each respective
depository, bank, or broker. High
    
    LowFiscal Year 2001First Quarter
    
    $
    12.88
    
    
    $
    7.09Second Quarter
    
    
    15.55
    
    
    
    6.56Third Quarter
    
    
    20.02
    
    
    
    13.77Fourth Quarter
    
    $
    20.85
    
    
    $
    15.67Fiscal Year 2002First Quarter
    
    $
    19.35
    
    
    $
    10.24Second Quarter
    
    
    11.46
    
    
    
    7.80Third Quarter
    
    
    8.24
    
    
    
    5.55Fourth Quarter
    
    $
    9.65
    
    
    $
    6.40Fiscal Year 2003First Quarter
    
    $
    12.21
    
    
    $
    7.63Second Quarter
    
    
    14.44
    
    
    
    11.45Third Quarter
    
    
    19.23
    
    
    
    13.74Fourth Quarter
    
    $
    16.99
    
    
    $
    12.35
 We have not declared or paid any dividends on our common stock and we do
not anticipate doing so in the foreseeable future. 
 Item 6.Selected Consolidated Financial Data The selected consolidated financial data presented below for the five
fiscal years ended January 3, 2004 is derived from audited financial
statements. The data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and related notes thereto appearing
elsewhere in this Annual Report, the consolidated financial statements of TCA
filed with the SEC on Form 8-K/A on March 30, 2001 and on Form 10-K on March
17, 2000 and March 12, 1999. Certain reclassifications have been made to the
financial statements previously filed with the SEC to conform to current
practice. The Merger of Thoratec with TCA was completed on February 14, 2001.
We
issued new shares of our common stock to the shareholders of TCA in exchange
for all the outstanding common stock of TCA at an exchange ratio of 0.835
shares of Thoratec stock for each share of TCA. The Merger was accounted for as
a reverse acquisition because former shareholders of TCA owned a majority of
our outstanding stock subsequent to the Merger. For accounting purposes, TCA is
deemed to have acquired Thoratec and therefore for fiscal years 1999 and 2000
all financial information presented herein represents the results of operations
of TCA. Our 2001 consolidated financial information presented herein includes
the financial results of TCA for the full fiscal year and Thoratecs financial
results for the post-merger period from February 14, 2001 through December 29,
2001. The weighted average number of common shares previously reported by TCA
has been adjusted for all periods presented to reflect the exchange ratio of
0.835 to 1. Our fiscal year ends on the Saturday closest to December 31.
Accordingly,
our fiscal year will periodically contain more or less than 365 days. For
example, 1999 ended on December 31, 1999, 2000 ended on December 30, 2000, 2001
ended on December 29, 2001, 2002 ended December 28, 2002 and 2003 ended January
3, 2004. 29




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##### Table of Contents



Fiscal Year2003
    
    2002
    
    2001
    
    2000 (a)
    
    1999 (a)(In thousands, except per share data)Statement of Operations:Product sales
    
    $
    149,916
    
    
    $
    130,844
    
    
    $
    113,384
    
    
    $
    83,396
    
    
    $
    78,611Gross profit
    
    
    88,748
    
    
    
    75,720
    
    
    
    60,544
    
    
    
    48,566
    
    
    
    45,285Amortization of goodwill and purchased
intangible assets
    
    
    12,333
    
    
    
    12,384
    
    
    
    15,674
    
    
    
    
    
    
    
    In-process research and development
    
    
    220
    
    
    
    
    
    
    
    76,858
    
    
    
    
    
    
    
    Impairment of intangible asset
    
    
    8,987
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Legal settlement, merger, restructuring and
other costs
    
    
    2,132
    
    
    
    1,409
    
    
    
    7,134
    
    
    
    1,831
    
    
    
    Net income (loss)
    
    
    (2,182
    )
    
    
    511
    
    
    
    (87,866
    )
    
    
    7,524
    
    
    
    9,584Basic and diluted earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    (1.68
    )
    
    $
    0.23
    
    
    $
    0.30Balance Sheet Data:Cash and cash equivalents
    
    $
    62,020
    
    
    $
    42,044
    
    
    $
    91,726
    
    
    $
    30,236
    
    
    $
    418Working capital
    
    
    116,430
    
    
    
    107,972
    
    
    
    135,924
    
    
    
    149,207
    
    
    
    115,471Total assets
    
    
    476,131
    
    
    
    468,432
    
    
    
    530,241
    
    
    
    176,685
    
    
    
    169,928Subordinated convertible debentures
    
    
    
    
    
    
    
    
    
    
    54,838
    
    
    
    54,838
    
    
    
    58,011Long-term deferred tax liability and other
    
    
    67,123
    
    
    
    75,454
    
    
    
    81,020
    
    
    
    
    
    
    
    Total shareholders equity
    
    $
    386,236
    
    
    $
    374,340
    
    
    $
    373,343
    
    
    $
    105,869
    
    
    $
    96,940
  (a)
    
    Our financial statements for 1999 and 2000 were audited by Arthur
Andersen LLP, who have ceased operations. 30




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##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The statements in Managements Discussion and Analysis of
Financial
Condition and Results of Operations that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. These factors, and others, are discussed more fully in Item 1
above and our other filings with the SEC. Actual results, events or performance
may differ materially from those anticipated in these forward-looking
statements as a result of a variety of factors, including those set forth in
Risk Factors presented in Item 1 above in this Annual Report onForm 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release the result of any revisions to these forward-looking
statements that may be needed to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Overview We are a leading manufacturer of circulatory support products for use by
patients with congestive heart failure, or CHF. According to the American Heart
Association, 4.9 million patients in the United States suffer from CHF and an
additional 550,000 patients are diagnosed with this disease annually. We were
the first company to receive approval from the United States Food and Drug
Administration, or FDA, to commercially market a ventricular assist device, or
VAD, to treat patients with late-stage heart failure, which comprises
approximately 5% to 10% of the CHF patient population. Our VADs are used
primarily by these CHF patients to perform some or all of the pumping function
of the heart and we currently offer the widest range of products to serve this
market. We believe that our long-standing reputation for quality and innovation
and our excellent relationships with leading cardiovascular surgeons worldwide
position us to capture growth opportunities in the expanding congestive heart
failure market. Through our ITC subsidiary, we design, develop, manufacture and
market point-of-care diagnostic test systems that provide fast, accurate blood
test results to improve patient management, reduce healthcare costs and improve
patient outcomes. Our Business Model The two product lines that represent the majority of our revenues are
Ventricular Assist Devices (VAD) and point-of-care diagnostic test systems and
services. Historical revenue mix has been as follows: 2001
    
    2002
    
    2003VAD pumps including associated products and services
    
    
    61
    %
    
    
    62
    %
    
    
    60
    %Point-of-care diagnostic test systems
    
    
    37
    %
    
    
    35
    %
    
    
    37
    %Grafts/Other
    
    
    2
    %
    
    
    3
    %
    
    
    3
    %Net Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Ventricular Assist Devices The VAD is a mechanical device to assist a failing heart pump blood, both
as a temporary measure until an failing heart recovers or is replaced in a
heart transplant (Bridge to Transplants  BTT), and as a permanent implant to
supplement the efforts of the heart to pump blood (Destination
Therapy  DT).
We derive our VAD revenue from two different VAD products as follows:  
    
    The HeartMate VAD was acquired in our 2001 merger with Thermo Cardio
Systems division of Thermo Electron. This VAD is made of titanium,
contains an electrically powered pump, provides a safe interface with
blood through a sintering process applied to the titanium, and has an
average selling price that is typically approximately $65,000 per unit.
The HeartMate VAD is only approved to assist the left ventricle, and is
implanted inside the body cavity. It is currently approved for use in
BTT and DT.
    
    The Thoratec VAD is made of polymers, is powered pneumatically,
provides a safe interface with blood through our proprietary Thoralon
coating, and has an average selling price that is approximately $35,000.
The Thoratec VAD is approved to assist the left and the right ventricle,
and is worn outside the body cavity. It is currently approved for use in
BTT. 31




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##### Table of Contents



VAD revenue historically has been split approximately equally between the
HeartMate and the Thoratec VAD, while unit sales volume has historically been
weighted around 2:1 in favor of the Thoratec VAD. As DT becomes a more
significant element of our business, we expect unit shipments and revenue for
the HeartMate VAD to grow to exceed that of the Thoratec VAD. The
market, competition and barriers to entry - We estimate we have
in
excess of 90% of the VAD market domestically and more than 50% internationally.
Domestic revenue growth will come from expanding the market through new
indications for our current products, in particular the recent approval of
Destination Therapy, and from the development and approval of new, generally
smaller and longer lasting products, that can be used in a broader range of
patients. Internationally we expect growth to come by taking market share from
our competitors and from expanding the market. We believe that potential competitors are at least 3 years away from
completion of DT clinical trials required before those products will become
commercially available and compete with our products in the United States. In
addition, unless our competitors products result in significantly better
outcomes than our products, we believe that absent any compelling reasons,
cardiac centers will not generally change suppliers. The use of our VADs for Destination Therapy in patients who are not
candidates for heart transplantation was approved by the FDA in 2002, and was
approved for reimbursement by CMS in late 2003. We estimate that there are
approximately 100,000 people who could be candidates for Destination Therapy,
of which we believe between 5,000 and 15,000 are treatable using current
technologies. Our future revenue growth is dependent on the successful adoption
and sale of our products for Destination Therapy. Point-Of-Care Diagnostic Test Systems Business Through our ITC subsidiary, we design, develop, manufacture and market
point-of-care diagnostic test systems that provide fast, accurate blood test
results, to monitor a patients coagulation while they are being administered
anticoagulants, and to monitor a patients blood gas/electrolyte and chemistry
status. These products are sold into Hospitals, Physicians offices, long-term
care facilities, clinics, visiting nurse associations, and home healthcare
companies. The
market, competition and barriers to entry - Large medical device
companies dominate these markets and we estimate our products hold anywhere
from 2% to 20% market share. Growth in this market will come from taking market
share away from other companies, and from testing being shifted from the
central laboratory to the point-of-care. However, this market segment is very
competitive, and includes the following potential drivers:  
    
    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 that might enter the market with broader test menus.
To address this risk, in late 2003 we acquired the IRMA (Immediate
Response Mobile Analysis) product line of blood gas/electrolyte and
chemistry tests, which has significantly increased our test menu
offering, and also offers us the opportunity to develop the next
generation system that combines blood gas and electrolyte testing in one
machine. Overall, we are planning for sales of our point-of-care diagnostic test
systems to grow at an annual growth rate of up to 10% for the next several
years. This growth assumes increased patient testing, better patient outcomes,
and increased decentralization of testing from central laboratories to
point-of-care. We expect our international sales to increase from 19% currently
to approximately 25% of ITCs total sales by 2007. Mergers On September 30, 2003, we completed an asset purchase of the
Immediate
Response Mobile Analysis, or IRMA, point-of-care blood analysis system product
line from Diametrics Medical, Inc. (Diametrics). We paid approximately $5.2
million in cash and assumed trade payables. The purchase price was allocated
based on the fair value of assets acquired as determined by an independent
valuation firm as follows (in thousands): 32




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##### Table of Contents



LifeWorking capital
    
    $
    1,034Property, plant and equipment
    
    
    2,492
    
    
    3-10 yearsCore technology
    
    
    331
    
    
    10 yearsExisting developed technology
    
    
    1,058
    
    
    10 yearsPatents
    
    
    317
    
    
    17 yearsOther intangibles
    
    
    143
    
    
    7-17 yearsIn-process research and development
    
    
    220
    
    
    Expensed in 2003Acquisition costs
    
    
    (395
    )Consideration paid
    
    $
    5,200
 There was no goodwill recorded with the
transaction. As a result of the
acquisition, $220,000 relating to in-process research and development was
expensed in the fourth quarter of 2003. The Merger of Thoratec with TCA was completed on February 14, 2001.
We
issued new shares of our common stock to the shareholders of TCA in exchange
for all the outstanding common stock of TCA at an exchange ratio of 0.835
shares of Thoratec stock for each share of TCA stock. The Merger was accounted
for as a reverse acquisition because former shareholders of TCA owned a
majority of our outstanding stock subsequent to the Merger. For accounting
purposes, TCA is deemed to have acquired Thoratec. Our 2001 consolidated
financial information presented herein includes the financial results of TCA
for the full fiscal year and Thoratecs financial results for the post-merger
period from February 14, 2001 through December 29, 2001. Restructuring Plan In June 2001, we initiated a restructuring plan to consolidate all
of our
VAD manufacturing operations to our facilities in Pleasanton, California.
Through April 2003, the completion date of the restructuring plan, we have
recorded a total of $1.5 million of restructuring charges. These charges
represent estimated employee severance costs and stock option acceleration
charges. Results of Operations The following table sets forth selected consolidated statements of
operations data for the years indicated as a percentage of total product sales: Fiscal Year2003
    
    2002
    
    2001Sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    41
    
    
    
    42
    
    
    
    47Gross profit
    
    
    59
    
    
    
    58
    
    
    
    53Operating expenses:Selling, general & administrative
    
    
    30
    
    
    
    29
    
    
    
    29Research & development
    
    
    17
    
    
    
    19
    
    
    
    19Amortization of purchased intangible assets
    
    
    8
    
    
    
    10
    
    
    
    10Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    4Loss on impairment of intangible asset
    
    
    6
    
    
    
    
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    68Litigation, merger, restructuring and other costs
    
    
    1
    
    
    
    1
    
    
    
    6Total operating expenses
    
    
    62
    
    
    
    59
    
    
    
    136Income (loss) from operations
    
    
    (4
    )
    
    
    (1
    )
    
    
    (83
    )Interest and
other income - net
    
    
    1
    
    
    
    2
    
    
    
    2Income (loss) before income taxes
    
    
    (3
    )
    
    
    1
    
    
    
    (81
    )Income tax expense (benefit)
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Net income (loss)
    
    
    (2
    )%
    
    
    1
    %
    
    
    (78
    )%
 33




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##### Table of Contents



Fiscal Years 2003 and 2002 Sales Product sales in 2003 were $149.9 million compared to
$130.8 million in
2002. The primary components of the $19.1 million increase in revenues were as
follows:  
    
    Higher VAD sales. The majority of this increase came from higher sales of the HeartMate VAD ($7.1
million)
    
    Higher Graft Sales ($1.0 million)
    
    Higher revenue from sales of ancillary products ($1.8 million)
    
    Higher revenue from sales of point-of-care diagnostic test systems at our ITC subsidiary ($7.4 million)
    
    Revenue from IRMA product line acquired by ITC in the fourth quarter of 2003 ($1.7 million) We are currently planning 2004 revenue in the range of
$190-200 million.
This is highly dependent upon the success of our Destination Therapy activities
in generating significant revenues. We anticipate the majority of these
revenues in the second half of 2004. Gross Profit Gross profit as a percentage of sales increased from 58% in 2002 to 59%
in
2003 due to the following drivers:  
    
    Higher VAD Average Selling Prices resulted in a 2.2% increase in
margin. This is driven largely by sales in 2003 of our HeartMate VAD
representing a higher percentage of our revenue when compared to the
lower priced Thoratec VAD. The HeartMate VAD typically sells at an ASP of
between $60,000 and $70,000, while the Thoratec VAD typically sells at an
ASP between $30,000 and $40,000.
    
    Lower margins on ITC product lines resulted in a 0.8% decline in the
Companys overall margins. This includes the impact of the IRMA product
line we acquired in the fourth quarter of 2003 which currently operates
with margins in the 30% range, compared to the margins on other products
sold by our ITC division which typically sell at margins in the 50%
range, and the impact of higher scrap, higher freight, and lower ASPs in
our Incision product line. As we recognize higher revenues for our current Destination Therapy
initiatives, we anticipate that margins will trend upwards into the mid 60%
range as the higher margin VAD products represent a larger portion of our
overall revenues. Selling, General and Administrative Selling, general and administrative expenses in 2003 were
$44.4 million,
or 30% of product sales, compared to $37.4 million, or 29% of product sales, in
2002. Underlying the $7.0 million increase in spending were the following
drivers:  
    
    Increased headcount from 125 at the end of 2001 to 139 at the
end of 2002 to 174 at the end of 2003, together with annual salary
increases aggregating 4% effective January 2003.
    
    Higher spending on Medicare reimbursement activities and market
research and related activities, primarily associated with
Destination Therapy, and costs associated with the IRMA product line
acquired in Q4, 2003.
    
    Higher insurance premiums
    
    Higher facilities costs related to higher headcount. These higher costs were offset by lower legal costs associated with
filing
an S-3 in 2002 that did not recur in 2003, and lower meeting expense related to
a customer event in 2002 that did not recur in 2003. We anticipate that
selling, general and administrative costs will generally increase each year as
our business grows, with some quarterly and annual spending around events such
as product introductions, and with spending as a percentage of revenue trending
downward as revenues from current products increase, in particular as we
realize revenue associated with Destination Therapy. Research and Development Research and development expenses in 2003 were $26.1 million, or 17%
of
product sales, compared to $25.3 million, or 19% of product sales, in 2002.
Research and development costs are largely project driven, and the level of
spending depends on the level of 34




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project activity planned and subsequently approved
and conducted. Projects
typically include efforts to develop new products such as the HeartMate II and
HeartMate III, efforts to improve the operation and performance of current
products such as efforts to improve the life of various components of the
HeartMate and the Thoratec VAD products. Research and development costs also
include regulatory and clinical costs associated with our compliance with FDA
regulations. We anticipate that Research and Development costs will generally
increase modestly each year as our business grows, with some quarterly and
annual spikes in spending around events such as product introductions and
regulatory approvals, and with spending as a percentage of revenue trending
downward as revenues from current products increase, in particular as we
realize revenue associated with Destination Therapy. Amortization of Purchased Intangible Assets Amortization of purchased intangible assets in 2003 was
$12.3 million
compared to $12.4 million in 2002. We anticipate that amortization of
intangible assets in 2004 will total approximately $11.7 million. Amortization of Goodwill Beginning in 2002, we have stopped amortizing goodwill in accordance with
SFAS No. 142. Impairment of Intangible Asset Subsequent
to year-end, the Company completed its assessment of the final
results from its feasibility clinical trial for the Aria CABG graft,
which was ongoing through fiscal 2003. Based on the clinical trial results, the
Company determined that it will not devote additional resources to the
development of the Aria graft. Upon the decision to discontinue product
development, the Company recorded an impairment charge of $9.0 million as of
January 3, 2004 to write off purchased intangible assets related to the Aria
graft, which were recorded as a result of the Merger. In-process Research and Development Costs In-process research and development expense in 2003 was $0.2 million
related to our acquisition of the IRMA product line. Legal Settlement, Merger, Restructuring and Other Costs Legal settlement, merger, restructuring and other charges in 2003 were
$2.1
million compared to $1.4 million in 2002. The 2003 expense is primarily
comprised of $2.3 million to settle a patent infringement claim filed against
us by Bodycote Materials Testing Canada, Inc. and David C. MacGregor, M.D
related to materials used in the Companys HeartMate® LVAS. Interest and Other
Income - Net Interest
and other income - net in 2003 was $1.8 million
compared to $1.6
million in 2002. This increase was primarily due to $1.1 million less interest
paid due to the redemption of our debentures in March 2002, offset partially by
the impact of lower interest rates on invested cash in 2003, which resulted in
a decrease in interest income of $0.4 million from $1.9 million in 2002 to $1.5
million in 2003, and the impact of our foreign exchange hedging program
commenced in 2003. Income Taxes Our effective tax rate was 39% in 2003 compared to an effective tax rate
of 42% in 2002. This reduction reflects the relatively larger impact of various
tax incentives, nondeductible expenses and tax credits in 2002 when net income
subject to tax was less than $1 million. Based on a pre tax loss in 2003 of
$3.6 million, the impact of these tax differences is proportionately lower. Fiscal Years 2002 and 2001 Product Sales Product sales in 2002 were $130.8 million compared to
$113.4 million in
2001, an increase of $17.4 million or 15%. This increase was primarily
attributable to an increase in VAD product sales of $10.5 million resulting
from higher unit sales and average selling prices, an increase in vascular
graft product sales of $2.1 million due to higher unit sales, and an increase
in ITC sales of $4.8 million. 35




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Product sales in 2001 included Thoratec sales for the post-merger period
from February 14, 2001 through December 29, 2001 whereas product sales in 2002
included Thoratec sales for the full 12 months of 2002. The increase in ITC sales $4.8 million was primarily due to increases in
sales of our blood coagulation testing products of $4.4 million. Gross Profit Gross profit in 2002 was $75.7 million, representing approximately 58% of
product sales, compared to $60.5 million, representing approximately 53% of
product sales in 2001. This increase in gross profit as a percentage of sales
was primarily due to higher average selling prices for our VAD products and
lower manufacturing and product service costs as a percentage of sales in 2002
compared to 2001. Selling, General and Administrative Selling, general and administrative expenses in 2002 were $37.4 million,
or 29% of product sales, compared to $32.3 million, or 29% of product sales, in
2001. While selling, general and administrative expenses were consistent as a
percentage of product sales from period to period, they increased as a result
of promotional activities, new product introductions and costs to expand
markets for our blood coagulation testing equipment and VADs as well as higher
insurance costs, costs associated with computer systems installed in 2002 and
business development activities. Research and Development Research and development expenses in 2002 were $25.3 million, or 19% of
product sales, compared to $22.1 million, or 19% of product sales, in 2001.
This increase resulted from an increase in spending for certain VAD product
development programs partially offset by lower spending related to the REMATCH
trials. Amortization of Purchased Intangible Assets Amortization of purchased intangible assets in 2002 was $12.4 million
compared to $11.3 million in 2001. As of January 3, 2004, intangible assets of
$207.0 million have been recorded as a result of our Merger and are being
amortized over their estimated useful lives of eight to twenty years. In
accordance with SFAS No. 142, at the beginning of 2002 we reclassified our
purchased intangible asset related to acquired workforce in the net amount of
$1.3 million to goodwill and ceased amortization of that asset. The increase in
the amortization of purchased intangible assets from 2001 is due to the
inclusion of a full year of amortization in 2002 compared to only ten months of
amortization in 2001. Amortization of Goodwill Amortization of goodwill in 2001 was $4.4 million. Beginning in 2002, we
have stopped amortizing goodwill in accordance with SFAS No. 142. In-process Research and Development Costs In-process research and development, or IPR&D, expense in 2001 was $76.9
million and represents the one-time write-off of nonrecurring charges
associated with our Merger in February 2001 for projects that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. One of the projects was completed in 2001. There have been no significant
developments subsequent to the Merger related to the current status of any of
the remaining IPR&D projects that would result in material changes to the
assumptions or resulting valuation performed at the time of the Merger.
Development of IPR&D projects continues and while the timing of completion of
these projects may vary due to the highly regulated and technical nature of our
products, current estimates remain materially consistent with our initial
estimates. There can be no assurances that we will be able to complete the
development of these products on a timely basis. Failure to complete these
projects could have an adverse impact on our financial condition or results of
operations. 36




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Legal Settlement, Merger, Restructuring and Other Costs Legal settlement, merger, restructuring and other charges in 2002 were
$1.4 million compared to $7.1 million in 2001. The 2002 amount included costs
consisting mainly of executive waiver agreement costs of $0.4 million,
restructuring costs of $0.5 million representing estimated severance costs
related to the consolidation of our VAD manufacturing operations, and other
costs of $0.5 million related to the termination of a European distribution
agreement. The 2001 amount included employee severance of $2.8 million,
executive waiver agreement costs of $0.7 million, consulting, accounting and
legal expenses of $1.8 million, restructuring costs of $1.1 million,
representing estimated severance costs related to the consolidation of our VAD
manufacturing operations, and costs of $0.7 million related to the events of
September 11, 2001. Interest and Other Income  Net Interest
and other income - net in 2002 was $2.1 million compared to $2.4
million in 2001. This decrease was primarily due to a decrease of $3.2 million
in interest income caused by both lower cash balances and a reduction in
interest rates during 2002. The decrease in interest income was partially
offset by a reduction of interest expense due to the redemption of our
subordinated convertible debentures in the first quarter of 2002 and an
increase in other income primarily related to foreign currency translation
gains. Income Taxes Our effective tax provision rate was 42% in 2002 compared to an effective
tax benefit rate of 4% in 2001. For 2002, the effective tax provision rate
exceeded the federal statutory income tax rate primarily due to the impact of
state income taxes. Our effective tax benefit rate for 2001 differed from the
statutory federal income tax rate primarily due to the impact on the reported
net loss of nondeductible expenses related to our Merger with TCA, including
the write-off of IPR&D costs, the amortization of goodwill and other
nondeductible merger transaction costs. Liquidity and Capital Resources At the end of 2003, we had working capital of $116.4 million compared with
$108.0 million at the end of 2002. Cash and cash equivalents at the end of 2003
were $62.0 million compared to $42.0 million at the end of 2002, an increase of
$20.0 million. Cash provided by operating activities was $30.7 million in 2003. In addition
we had cash flows from financing activities of $10.6 million in 2003 from the
sale of stock, through the exercising of stock options and stock issued under
the newly implemented Employee Stock Purchase Plan. This total of $41.3
million of cash inflows was offset by $8.9 million net purchases of available
for sale investments, $6.9 million paid to acquire property, plant and
equipment which primarily consisted of $5.0 million of equipment additions and
$1.7 million of leasehold improvements, and $5.2 million used in the
acquisition of the IRMA product line. In February 2004, we announced a stock repurchase program under which up
to $25 million of our common stock could be acquired in the open market or in
privately negotiated transactions. The number of shares to be purchased and the
timing of purchases were based on several conditions, including the price of
our stock, general market conditions and other factors. We believe that cash and investments on-hand and expected cash flows from
operations will be sufficient to fund our operations and capital requirements
for the foreseeable future, and our stock repurchase program. The impact of inflation on our financial position and the results of
operations was not significant during any of the years presented. Critical Accounting Policies We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed below. For a more detailed discussion on the application of these and
other accounting policies, see the Notes to the Consolidated Financial
Statements included in this Annual Report on Form 10-K. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amount of assets, liabilities, revenue and expenses and the
disclosure of contingent assets and liabilities. There can be no assurance that
actual results will not differ from those estimates. Merger Accounting 37




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On September 30, 2003, we completed an asset purchase of the Immediate
Response Mobile Analysis, or IRMA, point-of-care blood analysis system product
line from Diametrics Medical, Inc. (Diametrics). We paid $5.2 million in cash
and assumed trade payables. The purchase price was allocated based on the fair
value of assets acquired and liabilities assumed as determined by an
independent valuation firm. As a result of the acquisition, $220,000 relating
to in-process research and development was expensed in the fourth quarter of
2003. On February 14, 2001, Thoratec completed its Merger with TCA. Pursuant to
the Merger agreement between Thoratec and TCA, Thoratec issued new shares of
its common stock to the shareholders of TCA in exchange for all the outstanding
common stock of TCA. The Merger was treated as a reverse acquisition because
the shareholders of TCA owned the majority of Thoratec common stock after the
Merger. TCA was considered the acquiror for accounting and financial reporting
purposes. The Merger was accounted for under the purchase method of accounting.
Due to the reverse acquisition, Thoratecs assets and liabilities were recorded
based upon their estimated fair values at the date of acquisition. The purchase
price is also allocated to intangible assets, including goodwill. Approximately
$309.0 million of the total purchase price of $346.2 million was allocated to
goodwill and other purchased intangibles. The determination of the value of
such intangible assets requires management to make estimates and assumptions
that affect our consolidated financial statements. The amounts allocated to
goodwill and other intangible assets will affect the amount of amortization
expense we recognize in future periods and could result in a possible
impairment expense if at some future date such assets were determined to be
impaired. As a result of the Merger, $76.9 million relating to IPR&D was expensed in
the first quarter of 2001. The write-off of IPR&D was related to projects that
were in development, had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
There have been no significant developments subsequent to the Merger related to
the current status of any of the IPR&D projects that would result in material
changes to the assumptions or resulting valuation performed at the time of the
Merger. Development of IPR&D projects continues and while the timing of
completion of these projects may vary due to the highly regulated and technical
nature of the Companys products, current estimates remain materially
consistent with the Companys initial estimates. Evaluation of Goodwill and Purchased Intangibles for Impairment In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which we adopted as of the beginning of fiscal
year 2002, we periodically evaluate the carrying value of long-lived assets to
be held and used including intangible assets, when events or circumstances
warrant such a review. The carrying value of a long-lived asset to be held and
used is considered impaired when the anticipated separately identifiable
undiscounted cash flows from such an asset are less than the carrying value of
the asset. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. As of the beginning of fiscal year 2002, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets, and ceased the amortization of
purchased goodwill. In addition, we reevaluated the useful lives of our
identifiable intangible assets and determined that the remaining useful lives
were appropriate. Each year we complete an impairment test of goodwill as
required by SFAS No. 142. Upon completion of our impairment tests as of the end
of fiscal 2003, we determined that our goodwill was not impaired. Revenue Recognition We recognize revenue from product sales 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
upon shipment. One distributor has certain limited product return rights. A
limited number of 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 significant 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 or price protection. Sales of certain Cardiovascular segment 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. For most customers, training is
not essential to the functionality of the products as the customers already
possess sufficient expertise and experience to use the products. In these
situations, training is provided as a best practice to optimize the use 38




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and success of the products. The amount of revenues under these arrangements
allocated to training is based upon fair market value of the training,
performed principally by third party providers. The amount of revenues
allocated to the Cardiovascular segment products is done on a residual method
basis. Under this method, the total value of the arrangement is allocated first
to the undelivered training element based on the fair market value, with the
remainder being allocated to the Cardiovascular segment products. The amount of
revenues allocated to training is recorded as deferred revenue and is
recognized when the training is completed. As of the end of 2003, $0.1 million
of products have been delivered and recorded as product sales for customers
that were determined to be able to use those products, but for which training
had not yet been completed. The amount of revenue deferred related to this
training not yet completed was $20,000 at the end of 2003, $100,000 at the end
of 2002 and $38,000 at the end of 2001. We also rent certain medical devices to customers on a month-to-month or
as-used basis. Rental income is based on utilization and is included in product
sales as earned. Included in product sales for 2003, 2002 and 2001 are $4.6
million, $3.8 million and $3.5 million, respectively, of income earned from the
rental of these medical devices. The majority of our products are covered by a one-year limited
manufacturers warranty from the date of installation. 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. The change in accrued warranty expense in 2003 and 2002
is summarized in the following table (in thousands): Balance
    
    Charges to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Warranty
    
    Endof Year
    
    Expenses
    
    Expenditures
    
    of YearYear ended 2003
    
    $
    695
    
    
    $
    193
    
    
    $
    (59
    )
    
    $
    829Year ended 2002
    
    $
    910
    
    
    $
    45
    
    
    $
    (260
    )
    
    $
    695Year ended 2001
    
    $
    970
    
    
    $
    594
    
    
    $
    (654
    )
    
    $
    910
 Reserves We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments owed to us for
product sales. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. In June 2001, we approved a Restructuring Plan to consolidate all of our
VAD manufacturing operations to our manufacturing facilities and headquarters
in Pleasanton, California. Through the completion date of the Restructuring
Plan in April 2003, we have recorded $1.5 million of restructuring charges in
accordance with Emerging Issues Task Force 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity and
Staff Accounting Bulletin 100, Restructuring and Impairment Charges. These
charges represent estimated employee severance costs and stock option
acceleration charges. We completed the relocation of the Woburn, Massachusetts
manufacturing operations to our Pleasanton facility in the first quarter of
2003 and in February 2003 the FDA inspected the Pleasanton facility related to
this transfer. We received FDA approval in April 2003. As of the completion
date of the Restructuring Plan, we have paid approximately $1.3 million in
severance payments to 78 employees. Contractual Obligations As of January 3, 2004, we have the following contractual obligations (in
millions): Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterOperating lease obligations
    
    $
    22.2
    
    
    $
    2.5
    
    
    $
    2.5
    
    
    $
    2.5
    
    
    $
    2.4
    
    
    $
    2.1
    
    
    $
    10.2Purchase obligations
    
    
    10.2
    
    
    
    10.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    32.4
    
    
    $
    12.7
    
    
    $
    2.5
    
    
    $
    2.5
    
    
    $
    2.4
    
    
    $
    2.1
    
    
    $
    10.2
 Our purchase obligations of $10.2 million include $6.4 million of supply
agreements and $3.8 million of purchase orders open at January 3, 2004. Recent Accounting Pronouncements In April 2002, the FASB issued SFAS No. 145, which, among other things,
changed the presentation of gains and losses on the extinguishment of debt. Any
gain or loss on extinguishment of debt that does not meet the criteria in APB
Opinion 30, Reporting the 39




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Results
of Operations - Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, is to be included in operating earnings and not presented
separately as an extraordinary item. We adopted SFAS No. 145 at the beginning
of fiscal year 2003 and therefore, we reclassified in the first quarter of 2003
the extraordinary loss incurred in 2002 of $0.5 million to interest and other
income-net. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The Company will apply the
provisions of SFAS No. 146 for any restructuring activities initiated after
December 31, 2002. In November 2002, the Emerging Issues Task Force, or EITF, reached a
consensus regarding EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. The guidance provided is effective for contracts entered into
on or after July 1, 2003. The adoption of this guidance did not have a
material effect upon our consolidated financial statements. In November 2002, the FASB issued Interpretation, or FIN, No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. We adopted the disclosure
provisions of FIN No. 45 effective as of fiscal year end 2002. We do not
expect that the recognition provisions of FIN 45 will have a material impact
upon our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We adopted the disclosure provisions of SFAS No. 148
at the beginning of fiscal 2003. We do not expect to change to use the fair
value based method of accounting for stock-based employee compensation. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. The provisions of FIN 46 are effective for any
arrangements entered into after January 31, 2003. Since January 31, 2003, the
Company has not invested in any entities it believes are variable interest
entities. In December 2003, the FASB issued a revised interpretation of FIN
46, FIN 46-R. The Company does not expect the adoption of FIN 46-R to have a
material impact upon our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. This statement is effective
for contracts entered into or modified after June 30, 2003. We adopted SFAS
No. 149 effective July 1, 2003. The adoption of this statement did not have a
material effect upon our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and was effective at the beginning of the first interim
period beginning after June 15, 2003. In November 2003, the FASB issued FASB
Staff Position No. 150-3, Effective Date, Disclosures, and Transition for
Madatorily Redeemable Noncontrolling Interests under SFAS No. 150, which
defers the effective date for various provisions of SFAS 150. The adoption of
this statement is not expected to have an impact upon our consolidated
financial statements. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our investment portfolio is made up of cash equivalent and marketable
security investments in money market funds and debt instruments of government
agencies and high quality corporate issuers. All investments are carried at
market value and are treated as available-for-sale. All investments mature
within two years or less from the date of purchase. The holdings of any one
issuer, except government agencies, do not exceed 10% of the portfolio. We are
exposed to market risk related to changes in interest rates. The market value
of these investments may fall if market interest rates increase. If market
interest rates were to increase by 10% from the levels at January 3, 2004,
absent other factors, we estimate the fair market value of our investment
portfolio would decline by an immaterial amount. We do not utilize derivative
financial instruments to manage interest rate risks. 40




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Foreign Currency Rate Fluctuations We conduct business in foreign countries. Our international operations
consist primarily of sales and service personnel for our ventricular assist
products, who report into our U.S. sales and marketing group and are internally
reported as part of that group. All assets and liabilities of our non-U.S.
operations are translated into U.S. dollars at the period-end exchange rates,
and the resulting translation adjustments are included in comprehensive income.
The period-end translation of our non-functional currency assets and
liabilities (primarily assets and liabilities on our UK subsidiary consolidated
balance sheet that are not denominated in UK Pounds) at the period-end exchange
rates result in foreign currency exchange gains and losses, which are included
in Interest and Other Income-Net. Commencing in September of 2003, the Company began using forward foreign
currency contracts to hedge the gains and losses generated by the remeasurement
of these non-functional currency assets and liabilities. Changes in the fair
value of the forward foreign currency contracts are included in Interest and
Other Income-Net, and typically offset the foreign currency exchange gains and
losses described above. These derivatives are not designated as cash flow or
fair value hedges under SFAS No. 133 and typically have maturities of three
months or less. At January 3, 2004, the Company had forward foreign currency
contracts to exchange Pounds Sterling and Euros for US Dollars with a notional
value of $4.3 million and a negligible fair value. There were no forward
foreign currency contracts outstanding at the end of 2002. Net foreign
currency exchange gain was negligible in 2003 compared to $0.5 million for
2002. Net foreign currency exchange loss was approximately $0.1 million in
2001. 41




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Item 8.Financial Statements and Supplementary Data THORATEC CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  PageFinancial Statements:Independent Auditors Report
    
    
    
    43Consolidated 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
 42




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INDEPENDENT AUDITORS REPORT To the Shareholders and Board of Directors of Thoratec Corporation: We have audited the accompanying consolidated balance sheets of Thoratec
Corporation and subsidiaries as of January 3, 2004 and December 28, 2002 and
the related consolidated statements of operations, comprehensive income (loss),
shareholders equity and cash flows for the years ended January 3,
2004, December 28, 2002 and December 29, 2001. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Thoratec Corporation and
subsidiaries as of January 3, 2004 and December 28, 2002 and the results of
their operations and their cash flows for the years ended January 3,
2004, December 28, 2002 and December 29, 2001 in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. /s/ DELOITTE & TOUCHE LLP San Francisco, California March 12, 2004 43




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THORATEC CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS 2003
    
    2002(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    62,020
    
    
    $
    42,044Short-term available-for-sale investments
    
    
    
    
    
    
    3,439Receivables, net of allowances of $486 in 2003 and $238 in 2002
    
    
    27,969
    
    
    
    27,593Inventories
    
    
    36,417
    
    
    
    38,835Deferred tax asset
    
    
    9,717
    
    
    
    12,182Prepaid expenses and other assets
    
    
    3,079
    
    
    
    2,517Total current assets
    
    
    139,202
    
    
    
    126,610Property, plant and equipment, net
    
    
    28,492
    
    
    
    24,715Long-term available-for-sale investments
    
    
    41,179
    
    
    
    30,051Goodwill
    
    
    96,065
    
    
    
    96,492Purchased intangible assets, net
    
    
    164,865
    
    
    
    184,282Long-term deferred tax asset
    
    
    4,796
    
    
    
    5,244Other assets
    
    
    1,532
    
    
    
    1,038Total Assets
    
    $
    476,131
    
    
    $
    468,432LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,952
    
    
    $
    6,319Accrued compensation
    
    
    8,851
    
    
    
    6,372Accrued merger, restructuring and other
    
    
    
    
    
    
    1,208Estimated liabilities for warranty, legal and other
    
    
    1,463
    
    
    
    1,304Accrued legal settlement
    
    
    2,000
    
    
    
    Accrued income taxes
    
    
    1,637
    
    
    
    1,393Other accrued liabilities
    
    
    1,869
    
    
    
    2,042Total current liabilities
    
    
    22,772
    
    
    
    18,638Long-term deferred tax liability and other
    
    
    67,123
    
    
    
    75,454Total Liabilities
    
    
    89,895
    
    
    
    94,092CommitmentsShareholders equity:Common shares: authorized 100,000; issued and outstanding 56,242 in 2003 and 55,037 in 2002
    
    
    423,045
    
    
    
    410,266Deferred compensation
    
    
    (2,630
    )
    
    
    (3,735
    )Accumulated deficit
    
    
    (34,594
    )
    
    
    (32,412
    )Accumulated other comprehensive income (loss):Unrealized gain on investments
    
    
    51
    
    
    
    130Cumulative translation adjustments
    
    
    364
    
    
    
    91Total accumulated other comprehensive income (loss)
    
    
    415
    
    
    
    221Total Shareholders Equity
    
    
    386,236
    
    
    
    374,340Total Liabilities and Shareholders Equity
    
    $
    476,131
    
    
    $
    468,432
 See notes to consolidated financial statements. 44




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THORATEC CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended2003
    
    2002
    
    2001(In thousands, except per share data)Product sales
    
    $
    149,916
    
    
    $
    130,844
    
    
    $
    113,384Cost of product sales
    
    
    61,168
    
    
    
    55,124
    
    
    
    52,840Gross profit
    
    
    88,748
    
    
    
    75,720
    
    
    
    60,544Operating expenses:Selling, general and administrative
    
    
    44,437
    
    
    
    37,413
    
    
    
    32,346Research and development
    
    
    26,052
    
    
    
    25,251
    
    
    
    22,082Amortization of purchased intangible assets
    
    
    12,333
    
    
    
    12,384
    
    
    
    11,321Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    4,353Impairment of intangible asset
    
    
    8,987
    
    
    
    
    
    
    
    In-process research and development
    
    
    220
    
    
    
    
    
    
    
    76,858Legal settlement, merger, restructuring and other costs
    
    
    2,132
    
    
    
    1,409
    
    
    
    7,134Total operating expenses
    
    
    94,161
    
    
    
    76,457
    
    
    
    154,094Loss from operations
    
    
    (5,413
    )
    
    
    (737
    )
    
    
    (93,550
    )Interest and
other income - net
    
    
    1,837
    
    
    
    1,631
    
    
    
    2,359Income (loss) before taxes
    
    
    (3,576
    )
    
    
    894
    
    
    
    (91,191
    )Income tax expense (benefit)
    
    
    (1,394
    )
    
    
    383
    
    
    
    (3,325
    )Net income (loss)
    
    $
    (2,182
    )
    
    $
    511
    
    
    $
    (87,866
    )Basic and diluted earnings (loss) per share
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    (1.68
    )Shares used to compute earnings (loss) per share:Basic
    
    
    55,583
    
    
    
    56,184
    
    
    
    52,336Diluted
    
    
    55,583
    
    
    
    56,762
    
    
    
    52,336
 See notes to consolidated financial statements. 45




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Fiscal Years Ended2003
    
    2002
    
    2001(In thousands)Net income (loss)
    
    $
    (2,182
    )
    
    $
    511
    
    
    $
    (87,866
    )Other net comprehensive income (loss):Unrealized gain (loss) on
available-for-sale investments (net of
taxes of $(54), $87 and $22 in 2003,
2002 and 2001, respectively)
    
    
    (79
    )
    
    
    130
    
    
    
    39Foreign currency translation adjustments
    
    
    273
    
    
    
    108
    
    
    
    (26
    )Comprehensive income (loss)
    
    $
    (1,988
    )
    
    $
    749
    
    
    $
    (87,853
    )
 See notes to consolidated financial statements. 46




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##### Table of Contents



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, FISCAL YEAR ENDED 2000
    
    
    32,215
    
    
    $
    49,125
    
    
    $
    57,025
    
    
    $
    (251
    )
    
    $
    (30
    )
    
    $
    105,869Common stock issued in connection with merger of Thoratec
and Thermo Cardiosystems
    
    
    22,452
    
    
    
    306,889
    
    
    
    
    
    
    
    (841
    )
    
    
    
    
    
    
    306,048Common stock options granted for Thermo Cardiosystems merger
    
    
    
    
    
    
    33,524
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,524Common stock issued for services
    
    
    12
    
    
    
    136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136Non-cash compensation for services
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166Exercise of common stock options for cash
    
    
    1,378
    
    
    
    11,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,077Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    5,402
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,402Common stock issued under restricted common stock
award
    
    
    250
    
    
    
    4,140
    
    
    
    
    
    
    
    (4,140
    )
    
    
    
    
    
    
    Repurchase of common stock
    
    
    (193
    )
    
    
    (1,378
    )
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    (1,703
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    677
    
    
    
    
    
    
    
    677Other comprehensive income:Unrealized gain on available-for-sale investments (net of
taxes of $22)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    39Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Net Loss
    
    
    
    
    
    
    
    
    
    
    (87,866
    )
    
    
    
    
    
    
    
    
    
    
    (87,866
    )BALANCE, FISCAL YEAR ENDED 2001
    
    
    56,114
    
    
    $
    409,081
    
    
    $
    (31,166
    )
    
    $
    (4,555
    )
    
    $
    (17
    )
    
    $
    373,343Issuance of common shares, net of costs
    
    
    1,055
    
    
    
    16,120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,120Non-cash compensation for services
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100Exercise of common stock options for cash
    
    
    93
    
    
    
    829
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    829Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    334
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334Common stock issued under restricted common stock
award
    
    
    50
    
    
    
    328
    
    
    
    
    
    
    
    (328
    )
    
    
    
    
    
    
    Repurchase of common stock
    
    
    (2,275
    )
    
    
    (16,526
    )
    
    
    (1,757
    )
    
    
    
    
    
    
    
    
    
    
    (18,283
    )Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,148
    
    
    
    
    
    
    
    1,148Other comprehensive income:Unrealized gain on available-for-sale investments (net of
taxes of $87)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    130Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    108Net Income
    
    
    
    
    
    
    
    
    
    
    511
    
    
    
    
    
    
    
    
    
    
    
    511BALANCE, FISCAL YEAR ENDED 2002
    
    
    55,037
    
    
    $
    410,266
    
    
    $
    (32,412
    )
    
    $
    (3,735
    )
    
    $
    221
    
    
    $
    374,340Non-cash compensation for services
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Exercise of common stock options for cash
    
    
    1,082
    
    
    
    9,494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,494Issuance of common shares under Employee Stock Purchase Plan
    
    
    123
    
    
    
    1,107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,107Tax benefit related to employees and directors stock plans
    
    
    
    
    
    
    2,148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,148Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,105
    
    
    
    
    
    
    
    1,105Other comprehensive income:Unrealized loss on available-for-sale investments (net of
taxes of $(54))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    (79
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273
    
    
    
    273Net Loss
    
    
    
    
    
    
    
    
    
    
    (2,182
    )
    
    
    
    
    
    
    
    
    
    
    (2,182
    )BALANCE, FISCAL YEAR ENDED 2003
    
    
    56,242
    
    
    $
    423,045
    
    
    $
    (34,594
    )
    
    $
    (2,630
    )
    
    $
    415
    
    
    $
    386,236
 See notes to consolidated financial statements. 47




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended2003
    
    2002
    
    2001(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (2,182
    )
    
    $
    511
    
    
    $
    (87,866
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    18,914
    
    
    
    17,076
    
    
    
    19,845Impairment of intangible asset
    
    
    8,987
    
    
    
    
    
    
    
    In-process research and development
    
    
    220
    
    
    
    
    
    
    
    76,858Non-cash compensation expense
    
    
    30
    
    
    
    100
    
    
    
    303Amortization of deferred compensation
    
    
    1,105
    
    
    
    1,148
    
    
    
    677Income tax (benefit) expense
    
    
    (1,394
    )
    
    
    383
    
    
    
    (3,325
    )Changes in assets and liabilities:Receivables
    
    
    565
    
    
    
    (420
    )
    
    
    (5,892
    )Inventories
    
    
    3,666
    
    
    
    (12,640
    )
    
    
    (560
    )Prepaid expenses and other assets
    
    
    (1,043
    )
    
    
    (1,035
    )
    
    
    814Accounts payable and other liabilities
    
    
    5,153
    
    
    
    (1,806
    )
    
    
    (4,326
    )Change in net deferred tax liability
    
    
    (3,362
    )
    
    
    (1,092
    )
    
    
    332Net cash provided by (used in) operating activities
    
    
    30,659
    
    
    
    2,225
    
    
    
    (3,140
    )Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    (24,848
    )
    
    
    (34,060
    )
    
    
    (120,267
    )Sales and maturities of available-for-sale investments
    
    
    15,891
    
    
    
    700
    
    
    
    218,989Reclassification from (to) restricted cash and cash equivalents
    
    
    
    
    
    
    45,884
    
    
    
    (45,884
    )Capitalized transaction costs
    
    
    (395
    )
    
    
    
    
    
    
    (5,838
    )Purchases of property, plant and equipment
    
    
    (6,926
    )
    
    
    (7,528
    )
    
    
    (7,947
    )Cash and equivalents acquired in business acquisition
    
    
    
    
    
    
    
    
    
    
    16,199Acquisition of IRMA product line
    
    
    (5,200
    )
    
    
    
    
    
    
    Net cash provided by investing activities
    
    
    (21,478
    )
    
    
    4,996
    
    
    
    55,252Cash flows from financing activities:Proceeds from stock option exercises, net
    
    
    9,494
    
    
    
    829
    
    
    
    11,077Proceeds from common stock offering
    
    
    
    
    
    
    15,335
    
    
    
    Proceeds from stock issued under employee stock purchase plan
    
    
    1,107
    
    
    
    
    
    
    
    Repurchase of common stock
    
    
    
    
    
    
    (18,283
    )
    
    
    (1,703
    )Repurchase of convertible debentures
    
    
    
    
    
    
    (54,838
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    10,601
    
    
    
    (56,957
    )
    
    
    9,374Effect of exchange rate changes on cash and cash equivalents
    
    
    194
    
    
    
    54
    
    
    
    4Net increase (decrease) in cash and cash equivalents
    
    
    19,976
    
    
    
    (49,682
    )
    
    
    61,490Cash and cash equivalents at beginning of period
    
    
    42,044
    
    
    
    91,726
    
    
    
    30,236Cash and cash equivalents at end of period
    
    $
    62,020
    
    
    $
    42,044
    
    
    $
    91,726Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    889
    
    
    $
    347
    
    
    $
    470Cash paid for interest
    
    $
    
    
    
    $
    839
    
    
    $
    2,604Supplemental disclosure of Non-cash investing and financing activities:Issuance of restricted stock for services
    
    $
    
    
    
    $
    328
    
    
    $
    4,140Tax benefit related to stock option exercises
    
    $
    2,148
    
    
    $
    334
    
    
    $
    5,402Reclassification of acquired workforce, net of taxes
    
    $
    
    
    
    $
    1,334
    
    
    $
    
 See notes to consolidated financial statements. 48




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Operations and Significant Accounting Policies Operations- Thoratec Corporation, referred to as we, our, Thoratec or our
Company, is headquartered in Pleasanton, California and is a leading
manufacturer of circulatory support products for use by patients with
congestive heart failure. We develop, manufacture and market products that are
used by physicians and hospitals for cardiac assist, vascular and diagnostic
applications. We organize and manage our business by functional operating
entities, which operate in two business segments: our Cardiovascular segment
and our ITC segment. Our Cardiovascular segment develops, manufactures and
markets proprietary medical devices used for circulatory support and vascular
graft applications. Our ITC segment designs, develops, manufactures and markets
point-of-care diagnostic test systems. We conduct business both domestically
and internationally. In February 2001, we merged with Thermo Cardiosystems,
Inc. (TCA). Prior to the merger (the Merger), TCA was a subsidiary of
Thermo Electron Corporation (Thermo Electron). In September 2003, ITC
acquired the Immediate Response Mobile Analysis, (IRMA), point-of-care blood
analysis system product line from Diametrics Medical, Inc., (Diametrics), in
an asset purchase. Fiscal Year- We report on a 52-53 week fiscal year, which ends on the
Saturday closest to December 31. The fiscal years ended December 29, 2001,
(2001) and December 28, 2002, (2002) included 52 weeks and the fiscal year
ended January 3, 2004, (2003) included 53 weeks. Principles of Consolidation- The consolidated financial statements
include the accounts of our Company and our wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Use of Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Major Customers and Concentration of Credit Risk- We primarily sell our
products to large hospitals and distributors. No customer accounted for more
than 10% of product sales in fiscal year 2003. For fiscal years 2002 and 2001,
one distributor customer accounted for 11% and 12% of total product sales,
respectively. Accounts receivable for this same distributor customer accounted
for 11% and 10% of total accounts receivable as of the end of 2003 and 2002,
respectively. No other customer accounted for more than 10% of total product
sales in 2003, 2002 or 2001 or had an accounts receivable balance greater than
10% of total accounts receivable at the end of 2003 or 2002. Credit is extended based on an evaluation of a customers financial
condition and generally collateral is not required. To date, credit losses have
not been significant, however, we maintain allowances for potential credit
losses. Additionally, we are potentially subject to concentrations of credit risk
in our investments. To mitigate this credit risk, we invest in high-grade
instruments and limit our exposure to any one issuer. Certain Risks and Uncertainties- We are subject to certain risks and
uncertainties and believe that changes in any of the following areas could have
a material adverse effect on our future financial position or results of
operations: the ability to achieve and maintain profitability; the ability of
third party payors to cover and provide appropriate levels of reimbursement for
our products; the ability to receive Food and Drug Administration, or FDA, and
foreign regulatory authorities approval to manufacture, market and sell our
products; the ability to direct and manage current and future growth, including
the growth of the number of Destination Therapy, or DT, procedures performed
and the integration of any current and future acquisitions of companies or
technologies; new product development and introduction, including FDA approval
and market receptiveness; the ability to realize the full value of our
intangible assets; the reliance on specialized suppliers; competition from
other products; the ability to manufacture products on an efficient and timely
basis and at a reasonable cost and in sufficient volume, including the ability
to obtain timely deliveries of parts from suppliers; the dependence upon
distributors and any changes made to our method of distribution; the ability to
protect our proprietary technologies or an infringement of others patents;
product liability or other claims; our ability to identify and correct quality
issues in a timely manner and at a reasonable cost; the ability to maintain
compliance with changing federal and state regulations; the long and variable
sales and deployment cycle of our ventricular assist device (VAD) products;
worldwide demand for circulatory support and 49




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##### Table of Contents



graft products and blood coagulation testing and skin incision devices and
the management of risks inherent in selling in foreign countries; claims
relating to the handling, storage or disposal of hazardous chemicals and
biomaterials; stock price volatility due to general economic conditions or
future issuances and sales of our stock; the occurrence of natural catastrophic
disasters; foreign currency fluctuations; the ability to attract and retain
talented employees; and other risks as detailed from time to time in our
filings with the Securities and Exchange Commission, referred to as the SEC. Cash and Cash Equivalents- Cash and cash equivalents are defined as
short-term highly liquid investments with original maturities of 90 days or
less. Short-Term and Long-Term Available-For-Sale Investments- Our investments
are primarily held in corporate bonds and U.S. government obligations and are
classified as available-for-sale and are reported at fair value based upon
quoted market price. Any temporary difference between cost and fair value of an
investment is presented as a separate component of accumulated other
comprehensive income. The specific identification method is used to determine
realized gains and losses on investments. Inventories- Inventories are stated at the lower cost or market. Cost is
based on the first in, first out method. Property, Plant and Equipment- Property, plant and equipment are stated
at cost. Depreciation is computed using the straight-line method based on
estimated useful lives of 2 to 30 years. Leasehold improvements are amortized
over the lesser of the useful life or the remaining term of the lease.
Property, plant and equipment includes certain medical devices rented to
customers. Amortization expense of all rental equipment included in our rental
program is recognized ratably over 2 to 3 years and is recorded in cost of
product sales. Capitalized Software Costs- We capitalize the costs of computer software
developed or obtained for internal use in accordance with Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Capitalized computer software costs consist of purchased
software licenses, implementation costs and consulting for certain projects
that qualify for capitalization. We expense costs related to preliminary
project assessment, research and development, re-engineering, training and
application maintenance as incurred. Through fiscal year 2002, costs
capitalized for a new enterprise resource planning software system, (ERP
System), were $3,666,000. No additional costs were capitalized in 2003 related
to this ERP System. Depreciation expense related to this ERP System of $494,000
and $413,000 were recorded in 2003 and 2002, respectively. All capitalized
software costs are depreciated on a straight-line method over a period of eight
years upon being placed in service. Valuation
of Long-Lived Assets In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which we
adopted as of the beginning of fiscal year 2002, we periodically evaluate the
carrying value of long-lived assets to be held and used including intangible
assets, when events or circumstances warrant such a review. The carrying value
of a long-lived asset to be held and used is considered impaired when the
anticipated separately identifiable undiscounted cash flows from such an asset
are less than the carrying value of the asset. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. Purchased Intangible Assets and Goodwill- As of the beginning of fiscal
year 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, and
ceased the amortization of purchased goodwill. In addition, we reevaluated the
useful lives of our identifiable intangible assets and determined that the
remaining useful lives were appropriate. Each year we complete an impairment
test of goodwill as required by SFAS No. 142. Upon completion of our impairment
tests as of the end of fiscal 2003, we determined that our goodwill was not
impaired. The following table presents the impact of adopting SFAS No. 142 on net
income (loss) and net income (loss) per share had the standard been in effect
for fiscal year 2001 (in thousands, except per share amounts): 50




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##### Table of Contents



For FiscalYear Ended2001Net income (loss) as reported
    
    $
    (87,866
    )Add back:Amortization of goodwill, net of tax
    
    
    4,194Adjusted net income (loss)
    
    $
    (83,672
    )As reported basic and diluted net income (loss) per share
    
    $
    (1.68
    )Impact of amortization of goodwill, net of tax
    
    
    0.08Adjusted basic and diluted net income (loss) per share
    
    $
    (1.60
    )
 The change in the carrying amount of goodwill, which is only attributable
to our Cardiovascular business segment, for fiscal years 2003 and 2002 were as
follows (in thousands): As of Fiscal Years2003
    
    2002Balance at the beginning of year
    
    $
    96,492
    
    
    $
    95,209Adjustment to reflect realization of acquired foreign deferred tax asset
    
    
    (427
    )
    
    
    Reclassification of assembled workforce, net of taxes
    
    
    
    
    
    
    1,334Adjustment to reflect resolution of pre-merger contingency
    
    
    
    
    
    
    (51
    )Balance as of January 3, 2004
    
    $
    96,065
    
    
    $
    96,492
 In 2003, goodwill related to the Merger of Thoratec with TCA was adjusted
to reflect the utilization of tax net operating loss, (NOL), benefits related
to our subsidiary in the United Kingdom, (UK). At the time of the Merger, a
deferred tax asset related to these NOL tax benefits was established with a
corresponding valuation allowance for the full amount. As our UK subsidiary
more likely than not will begin utilizing a portion of this NOL benefit, a
portion of the original valuation allowance has been reversed against goodwill. The components of identifiable intangible assets, consisting primarily of
patents and trademarks, core technology and developed technology, which are
included in purchased intangible assets on the consolidated balance sheets, are
as follows (in thousands): Fiscal Year 2003Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net Carrying AmountPatents and Trademarks
    
    $
    37,815
    
    
    $
    (10,416
    )
    
    $
    27,399Core Technology
    
    
    37,485
    
    
    
    (5,353
    )
    
    
    32,132Developed Technology
    
    
    122,782
    
    
    
    (17,535
    )
    
    
    105,247Non-compete Agreement
    
    
    90
    
    
    
    (3
    )
    
    
    87Total Purchased Intangible Assets.
    
    $
    198,172
    
    
    $
    (33,307
    )
    
    $
    164,865
 Fiscal Year 2002Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net Carrying AmountPatents and Trademarks
    
    $
    37,478
    
    
    $
    (6,789
    )
    
    $
    30,689Core Technology
    
    
    37,181
    
    
    
    (3,486
    )
    
    
    33,695Developed Technology
    
    
    132,301
    
    
    
    (12,403
    )
    
    
    119,898Total Purchased Intangible Assets
    
    $
    206,960
    
    
    $
    (22,678
    )
    
    $
    184,282
 As of the beginning of fiscal 2002, the purchased intangible asset
associated with the assembled workforce in the amount of $1,334,000, net of
accumulated amortization of $381,000 and taxes of $897,000, was reclassified to
goodwill in accordance with SFAS No. 142. Subsequent
to year-end, the Company completed its assessment of the final
results from its feasibility clinical trial for the Aria CABG graft
which was ongoing through fiscal 2003. Based on the clinical trial results, the
Company determined that it will not 51




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devote additional resources to the development of the Aria graft. Upon the
decision to discontinue product development, the Company recorded an impairment
charge of $9.0 million as of January 3, 2004 to write off purchased
intangible assets related to the Aria graft, which were recorded as a result of
the Merger. On September 30, 2003, we completed our previously announced asset
purchase agreement to acquire the Immediate Response Mobile Analysis, or IRMA,
point-of-care blood analysis system product line from Diametrics Medical, Inc.
(Diametrics). We paid approximately $5.2 million in cash and assumed trade
payables. Approximately $1.8 million of the total purchase price was allocated
to purchased intangible assets. Amortization expense related to identifiable intangible assets for fiscal
2003, 2002 and 2001 was $12,333,000, $12,384,000, and $11,321,000,
respectively. Amortization expense is expected to be approximately $11,700,000
for each of the next five years. The purchased intangible assets have estimated
useful lives of eight to twenty years. Fair Value of Financial Instruments- Financial instruments include cash
and cash equivalents, short-term and long-term available-for-sale investments,
customer receivables, accounts payable and certain other accrued liabilities.
The fair value of short-term and long-term investments are assessed using
current market quotations from major investment brokers. The carrying amounts
of these investments are adjusted to market value monthly. The carrying amounts
of all other financial investments are reasonable estimates of their fair
values. Foreign Currency Translation- All assets and liabilities of our
non-United States operations are translated into United States dollars at
period-end exchange rates, and the resulting translation adjustments are
included in other comprehensive income. Income items are translated at actual
or average monthly rates of exchange. Exchange rate fluctuations resulting from
the period-end translation of the current portion of the intercompany
obligation of our wholly-owned subsidiary into United States dollars are
recorded in the statements of operations as foreign currency translation gains
or losses and are included in interest and other income-net. Commencing in September 2003, the Company began using forward foreign
currency contracts to hedge the gains and losses generated by the remeasurement
of these non-functional currency assets and liabilities. Changes in the fair
value of the forward currency contracts are included in Interest and Other
Income-Net, and typically offset the foreign currency exchange gains and
losses described above. These derivatives are not designated as cash flow or
fair value hedges under SFAS No. 133 and typically have maturities of three
months or less. At January 3, 2004, the Company had forward foreign currency
contracts to exchange Pounds Sterling and Euros for US Dollars with a notional
value of $4.3 million and negligible fair value. Net foreign currency exchange
gain was negligible in 2003 compared to $0.5 million for 2002. Net foreign
currency exchange loss was approximately $0.1 million on 2001. Repurchases of Common Stock- In April 2001, the Board of Directors
authorized a stock repurchase program under which up to $20,000,000 of our
common stock could be acquired. We completed this stock repurchase program in
the third quarter of 2002. From the inception of the program through the third
quarter of 2002, we repurchased 2,467,600 shares of our common stock for
$20,000,000. For each share repurchased, we reduced the common stock account by
the average value per share reflected in the account prior to the repurchase
with the excess allocated to retained earnings. All repurchased shares have
been retired. In February 2004, the Board of Directors authorized a stock repurchase
program under which up to $25.0 million of our common stock could be acquired
in the open market or in privately negotiated transactions. The number of
shares to be purchased and the timing of purchases were based on several
conditions, including the price of our stock, general market conditions and
other factors. Revenue Recognition and Product Warranty- We recognize revenue from
product sales 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 upon shipment. One distributor
has certain limited product return rights. A limited number of 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
significant 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 or price protection. 52




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Sales of certain Cardiovascular segment 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. For most customers,
training is not essential to the functionality of the products as the customers
already possess sufficient expertise and experience to use the products. In
these situations, training is provided as a best practice to optimize the use
and success of the products. The amount of revenues under these arrangements
allocated to training is based upon fair market value of the training,
performed principally by third party providers. The amount of revenues
allocated to the Cardiovascular segment products is done on a residual method
basis. Under this method, the total value of the arrangement is allocated first
to the undelivered training element based on the fair market value, with the
remainder being allocated to the Cardiovascular segment products. The amount of
revenues allocated to training is recorded as deferred revenue and is
recognized when the training is completed. As of the end of 2003, $128,000 of
products have been delivered and recorded as product sales for customers that
were determined to be able to use those products, but for which training had
not yet been completed. The amount of revenue deferred related to this training
not yet completed was $20,000 at the end of 2003, $148,000 at the end of 2002
and $38,000 at the end of 2001. We also rent certain medical devices to customers on a month-to-month or
as-used basis. Rental income is based on utilization and is included in product
sales as earned. Included in product sales for 2003, 2002 and 2001 are
$4,727,000, $3,884,000 and $3,456,000, respectively, of income earned from the
rental of these medical devices. The majority of our products are covered by a one-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. The
change in accrued warranty expense in 2003 and 2002 is summarized in the
following table (in thousands): Balance
    
    Charges to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Warranty
    
    Endof Year
    
    Expenses
    
    Expenditures
    
    of YearFiscal year ended 2003
    
    $
    695
    
    
    $
    193
    
    
    $
    (59
    )
    
    $
    829Fiscal year ended 2002
    
    $
    910
    
    
    $
    45
    
    
    $
    (260
    )
    
    $
    695Fiscal year ended 2001
    
    $
    970
    
    
    $
    594
    
    
    $
    (654
    )
    
    $
    910
 Stock-Based Compensation- We account for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principals Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to equity. The fair value of each option granted is
estimated using the Black-Scholes option pricing model. If compensation cost
for our stock-based plans had been determined based on the fair value at the
grant dates for awards under those plans, consistent with the method of FASB
Statement No. 123, our reported net income (loss) would have been adversely
affected, as shown in the following table (in thousands, except per share
data): For Fiscal Year Ended2003
    
    2002
    
    2001Net income (loss):As reported
    
    $
    (2,182
    )
    
    $
    511
    
    
    $
    (87,866
    )Add: Stock-based compensation expense
included in reported net income, net
of related tax effects
    
    
    693
    
    
    
    726
    
    
    
    812Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects
    
    
    (8,465
    )
    
    
    (9,788
    )
    
    
    (9,421
    )Pro forma
    
    $
    (9,954
    )
    
    $
    (8,551
    )
    
    $
    (96,475
    )Basic and diluted earnings (loss) per share:As reported
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    (1.68
    )Pro forma
    
    $
    (0.18
    )
    
    $
    (0.15
    )
    
    $
    (1.84
    )
 53




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The fair value of each option granted is estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants made: Stock Option Plans
    
    Employee Stock Purchase PlanFor Fiscal Year Ended
    
    For Fiscal Year Ended2003
    
    2002
    
    2001
    
    2003
    
    2002Risk-free interest rate
    
    
    3.69
    %
    
    
    4.79
    %
    
    
    5.08
    %
    
    
    1.16
    %
    
    
    1.39
    %Expected volatility
    
    
    67
    %
    
    
    69
    %
    
    
    71
    %
    
    
    67
    %
    
    
    69
    %Expected option life
    
    3.88 years
    
    3.85 years
    
    2.85 years
    
    0.50 years
    
    0.50 yearsDividends
    
    None
    
    None
    
    None
    
    None
    
    None
 Earnings (Loss) Per Share- Basic earnings (loss) per share were computed
using the weighted average number of common shares outstanding for each
respective year. Diluted earnings (loss) per share amounts reflect the weighted
average impact from the date of issuance of all potentially dilutive securities
during the years presented unless the inclusion would have had an antidilutive
effect. Other Comprehensive Income (Loss)- Comprehensive income (loss) includes
net income (loss) and is defined as the change in net assets during the period
from non-owner sources, including unrealized gains and losses on
available-for-sale investments and foreign currency translation adjustments. Recently Issued Accounting Standards- In June 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. We adopted SFAS No. 143
at the beginning of fiscal 2003. The adoption of this statement did not
materially impact our consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, which, among other things,
changed the presentation of gains and losses on the extinguishment of debt. Any
gain or loss on extinguishment of debt that does not meet the criteria in APB
Opinion 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, is to be included in operating
earnings and not presented separately as an extraordinary item. We
adopted SFAS No. 145 at the beginning of fiscal year 2003 and therefore, we
reclassified in the first quarter of 2003 the extraordinary loss incurred in
2002 of $0.5 million to interest and other income-net. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The Company will apply the
provisions of SFAS No. 146 for any restructuring activities initiated after
December 31, 2002. In November 2002, the Emerging Issues Task Force, or EITF, reached a
consensus regarding EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. The guidance provided is effective for contracts entered into
on or after July 1, 2003. The adoption of this guidance did not have a
material effect upon our consolidated financial statements. In November 2002, the FASB issued Interpretation, or FIN, No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. We adopted the disclosure
provisions of FIN No. 45 effective as of fiscal year end 2002. We do not
expect that the recognition provisions of FIN 45 will have a material impact
upon our consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements of the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. We adopted the disclosure provisions of
SFAS No. 148 at the beginning of fiscal 2003. We do not currently plan to
change to use the fair value based method of accounting for stock-based
employee compensation. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. The provisions of FIN 46 are effective for any
arrangements entered into after January 31, 2003. Since January 31, 2003, the
Company has not invested in any entities it believes are variable interest
entities. In December 2003, the FASB issued a revised interpretation of FIN
46, FIN 46-R. The Company does not expect the adoption of FIN 46-R to have a
material impact upon our consolidated financial statements. 54




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In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. The statement is effective
for contracts entered into or modified after June 30, 2003. We adopted SFAS
No. 149 effective July 1, 2003. The adoption of this standard did not have a
material effect on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and was effective at the beginning of the first interim
period beginning after June 15, 2003. In November 2003, the FASB issued FASB
Staff Position No. 150-3, Effective Date, Disclosures, and Transition for
Mandatorily Redeemable Noncontrolling Interests under SFAS No. 150, which
defers the effective date for various provisions of SFAS 150. The adoption of
this statement is not expected to have an impact on our consolidated financial
statements. Presentation Certain 2002 and 2001 amounts have been reclassified to
conform to the presentation in the 2003 financial statements. 2. Merger and Acquisitions Merger of Thoratec and TCA On February 14, 2001, we completed our Merger with TCA. Pursuant to the
Merger agreement between us and TCA dated October 3, 2000, we issued 32,226,074
new shares of our common stock to the shareholders of TCA in exchange for all
the outstanding common stock of TCA (38,594,281 shares outstanding as of
February 14, 2001) at an exchange ratio of 0.835 shares of our stock for each
share of TCA stock. The Merger was accounted for under the purchase method of accounting and
was treated as a reverse acquisition because the shareholders of TCA owned the
majority of our common stock after the Merger. TCA was considered the acquiror
for accounting and financial reporting purposes. Due to the reverse
acquisition, Thoratecs assets and liabilities were recorded based upon their
estimated fair values at the date of acquisition. The consolidated financial
information for 2000 includes the results of operations of TCA. The operating
results of Thoratec have been included in the accompanying consolidated
financial statements from the date of acquisition forward. All reported amounts
of outstanding common shares and common share equivalents (stock options and
convertible debentures) prior to the Merger have been adjusted to reflect the
exchange ratio of 0.835 to 1. Approximately $309,025,000 of the total purchase
price of $346,193,000 was allocated to goodwill and other purchased intangible
assets. As a result of the Merger, $76,858,000 relating to in-process research and
development (IPR&D) was expensed in the first quarter of 2001. The one-time
write-off of IPR&D related to four technology projects that were in
development, had not reached technological feasibility, had no alternative
future use and for which successful development was uncertain. One of the
projects was completed in 2002. There have been no significant developments
subsequent to the Merger related to the current status of any of the three
remaining IPR&D projects that would result in material changes to the
assumptions or resulting valuation performed at the time of the Merger.
Development of IPR&D projects continues and while the timing of completion of
these projects may vary due to the highly regulated and technical nature of our
products, current estimates remain materially consistent with our initial
estimates. Acquisition of Immediate Response Mobile Analysis (IRMA) On September 30, 2003, we completed an asset purchase of the Immediate
Response Mobile Analysis, or IRMA, point-of-care blood analysis system product
line from Diametrics Medical, Inc. (Diametrics). We paid approximately $5.2
million in cash and assumed trade payables. The purchase price was allocated
based on the fair value of assets acquired as determined by an independent
valuation firm as follows (in thousands): 55




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##### Table of Contents



LifeWorking capital
    
    $
    1,034Property, plant and equipment
    
    
    2,492
    
    
    3-10 yearsCore technology
    
    
    331
    
    
    10 yearsExisting developed technology
    
    
    1,058
    
    
    10 yearsPatents
    
    
    317
    
    
    17 yearsOther intangibles
    
    
    143
    
    
    7-17 yearsIn-process research and development
    
    
    220
    
    
    Expensed in 2003Acquisition costs
    
    
    (395
    )Consideration paid
    
    $
    5,200
 There was no goodwill recorded with the transaction. As a result of the
acquisition, $220,000 relating to in-process research and development was
expensed in the fourth quarter of 2003. On a pro-forma basis, consolidating historic financial information of
Thoratec and the IRMA product line and making pro forma consolidation
adjustments, as if the acquisition had occurred on December 30, 2001, unaudited
pro forma revenue for 2002 and 2003 would have been $143.2 million and $154.8
million respectively. On the same basis, 2002 net loss and loss per share would
have been $0.4 million $0.01 respectively, and 2003 net loss and loss per share
would have been approximately $2.7 million and $0.05 respectively. 3. Investments Our investments are considered available-for-sale investments in the
accompanying balance sheet and are carried at fair value with the difference
between cost and fair value, net of related tax effects, recorded as a separate
component of accumulated other comprehensive income. We classify investments
that mature in less than one year of the purchase date as short-term
investments. Investments that mature greater than one year from the purchase
date are classified as long-term investments. At the end of 2003 and 2002, we
had no investments with maturities greater than two years from the date of
purchase. The aggregate market value, cost basis and gross unrealized gains and
losses of short-term and long-term available-for-sale investments for 2003 and
2002 by major security type are as follows (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueAs of Fiscal Year 2003:Long-term investments:Corporate bonds
    
    $
    37,095
    
    
    $
    105
    
    
    $
    (19
    )
    
    $
    37,181US government
obligations
    
    
    4,000
    
    
    
    
    
    
    
    (2
    )
    
    
    3,998$
    41,095
    
    
    $
    105
    
    
    $
    (21
    )
    
    $
    41,179As of Fiscal Year 2002:Short-term investments:Corporate bonds
    
    $
    3,438
    
    
    $
    1
    
    
    $
    
    
    
    $
    3,439Long-term investments:Corporate bonds
    
    
    29,834
    
    
    
    218
    
    
    
    (1
    )
    
    
    30,051$
    33,272
    
    
    $
    219
    
    
    $
    (1
    )
    
    $
    33,490
 The contractual maturities of available-for-sale investments as of January
3, 2004 and December 28, 2002, regardless of the consolidated balance sheet
classifications, are as follows (in thousands): 56




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Amortized
    
    FairCost
    
    ValueAs of Fiscal Year 2003Due within one year
    
    $
    23,790
    
    
    $
    23,876Due after one year through two years
    
    
    17,305
    
    
    
    17,303$
    41,095
    
    
    $
    41,179As of Fiscal Year 2002Due within one year
    
    $
    11,879
    
    
    $
    11,922Due after one year through two years
    
    
    21,393
    
    
    
    21,568$
    33,272
    
    
    $
    33,490
 The cost of available-for-sale investments that are sold is based on
specific identification in determining recorded realized gains and losses. In
2003 and 2002 there were no significant gains or losses recorded. 4. Inventories Inventories consist of the following (in thousands): As of Fiscal Year2003
    
    2002Finished goods
    
    $
    15,504
    
    
    $
    14,692Work-in-process
    
    
    9,089
    
    
    
    6,645Raw materials
    
    
    11,824
    
    
    
    17,498Total
    
    $
    36,417
    
    
    $
    38,835
 5. Financial Instruments In 2003 we initiated a foreign currency exchange risk management program
principally designed to mitigate the change in value of assets and liabilities
that are denominated in non-functional currencies. Forward foreign exchange
contracts that generally have terms of three months or less are used to hedge
these non-functional currency exposures. The derivatives used in the foreign
currency exchange risk management program are not designated as cash flow or
fair value hedges under SFAS No. 133, Accounting for Derivative Investments
and Hedging Activities. These contracts are recorded on the balance sheet at
fair value in current assets. Changes in the fair value of the contracts and
of the underlying exposures being hedged are included in Interest and Other
Income  Net. As of the end of fiscal year 2003, the notional value of
outstanding contracts was $4.3 million and their fair value was negligible. 6. Property, Plant and Equipment Property, plant and equipment consist of the following (in thousands): As of Fiscal Year2003
    
    2002Land
    
    $
    341
    
    
    $
    341Building
    
    
    2,445
    
    
    
    2,445Building lease
    
    
    2,285
    
    
    
    2,285Equipment
    
    
    34,606
    
    
    
    28,897Rental equipment
    
    
    6,493
    
    
    
    6,095Leasehold improvements
    
    
    11,853
    
    
    
    9,292Total
    
    
    58,023
    
    
    
    49,355Accumulated depreciation and amortization
    
    
    (29,531
    )
    
    
    (24,640
    )$
    28,492
    
    
    $
    24,715
 Depreciation expense in 2003, 2002 and 2001 was $5,717,000, $5,187,000 and
$4,523,000, respectively. 57




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7. Commitments and Contingencies Leases We lease manufacturing, office, research facilities and equipment under
various operating lease agreements. Future minimum lease payments as of the end
of 2003 are noted below (in thousands): Fiscal year:2004
    
    $
    2,5422005
    
    
    2,4512006
    
    
    2,4522007
    
    
    2,4382008
    
    
    2,106Thereafter
    
    
    10,176Total
    
    $
    22,165
 Rent expense for all operating leases was $2,149,000 in 2003, $1,808,000 in
2002 and $1,778,000 in 2001. Commitments We had various purchase order commitments totaling approximately
$10,162,000 and $11,032,000 as of the end of fiscal years 2003 and 2002,
respectively. Contingencies We are involved in various other litigation matters in the normal course
of business. We believe that the ultimate resolution of these matters will not
have a material effect on our financial position or results of operations. 8. Subordinated Convertible Debentures On March 11, 2002 we completed the redemption of our outstanding
subordinated convertible debentures using restricted cash, cash and cash
equivalents of approximately $54,800,000. Loss in the amount of $515,000 and a
tax benefit of $206,000 was recorded on the date of the redemption related to
the write-off of the capitalized debt issuance costs. Restricted cash had been
pledged as collateral for a letter of credit guarantee to Thermo Electron
related to Thermo Electrons guarantee of our subordinated debentures. As a
result of the redemption, the letter of credit guarantee to Thermo Electron was
extinguished. 58




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9. Common and Preferred Stock We have authorized 100,000,000 no par common shares, and 2,500,000 shares
of preferred stock, of which 540,541 shares have been designated Series A and
500,000 shares designated Series B. The Series A preferred stock is entitled to cumulative annual dividends of
$1.30 per share and has a liquidation preference of $9.25 per share plus
cumulative unpaid dividends. We may redeem the Series A preferred stock at any
time for our liquidation preference. Each share of preferred stock is
convertible into one-third of a share of common stock, after adjusting for
earned but unpaid dividends. At January 3, 2004, no shares of Series A
preferred stock were outstanding. The Series B preferred stock is senior to the Series A in all preferences.
Series B is entitled to cumulative annual dividends of $0.96 per share and has
a liquidation preference of $8.00 per share plus cumulative unpaid dividends.
The Series B preferred stock is redeemable by us five years after its issuance
for $8.00 per share plus cumulative unpaid dividends. Each share of Series B
preferred stock is convertible at any time into three and one-third shares of
common stock and has certain anti-dilution provisions. Series B preferred vote
on an as-converted basis. At January 3, 2004, no shares of Series B preferred
stock were outstanding. On May 2, 2002, we adopted a shareholder rights plan, which we call the
Rights Plan. Under the Rights Plan, we distributed one purchase right for each
share of common stock outstanding at the close of business on May 17, 2002. If
a person or group acquires 15% or more of our common stock in a transaction not
pre-approved by our Board of Directors, each right will entitle its holder,
other than the acquirer, to buy our common stock at 50% of its market value for
the rights then current exercise price (initially $70.00). In addition, if an
unapproved party acquires more than 15% of our common stock, and our Company or
our business is later acquired by the unapproved party or in a transaction in
which all shareholders are not treated alike, shareholders with unexercised
rights, other than the unapproved party, will be entitled to purchase common
stock of the merger party or asset buyer with a value of twice the exercise
price of the rights. Each right also becomes exercisable for one one-thousandth
of a share of our Series RP preferred stock at the rights then current
exercise price ten days after an unapproved third party makes, or announces an
intention to make, a tender offer or exchange offer that, if completed, would
result in the unapproved party acquiring 15% or more of our common stock. Our
Board of Directors may redeem the rights for a nominal amount before an event
that causes the rights to become exercisable. The rights will expire on May 2,
2012. In connection with the Rights Plan, we designated 100,000 no par shares of
Series RP preferred stock. These shares, if issued, will be entitled to receive
quarterly dividends and liquidation preferences. There are no shares of Series
RP preferred stock issued and outstanding and we do not anticipate issuing any
shares of Series RP preferred stock except as may be required under the Rights
Plan. We filed a Registration Statement on Form S-3 with the SEC to register for
sale 1,055,000 newly issued shares of our common stock and 5,945,000 shares
held by selling shareholders, of which 5,825,000 shares were held by Thermo
Electron. This Registration Statement became effective February 12, 2002, and
all of the registered shares were subsequently sold. We received $15,335,000,
net of underwriting discounts, fees and other expenses of the offering, from
the sale of the 1,055,000 newly issued shares. In addition, the underwriters
exercised a 30-day option to purchase from Thermo Electron 1,050,000 shares of
common stock to cover any over-allotments. We received no proceeds from the
sale of these over-allotment shares. 59




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##### Table of Contents



10. Stock-Based Compensation Restricted Common Stock In 2001, an award of 250,000 shares of restricted common stock was made to
one of our executive officers under our 1997 Stock Option Plan. This award was
valued at $4,140,000, recorded as deferred compensation and is being amortized
over the restriction lapse period. In 2002, a similar award of 50,000 shares
was made to another of our executive officers. This award was valued at
$328,000, was recorded as deferred compensation and is being amortized over the
restriction lapse period. As of the end of fiscal 2003, none of the
restrictions on these shares have lapsed. Stock Option Plans Pursuant to the terms of the Thoratec and TCA Merger agreement, all TCA
stock-based compensation plans were assumed by Thoratec effective February 14,
2001. There were no grants under any of TCAs plans during 2003, 2002 or 2001.
Moreover, all outstanding options and restrictions on past TCA grants were
accelerated and became fully vested as of the Merger date of February 14, 2001
and were converted to 971,222 of our common stock options at the Merger
conversion ratio of 0.835 to 1. Although assumed by Thoratec, the TCA stock
options remain exercisable upon the same terms and conditions as under the TCA
stock option plan pursuant to which it was granted and the applicable option
agreement. In 1993, our Board of Directors approved the 1993 Stock Option Plan (1993
SOP), which permits us to grant options to purchase up to 666,667 shares of
common stock. No options were granted under this plan in 2003 or 2002. In 1996, the Directors adopted the 1996 Stock Option Plan (1996 SOP) and
the 1996 Non-employee Directors Stock Option Plan (Directors Option Plan).
The 1996 SOP consists of two parts. Part One permits us to grant options to
purchase up to 500,000 shares of common stock. During both 2003 and 2002 no
options were granted at fair market value under Part One of the 1996 SOP. Part
Two related to the Chief Executive Officer (CEO) and permitted us to grant
non-qualified options to the CEO to purchase up to 333,333 shares of common
stock, which were granted in 1996. The Directors Option Plan, as amended,
permits us to grant up to 550,000 shares and provides for an initial grant to a
Director to purchase 15,000 shares upon appointment to the Board , and annual
grants thereafter to purchase 7,500 shares (granted in four equal
installments). Provisions also include immediate vesting of both initial and
annual grants and a five year life on the options. In addition, the plan
administrator has been provided with the discretion to impose any repurchase
rights in our favor on any optionee. We currently have seven non-employee
directors, each of whom is eligible to participate in the Directors Option
Plan. There were 61,875 and 45,000 options granted in 2003 and 2002,
respectively, at fair market value under the Directors Option Plan. In 1997, the Directors adopted the 1997 Stock Option Plan (1997 SOP).
The 1997 SOP was amended by approval of a vote of our shareholders in February
2001, amended by the Board of Directors in December 2001, and amended again by
approval of a vote of our shareholders in May 2003. The 1997 SOP allows us to
grant up to 13,700,000 shares of stock in the form of stock options, restricted
stock awards, and stock bonuses. During 2003 and 2002, 2,240,673 options and
2,780,200 options, respectively, were granted at fair market value under this
plan. During 2003 and 2002, no shares and 50,000 shares, respectively, were
granted as restricted stock awards under this plan. We have four common stock option plans with options still outstanding at
January 3, 2004. Options may be granted by the Board of Directors at the fair
market value on the date of grant and generally become exercisable within five
years of grant and expire between five and ten years from the date of grant. At
the end of 2003, options to purchase 4,211,966 common shares remain available
for grant under all the plans. 60




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Stock option activity is summarized as follows (in thousands, except per
share data): WeightedNumber of
    
    AverageOptions
    
    Exercise PriceOutstanding at fiscal year end 2000 (977 exercisable at
$15.72 weighted average price per share)
    
    
    977
    
    
    $
    15.72Granted ($5.22 weighted average fair value per share)
    
    
    2,817
    
    
    
    11.02Cancelled and expired
    
    
    (527
    )
    
    
    12.35Exercised
    
    
    (1,378
    )
    
    
    8.04Options assumed during Merger
    
    
    3,696
    
    
    
    8.09Outstanding at fiscal year end 2001 (2,615 exercisable
at $9.99 weighted average price per share)
    
    
    5,585
    
    
    
    10.51Granted ($9.45 weighted average fair value per share)
    
    
    2,825
    
    
    
    13.31Cancelled and expired
    
    
    (582
    )
    
    
    13.19Exercised
    
    
    (93
    )
    
    
    8.90Outstanding at fiscal year end 2002 (3,392 exercisable
at $9.94 weighted average price per share)
    
    
    7,735
    
    
    $
    11.36Granted ($6.57 weighted average fair value per share)
    
    
    2,302
    
    
    
    12.74Cancelled and expired
    
    
    (801
    )
    
    
    13.51Exercised
    
    
    (1,082
    )
    
    
    8.74Outstanding at fiscal year end 2003 (3,566 exercisable
at $10.76 weighted average price per share)
    
    
    8,154
    
    
    $
    11.88
 In conjunction with the Merger, 887,621 options of the 3,696,000 Thoratec
options assumed as a result of the Merger became fully vested pursuant to
existing change of control agreements. This acceleration of vesting was
provided in the terms of the original Thoratec grants. Of the options that
accelerated, agreements involving substantially all of the underlying shares
were entered into whereby certain option holders agreed not to sell or transfer
any of their shares for a period of up to 18 months and to remain employed with
us for a period of 12 months after the effective date of the Merger. In
exchange, the options holders received cash payments totaling $810,000 on the
one-year anniversary of the Merger. In addition, all options to purchase TCA shares that were outstanding at
the date of the Merger were exchanged for options to purchase 971,222 Thoratec
shares and became fully vested as of the Merger date. This acceleration of
vesting was provided for in the terms of the underlying TCA grants. Options outstanding as of the end of 2003 are summarized as follows: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AveragePrice
    
    Number
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseRange
    
    Outstanding
    
    (In Years)
    
    Price
    
    Outstanding
    
    Price$   4.38
 $  6.38
    
    
    927,252
    
    
    
    5.76
    
    
    $
    5.69
    
    
    
    693,245
    
    
    $
    5.686.40
     8.78
    
    
    1,167,527
    
    
    
    7.14
    
    
    
    8.31
    
    
    
    586,858
    
    
    
    8.168.81
   11.97
    
    
    2,127,879
    
    
    
    6.87
    
    
    
    9.91
    
    
    
    1,243,573
    
    
    
    9.9811.98
   15.48
    
    
    1,751,690
    
    
    
    8.43
    
    
    
    14.10
    
    
    
    382,871
    
    
    
    14.1715.55
   17.77
    
    
    2,005,391
    
    
    
    8.04
    
    
    
    15.96
    
    
    
    538,082
    
    
    
    16.0917.80
   20.85
    
    
    113,625
    
    
    
    6.77
    
    
    
    19.09
    
    
    
    61,198
    
    
    
    19.2429.40
   33.05
    
    
    60,516
    
    
    
    2.89
    
    
    
    32.35
    
    
    
    60,516
    
    
    
    32.35$   4.38
 $33.05
    
    
    8,153,880
    
    
    
    7.37
    
    
    $
    11.88
    
    
    
    3,566,343
    
    
    $
    10.76
 61




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Employee Stock Purchase Plan In May 2002, our shareholders approved the Companys Employee Stock
Purchase Plan (ESPP) under which 500,000 shares of common stock had been
reserved for issuance. In addition, the ESPP provides for an annual increase
of up to 250,000 shares in the total number of shares available for issuance
under the ESPP on March 1 of each year. No increase in shares available for
issuance under the ESPP was made during 2003. Eligible employees may purchase
a limited number of shares of the Companys stock at 85% of the lower of the
market value at the offering date or market value on the purchase date.
Approximately 123,000 shares of common stock were issued in 2003 for
$1,100,000. No shares of common stock were issued under this plan in 2002. As
of the end of fiscal year 2003, approximately 377,000 shares are available for
issuance under this plan. 11. Related Parties Corporate Service Agreement We had a corporate services agreement with Thermo Electron, which
terminated upon completion of the Merger in 2001. Thermo Electrons corporate
staff provided to us certain administrative and financial services. We paid
Thermo Electron an annual amount equal to 0.8% of our revenues for these
services. In addition, we incurred direct charges that Thermo Electron paid
directly on our behalf. Included in the 2001 statement of operations is
$124,000 of expense for these administrative and financial services and direct
charges. Operating Leases We subleased manufacturing, office and research facilities from Thermedics
Inc. in connection with the development and manufacturing of our VADs in
Woburn, Massachusetts. Thermedics was a division of Thermo Electron until
November 21, 2001 when it was divested by Thermo Electron and became an
unrelated third party. We were charged for actual square footage occupied at
approximately the same rent paid per square foot by Thermedics under its lease.
The accompanying statements of income include expenses from the sublease when
Thermedics was owned by Thermo Electron of $193,600 in 2001. Purchases We purchased metal fabrication products and services from Tecomet, Inc. in
connection with the manufacture of the ventricular-assist products we sell.
Tecomet was a division of Thermo Electron until November 15, 2001 when it was
sold by Thermo Electron to an unrelated third party. We paid $2,931,000 to
Tecomet for product purchases in 2001, and continue to purchase products from
Tecomet, Inc. under substantially the same terms and conditions. 12. Taxes on Income The provisions for income tax expenses (benefits) are as follows (in
thousands): For Fiscal Year Ended2003
    
    2002
    
    2001Current:Federal
    
    $
    232
    
    
    $
    661
    
    
    $
    State
    
    
    873
    
    
    
    1,103
    
    
    
    420Foreign
    
    
    13
    
    
    
    14
    
    
    
    1,118
    
    
    
    1,778
    
    
    
    420Deferred:Federal
    
    
    (2,175
    )
    
    
    (930
    )
    
    
    (2,915
    )State
    
    
    (764
    )
    
    
    (465
    )
    
    
    662Foreign
    
    
    427
    
    
    
    
    
    
    
    (2,512
    )
    
    
    (1,395
    )
    
    
    (2,253
    )Total provision before valuation allowance
    
    
    (1,394
    )
    
    
    383
    
    
    
    (1,833
    )Reduction of valuation allowance
    
    
    
    
    
    
    
    
    
    
    (1,492
    )Total provision
    
    $
    (1,394
    )
    
    $
    383
    
    
    $
    (3,325
    )
 62




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The provision for income taxes in the accompanying statements of
operations differs from the provision calculated by applying the U.S. federal
statutory income tax rate of 35% to income before provision for income taxes
due to the following (in thousands): For Fiscal Year Ended2003
    
    2002
    
    2001U.S. federal statutory income tax
expense (benefit)
    
    $
    (1,251
    )
    
    
    35.0
    %
    
    $
    313
    
    
    
    35.0
    %
    
    $
    (31,916
    )
    
    
    (35.0
    )%State income tax expense (benefit), net
of federal tax expense (benefit)
    
    
    (126
    )
    
    
    3.5
    
    
    
    177
    
    
    
    19.8
    
    
    
    (794
    )
    
    
    (0.9
    )Non-deductible amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,524
    
    
    
    1.7Non-deductible acquired IPR&D
    
    
    77
    
    
    
    (2.2
    )
    
    
    
    
    
    
    
    
    
    
    26,900
    
    
    
    29.5Non-deductible merger expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    0.2Export benefits
    
    
    (166
    )
    
    
    4.6
    
    
    
    (334
    )
    
    
    (37.3
    )
    
    
    (50
    )
    
    
    (0.1
    )Federal research and development credits
    
    
    (177
    )
    
    
    4.9
    
    
    
    (118
    )
    
    
    (13.2
    )
    
    
    (100
    )
    
    
    (0.1
    )Non-deductible amortization of deferred
compensation
    
    
    68
    
    
    
    (1.9
    )
    
    
    101
    
    
    
    11.3
    
    
    
    82
    
    
    
    0.1Meals and entertainment
    
    
    105
    
    
    
    (2.9
    )
    
    
    101
    
    
    
    11.3
    
    
    
    63
    
    
    
    0.1Expiration of net operating losses
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    17.2
    
    
    
    154
    
    
    
    0.2Foreign earnings permanently reinvested
    
    
    (72
    )
    
    
    2.0Other
    
    
    148
    
    
    
    (4.0
    )
    
    
    (11
    )
    
    
    (1.3
    )
    
    
    637
    
    
    
    0.7$
    (1,394
    )
    
    
    39.0
    %
    
    $
    383
    
    
    
    42.8
    %
    
    $
    (3,325
    )
    
    
    (3.6
    )%
 Deferred income taxes reflect the net tax effects of: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss and tax credits carryforwards. Significant components of our net deferred taxes are as follows (in
thousands): As of Fiscal Year2003
    
    2002Deferred tax assets:Write-off of acquired technology
    
    $
    1,043
    
    
    $
    1,173Reserves and accruals
    
    
    2,265
    
    
    
    1,895Depreciation and amortization
    
    
    368
    
    
    
    1,536Inventory basis difference
    
    
    2,621
    
    
    
    2,196Research and development credit carryforwards
    
    
    2,324
    
    
    
    1,997Net operating loss carryovers
    
    
    5,570
    
    
    
    8,339Other, net
    
    
    322
    
    
    
    290Total deferred tax assets
    
    
    14,513
    
    
    
    17,426Deferred tax liabilities:Purchased intangibles
    
    
    (65,845
    )
    
    
    (74,081
    )Net deferred tax liabilities
    
    $
    (51,332
    )
    
    $
    (56,655
    )
 At the end of 2003, we had recognized a benefit of $72,000 related to $1.4
million of foreign earnings considered to be permanently invested in operations
outside the United States. At the end of 2003, we had federal, state and foreign net operating loss
(NOL) carryforwards of approximately $15.6 million, $2.0
million and $2.8 million, respectively, which expire from 2011 through 2021.
The foreign NOL has no expiration date and will be treated as a post
acquisition purchase price adjustment when utilized. Use of $0.9 million of the
federal NOL carryforwards, which arose prior to a greater than 50% change in
ownership in 1992, is limited to approximately $0.4 million per year. At the end of 2003, we had available carryforward research and
experimentation tax credits for federal and state income tax purposes of
approximately $1.7 million and $0.6 million, respectively. Federal tax credit
carryforwards expire from 2009 through 2023. State tax credits carry forward
indefinitely. 63




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##### Table of Contents



The federal and state provisions do not reflect the tax savings resulting
from reductions associated with our various stock option plans. These savings
were $2.1 million, $0.3 million and $5.4 million in 2003, 2002 and 2001,
respectively. 13. Enterprise and Related Geographic Information We organize and manage our business by functional operating entities. Our
functional entities operate in two segments: (1) Cardiovascular and (2) ITC.
The Cardiovascular segment develops, manufactures and markets proprietary
medical devices used for circulatory support and vascular graft applications.
The ITC segment designs, develops, manufactures and markets point-of-care
diagnostic test systems. The 2001 financial information presented herein
includes the financial results of TCAs segments for the entire fiscal year and
the financial results of Thoratecs Cardiovascular segment only for the
post-merger period from February 14, 2001 through December 29, 2001. Business segments (in thousands): For the Fiscal Years Ended2003
    
    2002
    
    2001Product sales:Cardiovascular
    
    $
    94,382
    
    
    $
    84,442
    
    
    $
    71,809ITC
    
    
    55,534
    
    
    
    46,402
    
    
    
    41,575Total product sales
    
    $
    149,916
    
    
    $
    130,844
    
    
    $
    113,384Income (loss) before income taxes:Cardiovascular
    
    $
    13,604
    
    
    $
    8,392
    
    
    $
    (177
    )ITC
    
    
    10,586
    
    
    
    9,680
    
    
    
    8,953Corporate
    
    
    (5,931
    )
    
    
    (5,016
    )
    
    
    (2,660
    )Amortization of goodwill and purchased intangibles
    
    
    (12,333
    )
    
    
    (12,384
    )
    
    
    (15,674
    )In-process research and development
    
    
    (220
    )
    
    
    
    
    
    
    (76,858
    )Impairment of intangible asset
    
    
    (8,987
    )
    
    
    
    
    
    
    Legal settlement, merger, restructuring and other costs
    
    
    (2,132
    )
    
    
    (1,409
    )
    
    
    (7,134
    )Total operating loss
    
    
    (5,413
    )
    
    
    (737
    )
    
    
    (93,550
    )Interest and other income, net
    
    
    1,837
    
    
    
    1,631
    
    
    
    2,359Total income (loss) before taxes
    
    $
    (3,576
    )
    
    $
    894
    
    
    $
    (91,191
    )Total assets:Cardiovascular
    
    $
    67,607
    
    
    $
    71,234
    
    
    $
    57,299ITC
    
    
    29,881
    
    
    
    23,464
    
    
    
    19,883Corporate
    
    
    117,713
    
    
    
    92,960
    
    
    
    159,242Goodwill and purchased intangible assets
    
    
    260,930
    
    
    
    280,774
    
    
    
    293,817Total assets
    
    $
    476,131
    
    
    $
    468,432
    
    
    $
    530,241Depreciation and amortization:Cardiovascular
    
    $
    6,508
    
    
    $
    4,766
    
    
    $
    3,634ITC
    
    
    1,178
    
    
    
    1,074
    
    
    
    1,214Amortization of goodwill and purchased intangible assets
    
    
    12,333
    
    
    
    12,384
    
    
    
    15,674Total depreciation and amortization
    
    $
    20,019
    
    
    $
    18,224
    
    
    $
    20,522Capital expenditures:Cardiovascular
    
    $
    4,785
    
    
    $
    6,321
    
    
    $
    6,789ITC
    
    
    4,634
    
    
    
    1,207
    
    
    
    1,158Total capital expenditures
    
    $
    9,419
    
    
    $
    7,528
    
    
    $
    7,947
 Corporate primarily represents general and administrative items not
specifically allocated to any particular business segment. 2003 ITC capital expenditures include $2,493 of property, plant and
equipment acquired through our acquisition of the IRMA product line. 64




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Geographic Areas (in thousands): For the Fiscal Years Ended2003
    
    2002
    
    2001Product Sales:Domestic
    
    $
    121,831
    
    
    $
    106,983
    
    
    $
    90,678Europe
    
    
    18,433
    
    
    
    15,188
    
    
    
    13,000All other international
    
    
    9,652
    
    
    
    8,673
    
    
    
    9,706Total international.
    
    
    28,085
    
    
    
    23,861
    
    
    
    22,706Total
    
    $
    149,916
    
    
    $
    130,844
    
    
    $
    113,384
 14. Retirement Savings Plan Substantially all of our full-time employees are eligible to participate
in a 401(k) retirement savings plan. As of the date of the Merger and
continuing through June 30, 2001, two retirement savings plans were in effect,
representing the pre-merger plan of Thoratec and a new plan set in place as of
the Merger date. Prior to February 14, 2001, TCA participated in Thermo
Electrons retirement savings plan. Effective July 1, 2001, the two plans were
combined into a new savings plan (the Retirement Plan). Under the Retirement
Plan, employees may elect to contribute up to 25% of their eligible
compensation to the Retirement Plan with Thoratec making discretionary matching
contributions, subject to certain IRS limitations. In 2003, 2002 and 2001 our
match was 50%, up to the first 6% of eligible employee plan compensation.
Employees vest under the Retirement Plan at the rate of 25% per year, with full
vesting after four years of service with us. For 2003, 2002 and 2001, we made
contributions to the Retirement Plan of approximately $827,000, $806,000 and
$674,000, respectively. 15. Legal Settlement, Merger, Restructuring and Other Costs During 2003, 2002 and 2001, the following legal settlement, merger,
restructuring and other costs were recorded in expense (in thousands): For the Fiscal Years Ended2003
    
    2002
    
    2001Legal Settlement
    
    $
    2,256
    
    
    $
    
    
    
    $
    Merger
    
    
    
    
    
    
    356
    
    
    
    5,326Restructuring
    
    
    (118
    )
    
    
    524
    
    
    
    1,093Other
    
    
    (6
    )
    
    
    529
    
    
    
    715Total
    
    $
    2,132
    
    
    $
    1,409
    
    
    $
    7,134
 Legal Settlement In
October 2003, a patent infringement claim was filed against the
Company by Bodycote Materials Testing Canada, Inc. and David C.
MacGregor, M.D. related to materials used in the HeartMate LVAS. On February 3, 2004 the Company settled the
claim and recorded a charge of $2.3 million in the fourth
quarter of 2003 for the settlement and related legal costs. Merger Costs All Merger activities and related expenses were completed in the third
quarter of 2002. Merger costs recorded during 2002 and 2001 consisted
principally of employee severance, pre-merger employee retention costs, and
outside consulting, accounting and legal expenses associated with the Merger.
Early in 2000, Thermo Electron announced its intent to sell TCA. In conjunction
with this announcement, TCA put in place an employee retention plan, which
offered a bonus to certain key employees to continue employment with TCA
through the completion of the sale of the company. Upon closure of the Merger,
certain Thoratec executives stock options accelerated according to their
terms. In exchange for a waiver of their rights to immediately exercise these
options and to sell the related stock, we put in place a bonus plan to serve as
compensation to these executives for that waiver. The following table reflects the activity in accrued merger costs for 2002
(in thousands): 65




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##### Table of Contents



2002Accrued Merger Costs:Beginning balance
    
    $
    472Add:Accruals pursuant to executive waiver agreement
    
    
    337Less:Payments pursuant to executive waiver agreement
    
    
    (809
    )Ending balance
    
    $
    
 Certain merger costs were recorded directly to expense and did not pass
through accrued merger costs. These expenses consisted primarily of legal,
audit, consulting and other professional fees related to the Merger and totaled
$19,000 for 2002. All of these expenses have been paid. Restructuring Costs In June 2001, we initiated a restructuring plan (the Restructuring Plan)
to consolidate all of our VAD manufacturing operations to our facilities in
Pleasanton, California. This plan required the closure of our Chelmsford,
Massachusetts office and research facility and the relocation of the Woburn,
Massachusetts manufacturing operations. We continue to perform some marketing,
research and development, and administrative functions at the Woburn facility.
We notified the affected employees during the second quarter of 2001, both
through direct personal contact and written notification. The Chelmsford
facility was closed in February 2002 and all relocation activities were
completed under the Restructuring Plan in the first quarter of 2003. In
February 2003, the FDA inspected the Pleasanton facility related to the
relocation of the manufacturing operations and we received FDA approval to
begin manufacturing our HeartMate product line in Pleasanton in April of 2003.
Through the completion date of the Restructuring Plan in April 2003, we have
recorded $1,495,000 of restructuring charges in accordance with Emerging Issues
Task Force 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity and Staff Accounting Bulletin
100, Restructuring and Impairment Charges. These charges represent estimated
employee severance costs and stock option acceleration charges. As of the
completion date of the Restructuring Plan, we have paid approximately
$1,297,000 in severance payments to 78 employees. The following is a summary of
our accrued restructuring costs activity in 2003 and 2002 (in thousands): Fiscal Year2003
    
    2002Accrued Restructuring Costs:Beginning balance
    
    $
    679
    
    
    $
    863Employee severance accrual
    
    
    
    
    
    
    425Reduction of severance accrual
    
    
    (122
    )
    
    
    Payments of employee severance
    
    
    (557
    )
    
    
    (609
    )Ending balance
    
    $
    
    
    
    $
    679
 In addition to the employee severance costs, estimated restructuring costs
includes expense related to the acceleration of stock options granted to
employees who have been or will be terminated under the Restructuring Plan. In
the fiscal years ended 2003 and 2002, $4,000 and $99,000, respectively, of
stock options acceleration expense was recorded. Other Costs Other costs of $529,000 were incurred in the fourth quarter of 2002
related to the termination of a European distribution agreement. In the first
quarter of 2003 $523,000 of this amount was paid. The remaining $6,000 of the
original accrual was reversed from expense in the second quarter of 2003 as an
adjustment to estimated settlement costs. Other costs of $715,000 were incurred in the third quarter of 2001 related
to the events of September 11, 2001. As of December 29, 2001, the total amount
of these costs have been paid. 16. Earnings (Loss) Per Share 66




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Although Thoratec is the surviving legal entity after the Merger, the
Merger is treated as an acquisition of Thoratec by TCA for accounting and
financial reporting purposes. The weighted average number of common shares
previously reported by TCA has been adjusted for all periods to reflect the
exchange ratio of 0.835 to 1. Basic earnings (loss) per share are computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Options to purchase 3,257,000, 4,165,000 and 5,585,000
shares of common stock were not included in the computations of diluted
earnings and losses per share for 2003, 2002 and 2001, respectively, as their
inclusion would be antidilutive. In addition, the computation of diluted
earnings per share for all years presented excluded the effect of assuming the
conversion of our 4.75% subordinated convertible debentures, convertible at
$37.62 per share, because their effect would have been antidilutive. Basic and diluted earnings (loss) per share were calculated as follows (in
thousands, except per share data): 2003
    
    2002
    
    2001Net income (loss)
    
    $
    (2,182
    )
    
    $
    511
    
    
    $
    (87,866
    )Weighted average number of common shares-Basic
    
    
    55,583
    
    
    
    56,184
    
    
    
    52,336Dilutive effect of stock-based compensation plans
    
    
    
    
    
    
    578
    
    
    
    Weighted average number of common shares-Diluted
    
    
    55,583
    
    
    
    56,762
    
    
    
    52,336Basic and diluted earnings (loss) per common share
    
    $
    (0.04
    )
    
    $
    0.01
    
    
    $
    (1.68
    )
 17. Quarterly Results of Operations (Unaudited) The following is a summary of our unaudited quarterly results of
operations for the fiscal years 2003 and 2002: First
    
    Second
    
    Third
    
    Fourth(In thousands, except per share data)Fiscal Year
2003Product sales
    
    $
    36,062
    
    
    $
    36,156
    
    
    $
    35,250
    
    
    $
    42,448Gross profit
    
    
    21,171
    
    
    
    21,505
    
    
    
    20,994
    
    
    
    25,078Net income (loss)
    
    
    1,418
    
    
    
    1,023
    
    
    
    887
    
    
    
    (5,510
    )Basic and diluted earnings (loss) per share
    
    $
    0.03
    
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    (0.10
    )Fiscal Year 2002Product sales
    
    $
    29,639
    
    
    $
    31,034
    
    
    $
    31,105
    
    
    $
    39,066Gross profit
    
    
    16,475
    
    
    
    17,753
    
    
    
    18,050
    
    
    
    23,442Net income (loss)
    
    
    (1,758
    )
    
    
    (556
    )
    
    
    237
    
    
    
    2,588Basic and diluted earnings (loss) per share
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    0.05
 The fourth quarter of 2003 included charges of $2.3 million relating to a
settlement of a patent infringement claim and $9.0 million to write off
purchased intangibles both of which are described in Note 18. 18. Subsequent Events In
October 2003, a patent infringement claim was filed against the
Company by Bodycote Materials Testing Canada, Inc. and David C.
MacGregor, M.D. related to materials used in the HeartMate LVAs. On
February 3, 2004 the Company settled the claim and recorded a charge
of $2.3 million in the fourth quarter of 2003 for the settlement and
related legal costs. Subsequent
to year-end, the Company completed its assessment of the final
results from its feasibility clinical trial for the Aria CABG graft which was ongoing through fiscal 2003. Based on the clinical trial results, the
Company determined that it will not devote additional resources to the
development of the Aria graft. Upon the decision to discontinue product
development, the Company recorded an impairment charge of $9.0 million as of
January 3, 2004 to write off purchased intangible assets related to the Aria
graft, which were recorded as a result of the Merger. 67




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On February 11, 2004 the company announced that the board of directors
authorized a stock repurchase program under which Thoratec common stock with a
market value of up to $25 million may be acquired in the open market or in
privately negotiated transactions. The number of shares to be purchased and the
timing of such activity will be dependent on several conditions, including the
price of Thoratec stock, general market conditions and other factors. As of the
end of fiscal 2003, Thoratec had approximately 56 million shares outstanding.
The purchases will be funded from available cash and cash equivalents. The
stock repurchase program will be effective immediately and purchases may
continue until the authorized limit is reached or the Company discontinues the
program. Through March 12, 2004, we have repurchased 465,000 shares at an
average price of $13.25 per share for an aggregate outlay of
$6.2 million including 250,000 shares purchased from Thermo
Electron Corporation in a privately arranged transaction executed
through a third party broker at the then current market price. 68




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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A.Controls and Procedures An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of January 3, 2004. Based on that
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that as of January 3, 2004 the Companys
disclosure controls and procedures were effective in providing reasonable
assurance that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms. There have been no changes in our internal controls during the
fiscal year ended January 3, 2004 that have materially affected or are
reasonably likely to materially affect the Companys internal control over
financial reporting. Our management, including the Chief Executive Officer and the Chief
Financial Officer, do not expect that the disclosure controls and procedures or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can only provide reasonable assurances
that the objectives of the control system are met. The design of a control
system reflects resource constraints; the benefits of controls must be
considered relative to their costs. Because there are inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the Company have
been or will be detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns occur because of
simple error or mistake. Controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events. There can be no assurance
that any design will succeed in achieving its stated goals under all future
conditions; over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with the policies or
procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. We intend to review and evaluate the design and effectiveness of our
disclosure controls and procedures on an ongoing basis and to improve our
controls and procedures over time and to correct any deficiencies that we may
discover in the future. Our senior management has timely access to all material
financial and non-financial information concerning our business. While we
believe the present design of our disclosure controls and procedures is
effective, future events affecting our business may cause us to significantly
modify our disclosure controls and procedures. 69




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PART III 
 Item 10.Directors and Executive Officers of the Registrant and Code of Ethics The information regarding directors and executive officers required by
Item 10 is incorporated by reference from the information under the captions
Election of Directors, Section 16(a) Beneficial Ownership Reporting
Compliance, Code of Ethics, and in other applicable sections in the
definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A for our 2004 annual meeting of
stockholders. 
 Item 11.Executive Compensation The information required by Item 11 is incorporated by reference from the
information under the caption Executive Compensation in the definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A for our 2004 annual meeting of stockholders. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is incorporated by reference from the
information under the caption Security Ownership of Certain Beneficial Owners
and Management in the definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A for our 2004
annual meeting of stockholders. 
 Item 13.Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference from the
information under the caption Certain Transactions in the definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A for our 2004 annual meeting of stockholders. 
 Item 14.Principal Accountant Fees and Services The information required by Item 14 is incorporated by reference from the
information under the caption Independent Public Accountants in the
definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A for our 2004 annual meeting of
stockholders. 70




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PART IV 
 Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K  (a)
    
    List of documents filed as part of this report:1.
    
    Financial Statements and Independent Auditors ReportReference is made to the Index to Financial Statements under Item 8 of Part
II of this report, where these documents are included.2.
    
    Financial Statement SchedulesSchedule II - Valuation and Qualifying Accounts and Reserves for each of the
three fiscal years ended January 3, 2004.Other financial statement schedules are not included either because
they are not required or the information is otherwise shown in the financial
statements or notes thereto.3.
    
    ExhibitsReference is made to the Exhibit Index on page 74 of this report,
where these documents are included.(b)
    
    Reports on Form 8-K:On November 10, 2003, Thoratec filed a report on Form 8-K/A dated September
29, 2003 for the purpose of filing financial statements required by Item
7(a) and proforma financial information required by Item 7(b) of Diametrics
Medical Inc.s Intermittent Testing Operations (a business unit of
Diametrics Medical, Inc,) which was acquired by Thoratecs subsidiary,
International Technidyne Corporation.On October 21, 2003, Thoratec filed a report on form 8-K dated October
21, 2003 relating to the results of its third fiscal quarter ended September
27, 2003. Under the Form 8-K, Thoratec furnished (not filed) pursuant to
Item 12 under Item 7 the press release entitled, Thoratec Reports Third
Quarter 2003 Financial Results; Fourth Consecutive Quarter of Double Digit
Sales Growth relating to the results of its third fiscal quarter ended
September 27, 1003, as well as related non-GAAP financial information and
GAAP financial statements for the quarter as an exhibit under Item 7.On September 30, 2003, Thoratec filed a report on form 8-K dated
September 29, 2003 disclosing the completion of the acquisition of the
assets relating to the intermittent testing business products of Diametrics
Medical, Inc. by Thoratecs subsidiary, International Technidyne Corporation
under Item 2. Thoratec also filed the related press release entitled,
Thoratec Subsidiary Announces Closing of Previously Announced
IRMA®
Product Line Acquisition as an exhibit under Item 7. 71




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##### Table of Contents



INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of
Thoratec Corporation: We have audited the financial statements of Thoratec Corporation as of
January 3, 2004 and December 28, 2002, and for the years ended January
3, 2004, December 28, 2002 and December 29, 2001 and have issued our report
thereon dated March 12, 2004 (which report expresses an unqualified opinion
and includes an explanatory paragraph concerning the adoption of a new
accounting principle in 2002); such report is included elsewhere in this Annual
Report on Form 10-K. Our audits also included the financial
statement schedules of Thoratec Corporation listed in Item 15 (a)(2). These
financial statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when
considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein. /s/ DELOITTE & TOUCHE LLP San Francisco, California
March 12, 2004 72




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##### Table of Contents



THORATEC CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For Each of the Three Fiscal Years for the Period Ended January 3, 2004 Balance
    
    
    
    
    
    
    
    
    
    BalanceBeginning
    
    
    
    
    
    
    
    
    
    End ofof Year
    
    Additions
    
    Deductions
    
    Year(In thousands)Year Ended January 3, 2004:Allowance for doubtful accounts
    
    $
    238
    
    
    $
    361
    
    
    $
    (113
    )(1)
    
    $
    486Accrued product warranty
    
    $
    695
    
    
    $
    193
    
    
    $
    (59
    )(2)
    
    $
    829Year Ended December 28, 2002:Allowance for doubtful accounts
    
    $
    551
    
    
    $
    154
    
    
    $
    (467
    )(1)
    
    $
    238Accrued product warranty
    
    $
    910
    
    
    $
    45
    
    
    $
    (260
    )(2)
    
    $
    695Year Ended December 29, 2001:Allowance for doubtful accounts
    
    $
    939
    
    
    $
    337
    
    
    $
    (725
    )(1)
    
    $
    551Accrued product warranty
    
    $
    970
    
    
    $
    594
    
    
    $
    (654
    )(2)
    
    $
    910
   (1)
    
    Accounts written off, net of recoveries.(2)
    
    Warranty expenditures incurred. 73




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Exhibit3.1
    
    Thoratecs Articles of Incorporation, as amended.(1)3.2
    
    Thoratecs By-Laws, as amended.4.1
    
    Rights Agreement between Thoratec Corporation and Computershare Trust Company, Inc. as Rights Agent
dated as of May 2, 2002.(2)10.1
    
    Thoratecs 1984 Incentive Stock Option Plan, as amended.(3)10.2
    
    Sublease dated August 19, 1988, between Thoratec Cardiosystems and Thermedics, as amended by
Amendment No. 1 dated January 1, 1990(4); and as further amended by Amendment No. 2 dated as of
February 14, 2001.(1)10.3
    
    Intellectual Property Cross-license Agreement between Thermedics and the Thoratec Cardiosystems
dated August 19, 1988.(5)10.4
    
    Form of Indemnification Agreement between Thoratec Cardiosystems and its officers and directors.(5)10.5
    
    Agreement for the acquisition of Th. Goldschmidt AG of Certain of the Assets of Thoratec dated
March 29, 1989.(6)10.6
    
    Thoratecs 1993 Stock Option Plan.(7)10.7
    
    Agreement dated May 26, 1993, between The Polymer Technology Group Incorporated and the Thoratec
Cardiosystems.(8)10.8
    
    Thoratecs 1996 Stock Option Plan.(9)10.9
    
    Thoratecs 1996 Nonemployee Directors Stock Option Plan, as amended.10.10
    
    Lease Agreement dated July 25,
1996, between Main Street Associates and Thoratec, as amended.(10)10.11
    
    First Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated
July 25, 1996.(11)10.12
    
    Second Amendment to Lease Agreement originally between Main Street Associates and Thoratec dated
July 25, 1996.(12)10.13
    
    Thoratecs 1997 Stock Option
Plan, as amended.(13)10.14
    
    Amended and Restated Directors
Stock Option Plan of Thoratec Cardiosystems.(14)10.15
    
    Amended and Restated Nonqualified
Stock Option Plan of Thoratec Cardiosystems.(14)10.16
    
    Agreement and Plan of Merger by and among Thoratec, Lightning Acquisition Corporation, Thermo
Cardiosystems Inc, and Thermo Electron Corporation dated
October 3, 2000.(15)10.17
    
    Registration Rights Agreement by
and between Thoratec and Thermo Electron dated October 3, 2000.(15)10.18
    
    Shareholder Agreement by and
between Thoratec and Thermo Electron dated October 3, 2000.(15)10.19
    
    Lease agreement dated
August 16, 1995, between International Technidyne and BHBMC, as amended.(16)10.20
    
    Employment Agreement by and between Thoratec and D. Keith Grossman, amended as of December 6,
2001.(16)10.21
    
    Thoratecs 2002 Employee Stock
Purchase Plan.(17)10.22
    
    Amended and Restated Thoratec Corporation Executive Severance Benefits Plan as amended February 26,
2004.10.23
    
    Thoratecs Deferred Compensation Plan effective as of January 1, 2004.10.24
    
    Grantor Trust Agreement between Thoratec and Wachovia Bank, National Association effective as of
January 1, 2003.10.25
    
    Asset Purchase Agreement by and between Diametrics Medical, Inc. and International Technidyne
Corporation dated as of July 17, 2003.(18)10.26
    
    Lease Agreement between International Technidyne Corporation and Roseville Properties Management
Company dated September 26, 2003.21
    
    Subsidiaries of Thoratec.(16)23.1
    
    Independent Auditors Consent - Deloitte & Touche LLP.
 74




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ExhibitNumber
    
    Exhibit24
    
    Power of Attorney  Reference
is made to page 77 hereof.31.1
    
    Section 302 Certification of Chief Executive Officer and Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer and 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-A12G filed with the SEC on May
3, 2002 (Registration No. 000-49798), and incorporated herein by
reference.(3)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the
fiscal year ended December 29, 1990 filed with the SEC on March 28, 1991,
and incorporated herein by reference.(4)
    
    Filed as an Exhibit to Thoratec Cardiosystems Annual Report on Form 10-K
for the fiscal year ended December 30, 1989 and incorporated herein by
reference.(5)
    
    Filed as an Exhibit to Thoratec Cardiosystems Registration Statement on
Form S-1 (Registration No. 33-25144) and incorporated herein by reference.(6)
    
    Filed as an Exhibit to Thoratecs Annual Report on Form 10-K for the
fiscal year ended December 30, 1989 filed with the SEC on March 30, 1990,
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.(10)
    
    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.(11)
    
    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.(12)
    
    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.(13)
    
    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.(14)
    
    Filed as an Exhibit to Thoratec Cardiosystems Quarterly Report on Form
10-Q for the fiscal quarter ended July 3, 1999 and incorporated herein by
reference.(15)
    
    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. 75




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##### Table of Contents



(16)
    
    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.(17)
    
    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.(18)
    
    Filed as an Exhibit to Thoratecs Form 8-K filed with the SEC on July 21,
2003 76




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SIGNATURES In accordance with Section 13 or Section 15(d) of the Exchange Act, as
amended, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized on this
17th day of March
2004. THORATEC CORPORATIONBy:
    
    /s/ D. KEITH GROSSMAND. Keith GrossmanChief Executive Officer
 Date: March 17, 2004 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints D. Keith Grossman and M. Wayne Boylston,
and each of them, his true and lawful attorney-in-fact, with full power of
substitution and resubstitution, to act for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this annual
report on Form 10-K and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing which they, or any
of them, may deem necessary or advisable to be done in connection with this
annual report as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or any substitute or substitutes for any or all of them,
may lawfully do or cause to be done by virture hereof. In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Thoratec Corporation and in the
capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ D. KEITH GROSSMAN
D. Keith Grossman
    
    Chief Executive Officer,
President and Director
    
    March 17, 2004/s/ M. WAYNE BOYLSTON
M. Wayne Boylston
    
    Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
    
    March 17, 2004/s/ J. DONALD HILL
J. Donald Hill
    
    Director and Chairman of the
Board of Directors
    
    March 17, 2004/s/ HOWARD E. CHASE
Howard E. Chase
    
    Director
    
    March 17, 2004/s/ J. DANIEL COLE
J. Daniel Cole
    
    Director
    
    March 17, 2004/s/ NEIL F. DIMICK
Neil F. Dimick
    
    Director
    
    March 17, 2004/s/ WILLIAM M. HITCHCOCK
William M. Hitchcock
    
    Director
    
    March 17, 2004/s/ GEORGE W. HOLBROOK, JR.
George W. Holbrook, Jr.
    
    Director
    
    March 17, 2004/s/ DANIEL M. MULVENA
Daniel M. Mulvena
    
    Director
    
    March 17, 2004
 77