Volcano 10K 2013 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52045

Volcano Corporation

(Exact Name of Registrant as Specified in its Charter)



Delaware		33-0928885
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
3721 Valley Centre Drive, Suite 500
San Diego, California		92130
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(800) 228-4728

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Stock, $0.001 per share par value		The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. ¨

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



Large accelerated filer	x		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the voting common equity held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on June 30, 2013 (which is the last business day of registrant’s most recently completed second fiscal quarter), as reported on the NASDAQ Global Select Market was approximately $981.5 million. Approximately 452,321 shares of common stock held by executive officers and directors on June 30, 2013 have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At February 14, 2014, 51,926,493 shares of Common Stock, par value $0.001, of the registrant were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates information by reference to portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 3, 2014. Such definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2013.

VOLCANO CORPORATION

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013

TABLE OF CONTENTS




PART I
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	34
Item 2.	Properties	34
Item 3.	Legal Proceedings	35
Item 4.	Mine Safety Disclosures	35

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6.	Selected Financial Data	37
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 8.	Financial Statements and Supplementary Data	59
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	106
Item 9A.	Controls and Procedures	106
Item 9B.	Other Information	107

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	108
Item 11.	Executive Compensation	108
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	108
Item 13.	Certain Relationships and Related Transactions, and Director Independence	108
Item 14.	Principal Accounting Fees and Services	108

PART IV
Item 15.	Exhibits, Financial Statement Schedules	109
SIGNATURES		115
EXHIBIT INDEX

Forward-looking statements: This annual report on Form 10-K (“Annual Report”) contains forward-looking statements regarding future events and our future results that are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of our management. In some cases, you can identify these “forward-looking statements” by words like “may,” “will,” “should,” "could," “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” "intends" or “continues” or the negative of those words and other comparable words. Forward-looking statements include, but are not limited to, statements about:


•	our intentions, beliefs and expectations regarding our expenses, sales, operations and future financial performance;


•	our operating results;


•	our plans for future products and enhancements of existing products;


•	anticipated growth and trends in our business;


•	the timing of and our ability to maintain and obtain regulatory clearances or approvals;


•	our belief that our cash and cash equivalents and short-term available-for-sale investments will be sufficient to satisfy our anticipated cash requirements;


•	our expectations regarding our revenues, customers and distributors;


•	our beliefs and expectations regarding our market penetration and expansion efforts;


•	our expectations regarding the benefits and integration of recently-acquired businesses and our ability to make future acquisitions and successfully integrate any such future-acquired businesses;


•	our anticipated trends and challenges in the markets in which we operate; and


•	our expectations and beliefs regarding and the impact of investigations, claims and litigation

These statements are not guarantees of future performance or events. Our actual results may differ materially from those discussed here. For a detailed discussion of the risks and uncertainties that could contribute to such differences see the “Risk Factors” section in Part I, Item 1A of this Annual Report as well as the discussion in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere throughout this Annual Report and in any other documents incorporated by reference into this Annual Report. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report.

Volcano has registered and common law trademarks in the U.S. and elsewhere in the world including, but not limited to, Aim®, Axsun®, Bi-Trieval, Centriq, ChromaFlo®, ComboMap®, ComboWire®, Core, Crux®, Crux Biomedical®, Define, Eagle Eye®, ETNA, FACT, FloMap®, FloWire®, Ginko, GlyDx®, Hi-Q, iFR®, In-Line Digital®, Instant Wave-Free Ratio, Intentio, Octave, pcFM®, Precision Guided Therapy, PreView, PrimeWire®, PrimeWire Prestige®, ReFlow, Revolution®, SlyDx, s5i®, SmartMap®, SpinVision®, Sync-Rx, Trak Back®, Valet®, Verrata, VH®, VIBE®, Virtual Histology®, Visions®, Volcano®, Wavewire®, Xtract® and Zuum. Other brand names or trademarks appearing in this Annual Report are the property of their respective holders.

PART I



Item 1.	Business

Overview

We design, develop, manufacture and commercialize a broad suite of precision guided therapy tools including intravascular ultrasound, or IVUS, and fractional flow reserve, or FFR, products. We believe that these products enhance the diagnosis and treatment of coronary and peripheral vascular disease by improving the efficiency and efficacy of existing diagnostic angiograms and percutaneous coronary interventional, or PCI, and endovascular procedures in the coronary arteries or peripheral arteries and veins. We are facilitating the adoption of functional PCI, in which our FFR technology is used to help determine whether or not a stent is necessary, and IVUS is used as an adjunct to angiography to guide stent placement and optimization. We market our products to physicians, nurses and technicians who perform a variety of endovascular based coronary and peripheral interventional procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals.

Our products consist of consoles that are marketed as stand-alone units or as units that can be integrated into a variety of hospital-based interventional surgical suites called catheterization laboratories, or cath labs. We have developed customized cath lab versions of these consoles and are developing additional functionality options as part of our cath lab integration initiative. Our consoles have been designed to serve as a multi-modality platform for our phased array and rotational IVUS catheters, FFR pressure and flow wires and image-guided therapy catheters, such as the Pioneer Plus reentry device acquired from Medtronic, Inc., or Medtronic, on August 30, 2013.

Our IVUS products include single-procedure disposable phased array and rotational IVUS imaging catheters, and additional functionality options such as ChromaFlo® stent apposition analysis. Our FFR offerings can be accessed through our multi-modality platforms, and we also provide FFR-only consoles. Our FFR disposables are single-procedure disposable pressure and flow guide wires used to measure the pressure and flow characteristics of blood around plaque enabling physicians to gauge the plaque's physiological impact on blood flow and pressure. We have developed additional offerings for integration into the platform, including adenosine-free Instant Wave-Free Ratio FFR, or iFR®. We are currently developing high resolution Focal Acoustic Computed Tomography, or FACT, catheters, co-registration with IVUS and an IVUS-guided Crux VCF system featuring our inferior vena cava, or IVC, filter. Our Valet microcatheter, Visions® PV .035 catheter and Eagle Eye® Platinum ST short tip catheter, or EEP, products received 510(k) clearance and CE Mark approval in 2012 and their commercial launch occurred in 2013. In addition, we initiated the commercial launch of our Verrata pressure guide wire, our fifth new pressure wire in five years, during 2013.

Through Axsun Technologies, Inc., or Axsun, one of our wholly-owned subsidiaries, we also develop and manufacture optical monitors for the telecommunications industry, laser and non-laser light sources, optical engines used in medical optical coherence topography, or OCT, imaging systems and advanced photonic components and sub-systems used in spectroscopy and other industrial applications. We believe Axsun's proprietary OCT technology will provide us competitive advantages in the invasive imaging sector, as well as for applications in ophthalmology and dental.

We believe the market segments relevant to Volcano will grow from approximately $1.3 billion in 2012 to approximately $1.7 billion by 2017, representing a compound annual growth rate, or CAGR, of approximately six percent. Within this broader market, we estimate that the current market for our IVUS products, FFR products and Axsun industrial products is approximately $900 million. We base our estimated market sizes in part on discussion with market analysts and on our internal assessment of our historical and projected sales and those of our competitors. We believe the intravascular imaging market is growing at approximately five percent annually and the FFR market is growing at approximately 10 percent annually, and we expect that these markets, together with the market for our Axsun industrial products, could grow to more than $1.1 billion in the next five years. In addition, we have a number of products in our emerging business segment, including IVUS-guided therapies, such as our Pioneer PlusRe-entry catheter, our Crux IVC filter, Axsun medical and ophthalmology products, SyncVision (co-registration with IVUS) and iFR. Many of these products leverage our existing platform technology and represent an aggregate estimated current market opportunity of approximately $400 million, which we expect to grow at approximately eight percent on a CAGR basis to approximately $600 million by 2017.

We have focused on building our domestic and international sales and marketing infrastructure to market our products to physicians and technicians who perform diagnostic angiography, PCI and endovascular procedures in hospitals and to other personnel who make purchasing decisions on behalf of hospitals. We sell our products directly to customers in the United States, Japan, certain European markets and South Africa. We utilize distributors in other geographic areas, which are also involved in product launch planning, education and training, physician support and clinical study management.

We derive our revenues from two reporting segments: medical and industrial. Our medical segment represents our core business, in which we derive revenues primarily from the sale of our multi-modality and FFR consoles and our IVUS and FFR single-use disposables. Our industrial segment derives revenues related to the sales of micro-optical spectrometers and optical channel monitors by Axsun to telecommunication and industrial companies. We continue building direct sales capabilities in the U.S., certain parts of Europe, South Africa, and Japan. During the year ended December 31, 2013, we generated worldwide revenues of $393.7 million, which is comprised of $385.2 million from our medical segment and $8.4 million from our industrial segment, and had an operating loss of $29.9 million. Our total assets as of December 31, 2013 were $831.9 million. Our revenue, operating income (loss) and other financial results for the last three fiscal years are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Consolidated Financial Statements” sections contained in this Annual Report. At December 31, 2013, we had a worldwide installed base of more than 7,000 consoles, excluding our legacy In-Vision Gold systems. We intend to grow and leverage this installed base of consoles to drive recurring sales of our single-use disposable catheters and guide wires, which accounted for approximately 79.7% of our medical segment revenues during the year ended December 31, 2013. In 2013, approximately 48.2% of our revenues were generated in the U.S., approximately 27.8% were generated in Japan, and approximately 18.0% were generated in Europe, the Middle East and Africa, with the balance of sales occurring in other international markets.

Our Strategy

Our long-term growth strategy incorporates expansion of our existing businesses, commercialization of new products and markets and licensing or acquiring new technologies. We believe our continued product innovation and expansion of our direct distribution sales programs will enable us to expand market penetration and share, as well as broaden the clinical indications that our products can address. The core of this strategy is offering a multi-modality platform that seeks to deliver all of the benefits associated with conventional IVUS and FFR devices, while providing enhanced functionality and proprietary features

that address the limitations associated with conventional forms of these technologies. We are seeking to make precision-guided, functional PCI a standard of care and to position us as a leading provider of precision-guided therapy. We believe that recent clinical data from studies involving IVUS and FFR, as well as updated clinical guidelines elevating the use of these technologies, will help drive market adoption. For example, two-year data released in 2013 from the ADAPT-DES study (Assessment of Platelet Therapy with Drug-Eluting Stents), the largest study conducted with IVUS guidance to date, indicated IVUS guidance was associated with reductions in certain serious patient events, including stent thrombosis and myocardial infarction, and that IVUS guidance was associated with a change in procedure 74% of the time. In addition, we have a number of new offerings under development that will further leverage our multi-modality platform. Factors driving our strategy include:

•

Accelerating the trend toward less invasive procedures. Our IVUS products offer continuous, real-time three-dimensional imaging, plaque visualization, color-coded identification of plaque composition, and automatic drawing of lumen and vessel borders allowing for automatic vessel sizing. Our FFR products offer physicians a simple pressure and flow based method to determine whether stenting or additional PCI is required. This strategy complements our focus on precision-guided therapy by providing sophisticated guidance tools that enhance the value of minimally invasive procedures.


•	Enhancing the outcomes of PCI and endovascular procedures. We believe our products enabled with novel technological enhancements provide clinically significant information that improves the outcomes of current and increasingly complex PCI and endovascular procedures.


•	Providing documentation for necessity of procedures. Increasingly, hospitals and third-party payors are requesting proof of necessity for PCIs. We believe our IVUS and FFR technologies can assist clinicians in documenting the clinical necessity of these procedures.

•

Decreasing the number of interventional devices used per procedure and optimizing their usage. Our FFR products offer the opportunity to physiologically assess lesion severity and determine whether stents are needed. Additionally, our IVUS products provide intravascular imaging. As a result, our IVUS and FFR products have the potential to reduce the number of devices deployed by identifying the appropriate lesion for stenting and ensuring that stents are placed and expanded correctly, thereby enhancing patient outcomes and lowering treatment costs.


•	Improving ease of use of IVUS and FFR technologies to drive market adoption. We have designed our console offerings to be “always there, always on, and easy to use.” Our consoles are easily integrated into an existing or newly constructed cath lab facility.


•	Improving the diagnosis of cardiovascular disease. We believe our IVUS and FFR products can significantly improve the diagnosis of cardiovascular disease by addressing the limitations of diagnostic angiography, and allowing clinicians to better identify patients and lesions at risk for future adverse coronary vascular system events.

•

Enabling new procedures to treat coronary artery, and peripheral vascular disease. Currently, the treatment of a number of cardiovascular and peripheral vascular diseases is limited by conventional technologies, including angiography. Because our technologies address many of these current limitations, we believe our products provide physicians the potential to diagnose and optimally treat these diseases percutaneously.

Our primary goal is to establish our IVUS and FFR products as the standard of care for a variety of procedures including diagnostic, PCI and endovascular procedures and expand the use of IVUS and FFR for these procedures. The key elements of our strategy for achieving this goal are to:

•

Grow existing IVUS and FFR markets globally. We believe that most PCI and endovascular procedures today, particularly those of a more complex nature, benefit greatly from more precise guidance than angiography alone can provide. We believe that by making our devices easier to use and enabling faster, more comprehensive interpretation of images, investing in thoughtful clinical studies and registries that support the benefits of our technologies, educating physicians and hospital executives on the clinical need for our products and existing guidelines, training staff on the procedural use of our products, and providing access to all patients through the expansion of our installed base, we can continue to grow and cultivate the current PCI market which represents, on an annual basis, more than three million procedures worldwide as well as the current endovascular market. We also plan to develop a portfolio of image guided therapy devices.

•

Increase market share in existing IVUS and FFR markets. We continue to introduce product enhancements to meet physicians’ needs for improved visualization, characterization, and ease of use. We believe these enhancements make our products easier to use than competing products and provide substantially more and better information to improve procedural outcomes, thereby driving greater usage of our IVUS and FFR products within the existing PCI and endovascular markets. We believe we are the IVUS market leader and intend to implement several strategies to increase our penetration in the FFR market. First, we have addressed certain limitations of conventional IVUS such as difficulty in use, lack of automation and grayscale imaging by developing technologies and introducing features such as automatic real-time drawing of lumen and vessel borders, color-coded identification of plaque composition, and automatic vessel sizing. Second, we developed PC-based IVUS and FFR consoles that can be integrated easily into cath labs, thereby making it easier for physicians to adopt and use our products. Third, we have increased the size of our direct sales force and initiated direct distribution strategies in key geographies. We have also entered into distribution and marketing agreements with leading cath lab equipment and stent manufacturers. We intend to grow and leverage our installed base of IVUS and FFR consoles to drive recurring sales of our single-procedure disposable catheters and guide wires.

•

Expand our existing technologies to serve new markets. We plan to utilize our existing diagnostic technologies, including FFR and IVUS, to address new markets. The nearest term opportunity is in the peripheral vasculature, where we believe IVUS and FFR enable enhanced decision-making by clinicians versus the use of angiography alone. Current and potential IVUS applications include stenting in the iliac, femoral and below-the-knee arteries, atherectomy, AV Fistula/graft revascularization, endovascular aneurysm repair, thoracic endovascular aortic repair, inferior vena cava, or IVC, filter placement, and compressive and thrombotic venous disease. We believe FFR has several applications as well, including the assessment of gradients in lower limb arteries to determine treatment needs. As we pursue opportunities in this market, we plan to develop new IVUS and FFR products and develop or acquire therapeutic products that have clinical synergies with our diagnostic technologies. In addition, we plan to explore product development and marketing partnerships with other leading companies in the sector.

•

Enhance product capabilities and introduce new products through collaborations or acquisitions. We have a successful track record of acquiring and licensing technologies and collaborating with third parties to create synergistic product offerings. For instance, we license the iFR technology from Imperial College London and FACT technology from The Cleveland Clinic Foundation. Since December 2007, we have acquired, among others, Impact Medical Technologies, LLC; Axsun; Sync-Rx Ltd.; Crux Biomedical, Inc.; and the Pioneer Plus Reentry Catheter from Medtronic. The technologies obtained from these acquisitions form the foundation of many of the new technologies and products we expect to introduce. We believe there will be additional opportunities to leverage these capabilities through select technology or company acquisitions as well as collaborations that enhance our capabilities or complement our market strategies.

Our Products

Our multi-modality consoles are marketed as stand-alone units or units that can be integrated into cath labs. We offer consoles that combine IVUS and FFR technology, which are designed to allow the user to switch seamlessly between each modality. We also offer systems with either IVUS or FFR independently. The significantly expanded functionality of our offering enables the networking of patient information, control of IVUS and FFR information at both the operating table and in the cath lab control room, as well as the capability for images to be displayed on standard cath lab monitors. Our products include IVUS catheters, FFR guide wires and various options that provide additional functionality. We expect to continue developing new products and technologies to expand the market adoption of our offering, and also expect our platform will support IVUS integrated with other interventional devices in the future.

Consoles

We design, develop, manufacture and commercialize multi-modality consoles that are proprietary, high-speed electronic systems that process the signals received from our IVUS catheters and FFR wires. These consoles generate high-resolution images that can be displayed on a monitor and can be permanently stored on the system or another medium. Our consoles are mobile, proprietary and high speed electronic systems with different functionalities and sizes designed and manufactured to process the signals received only from our catheters and guide wires. Our market strategy includes offering devices to clinicians that are easy to use, reduce procedure times and provide a higher level of information. Our consoles are offered as stand-alone or customized and integrated versions and are smaller and lighter, provide enhanced functionality and are less expensive to manufacture than our prior console offerings. The current family of consoles includes:


•	Stand-Alone Version: We believe this portable and mobile console is the lightest product on the market and has a simple user interface.


•	Integrated Version: This console is made up of components that can be customized to each cath lab’s specifications and integrated into virtually any cath lab while retaining full functionality. When the integrated version is integrated into the cath lab, it works seamlessly with the workflow of the cath lab in terms of acquiring and archiving patient images and data.

Both platforms support digital and rotational IVUS, FFR and our ChromaFlo and VH® IVUS functionality. Most recent versions of our consoles are intended to support, or can be upgraded to support, our planned future offerings.

Our IVUS Products

Catheters. Our single-use disposable catheters operate and interface solely with our family of consoles. We are the only company that offers both digital and rotational catheters. We believe this allows us to meet the needs of a greater number of physicians than our competitors. Our IVUS catheters vary in their principal uses, frequencies, shaft sizes, shaft lengths, guide wire compatibility and distal tip lengths. These differences allow for the use of different catheters in various portions of the vascular system.

We launched our latest generation digital catheter, the Eagle Eye Platinum Digital IVUS Catheter, commercially in May 2010. In September 2012, we introduced a new, short tip version of the Eagle Eye Platinum IVUS catheter that enables clinicians to get closer to a chronic total occlusion. We now also offer three IVUS catheters that are optimized for use in peripheral vessels. During 2014, we expect to obtain clearance from the U.S. Food and Drug Administration, or FDA, for and begin commercial sales of our FACT catheter, which is designed to provide a higher level of ultrasound resolution imaging than is available with current IVUS ultrasound catheters.

Additional Functionality. Our IVUS products incorporate key features that add valuable clinical functionality addressing a number of the historical limitations of conventional IVUS. We intend to develop additional functionality in the future. Currently, we offer:

ChromaFlo. Angiography alone does not always identify malapposed stents because the contrast injection that makes the lumen visible on x-ray can flow inside the stent, and in between the stent and vessel wall. When this occurs, the stent struts are too small to compete with the dark lumen of the x-ray, leaving the two dimensional image inconclusive or misleading. Our ChromaFlo stent apposition analysis technology uses sequential IVUS frames to differentiate circulating blood from stationary or anchored tissue. ChromaFlo can be particularly important when assessing stent placement as the detailed cross-sectional image clearly identifies moving blood inside and outside of the stent lumen, prompting physicians in many cases to expand the stent until all of the blood appears inside of the stent lumen. ChromaFlo can also help with the identification of luminal structures such as lumen border, bifurcations, dissections, and thrombus.

SyncVision. In November 2012, we acquired Sync-Rx Ltd, or Sync-Rx, an Israel-based company that develops advanced software applications designed to optimize and facilitate trans-catheter cardiovascular interventions using automated online image processing. We believe that the SyncVision technology will provide us with a platform on which to build a range of advanced software features that will aid clinical decision-making by providing angiography and intra-body image enhancement, measurement and non-invasive imaging and intravascular co-registration capabilities, and create future opportunities in physiology and peripheral therapy guidance.

Our FFR Products

Our FFR products consist of pressure and flow consoles and single-procedure disposable pressure and flow guide wires. We believe we are the only company that offers a full line of pressure and flow guide wires as well as a guide wire that can measure both pressure and flow. In addition, our FFR products are integrated with our multi-modality consoles. We have a strong track record of innovation in the development of pressure and flow guide wires and in 2013 we launched Verrata-our fifth new pressure guide wire in five years-that is designed to be more durable and faster and easier to use. In addition, we believe we are the only company to have developed iFR functionality, which is an FFR technology that does not require the administration of adenosine, used to widen blood vessels prior to the procedure. As a result, by enabling cardiologists to perform FFR without adenosine, iFR functionality has the potential to expand the patient population that could be diagnosed using FFR, and reduce the costs and time associated with its use. During 2013, we launched our iFR product in Europe and Japan, and filed for regulatory approval in the U.S.

We believe that favorable trial data relating to the measurement of FFR in addition to angiography will lead to further adoption of FFR technology by clinicians. In September 2009, published findings from the Fractional Flow Reserve versus

Angiography for Multivessel Evaluation, or FAME, study demonstrated that patients in the study with multi-vessel coronary artery disease who were treated by FFR guidance had a 34% reduction in death and myocardial infarction (heart attack) compared to angiographic guidance alone. In August 2012, the results of the Fractional Flow Reserve-Guided PCI vs. Medical Therapy in Stable Coronary Disease, or FAME 2, study were published in the New England Journal of Medicine. FAME 2 showed that patients receiving PCI with proven ischemia (restriction of blood flow) by FFR had 66% fewer primary endpoint events including death, myocardial infarction and urgent revascularizations (e.g. coronary bypass) than those patients treated with optimal medical therapy alone. We believe these findings will continue to drive the growth and adoption of our disposable FFR wire products.

Product Expansion

We have recently introduced or have under development a number of products designed to leverage our existing platform technology that we believe will expand our presence in interventional medicine and related markets. Our product pipeline includes:

Crux VCF System

In December 2012, we acquired Crux Biomedical, Inc., or Crux, a private company developing a number of products designed to capture emboli (blood vessel package) and other debris through the vasculature. These include the Crux VCF System, featuring the Crux IVC filter, a retrievable filter intended to prevent recurrent pulmonary embolism (blockage of main artery of the lung). The Crux VCF System received a CE Mark in December 2011 and 510(k) clearance in July 2012. We launched the Crux VCF System in 2013 and also received 510(k) clearance for our Crux Snare Retrieval Set in January 2014. We believe the Crux IVC filter product can add significant clinical and economical value to our customers and patients.

Pioneer Plus Re-Entry Catheter

During 2013, we acquired the Pioneer PlusRe-Entry Catheter designed to enable the crossing of sub-total, total and chronic total occlusions within the peripheral vasculature. Volcano’s IVUS technology is used to direct the guidewire past stenotic lesions prior to additional interventions. We believe we can significantly expand the market for the Pioneer device in both the U.S. and international markets.

Sales, Marketing and Distribution

We sell consoles and disposables through our own direct sales force and distributors. In addition, we sell our consoles through our supply and distribution agreements with third parties. Our strategy is to leverage our installed base of consoles to drive recurring sales of our proprietary disposables. We provide training and clinical support to users of our products to increase their familiarity with product features and benefits, thereby increasing usage.

We have direct sales capability in the U.S., certain parts of Europe, Japan and South Africa. We intend to continue to increase our direct sales personnel over time. At December 31, 2013, we had over 320 direct sales and support professionals, including 181 in the U.S., 80 in Japan, 59 in Europe and the remaining in other geographies. In addition, we have numerous distributor relationships in Europe, Canada, Asia and Latin America. In the fourth quarter of 2013, we reorganized our sales force in order to provide us a greater presence within our key markets and enable us to dedicate additional resources to the IVUS peripheral market.

All of our business in Japan is served by the Company’s direct sales force and we currently support our Japanese customers through our Tokyo-based subsidiary, Volcano Japan Co., Ltd., or Volcano Japan. In addition, we distribute third party products in the coronary and peripheral markets through our direct sales channel in Japan. In Europe, we distribute our IVUS and FFR products through our subsidiary, Volcano Europe, B.V.B.A., or Volcano Europe. We sell our products directly to customers in certain European markets and utilize distributors in other geographic markets.

We have marketing agreements with leading healthcare company partners or their affiliates, including Medtronic, General Electric Company, Siemens AG, and Philips Medical Systems Nederland B.V. These agreements allow us to coordinate our marketing efforts with our strategic partners while still dealing directly with the customer.

At December 31, 2013, our global marketing team was comprised of 57 individuals, covering product management, corporate communications and programs, clinical support, and education and training. We devote significant resources to training and educating physicians in the use and benefits of our products. We also promote our products through medical society meetings attended by interventionists.

Our relationships with physician thought leaders in interventional cardiology are an important component of our selling and marketing efforts. These relationships are typically built around research collaborations that enable us to better understand and articulate the most useful features and benefits of our products, and to develop new solutions to challenges in PCI medicine.

Financial Information About Geographic Areas

The following table sets forth our revenues by geography expressed as dollar amounts (in thousands):



	Years Ended December 31,						Percentage Change (2)
	2013		2012		2011		2012 to 2013		2011 to 2012
Revenues (1):
United States	$	189,748	$	177,992	$	157,412	6.6	%	13.1	%
Japan	109,492		123,558		105,892		(11.4	)	16.7
Europe, the Middle East and Africa	71,018		57,913		60,249		22.6		(3.9	)
Rest of world	23,420		22,403		19,993		4.5		12.1
	$	393,678	$	381,866	$	343,546	3.1	%	11.2	%


(1)	Revenues are attributed to geographies based on the location of the customer, except for shipments to original equipment manufacturers, which are attributed to the country of origin of the equipment distributed.


(2)	For a year-over-year comparison analysis, refer to "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" in this Annual Report on Form 10-K.

At December 31, 2013, approximately 49% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 39% were located in Costa Rica, approximately 8% were located in Japan, and approximately 4% were located elsewhere.

At December 31, 2012, approximately 42% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 42% were located in Costa Rica, approximately 12% were located in Japan, and approximately 4% were located elsewhere.

At December 31, 2011, approximately 45% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 30% were located in Costa Rica, approximately 21% were located in Japan and approximately 4% were located elsewhere.

Our international operations expose us and our representatives, agents, and distributors to risks inherent in operating in foreign jurisdictions, including the risks described in “Risk Factors—The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.”

Competition

We compete primarily on the basis of our ability to assist in the diagnosis and treatment of vascular diseases safely and effectively, with ease and predictability of product use, adequate third-party reimbursement, brand name recognition and cost. We believe that we compete favorably with respect to these factors, although there can be no assurance that we will be able to continue to do so in the future or that new products that perform better than those we offer will not be introduced. We believe that our continued success depends on our ability to:


•	innovate and maintain scientifically advanced technology;


•	apply our technology across products and markets;


•	successfully market our products;


•	develop proprietary products;


•	successfully conduct clinical studies that expand our markets;


•	obtain and maintain patent protection for our products;


•	secure and preserve regulatory approvals;


•	achieve manufacturing efficiencies;


•	attract and retain skilled personnel; and


•	successfully add complementary offerings and technology through acquisitions, licensing agreements and strategic partnerships.

Our primary imaging competitors globally are Boston Scientific, Inc., or Boston Scientific, with its IVUS offering and St. Jude Medical, Inc., or St. Jude with its OCT offering. In Japan, we also compete with Terumo Corporation, which offers both IVUS and OCT. In the FFR market, our primary competitor is St. Jude. Because of the size of the vascular market opportunities, competitors and potential competitors have dedicated and will continue to dedicate significant resources to aggressively promote their products. New product developments that could compete with us more effectively are likely because the vascular disease market is characterized by extensive research efforts and technological progress. Competitors may develop technologies and products that are safer, more effective, easier to use or less expensive than ours.

We have encountered and expect to continue to encounter potential physician customers who, due to existing relationships with our competitors, are committed to or prefer the products offered by these competitors.

Through the Axsun subsidiary we compete on the basis of leading technology, high quality and the enhanced productivity that our products offer to customers in a variety of industries, including telecommunications, pharmaceutical manufacturing, high-speed industrial process control, chemical and petrochemical processing, medical diagnostics, and scientific discovery. Products developed by competitors based on lower performance tunable filter technology could compete on the basis of lower cost. In addition, customers may build similar functionality directly into their products. Our primary competitors in the telecommunications market include Optoplex Corporation, II-VI Incorporated and BaySpec, Inc.

We expect that competitive pressures may result in price reductions and reduced margins over time for our products. Our products may be rendered obsolete or uneconomical by technological advances developed by one or more of our competitors.

Additional information regarding the risks associated with our competitive position and environment is described in “Risk Factors—Risks Related to Our Business and Industry.”

Intellectual Property

We believe that in order to maintain a competitive advantage in the marketplace, we must develop and maintain the proprietary aspects of our technologies. We rely on a combination of patent, trademark, trade secret, copyright and other intellectual property rights and measures to aggressively protect our intellectual property.

We require our employees and consultants to execute confidentiality agreements in connection with their employment or consulting relationships with us. We also require our employees and consultants who work on our products to agree to disclose and assign to us all inventions conceived during the term of their employment, while using our property or which relate to our business. Despite measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, our competitors may independently develop similar technologies.

The medical device industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the risk of an infringement claim against us grows. While we attempt to ensure that our products and methods do not infringe other parties’ patents and proprietary rights, our competitors may assert that our products, and the methods we employ, are covered by patents held by them. In addition, our competitors may assert that future products and methods we may employ infringe their patents. If third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling the affected product. For example, in July 2010, St. Jude sued us for patent infringement alleging products that have been on the market for more than ten years infringe upon St. Jude’s patents. Additional information regarding our litigation with St. Jude is provided in Note 4 “Commitments and Contingencies – Litigation” to our consolidated financial statements and risks related to our intellectual property rights are described in “Risk Factors—Risks Related to Our Intellectual Property and Litigation.”

Patents and Trademarks

We continue to expand and protect our intellectual property position. At December 31, 2013, we had a broad portfolio of over 546 owned or licensed U.S. and international patents and over 550 pending applications for owned or licensed patents. We intend to continue to expand our intellectual property position to protect the design and use of our products, principally in the areas of IVUS, FFR, peripheral imaging and image guided therapies for the diagnosis and guidance of treatment of vascular heart disease. We continue to invest in internal research and development of concepts within our current markets and within other potential future markets. This enables us to continue to build our patent portfolio in areas of company interest.

Additionally, we utilize trademarks, trade names or logos in conjunction with the sale of our products. We currently have registered and common law trademarks in the U.S. and elsewhere in the world including, but not limited to, Aim®, Axsun®, Bi-Trieval, Centriq, ChromaFlo®, ComboMap®, ComboWire®, Core, Crux®, Crux Biomedical®, Define, Eagle Eye®, ETNA, FACT, FloMap®, FloWire®, Ginko, GlyDx®, Hi-Q, iFR, In-Line Digital®, Instant Wave-Free Ratio, Intentio, Octave, pcFM®, Precision Guided Therapy, PreView, PrimeWire®, PrimeWire Prestige®, ReFlow, Revolution®, SlyDx, s5i®, SmartMap®, SpinVision®, Sync-Rx, Trak Back®, Valet®, Verrata, VH®, VIBE®, Virtual Histology®, Visions®, Volcano®, Wavewire®, Xtract® and Zuum.

Research and Development

Our research efforts are directed towards the development of new products and technologies that expand our existing platform of capabilities and applications in support of PCI and endovascular procedures. At December 31, 2013, our research and development staff consisted of 178 full-time engineers and technicians. We have research and development staff in Rancho Cordova, California; San Diego, California; Billerica, Massachusetts; and Netanya, Israel. Our research and development staff is focused on the development of new multi-modality systems and related software, FFR consoles and guide wires, image-guided therapy systems and additional clinical applications that support our core business objectives.

Our product development process incorporates teams organized around each of our core technologies, with each team having representatives from research and development, marketing, regulatory, quality, clinical affairs and manufacturing. Our team sets development priorities based on communicated customer needs. The feedback received from beta testing is incorporated into successive design iterations until a new product is ready for release.

Our clinical studies are generally post-marketing studies using FDA-cleared and/or CE-marked products intended to provide data regarding diagnostic effectiveness and disease treatment outcomes, as well as the potential value of our products in providing therapy in markets and indications such as stent placement and optimization, plaque assessment and therapy guidance in the coronary and carotid arteries.

Our research and development expenses were $69.2 million, $55.5 million, and $53.1 million in 2013, 2012 and 2011, respectively. These totals include expenses related to research and development, clinical and regulatory affairs.

During 2013, we announced a strategic reprioritization initiative that included the discontinuation of development programs for our Forward-Looking IVUS, Forward-Looking Intra-Cardiac Echo and OCT intravascular programs.

Manufacturing

Our manufacturing facilities are located in Coyol, Costa Rica, and Rancho Cordova, California. In Costa Rica we manufacture IVUS catheters and FFR guide wires. In California, we produce multi-modality consoles, FFR consoles, IVUS catheters and FFR guide wires. We are in the process of transitioning all of our disposable manufacturing activities to our Costa Rica facility. In addition, we have a manufacturing facility in Billerica, Massachusetts that produces our optical monitors, laser and non-laser light sources, and optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors.

Our console manufacturing strategy is to use third-party manufacturing partners to produce circuit boards and mechanical sub-assemblies. We perform incoming inspection, final assembly and product testing to assure quality control. Our manufacturing strategy for our single-procedure disposable products is to use third-party manufacturing partners for certain proprietary components used in the final assembly. We perform incoming inspection on these components, assemble them into finished devices and test the final product to assure quality control. A portion of the scanner and sensor manufacturing is performed at third party contractors’ facilities using automated assembly processes and equipment. We are dependent on these third parties for day-to-day control and protection of their systems. We conduct the remaining process operations including final testing on the scanners and sensors at our Rancho Cordova facility. We aim to continuously improve our manufacturing processes to reduce costs and improve margins. We believe that by moving to PC-based consoles and improving our manufacturing processes through broad adoption of lean principles, selective use of automation and continuous design enhancements, we will be able to continue to reduce the cost to manufacture our consoles and single-procedure disposable products.

We manufacture our products in accordance with FDA required global regulations. We believe we are in material compliance with the U.S., European, Japanese, and Costa Rican regulations. The FDA and the European Union Notified Body have both inspected our manufacturing facilities in Rancho Cordova during the last 20 months. The European Union Notified Body inspected our manufacturing facilities in Costa Rica in 2012. The control systems for our optical and laser products are certified under ISO 9001:2008.

Government Regulation

Our medical device products are subject to extensive and rigorous regulation by the FDA, as well as other federal and state regulatory bodies in the U.S. and comparable authorities in other countries. We currently market our products in the U.S. under authorizations from the FDA, which are based on clearances of pre-market notification submissions, or 510(k), or approval of premarket approval applications, or PMA. If we seek to market new products, or to market new indications for our existing products, we will be required to obtain 510(k) clearance or PMA approval, as applicable. In 2011, the FDA recommended reforms to the 510(k) pre-market notification process. Although the FDA made some limited changes to its guidance, policies and regulations pertaining to the review and regulation of devices such as ours which seek and receive market clearance through the 510(k) pre-market notification process, additional reforms are likely. These reforms, when implemented, could impose additional regulatory requirements upon us which could delay our ability to obtain new clearances, increase the costs of compliance, or restrict our ability to maintain our current clearances.

FDA regulations govern the following activities that we perform, or that are performed on our behalf, to ensure that medical products distributed domestically or exported internationally are safe and effective for their intended uses:


•	product design, development and manufacture;


•	product safety, testing, labeling and storage;


•	clinical trials;


•	record keeping;


•	product marketing, sales and distribution; and


•	post-marketing safety surveillance, complaint handling, investigating reports of adverse events and malfunctions, reporting of serious injuries, including deaths, repairs, and recall of products.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may be preceded by notices of deficiencies or noncompliance via inspectional observations on form FDA-483, or 483s, general correspondence known as “Untitled Letters,” and more formal letters called “Warning Letters.” If we do not adequately and appropriately address the cited deficiencies or noncompliance, including the repair, replacement or recall of affected products if necessary, within a reasonable period of time, the FDA may take any one or more the following actions, which could adversely affect our business:


•	order a mandatory recall;


•	physically seize the affected products;


•	seek a court-ordered injunction and consent decree that could include, but may not be limited to, operating restrictions, additional government oversight of our operations, specific corrective and preventative actions, and partial suspension or total shutdown of production;


•	suspend review or refuse to clear pending 510(k) submissions or approvals pending for new products, new intended uses, or modifications to existing products;


•	after notice and an opportunity for a hearing, withdraw 510(k) clearances or PMA approvals that have already been granted;


•	impose civil monetary penalties; and


•	initiate criminal prosecution.

See “Risk Factors—Risks Related to Government Regulation.”

Employees

At December 31, 2013, we had over 1,800 full time employees. None of our employees are represented by a labor union and we believe our employee relations are good.

Seasonality

Our business is generally seasonal in nature and, historically, demand for our products has been the highest in the fourth quarter. Our working capital requirements vary from period to period depending on manufacturing volumes, the timing of deliveries and the payment cycles of our customers.

Corporate Information

We were incorporated in the state of Delaware in January 2000. Our principal executive offices are located at 3721 Valley Centre Drive, Suite 500, San Diego, California, 92130. Our phone number is (800) 228-4728 and our website address is www.volcanocorp.com.

Available Information

Our corporate website is www.volcanocorp.com and our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding us, at www.sec.gov. These reports and other information concerning the company may also be accessed at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The contents of these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.



Item 1A.	Risk Factors

Risks Related to Our Business and Industry

We are dependent on the success of our consoles and catheters and cannot be certain that IVUS and FFR technology or our IVUS and FFR products will achieve the broad acceptance necessary for us to sustain a profitable business.

Our revenues are primarily derived from sales of our IVUS and FFR products, which include our multi-modality consoles and our single-procedure disposable catheters and fractional flow reserve wires. IVUS technology is widely used in Japan for determining the placement of stents in patients with coronary disease but the penetration rate in the United States and Europe for the same type of procedure is relatively low. Our wires are used to measure the pressure and flow characteristics of blood around plaque, enabling physicians to gauge the physiological impact of blood flow and pressure. We expect that sales of our IVUS and FFR products will continue to account for a majority of our revenues for the foreseeable future, however it is difficult to predict the penetration and future growth rate (if any) or size of the market for IVUS and FFR technology. The expansion of the IVUS and FFR markets depends on a number of factors, such as:


•	physicians accepting the benefits of the use of IVUS and FFR in conjunction with angiography;


•	physician experience with IVUS and FFR products either used alone or jointly used in a single percutaneous coronary intervention, or PCI;


•	the availability of training necessary for proficient use of IVUS and FFR products, as well as willingness by physicians to participate in such training;


•	the additional procedure time required for use of IVUS and FFR compared to the perceived benefits;


•	the perceived risks generally associated with the use of our products and procedures, especially our new products and procedures;


•	the placement of our products in treatment guidelines published by leading medical organizations;


•	the availability of alternative treatments or procedures that are perceived to be or are more effective, safer, easier to use or less costly than IVUS and FFR technology;


•	hospitals' willingness, and having sufficient budgets, to purchase our IVUS and FFR products;


•	the size and growth rate of the PCI market in the major geographies in which we operate;


•	the availability of adequate reimbursement in the United States and other countries; and


•	the success of our marketing efforts and publicity regarding IVUS and FFR technology.

Even if IVUS and FFR technology gain wide market acceptance, our IVUS and FFR products may not adequately address market requirements and may not continue to gain or maintain market acceptance among physicians, healthcare payors and the medical community due to factors such as:


•	the lack of perceived benefit from information related to plaque composition available to the physician through use of our IVUS products, including the ability to identify calcified and other forms of plaque;


•	the lack of perceived benefit from information related to pressure and flow characteristics of blood around plaque available to the physician through the use of our FFR products;


•	the actual and perceived ease of use of our IVUS and FFR products;


•	the quality of the images rendered by our IVUS products;


•	the quality of the measurements provided by our FFR products;


•	the cost, performance, benefits and reliability of our IVUS and FFR products relative to competing products and services;


•	the lack of perceived benefit of integration of our IVUS and FFR products into the cath lab; and


•	the extent and timing of technological advances.

If IVUS and FFR technology generally, or our IVUS and FFR products specifically, do not gain or continue to gain wide market acceptance, we may not be able to achieve our anticipated growth, revenues or profitability and our results of operations would suffer.

The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.

We derive, and anticipate that we will continue to derive, a significant portion of our revenues from operations in Japan and Europe. As we expand internationally, we will need to hire, train and retain qualified personnel for our manufacturing and direct sales efforts, retain distributors and train their and our manufacturing, sales and other personnel in countries where language, cultural or regulatory impediments may exist. We cannot ensure that distributors, physicians, regulators or other government agencies outside the United States will accept our products, services and business practices. Further, we purchase and manufacture some components in foreign markets. The manufacture, sale and shipment of our products and services across international borders, as well as the purchase of components from non-U.S. sources, subject us to extensive U.S. and foreign governmental trade regulations. Current or future trade, social and environmental regulations or political issues could restrict the supply of resources used in production or increase our costs. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations in connection with our international operations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations in connection with our international operations could result in the disruption of our manufacturing, shipping and sales activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions, including:


•	our ability to obtain, and the costs associated with obtaining, U.S. export licenses and other required export or import licenses or approvals;


•	changes in duties and tariffs, taxes, trade restrictions, license obligations and other non-tariff barriers to trade;


•	burdens of complying with a wide variety of foreign laws and regulations related to healthcare products;


•	costs of localizing product and service offerings for foreign markets;


•	business practices favoring local companies;


•	longer payment cycles and difficulties collecting receivables or otherwise exercising remedies (including by foreclosing on the applicable products sold) against defaulting counterparties through foreign legal systems;


•	difficulties in enforcing or defending agreements and intellectual property rights;


•	differing local product preferences, including as a result of differing reimbursement practices;

•

possible failure to comply with anti-bribery laws such as the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, even though non-compliance could be inadvertent (see, for example, the discussion under “-Risks related to government regulation-We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.”);


•	fluctuations in foreign currency exchange rates and their impact on our operating results; and


•	changes in foreign political or economic conditions.

In addition, we face risks associated with potential increased costs associated with overlapping tax structures, including the tax costs associated with repatriating cash. For example, President Obama's administration has announced legislative proposals to tax profits of U.S. companies earned abroad. We derive a significant portion of our revenues from our international operations, and while it is impossible for us to predict whether these and other proposals will be implemented, or how they will ultimately impact us, they may materially impact our results of operations if, for example, any future potential profits earned abroad are subject to U.S. income tax, or we are otherwise disallowed deductions as a result of any such profits.

We cannot ensure that one or more of these factors will not harm our business. Any material decrease in our international revenues or inability to expand our international operations would adversely impact our revenues, results of operations and financial condition.

Declines in the number of PCI procedures performed for any reason will adversely impact our business.

Our IVUS and FFR products are used in connection with procedures. Physicians may choose to perform fewer PCI procedures. For example, recently the number of PCI procedures declined in the United States and Japan, in part due to concerns regarding the efficacy of therapeutic treatment options, the long-term efficacy of drug-eluting stents, economic

constraints, reduced rates of restenosis and concerns by clinicians and payers regarding the appropriateness of conducting PCI procedures. If the number of PCI procedures continues to decline, the need for IVUS and FFR procedures could also decline, which would adversely impact our operating results and our business prospects.

We have only achieved profitability in 2010, 2011 and 2012. We cannot assure you that we will achieve and sustain profitability in 2014 or in future periods.

We were formed in January 2000 and have been profitable, on a full-year basis, only in 2010, 2011 and 2012. To the extent that we are able to increase revenues, we expect our operating expenses will also increase as we expand our business to meet anticipated growing demand for our products, devote resources to our sales, marketing and research and development activities and satisfy our debt service obligations. If we are unable to increase our revenues or reduce our cost of revenues and our operating expenses, we may not achieve profitability in 2014 or in the future. We expect to experience quarterly fluctuations in our revenues due to the timing of capital purchases by our customers and to a lesser degree the seasonality of disposable consumption by our customers. Additionally, expenses will fluctuate as we make future investments in research and development, selling and marketing and general and administrative activities, including as a result of new product introductions, transitioning from distributor arrangements to a direct sales force in different markets, satisfying our debt service obligations, and fund our litigation costs. This will cause us to experience variability in our reported earnings and losses in future periods. You should not rely on our operating results for any prior quarterly or annual period as an indication of our future operating performance.

We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, and we may incur additional indebtedness in the future, which could adversely affect our business, financial condition and results of operations.

We have a significant amount of indebtedness, including $485.0 million in aggregate principal amount of indebtedness under our 2.875% Convertible Senior Notes due 2015, or the 2015 Notes ($25.0 million), and our 1.75% Convertible Notes due 2017, or the 2017 Notes ($460.0 million). Our ability to make payments on, and to refinance, our indebtedness, including the 2015 Notes and the 2017 Notes, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of the 2015 Notes and the 2017 Notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the 2015 Notes or the 2017 Notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the 2015 Notes and 2017 Notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to execute any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions. In addition, in the event of a default under the 2015 Notes or the 2017 Notes, the holders and/or the trustee under the indenture governing the 2015 Notes or the 2017 Notes, as applicable, may accelerate our payment obligations under the applicable notes, which could have a material adverse effect on our business, financial condition and results of operations. Any such acceleration may also trigger an event of default under the other series of notes. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.

In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:


•	make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;


•	limit our flexibility in planning for, or reacting to, changes in our business and our industry;


•	place us at a competitive disadvantage compared to our competitors who have less debt; and


•	limit our ability to borrow additional amounts for working capital, capital expenditures, research and development efforts, acquisitions, debt service requirements, execution of our business strategy or other purposes.

Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, which we are not prohibited from doing under the terms of the indentures governing the 2015 Notes and the 2017 Notes, the risks related to our business and our ability to service our indebtedness would increase.

Competition from companies, particularly those that have longer operating histories and greater resources than us, may harm our business.

The medical device industry, including the market for IVUS and FFR products, is highly competitive, subject to rapid technological change and significantly affected by new product introductions and market activities of other participants. As a result, even if the size of the IVUS and FFR market increases, we can make no assurance that our revenues will increase. In addition, as the markets for medical devices, including IVUS and FFR products, develop, additional competitors could enter the market. To compete effectively, we will need to continue to demonstrate that our products are attractive relative to alternative devices and treatments. We believe that our continued success depends on our ability to:


•	innovate and maintain scientifically advanced technology;


•	apply our technology across products and markets;


•	successfully market our products;


•	develop proprietary products;


•	successfully conduct clinical studies that expand our markets;


•	obtain and maintain patent protection for our products;


•	secure and preserve regulatory approvals;


•	achieve manufacturing efficiencies;


•	attract and retain skilled personnel; and


•	successfully add complementary offerings and technology through acquisitions, licensing agreements and strategic partnerships.

With respect to our IVUS products, our primary competitor is Boston Scientific, Inc. Our FFR products compete with the products of St. Jude Medical, Inc., or St. Jude. We also compete in Japan with respect to IVUS products with Terumo Corporation, or Terumo. Boston Scientific, St. Jude, Terumo and other potential competitors who are or may be substantially larger than us may enjoy competitive advantages, including:


•	more established distribution networks;


•	entrenched relationships with physicians;


•	products and procedures that are less expensive;


•	broader ranges of products and services that may be sold in bundled arrangements;


•	greater experience in launching, marketing, distributing and selling products;


•	greater experience in obtaining and maintaining FDA and other regulatory clearances and approvals;


•	established relationships with healthcare providers and payors; and


•	greater financial and other resources for product development, sales and marketing, acquisitions of products and companies, and intellectual property protection.

For these and other reasons, we may not be able to compete successfully against our current or potential future competitors, and sales of our IVUS and FFR products may decline.

Failure to innovate may adversely impact our competitive position and may adversely impact our ability to drive price increases for our products and our product revenues.

Our future success will depend upon our ability to innovate new products and introduce enhancements to our existing products in order to address the changing needs of the marketplace. We also rely on new products and product enhancements to attempt to drive price increases for our products in our markets. Frequently, product development programs require assessments to be made of future clinical need and commercial feasibility, which are difficult to predict. Customers may forego purchases of our products and purchase our competitors' products as a result of delays in introduction of our new products and enhancements, failure to choose correctly among technical alternatives or failure to offer innovative products or enhancements at competitive prices and in a timely manner. In addition, announcements of new products may result in a delay in or cancellation of purchasing decisions in anticipation of such new products. We may not have adequate resources to introduce new products in time to effectively compete in the marketplace. Any delays in product releases may negatively affect our business.

We also compete with new and existing alternative technologies that are being used to penetrate the worldwide vascular imaging market without using IVUS technology. These products, procedures or solutions could prove to be more effective, faster, safer or less costly than our IVUS products. Technologies such as angiography, angioscopy, multi-slice computed tomography, intravascular magnetic resonance imaging, or MRI, electron beam computed tomography, and MRI with contrast agents are being used in lieu of or for imaging the vascular system.

We also develop and manufacture laser and non-laser light sources, optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors with applications in telecommunications, pharmaceutical manufacturing, high-speed industrial process control, and chemical and petrochemical processing, medical diagnostics, and scientific discovery. Products developed by competitors based on tunable filter technology could compete on the basis of lower cost and other factors. In addition, customers may build similar functionality directly into their products, which in turn could decrease the demand for our products.

The introduction of new products, procedures or clinical solutions by competitors may result in price reductions, reduced margins, loss of market share and may render our products obsolete. We cannot guarantee that these alternative technologies will not be commercialized and become viable alternatives to our products in the future, and we cannot guarantee that we will be able to compete successfully against them if they are commercialized.

The successful continuing development of our existing and new products depends on us maintaining strong relationships with physicians.

The research, development, marketing and sales of our products are dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding the development, marketing and sale of our products. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, our existing and new products may not be developed and marketed in line with the needs and expectations of the professionals who use or would use and support our products and the development and marketing of our products could suffer, which could have a material adverse effect on our business and results of operations.

Delays or failures in planned product introductions may adversely affect our business and negatively impact future revenues.

We are currently developing new products as well as product enhancements with respect to our existing products. We have in the past experienced, and may again in the future experience, delays and failures in various phases of product development and commercial launch, including during research and development, manufacturing, limited release testing, marketing and customer education efforts. In particular, developing and integrating products and technologies of acquired businesses is time consuming and has in the past resulted, and may again in the future result, in longer developmental timelines than we initially anticipated or our discontinuing our development or commercialization efforts with respect to the acquired products and technologies. Any delays in our product launches or our discontinuing our development or commercialization efforts with respect to any product candidates or products may significantly impede our ability to successfully compete in our markets and may reduce our revenues.

We and our present and future collaborators may fail to develop or effectively commercialize products covered by our present and future collaborations if:


•	our collaborators become competitors of ours or enter into agreements with our competitors;


•	we do not achieve our objectives under our collaboration agreements;


•	we are unable to manage multiple simultaneous product discovery and development collaborations;


•	we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators;


•	we or our collaborators are unable to obtain patent protection for the products or proprietary technologies we develop in our collaborations; or


•	we or our collaborators encounter regulatory hurdles that prevent commercialization of our products.

In addition, conflicts may arise with our collaborators, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any conflicts arise with our existing or future collaborators, they may act in their self-interest, which may be adverse to our best interest.

If we or our collaborators are unable to develop or commercialize products, or if conflicts arise with our collaborators, we will be delayed or prevented from developing and commercializing products, which will harm our business and financial results.

If the clinical studies that we sponsor or co-sponsor are unsuccessful, or clinical data from studies conducted by other industry participants are negative, we may not be able to develop or increase penetration in identified markets and our business prospects may suffer.

We sponsor or co-sponsor several clinical studies to demonstrate the benefits of our products in current markets where we are trying to increase use of our products and in new markets. Implementing a study is time consuming and expensive, and the

outcome is uncertain. The completion of any of these studies may be delayed or halted for numerous reasons, including, but not limited to, the following:


•	the death of one or more patients during a clinical study for reasons that may or may not be related to our products, including the advanced stage of their disease or other medical problems;


•	regulatory inspections of manufacturing facilities, which may, among other things, require us or a co-sponsor to undertake corrective action or suspend the clinical studies;


•	changes in governmental regulations or administrative actions;


•	adverse side effects in patients, including adverse side effects from our or a co-sponsor's drug candidate or device;


•	the FDA institutional review boards or other regulatory authorities do not approve a clinical study protocol or place a clinical study on hold;


•	patients do not enroll in a clinical study or do not follow up at the expected rate;


•	our co-sponsors do not perform their obligations in relation to the clinical study or terminate the study;


•	third-party clinical investigators do not perform the clinical studies on the anticipated schedule or consistent with the clinical study protocol and good clinical practices, or other third-party organizations do not perform data collection and analysis in a timely or accurate manner; and


•	the interim results of the clinical study are inconclusive or negative, and the study design, although approved and completed, is inadequate to demonstrate safety and efficacy of our products.

Some of the studies that we co-sponsor are designed to study the efficacy of a third-party's drug candidate or device. Such studies are designed and controlled by the third party and the results of such studies will largely depend upon the success of the third-party's drug candidate or device. These studies may be terminated before completion for reasons beyond our control such as adverse events associated with a third-party drug candidate or device. A failure in such a study may have an adverse impact on our business by either the attribution of the study's failure to our technology or our inability to leverage publicity for proper functionality of our products as part of a failed study.

Clinical studies may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient enrollment in clinical studies and completion of patient follow-up depend on many factors, including the size of the patient population, the study protocol, the proximity of patients to clinical sites, eligibility criteria for the study and patient compliance. For example, patients may be discouraged from enrolling in our clinical studies if the applicable protocol requires them to undergo extensive post-treatment procedures or if they are persuaded to participate in different contemporaneous studies conducted by other parties. Delays in patient enrollment or failure of patients to continue to participate in a study may result in an increase in costs, delays or the failure of the study. Such events may have a negative impact on our business by making it difficult to penetrate or expand certain identified markets. Further, if we are forced to contribute greater financial and clinical resources to a study, valuable resources will be diverted from other areas of our business.

Negative results from clinical studies conducted by other industry participants could harm our results.

Divestitures of any of our businesses or product lines may materially adversely affect our business, results of operations and financial condition.

We continue to evaluate the performance of all of our businesses and may sell a business or product line. Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our business, results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a business or product line.

In connection with our recent acquisitions we may experience difficulty with integration, and if we choose to acquire any new businesses, products or technologies, we may experience difficulty in the identification or integration of any such acquisition, and our business may suffer.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing customer demands, competitive pressures and technologies. Accordingly, we have acquired, and may in the future acquire, complementary businesses, products or technologies instead of developing them ourselves. We recently acquired Sync-Rx, Ltd., or Sync-Rx, and Crux Biomedical, Inc., or Crux, as well as the Pioneer Plus re-entry catheter product line, or Pioneer, from Medtronic, Inc. We can provide no assurance that the expected benefits of the Sync-Rx, Crux or Pioneer acquisitions will be realized. Furthermore, we have agreed in the merger agreement with Crux that, in the event that we have not achieved the applicable commercial launch for one of the Crux products by June 30, 2016 (which date may be extended upon a specified payment by us to June 30, 2017), we will license back to the former Crux stockholders certain intellectual property rights relating to that product, which could adversely affect our business. We do not know if we will identify or complete any

additional acquisitions, or whether we will be able to successfully integrate any acquired business, product or technology or retain key employees, including in connection with our acquisitions of Sync-Rx and Crux, or Pioneer. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we are unable to integrate any acquired businesses, products or technologies effectively, our business will suffer. We have entered, and may in the future enter, markets through our acquisitions that we are not familiar with and have no experience managing. If we fail to integrate these operations into our business, our resources may be diverted from our core business and this could have a material adverse effect on our business, financial condition and results of operations.

Our business has become more decentralized geographically through our acquisitions and this may expose us to operating inefficiencies across these diverse locations, including difficulties and unanticipated expenses related to the integration of departments, information technology systems, and accounting records and maintaining uniform standards, such as internal controls, procedures and policies. In addition, we have, and in the future may increase, our exposure to risks related to business operations outside the United States due to our acquisitions.

We may also encounter risks, costs and expenses associated with any undisclosed or other unanticipated liabilities, use more cash and other financial resources on integration and implementation activities than we expect or incur significant costs and expenses related to litigation with counterparties to such transactions, such as the lawsuit filed against us in federal district court on March 27, 2012 alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on our acquisition of CardioSpectra, Inc. in 2007. In addition, any amortization or other charges resulting from acquisitions, including write-offs relating to goodwill and other intangible assets, could negatively impact our operating results.

If our products and technologies are unable to adequately identify the plaque that is most likely to rupture and cause a coronary event, we may not be able to develop a market for our vulnerable plaque products or expand the market for existing products.

We are utilizing substantial resources in the development of products and technologies to aid in the identification, diagnosis and treatment of the plaque that is most likely to rupture and cause a coronary event, or vulnerable plaque. The Providing Regional Observations to Study Predictors of Events in the Coronary Tree, or PROSPECT, study demonstrated the ability of IVUS and virtual histology, or VH, to stratify lesions according to risk. However, no randomized controlled trial has been performed to assess the benefit of treating or deferring treatment in these stratified lesions. If we are unable to develop products or technologies that can identify vulnerable plaque, a market for products to identify vulnerable plaque may not materialize and our business may suffer.

Fluctuations in foreign currency exchange rates could result in declines in our reported revenues and earnings.

Even though we engage in foreign currency hedging arrangements for certain of our foreign currency exchange exposures, foreign currency fluctuations may adversely affect our revenues and earnings. During the year ended December 31, 2013, 26.8% and 17.8% of our revenues were denominated in Japanese yen and euro, respectively, and 10.5% and 9.3% of our operating expenses were denominated in yen and euro, respectively. We enter into derivative financial instruments, principally forward contracts, to manage a portion of the foreign currency risk related to transactions in non-functional currencies. Commencing in April 2013, we initiated a hedging program that broadened our use of foreign currency forward contracts to manage portions of our foreign currency risk related to certain forecasted intercompany inventory transactions with our foreign subsidiaries and expand the application of forward contracts to additional non-functional currency transactions worldwide. We cannot be assured our hedges will be effective or that the costs of the hedges will not exceed their benefits. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the yen and the euro, could result in material amounts of cash being required to settle the hedge transactions or could adversely affect our financial results. In periods of a strengthening U.S. dollar relative to the yen or the euro, we would record less revenue and our results of operations could be negatively impacted.

General national and worldwide economic conditions may materially and adversely affect our financial performance and results of operations.

Our operations and performance depend significantly on national and worldwide economic conditions and the resulting impact on purchasing decisions and the level of spending on our products by customers in the geographic markets in which our IVUS and FFR and other products are sold or distributed. These economic conditions remain challenging in many countries and regions, including without limitation the United States, Japan, Europe, the Middle East and Africa, where we have generated most of our revenues. In the United States, the recovery from the recent recession has been below historic averages and the unemployment rate is expected to remain high for some time. The challenging global economic conditions have also led to concerns over the solvency of certain European Union member states, including Greece, Ireland, Italy, Portugal and Spain. The political unrest in the Middle East may have adverse consequences to the global economy or to our customers in the Middle East, which could negatively impact our business. In any event, uncertainty about future economic conditions makes it

difficult for us to forecast operating results and to make decisions about future investments. If our customers do not obtain or do not have access to the necessary capital to operate their businesses, or are otherwise adversely affected by the deterioration in national and worldwide economic conditions, this could result in reductions in the sales of our products, longer sales cycles and slower adoption of new technologies by our customers, which would materially and adversely affect our business. We experienced declines in the number of PCI procedures performed in the U.S. and in sales of our non-medical products to telecommunications and industrial companies during 2013 due to, in part, the then-prevailing economic conditions. In addition, our customers', distributors' and suppliers' liquidity, capital resources and credit may be adversely affected by their relative ability or inability to obtain capital and credit, which could adversely affect our ability to collect on our outstanding invoices or lengthen our collection cycles or otherwise exercise remedies (including by foreclosing on the applicable products sold) against a defaulting customer or distributor, adversely affect our ability to distribute our products or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters.

We have invested a portion of our excess cash in money market funds and corporate debt securities issued by banks and corporations. The interest paid on these types of investments and the value of certain securities may decline. While our investment portfolio has experienced reduced yields, we have not yet experienced a deterioration of the credit quality of our holdings or other material adverse effects. There can be no assurances that our investment portfolio will not experience any such deterioration in credit quality or other material adverse effects in future periods, or that national and worldwide economic conditions will not worsen.

Quality problems with our processes and products could harm our reputation for producing high-quality products and erode our competitive advantage, sales and market share.

The manufacture of our products is a highly exacting and complex process, due in part to strict regulatory requirements. Failure to manufacture our products in accordance with product specifications could result in increased costs, lost revenues, field corrective actions, customer dissatisfaction or voluntary product recalls, any of which could harm our profitability and commercial reputation. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors. Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our products. If we fail to meet these standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high-quality devices will be harmed, our competitive advantage could be damaged, and we could lose customers and market share.

Our manufacturing operations are dependent upon third-party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.

We rely on a number of sole source suppliers to supply transducers, substrates and processing for our scanners used in our catheters. We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers and substrates would be available. We are not parties to supply agreements with these suppliers but instead use purchase orders as needed.

Our reliance on sole source suppliers for these and other materials, components, products and processing subjects us to a number of risks that could impact our ability to manufacture our products and harm our business, including:


•	inability to obtain adequate supply in a timely manner or on commercially reasonable terms;


•	interruption or delayed delivery of supply resulting from our suppliers' difficulty in accessing financial or credit markets or otherwise securing cash and capital resources;


•	interruption of supply resulting from modifications to, or discontinuation of, a supplier's operations;


•	delays in product shipments resulting from uncorrected defects, reliability issues or a supplier's variation in a component;


•	uncorrected quality and reliability defects that impact performance, efficacy and safety of products from replacement suppliers;


•	price fluctuations due to a lack of long-term supply arrangements with our suppliers for key components;


•	difficulty identifying and qualifying alternative suppliers for components in a timely manner;


•	production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and


•	delays in delivery by our suppliers due to changes in demand from us or their other customers.

In addition, because we do not have long term supply agreements with some of our suppliers, we are subjected to the following risks:


•	unscheduled price increases;


•	lack of notice when the materials used to manufacture are not available; and


•	lack of notice of discontinued operations or manufacturing.

We also utilize lean manufacturing processes that attempt to optimize the timing of our inventory purchases and supply levels of our inventories. Any significant delay or interruption in the supply of components or materials, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner or to plan for sufficient inventory, could impair our ability to manufacture our products or meet the demand of our customers and harm our business. Identifying and qualifying additional or replacement suppliers for any of the components or materials used in our products, or obtaining additional inventory, if required, may not be accomplished quickly or at all and could involve significant additional costs. Any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components or materials used to manufacture our products or sufficient inventory would limit our ability to manufacture our products and could therefore have a material adverse effect on our business, financial condition and results of operations.

We may encounter a number of challenges relating to the management and operation of our newly constructed Costa Rica facilities, and the expansion has and will continue to increase our fixed costs, which may have a negative impact on our financial results and condition.

In 2010, we, through a wholly owned subsidiary, entered into a series of agreements to acquire real property and design and build manufacturing facilities in Costa Rica. Prior to 2012, we had never operated manufacturing facilities outside the United States, and cannot assure you that we will be able to successfully operate these facilities in an efficient or profitable manner. In addition, we are continuing to transfer our manufacturing processes, technology and know-how to our Costa Rica facilities. If we are unable to operate these facilities or successfully transfer our manufacturing processes, technology and know-how in a timely and cost-effective manner, or at all, then we may experience disruptions in our operations, which could negatively impact our business and financial results.

During 2012 we received regulatory approval to ship product from our Costa Rica facility to the United States, Japan and certain countries in Europe. We will need to obtain a number of additional regulatory approvals prior, and subsequent, to shipping products from this facility to other geographies. Our ability to obtain these approvals may be subject to additional costs and possible delays beyond what we initially plan for. In addition, our manufacturing facilities, and those of our suppliers, must comply with applicable regulatory requirements. Failure of our manufacturing facilities to comply with regulatory and quality requirements would harm our business and our results of operations.

Our ability to operate this facility successfully will greatly depend on our ability to hire, train and retain an adequate number of employees, in particular employees with the appropriate level of knowledge, background and skills. We will compete with several other medical device companies with manufacturing facilities in Costa Rica to hire these skilled employees. Should we be unable to hire such employees, and an adequate number of them, our business and financial results could be negatively impacted.

The expansion of the manufacturing facilities has and will continue to increase our fixed costs. If we experience a demand in our products that exceeds our manufacturing capacity, we may not have sufficient inventory to meet our customers' demands, which would negatively impact our revenues. If the demand for our products decreases or if we do not produce the output we plan or anticipate after the facilities are operational, we may not be able to spread a significant amount of our fixed costs over the production volume, thereby increasing our per unit fixed cost, which would have a negative impact on our financial condition and results of operations.

We also face particular commercial, jurisdictional and legal risks associated with our operations in Costa Rica. The success of this relationship and our activities in Costa Rica in general are subject to the economic, political and legal conditions or developments in Costa Rica.

Disruptions or other adverse developments during the operations of our Costa Rica facilities could materially adversely affect our business. If our Costa Rica operations are disrupted for any reason, we may be forced to locate alternative manufacturing facilities, including facilities operated by third parties. Disruptions may include, but are not limited to: changes in the legal and regulatory environment in Costa Rica; slowdowns or work stoppages within the Costa Rican customs authorities; acts of God (including but not limited to potential disruptive effects from an active volcano near the facility or earthquakes, hurricanes and other natural disasters); and other issues associated with significant operations that are remote from our headquarters and operations centers. Additionally, continued growth in product sales could outpace the ability of our Costa Rican operation to supply products on a timely basis or cause us to take actions within our manufacturing operations, which increase costs, complexity and timing. Locating alternative facilities would be time-consuming, would disrupt our production

and cause shipment delays and could result in damage to our reputation and profitability. Additionally, we cannot assure you that alternative manufacturing facilities would offer the same cost structure as our Costa Rica facility.

If our facilities or systems are damaged or destroyed, we may experience delays that could negatively impact our revenues or have other adverse effects.

Our facilities may be affected by natural or man-made disasters. If one of our facilities were affected by a disaster, we would be forced to rely on third-party manufacturers or to shift production to another manufacturing facility. In such an event, we would face significant delays in manufacturing which would prevent us from being able to sell our products. In addition, our insurance may not be sufficient to cover all of the potential losses and may not continue to be available to us on acceptable terms, or at all. Furthermore, although our computer and communications systems are protected through physical and software safeguards, they are still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events, and any failure of these systems to perform for any reason and for any period of time could adversely impact our ability to operate our business.

We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents and short-term and long-term available-for-sale investments will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need to obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to act on opportunities to acquire or invest in complementary businesses, products or technologies. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:


•	market acceptance of our products;


•	the revenues generated by our products;


•	the need to adapt to changing technologies and technical requirements, and the costs related thereto;


•	the costs associated with expanding our manufacturing, marketing, sales and distribution efforts;


•	the existence and timing of opportunities for expansion, including acquisitions and strategic transactions; and


•	costs and fees associated with defending existing or potential litigation.

In addition, we are required to make periodic interest payments to the holders of the 2015 Notes and the 2017 Notes and to make payments of principal upon conversion or maturity. We may also be required to purchase the 2015 Notes or the 2017 Notes for cash upon the occurrence of a change of control or certain other fundamental changes involving us. If our capital resources are insufficient to satisfy our debt service or liquidity requirements, we may seek to sell additional equity or debt securities or to obtain debt financing. The sale of additional equity or debt securities, or the use of our stock in an acquisition or strategic transaction, would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing and our significant historical losses and the current national and global financial conditions may prevent us from obtaining additional funds on favorable terms, if at all.

We are dependent on our collaborations, and events involving these collaborations or any future collaborations could delay or prevent us from developing or commercializing products.

The success of our current business strategy and our near- and long-term viability will depend on our ability to execute successfully on existing strategic collaborations and to establish new strategic collaborations. Collaborations allow us to leverage our resources and technologies and to access markets that are compatible with our own core areas of expertise. To penetrate our target markets, we may need to enter into additional collaborative agreements to assist in the development and commercialization of future products. Establishing strategic collaborations is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position or our internal capabilities. Our discussions with potential collaborators may not lead to the establishment of new collaborations on favorable terms or at all.

We have collaborations with a number of entities or their affiliates, including Medtronic, Inc., The Cleveland Clinic Foundation, Siemens AG, Philips Medical Systems Nederland B.V. and General Electric Company. In each collaboration, we combine our technology or core capabilities with those of the third party to permit either greater penetration into markets or to enhance the functionality of our current and planned products. We have limited control over the amount and timing of resources that our current collaborators or any future collaborators devote to our collaborations or potential products. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop or commercialize products that arise out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. Moreover, in the event of termination of a collaboration agreement, we may not realize the intended benefits or we may not be able to replace the arrangement on comparable terms or at all.

If the third-party distributors that we rely on to market and sell our products are not successful, we may be unable to increase or maintain our level of revenues.

A portion of our revenue is generated by our third-party distributors, especially in international markets. If these distributors cease or limit operations or experience a disruption of their business operations, or are not successful in selling our products, we may be unable to increase or maintain our level of revenues, and any such developments could negatively affect our international sales strategy. Over the long term, we intend to grow our business internationally, and to do so we will need to attract additional distributors to expand the territories in which we do not directly sell our products. Our distributors may not commit the necessary resources to market and sell our products. If current or future distributors do not continue to distribute our products or do not perform adequately or if we are unable to locate distributors in particular geographic areas, we may not realize revenue growth internationally.

Our reported or future financial results could be adversely affected by the application of existing or future accounting standards.

U.S. generally accepted accounting principles and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new guidance or the application of existing guidance to changes in our business could have a significant adverse effect on our financial results. For example, the accounting for convertible debt securities, and the accounting for the convertible note hedge transactions and the warrant transactions we entered into in connection with the offerings of the 2015 Notes and the 2017 Notes, is subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. We cannot predict if or when any such change could be made, and any such change could have an adverse impact on our reported or future financial results. In addition, in the event the conversion features of the 2015 Notes or the 2017 Notes are triggered, we could be required under applicable accounting standards to reclassify all or a portion of the outstanding principal of the 2015 Notes or the 2017 Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

We cannot assure you that our net operating loss carryforwards will be available to reduce our tax liability.

Our ability to use our net operating loss carryforwards to reduce future income tax obligations may be limited or reduced. Generally, a change of more than 50 percentage points in the ownership of our shares, by value, over the three-year period ending on the date the shares were acquired constitutes an ownership change and may limit our ability to use our net operating loss carryforwards. Should additional ownership changes occur in the future, our ability to utilize our net operating loss carryforwards could be limited. In addition, with respect to any entity that we have acquired or may in the future acquire, the ability of those entities to use net operating loss carryforwards, if any, to reduce future income tax obligations may be limited or reduced due to changes in ownership of such entities occurring prior to or as a result of our acquisition of such entities.

If we fail to properly manage our anticipated growth, our business could suffer.

Rapid growth of our business is likely to continue to place a significant strain on our managerial, operational and financial resources and systems. To execute our anticipated growth successfully, we must attract and retain qualified personnel and manage and train them effectively. We anticipate hiring additional personnel to assist in the commercialization of our current products and in the development of future products. We will be dependent on our personnel and third parties to effectively market and sell our products to an increasing number of customers. We will also depend on our personnel to develop and manufacture in anticipated increased volumes our existing products, as well as new products and product enhancements. Further, our anticipated growth will place additional strain on our suppliers resulting in increased need for us to carefully monitor for quality assurance. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our development and commercialization goals.

Issues arising from the implementation of our new enterprise resource planning system could adversely affect our operating results and ability to manage our business effectively.

We recently completed our company-wide implementation of a new enterprise resource planning, or ERP, system to further enhance operating efficiencies and provide more effective management of our business operations. Implementing a new ERP system is costly and involves risks inherent in the conversion to a new computer system, including loss of information, disruption to our normal operations, changes in accounting procedures and internal control over financial reporting, as well as problems achieving accuracy in the conversion of electronic data. Failure to properly or adequately address these issues could result in increased costs, the diversion of management's and employees' attention and resources and could materially adversely affect our operating results, internal controls over financial reporting and ability to manage our business effectively. While the ERP system is intended to further improve and enhance our information systems, large scale implementation of a new information system exposes us to the risks of starting up the new system and integrating that system with our existing systems and processes, including possible disruption of our financial reporting, which could lead to a failure to make required filings under the federal securities laws on a timely basis.

Any defects or malfunctions in the computer hardware or software we utilize in our products could cause severe performance failures in such products, which would harm our reputation and adversely affect our results of operations and financial condition.

Our existing and new products depend and will depend on the continuous, effective and reliable operation of computer hardware and software. For example, our IVUS products utilize sophisticated software that analyzes in real-time plaque composition and identifies lumen and vessel borders, which are then displayed in three-dimensional, color-coded images on a computer screen. Although we update the computer software utilized in our products on a regular basis, there can be no guarantee that defects do not or will not in the future exist or that unforeseen malfunctions, whether within our control or otherwise, will not occur. In addition, our devices may be targeted and/or adversely affected by cybersecurity attacks, including malware. Although we have implemented various safeguards to prevent unauthorized access or modification to our products, we cannot assure you that these safeguards are or will continue to be effective. Any defect, malfunction or other failing in the computer hardware or software utilized by our IVUS or other products, including products we develop in the future, could result in inaccurate readings, misinterpretations of data, or other performance failures that could render our products unreliable or ineffective and could lead to decreased confidence in our products, damage to our reputation, reduction in our sales and product liability claims, the occurrence of any of which could have a material adverse effect on our results of operations and financial condition. Furthermore, as a result of cybersecurity vulnerabilities and incidents that could directly impact medical devices, in June 2013 the FDA issued draft guidance which may result in additional regulation in the medical device industry, which could, among other things, impact our ability to obtain regulatory approval of new products.

If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.

Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their employment at any time. The loss of any of our senior management team, in particular our President and Chief Executive Officer, R. Scott Huennekens, could harm our business. We have employment contracts or similar agreements with R. Scott Huennekens and our Chief Financial Officer, John T. Dahldorf, but these agreements do not guarantee that they will remain employed by us in the future. The announcement of the loss of one of our key employees could negatively affect our stock price. Our ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face challenges in hiring, training, managing and retaining employees in certain areas including clinical, technical, sales and marketing. This could delay new product development and commercialization, and hinder our marketing and sales efforts, which would adversely impact our competitiveness and financial results.

The expense and potential unavailability of insurance coverage for our company, customers or products may have an adverse effect on our financial position and results of operations.

While we currently have insurance for our business, property, directors and officers, and product liability, insurance is increasingly costly and the scope of coverage is narrower, and we may be required to assume more risk in the future. If we are subject to claims or suffer a loss or damage in excess of our insurance coverage, we will be required to cover the amounts outside of or in excess of our insurance limits. If we are subject to claims or suffer a loss or damage that is outside of our insurance coverage, we may incur significant costs associated with loss or damage that could have an adverse effect on our financial position and results of operations. Furthermore, any claims made on our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all. We do not have the financial resources to self-insure, and it is unlikely that we will have these financial resources in the foreseeable future.

Our product liability insurance covers our products and business operations, but we may need to increase and expand this coverage commensurate with our expanding business. Any product liability claims brought against us, with or without merit, could result in:


•	substantial costs of related litigation or regulatory action;


•	substantial monetary penalties or awards;


•	decreased demand for our products;


•	reduced revenue or market penetration;


•	injury to our reputation;


•	withdrawal of clinical study participants;


•	an inability to establish new strategic relationships;


•	increased product liability insurance rates; and


•	an inability to secure continuing coverage.

Some of our customers and prospective customers may have difficulty in procuring or maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain regions or

substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using our products and potential customers may opt against purchasing our products due to the cost or inability to procure insurance coverage.

Risks Related to Government Regulation

Compliance with changing corporate governance and public disclosure regulations may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new SEC regulations and Nasdaq Global Select Market rules, are creating uncertainty for companies such as ours. As one example, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has promulgated rules regarding disclosure of the presence in a company's products of certain metals, known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer's efforts to identify the sourcing of those minerals from this region. Complying with these rules will require investigative efforts, which will cause us to incur associated costs, and could adversely affect the sourcing, supply, and pricing of materials used in our products, or result in process or manufacturing modifications, all of which could adversely affect our results of operations.

To maintain high standards of corporate governance and public disclosure, we have invested, and intend to continue to invest, in reasonably necessary resources to comply with evolving standards. These investments have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities and may continue to do so in the future.

If we fail to obtain or maintain, or experience significant delays in obtaining, regulatory clearances or approvals for our products or product enhancements, our ability to commercially distribute and market our products could suffer.

Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities. Our failure to comply with such regulations or to make adequate, timely corrections, could lead to the imposition of injunctions, suspensions or loss of marketing clearances or approvals, product recalls, manufacturing cessation, termination of distribution, product seizures, civil penalties, or some combination of such actions. The process of obtaining regulatory authorizations to market a medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that such authorizations will be granted on a timely basis, if at all. If regulatory clearance or approvals are received, additional delays may occur related to manufacturing, distribution or product labeling. In addition, we cannot assure you that any new or modified medical devices we develop will be eligible for the shorter 510(k) clearance process as opposed to the PMA process. We have no experience in obtaining PMA approvals. For example, the FDA has been reviewing its 510(k) process and could change the criteria to obtain clearance, which could affect our ability to obtain timely reviews and increase the resources needed to meet new criteria. FDA has also issued, and may in the future issue, draft guidance documents that, if implemented, will likely entail additional regulatory burdens. These additional regulatory burdens could delay our ability to obtain new clearances, increase the costs of compliance or restrict our ability to maintain our current clearances. Such changes could adversely affect our business.

In the member states of the European Economic Area, or EEA, our medical devices are required to comply with the essential requirements of the EU Medical Devices Directives before they can be marketed. Our products, including their design and manufacture, have been certified by the British Standards Institute, or BSI, a United Kingdom Notified Body, as being compliant with the requirements of the Medical Devices Directives. Consequently, we are entitled to affix a CE mark to our products and their packaging and this gives us the right to sell them in the EEA. If we fail to maintain compliance with the Medical Devices Directives, our products will no longer qualify for the CE mark and the relevant devices would not be eligible for marketing in the EEA.

We currently market our IVUS and FFR products in Japan under two types of regulatory approval known as a SHONIN and a NINSHO. As the holder of the SHONINs, we have the authority to import and sell those products for which we have the SHONINs as well as those products for which we have obtained a NINSHO. Responsibility for Japanese regulatory filings and future compliance resides with us. We cannot guarantee that we will be able to adequately meet Japanese regulatory requirements. Non-compliance with Japanese regulations may result in action to prohibit further importation and sale of our products in Japan, a significant market for our products. If we are unable to sell our IVUS and FFR products in Japan, we will lose a significant part of our annual revenues, and our business will be substantially impacted.

Foreign governmental authorities that regulate the manufacture and sale of medical devices have become increasingly stringent, and to the extent we continue to market and sell our products in foreign countries, we will be subject to rigorous regulation in the future. In such circumstances, where we utilize distributors in foreign countries to market and sell our products, we would rely significantly on our distributors to comply with the varying regulations, and any failures on their part could result in restrictions on the sale of our products in foreign countries. Regulatory delays or failures to obtain and maintain

marketing authorizations, including 510(k) clearances and PMA approvals, could disrupt our business, harm our reputation, and adversely affect our sales.

Modifications to our products may require new regulatory clearances or approvals or may require us to recall or cease marketing our products until clearances or approvals are obtained.

Modifications to our products may require the submission of new 510(k) notifications or PMA applications. If a modification is implemented to address a safety concern, we may also need to initiate a recall or cease distribution of the affected device. In addition, if the modified devices require the submission of a 510(k) or PMA and we distribute such modified devices without a new 510(k) clearance or PMA approval, we may be required to recall or cease distributing the devices. The FDA can review a manufacturer's decision not to submit a modification and may disagree. The FDA may also on its own initiative determine that clearance of a new 510(k) or approval of a new PMA submission is required. We have made modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require clearance of a new 510(k) or approval of a new PMA. If we begin manufacture and distribution of the modified devices and the FDA later disagrees with our determination and requires the submission of a new 510(k) or PMA for the modifications, we may also be required to recall the distributed modified devices and to stop distribution of the modified devices, which could have an adverse effect on our business. If the FDA does not clear or approve the modified devices, we may need to redesign the devices, which could also harm our business. When a device is marketed without a required clearance or approval, the FDA has the authority to bring an enforcement action, including injunction, seizure and criminal prosecution. The FDA considers such additional actions generally when there is a serious risk to public health or safety and the company's corrective and preventive actions are inadequate to address the FDA's concerns.

Where we determine that modifications to our products require clearance of a new 510(k) or approval of a new PMA or PMA supplement, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. For those products sold in the EEA, we must notify BSI, our EEA Notified Body, if significant changes are made to the products or if there are substantial changes to our quality assurance systems affecting those products. Delays in obtaining required future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth.

If we or our suppliers fail to comply with the FDA's Quality System Regulation or ISO Quality Management Systems, manufacturing of our products could be negatively impacted and sales of our products could suffer.

Our manufacturing practices must be in compliance with the FDA's 21 CFR Part 820 Quality System Regulation, or QSR, which governs the facilities, methods, controls, procedures, and records of the design, manufacture, packaging, labeling, storage, shipping, installation, and servicing of our products intended for human use. We are also subject to similar state and foreign requirements and licenses, including the MDD-93/42/EEC and the ISO 13485 Quality Management Systems, or QMS, standard applicable to medical devices. In addition, we must engage in regulatory reporting in the case of potential patient safety risks and must make available our manufacturing facilities, procedures, and records for periodic inspections and audits by governmental agencies, including the FDA, state authorities and comparable foreign agencies. If we fail to comply with the QSR, QMS, or other applicable regulations and standards, our operations could be disrupted and our manufacturing interrupted, and we may be subject to enforcement actions if our corrective and preventive actions are not adequate to ensure compliance.

Failure to take adequate corrective action in response to inspectional observations or any notice of deficiencies from a regulatory inspection or audit could result in partial or total shut-down of our manufacturing operations unless and until adequate corrections are implemented, voluntary or FDA-ordered recall, FDA seizure of affected devices, court-ordered injunction or consent decree that could impose additional regulatory oversight and significant requirements and limitations on our manufacturing operations, significant fines, suspension or withdrawal of marketing clearances and approvals, and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our products and cause our revenue to decline.

The FDA, BSI, Japan's Pharmaceutical & Medical Device Administration and other regulatory agencies and bodies have previously imposed inspections and audits on us, and may in the future impose additional inspections or audits at any time, which may conclude that our quality system is noncompliant with applicable regulations and standards. Such findings could potentially disrupt our business, harm our reputation and adversely affect our sales.

Our products may in the future be subject to product recalls or voluntary market withdrawals that could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture that could affect patient safety. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, recall a product if any

material deficiency in a device is found or suspected. For example, in 2010 we recalled our Xtract catheter in circumstances where no patient safety incident was reported but where we had evidence that the device's integrity could be compromised under certain storage conditions. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include corrections as well as removals, of any of our products would divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers, and reduce our ability to achieve expected revenues.

We are required to comply with medical device reporting, or MDR, requirements and must report certain malfunctions, deaths, and serious injuries associated with our products, which can result in voluntary corrective actions or agency enforcement actions.

Under the FDA MDR regulations, medical device manufacturers are required to submit information to the FDA when they receive a report or become aware that a device has or may have caused or contributed to a death or serious injury or has or may have a malfunction that would likely cause or contribute to death or serious injury if the malfunction were to recur. All manufacturers placing medical devices on the market in the EEA are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the Competent Authority in whose jurisdiction the incident occurred. Were this to happen to us, the relevant Competent Authority would file an initial report, and there would then be a further inspection or assessment if there were particular issues. This would be carried out either by the Competent Authority or it could require that the BSI, as the Notified Body, carry out the inspection or assessment.

Malfunction of our products could result in future voluntary corrective actions, such as recalls, including corrections, or customer notifications, or agency action, such as inspection or enforcement actions. Malfunctions have been reported to us in the past, and, while we investigated each of the incidents and believe we have taken the necessary corrective and preventive actions, we cannot guarantee that similar or different malfunctions will not occur in the future. If malfunctions do occur, we cannot guarantee that we will be able to correct the malfunctions adequately or prevent further malfunctions, in which case we may need to cease manufacture and distribution of the affected devices, initiate voluntary recalls, and redesign the devices; nor can we ensure that regulatory authorities will not take actions against us, such as ordering recalls, imposing fines, or seizing the affected devices. If someone is harmed by a malfunction or by product mishandling, we may be subject to product liability claims. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

We are subject to federal, state and foreign healthcare laws and regulations and implementation or changes to such healthcare laws and regulations could adversely affect our business and results of operations.

In an effort to contain rising healthcare costs, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the PPACA, which may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs. PPACA includes, among other things, the following measures:


•	a deductible 2.3% excise tax, with limited exceptions, on the sale of certain medical devices by the manufacturer of the device;


•	a Patient-Centered Outcomes Research Institute intended to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research;

•

requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in the PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members in applicable manufacturers during the preceding calendar year, with data collection required beginning August 1, 2013 and reporting to the U.S. Department of Health and Human Services required by March 31, 2014 and the 90th day of each subsequent calendar year, and with disclosure of such information by the U.S. Department of Health and Human Services on a publicly available website beginning by September 2014; and


•	other measures designed to control Medicare spending.

An expansion in the government's role in the U.S. healthcare industry may cause general downward pressure on the prices of medical device products, lower reimbursements for procedures using our products, reduce medical procedure volumes and adversely affect our business and results of operations. Although we cannot predict the many ways that the federal healthcare reform laws might affect our business, sales of certain of our products became subject to the 2.3% excise tax beginning in 2013. It is unclear whether and to what extent, if at all, other anticipated developments resulting from the federal healthcare reform legislation, such as an increase in the number of people with health insurance and an increased focus on preventive medicine, may provide us additional revenue to offset this excise tax. If additional revenue does not materialize, or if our efforts to offset

the excise tax through spending cuts or other actions are unsuccessful, the increased tax burden would adversely affect our financial performance, which in turn could cause the price of our stock to decline. In addition, a number of foreign governments are also considering or have adopted proposals to reform their healthcare systems. Because a significant portion of our revenues from our operations is derived internationally, if significant reforms are made to the healthcare systems in other jurisdictions, our sales and results of operations may be materially and adversely impacted.

We intend to market our products in a number of international markets. Although certain of our IVUS products have been approved for commercialization in Japan and in the EEA, in order to market our products in other foreign jurisdictions, we have had to, and will need to in the future, obtain separate regulatory approvals. The approval procedure varies among jurisdictions and can involve substantial additional testing. Approval or clearance of a device by the FDA does not ensure approval by regulatory authorities in other jurisdictions, and approval by one foreign regulatory authority does not ensure marketing authorization by regulatory authorities in other foreign jurisdictions or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval in addition to other risks. In addition, the time required to obtain foreign approval may differ from that required to obtain FDA approval, and we may not obtain foreign regulatory approvals on a timely basis, if at all. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any foreign market other than in the EEA and Japan.

We may be subject to federal, state and foreign healthcare fraud and abuse laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.

Our operations may be directly or indirectly affected by various broad federal, state or foreign healthcare fraud and abuse laws. In particular, the federal healthcare program Anti-Kickback Statute prohibits any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, in return for or to induce the referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between device manufacturers on one hand and prescribers and purchasers on the other. For example, the government has sought to apply the Anti-Kickback Statute to device manufacturers' financial relationships with physician consultants. Among other theories, the government has alleged that such relationships are payments to induce the consultants to arrange for or recommend the ordering, purchasing or leasing of the manufacturers' products by the hospitals, medical institutions and other entities with whom they are affiliated. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and arrangements that involve remuneration that could induce prescribing, purchases, or recommendations may be subject to government scrutiny if they do not qualify for an exemption or a safe harbor. We are also subject to the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created federal criminal laws that prohibit executing a scheme to defraud any health care benefit program or making false statements relating to health care matters, and federal “sunshine” requirements to report certain financial arrangements with physicians and teaching hospitals, as defined in the PPACA and its implementing regulations, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members in applicable manufacturers.

Also, the federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.

In addition, several states have adopted laws similar to each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers as well as laws that restrict our marketing activities with physicians, and require us to report consulting and other payments to physicians. Some states, such as California, Connecticut, Massachusetts and Nevada, mandate implementation of commercial compliance programs to ensure compliance with these laws.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Moreover, recent health care reform legislation has strengthened these laws. For example, the recently enacted PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal health care fraud statutes; a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the PPACA provides that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Further, we expect there will continue to be federal and state laws and/or

regulations, proposed and implemented, that could impact our operations and business. The extent to which future legislation or regulations, if any, relating to health care fraud abuse laws and/or enforcement, may be enacted or what effect such legislation or regulation would have on our business remains uncertain. If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participating in governmental health care programs, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. We also are subject to foreign fraud and abuse laws, which vary by country. For instance, in the European Union, legislation on inducements offered to physicians and other healthcare workers or hospitals differ from country to country. Breach of the laws relating to such inducements may expose us to the imposition of criminal sanctions. It may also harm our reputation, which could in turn affect sales.

In November 2012, we became aware through newspaper reports in the Italian media that a former employee of ours was under criminal investigation for an alleged violation of Italian anti-bribery laws. The Italian public prosecutor is alleging that the approximately 5,000 euro that we paid to an Italian state-employed physician for conducting a training session was paid in an effort to influence the outcome of a clinical trial. Although we dispute these allegations, if we are unsuccessful in our defense, we may be faced with fines, penalties and a debarment from creating new contractual relationships with hospitals that are part of the Italian national health system. As a result, we cannot assure you that the outcome of this investigation would not have material adverse effects to our business in Italy, or harm our reputation in Europe generally, which could negatively affect our sales.

If our customers are unable to obtain coverage of or sufficient reimbursement for procedures performed with our products, it is unlikely that our products will be widely used.

Successful sales of our products depend on the availability of coverage and adequate reimbursement from third-party payors. Healthcare providers that purchase medical devices for treatment of their patients generally rely on third-party payors to reimburse all or part of the costs and fees associated with the procedures performed with these devices. Both public and private insurance coverage and reimbursement plans are central to new product acceptance. Customers are unlikely to use our products if they do not receive reimbursement adequate to cover the cost of our products and related procedures.

To the extent we sell our products internationally, market acceptance may depend, in part, upon the availability of coverage and reimbursement within prevailing healthcare payment systems. Coverage, reimbursement, and healthcare payment systems in international markets vary significantly by country, and by region in some countries, and include both government-sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international coverage or reimbursement approvals would negatively impact market acceptance of our products in the international markets in which those approvals are sought.

To date, our products have generally been covered as part of procedures for which reimbursement has been available. However, in the United States, as well as in foreign countries, government-funded programs (such as Medicare and Medicaid) or private insurance programs, together commonly known as third-party payors, pay the cost of a significant portion of a patient's medical expenses. Coverage of and reimbursement for medical technology can differ significantly from payor to payor.

All third-party coverage and reimbursement programs, whether government funded or insured commercially, whether inside the United States or outside, are developing increasingly sophisticated methods of controlling healthcare costs. Such cost-containment programs adopted by third-party payors, including legislative and regulatory changes to coverage and reimbursement policies, could potentially limit the amount which healthcare providers are willing to pay for medical devices, or related testing, which could adversely impact our business. The Centers for Medicare & Medicaid Services has announced various efforts to reduce costs in connection with the Medicare program that could have spillover into our business, including for example: (1) a three-year demonstration project that began September 2012, to allow Medicare recovery auditors to audit Medicare payments for procedures prior to Medicare making payment for the procedure, versus following Medicare payment for the procedure as has historically been Medicare's process, and (2) a proposed process to adjust provider payments amounts (with adjustments beginning January 2016) for certain laboratory tests based on changes in technology (historically, the payment for such tests would not typically be adjusted except for annual inflationary and productivity adjustments).

We believe that future coverage of and reimbursement for our products may be subject to increased restrictions both in the U.S. and in international markets. For example, on August 2, 2011, President Obama signed the Budget Control Act of 2011, which imposed significant cuts in federal spending over the next decade. Such cuts in federal spending could impact entitlement programs such as Medicare and aid to states for Medicaid programs. Third-party reimbursement and coverage for our products may not be available or adequate in either the U.S. or international markets. Future legislation, regulations, coverage or reimbursement policies adopted by third-party payors may adversely affect the growth of the markets for our products, reduce the demand for our existing products or our products currently under development and limit our ability to sell our products on a profitable basis.

We may be subject to health information privacy and security standards that include penalties for noncompliance.

The Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations safeguard the privacy and security of individually-identifiable health information. Certain of our operations may be subject to these requirements. Penalties for noncompliance with these rules include both criminal and civil penalties. In addition, the Health Information Technology for Economic and Clinical Health Act, or HITECH Act, expanded federal health information privacy and security protections. Among other things, HITECH makes certain of HIPAA's privacy and security standards directly applicable to “business associates”-independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HITECH also set forth new notification requirements for health data security breaches, increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to enforce HIPAA and seek attorney's fees and costs associated with pursuing federal civil actions. While we do not believe we are a covered entity or a business associate under HIPAA, occasionally our field service representatives enter into “field service agreements” which obligate us to protect any protected health information that we may receive in the field in accordance with HIPAA and HITECH.

Compliance with environmental laws and regulations could be expensive, and failure to comply with these laws and regulations could subject us to significant liability.

We use hazardous materials in our research and development and manufacturing processes, including specifically the sterilization processes conducted at our Costa Rica facility. We are subject to foreign, federal, state and local regulations governing use, storage, handling and disposal of these materials and associated waste products. We are currently licensed to handle such materials, but there can be no assurance that we will be able to retain these licenses in the future or obtain licenses under new regulations if and when they are required by governing authorities. We cannot completely eliminate the risk of contamination, injury, or even death resulting from such hazardous materials, and we may incur liability as a result of any such contamination, injury or death. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources and any applicable insurance. We have also incurred and may continue to incur expenses related to compliance with environmental laws. Such future expenses or liability could have a significant negative impact on our business, financial condition and results of operations. Further, we cannot assure that the cost of compliance with these laws and regulations will not materially increase in the future. We may also incur expenses related to ensuring that our operations comply with environmental laws related to our operations, and those of prior owners or operators of our properties, at current or former manufacturing sites where operations have previously resulted in spills, discharges or other releases of hazardous substances into the environment. We could be held strictly liable under U.S. environmental laws for contamination of property that we currently or formerly owned or operated without regard to fault or whether our actions were in compliance with law at the time. Our liability could also increase if other responsible parties, including prior owners or operators of our facilities, fail to complete their clean-up obligations or satisfy indemnification obligations to us. Similarly, if we fail to ensure compliance with applicable environmental laws in foreign jurisdictions in which we operate, we may not be able to offer our products and may be subject to civil or criminal liabilities.

The use, misuse or off-label use of our products may result in injuries that could lead to product liability suits, which could be costly to our business.

Our currently marketed products have been cleared by the relevant regulatory authority in each jurisdiction where we market them. There may be increased risk of injury if physicians attempt to use our products in procedures outside of those indications cleared or approved for use, known as off-label use. Our sales force is trained according to company policy not to promote our products for off-label uses, and in our instructions for use in all markets we specify that our products are not intended for use outside of those indications cleared for use. However, we cannot prevent a physician from using our products for off-label applications. Our catheters and guide wires are intended to be single-procedure products. In spite of clear labeling and instructions against reuse, we are aware that certain physicians have elected to reuse our products. Reuse of our catheters and guide wires may increase the risk of product liability claims. Reuse may also subject the party reusing the product to regulatory authority inspection and enforcement action. Physicians may also misuse our product if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management's attention from our core business, be expensive to defend and result in sizable damage awards against us.

Risks Related to our Intellectual Property and Litigation

Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain.

Our success depends significantly on our ability to protect our intellectual property and proprietary technologies. Our policy is to obtain and protect our intellectual property rights. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions to protect our

proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our pending U.S. and foreign patent applications may not issue as patents or may not issue in a form that will be advantageous to us. Any patents we have obtained or will obtain may be challenged by re-examination, inter partes or other post-grant review, opposition or other administrative proceeding, or in litigation. Such challenges could result in a determination that the patent is invalid. Some of our older patents have expired or will expire in the near future. In addition, competitors may be able to design alternative methods or devices that avoid infringement of our patents. To the extent our intellectual property protection offers inadequate protection, or is found to be invalid, we are exposed to a greater risk of direct competition. If our intellectual property does not provide adequate protection against our competitors' products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive. Furthermore, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

In the event a competitor infringes upon our patent or other intellectual property rights, litigation to enforce our intellectual property rights or to defend our patents against challenge, even if successful, could be expensive and time consuming and could require significant time and attention from our management. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against challenges from others.

The medical device industry is characterized by patent and other intellectual property litigation, and we could become subject to litigation that could be costly, result in the diversion of our management's time and efforts, require us to pay damages or prevent us from selling our products.

The medical device industry is characterized by extensive litigation and interference and other administrative proceedings over patent and other intellectual property rights. Whether or not a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Our competitors may assert that they own U.S. or foreign patents containing claims that cover our products, their components or the methods we employ in the manufacture or use of our products. For example, we are currently involved with St. Jude Medical in patent litigation regarding our FFR products and whether these products infringe a St. Jude Medical patent. Because patent applications can take many years to issue and in many instances at least 18 months to publish, there may be applications now pending of which we are unaware, which may later result in issued patents that contain claims that cover our products. There could also be existing patents, of which we are unaware, that contain claims that cover one or more components of our products. As the number of participants in our industry increases, the possibility of patent infringement claims against us also increases.

Any interference proceeding, litigation or other assertion of claims against us, including our current patent litigation with St. Jude Medical, may cause us to incur substantial costs, could place a significant strain on our financial resources, divert the attention of our management from our core business and harm our reputation. If the relevant patents asserted against us were upheld as valid and enforceable and were found to be infringed, we could be required to pay substantial damages and/or royalties and could be prevented from selling our products unless we could obtain a license or were able to redesign our products to avoid infringement. Any such license may not be available on reasonable terms, if at all. If we fail to obtain any required licenses or make any necessary changes to our products or technologies, we may be unable to make, use, sell or otherwise commercialize one or more of our products in the affected country. In addition, if we are found to infringe willfully, we could be required to pay treble damages and attorney fees, among other penalties.

We expect to enter new product fields in the future. Entering such additional fields may subject us to claims of infringement. Defending any infringement claims would be expensive and time consuming.

We are aware of certain third-party U.S. patents in fields that we are targeting for development. We do not have licenses to these patents nor do we believe that such licenses are required to develop, commercialize or sell our products in these areas. However, the owners of these patents may initiate a lawsuit alleging infringement of one or more of these or other patents. If they do, we may be required to incur substantial costs related to patent litigation, which could place a significant strain on our financial resources and divert the attention of management from our business and harm our reputation. Adverse determinations in such litigation could cause us to redesign or prevent us from manufacturing or selling our products in these areas, which would have an adverse effect on our business by limiting our ability to generate revenues through the sale of these products.

From time to time in the ordinary course of business, we receive letters from third parties advising us of third-party patents that may relate to our business. The letters do not explicitly seek any particular action or relief from us. Although these

letters do not threaten legal action, these letters may be deemed to put us on notice that continued operation of our business might infringe intellectual property rights of third parties. We do not believe we are infringing any such third-party rights, and, other than the matters described in Note 4 "Commitments and Contingencies - Litigation" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, we are unaware of any litigation or other proceedings having been commenced against us asserting such infringement. We cannot assure you that such litigation or other proceedings asserting infringement by us may not be commenced against us in the future.

Our rights to a worldwide license of certain IVUS patents owned or licensed by Boston Scientific may be challenged.

The marketing and sale of our current rotational IVUS catheters and pullback products depend on a license for IVUS-related patents owned or licensed by Boston Scientific. Boston Scientific was required to transfer the related intellectual property rights pursuant to a 1995 order of the Federal Trade Commission. We obtained rights to the license in 2003 through our former wholly-owned subsidiary, Pacific Rim Medical Ventures, which merged into us on December 30, 2004. In the event Boston Scientific disputes our rights to the license or seeks to terminate the license, we may be required to expend significant time and resources defending our rights. An adverse determination could cause us to redesign or prevent us from manufacturing or selling our rotational IVUS catheters and pullback products, which would have an adverse effect on our business. Additionally, in the event that the chain of title from the 1995 transfer of rights from Boston Scientific through the 2003 transfer to us is successfully challenged, we may have fewer rights to the technology than our business requires which will negatively impact our ability to continue our development of rotational IVUS catheters and pullback products or subject us to disputes with Boston Scientific or others with respect to the incorporation of this intellectual property into our products.

Our VH IVUS business depends on a license from The Cleveland Clinic Foundation, the loss of which would severely impact our business.

The marketing and sale of our VH IVUS functionality for IVUS depends on an exclusive license to patents owned by The Cleveland Clinic Foundation, the license to which we obtained in April 2002. We are aware that maintenance of the license depends upon certain provisions being met by us including payment of royalties, commercialization of the licensed technology and obtaining regulatory clearances or approvals. If The Cleveland Clinic Foundation were to claim that we committed a material breach or default of these provisions and we were not able to cure such breach or default, The Cleveland Clinic Foundation would have a right to terminate the agreement. The loss of the rights granted under the agreement could require us to redesign our VH IVUS functionality or prevent us from manufacturing or selling our IVUS products containing VH IVUS in countries covered by these patents. In addition, our exclusive license will become non-exclusive if we fail to obtain regulatory clearances or approvals to commercialize the licensed technology within a proscribed time period. The cost of redesigning or an inability to sell our VH IVUS products would have a negative impact on our ability to grow our business and achieve our expected revenues.

Risks Related to our Common Stock

We expect that the price of our common stock will fluctuate substantially.

The market price of our common stock could be subject to significant fluctuation. Factors that could cause volatility in the market price of our common stock include the following:


•	changes in earnings estimates, investors' perceptions, recommendations by securities analysts or our failure to achieve analysts' earnings estimates;


•	changes in foreign currency exchange rates;


•	quarterly variations in our or our competitors' results of operations;


•	changes in governmental regulations or in the status of our regulatory clearance or approvals;


•	changes in availability of third-party reimbursement in the United States or other countries;


•	the announcement of new products or product enhancements by us or our competitors or other developments involving our respective products;


•	the announcement of an acquisition or other business combination or strategic transaction;


•	possible sales of our common stock by investors who view the 2015 Notes and the 2017 Notes as a more attractive means of equity participation in us;


•	the conversion of some or all of the 2015 Notes or the 2017 Notes and any sales in the public market of shares of our common stock issued upon conversion of the 2015 Notes or the 2017 Notes;


•	hedging or arbitrage trading activity that may develop involving our common stock, including in connection with the convertible note hedge transactions and warrant transactions we entered into in connection with the offerings of our 2015 Notes and 2017 Notes, and arbitrage strategies employed or that may be employed by investors in our 2015 Notes and 2017 Notes;


•	announcements related to patents issued to us or our competitors;


•	the announcement of pending or threatened litigation and developments in litigation involving us;


•	sales of large blocks of our common stock, including sales by our executive officers and directors; and


•	general market and economic conditions and other factors unrelated to our operating performance or the operating performance of our competitors.

These factors may materially and adversely affect the market price of our common stock.

Additional equity issuances or a sale of a substantial number of shares of our common stock may cause the market price of our common stock to decline.

If our existing stockholders sell a substantial number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline. In addition, sales of a substantial number of shares of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. Because we may need to raise additional capital in the future to continue to expand our business and develop new products, we may, among other things, conduct additional equity offerings. These future equity issuances, together with any additional shares of our common stock issued or issuable in connection with past or any future acquisitions, would result in further dilution to investors and could depress the market price of our common stock.

No prediction can be made regarding the number of shares of our common stock that may be issued or the effect that the future sales of shares of our common stock will have on the market price of our shares.

Our directors, officers and principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

As of December 31, 2013, our directors, officers and principal stockholders (those holding more than 5% of our common stock) collectively controlled a significant portion of our outstanding common stock. To the extent our directors, officers and principal stockholders continue to hold a significant portion of our outstanding common stock, these stockholders, if they act together, would be able to exert significant influence over the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might adversely affect the market price of our common stock and may not be in the best interests of our other stockholders.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and other agreements and in Delaware law could discourage a takeover.

Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. These provisions include:


•	a classified board of directors;


•	advance notice requirements to stockholders for matters to be brought at stockholder meetings;


•	a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and


•	the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law that, in general, prohibit any business combination or merger with a beneficial owner of 15% or more of our common stock unless the holder's acquisition of our stock was approved in advance by our board of directors. These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

We have adopted a stockholder rights plan that may discourage, delay or prevent a change of control and make any future unsolicited acquisition attempt more difficult. Under the rights plan:


•	the rights will become exercisable only upon the occurrence of certain events specified in the plan, including the acquisition of 20% of our outstanding common stock by a person or group, with limited exceptions;


•	each right will entitle the holder, other than an acquiring person, to acquire shares of our common stock at a discount to the then prevailing market price;


•	our board of directors may redeem outstanding rights at any time prior to a person becoming an acquiring person at a minimal price per right; and


•	prior to a person becoming an acquiring person, the terms of the rights may be amended by our board of directors without the approval of the holders of the rights.

In addition, the terms of our 2015 Notes and 2017 Notes may require us to purchase those notes for cash in the event of a takeover of our company. The indentures governing the Notes also prohibit us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under such notes. These and other provisions applicable to the 2015 Notes and 2017 Notes may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to our stockholders

We have not paid dividends in the past and do not expect to pay dividends in the future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payments of dividends present in our current and future debt agreements, and other factors our board of directors may deem relevant. If we do not pay dividends, a return on our common stock will only occur if our stock price appreciates.



Item 1B.	Unresolved Staff Comments

None



Item 2.	Properties

The following table summarizes our principal facilities under lease as of December 31, 2013, the location and size of each such facility and their designed use.



Location	Purpose (1)	Square Feet (Approximate)	Lease Expiration Dates
San Diego, California (2)	Principal executive offices and research and development	92,602	August 2023
Rancho Cordova, California	Manufacturing operations, product distribution, research and development and administrative functions	155,421	December 2014
Billerica, Massachusetts	Axsun operations and administrative functions, research and development	64,784	October 2021
Zaventem, Belgium	Europe administrative functions, sales and product distribution	18,600	May 2021
Tokyo, Japan	Japan sales operations and administrative functions	19,331	January 2015
Costa Rica	Manufacturing operations	140,000	Owned


(1)	All facilities are utilized for activities in our medical segment. The Billerica, Massachusetts facility is utilized for activities both in our medical and industrial segments.


(2)	In December 2012, we agreed to lease a facility in San Diego, California to serve as our new corporate headquarters, which is comprised of 92,602 square feet with a lease expiration date of August 2023. We relocated our principal executive offices to the new facility in August 2013.

We also lease facilities in Alpharetta, Georgia for limited research and development activities and sales administration activities; Netanya, Israel for research and development activities and administrative functions; and Woodmead, South Africa and Warsaw, Poland for sales and distribution activities. Collectively, these facilities represent approximately 18,000 square feet of space.

We believe that our current and planned facilities are adequate to meet our needs for the foreseeable future.



Item 3.	Legal Proceedings

The information set forth under Note 4 “Commitments and Contingencies – Litigation” to our consolidated financial statements included in Part II, Item 8 of this Annual Report, is incorporated herein by reference.



Item 4.	Mine Safety Disclosures

Not applicable.

PART II



Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

We completed our initial public offering on June 15, 2006. Our common stock is traded on the NASDAQ Global Select Market under the symbol “VOLC”. The following table sets forth the high and low sales price of our common stock for the periods indicated.



	Price Range
	Low		High
Year Ended December 31, 2013
First Quarter	$	22.26	$	26.07
Second Quarter	16.58		22.41
Third Quarter	18.04		23.99
Fourth Quarter	18.95		24.36
Year Ended December 31, 2012
First Quarter	$	21.98	$	29.91
Second Quarter	25.12		29.95
Third Quarter	25.01		30.59
Fourth Quarter	23.08		30.15

Holders

At February 14, 2014, the closing price of our common stock on the NASDAQ Global Select Market was $21.49 per share, and we had 32 stockholders of record.

Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The graph below compares total stockholder return on our common stock from December 31, 2008 through December 31, 2013 with the cumulative total return of (a) the NASDAQ Composite Index and (b) the NASDAQ Medical Equipment Index assuming a $100 investment made in each on December 31, 2008. Each of the three measures of cumulative total return assumes reinvestment of dividends, if any. The stock performance shown on the graph below is based on historical data and is not indicative of, or intended to forecast, possible future performance of our common stock.

Securities Authorized for Issuance under Equity Compensation Plans

For information concerning prior stockholder approval of and other matters relating to our equity incentive plans, see Item 12 in this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities

None

Purchases of Equity Securities by the Issuer and Affiliated Purchasers



Period	Total Number of Shares Purchased	Average Price Paid Per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
10/01/2013 - 10/31/2013	—	$	—	—	$	—
11/01/2013 - 11/30/2013	—	—		—	—
12/01/2013 - 12/31/2013	3,557,137	28.11		3,557,137	100,000,000
Total	3,557,137	$	28.11	3,557,137	$	100,000,000

(1) On December 2, 2013, we announced that our board of directors authorized a $200 million share repurchase program, which will expire on June 30, 2014. Pursuant to this approval, we entered into a $100 million accelerated share repurchase, or ASR, program with a counterparty, and received 3,557,137 shares of our common stock, which represents a substantial majority of the total number of shares expected to be repurchased under the ASR program. The final number of shares to be repurchased by us under this ASR program will be determined at the completion of the ASR program and will be based generally on the daily volume-weighted average share price of our common stock during a period of up to approximately four months, less an agreed-to discount. Refer to "Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 5 - Stockholders' Equity" in this Annual Report on Form 10-K.

(2) Average price per share for the period December 1, 2013 to December 31, 2013 is calculated by dividing the total cost for the ASR program of $100 million, which was paid in December 2013, by the total number of shares repurchased under the ASR program as of December 31, 2013. This average price per share will be adjusted once the ASR program is completed and the final number of shares repurchased by us is determined. The final number of shares to be repurchased by us under this ASR will be determined at the completion of the ASR program and will be based generally on the daily volume-weighted average share price of our common stock during a period of up to approximately four months, less an agreed-to discount. Refer to "Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 5 - Stockholders' Equity" in this Annual Report on Form 10-K.

Dividends

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors. None of our outstanding capital stock is entitled to any dividends.



Item 6.	Selected Financial Data

The selected financial data set forth below are derived from our consolidated financial statements. The consolidated statement of operations data for the years ended December 31, 2013, 2012 and 2011, and the consolidated balance sheet data at December 31, 2013 and 2012 are derived from our consolidated financial statements included elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2010 and 2009 and the consolidated balance sheet data at December 31, 2011, 2010 and 2009 are derived from our consolidated financial statements which are not included herein.

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report (in thousands, except per share data):



	Years Ended December 31,
	2013			2012			2011			2010			2009
Consolidated Statement of Operations Data:
Revenues	$	393,678		$	381,866		$	343,546		$	294,146		$	227,867
Cost of revenues, excluding amortization of intangibles	143,302			128,915			114,533			108,860			91,489
Gross profit	250,376			252,951			229,013			185,286			136,378
Operating expenses:
Selling, general and administrative	182,950			172,794			147,057			132,990			111,598
Research and development	69,159			55,469			53,098			42,517			37,372
Amortization of intangibles	3,832			3,240			3,447			2,559			4,224
Acquisition-related items	4,964			1,858			—			184			—
Restructuring charges	19,374			—			—			—			—
In-process research and development	—			—			—			(2,935		)	14,030
Total operating expenses	280,279			233,361			203,602			175,315			167,224
Operating (loss) income	(29,903		)	19,590			25,411			9,971			(30,846		)
Interest income	1,287			902			908			477			756
Interest expense	(26,908		)	(7,975		)	(7,107		)	(2,192		)	(5		)
Exchange rate gain (loss)	(1,156		)	(576		)	(997		)	(904		)	2,328
Loss from debt extinguishment	—			(4,969		)	—			—			—
Other, net	5,856			2,717			(112		)	(25		)	—
(Loss) income before income taxes	(50,824		)	9,689			18,103			7,327			(27,767		)
Income tax (benefit) expense (1)	(16,330		)	1,667			(19,990		)	2,087			1,187
Net (loss) income	$	(34,494	)	$	8,022		$	38,093		$	5,240		$	(28,954	)
Net (loss) income per share:
Basic	$	(0.63	)	$	0.15		$	0.73		$	0.10		$	(0.60	)
Diluted	$	(0.63	)	$	0.15		$	0.70		$	0.10		$	(0.60	)
Shares used in calculating net (loss) income per share:
Basic	54,341			53,475			52,300			50,551			48,400
Diluted	54,341			55,195			54,596			53,281			48,400



	At December 31,
	2013		2012		2011		2010		2009
Balance Sheet Data:
Cash and cash equivalents	$	107,159	$	330,635	$	107,016	$	43,429	$	56,055
Short-term available-for-sale investments	231,864		140,960		112,327		175,283		66,028
Working capital	420,344		546,790		293,057		264,937		158,668
Intangible assets, net (2)	58,108		50,657		15,245		17,103		11,623
Total assets	831,919		902,344		496,724		431,566		276,734
Short and long-term debt, including current maturities	402,332		383,472		95,809		91,292		160
Total stockholders’ equity (3)	299,802		408,345		339,237		274,336		214,815

These historical results are not necessarily indicative of results expected for any future period.


(1)	During the quarter ended December 31, 2013, we concluded that it was more likely than not that we would not be able to realize the benefit of our remaining state and select foreign deferred tax assets in the future. Therefore, we increased the valuation allowance on our state and foreign deferred income tax assets by $3.8 million.

During the quarter ended December 31, 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. Therefore, we reversed $4.9 million of the valuation allowance on certain of our net foreign deferred income tax assets.

During the quarter ended December 31, 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future. Therefore, we reversed $22 million of the valuation allowance on our net federal and certain state deferred income tax assets.


(2)	Includes the effects of the Sync-Rx, Ltd. and Crux Biomedical, Inc. acquisitions in 2012 and the acquisition of the Pioneer Plus re-entry catheter product line from Medtronic, Inc. in 2013.

(3)



Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and notes thereto included elsewhere in this Annual Report.

Overview

We have infrastructure in the U.S., Europe, Japan and Costa Rica. Our corporate office is located in California, U.S. Our manufacturing facilities are located in Coyol, Costa Rica, and Rancho Cordova, California. In Costa Rica we manufacture IVUS catheters and FFR guide wires. In California, we produce multi-modality consoles, FFR consoles, IVUS catheters, FFR guide wires and our Crux IVC filters. We are in the process of transitioning all of our disposable manufacturing activities to our Costa Rica facility. In addition, we have a manufacturing facility in Billerica, Massachusetts that produces our optical monitors, laser and non-laser light sources, and optical engines used in OCT imaging systems as well as micro-optical spectrometers and optical channel monitors. We have research and development facilities in U.S. and Israel. We have sales offices in the U.S. and Japan; sales and distribution offices in Belgium and South Africa; and third-party distribution facilities in Japan. At December 31, 2013, we had over 1,800 full time employees worldwide, including over 900 manufacturing employees, over 370 sales and marketing employees and over 170 research and development employees.

At December 31, 2013, we had a worldwide installed base of over 7,000 consoles, excluding our legacy In-Vision Gold systems. We intend to grow and leverage this installed base to drive recurring sales of our single-procedure disposable catheters and guide wires. In the year ended December 31, 2013, the sale of our single-procedure disposable catheters and guide wires accounted for $306.9 million, or 79.7% of our medical segment revenues, a $6.2 million, or 2.1% increase from the year ended December 31, 2012, in which the sale of our single-procedure disposable catheters and guide wires accounted for $300.7 million, or 81.0% of our medical segment revenues.

Our revenues have increased from $343.5 million in 2011 to $381.9 million in 2012 and to $393.7 million in 2013. We had operating loss of $29.9 million during 2013, and operating income of $19.6 million and $25.4 million during 2012 and 2011, respectively. The 2013 operating loss includes $5.0 million of acquisition-related items and $19.4 million of restructuring charges. The 2012 operating income included $1.9 million of acquisition-related expenses.

During 2013, our management approved two restructuring plans: (1) to consolidate and transition our manufacturing resources related to the manufacture of disposables to Costa Rica, (2) to reprioritize and reallocate our resources within our distribution, research and development, and clinical programs that we believe better advance our key strategies. The key elements under the second restructuring plan include the discontinuation of development programs for our Forward-Looking IVUS, or FL.IVUS, Forward-Looking Intra-Cardiac Echo, or FL.ICE, and Optical Coherence Tomography, or OCT, intravascular coronary imaging development programs, the termination of the commercial sale of our ReFLOW Aspiration Catheter, or ReFLOW product line, and a modest reorganization of several functional areas and business units within the Company. We recorded $19.4 million of restructuring charges during 2013. Refer to "Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 3 Financial Statements Details - Restructuring Activity" in this Annual Report on Form 10-K.

In the years ended December 31, 2013, 2012 and 2011, 44.6%, 46.3% and 47.3%, respectively, of our revenues and 19.8%, 22.7% and 22.5%, respectively, of our operating expenses were denominated in various non-U.S. dollar currencies, primarily the Japanese yen and the euro. We expect that a significant portion of our revenue and operating expenses will continue to be denominated in non-U.S. dollar currencies. As a result, we are subject to risks related to fluctuations in foreign currency exchange rates, which could affect our operating results in the future. If our yen or euro denominated sales exceed our yen or euro denominated costs, and the U.S. dollar strengthens relative to the yen or euro, there is an adverse effect on our results of operations. Conversely, if the U.S. dollar weakens relative to the yen or euro, there is a positive effect on our results of operations. For example, the average exchange rate of one U.S. dollar to yen increased 21.5% from 79.3 in 2012 to 96.4 in 2013, which resulted in a net negative impact to our operational results for 2013 in the amount of approximately $14.1 million. The average exchange rate of one euro to U.S. dollar increased 2.8% from 1.29 in 2012 to 1.33 in 2013, which resulted in a net positive impact to our operational results for 2013 in the amount of approximately $1.2 million.

We use third-party manufacturing partners to produce circuit boards and mechanical sub-assemblies used in the manufacture of our consoles. We also use third-party manufacturing partners for certain proprietary components used in the manufacture of our single-procedure disposable products. We perform incoming inspection on these circuit boards, mechanical sub-assemblies and components, assemble them into finished products, and test the final product to assure quality control. We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers, substrates and subassemblies would be available.

External Factors

In September 2009, published findings from the Fractional Flow Reserve versus Angiography for Multivessel

Evaluation, or FAME, study demonstrated that patients in the study with multi-vessel coronary artery disease who were treated by FFR guidance had a 34% reduction in death and myocardial infarction (heart attack) compared to angiographic guidance alone. In August 2012, the results of the Fractional Flow Reserve-Guided PCI vs. Medical Therapy in Stable Coronary Disease, or FAME 2, study were published in the New England Journal of Medicine. FAME 2 showed that patients receiving PCI with proven ischemia by FFR had 66% fewer primary endpoint events including death, myocardial infarction and urgent revascularization's (e.g. coronary bypass) than those patients treated with optimal medical therapy alone. We believe these findings will continue to drive the growth and adoption of our disposable FFR wire products.

With respect to IVUS, two-year data released in 2013 from the ADAPT-DES study (Assessment of Platelet Therapy with Drug-Eluting Stents), the largest study conducted with IVUS guidance to date, indicated IVUS guidance was associated with reductions in certain serious patient events, including stent thrombosis and myocardial infarction, and that IVUS guidance was associated with a change in procedure 74% of the time. These data suggest that IVUS guidance can play an important role in helping to improve patient outcomes.

The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act were enacted into law in the U.S. on March 23, 2010. The legislation imposed on medical device manufacturers a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices beginning January 1, 2013.

The economic conditions in many countries and regions where we generate our revenues remain uncertain. If our customers do not obtain or do not have access to the necessary capital to operate their businesses, or are otherwise adversely affected by any deterioration in national and worldwide economic conditions, this could result in reductions in the sales of our products, longer sales cycles and slower adoption of new technologies by our customers, which would materially and adversely affect our business. In addition, our customers’ and suppliers’ liquidity, capital resources and credit may be adversely affected by their relative ability or inability to obtain capital and credit, which could adversely affect our ability to collect on our outstanding invoices and lengthen our collection cycles, or limit our timely access to important sources of raw materials necessary for the manufacture of our consoles and catheters.

In addition, the political unrest in certain regions of the world may have adverse consequences to the global economy or to our customers in certain regions, which could negatively impact our business. Uncertainty about future economic conditions may make it more difficult for us to forecast operating results and to make decisions about future investments. For further discussion, see “Risk Factors—General national and worldwide economic conditions may materially and adversely affect our financial performance and results of operations.”

Financial Operations Overview

The following is a description of the primary components of our revenue and expenses.

Revenues. We derive our revenues from two reporting segments: medical and industrial. Our medical segment represents our core business, in which we derive revenues primarily from the sale of our consoles and single-procedure disposables. Our industrial segment derives revenues related to the sales of Axsun’s micro-optical spectrometers and optical channel monitors to telecommunication and other industrial companies. In the year ended December 31, 2013, we generated $393.7 million of revenues which is comprised of $385.2 million from our medical segment and $8.4 million from our industrial segment. We experienced increases in revenues related to consoles and FFR single-procedure disposables and decrease in revenues related to IVUS single-procedure disposables in 2013 compared with 2012. In the year ended December 31, 2013, 11.3% of our medical segment revenues were derived from the sale of our consoles, 50.4% from IVUS single-procedure disposables and 29.2% from FFR single-procedure disposables as compared with 11.0% from consoles, 55.5% from IVUS single-procedure disposables and 25.6% from FFR single-procedure disposables in the year ended December 31, 2012. Other revenues consist primarily of service and maintenance revenues, shipping and handling revenues, sales of distributed products, sales of medical products manufactured by our Axsun subsidiary, spare parts sales, and license fees.

We expect to continue experiencing variability in our quarterly revenues from console sales due in part to the timing of hospital capital equipment purchasing decisions. Further, we expect variability of our revenues based on the timing of our new product introductions, which may cause our customers to delay their purchasing decisions until the new products are commercially available.

Our medical segment sales are generated by our direct sales representatives or through independent distributors and are shipped throughout the world from facilities in the United States, Belgium, Japan and South Africa. Our industrial segment sales are generated by our direct sales representatives or through independent distributors and these products are shipped primarily to telecommunications and industrial companies domestically and abroad from the United States.

Cost of Revenues. Cost of revenues consists primarily of material costs for the products that we sell and other costs associated with our manufacturing process, such as personnel costs, rent, depreciation related to our manufacturing equipment and utilities. In addition, cost of revenues includes depreciation of company-owned consoles, royalty expenses for licensed technologies included in our products, service costs, provisions for warranty, distribution, freight and packaging costs and stock-based compensation expense related to manufacturing employees. We expect a trend of improvement in our gross margin for IVUS and FFR products if we are successful in our ongoing efforts to streamline and improve our manufacturing processes, increase production volumes and transition certain manufacturing operations to Costa Rica.

Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and commissions and other related costs for personnel serving the sales, administrative and marketing functions. Other costs include stock-based compensation expense, professional fees for legal and accounting services, travel and entertainment expenses, facility costs, trade show, training and other promotional expenses. Due to ongoing litigation, legal expenses tend to be somewhat unpredictable in their timing and amount. We expect that our selling, general and administrative expenses will increase as we continue to expand our sales force and marketing efforts and invest in the necessary infrastructure to support our continued growth.

Included in selling, general and administrative expense is the U.S. medical device excise tax on the sale of medical devices that was effective January 1, 2013. The statutory rate of the medical device excise tax is 2.3% of revenues on initial sales of finished medical products sold in the United States. Our medical device excise tax is 0.71% of our total revenue for 2013. Our effective rate for this excise tax is less than the statutory rate which is primarily due to international sales.

Research and Development. Research and development expenses consist primarily of salaries and related expenses for personnel, consultants, prototype materials, clinical studies, depreciation, regulatory filing fees, certain legal costs related to our intellectual property and stock-based compensation expense. We expense research and development costs as incurred. Due to product development timelines, research and development costs tend to be distributed unevenly between the periods. We expect our research and development expenses to increase as we continue to develop our products and technologies.

Amortization of Intangibles. We amortize intangible assets, consisting of our developed technology, licenses, customer relationships, patents and trademarks, and covenants-not-to-compete, using the straight-line method over their estimated useful lives of up to 20 years. These assets are regularly tested for impairment and abandonment.

Acquisition-related items. Acquisition-related items consists of acquisition transaction costs, subsequent accretion of and revision, if any, to the fair value of the contingent consideration related to acquisitions and other expenses directly associated with acquisitions.

Restructuring Charges. Restructuring charges consist of employee termination benefits, asset impairments and other related charges associated with restructuring activities.

In-process Research and Development. In-process Research and Development, or IPR&D, consists of our projects acquired in connection with acquisitions that had not reached technological feasibility and had no alternative future uses as of each acquisition date. Certain additional payments that may be required in connection with our acquisitions could result in future charges to IPR&D.

OCT. In December 2007, we acquired certain OCT IPR&D assets in connection with our acquisition of CardioSpectra, Inc., or CardioSpectra, which were valued at $26.3 million. At the acquisition date, the estimated costs to complete the project were $7.2 million. We incurred a total of $31.3 million for the OCT project since acquisition.

FL.IVUS. In May 2008, we acquired the FL.IVUS IPR&D assets in connection with our acquisition of Novelis, which was valued at $12.2 million. At the acquisition date, the estimated costs to complete the project were $3.9 million. We incurred a total of $19.6 million for the FL.IVUS project since acquisition.

FL.ICE. In August 2010 we acquired the FL.ICE project in connection with our acquisition of Fluid Medical Inc., or Fluid Medical. This project was recorded as an IPR&D asset and was valued at $4.1 million. At the acquisition date, the estimated costs to complete the project were $5.9 million. We incurred a total of $8.5 million for the FL.ICE project since acquisition.

During 2013, our management evaluated various development projects, product lines and functional areas in an effort to reprioritize and reallocate our resources within our distribution, research and development, and clinical programs to focus on development and commercial efforts that we believe better advance our key strategies. The key elements under this restructuring plan include the discontinuation of development programs for our FL.IVUS, FL.ICE and OCT intravascular coronary imaging development programs. Refer to "Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 3 Financial Statements Details - Restructuring Activity" in this Annual Report on Form 10-K.

CO-REGISTRATION. In November 2012, in connection with our acquisition of Sync-Rx Ltd, or Sync-Rx, we acquired Sync-Rx's co-registration technology, which was still under development. This technology was recorded as an IPR&D asset and was valued at $1.3 million. At the acquisition date, the estimated costs to complete the project were approximately $4.4 million. At December 31, 2013, this project is substantially completed and we incurred a total of $3.2 million of expenses related to this project.

IVC FILTER & RETRIEVAL KIT. In December 2012, in connection with our acquisition of Crux Biomedical, Inc., or Crux, we acquired Crux's IVC filter and retrieval kit technologies, which were still under development at acquisition. These technologies were recorded as IPR&D assets and were valued at $28.4 million, of which $24.1 million was for the IVC filter technology and $4.3 million was for the IVC retrieval kit technology. At the acquisition date, the estimated costs to complete the development of the IVC filter were $4.7 million and the estimated costs to complete the development of the IVC retrieval kit were $1.7 million with estimated completion during 2014.

During the fourth quarter of 2013, we substantially completed the IVC filter development and launched the product to a limited market. The $24.1 million IPR&D associated with the IVC filter was transfered to developed technology and we began

amortizing this developed technology in December 2013. We incurred a total of $2.2 million of expenses related to the IVC filter project since acquisition.

We are continuing the development of the IVC retrieval kit and the following table summarizes this IPR&D project (in millions) at December 31, 2013:



	As of Acquisition Date				Costs Incurred Since Acquisition		Estimated Cost to Complete, as of December 31, 2013		Total Estimated Costs to Complete since Acquisition Date
Project Name	Fair Value		Estimated Cost to Complete		Costs Incurred Since Acquisition		Estimated Cost to Complete, as of December 31, 2013		Total Estimated Costs to Complete since Acquisition Date
IVC retrieval kit	$	4.3	$	1.7	$	1.0	$	0.7	$	1.7

Interest Income. Interest income is comprised of interest income earned from our cash and cash equivalents and our short-term and long-term available-for-sale investments.

Interest Expense. Interest expense is comprised of interest expense related to our convertible senior notes, including coupon interest, accretion of debt discount, and amortization of issuance costs, and interest expense related to the long-term debt acquired with Sync-Rx, offset by interest capitalization related to the Costa Rica plant construction, before the plant was placed into service in the second quarter of 2012, and our global Enterprise Resource Planning, or ERP, system implementation, before the ERP system was placed into service in the fourth quarter of 2013.

Exchange Rate Gain (Loss). Exchange rate gain (loss) is comprised of foreign currency transaction and remeasurement gains and losses, and the effect of changes in value and net settlements of our foreign exchange forward contracts.

Provision for Income Taxes. Our effective tax rate is a blended rate resulting from the composition of taxable income in the global jurisdictions in which we conduct business. We apply the “with and without method—direct effects only”, in accordance with authoritative guidance, with respect to recognition of stock option excess tax benefits within stockholders equity (additional paid in capital). Therefore, the provision for domestic income taxes is determined utilizing projected federal and state taxable income before the application of deductible excess tax benefits attributable to stock option exercises.

For the years ended December 31, 2013, 2012 and 2011, the provision for income taxes is comprised of federal, foreign and various state and local income taxes. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to continue to fluctuate as we increase foreign manufacturing and distribution operations. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by jurisdiction during the periods in which those temporary differences become deductible. To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the statement of operations. In the case of an acquired or merged entity, we will record a valuation allowance on a deferred asset through purchase accounting as an adjustment to goodwill at the acquisition date if it is more likely than not that all or a portion of the acquired deferred tax assets will not be recognized in the future. Any subsequent change to a valuation allowance established during purchase accounting within the measurement period of the acquisition (not to exceed twelve months) will also be recorded as an adjustment to goodwill, provided that such change relates to new information about the facts and circumstances that existed on the acquisition date.

During the fourth quarter of 2013, we concluded that it was more likely than not that we would not be able to realize a $3.8 million benefit related to our state and select foreign deferred tax assets. Further, in 2013, we completed our purchase accounting analysis and concluded that it was more likely than not that $1.4 million of foreign deferred tax assets related to the Sync-Rx, Ltd. acquisition and $1.1 million of state deferred tax assets related to the Crux Biomedical, Inc. acquisition are not realizable. This resulted in a net increase in valuation allowance against these deferred tax assets, which was recorded as a reduction to goodwill.

During the fourth quarter of 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our federal and state deferred tax assets in the future as a result of cumulative profitability and expected future taxable income. Therefore, we reversed $22.0 million of the valuation allowance on our net federal and certain state deferred income tax assets.

Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011 presented in both absolute dollars (in thousands) and as a percentage of revenues, with the dollar and percentage change year over year:



	Years Ended December 31,															Changes 2013 vs. 2012					Changes 2012 vs. 2011
	2013					2012					2011					$			%		$			%
Revenues	$	393,678		100.0	%	$	381,866		100.0	%	$	343,546		100.0	%	$	11,812		3.1	%	$	38,320		11.2	%
Cost of revenues, excluding amortization of intangibles	143,302			36.4		128,915			33.8		114,533			33.3		14,387			11.2		14,382			12.6
Gross profit	250,376			63.6		252,951			66.2		229,013			66.7		(2,575		)	(1.0	)	23,938			10.5
Operating expenses:
Selling, general and administrative	182,950			46.5		172,794			45.2		147,057			42.8		10,156			5.9		25,737			17.5
Research and development	69,159			17.6		55,469			14.5		53,098			15.5		13,690			24.7		2,371			4.5
Amortization of intangibles	3,832			1.0		3,240			0.8		3,447			1.0		592			18.3		(207		)	(6.0	)
Acquisition-related items	4,964			1.3		1,858			0.5		—			—		3,106			167.2		1,858			—
Restructuring charges	19,374			4.9		—			—		—			—		19,374			—		—			—
Total operating expenses	280,279			71.2		233,361			61.1		203,602			59.3		46,918			20.1		29,759			14.6
Operating (loss) income	(29,903		)	(7.6	)	19,590			5.1		25,411			7.4		(49,493		)	(252.6	)	(5,821		)	(22.9	)
Interest income	1,287			0.3		902			0.2		908			0.3		385			42.7		(6		)	(0.7	)
Interest expense	(26,908		)	(6.8	)	(7,975		)	(2.1	)	(7,107		)	(2.1	)	(18,933		)	237.4		(868		)	12.2
Exchange rate loss	(1,156		)	(0.3	)	(576		)	(0.2	)	(997		)	(0.3	)	(580		)	100.7		421			(42.2	)
Loss from debt extinguishment	—			—		(4,969		)	(1.3	)	—			—		4,969			(100.0	)	(4,969		)	—
Other, net	5,856			1.5		2,717			0.7		(112		)	—		3,139			115.5		2,829			(2,525.9	)
(Loss) income before income tax	(50,824		)	(12.9	)	9,689			2.5		18,103			5.3		(60,513		)	(624.6	)	(8,414		)	(46.5	)
Income tax (benefit) expense	(16,330		)	(4.1	)	1,667			0.4		(19,990		)	(5.8	)	(17,997		)	(1,079.6	)	21,657			(108.3	)
Net (loss) income	$	(34,494	)	(8.8	)%	$	8,022		2.1	%	$	38,093		11.1	%	$	(42,516	)	(530.0	)%	$	(30,071	)	(78.9	)%

The following table sets forth our revenues by segment and product (in thousands) and the changes in revenues between the specified periods:



	Years Ended December 31,						Changes 2013 vs. 2012					Changes 2012 vs. 2011
	2013		2012		2011		$			%		$			%
Medical segment:
Consoles	$	43,602	$	40,687	$	40,954	$	2,915		7.2	%	$	(267	)	(0.7	)%
Single-procedure disposables:
IVUS	194,225		205,843		200,970		(11,618		)	(5.6	)%	4,873			2.4	%
FFR	112,643		94,885		67,082		17,758			18.7	%	27,803			41.4	%
Other	34,775		29,716		23,530		5,059			17.0	%	6,186			26.3	%
Sub-total medical segment	385,245		371,131		332,536		14,114			3.8	%	38,595			11.6	%
Industrial segment	8,433		10,735		11,010		(2,302		)	(21.4	)%	(275		)	(2.5	)%
	$	393,678	$	381,866	$	343,546	$	11,812		3.1	%	$	38,320		11.2	%

The following table sets forth our revenues by geographic area (in thousands) and the changes in revenues in the specified periods:



	Years Ended December 31,						Changes 2013 vs. 2012					Changes 2012 vs. 2011
	2013		2012		2011		$			%		$			%
Revenues (1):
United States	$	189,748	$	177,992	$	157,412	$	11,756		6.6	%	$	20,580		13.1	%
Japan	109,492		123,558		105,892		(14,066		)	(11.4	)%	17,666			16.7	%
Europe, the Middle East and Africa	71,018		57,913		60,249		13,105			22.6	%	(2,336		)	(3.9	)%
Rest of world	23,420		22,403		19,993		1,017			4.5	%	2,410			12.1	%
	$	393,678	$	381,866	$	343,546	$	11,812		3.1	%	$	38,320		11.2	%


(1)	Revenues are attributed to geographies based on the location of the customer, except for shipments to original equipment manufacturers, which are attributed to the country of origin of the equipment distributed.

Comparison of Years Ended December 31, 2013 and 2012

Revenues. Overall, the increase in the medical segment revenue in the year ended December 31, 2013 compared with the year ended December 31, 2012 was driven by increased demand for our consoles and FFR disposable products, partially offset by the unfavorable impacts of foreign exchange rates, primarily the weakening yen. The increases in FFR disposable revenues were primarily due to the increased adoption of the technology based on clinical study data, offset by the unfavorable impact of approximately $3.8 million of foreign currency exchange related to the yen. The decrease in IVUS disposable revenues was due to the unfavorable impact of approximately $16.8 million of foreign currency exchange related to the yen and the unfavorable impact on pricing as a result of a reduction in the medical reimbursement rate in Japan, partially offset by increased demand and $2.3 million in revenue from the Pioneer Plus re-entry catheter product line acquired from Medtronic on August 30, 2013. The increase in other revenues is primarily due to higher sales of third-party products, higher service contract and rental revenues.

We recognized increases in revenues across all our key geographic markets except for Japan. The increase in Europe, the Middle East and Africa is due to the increased demand for our consoles and disposable products primarily as a result of our successful entrance into emerging markets in the Middle East and Eastern Europe. The decrease in Japan is primarily due to the unfavorable impact of approximately $22.5 million of foreign currency exchange related to the yen and the unfavorable impact on pricing as a result of a reduction in the medical reimbursement rate in Japan that became effective in the second quarter of 2012.

Our revenues have been impacted by the decline in the number of PCI procedures performed in the United States and in Japan. We believe the decline is in part due to concerns by clinicians and payers regarding the appropriateness of conducting PCI procedures, concerns regarding the efficacy of therapeutic treatment options, the long-term efficacy of drug-eluting stents, economic constraints, and reduced rates of restenosis. If the number of PCI procedures continues to decline, it may adversely impact our operating results and our business prospects.

Cost of Revenues. The increase in the cost of revenues in the year ended December 31, 2013 compared with the year ended December 31, 2012 was primarily due to higher sales volume. Gross margin was 63.6% of revenues in the year ended December 31, 2013, decreasing from 66.2% of revenues in the year ended December 31, 2012. This unfavorable change in gross margin was primarily the result of the unfavorable impacts of foreign exchange rates related to the yen, product mix, duplicate overhead costs as we transition certain manufacturing operations to Costa Rica, and unfavorable impact on pricing as a result of a reduction in the medical reimbursement rate in Japan that became effective in the second quarter of 2012.

Selling, General and Administrative. The increase in selling, general and administrative expenses in the year ended December 31, 2013 compared with the year ended December 31, 2012 was primarily due to the higher variable costs for U.S. sales driven by higher sales volumes, expansion of our Japanese and European sales and marketing organizations, including continued growth in our Japanese and European operations to support our direct sales efforts there, expansion of our peripheral marketing programs, increased information technology and infrastructure expenses to support company growth and increased expense related to corporate compliance programs. The increase was partially offset by not incurring Costa Rica start up expense in 2013, while we did incur such expense during the pre-production phase of our Costa Rica operation in the first quarter of 2012. In addition, medical device excise taxes for the year ended December 31, 2013 totaled $2.8 million, or 0.71% of revenue. This U.S. tax on the sale of medical devices was effective January 1, 2013, thus there was no corresponding amount for the year ended December 31, 2012.

Research and Development. The increase in research and development expenses in the year ended December 31, 2013 compared with the year ended December 31, 2012 was primarily due to increased spending on various product development and clinical trial programs and activities supporting other acquired technologies.

Amortization of Intangibles. The increase in amortization expense in the year ended December 31, 2013 compared with the year ended December 31, 2012 was primarily due to the addition of intangible assets acquired with Sync-Rx, Crux and Pioneer in November 2012, December 2012 and August 2013, respectively. We also reclassified the IPR&D asset related to the IVC filters from the Crux acquisition to developed technology and commenced amortization of such asset in December 2013 when the product line was launched.

Acquisition-Related Items. The acquisition-related items during the year ended December 31, 2013 primarily consist of $860,000 of transaction costs related to the Sync-Rx, Crux and Pioneer acquisitions and a $3.6 million change in fair value of the contingent consideration related to the Crux acquisition primarily as a result of the passage of time during 2013.

The acquisition-related items during the year ended December 31, 2012 consist of $1.6 million of transaction costs related to the Sync-Rx and Crux acquisitions and a $231,000 change in fair value of the contingent consideration related to the Crux acquisition as a result of the passage of time from acquisition date to December 31, 2012.

Restructuring Charges. Restructuring charges during the year ended December 31, 2013 consisted of $3.2 million of employee termination costs, $11.4 million for tangible and intangible asset impairments relating to the discontinuation of in-process research and development projects and termination of a product line, and $4.8 million of other restructuring charges, including our estimate of the probable contract termination costs related to our purchase and lease commitments and other costs directly related to the restructuring activities.

Interest Income. The increase in interest income for the year ended December 31, 2013 as compared to the year ended December 31, 2012 was primarily due to the increase in our available-for-sale investment balance resulting from the proceeds of our convertible debt offering that occurred in December 2012 and is discussed in Note 3 of our consolidated financial statements under "Financial Statement Details - Debt".

Interest Expense. Interest expense during the year ended December 31, 2013 was primarily related to interest and accretion of debt discount incurred on the convertible debt issued in December 2012 ($460 million aggregate principal amount during the year ended December 31, 2013) and the convertible debt issued in September 2010 ($25 million aggregate principal amount during the year ended December 31, 2013). Interest expense during the year ended December 31, 2012 was primarily related to interest and accretion of debt discount incurred on the convertible debt issued in September 2010 ($115 million aggregate principal amount until December 9, 2012, and thereafter $25 million aggregate principal amount through December 31, 2012).

Exchange Rate Gain (Loss). During the years ended December 31, 2013 and 2012, the impact of fluctuations in exchange rates was somewhat mitigated by our hedging practices. Through our hedging program, we reduce the volatility of our exchange rate gains and losses resulting from the remeasurement of our non-functional currency transactions at current exchange rates.

Loss from Debt Extinguishment. During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible senior notes due 2015, or the 2015 Notes, and recognized a $5.0 million loss, which is the difference between the carrying value of the liability component of the 2015 Notes, including any unamortized debt issuance costs, and the consideration attributed to the retirement of the liability component.

Other. During the year ended December 31, 2013, we recognized $5.8 million of gains in connection with the sales of long-term investments, which had been accounted for using the cost method.

Provision for Income Taxes. During the year ended December 31, 2013, we recognized income tax benefit of $16.3 million compared to an income tax expense of $1.7 million during the year ended December 31, 2012.

During the fourth quarter of 2013, we concluded that it was more likely than not that we would not be able to realize a $3.8 million benefit related to our state and select foreign deferred tax assets. Further, in 2013, we completed our purchase accounting analysis and concluded that it was more likely than not that $1.4 million of foreign deferred tax assets related to the Sync-Rx, Ltd. acquisition and $1.1 million of state deferred tax assets related to the Crux Biomedical, Inc. acquisition are not realizable. This resulted in an increase in valuation allowance against these deferred tax assets, which was recorded as a reduction to goodwill.

During the fourth quarter of 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future as a result of cumulative profitability and expected future taxable income, resulting in the recognition of a tax benefit from the reversal of $22.0 million of the valuation allowance on our net federal and certain state deferred income tax assets.

Stock option excess tax benefits of $0 and $35,000 were credited to additional paid-in-capital during the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible note due 2015 and recognized a loss for tax purposes, which is the difference between the carrying value of the liability for tax purposes compared to the repurchase price. In addition, the deferred tax asset related to the repurchased call option and deferred tax liability related to the warrant sold were recognized. The recognition of the loss for tax purposes (to the extent it related to equity transactions) and the related deferred tax asset and liability totaling $2.5 million was credited to additional paid in capital during the year ended December 31, 2012.

Comparison of Years Ended December 31, 2012 and 2011

Revenues. Overall, the increase in the medical segment revenue in the year ended December 31, 2012 compared with the year ended December 31, 2011 was driven by increased demand for our disposable products, as well as higher revenues resulting from our continued growth in our direct sales efforts in Japan and favorable impacts of foreign exchange rates related to the yen, partially

offset by the decline in the medical reimbursement rate in Japan, unfavorable impacts of foreign exchange rates to the euro and decreases in our revenues in southern Europe, in particular Spain where we were in the process of transitioning from a distributor to a direct sale model. Additionally, the increases in FFR disposable revenues were primarily due to the increased adoption of the technology based on clinical study data. The increase in other revenues is primarily due to higher sales of third-party products and higher service contract and rental revenues. We recognized increases in revenues across all our key geographic markets except for Europe. The Japanese market’s growth was due to the continued success of our direct sales efforts and the favorable impact of foreign currency exchange related to the yen. The decrease in European markets related to the unfavorable impacts of foreign currency exchange rates related to the euro and to the slowing economy in Europe, primarily in Spain.

Cost of Revenues. The increase in the cost of revenues in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to higher sales volume. Gross margin was 66.2% of revenues in the year ended December 31, 2012, decreasing from 66.7% of revenues in the year ended December 31, 2011. This unfavorable change in gross margin was primarily the result of the unfavorable impact of the foreign exchange rates to the euro and unfavorable impact on pricing as a result of a decline in the medical reimbursement rate in Japan.

Selling, General and Administrative. The increase in selling, general and administrative expenses in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to the higher variable costs for U.S. sales driven by higher sales volumes, the expansion of Japan and Europe sales and marketing organizations, including continued growth in our Japan operation to support our direct sales efforts there, expansion of our Costa Rica general and administrative activities during the pre-production phase in the first two quarters of 2012, and increased information technology and infrastructure expenses to support company growth.

Research and Development. The increase in research and development expenses in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to increased spending on various product development projects and activities supporting other acquired technologies.

Amortization of Intangibles. The decrease in amortization expense in the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily due to the complete amortization of customer relationships acquired in 2009.

Acquisition-Related Items. The acquisition-related items during the year ended December 31, 2012 consist of $1.6 million of transaction costs related to the Sync-Rx and Crux acquisitions and a $231,000 change in fair value of the contingent consideration related to the Crux acquisition as a result of the passage of time from acquisition date to December 31, 2012.

Interest Income. Interest income for the year ended December 31, 2012 as compared to the year ended December 31, 2011 remained consistent.

Interest Expense. The increase in interest expense during the year ended December 31, 2012 compared with the year ended December 31, 2011 was primarily related to interest incurred on the convertible debt issued in December 2012.

Exchange Rate Gain (Loss). During the years ended December 31, 2012 and 2011, the impact of fluctuations in exchange rates was mitigated by our hedging practices. Through our hedging program, we reduce the volatility of our exchange rate gains and losses resulting from the remeasurement of our intercompany receivable balances at current exchange rates.

Other. During the year ended December 31, 2012, we recognized $2.8 million of gains in connection with the liquidation of a long term investment, which had been accounted for using the cost method.

Provision for Income Taxes. During the year ended December 31, 2012, we recognized income tax expense of $1.7 million compared to an income tax benefit of $20.0 million during the year ended December 31, 2011. During the quarter ended December 31, 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. We expect that our foreign operations in the respective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax assets. As a result, we released $4.9 million of the valuation allowance on our foreign deferred tax assets. During the quarter ended December 31, 2011, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our deferred tax assets in the future as a result of cumulative profitability and expected future taxable income, resulting in the recognition of a tax benefit from the reversal of $22.0 million of the valuation allowance on our net federal and certain state deferred income tax assets.

Stock option excess tax benefits of $35,000 and $165,000 were credited to additional paid-in-capital during the years ended December 31, 2012 and 2011, respectively. During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible note due 2015 and recognized a loss for tax purposes, which is the difference between the carrying value of the liability for tax purposes compared to the repurchase price. In addition, the deferred tax asset related to the repurchased call option and deferred tax liability related to the warrant sold were recognized. The recognition of the loss for tax purposes (to the extent it related to equity transactions) and the related deferred tax asset and liability totaling $2.5 million was credited to additional paid in capital during the year ended December 31, 2012. The reversal of the valuation allowance related to our convertible senior notes of $1.7 million was credited to additional paid in capital during the year ended December 31, 2011.

Liquidity and Capital Resources

Sources of Liquidity

Historically, our sources of cash have included:


•	issuance of equity and debt securities, including underwritten public offerings of our common stock and convertible bonds, cash generated from the exercise of stock options and participation in our employee stock purchase plan;


•	cash generated from operations, primarily from product sales; and


•	interest income.

Our historical cash outflows have primarily been associated with:


•	cash used for operating activities such as the purchase and growth of inventory, expansion of our sales and marketing and research and development infrastructure and other working capital needs;


•	expenditures related to increasing our manufacturing capacity and improving our manufacturing efficiency;


•	capital expenditures related to the acquisition of equipment that we own and place at our customer premises and other fixed assets;


•	cash used to repay our debt obligations and related interest expense;


•	cash used for acquisitions; and


•	cash used to repurchase outstanding common stock.

Fluctuations in our working capital due to timing differences of our cash receipts and cash disbursements also impact our cash inflows and outflows.

On September 20, 2010, we issued $115 million principal amount of 2.875% Notes due 2015, or the 2015 Notes, in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the 2015 Notes, we purchased call options on our common stock. In addition, to reduce the cost of the hedge, under separate transactions we sold warrants. We received proceeds of $100.5 million from issuance of the 2015 Notes, net of issuance costs ($4.4 million) and net payments related to our hedge transactions ($10.0 million).

On December 5, 2012, we issued $460.0 million principal amount of 1.75% Notes due 2017, or the 2017 Notes, in an offering registered under the Securities Act of 1933, as amended. To hedge against potential dilution upon conversion of the 2017 Notes, we purchased call options on our common stock. In addition, to reduce the cost of the hedge, under separate transactions we sold warrants. We received proceeds of $409.3 million from the issuance of the 2017 Notes, net of debt issuance costs ($14.6 million) and net payments related to our hedge transactions ($36.1 million).

Concurrently with the issuance of the 2017 Notes, we retired $90.0 million of the 2015 Notes and retired the proportionate portion of the warrants and call options related to the 2015 Notes. We paid $104.9 million to repurchase the $90.0 million face value of the 2015 Notes and received a net amount of $3.6 million related to the retirement of the proportionate warrants and call options associated with the 2015 Notes.

At December 31, 2013, our cash and cash equivalents and available-for-sale investments totaled $373.9 million. We invest our excess funds in U.S. government securities, corporate fixed income securities, commercial paper, certificates of deposit and money market funds.

At December 31, 2013, our accumulated deficit was $116.4 million. Since inception, we have generated significant operating losses. During the years ended December 31, 2012 and 2011, we achieved full years of profitability. During the years ended December 31, 2013, 2012 and 2011, our business generated $13.5 million, $49.8 million and $43.6 million in cash flows from operating activities, respectively.

Cash Flows (in thousands)



	Years Ended December 31,
	2013			2012			2011
Net cash provided by operating activities	$	13,514		$	49,818		$	43,596
Net cash (used in) provided by investing activities	(145,691		)	(147,216		)	6,729
Net cash (used in) provided by financing activities	(90,126		)	321,756			13,140
Effect of exchange rate changes on cash and cash equivalents	(1,173		)	(739		)	122
Net change in cash and cash equivalents	$	(223,476	)	$	223,619		$	63,587

Cash Flows from Operating Activities. Cash provided by operating activities of $13.5 million for 2013 reflected our net loss of $34.5 million, adjusted for non-cash expenses, consisting primarily of $29.7 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $16.1 million of stock-based compensation expense, $19.0 million of accretion of debt discount on convertible notes and other long-term debt, $11.4 million of asset impairment charges related to restructuring activities, and $3.6 million of accretion of contingent consideration, offset by a $5.8 million gain on sale of other long-term investments. Additional sources of cash include increases in accrued compensation ($2.7 million), accrued expenses and other liabilities ($4.0 million) and deferred revenue ($1.3 million). Uses of cash include an increase in accounts receivable of $10.4 million due to increased sales, an increase in inventories of $14.4 million related to increased forecast sales demand, and an increase in prepaid expenses and other assets of $3.9 million.

Cash provided by operating activities of $49.8 million for 2012 reflected our net income of $8.0 million, adjusted for non-cash expenses, consisting primarily of $26.8 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $15.1 million of stock-based compensation expense, $5.7 million of accretion of debt discount on convertible notes and $5.0 million for the loss incurred on the extinguishment of debt. Additional sources of cash include increases in accrued compensation ($3.4 million), accrued expenses and other liabilities ($6.8 million) and deferred revenue ($4.2 million). Uses of cash include an increase in accounts receivable of $10.0 million due to increased sales and an increase in inventories of $13.3 million related to increased forecast sales demand.

Cash provided by operating activities of $43.6 million for 2011 reflected our net income of $38.1 million, adjusted for non-cash expenses, consisting primarily of $27.0 million of depreciation and amortization, including amortization or accretion of investment premium or discount, $13.0 million of stock-based compensation expense and $4.7 million of accretion of debt discount on our convertible notes, offset by $22.8 million deferred tax benefit. Additional sources of cash include increases in accrued compensation ($2.0 million) and deferred revenue ($1.9 million). Uses of cash included an increase in accounts receivable of $9.3 million due to increased sales, a decrease in accounts payable of $2.4 million and a decrease in accrued expenses and other liabilities of $6.5 million.

Cash Flows from Investing Activities. In 2013, $375.0 million was used to purchase short-term and long-term available-for-sale securities and $31.9 million was used for capital expenditures, including purchases of medical diagnostic equipment, manufacturing equipment and our ERP system. Additionally, we used $15.0 million for the acquisitions of Pioneer, $3.5 million for the acquisition of other intangible assets, including purchased technology and costs of patents, and $17.9 million for the acquisition of other long-term investments. These purchases were partially offset by $290.3 million from the sale or maturity of available-for-sale investments and $7.3 million of proceeds we received from sales of other long-term investments.

In 2012, $298.3 million was used to purchase short-term and long-term available-for-sale securities and $43.8 million was used for capital expenditures, including purchases of medical diagnostic equipment, manufacturing equipment and construction of the manufacturing facility in Costa Rica. Additionally, we used $54.5 million for the acquisitions of Sync-Rx and Crux, net of cash acquired, and $5.8 million for the acquisition of other intangible assets, including purchased technology and costs of patents. These purchases were partially offset by $252.9 million from the sale or maturity of investments.

In 2011, $310.6 million was used to purchase short-term and long-term available-for-sale securities and $43.2 million was used for the purchases of long-term assets, including facility construction in Costa Rica, and capital expenditures for medical

diagnostic equipment, manufacturing equipment and our ERP systems. Additionally, we used $3.5 million for the acquisition of other intangible assets and other investments, including purchased technology and costs of patents. These purchases were partially offset by $365.6 million from the sale or maturity of investments.

Cash Flows from Financing Activities. Cash provided by financing activities in 2013 consisted primarily of $6.4 million from exercises of common stock options and $3.6 million from the sale of common stock under our employee stock purchase plan. Cash used by financing activities consisted of the payment of $100.0 million for the accelerated share repurchase program we entered into in December 2013 in connection with our share repurchase program.

Cash provided by financing activities in 2012 consisted primarily of net proceeds of $409.3 million from the issuance of the 2017 Notes and related hedge transactions, $9.9 million from exercises of common stock options and $3.9 million from the sale of common stock under our employee stock purchase plan, partially offset by the net payment of $101.3 million from the repurchase of a portion of the 2015 Notes and retirement of the related proportionate hedge transaction.

Cash provided by financing activities in 2011 consisted primarily of $9.4 million from exercises of common stock options, and $3.6 million from the sale of common stock under our employee stock purchase plan.

Future Liquidity Needs

At December 31, 2013, our primary short-term needs for capital, which are subject to change, include expenditures related to:


•	medical diagnostic equipment that we own and place at our customers’ premises;


•	the acquisition of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;


•	support of our commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources in the U.S. and abroad, particularly in Japan where our strategy is to continue to pursue a direct sales model;


•	the continued advancement of research and development activities;


•	improvements to and increases in our manufacturing capacity and efficiency; and


•	acquisitions of technologies and/or businesses that enhance our capabilities or complement our markets.

Our capital expenditures are largely discretionary and within our control. We expect that our product revenue and the resulting operating income, as well as the status of each of our product development programs, will significantly impact our cash management decisions.

At December 31, 2013, we believe our current cash and cash equivalents and our available-for-sale investments will be sufficient to fund working capital requirements, debt service requirements, capital expenditures and operations for at least the next 12 months. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future.

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of any future operating losses, the level and timing of future sales and expenditures, the results and scope of ongoing research and product development programs, working capital required to support our sales growth, funds required to service our debt, the receipt of and time required to obtain regulatory clearances and approvals, our sales and marketing programs, our need for infrastructure to support our sales growth, the continuing acceptance of our products in the marketplace, competing technologies and changes in the market and regulatory environment and cash that may be required to settle our foreign currency hedges.

Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control—See “Risk Factors—We may require significant additional capital to pursue our growth strategy, and our failure to raise capital when needed could prevent us from executing our growth strategy.” Should we require additional funding, such as additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot assure that such funding will be available in needed quantities or on terms favorable to us, if at all.

At December 31, 2013, we have gross federal and state net operating loss carry forwards of approximately $133.6 million and $80.4 million, respectively, available to reduce future taxable income if we remain profitable. Pursuant to Internal Revenue Code Section 382, use of net operating loss carry forwards related to acquisitions of an additional approximately $20.1 million may be limited. We may have incurred one or more ownership changes under Internal Revenue Code Section 382 in 2013 and as such our net operating losses may be limited in future years. We are in the process of completing a formal Internal Revenue Code 382 study to determine the annual limitation on the use of the net operating losses. We do not expect substantial limitations. We expect to

utilize our available net operating loss carry forwards to reduce future tax obligations in the event we are successful in maintaining continued profitability. However, future limitations on our ability to use net operating loss carry forwards and other minimum state taxes may increase our overall tax obligations.

Off-Balance Sheet Arrangements

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification to business partners and customers for losses suffered or incurred for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these agreements is unlimited. At December 31, 2013, we have not incurred any costs to defend lawsuits or settle claims related to these indemnification arrangements.

Contractual Obligations

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2013 for each of the periods indicated (in thousands):



Contractual Obligations	Payments Due By Period
Contractual Obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Capital lease obligations (including interest)	$	30	$	18	$	12	$	—	$	—
Operating lease obligations (1)	55,452		8,800		11,574		10,629		24,449
Non-cancelable purchase obligations (2)	70,077		65,752		4,325		—		—
Convertible senior notes	485,000		—		25,000		460,000		—
Interest on convertible senior notes	32,727		8,769		16,579		7,379		—
Clinical programs (3)	—		—		—		—		—
Total (4)	$	643,286	$	83,339	$	57,490	$	478,008	$	24,449


(1)	We lease office space and have entered into other lease commitments in the U.S. as well as locations in Japan, Europe, Asia and the Middle East. Operating lease obligations include future minimum lease payments under all our non-cancelable operating leases at December 31, 2013.


(2)	Consists of non-cancelable commitments for the purchase of production materials, other inventory items and services.

(3)

We have commitments to provide funding of $4.6 million to a clinical study conducted by a third-party and at December 31, 2013, we have a remaining obligation of up to $2.1 million. We will be billed as services are performed under the agreement. In addition, we have entered into agreements with other third parties to sponsor clinical studies. Generally, we contract with one or more clinical research sites for a single study and no one agreement is material to our consolidated results of operations or financial condition. We are usually billed as services are performed based on enrollment and are required to make payments over periods ranging from less than one year up to three years. Our actual payments under these agreements will vary based on enrollment.


(4)	The total above does not include the following contingent liabilities: a) potential payment of up to $1.9 million plus interest payable to an agency of the Israeli government; and b) potential milestone payments of an estimated $51.6 million due to the former shareholders of Crux (see Note 2 "Acquisitions" to our consolidated financial statements).

Critical Accounting Policies:

Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increase, those judgments become even more subjective and complex. In order to provide an understanding about how our management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different circumstances, we have identified our critical accounting policies below.

Revenue Recognition

We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue from the sale of our products is generally recognized when title and risk of loss transfers to the customer, the terms of which are generally free on board, or FOB, shipping point. We use contracts and customer purchase orders to determine the existence of an arrangement. We use shipping documents and third-party proof of delivery to verify that title has transferred. We assess whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, we assess a number of factors, including past transaction history with the customer and the creditworthiness of the customer.

We recognize revenue from consignment arrangements based on product usage, which indicates that the sale is complete. Installation and training are generally not required elements of our sales transactions as most of our products do not require these services. In instances where installation and training are required elements of the sales transaction, revenue is recognized upon completion.

For an arrangement containing multiple deliverables that are considered separate units of accounting, these deliverables can consist of consoles, options for the console, single-procedure disposable products, among other items and are considered separate units of accounting. We allocate arrangement consideration based on the relative selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Selling prices are determined using fair value, when available, or our estimate of selling price when fair value is not available. Typically, we recognize revenue for each unit of accounting upon delivery of the item and complete all obligations under an arrangement with multiple deliverables within one year.

We evaluate lease agreements entered into with customers to determine whether they are sales-type leases or operating leases. Agreements classified as operating leases result in rental revenue reported on a straight-line basis as income over the lease term as it becomes receivable according to the provisions of the lease. For leases qualifying as sales-type leases, we recognize the present value of the lease payments as revenue at the time the lease is recorded and the associated unearned interest is amortized over the term of the lease. Our sales-type lease and operating lease revenue and receivables relating to sales-type leases are not significant for the years ended 2013, 2012 and 2011.

All costs associated with the provision of service are recognized in cost of revenues as incurred. Amounts billed in excess of revenue recognized are included as deferred revenue in the consolidated balance sheets.

We sell our products through direct sales representatives in the U.S. and a combination of direct sales representatives and independent distributors in international markets. Sales to distributors are recorded when title and risk of loss transfer upon shipment (generally FOB shipping point). No direct sales customers or distributors have price protection. Estimated returns, which are historically nominal, are recorded as an allowance for sales return and as a reduction in revenues.

Fair Value

We record our short-term and long-term available-for-sale investments at fair value. At December 31, 2013, our cash and investments totaled $373.9 million. FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, establishes three levels of inputs that may be used to measure fair value (see Note 3 “Financial Statement Details” to our consolidated financial statements included in this Annual Report). Each level of input represents varying degrees of subjectivity and difficulty involved in determining fair value. Valuations using Level 1 and 2 inputs are generally based on price quotations and other observable inputs in active markets and do not require significant management judgment or estimation. We utilize a third-party pricing service to assist us in obtaining fair value pricing for these investments. While pricing for these securities is based on proprietary models, the inputs used are based on observable market information, therefore we have classified our inputs as Level 1 and Level 2.

We record our foreign exchange forward contracts at fair value. At December 31, 2013, the fair value of our foreign exchange forward contracts of $2.9 million was included in prepaid and other current assets, $81,000 was included in other non-current assets and $1.4 million was included in other current liabilities in our consolidated balance sheet. We utilize third-party financial institutions to assist us in obtaining fair value pricing for our foreign currency forward contracts and classified these fair value inputs as Level 2.

We also record contingent consideration, which consist of obligations to pay former shareholders of an acquired entity if specified events occur or conditions are met such as the achievement of certain technological milestones or the achievement of targeted revenue milestones, at fair value. At December 31, 2013, the fair value of our contingent consideration arrangements was $33.6 million (net of the $1.2 million contingent receivable). We determined the fair values of the contingent consideration, which includes payment upon FDA clearance and milestone payments based on commercial sales of Crux products, using various estimates, including revenue projections, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. For the fair value relative to the milestone payments based on the commercial sales of Crux products, the key assumptions in applying the income approach include a 14% discount rate and probability-weighted expected milestone

payment ranges from $32.8 million to $70.1 million based on projected commercial sales of Crux products ranging from $124.9 million to $279.8 million from December 2013 to 2019.

In addition, we recorded a contingent liability related to a government grant received to develop an underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. The grant was recorded as other long term debt at its present value, $1.3 million at December 31, 2013, using various estimates, including revenue projections, discount rate and estimated years of repayment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At December 31, 2013, for the fair value relative to this liability, the key assumptions in applying the income approach included an 8% discount rate and estimated commercial sales derived from the underlying technology ranging from $256.1 million to $298.3 million over the expected period of repayment of 10 to 16 years.

Inventory Valuation

Inventories are valued at the lower of first-in, first-out cost or market value. Inventory provisions are recorded for materials that have become obsolete or are no longer used in current production and for inventory that has a market value less than the carrying value in inventory. We regularly monitor potential inventory excess, obsolescence and lower market values compared to standard costs and, when necessary, reduce the carrying amount of our inventory to its market value. Specific reserves are maintained to reduce the carrying value of inventory items on hand that we know may not be used in finished goods. If our estimates for potential inventory losses prove to be too low, then our future earnings will be affected when the related additional inventory losses are recorded.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Equipment and capitalized software are depreciated over the estimated useful lives of the assets, which range generally from three to ten years. Leasehold improvements are amortized over the lesser of the lease term including renewal periods that are reasonably assured or the estimated useful lives of the improvements, which are between three and ten years. The straight-line method is used for depreciation and amortization. Land is stated at cost and is not depreciated. Significant improvements which substantially extend the useful lives of assets are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.

Assets held under capital leases are recorded at the net present value of the minimum lease payments of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease and is included in our depreciation expense.

Our long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. We recorded $2.0 million in long-lived assets impairment charges as part of our restructuring charges during 2013. See Note 3 “Financial Statement Details—Restructuring Activity" for additional information. No significant impairment of long-lived assets was identified or recorded during the years ended December 31, 2012 and 2011.

Goodwill

We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired in a business combination to goodwill. The impairment evaluation for goodwill is conducted annually as of October 1, or more frequently if events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We test for goodwill impairment at the reporting unit level, which is the same as our operating segment level. Our goodwill at December 31, 2013 and 2012 is allocated entirely to our medical segment.

We first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of our reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. In the first step, we compare the fair value of our reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of our reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of our reporting unit's goodwill. If the carrying value of our reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference. There was no impairment of goodwill during the years ended December 31, 2013, 2012 and 2011.

Intangible Assets

Intangible assets are recorded at historical cost and amortized over their estimated useful lives. Intangible assets consist of acquired developed technology, licenses, customer relationships, patents and trademarks and covenants-not-to-compete as well as acquired in-process research and development technology. Intangible assets with a definite life are amortized using the straight-line method over their estimated useful lives of up to 20 years.

When we acquire another entity, the purchase price is allocated, as applicable, between acquired in-process research and development, or IPR&D, other identifiable intangible assets, and net tangible assets, with the remainder recognized as goodwill. IPR&D has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value. Determining the allocation of the purchase price, including the portion of the purchase price allocated to IPR&D requires us to make significant estimates. The amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows of each project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. These methodologies include consideration of the risk of the project not achieving commercial feasibility.

Intangible assets with definite lives are tested for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. We recorded $6.3 million in intangible asset impairment charges, including $4.1 million IPR&D impairment, as part of the restructuring charges during 2013. See Note 3 “Financial Statement Details—Restructuring Activity” for additional information. No impairment of intangible assets was identified or recorded during the years ended December 31, 2012 and 2011.

Stock-based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model, or Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates. See Note 5 “Stockholders’ Equity” to our consolidated financial statements for a complete discussion of our equity compensation programs and the fair value assumptions used to determine our stock-based compensation expense.

We have used the Black-Scholes model to estimate fair value of our stock-based awards which requires various judgmental assumptions including estimating stock price volatility, risk-free interest rate, and expected option life. If we had made different assumptions, the amount of our deferred stock-based compensation, stock-based compensation expense, gross margin, net income (loss) and net income (loss) per share amounts could have been significantly different. We believe that we have used reasonable methodologies, approaches and assumptions to determine the fair value of our common stock and that deferred stock-based compensation and related amortization were recorded properly for accounting purposes. If any of the assumptions used change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. For example, we granted stock options for 1,009,162 shares of our common stock during the year ended December 31, 2013. Using our assumptions, we calculated approximately $7.5 million of stock compensation expense related to these option grants that will generally be amortized over four years. Given a ten percent change in our volatility assumption, the value of these awards would have differed by approximately $1.7 million. Given a one-hundred basis point change in our risk-free interest rate assumption, the value of these awards would have differed by approximately $350,000. Given a one year change in our expected option life assumption, the value of these awards would have differed by approximately $950,000. In addition, given a one-hundred basis point change in our weighted-average forfeiture rate assumption, our stock-compensation expense recorded in the year ended December 31, 2013 would have differed by approximately $11,000.

Income Taxes

We account for income taxes in accordance with FASB ASC Topic 740, Income Taxes. Our deferred tax assets are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are expected to be recovered or settled.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in jurisdictions, which we expect to continue to fluctuate as we increase foreign manufacturing and distribution operations. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The impact of an uncertain

income tax position is recognized at the largest amount that is “more likely than not” to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

The realization of our deferred tax assets, which have a net carrying value of $44.7 million at December 31, 2013, is dependent upon our ability to generate sufficient future taxable income. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods and jurisdictions in which those temporary differences become deductible.

In 2013, the Company incurred a net loss, and is not projecting a return to profitability in 2014. As of December 31, 2013, management has evaluated the recoverability of its Federal deferred tax assets, including factors such as a consideration of forecasted operating results, in-process changes in its manufacturing processes, potential tax planning strategies, as well as the period of time that will transpire before the underlying deferred tax assets will expire. Based on this evaluation, management has concluded that it is more likely than not that the underlying deferred tax assets will be utilized prior to their expiration, and therefore continues to believe that the Federal deferred tax assets will be recovered.

During the fourth quarter of 2013, we concluded that it was more likely than not that we would not be able to realize a $3.8 million benefit related to our state and select foreign deferred tax assets. Further, in 2013, we completed our purchase accounting analysis and concluded that it was more likely than not that $1.4 million of foreign deferred tax assets related to the Sync-Rx, Ltd. acquisition and $1.1 million of state deferred tax assets related to the Crux Biomedical, Inc. acquisition are not realizable. This resulted in an increase in valuation allowance against these deferred tax assets, which was recorded as a reduction to goodwill.

During the fourth quarter of 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. Our expectation is that our operations in the respective foreign jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the majority of our foreign deferred tax assets. As a result, we released $4.9 million of the valuation allowance on our foreign deferred tax assets. We believe it is more likely than not that the benefit from a portion of our state tax credit and operating loss carry forwards and foreign net operating loss carry forwards will not be realized. In recognition of this risk, we will continue to provide a full valuation allowance on the deferred tax assets relating to these items. We will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist. To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the statement of operations. In the case of an acquired or merged entity, we will record a valuation allowance on a deferred tax asset through purchase accounting as an adjustment to goodwill at the acquisition date, if it is more likely than not that all or a portion of the acquired deferred tax assets will not be realized in the future. Any subsequent change to a valuation allowance established during purchase accounting within the measurement period of the acquisition (not to exceed twelve months) will also be recorded as an adjustment to goodwill, provided that such change relates to new information about the facts and circumstances that existed on the acquisition date.

Recent Accounting Pronouncements

In December 2011, the FASB amended the accounting standards to increase the prominence of other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in shareholders’ equity and requiring the components of OCI to be presented either in a single continuous statement of comprehensive income or in two consecutive statements. We adopted the amended accounting standards in 2013 by electing to present consolidated statements of comprehensive income separate from the consolidated statements of income.

In February 2013, the FASB further amended the above accounting standards to improve the presentation of amounts reclassified out of accumulated other comprehensive income in its entirety and by component by presenting the reclassification adjustments on either the face of the statement where net income is presented or in a separate disclosure in the notes to the financial statements. Amounts that are not required to be reclassified in their entirety to net income are required to be cross referenced to related footnote disclosures that provide additional detail. The amended accounting standards only impact the financial statement presentation of OCI and do not change the components that are recognized in net income or OCI. The adoption had no impact on the our financial position or results of operations.

Inflation

We do not believe that inflation has had a material impact on our historical results of operations; however, there can be no assurance that our business will not be materially affected by inflation in the future.



Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows. In the ordinary course of business, we are exposed to interest rate and foreign exchange risk. Fluctuations in interest rates and the rate of exchange between the U.S. dollar and foreign currencies, primarily the euro and yen, could adversely affect our financial results.

We do not carry significant inventory of transducers, substrates or scanner subassemblies. If we had to change suppliers, we expect that it would take 6 to 24 months to identify appropriate suppliers, complete design work and undertake the necessary inspections and testing before the new transducers, substrates and subassemblies would be available.

Interest Rate Risk

Our exposure to interest rate risk at December 31, 2013 is related to the investment of our excess cash into highly liquid financial investments as well as our convertible debt which has a fixed rate. Fixed rate investments and borrowings may have their fair market value adversely impacted from changes in interest rates.

At December 31, 2013, we held $373.9 million in cash and cash equivalents and available-for-sale investments of which $339.0 million consisted of highly liquid financial investments with original final maturities of one year or less and the remaining amount was long-term available-for-sale investments with original final maturities over one year. If interest rates were to increase instantaneously and uniformly by 10 basis points, compared to interest rates as of December 31, 2013, the fair market value of our investment portfolio would decrease by approximately $141,000.

We invest in cash and cash equivalents and available-for-sale investments in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields consistent with our tolerance for investment risk. Our investment policy specifies credit quality standards for our investments. We do not hold mortgage-backed securities. Due to the generally short-term nature of the majority of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar. We are exposed to foreign currency risks through our global operations, primarily in Japan and Europe, and when we enter into transactions in non-functional currencies. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the Japanese yen and the euro, could adversely affect our financial results. During the year ended December 31, 2013, 26.8% and 17.8% of our revenues were denominated in yen and euro, respectively, and 10.5% and 9.3% of our operating expenses were denominated in yen and euro, respectively. If our yen or euro denominated sales exceed our yen or euro denominated costs, and the U.S. dollar strengthens relative to the yen or euro, there is an adverse effect on our results of operations. Conversely, if the U.S. dollar weakens relative to the yen or euro, there is a positive effect on our results of operations. For example, the average exchange rate of one U.S. dollar to yen increased 21.5% from 79.3 in 2012 to 96.4 in 2013, which resulted in a net negative impact to our operational results for 2013 in the amount of approximately $14.1 million. The average exchange rate of one euro to U.S. dollar increased 2.8% from 1.29 in 2012 to 1.33 in 2013, which resulted in a net positive impact to our operational results for 2013 in the amount of approximately $1.2 million.

We enter into derivative financial instruments, principally forward contracts, to manage a portion of the foreign currency risk related to transactions in non-functional currencies. We record derivative financial instruments as either assets or liabilities in our consolidated balance sheets and measure them at fair value. Certain of the derivative instruments we use to mitigate this exposure are not designated for hedge accounting treatment, and as a result, changes in their fair values are recorded in exchange rate gain (loss) in the consolidated statement of operations. These contracts contain net settlement features. If we experience unfavorable changes in foreign exchange rates, we may be required to use significant amounts of cash to settle the transactions which may adversely affect the operating results that we report with respect to the corresponding period.

Commencing April 2013, we broadened our currency hedging program to hedge certain forecasted intercompany inventory transactions that are denominated in yen and euro. These forward contracts are designated as cash flow hedges and at December 31, 2013 have maturity dates of up to 13 months. Changes in the fair value of cash flow hedges, excluding time value of the hedges which is recorded as interest expense, are reported as a component of accumulated other comprehensive income (loss), or AOCI, within stockholders' equity. Once the underlying hedged transaction occurs, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction, reclassify the gain or loss recorded to date from AOCI into cost of goods sold, and record any further gains or losses to exchange rate gain (loss). We evaluate effectiveness at the inception of the hedge and on an ongoing basis. To the extent we experience ineffectiveness in our hedges, the gains or losses accumulated in other comprehensive income associated with the ineffective portion of the hedge are reclassified immediately

into exchange rate gain (loss). We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.

We are exposed to credit losses in the event of nonperformance by the banks with which we transact foreign currency contracts. We currently hold foreign exchange forward contracts with two counterparties. Our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We manage this credit risk by executing foreign currency contracts with counterparties that meet our minimum requirements, and monitoring the credit ratings of our counterparties on a periodic basis. As of December 31, 2013, we had a total credit exposure of $1.6 million from nonperformance of foreign exchange hedging counterparties.

Market Price Sensitive Instruments

In order to reduce the potential equity dilution that would result upon conversion of our convertible senior notes, we entered into convertible note hedge transactions, or the Hedge, entitling us to purchase up to 14 million shares of our common stock at an initial strike price of $32.83 per share and 850,000 shares of common stock at an initial strike price of $29.64 per share, subject to adjustments. Upon conversion of the convertible senior notes, the Hedge is expected to reduce the equity dilution if the daily volume-weighted average price per share of our common stock exceeds the strike price of the Hedge. We also entered into warrant transactions with the counterparties of the Hedge entitling them to acquire up to 14 million shares of our common stock at an initial strike price of $37.59 and 850,000 shares of our common stock at an initial strike price of $34.88 per share, subject to adjustments. The warrant transactions could have a dilutive effect on our earnings per share to the extent that the price of our common stock during a given measurement period (the quarter or year to date period) at maturity of the warrants exceeds the strike price of the warrants. In addition, non-performance by the counterparties under the Hedge would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price. See Note 3 “Financial Statement Details—Debt” for additional information.



Item 8.	Financial Statements and Supplementary Data

VOLCANO CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




	Page
Reports of Independent Registered Public Accounting Firm	60
Consolidated Balance Sheets at December 31, 2013 and 2012	62
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011	63
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2013, 2012 and 2011	64
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011	65
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011	66
Notes to Consolidated Financial Statements	68

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Volcano Corporation:

We have audited the accompanying consolidated balance sheets of Volcano Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Volcano Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Volcano Corporation's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2014, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

San Diego, California

February 28, 2014

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Volcano Corporation:

We have audited Volcano Corporation's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Volcano Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Volcano Corporation's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Volcano Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Volcano Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 28, 2014, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Diego, California

February 28, 2014

VOLCANO CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



	December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	107,159		$	330,635
Short-term available-for-sale investments	231,864			140,960
Accounts receivable, net	81,962			76,348
Inventories	60,970			52,811
Prepaid expenses and other current assets	27,299			21,773
Total current assets	509,254			622,527
Long-term available-for-sale investments	34,887			44,385
Property and equipment, net of accumulated depreciation of $96,651 and $80,652, respectively	118,094			104,385
Intangible assets, net	58,108			50,657
Goodwill	55,087			51,577
Other non-current assets	56,489			28,813
Total assets	$	831,919		$	902,344
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	19,137		$	16,284
Accrued compensation	26,918			23,227
Accrued expenses and other current liabilities	28,453			23,529
Deferred revenues	10,652			9,789
Contingent consideration	3,750			2,908
Total current liabilities	88,910			75,737
Convertible senior notes	401,012			382,300
Other long-term debt	1,268			1,119
Deferred revenues	5,079			4,661
Contingent consideration, non-current portion	29,888			27,323
Other non-current liabilities	5,960			2,859
Total liabilities	532,117			493,999
Commitments and contingencies (Note 4)
Stockholders’ equity:
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at December 31, 2013 and December 31, 2012	—			—
Common stock, par value of $0.001; 250,000 shares authorized at December 31, 2013 and December 31, 2012; 51,530 and 53,944 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively	52			54
Additional paid-in capital	420,234			494,276
Accumulated other comprehensive loss	(4,088		)	(4,083		)
Accumulated deficit	(116,396		)	(81,902		)
Total stockholders’ equity	299,802			408,345
Total liabilities and stockholders’ equity	$	831,919		$	902,344

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	Years Ended December 31,
	2013			2012			2011
Revenues	$	393,678		$	381,866		$	343,546
Cost of revenues, excluding amortization of intangibles	143,302			128,915			114,533
Gross profit	250,376			252,951			229,013
Operating expenses:
Selling, general and administrative	182,950			172,794			147,057
Research and development	69,159			55,469			53,098
Amortization of intangibles	3,832			3,240			3,447
Acquisition-related items	4,964			1,858			—
Restructuring charges	19,374			—			—
Total operating expenses	280,279			233,361			203,602
Operating (loss) income	(29,903		)	19,590			25,411
Interest income	1,287			902			908
Interest expense	(26,908		)	(7,975		)	(7,107		)
Exchange rate loss	(1,156		)	(576		)	(997		)
Loss from debt extinguishment	—			(4,969		)	—
Other, net	5,856			2,717			(112		)
(Loss) income before income tax	(50,824		)	9,689			18,103
Income tax (benefit) expense	(16,330		)	1,667			(19,990		)
Net (loss) income	$	(34,494	)	$	8,022		$	38,093
Net (loss) income per share:
Basic	$	(0.63	)	$	0.15		$	0.73
Diluted	$	(0.63	)	$	0.15		$	0.70
Shares used in calculating net (loss) income per share:
Basic	54,341			53,475			52,300
Diluted	54,341			55,195			54,596

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Years Ended December 31,
	2013			2012			2011
Net (loss) income	$	(34,494	)	$	8,022		$	38,093
Other comprehensive income (loss)
Foreign currency translation adjustments	(522		)	(2,732		)	(819		)
Changes in unrealized gain on available-for-sale investments, net of tax	16			31			30
Changes in unrealized gains on foreign currency forward exchange contracts, net of tax	501			—			—
Other comprehensive loss	(5		)	(2,701		)	(789		)
Comprehensive (loss) income	$	(34,499	)	$	5,321		$	37,304

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)



	Common Stock					Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2010	51,366		$	51		$	402,895		$	(593	)	$	(128,017	)	$	274,336
Issuance of common stock under equity compensation plans	1,285		2			13,024									13,026
Employee stock-based compensation cost						12,855									12,855
Non-employee stock-based compensation cost						115									115
Reversal of valuation allowance related to Convertible Senior Notes and tax benefit related to stock-based compensation						1,601									1,601
Net income												38,093			38,093
Other comprehensive loss									(789		)				(789		)
Balance at December 31, 2011	52,651		$	53		$	430,490		$	(1,382	)	$	(89,924	)	$	339,237
Issuance of common stock under equity compensation plans	1,293		1			13,812									13,813
Employee stock-based compensation cost						15,135									15,135
Equity component of convertible senior notes due 2017						89,415									89,415
Portion of convertible bond issuance costs attributed to equity component						(2,840		)							(2,840		)
Net deferred tax recognized in connection with issuance of convertible senior notes due 2017 and retirement of convertible senior notes due 2015						2,599									2,599
Call options purchased in connection with convertible senior notes due 2017						(89,798		)							(89,798		)
Issuance of warrants in connection with convertible senior notes due 2017						53,686									53,686
Portion of retirement of convertible senior notes due 2015 attributed to equity						(21,811		)							(21,811		)
Retirement of call options in connection with retirement of a portion of senior convertible notes due 2015						15,156									15,156
Retirement of warrants in connection with the retirement of a portion of senior convertible notes due 2015						(11,603		)							(11,603		)
Tax benefit related to stock-based compensation						35									35
Net income												8,022			8,022
Other comprehensive loss									(2,701		)				(2,701		)
Balance at December 31, 2012	53,944		$	54		$	494,276		$	(4,083	)	$	(81,902	)	$	408,345
Issuance of common stock under equity compensation plans	1,143		1			9,958									9,959
Employee stock-based compensation cost						16,045									16,045
Common stock repurchase/retirement	(3,557	)	(3		)	(100,045		)							(100,048		)
Net loss												(34,494		)	(34,494		)
Other comprehensive loss									(5		)				(5		)
Balance at December 31, 2013	51,530		$	52		$	420,234		$	(4,088	)	$	(116,396	)	$	299,802

See notes to consolidated financial statements.

VOLCANO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Years Ended December 31,
	2013			2012			2011
Operating activities
Net (loss) income	$	(34,494	)	$	8,022		$	38,093
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,363			23,503			23,214
Amortization (accretion) of investment premium (discount), net	3,294			3,256			3,805
Accretion of debt discount on convertible senior notes and other long-term debt	19,026			5,743			4,668
Loss on debt extinguishment	—			4,969			—
Accretion of contingent consideration	3,607			231			—
Non-cash stock compensation expense	16,084			15,079			12,991
Asset impairment related to restructuring	11,402			—			—
Gain on sale of other long-term investment	(5,832		)	—			—
Effect of exchange rate changes and others	13,360			(593		)	(2,350		)
Deferred income taxes	(18,558		)	(1,009		)	(22,771		)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(10,398		)	(9,971		)	(9,337		)
Inventories	(14,385		)	(13,270		)	831
Prepaid expenses and other assets	(3,865		)	(658		)	(540		)
Accounts payable	(40		)	157			(2,362		)
Accrued compensation	2,691			3,386			1,976
Accrued expenses and other liabilities	3,988			6,756			(6,541		)
Deferred revenues	1,271			4,217			1,919
Net cash provided by operating activities	13,514			49,818			43,596
Investing activities
Purchase of short-term and long-term available-for-sale securities	(374,954		)	(298,260		)	(310,573		)
Sale or maturity of short-term and long-term available-for-sale securities	290,304			252,937			365,639
Capital expenditures	(31,926		)	(43,842		)	(43,248		)
Cash paid for acquisitions, net of cash acquired	(14,975		)	(54,462		)	—
Cash paid for intangible assets	(3,537		)	(4,823		)	(1,222		)
Cash paid for other long-term investments	(17,936		)	(1,001		)	(2,260		)
Proceeds from sale of other long-term investments	7,333			1,500			—
Proceeds from foreign currency exchange contracts	—			1,260			2,355
Payment for foreign currency exchange contracts	—			(525		)	(3,962		)
Net cash (used in) provided by investing activities	(145,691		)	(147,216		)	6,729
Financing activities
Common stock repurchase	(100,048		)	—			—
Proceeds from issuance of convertible senior notes	—			460,000			—
Payment of debt issuance costs in connection with the convertible senior notes	—			(14,611		)	—
Purchase of call options in connection with the convertible senior notes	—			(89,798		)	—
Proceeds from warrants issuance in connection with the convertible senior notes	—			53,686			—
Repurchase of a portion of 2.875% convertible senior notes due 2015	—			(104,832		)	—
Retirement of call options in connection with the retirement of a portion of 2.875% convertible senior notes due 2015	—			15,156			—



Retirement of warrants in connection with the retirement of a portion of 2.875% convertible senior notes due 2015	—			(11,603		)	—
Proceeds from sale of common stock under employee stock purchase plan	3,576			3,880			3,554
Proceeds from exercise of common stock options	6,383			9,933			9,472
Tax benefit related to stock-based compensation	—			35			165
Repayment of capital lease liability	(37		)	(90		)	(51		)
Net cash (used in) provided by financing activities	(90,126		)	321,756			13,140
Effect of exchange rate changes on cash and cash equivalents	(1,173		)	(739		)	122
Net (decrease) increase in cash and cash equivalents	(223,476		)	223,619			63,587
Cash and cash equivalents, beginning of year	330,635			107,016			43,429
Cash and cash equivalents, end of year	$	107,159		$	330,635		$	107,016
Supplemental disclosures of cash flow information:
Cash paid for interest	$	8,567		$	3,334		$	3,395
Cash paid for income taxes	$	3,309		$	2,399		$	2,387

See notes to consolidated financial statements.

VOLCANO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Our Company

Basis of Presentation and Principles of Consolidation

Our consolidated financial statements include the accounts of Volcano Corporation and its wholly–owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires 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 revenue and expenses during the reporting period. Estimates are used for, but not limited to, the allowance for doubtful accounts, inventory reserves, depreciation and amortization, intangible assets, sales returns, deferred revenues, business combinations, warranty costs, certain accruals, long-lived asset impairment calculations, deferred tax assets and liabilities, contingent consideration and other contingencies. Actual results could differ materially from the estimates and assumptions we use in the preparation of our consolidated financial statements.

Foreign Currency Translation

The Company's reporting currency is the U.S. dollar. The yen and the euro are the functional currencies of our subsidiaries, Volcano Japan and Volcano Europe, respectively, as they are the primary currencies within the economic environments in which Volcano Japan and Volcano Europe operate. Assets and liabilities of their operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation are reported in other comprehensive income or loss.

Exchange rate fluctuations resulting from the remeasurement of the inter-company balances between Volcano Corporation, our U.S. entity, and Volcano Japan, and Volcano Corporation and Volcano Europe, and other non-U.S. dollar denominated balances into U.S. dollars are recorded as foreign currency transaction gains or losses and are included in exchange rate gain (loss) in the consolidated statements of operations.

The functional currency of our other foreign subsidiaries is the U.S. dollar since they operate as an extension of the Company’s U.S. operations.

Cash and Cash Equivalents

Cash primarily consisted of cash in bank deposits. Cash equivalents consist of money market funds and other highly liquid investments with an original maturity of three months or less on the date of acquisition.

Available-for-Sale Investments

Our short-term available-for-sale investments consist of highly liquid financial investments with maturities of one year or less that were not previously classified as cash equivalents. Our long-term available-for-sale investments consist of investments with maturities over one year. All investments are classified as available-for-sale and are recorded at market value using the specific identification method. Unrealized gains or losses are reflected in other comprehensive income or loss.

Financial Instruments

Financial instruments included in our financial statements are comprised of cash and cash equivalents, short-term and long-term available-for-sale investments, accounts receivable, derivative financial instruments, accounts payable, certain accrued liabilities, convertible senior notes, contingent consideration and other contingent liabilities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of those instruments. Our available-for-sale investments are carried at quoted fair market value with unrealized gains and losses reported in stockholders' equity as a component of accumulated other comprehensive income (loss). The fair value of our convertible senior notes is influenced by interest rates, our stock price, and stock price volatility, which is determined by market trading.

We record derivative financial instruments as either assets or liabilities in our consolidated balance sheets and measure them at fair value in accordance with ASC Topic 815, Derivatives and Hedging, and we present assets and liabilities associated with our derivative financial instruments on a gross basis in our financial statements. Our derivative instruments do not subject our earnings or cash flows to material risk, as gains and losses on these derivatives generally offset losses and gains on the item being hedged. We do not enter into derivative transactions for speculative purposes.

Certain of the derivative instruments we use to mitigate our exchange rate exposure are not designated for hedge accounting treatment, and as a result, changes in their fair values are recorded in exchange rate gain (loss) in the consolidated statement of operations. Changes in the fair value of cash flow hedges, excluding time value of the hedges which is recorded as interest expense, are reported as a component of accumulated other comprehensive income (loss), or AOCI, within stockholders' equity. Once the underlying hedged transaction occurs, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction, reclassify the gain or loss recorded to date from AOCI into cost of goods sold, and record any further gains or losses to exchange rate gain (loss). We evaluate hedge effectiveness at the inception of the hedge and on an ongoing basis. To the extent we experience ineffectiveness in our hedges, the gains or losses accumulated in other comprehensive income associated with the ineffective portion of the hedge are reclassified immediately into exchange rate gain (loss). We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis. See "Note 3 – Financial Statement Details - Derivative Financial Instruments" for additional information.

We recognize contingent purchase price consideration at fair value at acquisition date. The acquisition date fair value is measured based on the consideration expected to be transferred (probability-weighted), discounted to present value. The discount rate used is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period. Therefore, any changes in the fair value

will impact our earnings in such reporting period, thereby resulting in potential variability in our earnings until such contingencies are resolved.

Concentration of Credit Risk

Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, short-term and long-term available-for-sale investments, derivative financial instruments, and trade accounts receivable.

We have established guidelines to limit our exposure to credit risk by placing investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We place our cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand. Therefore we believe the financial risks associated with these financial instruments are minimal.

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms. We perform ongoing credit evaluations of our customers, and generally we do not require collateral on our accounts receivable. We estimate the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and we record a provision for uncollectible accounts when collection is uncertain. To date, we have not experienced significant credit related losses.

No single customer accounted for more than 10% of our revenues for 2013, 2012 and 2011. No single customer accounted for more than 10% of our trade receivables at December 31, 2013, 2012 and 2011.

In connection with the issuance of our 2.875% Convertible Senior Notes due 2015, or the 2015 Notes, and our 1.75% Convertible Senior Notes due 2017, or the 2017 Notes, or collectively, the Notes, we purchased call options from counterparties. Non-performance by the counterparties under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price (in the case of the 2015 Notes and the 2017 Notes). See Note 3 “Financial Statement Details—Debt” for additional information.

We purchase integrated circuits and other key components for use in our products. For certain components, which are currently single sourced, there are relatively few sources of supply. Although we believe that other suppliers could provide similar components on comparable terms, establishment of additional or replacement suppliers cannot be accomplished quickly. Any significant supply interruption could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see “Risk Factors—Our manufacturing operations are dependent upon third party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.”

Inventories

Property and Equipment

Our long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. We recorded $2.0 million in long-lived assets impairment charges as part of the restructuring charges during 2013. See Note 3 “Financial Statement Details—Restructuring Activity” for additional information. No significant impairment of long-lived assets was identified or recorded during the years ended December 31, 2012 and 2011.

Goodwill

Intangible Assets

Intangible assets with definite lives are tested for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Impairment is calculated as the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted future cash flow analysis. We recorded $6.3 million in intangible asset impairment charges, including $4.1 million of IPR&D impairment, as part of our restructuring charges during 2013. See Note 3 “Financial Statement Details—Restructuring Activity” for additional information. No impairment of intangible assets was identified or recorded during the years ended December 31, 2012 and 2011.

Other Non-Current Assets

At December 31, 2013 and 2012, other non-current assets include $18.4 million and $2.0 million, respectively, of investments we have made in various privately held entities engaged in emerging product development activities.

We account for our investments in privately held entities, for which fair value is not readily determinable, in accordance with ASC Topic 323, Investments – Equity Method and Joint Ventures. For all of our investments in privately held entities, we do not have the ability to exercise significant influence over the investee, thus we accounted for these investments under the cost method of accounting.

Each reporting period, we evaluate our investments to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. If the fair value of the investment is less than its carrying value, the investment is impaired and we make a determination as to whether the impairment is other-than-temporary. We deem an impairment to be other-than-temporary unless we have the ability and intent to hold an investment for a period sufficient for a market recovery up to the carrying value of the investment. Further, evidence must indicate that the carrying value of the investment is recoverable within a reasonable period. For other-than-temporary impairments, we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value. There was no impairment of investment in privately held entities during the years ended December 31, 2013, 2012 and 2011.

At December 31, 2013 and 2012, other non-current assets include $749,000 and $711,000, respectively, of restricted cash, which was restricted as collateral for our performance obligations to customers in foreign jurisdictions. The certificates of deposit and cash in the bank will remain restricted until such time as the current obligation is terminated.

Revenue Recognition

We recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured. Revenue from the sale of our products is generally recognized when title and risk of loss transfer to the customer. We recognize revenue from consignment arrangements based on product usage, which indicates that the sale is complete. Installation and training are generally not required elements of our sales transactions as most of our products do not require these services. In instances where installation and training are required elements of the sales transaction, revenue is recognized upon completion.

For an arrangement containing multiple deliverables that are considered separate units of accounting, we allocate arrangement consideration based on the relative selling prices of the separate units of accounting. Selling prices are determined using fair value, when available, or our estimate of selling price when fair value is not available.

Shipping and Handling Costs

Shipping and handling costs billed to customers are included in revenues. Shipping and handling costs we incur associated with shipping products to our customers are included in cost of revenues.

Product Warranty Costs

We typically offer a one-year warranty for parts and labor on our products commencing upon the transfer of title and risk of loss to the customer. We accrue the estimated cost of product warranties when we invoice our customers, based on historical results. The warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from these estimates, revisions to the estimated warranty liability would be required. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Our product warranty costs are not significant for the years ended 2013, 2012 and 2011.

Research and Development

Company-sponsored research and development expenses include the costs of technical activities that are useful in developing new products, services, processes or techniques, as well as expenses for technical activities that may significantly improve existing products or processes, and are expensed as incurred.

Clinical Studies

We recognize research and development costs for activities associated with clinical studies performed by third parties as incurred. All other costs relative to setting up clinical study sites are recognized as research and development expense as incurred. Clinical study site costs related to patient enrollment are accrued as patients are entered into the studies. Equipment that has alternative future use and is used at clinical study sites for participation in the studies is capitalized and expensed over the estimated life of the equipment.

Acquisition-related Items

Acquisition-related items include acquisition transaction costs, subsequent accretion of and revision, if any, to the fair value of the contingent consideration related to acquisitions and other expenses directly associated with acquisitions.

Restructuring Charges

Restructuring charges include employee termination benefits, contract termination costs, asset impairments and other related charges associated with restructuring activities.

Stock-Based Compensation

We account for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation, or ASC 718, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model, or Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates. See Note 5 “Stockholders’ Equity” for a complete discussion of our equity compensation programs and the fair value assumptions used to determine our stock-based compensation expense.

We account for stock-based compensation awards and warrants granted to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees, or ASC 505-50. Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.

Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and tax operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

realizable. This resulted in an increase in valuation allowance against these deferred tax assets, which was recorded as a reduction to goodwill.

During the fourth quarter of 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. We released $4.9 million of the valuation allowance on our foreign deferred tax assets as we expect our foreign operations in the respective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax assets. We believe that it was more likely than not that the benefit from certain international net operating losses and a portion of our state deferred tax assets will not be realized. In recognition of this risk, we will continue to provide a valuation allowance on the deferred tax assets relating to these items.

We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. To the extent we establish or change the valuation allowance in a period, the tax effect will generally flow through the statement of operations. In the case of an acquired or merged entity, we will record valuation allowance on a deferred tax asset through purchase accounting procedures as an adjustment to goodwill at the acquisition date, if it is more likely than not that all or a portion of the acquired deferred tax assets will not be realized in the future. Any subsequent change to a valuation allowance established during purchase accounting within the measurement period of the acquisition (not to exceed twelve months) will also be recorded as an adjustment to goodwill, provided that such change relates to new information about the facts and circumstances that existed on the acquisition date.

FASB ASC Topic 740, Income Taxes, or ASC 740, clarifies the accounting for uncertainty in income taxes recognized in the financial statements. ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We accrue interest and penalties on underpayment of income taxes related to unrecognized tax benefits as a component of income tax expense in our consolidated statements of operations. The amounts recognized for interest and penalties during the years ended December 31, 2013, 2012 and 2011 were $53,000, $46,000, and $34,000, respectively.

Net Income (Loss) Per Share

Basic and diluted net income (loss) per share is presented in accordance with FASB ASC Topic 260, Earnings per Share. Basic net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the period.

Our potentially dilutive shares include outstanding common stock options, restricted stock units, including those with performance conditions, incremental shares issuable upon the conversion of the Notes or exercise of the warrants relating to the Notes (See Note 3 “Financial Statement Details — Debt”) and the incremental shares receivable under the forward contract portion of the ASR. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income (loss) per share as discussed in the following paragraph. For the years ended December 31, 2013, 2012 and 2011, potentially dilutive shares totaling 20.8 million, 9.0 million, and 1.7 million, respectively, have not been included in the computation of diluted net income (loss) per share, as the result would be anti-dilutive.

Diluted net income (loss) per common share includes zero, zero and 12,000 incremental shares related to the Notes for the years ended December 31, 2013, 2012 and 2011, respectively. Because the principal amount of the Notes will be settled in cash upon conversion, only the conversion spread relating to the Notes may be included in our calculation of diluted net income (loss) per common share. As such, the Notes have no impact on diluted net income (loss) per common share until the price of our common stock exceeds the conversion price (initially $29.64 for the 2015 Notes and $32.83 for the 2017 Notes, subject to adjustments) of the Notes. During the year ended December 31, 2011, 12,000 shares related to the 2015 Notes were included in the computation of the diluted net income (loss) per common share because the average market price of our common stock during the three months ended September 30, 2011 exceeded the conversion price of the 2015 Notes. The average price of our

common stock did not exceed the conversion price of the Notes during any quarter of the years ended December 31, 2013 and 2012 or the other three quarters of 2011.

The diluted net income (loss) per common share does not include any incremental shares related to the exercise of the warrants for the years ended December 31, 2013, 2012 and 2011. The warrants will not have an impact on diluted net income (loss) per common share until the price of our common stock exceeds the strike price of the warrants (initially $34.875 for the 2015 Notes offering and $37.59 for the warrants issued in connection with the 2017 Notes offering, subject to adjustments). When the market price of our stock exceeds the strike price, as applicable, we will include, in the diluted net income (loss) per common share calculation, the effect of the additional shares that may be issued upon exercise of the warrants using the treasury stock method to the extent the effect is not anti-dilutive.

The call options to purchase our common stock, which we purchased to hedge against potential dilution upon conversion of the Notes (see Note 3 “Financial Statement Details — Debt”), are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the Notes.

The basic and diluted net income (loss) per common share calculations for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands, except per share data):



	Years Ended December 31,
	2013			2012		2011
Net (loss) income	$	(34,494	)	$	8,022	$	38,093
Weighted average common shares outstanding for basic	54,341			53,475		52,300
Dilutive potential common stock outstanding:
Stock options	—			1,404		1,896
Restricted stock units	—			309		377
Employee stock purchase plan	—			7		11
Convertible senior notes	—			—		12
Weighted average common shares outstanding for diluted	54,341			55,195		54,596
Net (loss) income per share:
Basic	$	(0.63	)	$	0.15	$	0.73
Diluted	$	(0.63	)	$	0.15	$	0.70

Comprehensive Income (Loss)

Comprehensive income (loss) represents the net income (loss) for the period plus the results of certain changes to stockholders’ equity that are not reflected in the consolidated statements of operations. Our comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, and changes in unrealized net gains and losses on available-for-sale investments and foreign currency forward exchange contracts, net of income taxes. Foreign currency translation adjustments were not adjusted for income taxes as they relate to cumulative losses in foreign subsidiaries which provide no corresponding tax benefit or investments in foreign subsidiaries with earnings which the foreign subsidiaries does not plan on remitting to the parent company.

Recent Accounting Pronouncements

2. Acquisitions

Pioneer Acquisition

On August 30, 2013, we completed the acquisition of the Pioneer Plus re-entry catheter product line, or Pioneer, from Medtronic. The product is an interventional medical device designed to enable the crossing of sub-total, total and chronic total occlusions within the peripheral vasculature, potentially eliminating the need for surgery. The primary reason for the acquisition was to diversify our product offerings, allow us the opportunity to better position ourselves in the peripheral vascular market and to increase our IVUS product sales.

This transaction was structured as an asset purchase and was accounted for as a business combination with an aggregate purchase price of $15.0 million. The assets acquired, primarily $12.7 million of intangible assets, were recorded at their estimated fair values as of the acquisition date. The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed is $1.5 million, which represents the goodwill amount resulting from the acquisition and was allocated to our medical segment and is not deductible for income tax purposes. As of the date of this Annual Report on Form 10-K, the Company is still finalizing the allocation of the purchase price. Changes to the current allocation may occur as additional information becomes available related to the valuation of inventory, fixed assets and intangible assets and deferred taxes, with such changes recorded as an adjustment to goodwill.

The acquisition was not individually or collectively considered material to the overall consolidated financial statements and the results of the Company’s operations. We have included the operating results associated with the Pioneer acquisition in our consolidated financial statements from the date of acquisition.

Crux Acquisition

On December 12, 2012 we completed the acquisition of all outstanding equity interests in Crux Biomedical, Inc., or Crux, a privately-held company engaged in the development of filter technology for the vascular, cardiovascular and interventional radiology markets. The primary reason for the acquisition was to diversify our product offerings, allow us the opportunity to better position ourselves in the peripheral vascular market and to increase our IVUS product sales. The transaction was accounted for as a business combination. The operating results of Crux from the date of acquisition were included in our consolidated financial statements.

Consideration

We made up-front cash payments totaling $39.1 million in exchange for 100% of Crux's capital stock. We also have a receivable for a working capital shortfall to target which is expected to be settled in 2014. The fair value of the working capital receivable represents the amount by which the working capital acquired in the transaction was less than the target working capital as stated in the Merger Agreement. The receivable will be accreted to its fair value with accretion recorded in acquisition-related items within operating expense. The receivable has a legal right of offset against milestone payments, which are expected to be paid beginning in 2014, and therefore is reflected as a contra liability in our consolidated financial statements. The working capital receivable was estimated to be approximately $1.2 million and the fair value of this receivable was estimated to be $900,000 at acquisition. According to the working capital audit completed in the second quarter of 2013, the working capital receivable was adjusted to be approximately $1.4 million and the fair value of this receivable was estimated to be $1.1 million at acquisition. The $200,000 adjustment is a result of additional information about facts that existed at the acquisition date that we obtained after that date, therefore this adjustment resulted in an increase in the working capital receivable and a reduction to goodwill. At December 31, 2013, the present value of the working capital adjustment was estimated to be $1.2 million.

In addition, under the Merger Agreement, we agreed to pay a cash milestone payment of $3.0 million following the achievement of written clearance by the U.S. Food and Drug Administration, or FDA, of a 510(k) notification for the commercial sale in the United States of an inferior vena cava filter retrieval device currently being developed by Crux, provided such 510(k) notification was submitted on or before June 30, 2013. On July 1, 2013, we entered into an amendment to the Merger Agreement to extend the date by which the 510(k) notification must be submitted from June 30, 2013 to November 30, 2013 for the $3.0 million milestone payment to remain eligible to be paid upon the written clearance by the FDA. The fair value of this contingent consideration was previously estimated to be $2.9 million at acquisition. The 510(k) notification was submitted to the FDA on November 30, 2013 and we received written clearance from the FDA on February 3, 2014. The $3.0 million milestone payment is expected to be made on or before March 1, 2014.

Furthermore, subject to the terms of the Merger Agreement, we may be required to make payments upon reaching various sales milestones. We estimated the contingent milestone payments to be approximately $46.6 million and the fair value of this

contingent consideration was estimated to be $28.0 million at acquisition. We determined the fair value of the contingent consideration relative to the milestone payments based on commercial sales of Crux products using various estimates, including revenue projections, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At December 31, 2013, we estimated the contingent milestone payment to be approximately $48.6 million and the present value of this contingent consideration to be $31.9 million. At December 31, 2013, for the fair value relative to the milestone payments based on the commercial sales of Crux products, the key assumptions in applying the income approach include a 14% discount rate and probability-weighted expected milestone payment ranges from $32.8 million to $70.1 million based on estimated commercial sales of Crux products ranging from $124.9 million to $279.8 million from December 2013 to 2019.

Using different valuation assumptions could result in significant differences in the fair value of the contingent consideration and accretion expense in the current or future periods.

The following table sets forth the changes in the estimated fair value of the Company’s contingent liabilities (net with working capital receivable adjustment) measured on a recurring basis using significant unobservable inputs (Level 3) (in thousands):



Fair value measurement at acquisition December 12, 2012	$	30,000
Change in fair value measurement included in operating expenses	231
Contingent consideration settled	—
Fair value measurement at December 31, 2012	30,231
Change in fair value measurement included in operating expenses	3,607
Working capital adjustment	(200		)
Contingent consideration settled	—
Fair value measurement at December 31, 2013	$	33,638

A reconciliation of upfront payments in accordance with the Merger Agreement to the total purchase price is presented below (in thousands):



Base payment per agreement	$	36,000
Reimbursement of transaction expenses incurred by Crux	3,100
Total up-front payments	39,100
Estimated fair value of receivable for working capital adjustment	(1,100		)
Estimated fair value of contingent consideration at acquisition	30,900
Total purchase price	$	68,900

Purchase Price Allocation

During 2013, we recorded adjustments to net assets acquired (total purchase price), deferred tax asset and goodwill, as a result of finalizing the purchase accounting.

The adjustment to the total purchase price is related to the $200,000 working capital receivable adjustment as a result of additional information about facts that existed at the acquisition date, therefore this adjustment resulted in an increase in the working capital receivable (component of total purchase price) and a reduction to goodwill.

In addition, we established a valuation allowance of $1.0 million against the deferred tax asset as realization of a portion of such assets do not meet the more likely than not threshold. This adjustment resulted in an increase to goodwill.

We recorded the identifiable assets acquired and liabilities assumed at fair value as follows (in thousands):



	December 12, 2012
Current assets:
Cash and cash equivalents	$	1,474
Deferred tax asset - current	108
Other current assets	253
Property and equipment	39
In-process research and development	28,400
Covenants-not-to-compete	200
Deferred tax asset	11,861
Total assets acquired	42,335
Current liabilities:
Accounts payable	(223		)
Accrued expenses	(302		)
Other long term payable	(97		)
Deferred tax liability	(10,307		)
Total liabilities assumed	(10,929		)
Goodwill	37,494
Net assets acquired	$	68,900

The IPR&D asset we recorded in the amount of $28.4 million represents an estimate of the fair value of in-process technology related to Crux's filter technology and retrieval device programs. The estimated fair value was determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after tax cash flows attributable to that intangible asset. The fair value using the multi-period excess earnings method was dependent on an estimated weighted average cost of capital for Crux of 14%, which represents a rate of return that a market participant would expect for these assets.

The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed, $37.5 million, represents the goodwill amount resulting from the acquisition, which was allocated to our medical segment and is not deductible for income tax purposes. We expect to benefit from the acquisition by expanding our product offerings to physicians thereby contributing to an expanded revenue base. Further, we expect to realize synergies by offering the products developed from the acquisition utilizing our existing sales force.

Pro forma financial information (unaudited)

The following unaudited pro forma information presents the combined results of operations for the years ended December 31, 2012 and 2011 as if the acquisition of Crux had been completed as of the beginning of 2011 (in thousands, except per share data):



	Years Ended December 31,
	2012			2011
Revenues	$	381,866		$	343,546
Net (loss) income	$	(515	)	$	31,035
Net (loss) income per share, basic and diluted:
Basic	$	(0.01	)	$	0.59
Diluted	$	(0.01	)	$	0.57
Shares used in computing basic and diluted net (loss) income per share:
Basic	53,475			52,300
Diluted	53,475			54,596

The pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Included in the pro forma net loss for the year ended December 31, 2012 are approximately $943,000 of acquisition-related costs, which are not expected to have an ongoing impact.

Sync-Rx Acquisition

On November 26, 2012, we acquired all of the outstanding equity interests in Sync-Rx Ltd., or Sync-Rx, a privately-held company, which is engaged in the development of advanced software applications that optimize and facilitate transcatheter cardiovascular interventions using automated online image processing. The Sync-Rx technology will provide us with a platform on which to build a range of advanced software features that will aid clinical decision-making by providing angiography and intra-body image enhancement, measurement and non-invasive imaging and intravascular co-registration capabilities, and future opportunities in physiology and peripheral therapy guidance.

The aggregate purchase price was $17.3 million, of which $3.3 million is being held in escrow to satisfy claims for indemnification for certain matters made within 18 months following the closing. The transaction was accounted for as a business combination. We have included the operating results associated with the Sync-Rx acquisition in our consolidated financial statements from the date of acquisition.

In connection with the acquisition, we recorded a contingent liability of $1.1 million related to a government grant received to develop the underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We expect to generate revenues sufficient to repay the liability in its entirety. The grant was recorded as other long term debt at its present value using various estimates, including revenue projections, discount rate and estimated years of re-payment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At acquisition, for the fair value relative to this liability, the key assumptions in applying the income approach included an 8% discount rate and estimated commercial sales derived from the underlying technology ranging from $256.1 million to $298.3 million over the expected period of re-payment of 10 to 16 years. The long term liability will be accreted to the re-payment amount of $1.9 million plus interest, with such accretion recorded as interest expense over the expected period of re-payment. As of December 31, 2013, there were no significant changes in the range of outcomes for the contingent liability recognized as a result of the acquisition.

During 2013, we recorded adjustments to deferred tax assets, deferred tax liabilities and goodwill, as a result of finalizing the purchase accounting. We established a valuation allowance of $1.2 million against the net deferred tax asset as it is expected that the net operating loss carryforward initially recorded as a deferred tax asset will not be utilized. This adjustment resulted in an increase to goodwill.

We recorded the identifiable assets acquired and liabilities assumed at fair value as follows (in thousands):



	November 26, 2012
Current assets:
Cash and cash equivalents	$	423
Receivable and other current assets	72
Property and equipment	37
Developed technology	3,200
In-process research and development	1,300
Covenants not-to-compete	100
Other non-current assets	8
Total assets acquired	5,140
Current liabilities:
Accounts payable	(56		)
Accrued expenses	(375		)
Other long-term debt	(1,100		)
Total liabilities acquired	(1,531		)
Goodwill	13,650
Net assets acquired	$	17,259

The $3.2 million developed technology represents an estimate of the fair value of Sync-Rx's image enhancement technology, which is subject to an estimated useful life of ten years. The $1.3 million IPR&D asset represents an estimate of the fair value of in-process technology related to Sync-Rx's co-registration technology, which is still under development. The estimated fair values of the developed technology and the IPR&D asset were determined using the multi-period excess earnings

method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The rate used to discount net future after-tax cash flows to their present values was based on a discount rate of 19% for developed technology and 20% for the IPR&D. Significant factors considered in the calculation of the discount rates include the weighted average cost of capital, the internal rate of return and the weighted average return on assets, as well as the risks inherent in the development process for the technology.

The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed, $13.7 million, represents the goodwill amount resulting from the acquisition, which was allocated to our medical segment and is not deductible for income tax purposes. We expect to benefit from the acquisition by expanding our product offerings to physicians thereby contributing to an expanded revenue base. Additionally, we expect to realize synergies by offering the products developed from the acquisition utilizing our existing sales force.

Acquisition-Related Items

During 2013, we recorded $5.0 million in acquisition-related items, including charges of $3.6 million related to the change in fair value of the contingent consideration associated with the Crux acquisition, which is primarily due to the passage of time, and $860,000 in transaction costs associated with the Pioneer, Crux and Sync-Rx acquisition.

During 2012, we recorded $1.9 million in acquisition-related items, including charges of $231,000 related to the change in fair value of the contingent consideration associated with the Crux acquisition, which is primarily due to the passage of time, and $1.6 million in transaction costs primarily associated with the Crux and Sync-Rx acquisitions.

3. Financial Statement Details

Cash and Cash Equivalents and Available-for-Sale Investments

We invest our excess funds in U.S. government securities, corporate fixed income securities, commercial paper, certificates of deposit and money market funds. As of December 31, 2013, all of our investments were classified as available-for-sale and will mature within 18 months. These investments are recorded at their estimated fair value including accrued interest receivable, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss.

At December 31, 2013 and 2012, available-for-sale investments are detailed as follows (in thousands):

At December 31, 2013

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	165,598	$	72	$	4	$	165,666
U.S. Treasury and agency debt securities	66,214		2		18		66,198
Short-term available-for-sale investments	$	231,812	$	74	$	22	$	231,864
Long-term:
Corporate debt securities	$	11,814	$	30	$	—	$	11,844
U.S. Treasury and agency debt securities	23,028		15		—		23,043
Long-term available for sale investments	$	34,842	$	45	$	—	$	34,887

At December 31, 2012

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Short-term:
Corporate debt securities	$	121,883	$	52	$	5	$	121,930
U.S. Treasury and agency debt securities	19,020		10		—		19,030
Short-term available-for-sale investments	$	140,903	$	62	$	5	$	140,960
Long-term:
Corporate debt securities	$	33,384	$	6	$	17	$	33,373
U.S. Treasury and agency debt securities	11,010		2		—		11,012
Long-term available for sale investments	$	44,394	$	8	$	17	$	44,385

Available-for-sale investments that are in an unrealized loss position at December 31, 2013 and 2012 are detailed as follows (in thousands):



	At December 31, 2013
	Estimated Fair Value		Gross Unrealized Losses
Corporate debt securities	$	21,464	$	4
U.S. Treasury and agency debt securities	41,034		18
	$	62,498	$	22

At December 31, 2013, eight of our corporate debt securities and two of our U.S. Treasury and agency debt securities are in an unrealized loss position. We fully expect to receive par value with full principal and interest when these securities mature. These investments have been in an unrealized loss position for less than 12 months. We do not consider these investments to be other-than-temporarily impaired at December 31, 2013.



	At December 31, 2012
	Estimated Fair Value		Gross Unrealized Losses
Corporate debt securities	$	46,987	$	22
U.S. Treasury and agency debt securities	—		—
	$	46,987	$	22

Derivative Financial Instruments

Foreign Currency Forward Contracts

We are exposed to foreign currency risks through our global operations, primarily in Japan and Europe, and when we enter into transactions in non-functional currencies. Exchange rate fluctuations between the U.S. dollar and foreign currencies, primarily Japanese yen and euro, could adversely affect our financial results. We use derivative financial instruments to mitigate our foreign currency exposures. We do not enter into derivative instruments for speculative purposes.

Commencing April 2013, we broadened our currency hedging program to hedge certain forecasted intercompany inventory transactions that are denominated in yen and euro. These forward contracts are designated as cash flow hedges and have maturity dates of up to 13 months. Changes in the fair value of cash flow hedges, excluding time value of the hedges which is recorded as interest expense, are reported as a component of accumulated other comprehensive income (loss), or AOCI, within stockholders' equity. Once the underlying hedged transaction occurs, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction, reclassify the gain or loss recorded to date from AOCI into cost of goods sold, and record any further gains or losses to exchange rate gain (loss). We evaluate hedge effectiveness at the inception of the hedge and on an ongoing basis. To the extent we experience ineffectiveness in our hedges, the gains or losses accumulated in

other comprehensive income associated with the ineffective portion of the hedge are reclassified immediately into exchange rate gain (loss). We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.

At December 31, 2013 and December 31, 2012, the notional amount of our outstanding forward contracts was $97.3 million and $64.4 million, respectively, of which $40.3 million and $0, respectively, were designated as cash flow hedges. At December 31, 2013, our outstanding forward contracts mature through January 2015.

As of December 31, 2013, the deferred gain, net of tax, for those derivative contracts that qualified for hedge accounting treatment was $501,000, all of which will be reclassified from accumulated other comprehensive loss into cost of sales at the then-current values over the next twelve months as the underlying hedged transactions are recognized.

The following tables summarize the location and fair values of derivative instruments on our consolidated balance sheets (in thousands) at December 31, 2013 and December 31, 2012. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not.



	As of December 31, 2013
	Asset Derivatives			Liability Derivatives
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
Derivatives Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	$	954	Other current liabilities	$	251
Foreign exchange forward contracts	Other long-term assets	81		Other long-term liabilities	—
Total Derivatives Designated as Hedging Instruments		1,035			251

Derivatives Not Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	1,953		Other current liabilities	1,164
Total Derivatives Not Designated as Hedging Instruments		1,953			1,164

Total Derivatives		$	2,988		$	1,415



	As of December 31, 2012
	Asset Derivatives			Liability Derivatives
	Balance sheet location	Fair Value		Balance sheet location	Fair Value
Derivatives Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	$	—	Other current liabilities	$	—
Foreign exchange forward contracts	Other long-term assets	—		Other long-term liabilities	—
Total Derivatives Designated as Hedging Instruments		—			—

Derivatives Not Designated as Hedging Instruments
Foreign exchange forward contracts	Other current assets	3,886		Other current liabilities	425
Total Derivatives Not Designated as Hedging Instruments		3,886			425

Total Derivatives		$	3,886		$	425

The Company has elected to present the fair value of derivative assets and liabilities within the consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information (in thousands) as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.



	As of December 31, 2013
				Gross Amount Not Offset on the Balance Sheet
	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments			Cash Collateral (Received) or Pledged		Net Amount
Derivative Assets
Foreign exchange forward contracts	$	2,988		$	(1,415	)	$	—	$	1,573
Derivative Liabilities
Foreign exchange forward contracts	(1,415		)	1,415			—		—
Total	$	1,573		$	—		$	—	$	1,573



	As of December 31, 2012
				Gross Amount Not Offset on the Balance Sheet
	Gross Amount of Recognized Assets (Liabilities)			Financial Instruments		Cash Collateral (Received) or Pledged		Net Amount
Derivative Assets
Foreign exchange forward contracts	$	3,886		$	—	$	—	$	3,886
Derivative Liabilities
Foreign exchange forward contracts	(425		)	—		—		(425		)
Total	$	3,461		$	—	$	—	$	3,461

The following table summarizes the effect of our foreign exchange forward contracts on our consolidated statements of operations (in thousands).



	Year Ended December 31,
	2013			2012		2011
Derivatives Designated as Hedging Instruments
Gain (loss) recognized in other comprehensive income on foreign currency forward contracts (effective portion)	$	449		$	—	$	—
Gain (loss) reclassified from accumulated other comprehensive income into cost of revenue (effective portion)	(319		)	—		—
Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)	49			—		—

Derivatives Not Designated as Hedging Instruments
Gain (loss) recognized in exchange rate gain (loss), net	$	6,413		$	4,786	$	(2,772	)

Options and Warrants Related to Our Convertible Notes

In connection with our convertible debt offering in December 2012, we purchased call options on our common stock. The call options give us the right to purchase up to approximately 14.0 million shares of our common stock at $32.8286 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants, which gave the purchasers of the warrants the right to purchase up to approximately 14.0 million shares of our common stock at $37.59 per share, subject to certain adjustments. In accordance with the authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2017 Notes occur.

In connection with our convertible debt offering in September 2010, we purchased call options on our common stock. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants, which gave the purchaser of the warrants the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. In accordance with the authoritative guidance, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2015 Notes occur. In December 2012, $90.0 million of the $115 million in aggregate principal amount of 2015 Notes were repurchased by the Company and the proportionate call option and warrant related to the convertible notes were also retired.

The remaining call options give us the right to purchase up to approximately 850,000 shares of our common stock at $29.64 per share, subject to certain adjustments, and the remaining warrants give the counterparty the right to purchase up to approximately 850,000 shares of our common stock at $34.875 per share, subject to certain adjustments. The remaining call options and warrants continue to be classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2015 Notes occur.

Fair Value Measurements

Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

•

Level 1—Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of money market funds and U.S. Treasury and agency debt securities.

•

Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of corporate debt securities including commercial paper, corporate bonds, certificates of deposit and foreign currency forward contracts.


•	Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Our Level 3 liability includes the contingent consideration related to the Crux acquisition and the other long-term debt related to the Sync-Rx acquisition.

We utilize a third-party pricing service to assist us in obtaining fair value pricing for our investments. Pricing for certain securities is based on proprietary models. Inputs are documented in accordance with the fair value disclosure hierarchy. We also utilize third-party financial institutions to assist us in obtaining fair value pricing for our foreign currency forward contracts.

Contingent consideration arrangements obligate us to pay former shareholders of an acquired entity if specified future events occur or conditions are met such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. We measure such liabilities using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. We used various key assumptions, such as the probability of achievement of the agreed milestones and the discount rate, in our determination of the fair value of contingent consideration. We monitor the fair value of the contingent consideration and the subsequent revisions are reflected in our consolidated statements of operations. For a further discussion on the key assumptions used in determining the fair value and the change in the estimated fair value of the contingent consideration during the year ended December 31, 2013 and 2012, refer to Note 2, "Acquisitions - Crux Acquisition".

In connection with the Sync-Rx acquisition, we recorded a contingent liability related to a government grant received to develop an underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We measure such liability using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. The grant was recorded as other long term debt at its present value using various estimates, including revenue projections, discount rate and estimated years of re-payment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. We monitor the fair value of the contingent liability and the subsequent revisions are reflected in our consolidated statements of operations. For a further discussion on the key assumptions used in determining the fair value, refer to Note 2, "Acquisitions - Sync-Rx Acquisition".

During the years ended December 31, 2013 and 2012, no transfers were made into or out of the Level 1, 2, or 3 categories. We will continue to review our fair value inputs on a quarterly basis.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below at December 31, 2013 and 2012 (in thousands):



	Fair Value Measurements at December 31, 2013
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	98,436	$	98,436	$	—	$	—
Money market funds	8,723		8,723		—		—
Corporate debt securities	165,666		—		165,666		—
U.S. Treasury and agency debt securities	66,198		66,198		—		—
Foreign currency forward contracts	2,907		—		2,907		—
Non-current:
Corporate debt securities	11,844		—		11,844		—
U.S. Treasury and agency debt securities	23,043		23,043		—		—
Foreign currency forward contracts	81		—		81		—
Total assets measured at fair value	$	376,898	$	196,400	$	180,498	$	—
Liabilities:
Current:
Foreign currency forward contracts	$	1,415	$	—	$	1,415	$	—
Contingent consideration, current portion (1)	3,750		—		—		3,750
Non-current:
Other long-term debt	1,268		—		—		1,268
Contingent consideration	29,888		—		—		29,888
Total liabilities measured at fair value	$	36,321	$	—	$	1,415	$	34,906

(1) This amount is reflected net of the fair value of the working capital receivable in the amount of $1.2 million at December 31, 2013.



	Fair Value Measurements at December 31, 2012
	Total		Level 1		Level 2		Level 3
Assets:
Current:
Cash	$	41,636	$	41,636	$	—	$	—
Money market funds	288,999		288,999		—		—
Corporate debt securities	121,930		—		121,930		—
U.S. Treasury and agency debt securities	19,030		19,030		—		—
Foreign currency forward contracts	3,886		—		3,886		—
Non-current:
Corporate debt securities	33,373		—		33,373		—
U.S. Treasury and agency debt securities	11,012		11,012		—		—
Total assets measured at fair value	$	519,866	$	360,677	$	159,189	$	—
Liabilities:
Current:
Foreign currency forward contracts	$	425	$	—	$	425	$	—
Contingent consideration, current portion	2,908		—		—		2,908
Non-current:
Other long-term debt	1,088		—		—		1,088
Contingent consideration (1)	27,323		—		—		27,323
Total liabilities measured at fair value	$	31,319	$	—	$	—	$	31,319

(1) This amount is reflected net of the fair value of the working capital receivable in the amount of $907,000 at December 31, 2012.

Accounts Receivable, Net

Accounts receivable, net consists of the following (in thousands):



	December 31,
	2013		2012
Trade accounts receivable	$	82,409	$	76,717
Less: allowance for doubtful accounts	447		369
	$	81,962	$	76,348

The change in the allowance for doubtful accounts for the years ended December 31, 2013, 2012 and 2011 is summarized in the following table (in thousands):



	Years Ended December 31,
	2013		2012		2011
Balance at beginning of year	$	369	$	84	$	29
Additions charged to selling, general and administrative expense	78		285		55
Balance at end of year	$	447	$	369	$	84

Inventories

Inventories consist of the following (in thousands):



	December 31,
	2013		2012
Finished goods (1)	$	27,237	$	19,002
Work-in-process	12,051		15,780
Raw materials	21,682		18,029
	$	60,970	$	52,811

(1) Finished goods inventory includes consigned inventory of $5.6 million and $5.3 million at December 31, 2013 and 2012, respectively.

Property and Equipment

Property and equipment consists of the following (in thousands):



	December 31,
	2013			2012
Medical diagnostic equipment	$	68,923		$	65,548
Other equipment	52,523			44,879
Leasehold improvements	12,641			9,289
Software	34,392			5,447
Land	3,046			3,046
Building	33,245			29,098
Construction-in-progress (1)	9,975			27,730
	214,745			185,037
Less: Accumulated depreciation and amortization	(96,651		)	(80,652		)
	$	118,094		$	104,385


(1)	At December 31, 2012, construction-in-process includes $1.0 million of capitalized interest related to the implementation of ERP systems worldwide. The implementation was completed during 2013.

Property and equipment includes certain medical diagnostic equipment that is located at customer premises. We retain the ownership of the equipment and have the right to remove the equipment if it is not being utilized according to expectations. Depreciation expense relating to the equipment of $8.3 million, $9.6 million and $10.9 million is recorded in cost of revenues during the years ended December 31, 2013, 2012 and 2011, respectively. The net book value of this equipment was $16.5 million and $21.7 million at December 31, 2013 and December 31, 2012, respectively. Also included in medical diagnostic

equipment is property and equipment used for demonstration and evaluation purposes. Depreciation expense for equipment used for demonstration and evaluation purposes recorded in selling, general and administrative expenses totaled $416,000, $816,000 and $1.2 million during the years ended December 31, 2013, 2012 and 2011, respectively. The net book value of this equipment was $939,000 and $869,000 at December 31, 2013 and December 31, 2012, respectively. Medical diagnostic equipment is recorded at our cost to acquire or manufacture the equipment and is depreciated over its estimated useful life (generally three to five years).

Depreciation and amortization expense for the years ended December 31, 2013, 2012 and 2011 was $22.0 million, $19.9 million, and $19.8 million, respectively.

Intangible Assets

Intangible assets consisted of acquired developed technology, licenses, customer relationships, patents and trademarks, and covenants-not-to-compete, as well as acquired in-process research and development technology. Intangible assets, except for acquired in-process research and development technology, are amortized using the straight-line method over their estimated useful lives of up to 20 years. Amortization of acquired in-process research and development technology will not commence until the technology reaches market feasibility. If the related project is terminated or abandoned, we may have an impairment related to the in-process research and development technology, calculated as the excess of the asset’s carrying value over its fair value.

During the year ended December 31, 2013, we recorded developed technology additions of $35.7 million, including $11.6 million from the Pioneer acquisition in August 2013 and $24.1 million IPR&D associated with the Crux IVC filter that was transferred to developed technology when the product launched in the fourth quarter of 2013. Other additions in intangible assets include a $5.6 million addition in patents and trademark, including a $4.7 million addition to internally developed patents and a $0.9 million addition in trademark and trade names from the Pioneer acquisition in August 2013.

We also recorded $6.3 million of net intangible asset impairments due to the restructuring plan we executed in 2013, including a $4.1 million impairment for the IPR&D assets associated with the Forward-Looking IVUS project we acquired from Novelis in 2008, a $1.7 million impairment (cost of $3.2 million and accumulated amortization of $1.6 million) for the developed technology associated with the Optical Coherence Tomography project we acquired from CardioSpectra, Inc. in 2007, and a $566,000 impairment (cost of $2.1 million and accumulated amortization of $1.5 million) for the developed technology associated with the discontinuation of our ReFLOW Aspiration Catheter product line. Refer to "Note 3 - Financial Statement Details - Restructuring Activity" for details.

During the year ended December 31, 2012, we recorded intangible asset additions of $4.4 million related to developed technology, $150,000 related to licenses, $4.0 million related to internally developed patents and trademarks, $300,000 related to covenants-not-to-compete, and $29.7 million related to in-process research and development technology acquired from acquisitions.

Intangible assets subject to amortization, by major class, consist of the following (in thousands):



	December 31, 2013
Intangible assets subject to amortization	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Developed technology	$	57,507	$	16,393	$	41,114	8.6
Licenses	7,441		7,102		339		8.8
Customer relationships	4,441		4,312		129		6.1
Patents and trademarks	13,668		2,894		10,774		13.2
Covenants-not-to-compete	300		108		192		3.0
	83,357		30,809		52,548		9.2
Intangible assets not yet subject to amortization
In-process research and development	5,560		—		5,560		n/a
	$	88,917	$	30,809	$	58,108



	December 31, 2012
Intangible assets subject to amortization	Cost		Accumulated Amortization		Net		Weighted- Average Life (in years) (1)
Developed technology	$	27,051	$	17,408	$	9,643	8.8
Licenses	7,345		6,709		636		10.0
Customer relationships	4,177		3,756		421		6.0
Patents and trademarks	8,029		2,114		5,915		13.2
Covenants-not-to-compete	300		8		292		3.0
	46,902		29,995		16,907		9.4
Intangible assets not yet subject to amortization
In-process research and development	33,750		—		33,750		n/a
	$	80,652	$	29,995	$	50,657


(1)	Weighted average life of intangible assets is presented excluding fully amortized assets.

We recorded amortization of intangible assets totaling $3.8 million, $3.2 million and $3.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

At December 31, 2013, future amortization expense related to our intangible assets subject to amortization is expected to be as follows (in thousands):



2014	$	7,187
2015	7,027
2016	6,821
2017	6,309
2018	6,182
Thereafter	19,022
	$	52,548

Goodwill

The change in goodwill for the years ended December 31, 2013 and 2012 is summarized in the following table (in thousands):



	Years Ended December 31,
	2013		2012
Balance at beginning of year	$	51,577	$	2,487
Additions	3,510		49,090
Balance at end of year	$	55,087	$	51,577

In 2013, goodwill of $817,000 was recorded in connection with finalizing the purchase price allocation for the Crux acquisition, goodwill of $1.2 million was recorded in connection with finalizing the purchase price allocation for the Sync-Rx acquisition, and goodwill of $1.5 million was recorded in connection with the Pioneer acquisition.

In 2012, goodwill of $12.4 million was recorded in connection with the Sync-Rx acquisition, and goodwill of $36.7 million was recorded in connection with the Crux acquisition.

Accrued Warranty

Accrued warranty liability is included in accrued expenses and other current liabilities in the consolidated balance sheets. The change in the accrued warranty liability for the years ended December 31, 2013, 2012 and 2011 is summarized in the following table (in thousands):



	Years Ended December 31,
	2013			2012			2011
Balance at beginning of year	$	1,176		$	1,077		$	852
Warranties issued	2,135			1,898			1,864
Settlements	(2,159		)	(1,799		)	(1,639		)
Balance at end of year	$	1,152		$	1,176		$	1,077

Capital Lease Obligations

We lease certain equipment under capital lease arrangements. See Note 4 “Commitments and Contingencies - Leases” for more information.

Restructuring Activity

Disposables Manufacturing Transition to Costa Rica Initiative

During the second quarter of 2013, our management approved plans to consolidate and transition our manufacturing resources related to the manufacture of disposables to Costa Rica. Activities under this restructuring plan were initiated in the second quarter of 2013 and are expected to be substantially completed by the end of 2014. We estimate that this restructuring plan will result in total pre-tax charges of approximately $2.8 million, all of which are one-time termination benefits, including severance payments and continuing medical benefits.

A summary of the activities related to this initiative during 2013 is presented below (in thousands):



	Employee Termination Cost
Balance at beginning of year	$	—
Restructuring charges	333
Payments	(333		)
Balance at end of year	$	—

All charges were recorded in the restructuring charges line item within our consolidated statement of operations.

Strategic Reorganization Initiative

During the third quarter of 2013, our management evaluated various development projects, product lines and functional areas in an effort to reprioritize and reallocate our resources within our distribution, research and development, and clinical programs to focus on development and commercial efforts that we believe better advance our key strategies. The key elements under this restructuring plan include the discontinuation of development programs for our FL.IVUS, FL.ICE and OCT intravascular coronary imaging development programs, the termination of the commercial sale of the ReFLOW product line, and a modest reorganization of several functional areas and business units within the Company.

Activities under this restructuring plan were initiated in the third quarter of 2013 and are expected to be substantially completed by mid-year 2014. We estimate that this restructuring plan will result in total pre-tax charges of approximately $19.2 million, of which $19.0 million incurred during 2013. Approximately $7.8 million of these charges resulted or will result in cash outlay. The following provides a summary of our expected total costs associated with the plan by major type of costs (in thousands):



Type of Cost	Total Estimated Amount
Employee termination cost	$	2,812
Asset write-off	11,402
Other associated cost	4,983
Total	$	19,197

A summary of the restructuring charges related to this initiative during 2013 is presented below (in thousands):



	Employee Termination Cost			Asset Write-Off			Other Associated Cost		Total
Balance at beginning of year	$	—		$	—		$	—	$	—
Restructuring charges	2,867			11,402			4,772		19,041
Payments/write-off	(797		)	(11,402		)	—		(12,199		)
Balance at end of year	$	2,070		$	—		$	4,772	$	6,842

The employee termination cost includes severance payments and continuing medical and other benefits. The asset write-off is related to the discontinued programs and includes impairment of properties, plant and equipments of $2.0 million, impairment of intangible assets of $6.3 million and other tangible asset impairment of $3.1 million. The other associated costs include our estimate of the probable contract termination costs related to our purchase and lease commitments, and other costs directly related to the restructuring activities.

All charges were recorded in the restructuring charges line item within our consolidated statement of operations.

Both restructuring initiatives are related to our medical segment.

Debt

1.75% Convertible Note Due December 1, 2017

In December 2012, we issued $460 million aggregate principal amount of 1.75% Convertible Senior Notes due 2017 ("2017 Notes"), in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on June 1 and December 1, commencing on June 1, 2013.

The 2017 Notes are general unsecured obligations that rank the same with our other existing and future unsecured obligations. Prior to August 7, 2017, the 2017 Notes are convertible only upon certain specified events. The initial conversion rate for the 2017 Notes is 30.4612 shares of common stock per $1,000 principal amount of the 2017 Notes, representing an initial effective conversion price of approximately $32.83 per share of common stock. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the 2017 Notes but will not be adjusted for accrued and unpaid interest.

We received net proceeds of $409.3 million from issuance of the 2017 Notes, net of $14.6 million debt issuance costs and net payments of $36.1 million related to our hedge transactions. We recorded total debt issuance costs (including broker fees) of approximately $14.6 million, which have been allocated on a pro-rata basis to the debt ($11.8 million) and equity ($2.8 million) components of the transaction. The long-term debt component is included in non-current liabilities and is being accreted to interest expense over 5 years, the term of the 2017 Notes. The equity component was netted against the proceeds and included in additional paid-in capital.

We may not redeem the 2017 Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the 2017 Notes may require us to purchase all or a portion of their 2017 Notes at a purchase price equal to 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest, if any, to the repurchase date. Holders, who convert their 2017 Notes in connection with a make-whole fundamental change, as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate.

Prior to August 7, 2017, the 2017 Notes are convertible only under the following circumstances: (1) during any fiscal quarter commencing after March 31, 2013 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “ 2017 Notes Measurement Period”) in which, for each trading day of such 2017 Notes Measurement Period, the trading price per $1,000 principal amount of 2017 Notes on such trading day was less than 98% of the product of the last reported sale price of our common stock on such trading day and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified distributions and corporate events. As of December 31, 2013, none of the conditions allowing holders of the 2017 Notes to convert had been met.

We determined that the embedded conversion option in the 2017 Notes is not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging. However, since the 2017 Notes are within the scope of ASC 470, Topic 20, Debt with Conversion and Other Options, we are required to separate the 2017 Notes into a liability component and equity

component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 2017 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest cost over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in ASC 815, Topic 40, Contracts in an Entity’s Own Equity, or ASC 815.

We are using an effective interest rate of 7.00% to calculate the accretion of the bond discount, which is being recorded as interest expense over the expected remaining term of the 2017 Notes. (The amount by which interest expense calculated using the effective interest rate of 7.00% exceeds the interest expense related to the coupon rate of 1.75%, is non-cash interest expense.) The effective rate is based on the interest rate for a similar instrument that does not have a conversion feature. We may be required to pay additional interest upon occurrence of certain events as outlined in the indenture governing the 2017 Notes. As of December 31, 2013, the remaining term of the 2017 Notes is 3.92 years.

Upon conversion of a note, holders of the 2017 Notes will receive up to the principal amount of the converted note in cash and any excess conversion value (conversion spread) in shares of our common stock. The amount of cash and the number of shares of our common stock, if any, will be based on an 80 trading day observation period as described in the indenture. As described in Note 1 - “Organization and Summary of Significant Accounting Policies”, the conversion spread will be included in the denominator for the computation of diluted net income (loss) per common share, using the treasury stock method, if the effect is dilutive.

As discussed above, to hedge against potential dilution upon conversion of the 2017 Notes, we also purchased call options on our common stock from counterparties. The call options give us the right to purchase up to approximately 14.0 million shares of our common stock at $32.83 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the 2017 Notes. We paid an aggregate of $89.8 million to purchase these call options. The call options will expire on December 1, 2017, unless earlier terminated or exercised. To reduce the cost of the hedge, in a separate transaction we sold warrants to counterparties. These warrants give the counterparties the right to purchase up to approximately 14.0 million shares of our common stock at $37.59 per share, subject to certain adjustments. These warrants will be exercisable and will expire in equal installments for a period of 120 trading days beginning on March 15, 2018. We received an aggregate of $53.7 million from the sale of these warrants. In accordance with ASC 815, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and will not be marked to market prospectively unless certain conditions as described in the 2017 Notes occur. The net amount of $36.1 million was recorded as a reduction to additional paid-in capital. The settlement terms of the call options provide for net share settlement and the settlement terms of the warrants provide for net share or cash settlement at our option.

2.875 Convertible Note Due September 1, 2015

In September 2010, we issued $115 million aggregate principal amount of 2.875% Convertible Senior Notes due 2015 ("2015 Notes"), in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on March 1 and September 1, commencing on March 1, 2011.

The 2015 Notes are general unsecured obligations that rank the same with our other existing and future unsecured obligations. Prior to June 1, 2015, the 2015 Notes are convertible only upon certain specified events. The initial conversion rate for the 2015 Notes is 33.7339 shares of common stock per $1,000 principal amount of the 2015 Notes, representing an initial effective conversion price of approximately $29.64 per share of common stock. The conversion rate is subject to adjustment for certain events as outlined in the indenture governing the 2015 Notes but will not be adjusted for accrued and unpaid interest.

We received proceeds of $100.5 million from issuance of the 2015 Notes, net of debt issuance costs of $4.4 million and net payments related to our hedge transactions of $10.0 million which are described in more detail below. We recorded total debt issuance costs (including broker fees) of approximately $4.4 million, which have been allocated on a pro-rata basis to the debt ($3.5 million) and equity ($866,000) components of the transaction. The debt component is primarily included in non-current liabilities and is being accreted to interest expense over 5 years, the term of the 2015 Notes. The equity component was netted against the proceeds and included in additional paid-in capital.

We may not redeem the 2015 Notes prior to maturity. However, in the event of a fundamental change, as defined in the indenture, the holders of the 2015 Notes may require us to purchase all or a portion of their 2015 Notes at a purchase price equal to 100% of the principal amount of the 2015 Notes, plus accrued and unpaid interest, if any, to the repurchase date. Holders, who convert their 2015 Notes in connection with a make-whole fundamental change, as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate.

Prior to June 1, 2015, the 2015 Notes are convertible only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2010 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “2015 Notes Measurement Period”) in which, for each trading day of such 2015 Notes Measurement Period, the trading price per $1,000 principal amount of 2015 Notes on such trading day was less than 98% of the product of the last reported sale price of our common stock on such trading day and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified distributions and corporate events. As of December 31, 2013, the “if-converted” value of the 2015 Notes did not exceed its principal amount and none of the conditions allowing holders of the 2015 Notes to convert had been met.

We determined that the embedded conversion option in the 2015 Notes is not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging. However, since the 2015 Notes are within the scope of ASC 470, Topic 20, Debt with Conversion and Other Options, we are required to separate the 2015 Notes into a liability component and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 2015 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest cost over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification in ASC 815, Topic 40, Contracts in an Entity’s Own Equity, or ASC 815.

We are using an effective interest rate of 7.65% to calculate the accretion of the bond discount, which is being recorded as interest expense over the expected remaining term of the 2015 Notes. (The amount by which interest expense calculated using the effective interest rate of 7.65% exceeds the interest expense related to the coupon rate of 2.875%, is non-cash interest expense.) The effective rate is based on the interest rate for a similar instrument that does not have a conversion feature. We may be required to pay additional interest upon occurrence of certain events as outlined in the indenture governing the 2015 Notes. As of December 31, 2013, the remaining term of the 2015 Notes is 1.67 years.

Upon conversion of a note, holders of the 2015 Notes will receive up to the principal amount of the converted note in cash and any excess conversion value (conversion spread) in shares of our common stock. The amount of cash and the number of shares of our common stock, if any, will be based on a 25 trading day observation period as described in the indenture. As described in Note 1 - “Organization and Summary of Significant Accounting Policies”, the conversion spread will be included in the denominator for the computation of diluted net income (loss) per common share, using the treasury stock method.

As discussed above, to hedge against potential dilution upon conversion of the 2015 Notes, we also purchased call options on our common stock from a counterparty. The call options give us the right to purchase up to approximately 3.9 million shares of our common stock at $29.64 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the 2015 Notes. We paid an aggregate of $27.2 million to purchase these call options. The call options will expire on September 1, 2015, unless earlier terminated or exercised. To reduce the cost of the hedge, in a separate transaction we sold warrants to a counterparty. These warrants give the counterparty the right to purchase up to approximately 3.9 million shares of our common stock at $34.875 per share, subject to certain adjustments. These warrants will be exercisable and will expire in equal installments for a period of 50 trading days beginning on December 1, 2015. We received an aggregate of $17.1 million from the sale of these warrants. In accordance with ASC 815, we concluded that the call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and will not be marked to market prospectively unless certain conditions as described in the 2015 Notes occur. The net amount of $10.0 million paid to the counterparty was recorded as a reduction to additional paid-in capital. The settlement terms of the call options provide for net share settlement and the settlement terms of the warrants provide for net share or cash settlement at our option.

Concurrently with the issuance of the 2017 Notes in December 2012, the Company repurchased $90.0 million of its 2015 Notes with a $104.9 million cash payment, including $711,000 of accrued interest. Since the 2015 Notes are within the scope of ASC 470, we allocated the consideration to the extinguishment of the liability component and the reacquisition of the equity component. We recognized a $5.0 million loss on repurchasing the 2015 Notes, which is the difference between the carrying value of the liability component, including any unamortized debt issuance costs, and the consideration attributed to the liability component as loss from debt extinguishment in other expenses in December 2012. The consideration attributed to the liability component of $83.0 million is calculated by measuring the fair value of a similar liability that does not have an associated equity component. The consideration attributable to the equity component of $21.8 million was recorded as a reduction of additional paid-in capital. In addition, the proportionate call options and warrants related to the 2015 Notes were also retired in

December 2012. We received an aggregate of $15.2 million for the proportionate call option retirement and paid an aggregate of $11.6 million for buying back the proportionate portion of the warrants. The net amount of $3.6 million was recorded as an addition to additional paid-in capital.

Carrying value, fair value and interest expense

The carrying values of the liability and equity components of both the 2017 Notes and the 2015 Notes, together the "Notes", are reflected in our consolidated balance sheets as follows (in thousands):



	As of December 31,
	2013			2012
Long-term debt:
2.875% Convertible Senior Notes due 2015:
Principal amount	$	25,000		$	25,000
Unamortized discount of liability component	(1,818		)	(2,830		)
Unamortized debt issuance costs	(204		)	(326		)
Carrying value of liability component	$	22,978		$	21,844

1.75% Convertible Senior Notes due 2017:
Principal amount	$	460,000		$	460,000
Unamortized discount of liability component	(72,902		)	(88,536		)
Unamortized debt issuance costs	(9,064		)	(11,008		)
Carrying value of liability component	$	378,034		$	360,456
Total long-term debt	$	401,012		$	382,300

Equity—net carrying value
2.875% Convertible Senior Notes due 2015	$	452		$	452
1.75% Convertible Senior Notes due 2017	$	89,415		$	89,415

The fair values of the Notes, which are all Level 2 measurements, are summarized as follows (in thousands):



	As of December 31,
	2013		2012
2.875% Convertible Senior Notes due 2015	$	25,950	$	26,950
1.75% Convertible Senior Notes due 2017	456,320		462,850
Total	$	482,270	$	489,800

Interest expense related to the Notes was included in interest expense on the consolidated statements of operations as follows (in thousands):



	Year Ended December 31,
	2013			2012
Contractual coupon interest	$	8,769		$	3,625
Amortization of debt issuance costs	2,217			811
Accretion of debt discount	16,646			4,932
Capitalized interest	(939		)	(1,638		)
	$	26,693		$	7,730

4. Commitments and Contingencies

Litigation-LightLab

On January 7, 2009, LightLab Imaging, Inc., or LightLab, which was acquired by St. Jude Medical, Inc., or St. Jude, in 2010, filed a complaint against us and our wholly owned subsidiary, Axsun, in the Superior Court of Massachusetts, Suffolk County, seeking injunctive relief and unspecified damages (the Massachusetts Action). The complaint included allegations that

Volcano interfered with an agreement between Axsun and Lightlab and with LightLab's advantageous business relationship with Axsun, breach of contract by Axsun, that Axsun and Volcano misappropriated LightLab's confidential information and trade secrets, and violated Chapter 93A, a Massachusetts statute that provides for recovery of up to three times damages plus attorney's fees (93A).

On April 7, 2011, the Court entered an Amended Final Judgment in the Massachusetts Action: a) in favor of Volcano and Axsun on LightLab's claims for trade secret misappropriation on items 1-30 on LightLab's list of alleged trade secrets, b) ordered Volcano and Axsun to collectively pay $600,000 in damages and $4.5 million in attorneys' fees, c) in favor of LightLab on its claims against Axsun for breach of contract, breach of implied covenant of good faith and fair dealing, for violation of 93A, and misappropriation of trade secrets for disclosing three particular items to Volcano in December 2008 - the specifications for the two lasers provided by Axsun to LightLab and one Axsun laser prototype made in 2008, d) in favor of LightLab on its claims against Volcano for intentional interference with a contract and advantageous business relationship, unjust enrichment, violation of 93A, and misappropriation of trade secrets for the same three trade secrets described above. In addition, the Court denied a majority of LightLab's requested injunctions, and entered limited injunctive relief, none of which management believes have a material effect upon Volcano.

LightLab appealed various decisions of the Court including, a) the Court's pre-trial rulings excluding certain lost profits damages evidence that LightLab sought to introduce at trial; b) the Court's decisions adverse to LightLab's claims for trade secret misappropriation in items 1-30 of LightLab's alleged list of trade secrets, including various rulings requiring evidence of use or intent to use as a prerequisite for injunctive relief; c) the Court's post-trial decisions denying permanent injunctive relief that LightLab requested as terms of the Final Judgment; and; d) the denial of LightLab's motion to alter or amend the Final Judgment, which motion sought to obtain additional declaratory relief barring Axsun from “supplying” tunable lasers to Volcano. Volcano and Axsun did not cross appeal the Amended Final Judgment in 2011, and Volcano and Axsun satisfied their payment obligations under the Amended Final Judgment by Volcano paying Lightlab approximately $5.4 million. The Massachusetts Supreme Judicial Court heard LightLab's appeal on December 2, 2013.

In February 2010, Volcano and Axsun commenced an action in the Delaware Chancery Court, or the Chancery Court Action, against LightLab seeking a declaration of Volcano and Axsun's rights with respect to certain OCT technology, the High Definition Swept Source. LightLab then filed a counter-claim that included a claim against Axsun and Volcano for violations of 93A. This case has been stayed until such time as Volcano has achieved certain development and regulatory milestones.

Additionally, on May 24, 2011, LightLab commenced a separate action in Delaware Chancery Court, or the Second Chancery Court Action, against Volcano and Axsun alleging that Axsun is inappropriately assisting Volcano in the development of a third-party laser. The complaint seeks injunctive relief and unspecified damages. After Volcano and Axsun moved to dismiss the Second Chancery Court Action, LightLab filed an amended complaint against Volcano and Axsun, adding additional allegations regarding misappropriation of trade secrets. This case has been stayed indefinitely.

In January 2014, Volcano requested the Chancery Court dismiss the Chancery Court Actions. The Chancery Court has not ruled on this motion.

Litigation - St. Jude Medical

On July 27, 2010, St. Jude Medical filed a lawsuit against Volcano in federal district court in Delaware (collectively, with the counterclaims described below, the Delaware Patent Action), alleging that our pressure guide wire products infringe five patents owned by St. Jude Medical. St. Jude Medical is seeking injunctive relief and monetary damages. This action does not involve OCT technology and is separate from the Massachusetts Action.

On September 20, 2010, Volcano filed its response, in which we denied the allegations that our PrimeWire ^®products infringe any valid claim of St. Jude Medical's asserted patents. In addition, Volcano filed a counterclaim in which we alleged that St. Jude Medical's PressureWire ^®products and its RadiAnalyzer ^®Xpress product infringe three Volcano patents. In our counterclaim, Volcano sought injunctive relief and monetary damages. Trials on the St. Jude Medical patents and Volcano's patents were held in October 2012.

On October 12, 2012, the court entered summary judgment for Volcano with respect to one of St. Jude Medical's asserted patents. On October 19, 2012, a jury found in favor of Volcano on the remaining four St. Jude Medical patents, finding that two of the patents were invalid and that Volcano did not infringe two of the patents. On October 22, 2012, Volcano voluntarily dismissed its claims against St. Jude Medical with respect to one of Volcano's patents. On October 25, 2012, a jury found in favor of St. Jude Medical with respect to Volcano's asserted patents. In conjunction with the trial, St. Jude Medical agreed that previous versions of its PressureWire® products infringed Volcano's 6,976,965 patent (a pressure sensing guide wire patent). Post-trial motions are pending or remain available to the parties in the case. Volcano and St. Jude have stipulated to a confidential damages amount.

On April 9, 2012, St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB and St. Jude Medical S.C. filed a sealed complaint in the United States District Court for the District of Delaware alleging that Volcano Corporation infringes United States Patent No. 6,565,514. Trial will be in December 2014 in this case.

On April 16, 2013, Volcano filed suit in Federal District Court in Delaware against St. Jude Medical, Cardiovascular and Ablation Technologies Division, Inc., St. Jude Medical, Cardiology Division, Inc., St. Jude Medical, U.S. Division, St. Jude Medical S.C. Inc., and St. Jude Medical Systems AB, (collectively, “St. Jude”) for infringement of Volcano's recently issued United States Patent Nos. 8,419,647 and 8,419,648 both entitled “Ultra Miniature Pressure Sensor.” Volcano's complaint accuses St. Jude's PressureWire™ Certus and PressureWire™ Aeris cardiac pressure sensing guide wire products (the “Accused Guide Wires”) and St. Jude's RadiAnalyzer™ Xpress Measurement System, Ilumien™ PCI Optimization System and Quantien™ Integrated FFR Platform, which are used with the Accused Guide Wires, of infringing the patented methods of United States Patent No. 8,419,647. Volcano's complaint also accuses the Accused Guide Wires of infringing the patented device claims of United States Patent No. 8,419,648. A claim construction hearing was held in November 2013, and a ruling adverse to Volcano was issued in January 2014. In February 2014, the parties submitted a joint stipulation to the Court agreeing that the Accused Guide Wires do not infringe Volcano’s patents under the Court’s claim construction ruling. Volcano intends to appeal the claim construction ruling.

Litigation - CardioSpectra

On March 27, 2012, Christopher E. Banas, et al., filed a lawsuit against Volcano in federal district court in the Northern District of California, alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on Volcano's acquisition of CardioSpectra in 2007. Specifically, plaintiffs assert that Volcano has failed to comply with the terms and the alleged implied obligations of the Merger Agreement relating to potential milestone payments. CardioSpectra was in the business of developing OCT technology; however, this litigation is separate from the Massachusetts Action.

On May 14, 2012, Volcano moved to dismiss the complaint in its entirety. The motion sought to dismiss the breach of fiduciary duty and implied covenant claims without leave for amendment, and to dismiss the breach of contract claim with leave to amend. By order dated August 6, 2012, the Court granted Volcano's motion as to all issues with leave to amend. The plaintiffs filed a Second Amended Complaint on August 20, 2012, which included a single claim for breach of the Merger Agreement. In addition, the plaintiffs identified in the Second Amended Complaint are listed as Christopher E. Banas and Paul Castella in their respective capacities as Shareholder Representatives under the Merger Agreement. Volcano answered the Second Amended Complaint on September 4, 2012, and in the same document Volcano asserted several affirmative defenses. A trial date has been scheduled for May 27, 2014 for this matter.

Litigation - Other

In November 2012, we became aware through newspaper reports in the Italian media that a former employee of ours was under criminal investigation for an alleged violation of Italian anti-bribery laws. We also learned that Volcano Europe B.V.B.A., our wholly-owned subsidiary, had temporarily been prohibited from establishing new contractual relationships with hospitals that are part of the Italian national health system. Following a court hearing, the temporary prohibition was lifted. The Italian public prosecutor's request that such prohibition be reinstituted was denied. The Italian public prosecutor is alleging that the approximately €5,000 that we paid to an Italian state-employed physician for conducting a training session was paid in an effort to influence the outcome of a clinical trial.

The Company believes the lawsuits and other matter described above are without merit, and intends to vigorously defend against or prosecute, as applicable, the matters described above.

We may also be a party to various other claims in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred and were not material in any period reported. Additionally, we assess, in conjunction with our legal counsel, the need to record a liability for litigation and contingencies. Reserve estimates are recorded when and if it is determined that a loss related matter is both probable and reasonably estimable. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter. Based on its experience, the Company also believes that the damage amounts claimed in the lawsuits disclosed above are not a meaningful indicator of the Company's potential liability. At this time, we are not able to predict or estimate the ultimate outcome or range of possible losses relating to the lawsuits, claims or counterclaims described above. However, we believe that the ultimate disposition of these matters, individually and in the aggregate, including the matters discussed above, will not have a material impact on our consolidated results of operations, financial position or cash flows. Our evaluation of the likely impact of these matters could change in the future, as litigation is inherently unpredictable, and unfavorable outcomes and/or defense costs, depending upon the amount and timing, could have a material adverse effect on our results of operations, financial position, or cash flows in future periods.

Licenses

We entered into various license agreements with third parties whereby we were granted licenses or rights to certain patents and technology. During the years ended December 31, 2013, 2012 and 2011, royalty expense related to the use of these licensed technology of $2.5 million, $1.5 million, and $1.8 million, respectively, was recorded in cost of revenues. None of the agreements are individually material to our consolidated results of operations or financial position.

Leases

We lease our domestic and certain foreign facilities and other equipment under non-cancelable capital and operating lease agreements, which expire at various dates through 2023. In addition to the minimum future lease commitments presented below, the leases generally require that we pay property taxes, insurance, maintenance and repair costs. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession such as a rent holiday, rent expense is recognized using the straight-line method over the term of the lease.

At December 31, 2013, future minimum lease commitments under non-cancelable leases are as follows (in thousands):



Year Ending December 31,	Capital		Operating
2014	$	18	$	8,800
2015	7		5,808
2016	5		5,766
2017	—		5,407
2018	—		5,222
Thereafter	—		24,449
Net minimum lease payments	$	30	$	55,452
Less:
Amounts representing interest	—
Current	—
Long-term	$	30

Total rental expense was $7.1 million, $7.0 million, and $6.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Commitments and Other Contractual Obligations

We have obligations under non-cancelable purchase commitments. The majority of these obligations related to inventory, primarily raw materials. At December 31, 2013, the future minimum payments under these non-cancelable purchase commitments totaled $70.1 million. Approximately $65.8 million of these commitments will require payment in 12 months, of which $63.5 million of these commitments will require payment prior to March 31, 2014. The remaining amount will require payments at various dates through 2016.

Indemnification

Our supplier, distributor and collaboration agreements generally include certain provisions for indemnification against liabilities if our products are recalled, infringe a third party’s intellectual property rights or cause bodily injury due to alleged defects in our products. In addition, we have agreements with our present and former directors and executive officers indemnifying them against liabilities arising from service in their respective capacities to Volcano. We maintain directors’ and officers’ insurance policies that may limit our exposure to such liabilities. To date, we have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

Sole Source Suppliers

5. Stockholders’ Equity

Common Stock

We are authorized to issue 250,000,000 shares of common stock at $0.001 par value per share.

Stockholders Rights Plan

In May 2006, our stockholders approved a stockholder rights plan and a classified board of directors with staggered terms of election. Pursuant to the stockholder rights plan, we declared and paid a dividend of one right for each share of common stock. Unless redeemed prior to the time the rights are exercised, upon the occurrence of certain events, the rights will entitle the holders to receive shares of our preferred stock, or shares of an acquiring entity.

Our increase of the authorized shares to 250,000,000 shares, the stockholder rights plan and the classified board of directors became effective upon the consummation of our initial public offering.

Warrants

In connection with our convertible debt offerings discussed in Note 3 “Financial Statement Details — Debt”, at December 31, 2013, we had warrants for approximately 14.0 million shares of common stock that are exercisable at a price of $37.59 per share, subject to certain adjustments, in equal installments for a period of 120 trading days beginning on March 15, 2018, and warrants for approximately 850,000 shares of common stock that are exercisable at a price of $34.875 per share, subject to certain adjustments, in equal installments for a period of 50 trading days beginning on December 1, 2015.

Preferred Stock

We are authorized to issue 10,000,000 shares of undesignated preferred stock at $0.001 par value per share. The Board of Directors may determine the rights, preferences, privileges, qualifications, limitations and restrictions granted or imposed upon any series of preferred stock. As of December 31, 2013 and 2012, no preferred stock was outstanding.

Share Repurchase Program

On December 2, 2013, our board of directors authorized a $200 million share repurchase program. Pursuant to this approval, we entered into a $100 million accelerated share repurchase, or ASR, program with a counterparty, and received 3,557,137 shares of our common stock. The final number of shares to be repurchased by us under this ASR will be determined at the completion of the ASR program and will be based generally on the daily volume-weighted average share price of our common stock during a period of up to approximately four months, less an agreed-to discount. At settlement, we may receive additional shares of common stock from the counterparty, or under certain circumstances, may be required to deliver shares of common stock or remit a settlement amount in cash, at our option. All common shares repurchased under the ASR program were retired in December 2013.

All of our repurchases were treated as effective retirements of the purchased shares and therefore reduced reported shares issued and outstanding by the number of shares repurchased. In addition, the Company recorded the excess of the purchase price over the par value of the common stock as a reduction to additional paid-in capital.

Equity Compensation Plans

In October 2005, our stockholders approved the 2005 Equity Compensation Plan, or the 2005 Plan. Upon adoption of the 2005 Plan, issuance of stock awards under our 2000 Long Term Incentive Plan ceased.

On July 29, 2009, our stockholders approved an amendment and restatement of our 2005 Plan and the plan was renamed to the Amended and Restated 2005 Equity Compensation Plan, or the 2005 Amended Plan. The 2005 Amended Plan was further amended by our Board of Directors in February 2011, March 2011 and February 2013, which amendments were approved by our shareholders in May 2011 and May 2013. The 2005 Amended Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, or RSU, performance stock awards, performance cash awards and other stock awards. The 2005 Amended Plan does not allow repricing

of stock options without express approval of the stockholders and clarifies that a change in control must actually occur in order for change in control benefits to be realized. Our 2005 Amended Plan provides for an aggregate of 21,572,558 shares of our common stock that may be issued or transferred to our employees, non-employee directors and consultants, including increases of 2,050,000, 2,500,000 and 5,360,000 shares which were approved by our stockholders on July 29, 2009, May 2, 2011 and May 15, 2013, respectively. Commencing July 29, 2009, the number of shares of common stock available for issuance under the 2005 Amended Plan was reduced by one share for each share of stock issued pursuant to a stock option or a stock appreciation right and one and sixty-three hundredths (1.63) shares for each share of common stock issued pursuant to a restricted stock award, restricted stock unit, or RSU, award, performance stock award or other stock award. On May 2, 2011, the plan was amended again and the number of shares of common stock available for issuance under the 2005 Amended Plan was reduced by one share for each share of stock issued pursuant to a stock option or a stock appreciation right and two and twelve hundredths (2.12) shares for each share of common stock issued pursuant to a restricted stock award, RSU, award, performance stock award or other stock award. Shares net exercised or retained to cover a participant’s minimum tax withholding obligations are not available for issuance under the 2005 Amended Plan.

At December 31, 2013, we have granted stock options and RSUs under the 2005 Amended Plan. Stock options previously granted under the 2000 Long Term Incentive Plan and the 2005 Plan that are canceled or expired will increase the shares available for grant under the 2005 Amended Plan. At December 31, 2013, 6,793,238 shares remained available to grant under the 2005 Amended Plan.

Stock Option Activity

The maximum term of options granted under the 2005 Amended Plan is seven years. For an initial grant to an employee, 25% of the options generally vest on the first anniversary of the original grant date, with the balance vesting monthly over the remaining three years. For subsequent grants to an employee, the options generally vest monthly over a four-year term. We may grant options that are exercisable immediately regardless of the vesting status of the option with us retaining a right to repurchase exercised unvested shares at the original exercise price of the option. Recipients of stock options shall be eligible to purchase shares of our common stock at an exercise price no less than the estimated fair market value of such stock on the date of grant.

Stock option activity for the year ended December 31, 2013 is as follows:



	Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2012	3,596,135		$	17.82
Granted	1,009,162		23.11
Exercised	(574,194	)	11.12
Forfeited or expired	(265,920	)	21.33
Outstanding at December 31, 2013	3,765,183		$	20.01	3.43	$	13,734
Exercisable at December 31, 2013	2,717,951		$	18.27	2.24	$	13,125
Vested and expected to vest at December 31, 2013	3,663,644		$	19.89	3.36	$	13,689

Options outstanding at December 31, 2013 are summarized as follows:



	Options Outstanding				Options Vested
	Number Outstanding	Weighted- Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price		Number Vested Outstanding	Weighted- Average Exercise Price
$0.33–$12.63	385,031	1.36	$	8.50	384,907	$	8.51
$12.96–$13.77	381,232	1.86	13.52		381,232	13.52
$14.00–$17.27	402,452	2.85	15.60		364,426	15.47
$17.67–$18.90	129,017	4.72	18.49		41,128	18.40
$19.07	542,674	3.10	19.07		518,512	19.07
$19.11-$21.06	384,991	1.06	19.49		345,510	19.35
$21.07–$25.00	309,224	4.81	22.41		128,311	22.53
$25.40	484,791	6.15	25.40		88,912	25.40
$25.57-$28.63	386,569	4.08	27.41		292,373	27.35
$28.70-$32.52	359,202	5.01	29.43		172,433	29.57
$0.33–$32.52	3,765,183	3.43	20.01		2,717,744	18.27

Non-vested stock option activity for the year ended at December 31, 2013 is as follows:



	Non-vested Stock Options		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2012	784,820		$	7.63
Granted	1,009,162		7.37
Vested	(557,180	)	8.37
Forfeited or expired	(189,570	)	12.32
Outstanding at December 31, 2013	1,047,232		6.14

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2013, 2012 and 2011 was $7.45, $10.78 and $11.34, respectively.

Restricted Stock Unit Activity

The RSU includes time-vested RSU and performance-based RSU. The time-vested RSU entitle the holder to shares of common stock as the units vest in equal annual installments over a four-year period.

Starting from 2012, we granted performance RSU to officers and key employees under the terms of the 2005 Amended Plan to align key management and senior leadership with stockholders' interests and to retain key employees. The performance RSU granted for years 2012 and 2013 generally vest over three years, with one third vesting on the date of certification of achievement of the pre-determined performance goals, and the remaining two thirds vesting evenly on the following two year-end dates (December 31), contingent upon the recipient’s continued service to the Company on each such date.

On February 19, 2013, the Compensation Committee certified the actual performance achievement of participants in the 2012 Long-Term Incentive Plan, or the 2012 program. Based upon the achievement of specific performance goals outlined in the 2012 Program, participants were granted approximately 58,000 RSUs under the 2012 Program. One third of the RSUs under the 2012 Program vested on the certification date, one third vested on December 31, 2013 and the remaining one third vests on December 31, 2014, contingent upon the recipient's continued service to the Company.

On February 12, 2014, the Compensation Committee certified the actual performance achievement of participants in the 2013 Long-Term Incentive Plan, or the 2013 program. Based upon the achievement of specific performance goals outlined in the 2013 Program, participants were granted approximately 73,000 RSUs under the 2013 Program. One third of the RSUs under the 2013 Program vested on the certification date and the remaining two thirds will vest evenly on each of December 31, 2014 and December 31, 2015, contingent upon the recipient's continued service to the Company.

RSU activity, including time-vested RSU and performance RSU, for the year ended December 31, 2013 is as follows:



	Restricted Stock Units
Outstanding at December 31, 2012	918,367
Granted	526,624
Vested	(372,920	)
Forfeited or expired	(69,690	)
Outstanding at December 31, 2013	1,002,381

The weighted-average grant-date fair value of RSU granted, including time-vested RSU and performance RSU, during the years ended December 31, 2013, 2012 and 2011 was $24.30, $27.87 and $26.62, respectively.

During the year ended December 31, 2013, we released 372,920 shares of common stock based on the vesting terms of certain RSU agreements.

There was no common stock held in treasury as of December 31, 2013 and 2012.

Employee Stock Purchase Plan Activity

In June 2007, our stockholders approved the adoption of our 2007 Employee Stock Purchase Plan, or Purchase Plan. The Purchase Plan provides eligible employees the opportunity to purchase shares of our common stock at the lower of up to 85% of the fair market value on the first or last day of the applicable offering period, by having withheld from their salary an amount up to 15% of their compensation, without paying brokerage fees or commissions on purchases. Our Purchase Plan is deemed to be compensatory, and therefore, Purchase Plan expense has been included in our consolidated statements of operations for the years ended December 31, 2013, 2012 and 2011. We pay for the administrative expenses of the Purchase Plan. No employee may purchase more than $25,000 worth of common stock (calculated at the time the purchase right is granted) in any calendar year, nor may purchase more than 750 shares in any six-month purchase period.

Commencing January 1, 2008, common stock reserved for issuance under the Purchase Plan automatically increases by the lower of 1/2% of our outstanding common stock or 600,000 shares on the first day of January of each year. In November 2012 and 2011, the Board of Directors exercised its right not to increase the number of shares of common stock available for issuance under the Purchase Plan that was scheduled to occur on January 1, 2013 and January 1, 2012, respectively. As a result, at December 31, 2013, the number of shares of common stock reserved for issuance under the Purchase Plan remained at 1,100,000 shares and 55,911 shares of common stock were available for issuance under the Purchase Plan. According to the terms of the Purchase Plan, the number of shares of common stock available for issuance under the Purchase Plan was automatically increased by 600,000 shares on January 1, 2014.

During the years ended December 31, 2013, 2012 and 2011, 195,469, 163,818, and 171,251 shares, respectively, were purchased at an average per share price of $18.30, $23.69, and $20.75, respectively.

Fair Value Assumptions

The fair value of each stock option is estimated on the date of grant using the Black-Scholes model utilizing the following weighted-average assumptions:



	2013			2012			2011
Risk-free interest rate	0.7		%	0.8		%	1.9		%
Expected life (years)	4.2			4.1			4.4
Estimated volatility	39.2		%	46.9		%	47.4		%
Expected dividends	None			None			None
Weighted-average grant date fair value	$	7.45		$	10.78		$	11.34

The risk-free interest rate for periods within the contractual life of the stock option is based on the implied yield available on U.S. Treasury constant maturity securities with the same or substantially equivalent remaining terms at the time of grant. We use our historical stock option exercise experience to estimate the expected term of our stock options. We use volatility of our own common stock in determining the grant date fair value. We use a zero value of the expected dividend value factor since we have not declared any dividends in the past and we do not anticipate declaring any dividends in the foreseeable future.

The first offering period under the Purchase Plan commenced in September 2007. The fair value of each purchase option under the Purchase Plan is estimated at the beginning of each purchase period using the Black-Scholes model utilizing the following weighted-average assumptions:

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	Years Ended December 31,
	2013			2012			2011
Risk-free interest rate	0.1		%	0.1		%	0.1		%
Expected life (years)	0.5			0.5			0.5
Estimated volatility	29.6		%	38.2		%	36.4		%
Expected dividends	None			None			None
Fair value of purchase right	$	5.30		$	7.31		$	6.76

The computation of the expected volatility assumption used in the Black-Scholes model for purchase rights is based on the trading history of our common stock. The expected life assumption is based on the six-month term of each offering period. The risk-free interest rate is based on the U.S. Treasury constant maturity securities with the same or substantially equivalent remaining term in effect at the beginning of the offering period. We use a zero value for the expected dividend value factor since we have not declared any dividends in the past and we do not anticipate declaring any dividends in the foreseeable future.

Stock-Based Compensation Expense

With the exception of performance-based RSUs, stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period.

We recognize the estimated compensation cost of performance-based RSUs, net of estimated forfeitures. The performance-based RSUs are earned upon attainment of identified performance goals, some of which contain discretionary metrics. As such, these award are re-valued based on our traded stock price at the end of each reporting period. If the discretion is removed, the award will be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date the award becomes fixed. Expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award.

The following table sets forth stock-based compensation expense included in our consolidated statements of operations (in thousands):



	Years Ended December 31,
	2013		2012		2011
Cost of revenues	$	748	$	715	$	459
Selling, general and administrative	13,608		12,666		10,850
Research and development	1,728		1,698		1,682
	$	16,084	$	15,079	$	12,991

Included in our stock-based compensation expense is $0, $0 and $115,000 of stock-based compensation expense related to non-employees in the years ended December 31, 2013, 2012 and 2011, respectively. In the years ended December 31, 2013, 2012 and 2011, we recorded $1.0 million, $1.2 million and $1.0 million, respectively, of stock-based compensation expense related to the Purchase Plan. At December 31, 2013 and 2012, there was $219,000 and $258,000, respectively, of total stock-based compensation cost capitalized in inventories.

We estimate forfeitures and only recognize expense for those shares expected to vest. Our estimated forfeiture rates in the years ended December 31, 2013, 2012 and 2011 are based on our historical forfeiture experience.

Stock option excess tax benefits of $0, $35,000 and $165,000 were credited to additional paid-in-capital during the year ended December 31, 2013, 2012 and 2011.

The total intrinsic value of stock options exercised during the year ended December 31, 2013, 2012 and 2011 was $6.3 million, $12.2 million and $14.7 million, respectively, and represents the difference between the exercise price of the option and the fair value of our common stock on the dates exercised. The total grant-date fair value of stock options vested during the year ended December 31, 2013, 2012 and 2011 was $4.7 million, $5.4 million and $5.6 million, respectively.

At December 31, 2013, there was $8.3 million, $16.5 million, and $182,000 of total unrecognized employee compensation cost related to stock options, RSUs and the Purchase Plan, respectively, which is expected to be recognized over a weighted average of 2.60 years, 2.38 years, and 0.20 years, respectively.

6. Income Taxes

The income tax expense (benefit) is as follows (in thousands):

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	Years Ended December 31,
	2013			2012			2011
Current:
Federal	$	—		$	—		$	—
State	224			207			498
Foreign	2,004			2,469			2,283
	2,228			2,676			2,781
Deferred:
Federal	(20,903		)	3,940			(19,739		)
State	1,878			182			(2,248		)
Foreign	467			(5,131		)	(784		)
	(18,558		)	(1,009		)	(22,771		)
Income tax expense (benefit)	$	(16,330	)	$	1,667		$	(19,990	)

Losses before income taxes relating to non-U.S. operations were $794,000, $43,000 and $133,000 in the years ended December 31, 2013, 2012 and 2011, respectively.

The income tax expense (benefit) in the accompanying consolidated statements of operations differ from the expense (benefit) calculated by applying the U.S. federal statutory income tax rate of 35% to income (loss) before income taxes expense (benefit) due to the following (in thousands):



	Years Ended December 31,
	2013			2012			2011
U.S. federal statutory income tax expense (benefit)	$	(17,791	)	$	3,391		$	6,339
State income tax expense (benefit), net of federal income tax expense	(1,470		)	296			(1,800		)
Valuation allowance	3,777			(4,917		)	(25,840		)
Foreign tax rate differential	(2,997		)	(342		)	156
Credits	(1,935		)	—			(1,405		)
Acquisition-related items	1,409			559			—
Other	2,677			2,680			2,560
Income tax expense (benefit)	$	(16,330	)	$	1,667		$	(19,990	)

The components of our deferred tax assets are as follows (in thousands):



	December 31,
	2013			2012
Deferred tax assets:
Net operating loss carryovers	$	40,071		$	28,431
Tax credit carryovers	12,343			9,704
Accruals and deferred revenue	12,979			7,355
Stock based compensation	10,310			9,021
Original issue discount	—			379
Total deferred tax assets	75,703			54,890
Deferred tax liabilities:
Depreciation and amortization	(18,361		)	(20,557		)
Deferred tax assets:	57,342			34,333
Valuation allowance	(12,601		)	(6,309		)
Net deferred tax assets (liabilities)	$	44,741		$	28,024

The net change in the total valuation allowance was an increase of $6.3 million in 2013. Of this amount, $3.8 million was recorded as reduction in the income tax benefit and $2.5 million was recorded as a reduction to goodwill.

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In February 2009, the California 2009-2010 budget was enacted into law, allowing companies to elect, for income tax purposes, to apply a single sales factor apportionment for years beginning after January 1, 2011. Further, Proposition 39 was passed on November 6, 2012, requiring multi-state business to apportion income to California using a single-sales factor method of apportionment for taxable years beginning on or after January 1, 2013. Based upon our election in 2011 and change in law in 2012, we were maintaining a valuation allowance to offset a portion of our California deferred tax assets as realization of such assets did not meet the more-likely-than-not threshold required under accounting guidelines. During 2013, we reevaluated our California deferred tax asset, and other state deferred tax assets, in light of our current and forecasted operations, and we concluded that it was more likely than not that we would not be able to realize the remaining California deferred tax assets. Therefore, during 2013, we recognized an additional $3.8 million of valuation allowance against our state deferred tax assets as discussed above.

In the case of an acquired entity, we record a valuation allowance through purchase accounting as an adjustment to goodwill at the acquisition date if it is more likely than not that all or a portion of the acquired deferred tax assets will not be realized in the future. To the extent there is a change in the valuation allowance in the case of an acquired entity during the measurement period, adjustments were recorded through goodwill provided that such change relates to new information about the facts and circumstances that existed on the acquisition date. In 2013, we completed our purchase accounting analysis regarding two 2012 acquisitions, and concluded that it was more likely than not that an additional $1.4 million of foreign deferred tax assets related to the Sync-Rx, Ltd. acquisition and $1.1 million of acquired state deferred tax assets related to Crux Biomedical, Inc. acquisition are not realizable. This resulted in an increase in valuation allowance against these deferred tax assets, which was recorded as a reduction to goodwill as discussed above.

The net change in the total valuation allowance was a decrease of $3.1 million in 2012. At December 31, 2012 , we concluded that it is more likely than not that the benefits of a portion of our foreign deferred income tax assets will be realized. We expect that our foreign operations in the respective jurisdictions will generate sufficient taxable income in future periods to realize the tax benefit associated with the related deferred tax asset. Accordingly,we reversed the valuation allowance on the foreign gross deferred income tax assets.

At December 31, 2013 and 2012, valuation allowances remained within certain U.S. state jurisdictions and selected international jurisdictions to offset deferred tax assets, as realization of such assets is not more likely than not.

During 2012, we also acquired Sync-Rx, an Israeli corporation. Total pre-acquisition net operating loss carryforwards were approximately $8.4 million. It is expected that the net operating loss carryforward recorded as a deferred tax asset will not be utilized.

Internal Revenue Code Section 382 places a limitation on the utilization of U.S. and state net operating losses and credit carryforwards when an ownership change, as defined by the tax law occurs. Generally, this occurs when a greater than 50% change in ownership occurs. During 2012, we acquired a greater than 50% ownership in Crux Biomedical, a U.S. corporation. We analyzed our ability to use the NOL's acquired from Crux under Section 382 limitations and concluded that federal and state net operating losses of $30.6 million and $30.8 million were not limited.

Pursuant to Internal Revenue Code Section 382, use of net operating loss carry forwards related to prior acquisitions of approximately $20.1 million may be limited. These carry forwards will expire if we are unable to generate sufficient taxable income within the carry forward period. The Company is assessing whether any additional limitations are required.

At December 31, 2013, we have federal and state net operating loss carry forwards of approximately $133.6 million and $80.4 million, respectively. The federal and state net operating loss carry forwards begin to expire in 2021 and 2014, respectively, unless previously utilized. In addition, we have federal and state research and experimentation tax credit carry forwards of approximately $8.7 million and $10.2 million, respectively. The federal credits begin to expire in 2023. The California state credits carry forward indefinitely. The Massachusetts state credit carry forwards begin to expire in 2019. Foreign net operating losses are approximately $20.9 million and carry forward indefinitely.

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The Company has

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no intent to repatriate such earnings. The amount of the temporary difference is approximately $16.7 million as of December 31, 2013. The amount of unrecognized deferred tax liability related to the temporary difference is estimated to be no more than $5.9 million as of December 31, 2013.

As a result of certain realization requirements of ASC 718, the table of deferred tax assets shown above does not include certain deferred tax assets at December 31, 2013 and 2012 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by approximately $20.1 million if and when such deferred tax assets are ultimately realized. We use the with-and-without approach ignoring indirect effects for purposes of determining when excess tax benefits have been realized. Stock option excess tax benefits of $0 and $35,000 were credited to additional paid-in-capital during the years ended December 31, 2013 and 2012.

During the year ended December 31, 2012, we repurchased $90.0 million of our 2.875% convertible notes due 2015 and recognized a loss for tax purposes, which is the difference between the carrying value of the liability for tax purposes compared to the repurchase price. In addition, the deferred tax asset related to the repurchased call option and deferred tax liability related to the warrant sold were recognized. The recognition of the loss for tax purposes (to the extent it related to equity transactions) and the related deferred tax asset and liability totaling $2.5 million was credited to additional paid in capital during the year ended December 31, 2012. The reversal of the valuation allowance related to our convertible senior notes of $1.7 million was credited to additional paid in capital during the year ended December 31, 2012.

At December 31, 2013, the total amount of gross unrecognized tax benefits, including interest and penalties, was approximately $1.1 million. If recognized, these benefits would affect our effective tax rate. The aggregate change in the balances of these benefits is as follows (in thousands):



	Years Ended December 31,
	2013			2012			2011
Balance at beginning of year	$	1,071		$	1,065		$	878
Increases related to tax positions taken during the current year	53			46			205
Increases (decreases) related to tax positions taken during a prior period	(42		)	(40		)	(18		)
Balance at end of year	$	1,082		$	1,071		$	1,065

We are open for audit by the U.S. Internal Revenue Service and state tax jurisdictions from our inception in 2000 through 2013. We were audited by the Belgian tax authorities for the 2005 and 2006 years. There were no significant adjustments as a result of this audit. We continue to be open for audit by Belgium and various European tax jurisdictions from the inception of Volcano Europe in 2003 through 2013, and by South Africa from the inception of Volcano South Africa in 2008 through 2013. We were audited by the Japanese tax authorities for the 2005 through 2007 years. There were no significant adjustments as a result of this audit. We continue to be open for audit by the Japanese tax authorities from the inception of Volcano Japan in 2004 through 2013. We continue to be open for audit by the Israeli tax authorities from the inception of Sync-Rx in 2005 through 2013.

7. Segment and Geographic Information

Our chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about segment revenues by product and geographic region for purposes of making operating decisions and assessing financial performance. We have two reporting segments, the first being the medical segment which include the manufacture, sale, discovery, development and commercialization of products for the diagnosis of atherosclerosis in the coronary arteries and peripheral vascular system. In addition we have an industrial segment which includes the discovery, development, manufacture and sale of micro-optical spectrometers and optical channel monitors to telecommunications and other industrial companies.

We do not assess the performance of our segments on other measures of income or expense, such as depreciation and amortization, operating income or net income (loss). We do not produce reports for, or measure the performance of, our segments on any asset-based metrics. Therefore, segment information is presented only for revenues by product.

The following table sets forth our revenues by segment and product (in thousands):

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	Years Ended December 31,						Percentage Change
	2013		2012		2011		2012 to 2013		2011 to 2012
Medical segment:
Consoles	$	43,602	$	40,687	$	40,954	7.2	%	(0.7	)%
Single-procedure disposables:
IVUS	194,225		205,843		200,970		(5.6	)%	2.4	%
FM	112,643		94,885		67,082		18.7	%	41.4	%
Other	34,775		29,716		23,530		17.0	%	26.3	%
Sub-total medical segment	385,245		371,131		332,536		3.8	%	11.6	%
Industrial segment	8,433		10,735		11,010		(21.4	)%	(2.5	)%
	$	393,678	$	381,866	$	343,546	3.1	%	11.2	%

The following table sets forth our revenues by geography expressed as dollar amounts (in thousands) and the changes in revenues in the specified periods expressed as percentages:



	Years Ended December 31,						Percentage Change
	2013		2012		2011		2012 to 2013		2011 to 2012
Revenues (1):
United States	$	189,748	$	177,992	$	157,412	6.6	%	13.1	%
Japan	109,492		123,558		105,892		(11.4	)%	16.7	%
Europe, the Middle East and Africa	71,018		57,913		60,249		22.6	%	(3.9	)%
Rest of world	23,420		22,403		19,993		4.5	%	12.1	%
	$	393,678	$	381,866	$	343,546	3.1	%	11.2	%


(1)	Revenues are attributed to geographies based on the location of the customer, except for shipments to original equipment manufacturers, which are attributed to the country of origin of the equipment distributed.

At December 31, 2013, approximately 49% of our long-lived assets, excluding financial assets, are located in the U.S., approximately 39% are located in Costa Rica, 8% are located in Japan, and approximately 4% are located in our remaining geographies. At December 31, 2012, approximately 42% of our long-lived assets, excluding financial assets, were located in the U.S., approximately 42% were located in Costa Rica, approximately 12% were located in Japan, and approximately 4% were located in our remaining geographies.

At December 31, 2013 and 2012, goodwill of $55.1 million and $51.6 million, respectively, has been allocated entirely to our medical segment.

8. Related Party

In November 2013, we purchased shares of preferred stock of a private company, for an aggregate purchase price of approximately $15.0 million in a preferred stock financing transaction pursuant to which the private company raised an aggregate of $20.0 million. The investment was accounted for under the cost method of accounting and is recorded as other non-current assets in our consolidated balance sheets.

John Onopchenko, our Executive Vice President of Strategy, Business Development and Integration, owns 33.33% of Synergy Life Science Partners, L.P., or Synergy, which, immediately prior to the financing transaction, held approximately 14% of the private company's outstanding capital stock on a fully-diluted basis. In addition, Synergy invested approximately $884,000 in the financing transaction. Immediately following the financing transaction, we held approximately 13% of the private company's outstanding capital stock on a fully-diluted basis and Synergy held approximately 12% of the private company's outstanding capital stock on a fully-diluted basis.

9. Employee Benefits

Defined Contribution Plans

We have a defined contribution 401(k) plan for our U.S. employees who are at least 21 years of age. Employees are eligible to participate in the plan beginning on the first day of the month following their first date of hire. Under the terms of the plan, employees may make voluntary contributions as a percent of compensation or as a fixed amount per pay period. During the years ended December 31, 2013, 2012 and 2011, we have made discretionary contributions equal to 25% of participant contributions up to a maximum of 6% of the participant’s annual salary totaling $1.1 million, $1.0 million, and $928,000, respectively.

We also sponsor additional defined contribution plans for most of our European employees. Contributions under all such plans were $707,000, $481,000 and $412,000 in the years ended December 31, 2013, 2012 and 2011, respectively.

10. Quarterly Information (Unaudited)

The following table sets forth our unaudited quarterly summary consolidated statements of operations in each of the quarters for the years ended December 31, 2013 and 2012. The information for each of these quarters is unaudited and has been prepared on the same basis as our consolidated financial statements. This data should be read in conjunction with our

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consolidated financial statements and related notes. These operating results may not be indicative of results to be expected for any future period (amounts in thousands, except per share data).



	Quarter Ended (unaudited)												Year ended December 31 (1)
2013	March 31			June 30			September 30			December 31 (2)			Year ended December 31 (1)
Revenue	$	93,231		$	101,344		$	95,809		$	103,294		$	393,678
Gross profit	60,104			65,305			62,351			62,616			250,376
Operating loss	(1,788		)	(114		)	(6,440		)	(21,561		)	(29,903		)
Net loss	(3,161		)	(2,388		)	(8,456		)	(20,489		)	(34,494		)
Net loss per share:
Basic	$	(0.06	)	$	(0.04	)	$	(0.15	)	$	(0.38	)	$	(0.63	)
Diluted	$	(0.06	)	$	(0.04	)	$	(0.15	)	$	(0.38	)	$	(0.63	)
Includes the following stock-based compensation expense:
Cost of revenues	$	192		194			196			$	166		$	748
Selling, general and administrative	2,981			3,579			3,592			3,456			13,608
Research and development	425			476			462			365			1,728

	Quarter Ended (unaudited)												Year ended December 31
2012	March 31			June 30			September 30			December 31 (3)			Year ended December 31
Revenue	$	90,360		$	95,373		$	93,656		$	102,477		$	381,866
Gross profit	60,787			63,397			60,408			68,359			252,951
Operating income	1,921			6,639			5,967			5,063			19,590
Net income	271			3,299			1,975			2,477			8,022
Net income per share:
Basic	$	0.01		$	0.06		$	0.04		$	0.05		$	0.15
Diluted	$	—		$	0.06		$	0.04		$	0.04		$	0.15
Includes the following stock-based compensation expense:
Cost of revenues	$	152		162			202			$	199		$	715
Selling, general and administrative	2,996			3,278			3,331			3,061			12,666
Research and development	469			435			403			391			1,698


(1)	During the year ended December 31, 2013, we recorded $19.4 million in restructuring charges, including $258,000 in the second quarter, $4.6 million in the third quarter and $14.5 million in the fourth quarter.


(2)	During the quarter ended December 31, 2013, we concluded that it was more likely than not that we would not be able to realize the benefit of our remaining state and select foreign deferred tax assets in the future. Therefore, we increased the valuation allowance on our state and foreign deferred income tax assets by $3.8 million.

In addition, during the quarter ended December 31, 2013, we reduced our bonus accrual by $2.3 million as a result of change in the estimate of our bonus payout.


(3)	During the quarter ended December 31, 2012, we recorded $1.9 million in acquisition-related expense within operating expenses and $5.0 million in loss from debt extinguishment within other expenses.

In addition, during the quarter ended December 31, 2012, we concluded that it was more likely than not that we would be able to realize the benefit of a significant portion of our foreign deferred tax assets in the future. Therefore, we reversed $4.9 million of the valuation allowance on the Company’s net certain foreign deferred income tax assets.



Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None



Item 9A.	Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the

106

Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at December 31, 2013, such disclosure controls and procedures were effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

Management's Annual Report on Internal Control Over Financial Reporting

As required by the SEC rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:


(1)	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company,


(2)	provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and


(3)	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements in our consolidated financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2013. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992). Based on our assessments and those criteria, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2013.

Attestation Report of the Independent Registered Public Accounting Firm

KPMG LLP, our independent registered public accounting firm that has audited our consolidated financial statements included herein, has issued an audit report on our internal control over financial reporting as of December 31, 2013, which report is included under Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during our last fiscal year. There were no changes in our internal control over financial reporting during the year ended December 31, 2013 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.



Item 9B.	Other Information

None.

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PART III



Item 10.	Directors, Executive Officers and Corporate Governance.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 3, 2014 under the headings "Executive Officers" and "Information Regarding the Board of Directors and Corporate Governance" and is incorporated in this report by reference.



Item 11.	Executive Compensation.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 3, 2014 under the heading "Executive Compensation" and is incorporated in this report by reference.



Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 3, 2014 under the heading "Security Ownership of Certain Beneficial Owners and Management" and is incorporated in this report by reference.



Item 13.	Certain Relationships and Related Transactions, and Director Independence.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 3, 2014 under the heading "Certain Relationships and Related Transactions" and is incorporated in this report by reference.



Item 14.	Principal Accounting Fees and Services.

The information required by this item will be set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on June 3, 2014 under the heading "Independent Auditor Fee Information" and is incorporated in this report by reference.

108

PART IV



Item 15.	Exhibits, Financial Statement Schedules.


(a)	Index of Financial Statements:


(1)	The financial statements required by Item 15(a) are filed in Item 8 of this Annual Report on Form 10-K.


(2)	Schedules required by Item 15(a) are omitted because they are not required, are not applicable or the information is included in the consolidated financial statements or notes thereto.


(b)	Index of Exhibits:



Exhibit Number		Description

2.1		Asset Purchase Agreement, dated July 10, 2003, by and among Jomed Inc., Jomed N.V., Jomed GmbH, Jomed Benelux S.A. and the Registrant (filed as Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

2.2†		Asset Transfer Agreement, dated July 3, 2003, by and between Pacific Rim Medical Ventures Corp and Koninklijke Philips Electronics N.V. (filed as Exhibit 2.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

2.3		Agreement and Plan of Merger, dated as of December 22, 2008, by and among Volcano Corporation, Hummingbird Merger, Inc., Axsun Technologies, Inc. and William Seifert (filed as Exhibit 2.5 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 10, 2009, and incorporated herein by reference).

2.4†		Agreement and Plan of Merger, dated as of December 1, 2012, by and among Volcano Corporation, Volcalypso, Inc., a wholly-owned subsidiary of Volcano Corporation, Crux Biomedical, Inc., Shareholder Representative Services LLC, as the Stockholders' Representative, and DPD Newco, LLC (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 13, 2012, and incorporated herein by reference).

2.5		Amendment to Merger Agreement, dated July 1, 2013, by and among the Volcano Corporation, Crux Biomedical, Inc. and Shareholder Representative Services LLC. (filed as Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

3.2		Bylaws of the Registrant, as revised (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

4.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.

4.2		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).

4.3		Fourth Amended and Restated Investor Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

4.4		Rights Agreement, dated June 20, 2006, by and between the Registrant and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

109



4.5		Indenture, dated September 20, 2010, by and between the Registrant and Wells Fargo Bank (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.6		Supplemental Indenture, dated September 20, 2010 by and between Registrant and Wells Fargo Bank, N.A. (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20 2010, and incorporated herein by reference).

4.7		Form of 2.875% Convertible Senior Notes due 2015 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.8		Second Supplemental Indenture, dated December 10, 2012, by and between Volcano Corporation and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).
4.9		Form of 1.75% Convertible Senior Notes due 2017 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.1*		Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.2*		2000 Long Term Incentive Plan and forms of Stock Option Agreements thereunder (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3*		Amended and Restated 2005 Equity Compensation Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as filed on August 8, 2011, and incorporated herein by reference).

10.3a*		2005 Equity Compensation Plan Forms of Stock Option Agreements and Stock Grant Agreement thereunder (forms filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3b*		2005 Equity Compensation Plan Form of Grantee Restriction Agreement (filed as Exhibit 10.3a to the Registrant’s Annual Report on Form 10-K, as amended (File No. 000-52045), as originally filed on March 23, 2007, as amended, and incorporated herein by reference).

10.3c*		Amended and Restated 2005 Equity Compensation Plan Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11, 2010, and incorporated herein by reference).

10.3d*		Amended and Restated 2005 Equity Compensation Plan Form of Stock Option Agreement (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11,2010, and incorporated herein by reference).

10.3e*		Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement with deferred delivery under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2010, and incorporated herein by reference).

10.3f*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Grant Agreement under the 2012 Long Term Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.3g*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Award Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.3h*		Form of Stock Option Grant Notice and form of Stock Option Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.3i*		Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

110




10.4*		2007 Employee Stock Purchase Plan (filed as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-145761), filed with the SEC on August 29, 2007, and incorporated herein by reference).

10.5†		License Agreement by and between the Registrant and The Cleveland Clinic Foundation, dated April 30, 2002 (filed as Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).
10.6*		Amended and Restated Employment Agreement by and between the Registrant and R. Scott Huennekens, dated February 12, 2014.

10.7*		Employment Agreement by and between the Registrant and Jorge J. Quinoy, dated December 10, 2008 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on December 12, 2008, and incorporated herein by reference).

10.8*		Amended and Restated Employment Agreement by and between the Registrant and John T. Dahldorf, dated February 12, 2014.

10.9*		Employment Offer Letter, dated January 18, 2013, by and between the Registrant and John Onopchenko.

10.10*		Employment Agreement, dated August 1, 2010, by and between the Registrant and Darin Lippoldt (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.11*		Employment Offer Letter, dated June 23, 2008, by and between the Registrant and David Sheehan (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.12*		Termination Agreement, dated June 3, 2013, by and between the Registrant and Michel Lussier (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

10.13*		Relocation Agreement, dated May 22, 2013, by and between the Registrant and Michel Lussier (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

10.14		Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, as amended (filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.15		Third Amendment to Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, dated December 24, 2008 (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.16†		Supply Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.17		License Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.18*		Software Development and License Agreement, dated May 10, 2006, by and between Paieon, Inc. and the Registrant (filed as Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).

10.19*		Director Compensation Policy, as revised effective November 13, 2013.

10.20*		2012 Short Term Incentive Plan and form of Stock Option Agreement thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.21		Sublease Agreement, dated February 12, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2009, and incorporated herein by reference).

10.22		Office Lease, dated December 28, 2009, by and between the Registrant and Kilroy Realty, L.P. (filed as Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

111



10.23		Assignment and Assumption of Sublease, and Consent to Assignment and Assumption of Sublease, dated December 28, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.24		Trust, Land Purchase and Right of First Refusal Agreement by and among Volcarica, Socieded de Responsabilidad Limitada, Zona Franca Coyol, Sociedad Anonima and Banco Improsa, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.25		Fixed Price Building Construction Agreement for Phase One by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.26		Design, Architecture, Engineering and Construction Management Contract by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.27		Base Call Option Transaction Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.28		Base Warrants Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.29		Additional Call Option Transaction Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

10.30		Additional Warrants Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

10.31		Second Amendment to Office Lease, dated December 14, 2012, between Volcano Corporation and Kilroy Realty, L.P. (filed as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K (File No. 000-52045), as originally filed on February 28, 2013, and incorporated herein by reference

10.32		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).
10.33		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).
10.34		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.35		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.36		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.37		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

112



10.38		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.39		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.40*		Commission Plan between the Registrant and Jorge Quinoy (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.41		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Base Warrants Confirmation dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.42		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Base Warrants Confirmation dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.43		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Additional Warrants Confirmation dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.44		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Additional Warrants Confirmation dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.45		Master Confirmation - Uncollared Accelerated Share Repurchase dated December 2, 2013 by and between Volcano Corporation and J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank.

10.46*		2013 Short Term Incentive Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.47*		2013 Long Term Incentive Plan (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.48*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Grant Agreement under the 2013 Long Term Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

12.1		Ratio of earnings to fixed charges.

21.1		Subsidiaries of the Registrant.
23.1		Consent of Independent Registered Public Accounting Firm.

24.1		Power of Attorney (See signature pages hereto).

31.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1**		Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***		XBRL Instance Document.

101.SCH***		XBRL Taxonomy Extension Schema Document.

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document.

113



101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document.



†	Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.



*	Management contract or compensatory plan or arrangement.



**	The certifications attached as Exhibits 32.1 and 32.2 accompany this annual report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.



***	Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability.

114

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of February, 2013.



		Volcano Corporation
	By:	/s/ R. SCOTT HUENNEKENS
		R. Scott Huennekens
		President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. Scott Huennekens and John T. Dahldorf, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other 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 requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



Signature	Title	Date

/s/ R. SCOTT HUENNEKENS R. Scott Huennekens	President and Chief Executive Officer and Director (principal executive officer)	February 28, 2014

/s/ JOHN T. DAHLDORF John T. Dahldorf	Chief Financial Officer (principal financial officer and principal accounting officer)	February 28, 2014

/s/ KIERAN T. GALLAHUE Kieran T. Gallahue	Director	February 28, 2014

/s/ LESLEY H. HOWE Lesley H. Howe	Director	February 28, 2014

/s/ SIDDHARTHA KADIA Siddhartha Kadia	Director	February 28, 2014

/s/ ALEXIS V. LUKIANOV Alexis V. Lukianov	Director	February 28, 2014

/s/ RONALD A. MATRICARIA Ronald A. Matricaria	Director	February 28, 2014

/s/ ROY T. TANAKA Roy T. Tanaka	Director	February 28, 2014

/s/ ERIC J. TOPOL Eric J. Topol	Director	February 28, 2014

/s/ LESLIE V. NORWALK Leslie V. Norwalk	Director	February 28, 2014

/s/ DANIEL J. WOLTERMAN Danial J. Wolterman	Director	February 28, 2014

115

EXHIBIT INDEX



Exhibit Number		Description

2.1		Asset Purchase Agreement, dated July 10, 2003, by and among Jomed Inc., Jomed N.V., Jomed GmbH, Jomed Benelux S.A. and the Registrant (filed as Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

2.2†		Asset Transfer Agreement, dated July 3, 2003, by and between Pacific Rim Medical Ventures Corp and Koninklijke Philips Electronics N.V. (filed as Exhibit 2.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

2.3		Agreement and Plan of Merger, dated as of December 22, 2008, by and among Volcano Corporation, Hummingbird Merger, Inc., Axsun Technologies, Inc. and William Seifert (filed as Exhibit 2.5 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 10, 2009, and incorporated herein by reference).

2.4†		Agreement and Plan of Merger, dated as of December 1, 2012, by and among Volcano Corporation, Volcalypso, Inc., a wholly-owned subsidiary of Volcano Corporation, Crux Biomedical, Inc., Shareholder Representative Services LLC, as the Stockholders' Representative, and DPD Newco, LLC (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 13, 2012, and incorporated herein by reference).

2.5		Amendment to Merger Agreement, dated July 1, 2013, by and among the Volcano Corporation, Crux Biomedical, Inc. and Shareholder Representative Services LLC. (filed as Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.1		Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

3.2		Bylaws of the Registrant, as revised (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

3.3		Certificate of Designation of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).

4.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.

4.2		Specimen Common Stock certificate of the Registrant (filed as Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).

4.3		Fourth Amended and Restated Investor Rights Agreement, dated February 18, 2005, by and among the Registrant and certain stockholders (filed as Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

4.4		Rights Agreement, dated June 20, 2006, by and between the Registrant and American Stock Transfer & Trust Company (filed as Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 9, 2006, and incorporated herein by reference).
4.5		Indenture, dated September 20, 2010, by and between the Registrant and Wells Fargo Bank (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

4.6		Supplemental Indenture, dated September 20, 2010 by and between Registrant and Wells Fargo Bank, N.A. (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20 2010, and incorporated herein by reference).

4.7		Form of 2.875% Convertible Senior Notes due 2015 (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

116



4.8		Second Supplemental Indenture, dated December 10, 2012, by and between Volcano Corporation and Wells Fargo Bank, N.A. (filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).
4.9		Form of 1.75% Convertible Senior Notes due 2017 (filed as Exhibit 4.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.1*		Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.2*		2000 Long Term Incentive Plan and forms of Stock Option Agreements thereunder (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3*		Amended and Restated 2005 Equity Compensation Plan (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as filed on August 8, 2011, and incorporated herein by reference).

10.3a*		2005 Equity Compensation Plan Forms of Stock Option Agreements and Stock Grant Agreement thereunder (forms filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 5, 2006, and incorporated herein by reference).

10.3b*		2005 Equity Compensation Plan Form of Grantee Restriction Agreement (filed as Exhibit 10.3a to the Registrant’s Annual Report on Form 10-K, as amended (File No. 000-52045), as originally filed on March 23, 2007, as amended, and incorporated herein by reference).

10.3c*		Amended and Restated 2005 Equity Compensation Plan Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11, 2010, and incorporated herein by reference).

10.3d*		Amended and Restated 2005 Equity Compensation Plan Form of Stock Option Agreement (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on February 11,2010, and incorporated herein by reference).

10.3e*		Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Agreement with deferred delivery under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2010, and incorporated herein by reference).

10.3f*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Grant Agreement under the 2012 Long Term Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.3g*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Award Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.3h*		Form of Stock Option Grant Notice and form of Stock Option Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.3i*		Form of Restricted Stock Unit Grant Notice and Form of Restricted Stock Unit Award Agreement under the Volcano Corporation 2005 Equity Compensation Plan, as amended and restated (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.4*		2007 Employee Stock Purchase Plan (filed as Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (File No. 333-145761), filed with the SEC on August 29, 2007, and incorporated herein by reference).

10.5†		License Agreement by and between the Registrant and The Cleveland Clinic Foundation, dated April 30, 2002 (filed as Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).
10.6*		Amended and Restated Employment Agreement by and between the Registrant and R. Scott Huennekens, dated February 12, 2014.

117



10.7*		Employment Agreement by and between the Registrant and Jorge J. Quinoy, dated December 10, 2008 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on December 12, 2008, and incorporated herein by reference).

10.8*		Amended and Restated Employment Agreement by and between the Registrant and John T. Dahldorf, dated February 12, 2014.

10.9*		Employment Offer Letter, dated January 18, 2013, by and between the Registrant and John Onopchenko.

10.10*		Employment Agreement, dated August 1, 2010, by and between the Registrant and Darin Lippoldt (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.11*		Employment Offer Letter, dated June 23, 2008, by and between the Registrant and David Sheehan (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.12*		Termination Agreement, dated June 3, 2013, by and between the Registrant and Michel Lussier (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

10.13*		Relocation Agreement, dated May 22, 2013, by and between the Registrant and Michel Lussier (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on August 8, 2013, and incorporated herein by reference).

10.14		Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, as amended (filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.15		Third Amendment to Standard Multi-Tenant Office Lease—Gross, dated June 13, 2005, by and between Ethan Conrad and the Registrant, dated December 24, 2008 (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 1, 2011, and incorporated herein by reference).

10.16†		Supply Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.17		License Agreement, dated July 21, 2003, by and between the Registrant and AVE Galway Limited (filed as Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-132678), as originally filed on March 24, 2006, and incorporated herein by reference).

10.18*		Software Development and License Agreement, dated May 10, 2006, by and between Paieon, Inc. and the Registrant (filed as Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1/A, as amended (File No. 333-132678), as originally filed on May 24, 2006, and incorporated herein by reference).

10.19*		Director Compensation Policy, as revised effective November 13, 2013.

10.20*		2012 Short Term Incentive Plan and form of Stock Option Agreement thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

10.21		Sublease Agreement, dated February 12, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 7, 2009, and incorporated herein by reference).

10.22		Office Lease, dated December 28, 2009, by and between the Registrant and Kilroy Realty, L.P. (filed as Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.23		Assignment and Assumption of Sublease, and Consent to Assignment and Assumption of Sublease, dated December 28, 2009, by and between the Registrant and Fair Isaac Corporation (filed as Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K (File No. 000-52045), as originally filed on March 5, 2010, and incorporated herein by reference).

10.24		Trust, Land Purchase and Right of First Refusal Agreement by and among Volcarica, Socieded de Responsabilidad Limitada, Zona Franca Coyol, Sociedad Anonima and Banco Improsa, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

118



10.25		Fixed Price Building Construction Agreement for Phase One by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.26		Design, Architecture, Engineering and Construction Management Contract by and between Volcarica, Socieded de Responsabilidad Limitada and Zona Franca Coyol, Sociedad Anonima, dated as of September 23, 2010 (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 29, 2010, and incorporated herein by reference).

10.27		Base Call Option Transaction Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.28		Base Warrants Confirmation, dated September 14, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 15, 2010, and incorporated herein by reference).

10.29		Additional Call Option Transaction Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

10.30		Additional Warrants Confirmation, dated September 16, 2010, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K (File No. 000-52045), as originally filed on September 20, 2010, and incorporated herein by reference).

10.31		Second Amendment to Office Lease, dated December 14, 2012, between Volcano Corporation and Kilroy Realty, L.P. (filed as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K (File No. 000-52045), as originally filed on February 28, 2013, and incorporated herein by reference

10.32		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).
10.33		Base Call Option Transaction Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).
10.34		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.35		Base Warrants Confirmation, dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 5, 2012, and incorporated herein by reference).

10.36		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.37		Additional Call Option Transaction Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.38		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.39		Additional Warrants Confirmation, dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K (File No. 000-52045), as originally filed on December 10, 2012, and incorporated herein by reference).

10.40*		Commission Plan between the Registrant and Jorge Quinoy (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2012, and incorporated herein by reference).

119



10.41		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Base Warrants Confirmation dated December 4, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.42		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Base Warrants Confirmation dated December 4, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.43		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Additional Warrants Confirmation dated December 5, 2012, between Volcano Corporation and JPMorgan Chase Bank, National Association, London Branch (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.44		Warrants Confirmation Amendment Agreement, dated as of March 26, 2013, with respect to Additional Warrants Confirmation dated December 5, 2012, between Volcano Corporation and Goldman, Sachs & Co. (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.45		Master Confirmation - Uncollared Accelerated Share Repurchase dated December 2, 2013 by and between Volcano Corporation and J.P. Morgan Securities LLC, as agent for JPMorgan Chase Bank.

10.46*		2013 Short Term Incentive Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.47*		2013 Long Term Incentive Plan (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

10.48*		Form of Restricted Stock Unit Grant Notice and form of Restricted Stock Unit Grant Agreement under the 2013 Long Term Incentive Plan (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (File No. 000-52045), as originally filed on May 3, 2013, and incorporated herein by reference).

12.1		Ratio of earnings to fixed charges.

21.1		Subsidiaries of the Registrant.
23.1		Consent of Independent Registered Public Accounting Firm.

24.1		Power of Attorney (See signature pages hereto).

31.1		Certification of the President & Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1**		Certification of the President & Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***		XBRL Instance Document.

101.SCH***		XBRL Taxonomy Extension Schema Document.

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document.



†	Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.



*	Management contract or compensatory plan or arrangement.

120



**	The certifications attached as Exhibits 32.1 and 32.2 accompany this annual report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.



***	Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 460T, these interactive data files are deemed not filed and otherwise are not subject to liability.

121

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Volcano (VOLC) Inactive 10-K2013 FY Annual report

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