##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    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: 000-50786
 STRATAGENE CORPORATION
  Delaware
    
    33-0683641(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 11011 North Torrey Pines Road, La Jolla, CA
    
    92037(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
  o o þ
 o þ
  Class
    
    Outstanding at November 16, 2006Common Stock, $0.0001 Par Value
    
    22,436,347




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##### 



PagePart I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 (unaudited) and
2005 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2006 (unaudited) and
2005 (unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. Other Information
    
    
    36Item 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 6. Exhibits
    
    
    48Signatures
    
    
    49EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,633,817
    
    
    $
    40,508,365Restricted cash
    
    
    21,474,463
    
    
    
    192,388Accounts receivable, less allowance for doubtful
accounts and sales returns of $612,228 and
$580,182 at September 30, 2006 and December 31,
2005, respectively
    
    
    11,896,442
    
    
    
    11,530,214Income taxes receivable
    
    
    
    
    
    
    1,520,466Inventories
    
    
    12,783,917
    
    
    
    13,249,815Deferred income tax assets
    
    
    17,653,663
    
    
    
    10,003,948Prepaid expenses and other current assets
    
    
    2,883,179
    
    
    
    2,134,828Total current assets
    
    
    83,325,481
    
    
    
    79,140,024Property and equipment, net
    
    
    11,016,459
    
    
    
    11,266,939Other assets
    
    
    433,446
    
    
    
    395,453Goodwill
    
    
    27,234,214
    
    
    
    27,234,214Intangible assets
    
    
    6,580,459
    
    
    
    6,645,137Total assets
    
    $
    128,590,059
    
    
    $
    124,681,767LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,078,791
    
    
    $
    5,373,865Dividend payable
    
    
    
    
    
    
    5,571,321Accrued expenses and other liabilities
    
    
    62,856,537
    
    
    
    42,776,252Current portion of long-term debt
    
    
    240,000
    
    
    
    5,740,000Income taxes payable
    
    
    514,332
    
    
    
    Deferred revenue, current
    
    
    1,457,225
    
    
    
    736,142Total current liabilities
    
    
    71,146,885
    
    
    
    60,197,580Deferred revenue
    
    
    499,854
    
    
    
    315,634Long-term debt, less current portion
    
    
    3,535,000
    
    
    
    3,775,000Deferred income tax liabilities
    
    
    1,621,030
    
    
    
    1,621,040Other liabilities
    
    
    278,473
    
    
    
    282,287Total liabilities
    
    
    77,081,242
    
    
    
    66,191,541Commitments and contingencies (Note 9)Stockholders equity:Preferred stock, $.0001 par value; 4,000,000
shares authorized; no shares issued and
outstanding at September 30, 2006 and December
31, 2005
    
    
    
    
    
    
    Common stock, $.0001 par value; 50,000,000
shares authorized; 22,432,114 and 22,319,250
shares issued and outstanding at September 30,
2006 and December 31, 2005, respectively
    
    
    2,243
    
    
    
    2,232Additional paid-in capital
    
    
    55,849,159
    
    
    
    54,398,471Unearned stock-based compensation
    
    
    (12,090
    )
    
    
    (48,294
    )Retained earnings (accumulated deficit)
    
    
    (3,216,634
    )
    
    
    5,731,260Accumulated other comprehensive loss
    
    
    (1,113,861
    )
    
    
    (1,593,443
    )Total stockholders equity
    
    
    51,508,817
    
    
    
    58,490,226Total liabilities and stockholders equity
    
    $
    128,590,059
    
    
    $
    124,681,767
  3




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesProduct sales
    
    $
    22,938,053
    
    
    $
    23,182,232
    
    
    $
    69,812,728
    
    
    $
    71,991,229Royalty revenue
    
    
    261,863
    
    
    
    513,651
    
    
    
    1,046,233
    
    
    
    1,196,089Total revenue
    
    
    23,199,916
    
    
    
    23,695,883
    
    
    
    70,858,961
    
    
    
    73,187,318Costs and expenses:Cost of product sales
    
    
    8,582,478
    
    
    
    8,446,940
    
    
    
    25,332,274
    
    
    
    25,606,209Research and development
    
    
    2,834,280
    
    
    
    2,837,902
    
    
    
    9,330,842
    
    
    
    8,587,164Selling and marketing
    
    
    4,826,763
    
    
    
    5,318,144
    
    
    
    15,950,062
    
    
    
    15,731,760General and administrative
    
    
    4,331,112
    
    
    
    5,919,374
    
    
    
    13,820,466
    
    
    
    14,957,924Litigation
charges (Note 9)
    
    
    12,471,111
    
    
    
    
    
    
    
    20,527,135
    
    
    
    Other operating expenses
    
    
    1,055
    
    
    
    
    
    
    
    69,544
    
    
    
    20,025Total operating costs and expenses
    
    
    33,046,799
    
    
    
    22,522,360
    
    
    
    85,030,323
    
    
    
    64,903,082Income (loss) from operations
    
    
    (9,846,883
    )
    
    
    1,173,523
    
    
    
    (14,171,362
    )
    
    
    8,284,236Other non-operating income and expenses:Loss on foreign currency transactions
    
    
    (41,110
    )
    
    
    (99,723
    )
    
    
    (94,060
    )
    
    
    (218,295
    )Other income (expense), net
    
    
    (45,241
    )
    
    
    2,740
    
    
    
    (16,859
    )
    
    
    515,363Interest expense
    
    
    (302,284
    )
    
    
    (52,162
    )
    
    
    (891,768
    )
    
    
    (210,114
    )Interest income
    
    
    398,057
    
    
    
    13,450
    
    
    
    988,924
    
    
    
    22,533Total other non-operating income (expense)
    
    
    9,422
    
    
    
    (135,695
    )
    
    
    (13,763
    )
    
    
    109,487Income (loss) before income taxes
    
    
    (9,837,461
    )
    
    
    1,037,828
    
    
    
    (14,185,125
    )
    
    
    8,393,723Income tax (expense) benefit
    
    
    3,531,648
    
    
    
    (349,400
    )
    
    
    5,237,231
    
    
    
    (2,632,559
    )Net income (loss)
    
    $
    (6,305,813
    )
    
    $
    688,428
    
    
    $
    (8,947,894
    )
    
    $
    5,761,164Earnings per share:Basic
    
    $
    (0.28
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    0.26Diluted
    
    $
    (0.28
    )
    
    $
    0.03
    
    
    $
    (0.40
    )
    
    $
    0.26Weighted average shares:Basic
    
    
    22,410,973
    
    
    
    22,141,647
    
    
    
    22,373,078
    
    
    
    22,076,654Diluted
    
    
    22,410,973
    
    
    
    22,281,247
    
    
    
    22,373,078
    
    
    
    22,203,286
  4




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2006
    
    
    2005(unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    (8,947,894
    )
    
    $
    5,761,164Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    2,779,678
    
    
    
    2,694,117Stock-based compensation
    
    
    617,658
    
    
    
    408,098Impairment of long-lived assets
    
    
    69,544
    
    
    
    20,025Bad debt expense
    
    
    135,023
    
    
    
    (33,238
    )Excess and obsolete inventory (recovery) expense
    
    
    61,934
    
    
    
    377,949Loss on disposal of assets
    
    
    137,449
    
    
    
    25,114Deferred income taxes
    
    
    (7,649,715
    )
    
    
    16,930Changes in assets and liabilities:Accounts receivable
    
    
    (284,204
    )
    
    
    (965,867
    )Inventories
    
    
    631,821
    
    
    
    (1,609,179
    )Prepaid expenses and other current assets
    
    
    (801,078
    )
    
    
    (861,917
    )Income taxes receivable
    
    
    1,519,431
    
    
    
    Other assets
    
    
    (27,787
    )
    
    
    (6,995
    )Accounts payable
    
    
    670,994
    
    
    
    4,275,420Accrued expenses and other liabilities
    
    
    19,927,025
    
    
    
    651,927Deferred revenue
    
    
    874,114
    
    
    
    (391,509
    )Other liabilities
    
    
    (3,813
    )
    
    
    261,744Income taxes payable
    
    
    571,319
    
    
    
    372,627Net cash provided by operating activities
    
    
    10,281,499
    
    
    
    10,996,410Cash flows from investing activities:Purchases of property and equipment
    
    
    (1,530,065
    )
    
    
    (1,207,035
    )Additions to intangible assets
    
    
    (1,023,816
    )
    
    
    (1,110,695
    )Proceeds from maturities of marketable debt securities
    
    
    
    
    
    
    130,000Changes in restricted cash
    
    
    (21,279,971
    )
    
    
    450,024Net cash used in investing activities
    
    
    (23,833,852
    )
    
    
    (1,737,706
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (240,000
    )
    
    
    (735,000
    )Borrowings under line of credit
    
    
    9,030
    
    
    
    46,620Payments under line of credit
    
    
    (5,509,030
    )
    
    
    (5,003,544
    )Distributions to shareholders
    
    
    (5,571,321
    )
    
    
    Proceeds from issuance of common stock
    
    
    773,862
    
    
    
    497,728Net cash used in financing activities
    
    
    (10,537,459
    )
    
    
    (5,194,196
    )Effects of foreign currency exchange rates on cash
    
    
    215,264
    
    
    
    (165,953
    )Net increase (decrease) in cash
    
    
    (23,874,548
    )
    
    
    3,898,555Cash and cash equivalents at beginning of period
    
    
    40,508,365
    
    
    
    4,890,458Cash and cash equivalents at end of period
    
    $
    16,633,817
    
    
    $
    8,789,013Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    123,106
    
    
    $
    113,901Income taxes
    
    $
    377,188
    
    
    $
    2,118,753
  5




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STRATAGENE CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2006
 1. Basis of Presentation
      Reclassification 
 New Accounting Pronouncements  Accounting for Uncertainty in Income Taxes
- an Interpretation of FASB Statement No. 109 Accounting for Income Taxes, .
 Fair Value Measurements
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 6




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##### Table of Contents



2. Earnings Per Share (EPS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average shares:Basic
    
    
    22,410,973
    
    
    
    22,141,647
    
    
    
    22,373,078
    
    
    
    22,076,654Effect of dilutive common stock options
    
    
    
    
    
    
    139,600
    
    
    
    
    
    
    
    126,632Diluted
    
    
    22,410,973
    
    
    
    22,281,247
    
    
    
    22,373,078
    
    
    
    22,203,286
  3. Accounting for Share-Based Compensation
 Share-Based Payment
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
 Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards
 7




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##### Table of Contents



Share-Based Compensation Information under SFAS No. 123(R)
 Accounting for Stock Appreciation Rights and Other
Variable Stock Option and Award Plans
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006Options
    
    ESPP
    
    Options
    
    ESPPRisk free interest rate
    
    
    4.9
    %
    
    
    4.9
    %
    
    
    5.0
    %
    
    
    4.8
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    45
    %
    
    
    45
    %
    
    
    45
    %
    
    
    45
    %Expected life (in years)
    
    4.8 years
    
    0.25 years
    
    4.8 years
    
    0.25 yearsPre-vesting forfeiture rate
    
    
    7
    %
    
    NA
    
    
    7
    %
    
    NA
 Share-Based Payment,
 8




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2006
    
    
    2006Capitalized to inventory
    
    $
    17,839
    
    
    $
    39,532Cost of product sales
    
    
    29,997
    
    
    
    68,002Research and development
    
    
    74,607
    
    
    
    143,838Selling and marketing
    
    
    70,128
    
    
    
    140,311General and administrative
    
    
    94,066
    
    
    
    275,840Share-based compensation expense before taxes
    
    
    268,798
    
    
    
    627,991Related income tax benefits
    
    
    (90,047
    )
    
    
    (210,377
    )Share-based compensation expense after taxes
    
    $
    178,751
    
    
    $
    417,614Net share-based compensation expense, per common share:Basic
    
    $
    0.01
    
    
    $
    0.02Diluted
    
    $
    0.01
    
    
    $
    0.02
 Pro Forma Information under SFAS No. 123(R) for Periods Prior to Fiscal 2006
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005Net income as reported
    
    $
    688,428
    
    
    $
    5,761,164Stock-based compensation expense
determined under SFAS No. 123 for all
awards, net of related tax effects
    
    
    (97,828
    )
    
    
    (2,244,340
    )Pro forma net income
    
    $
    590,600
    
    
    $
    3,516,824Earnings per common share:Basic  as reported
    
    $
    0.03
    
    
    $
    0.26Basic  pro forma
    
    $
    0.03
    
    
    $
    0.16Diluted  as reported
    
    $
    0.03
    
    
    $
    0.26Diluted  pro forma
    
    $
    0.03
    
    
    $
    0.16
 Options to Non-Employees
 Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 9




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##### Table of Contents



4. Balance Sheet Information
 Restricted Cash
  Commitments and Contingencies  Legal.
 of Invitrogen vs. Stratagene Commitments and Contingencies  Legal
  Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    7,467,432
    
    
    $
    4,955,062Work-in-process
    
    
    1,351,488
    
    
    
    3,854,153Finished goods
    
    
    3,964,997
    
    
    
    4,440,600Total
    
    $
    12,783,917
    
    
    $
    13,249,815
 10




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##### Table of Contents



Intangible Assets and Goodwill
  September 30, 2006
    
    
    December 31, 2005Useful Life
    
    
    
    
    
    
    Accumulated
    
    
    Net Book
    
    
    
    
    
    
    Accumulated
    
    
    Net Book(Years)
    
    
    Gross
    
    
    Amortization
    
    
    Value
    
    
    Gross
    
    
    Amortization
    
    
    ValueIntangible assets subject to amortization:Amortizable patents and other
    
    2  7 years
    
    $
    9,604,602
    
    
    $
    5,041,752
    
    
    $
    4,562,850
    
    
    $
    8,696,142
    
    
    $
    4,284,418
    
    
    $
    4,411,724Amortizable intangible assets
    
    1  5 years
    
    $
    1,189,000
    
    
    $
    746,391
    
    
    $
    442,609
    
    
    $
    1,189,000
    
    
    $
    530,587
    
    
    $
    658,413Intangible assets not subject to amortization:Non-amortizable intangible assets
    
    
    
    
    
    $
    1,575,000
    
    
    $
    
    
    
    $
    1,575,000
    
    
    $
    1,575,000
    
    
    $
    
    
    
    $
    1,575,000Goodwill
    
    
    
    
    
    $
    27,234,214
    
    
    $
    
    
    
    $
    27,234,214
    
    
    $
    27,234,214
    
    
    $
    
    
    
    $
    27,234,214$
    39,602,816
    
    
    $
    5,788,143
    
    
    $
    33,814,673
    
    
    $
    38,694,356
    
    
    $
    4,815,005
    
    
    $
    33,879,351
   Accrued Expenses and Other Liabilities
  September 30,
    
    
    December 31,2006
    
    
    2005Accrued compensation
    
    $
    1,826,639
    
    
    $
    3,406,685Accrued royalties
    
    
    17,386,985
    
    
    
    17,208,443Litigation accruals
    
    
    41,800,193
    
    
    
    20,600,352Warranty
    
    
    200,168
    
    
    
    233,299Other accrued expenses and liabilities
    
    
    1,642,552
    
    
    
    1,327,473Total
    
    $
    62,856,537
    
    
    $
    42,776,252
 5. Long-Term Debt
  11




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005Reducing revolving line of credit
not to exceed $9,000,000 bearing
interest at LIBOR plus 2.55% (7.87% and
6.94% at September 30, 2006 and
December 31, 2005, respectively; 7.56%
and 5.94% average rate for the nine
months and year ended September 30,
2006 and December 31, 2005,
respectively); debt
held by subsidiary of the Company,
guaranteed by the Company and secured
by substantially all of its assets
    
    $
    
    
    
    $
    5,500,000Debt held by subsidiary of the Company
from bond indenture agreement with
Bastrop County, Texas in the original
principal amount of $9,100,000, at an
average interest rate of 3.56% and
2.57% for the nine months and year
ended September 30, 2006 and December
31, 2005, respectively (3.90% and 3.65%
at September 30, 2006 and December 31,
2005, respectively); sinking fund
payment of $735,000 required in April
2005, reducing to $240,000 per year
through April 2021, and $175,000 in
April 2022 when the bonds mature;
proceeds are restricted to the purchase
of land, building and equipment
    
    
    3,775,000
    
    
    
    4,015,0003,775,000
    
    
    
    9,515,000Current portion of long-term debt
    
    
    240,000
    
    
    
    5,740,000Long-term debt, less current portion
    
    $
    3,535,000
    
    
    $
    3,775,000
   PrincipalPaymentLess than one year
    
    $
    240,000One year
    
    
    240,000Two years
    
    
    240,000Three years
    
    
    240,000Four years
    
    
    240,000Thereafter
    
    
    2,575,000Total
    
    $
    3,775,000
 12




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##### Table of Contents



6. Stockholders Equity
  RetainedAdditional
    
    
    Unearned
    
    
    Earnings
    
    
    Accumulated Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Stock-based
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Deficit)
    
    
    Loss
    
    
    EquityBalance as of January 1, 2006
    
    
    22,319,250
    
    
    $
    2,232
    
    
    $
    54,398,471
    
    
    $
    (48,294
    )
    
    $
    5,731,260
    
    
    $
    (1,593,443
    )
    
    $
    58,490,226Amortization of unvested
options acquired in the
Hycor merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,204
    
    
    
    
    
    
    
    
    
    
    
    36,204Common stock issued pursuant
to employee stock purchase
plan
    
    
    53,982
    
    
    
    5
    
    
    
    321,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,643Common stock issued upon
exercise of stock options
    
    
    58,882
    
    
    
    6
    
    
    
    452,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452,219Tax benefit received from
the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    54,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,579Compensation expense for
non-employee stock options
    
    
    
    
    
    
    
    
    
    
    (45,265
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,265
    )Compensation expense for
employee stock options and
employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    667,523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    667,523Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,947,894
    )
    
    
    
    
    
    
    (8,947,894
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479,582
    
    
    
    479,582Balance as of September 30, 2006
    
    
    22,432,114
    
    
    $
    2,243
    
    
    $
    55,849,159
    
    
    $
    (12,090
    )
    
    $
    (3,216,634
    )
    
    $
    (1,113,861
    )
    
    $
    51,508,817
  7. Stock Benefit Plans
 2000 Stock Option Plan, as amended and restated
  2004 Independent Directors Option Plan
 Stratagene Corporation 2006 Equity Incentive Award Plan (the 2006 Plan)
 13




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##### Table of Contents




    
    5% of the Companys outstanding capital stock on such January 1;
    
    750,000 shares; or
    
    an amount determined by the Companys board of directors.
    Weighted-averageExerciseOptions
    
    PriceOutstanding, December 31, 2005
    
    
    2,670,598
    
    
    $
    8.98Granted
    
    
    525,250
    
    
    
    6.84Exercised
    
    
    (64,875
    )
    
    
    7.93Forfeited
    
    
    (284,519
    )
    
    
    8.35Outstanding, September 30, 2006
    
    
    2,846,454
    
    
    $
    8.67Exercisable September 30, 2006
    
    
    1,951,718
    
    
    $
    9.21
   14




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##### Table of Contents



Options Outstanding
    
    Options ExercisableNumber
    
    Weighted-
    
    
    
    
    
    NumberOutstanding
    
    average
    
    Weighted-
    
    Exercisable
    
    Weighted-as of
    
    Remaining
    
    average
    
    as of
    
    averageSeptember 30,
    
    Contractual
    
    Exercise
    
    September 30,
    
    ExerciseRange of Exercise Prices
    
    2006
    
    Life (in Years)
    
    Price
    
    2006
    
    Price$1.63 - $8.00
    
    
    786,771
    
    
    
    7.69
    
    
    $
    6.54
    
    
    
    205,592
    
    
    $
    5.88$8.01 - $8.11
    
    
    428,900
    
    
    
    7.71
    
    
    
    8.11
    
    
    
    386,900
    
    
    
    8.11$8.12 - $9.20
    
    
    316,375
    
    
    
    8.12
    
    
    
    8.65
    
    
    
    103,066
    
    
    
    8.64$9.21 - $9.34
    
    
    798,960
    
    
    
    7.68
    
    
    
    9.34
    
    
    
    778,962
    
    
    
    9.34$9.35 - $11.50
    
    
    164,272
    
    
    
    4.41
    
    
    
    10.05
    
    
    
    126,022
    
    
    
    9.90$11.51 - $12.00
    
    
    351,176
    
    
    
    1.52
    
    
    
    12.00
    
    
    
    351,176
    
    
    
    12.002,846,454
    
    
    
    6.79
    
    
    $
    8.67
    
    
    
    1,951,718
    
    
    $
    9.21
 Employee Stock Purchase Plan
 8. Comprehensive Income
  Three Months Ended,
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (6,305,813
    )
    
    $
    688,428
    
    
    $
    (8,947,894
    )
    
    $
    5,761,164Foreign currency translation gain (loss)
    
    
    142,530
    
    
    
    (23,525
    )
    
    
    479,582
    
    
    
    (733,487
    )Unrealized gains (losses) on marketable debt securities
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    (183
    )Comprehensive income (loss), net of tax
    
    $
    (6,163,283
    )
    
    $
    665,085
    
    
    $
    (8,468,312
    )
    
    $
    5,027,494
 9. Commitments and Contingencies
 Royalty Payments 
 15




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Corporate Collaboration 
  Revenue Arrangements with Multiple
Deliverables,
   16




---



##### Table of Contents



Legal
 Invitrogen Corporation
  E.
coli
   17




---



##### Table of Contents



Accounting for Contingencies, Reasonable Estimation of the Amount of a Loss, an
Interpretation of FASB Statement No. 5
  Takara Bio
  Third Wave Technologies
  18




---



##### Table of Contents



Accounting for Contingencies.
  ®
 Applera Corporation
   19




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##### Table of Contents



Ariadne Genomics
  Other Legal Matters
  10. Segment Information
  Three Months Ended
    
    Three Months EndedSeptember 30, 2006
    
    September 30, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    17,330,042
    
    
    $
    5,869,874
    
    
    $
    23,199,916
    
    
    $
    18,073,567
    
    
    $
    5,622,316
    
    
    $
    23,695,883Income before income taxes
    
    $
    (11,384,946
    )
    
    $
    1,547,485
    
    
    $
    (9,837,461
    )
    
    $
    (622,705
    )
    
    $
    1,660,533
    
    
    $
    1,037,828
 Nine months ended
    
    Nine months endedSeptember 30, 2006
    
    September 30, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    52,895,188
    
    
    $
    17,963,773
    
    
    $
    70,858,961
    
    
    $
    55,574,414
    
    
    $
    17,612,904
    
    
    $
    73,187,318Income before income taxes
    
    $
    (19,219,266
    )
    
    $
    5,034,141
    
    
    $
    (14,185,125
    )
    
    $
    3,760,693
    
    
    $
    4,633,030
    
    
    $
    8,393,723
  September 30, 2006
    
    December 31, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalTotal assets
    
    $
    87,343,938
    
    
    $
    41,246,121
    
    
    $
    128,590,059
    
    
    $
    82,611,880
    
    
    $
    42,069,887
    
    
    $
    124,681,767
 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following information should be read in conjunction with the financial statements and the
related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the
financial statements and related notes included in our Annual Report on Form 10-K for the year
ended December 31, 2005. Our financial information includes the accounts and balances of Stratagene
Corporation and its subsidiaries on a consolidated basis.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations
and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements and
include assumptions concerning our operations, future results and prospects. These forward-looking
statements are based on current expectations and are subject to a number of risks, uncertainties
and other factors. Our actual results could differ materially from those expressed in or implied by
these forward-looking statements as a result of various factors, including those set forth below
under Risk Factors.
 Cautionary Note Regarding Forward-Looking Statements
   Overview
   21




---



##### Table of Contents



Basis of Presentation
  Critical Accounting Policies and Estimates
  Use of Estimates
  Share-Based Compensation
      22




---



##### Table of Contents



Revenue Recognition
 Revenue Recognition, Software Revenue Recognition
  Type of deferred revenue
    
    When recognizedExtended warranty or maintenance 
agreements
    
    Recognized over the term of the contract, generally 12
months. In
most cases, these contracts were sold at the time of product
purchase and the recognition of revenue begins after the
warranty
period, which is generally one year.License agreements
    
    Recognized over the term of the agreement, generally 12
months.Collaboration agreements  milestone payments
    
    Recognized over the period that the specified services or
products are delivered and accepted by the customer.
  September 30,
    
    
    December 31,Type of deferred revenue
    
    2006
    
    
    2005Extended warranty, installation or maintenance agreement
    
    
    41
    %
    
    
    59
    %License agreements
    
    
    30
    %
    
    
    41
    %Collaboration agreements  milestone payments
    
    
    29
    %
    
    
    0
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 Revenue Arrangements with Multiple Deliverables,
  23




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##### Table of Contents



Accounts Receivable
  Inventories
   Deferred Taxes
  Long-lived Assets
 Goodwill
and Intangibles, Accounting for the Impairment or Disposal of Long-Lived Assets.
 Royalties
  24




---



##### Table of Contents



Warranties
  Research and Development
    Results of Operations
 Three months ended September 30, 2006 compared to three months ended September 30, 2005
 Revenues
  25




---



##### Table of Contents



Cost of product sales
  Research and Development Expenses
   Selling and Marketing Expenses
  General and Administrative Expenses
  Litigation Charges
  26




---



##### Table of Contents



Accounting for Contingencies.
 Total Other Income (Expense), Net
  Income Taxes
   Nine months ended September 30, 2006 compared to nine months ended September 30, 2005
 Revenues
  Cost of product sales
  27




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##### Table of Contents



Research and Development Expenses
  Selling and Marketing Expenses
  General and Administrative Expenses
  Litigation Charges
 Accounting for
Contingencies.
  Total Other Income (Expense), Net
  28




---



##### Table of Contents



Income Taxes
  Liquidity and Capital Resources
         29




---



##### Table of Contents



of Invitrogen vs. Stratagene
 30




---



##### Table of Contents



Contractual Obligations
      31




---



##### Table of Contents



Payment Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    4,502,174
    
    
    $
    1,969,071
    
    
    $
    2,533,103
    
    
    
    
    
    
    
    Principal under reducing revolving
line of credit (1)
    
    
    5,500,000
    
    
    
    5,500,000
    
    
    
    
    
    
    
    
    
    
    
    Principal on long-term debt
    
    
    4,015,000
    
    
    
    240,000
    
    
    
    720,000
    
    
    
    480,000
    
    
    
    2,575,000Collaborative agreements
    
    
    3,200,000
    
    
    
    1,500,000
    
    
    
    1,700,000
    
    
    
    
    
    
    
    Employment agreements
    
    
    794,382
    
    
    
    597,507
    
    
    
    196,875
    
    
    
    
    
    
    
    Other purchase commitments
    
    
    3,056,000
    
    
    
    3,056,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    21,067,556
    
    
    $
    12,862,578
    
    
    $
    5,149,978
    
    
    $
    480,000
    
    
    $
    2,575,000
 
 (1)
    
    The principal due under the reducing revolving line of credit was paid in full on
January 3, 2006.  Off-Balance Sheet Arrangements
  New Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes.
 32




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##### Table of Contents



Fair Value Measurements
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 33




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Translation/Transaction
    Fair Value of Financial Instruments
  Interest Rates
   Average Interest Rate for
    
    Average Interest Rate forthe Three Months Ended
    
    the Nine Months EndedLong-term Debt Obligations
    
    September 30, 2006
    
    September 30, 2006Reducing revolving line of credit
    
    
    7.90
    %
    
    
    7.56
    %Industrial revenue bonds
    
    
    3.72
    %
    
    
    3.56
    %
  34




---



##### Table of Contents



Item 4. Controls and Procedures
   Changes in Internal Control
  35




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Our future success depends on the timely introduction of new products and the acceptance of
these new products in the marketplace.
    
    
    availability, quality and price relative to competitive products;
    
    the timing of introducing the product relative to competitive products;
    
    customers opinions of the products utility;
    
    citation of the product in published research; and
    
    general trends in life sciences and clinical diagnostics research.
 The markets for our products are extremely competitive and subject to chnological
change. If we fail to compete effectively, our business may suffer.
  
    
    product performance, features and reliability;
    
    price;
    
    timing of product introductions;
 36




---



##### Table of Contents




    
    ability to develop, maintain and protect proprietary products and technologies;
    
    sales and distribution capabilities;
    
    technical support and service; and
    
    breadth of product line.
    We may be prevented from selling some of our products if our existing license agreements are
terminated.
   
    
    a license from Applera Corporation (which license was assigned to Applera from Hoffman La
Roche and Roche Molecular Systems, Inc. in 2005) granting us, among other rights, the right
to manufacture, promote and sell certain products for use in the research field in a process
referred to as the PCR process; and
    
    a license from Applied Biosystems, which grants us rights to manufacture, promote and
sell thermal cyclers (certain laboratory instruments capable of generating and maintaining
specific temperatures for a defined period of time) under certain patents for use in the
research field.
    37




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##### Table of Contents



Because our quarterly revenue and operating results may vary significantly in future periods,
our stock price may decline.
  Our founder, chairman of our board of directors, chief executive officer and president exerts
considerable control over our business.
  We depend substantially on key employees, and losing the services of any of our key employees
or failing to hire qualified employees could seriously damage our business.
   38




---



##### Table of Contents



Our indebtedness could limit our ability to operate our business, obtain additional financing
and pursue other business opportunities.
  
    
    we will need a portion of our cash flow to pay the principal and interest on our
indebtedness, including indebtedness we may incur in the future;
    
    payments of our indebtedness will reduce the funds that would otherwise be available for
our operations and future business opportunities;
    
    we may have greater relative debt burdens than our competitors, which may place us at a
competitive disadvantage;
    
    our debt level may make us more vulnerable than our competitors to a downturn in our
business or the economy in general; and
    
    there would be a material adverse effect on our business and financial condition if we
are unable to service our indebtedness or obtain additional financing.
 We
may not have financing for future capital requirements, which may
have a material adverse effect on our business.
   
    
    for research and development to successfully develop additional products;
    
    to file and prosecute patent applications and defend and assert patents to protect our technology;
    
    to retain qualified employees, particularly in light of intense competition for qualified scientists;
    
    to manufacture additional products ourselves or through third parties;
    
    to acquire new technologies, products or companies; and
    
    to pay outstanding judgments or to fund litigation
settlements.
  Our inability to secure and maintain intellectual property protection for our products and
technologies could adversely affect our ability to compete.
  39




---



##### Table of Contents



We are currently, and could in the future be, subject to lawsuits, arbitrations, and other
legal actions, particularly involving claims for infringement of patents and other intellectual
property rights.
   40




---



##### Table of Contents



41




---



##### Table of Contents



We may spend resources on research and development projects without being able to achieve an
adequate return, if any, on our investment.
  Our business could suffer if we fail to manage our growth effectively.
  Our stock price could be adversely affected if we are unable to implement and maintain
effective internal control over financial reporting.
    42




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##### Table of Contents



The price of our common stock is expected to be volatile.
  
    
    quarterly fluctuations in our operating and earnings per share results;
    
    technological innovations or new product introductions by us or our competitors;
    
    delays in developing and introducing new products;
    
    disputes concerning patents, licenses or other proprietary rights;
    
    changes in earnings estimates by equity and market research analysts;
    
    sales of common stock by existing stockholders;
    
    loss of key personnel; and
    
    securities class actions or other litigation affecting us or other companies in our industry.
  Future sales of currently outstanding shares of our common stock could adversely affect our
stock price.
  43




---



##### Table of Contents



Reductions in research and development budgets or government funding may impact our sales.
     Failure to license new technologies could impair our new product development.
  44




---



##### Table of Contents



We may acquire other businesses or form joint ventures that could decrease our profitability,
dilute your ownership, increase our debt or cause us to incur significant expense.
  Changes in distribution and purchasing methods by our customers may force us to use more
expensive marketing and distribution channels.
   We rely on third party manufacturers for raw materials and product components.
  
    
    an inability to obtain an adequate supply of required components due to manufacturing
capacity constraints, the discontinuance of a product by a third-party manufacturer, or an
acquisition of the manufacturer by one of our competitors or other supply constraints;
 45




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##### Table of Contents




    
    delays and long lead times in receiving materials from vendors; and
    
    reduced control over quality and pricing of components.
  Adverse developments affecting our international operations or foreign currency fluctuations
could harm our results from operations.
  
    
    difficulties and costs associated with staffing and managing foreign operations;
    
    unexpected changes in regulatory requirements;
    
    the difficulties of compliance with a wide variety of foreign laws and regulations;
    
    more limited protection for intellectual property rights in some countries;
    
    changes in our international distribution network and direct sales force;
    
    potential trade restrictions and exchange controls;
    
    import and export licensing requirements;
    
    longer accounts receivable collection cycles in certain foreign countries; and
    
    potential increased costs associated with overlapping tax structures.
  Our activities involve hazardous materials and may subject our business to costly
environmental liability.
  46




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##### Table of Contents



Interruptions in our manufacturing operations could adversely impact our ability to
effectively operate our business.
  We could incur substantial unexpected expenses, experience product returns and suffer damage
to our brand and reputation if our biological products and instruments are not properly produced or
manufactured.
  Our business could suffer if our access to necessary tissue samples is restricted or ethical
concerns surrounding the use of genetic information become widespread.
  Anti-takeover provisions of our certificate of incorporation and bylaws and provisions of
Delaware law could delay or prevent a change of control that you may favor.
    47




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description3.1
    
    Second Amended and Restated Certificate of Incorporation of the registrant *3.2
    
    Amended and Restated Bylaws of the registrant*10.1
    
    Employment Separation Agreement and Mutual General Release of
all Claims between Stratagene Corporation and Ms. Ronni L. Sherman.10.2
    
    Consulting Agreement between Stratagene Corporation and Ms.
Ronni L. Sherman.31.1
    
    Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 *
    
    Incorporated by reference to the Quarterly Report on Form 10-Q for the period
ended June 30, 2004.**
    
    These certifications are being furnished solely to accompany this quarterly
report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any filing of the Company, whether made before or after
the date hereof, regardless of any general incorporation language in such filing. 48




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SIGNATURES
  STRATAGENE CORPORATIONDate: November 17, 2006
    By:
    /s/ Joseph A. Sorge, M.D.Joseph A. Sorge, M.D.Chairman of the Board, Chief Executive
Officer and President

(Principal Executive Officer)Date: November 17, 2006
    By:
    /s/ Steve R. MartinSteve R. MartinVice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 49