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U.S. SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

For the quarterly period ended September 27, 2003

or

for the transition period from __________ to ___________

COMMISSION FILE NUMBER: 1-8145

THORATEC CORPORATION

Registrant’s telephone number, including area code: (925) 847-8600

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
Yes [X] No [   ]

     As of November 6, 2003, registrant had 56,122,770 shares of common stock outstanding.

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THORATEC CORPORATION AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)
(in thousands)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(in thousands)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)
(in thousands)

See notes to condensed consolidated financial statements.

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THORATEC CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, unless otherwise stated)

1. Basis of Presentation and Significant Accounting Policies

     The interim condensed consolidated financial statements of Thoratec Corporation, referred to as “we”, “our”, “Thoratec”, or the “Company” have been prepared and presented in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission, or the SEC, without audit and reflect all adjustments necessary (consisting only of normal recurring adjustments) to present fairly our financial position at September 27, 2003 and December 28, 2002, our results of operations for the three-month and nine-month periods ended September 27, 2003 and September 28, 2002 and cash flows for the nine-month periods ended September 27, 2003 and September 28, 2002. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying financial statements should be read in conjunction with our fiscal 2002 consolidated financial statements filed with the SEC in our Annual Report on Form 10-K. The operating results for any interim period are not necessarily indicative of the results that may be expected for any future period.

     The preparation of our condensed consolidated financial statements included herein necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented.

We have made certain reclassifications of 2002 amounts to conform to the current presentation.

Stock Based Compensation

     We account for stock-based compensation to employees using the intrinsic value method in accordance with APB 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 recorded in shareholders’ equity. Similarly, no accounting recognition is given to our recently implemented employee stock purchase plan until a purchase occurs. Upon purchase, net proceeds are recorded in common stock. Under fair value recognition provisions of SFAS No. 123, the fair value of each option granted as a stock option or as an option to purchase shares under the employee stock purchase plan 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 SFAS No. 123, our reported net income (loss) would have been adversely affected, as shown in the following table (in thousands, except per share data):

2. Merger of Thoratec and TCA

     Our merger with Thermo Cardiosystems Inc., or TCA, was completed on February 14, 2001 which we refer to as the Merger. 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 market values at the date of acquisition.

     As a result of the Merger, $76.9 million relating to in-process research and development, or 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.

3. New Accounting Pronouncements

     In April 2002, the FASB issued SFAS No. 145, (“Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”) 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 Accounting Principle Board, or APB, Opinion No. 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”, shall 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. Upon adoption, we reclassified the extraordinary loss on extinguishment of debt incurred in the first quarter of 2002 of $515 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.

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     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 statement did not have a material effect upon our consolidated financial statements.

     In November 2002, the FASB issued Financial 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 No. 45 will 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.” The adoption of this statement is not expected to have an impact on our financial position, results of operations or cash flows.

4. Financial Instruments

     We have 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 exchange contracts that generally have terms of three months or less are used to hedge these non-functional currency exposures on the Company’s books. The derivatives used in the foreign currency exchange risk management program are not designated as cash flow or fair value hedges under SFAS 133. These contracts are recorded on the balance sheet at fair value in “Deferred Tax Asset and Other” current assets. Changes in the fair value of the contracts and the underlying exposures being hedged are included concurrently in “Interest and Other Income — Net”. At September 27, 2003, the fair value was $4,600, and the change from the notional value was insignificant.

5. Inventories

     Inventories consist of the following:

6. Property, Plant and Equipment

     Property, plant, and equipment consist of the following:

7. Goodwill and Other Intangible Assets

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     The change in the carrying amount of goodwill attributable to our Cardiovascular business segment was as follows:

     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, were as follows:

     As of the beginning of fiscal 2002, the purchased intangible asset associated with the assembled workforce in the amount of $1,334, net of accumulated amortization of $381 and taxes of $897, was reclassified to goodwill.

     Amortization expense related to identifiable intangible assets for the three month and nine month periods ended September 27, 2003 and September 28, 2002 was $3,096, $9,288, $3,096 and $9,288, respectively. For the three and nine months ended September 27, 2003 and September 28, 2002, purchased intangible assets amortization expense also included $72, $217, $72 and $217, respectively, of amortization of deferred compensation recorded at the time of the Merger related to the valuation of stock options. Amortization expense is expected to be approximately $12,100 for each of the next five years. The purchased intangible assets have estimated useful lives of eight to twenty years.

8. Common Stock

     On May 30, 2003, our 1996 Nonemployee Directors Stock Option Plan (“Directors Option Plan”) and our 1997 Stock Option Plan (“1997 SOP”) were amended by approval of our Company’s shareholders. These amendments increased the number of shares of our common stock reserved for issuance upon exercise of options granted under the Directors Option Plan and the 1997 SOP by 200,000 and 4,500,000, respectively. These increases assist us in attracting and retaining employees and non-employee directors.

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9. Merger, Restructuring and Other Costs

     Merger, restructuring and other costs were recorded as follows:

     Merger Costs

     All merger activities and related expenses were completed in the third quarter of 2002. Merger costs recorded during the three and six months ended September 28, 2002 consisted of executive waiver agreement expenses. In accordance with the executive waiver agreements, payments to the executives occurred at the one-year anniversary of the Merger, although the executives continued to be restricted from exercising some of their options and selling the related stock for an additional six months following the one-year anniversary date. The total expense related to the waiver agreements of $811 was amortized over the 18-month waiver period. As of September 28, 2002, the ending balance of accrued merger costs was reclassified to “Deferred Tax Asset and Other” current assets.

     The following table reflects the activity in accrued merger costs for the three-month and six-month periods ended September 28, 2002:

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     Restructuring Costs

     All restructuring activities and related expenses were completed in the second quarter of 2003. From the inception of our plan to consolidate all of our ventricular assist device, or VAD, manufacturing operations which we call the Restructuring Plan, through September 27, 2003, we recorded $1,495 of restructuring charges. These charges represented estimated employee severance costs and stock option acceleration charges. Total severance payments under the Restructuring Plan were $1,297 to 78 employees. Following is a summary of our restructuring costs activity:

     For the three months and nine months ended September 27, 2003 and September 28, 2002, in addition to the employee severance costs, estimated restructuring costs included expense related to the acceleration of stock options granted to employees who were terminated under the Restructuring Plan. Stock option acceleration expense recorded in the three and nine-month periods ending September 27, 2003 and in the nine-month period ending September 28, 2002 was nil, $4 and $99, respectively. In the three-month period ending September 28, 2002, the estimated expense was reduced by $53.

     Other Costs

     Other costs of $529 were accrued in the fourth quarter of 2002 related to the termination of a European distribution agreement. In the first quarter of 2003, $523 of this amount was paid. The remaining $6 of the original accrual was reversed from expense in the second quarter of 2003 as an adjustment to estimated settlement costs.

10. Income Taxes

     Our effective tax provision rate was 39% for the three-month and nine-month periods ended September 27, 2003. For the three and nine-months periods ended September 28, 2002, our effective tax provision and tax benefit rates, respectively, were 40%. The effective tax provision rate for 2003 and the effective tax benefit rate for 2002 both differed from the statutory federal income tax rate primarily due to the impact of state taxes.

     At September 27, 2003 and December 28, 2002, we reported a net deferred tax liability of approximately $56.0 million and $56.7 million, respectively, comprised principally of temporary differences between the financial statement and income tax bases of intangible assets.

11. Net Income (Loss) Per Share

Basic and diluted earnings (loss) per share were calculated as follows:

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     Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Of the options to purchase shares of common stock outstanding as of September 27, 2003, options covering 225 shares and 3,211 shares of common stock were not included in the computation of the diluted income per share for the three-month and nine-month periods ending September 27, 2003, respectively, as their inclusion would be antidilutive. Of the options to purchase shares of common stock outstanding as of September 28, 2002, options covering 6,679 shares for the three-month period and all options for the nine-month period were excluded from the computation of diluted net income (loss) per share as their inclusion would be antidilutive.

12. Business Segment and Geographical Data

     We organize and manage our business by functional operating entities operating in two segments: Cardiovascular and ITC. The Cardiovascular segment develops, manufactures and markets proprietary medical devices used for circulatory support and vascular graft applications. The ITC segment develops, manufactures and markets near-patient, whole-blood coagulation testing equipment and related disposables, as well as single-use skin incision devices.

     Business Segments: