##### 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, 2005
 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
(State or other jurisdiction of
incorporation or organization)
    
    33-0683641
(I.R.S. Employer
Identification No.)
 11011 North Torrey Pines Road, La Jolla, CA
(Address of principal executive offices)
    
    92037
(Zip Code)
 
 
 þ o
 o þ
 o þ
  Class
    
    Outstanding at November 7, 2005Common Stock, $0.0001 Par Value
    
    
    22,191,815




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PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Consolidated Income Statements for the Three and Nine Months Ended September 30, 2005 (unaudited) and 2004 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 (unaudited) and 2004 (unaudited)
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 4. Controls and Procedures
    
    
    39Part II. Other Information
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 6. Exhibits
    
    
    41Signatures
    
    
    42EXHIBIT 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 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,789,013
    
    
    $
    4,890,458Marketable debt securities
    
    
    65,094
    
    
    
    197,125Cash  restricted related to bond indenture
    
    
    131,092
    
    
    
    582,995Accounts receivable, less allowance for doubtful
accounts and sales returns of $559,911 and
$766,772 at September 30, 2005 and December 31,
2004, respectively
    
    
    11,627,756
    
    
    
    11,059,464Income taxes receivable
    
    
    
    
    
    
    269,861Inventories
    
    
    13,967,364
    
    
    
    12,986,910Deferred income tax assets
    
    
    1,944,973
    
    
    
    2,002,013Prepaid expenses and other current assets
    
    
    2,564,624
    
    
    
    1,713,729Total current assets
    
    
    39,089,916
    
    
    
    33,702,555Property and equipment, net
    
    
    11,497,737
    
    
    
    12,111,957Other assets
    
    
    541,245
    
    
    
    541,091Deferred income tax assets
    
    
    209,132
    
    
    
    217,102Goodwill
    
    
    27,234,214
    
    
    
    27,234,214Intangible assets
    
    
    6,654,364
    
    
    
    6,524,781Total assets
    
    $
    85,226,608
    
    
    $
    80,331,700LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,185,595
    
    
    $
    4,129,171Accrued expenses and other liabilities
    
    
    10,371,167
    
    
    
    9,877,253Current portion of long-term debt
    
    
    240,000
    
    
    
    735,000Deferred revenue, current
    
    
    539,211
    
    
    
    1,062,288Income taxes payable
    
    
    241,901
    
    
    
    Total current liabilities
    
    
    19,577,874
    
    
    
    15,803,712Deferred revenue
    
    
    487,586
    
    
    
    395,881Long-term debt, less current portion
    
    
    3,775,000
    
    
    
    8,971,923Other liabilities
    
    
    256,092
    
    
    
    Total liabilities
    
    
    24,096,552
    
    
    
    25,171,516Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.0001 par value; 4,000,000
shares authorized; no shares issued and
outstanding at September 30, 2005 and December
31, 2004
    
    
    
    
    
    
    Common stock, $0.0001 par value; 50,000,000
shares authorized; 22,186,690 and 22,029,430
shares issued and outstanding at September 30,
2005 and December 31, 2004, respectively
    
    
    2,219
    
    
    
    2,203Additional paid-in capital
    
    
    53,506,494
    
    
    
    52,880,192Unearned stock-based compensation
    
    
    (104,617
    )
    
    
    (420,677
    )Retained earnings
    
    
    9,275,975
    
    
    
    3,514,811Accumulated other comprehensive loss
    
    
    (1,550,015
    )
    
    
    (816,345
    )Total stockholders equity
    
    
    61,130,056
    
    
    
    55,160,184Total liabilities and stockholders equity
    
    $
    85,226,608
    
    
    $
    80,331,700
  3




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED INCOME STATEMENTS
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    23,695,883
    
    
    $
    23,076,572
    
    
    $
    73,187,318
    
    
    $
    62,245,123Costs and expenses:Cost of products sold
    
    
    8,446,940
    
    
    
    8,087,522
    
    
    
    25,606,209
    
    
    
    21,138,317Research and development
    
    
    2,837,902
    
    
    
    2,727,998
    
    
    
    8,587,164
    
    
    
    8,059,848Selling and marketing
    
    
    5,318,144
    
    
    
    4,775,211
    
    
    
    15,731,760
    
    
    
    13,098,879General and administrative
    
    
    5,919,374
    
    
    
    3,744,194
    
    
    
    14,957,924
    
    
    
    12,307,715Impairment of long-lived assets
    
    
    
    
    
    
    20,226
    
    
    
    20,025
    
    
    
    78,357Total costs and expenses
    
    
    22,522,360
    
    
    
    19,355,151
    
    
    
    64,903,082
    
    
    
    54,683,116Income from operations
    
    
    1,173,523
    
    
    
    3,721,421
    
    
    
    8,284,236
    
    
    
    7,562,007Other income and expenses:Loss on foreign currency transactions
    
    
    (99,723
    )
    
    
    (134,343
    )
    
    
    (218,295
    )
    
    
    (217,593
    )Equity in earnings of joint venture
    
    
    
    
    
    
    51,157
    
    
    
    
    
    
    
    1,812,765Other income, net
    
    
    2,740
    
    
    
    665,903
    
    
    
    515,363
    
    
    
    749,248Interest expense
    
    
    (52,162
    )
    
    
    (248,829
    )
    
    
    (210,114
    )
    
    
    (1,440,116
    )Interest income
    
    
    13,450
    
    
    
    16,993
    
    
    
    22,533
    
    
    
    133,036Total other income (expense)
    
    
    (135,695
    )
    
    
    350,881
    
    
    
    109,487
    
    
    
    1,037,340Income before income taxes
    
    
    1,037,828
    
    
    
    4,072,302
    
    
    
    8,393,723
    
    
    
    8,599,347Income tax expense
    
    
    (349,400
    )
    
    
    (1,863,508
    )
    
    
    (2,632,559
    )
    
    
    (2,857,364
    )Net income
    
    $
    688,428
    
    
    $
    2,208,794
    
    
    $
    5,761,164
    
    
    $
    5,741,983Earnings per share:Basic
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.26
    
    
    $
    0.31Diluted
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.26
    
    
    $
    0.31Weighted average shares:Basic
    
    
    22,141,647
    
    
    
    21,941,806
    
    
    
    22,076,654
    
    
    
    18,398,266Diluted
    
    
    22,281,247
    
    
    
    22,077,933
    
    
    
    22,203,286
    
    
    
    18,401,527
  4




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STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    5,761,164
    
    
    $
    5,741,983Adjustments to reconcile net income to net cash provided
by operating activities:Equity in (income of) joint venture
    
    
    
    
    
    
    (1,812,765
    )Depreciation and amortization
    
    
    2,694,117
    
    
    
    2,142,394Impairment of long-lived assets
    
    
    20,025
    
    
    
    78,357Stock-based compensation
    
    
    408,098
    
    
    
    726,129Bad debt expense
    
    
    (33,238
    )
    
    
    (333,258
    )Excess and obsolete inventory expense
    
    
    377,949
    
    
    
    (275,716
    )Loss on disposal of assets
    
    
    25,114
    
    
    
    4,844Interest accrued on notes receivable from stockholders
    
    
    
    
    
    
    (83,134
    )Accretion of interest on long-term debt
    
    
    
    
    
    
    740,842Deferred income taxes
    
    
    16,930
    
    
    
    (644,253
    )Changes in assets and liabilities:Foreign currency exchange contracts
    
    
    
    
    
    
    (14,015
    )Accounts receivable
    
    
    (965,867
    )
    
    
    820,271Inventories
    
    
    (1,609,179
    )
    
    
    426,823Prepaid expenses and other current assets
    
    
    (861,917
    )
    
    
    642,041Due from related party
    
    
    
    
    
    
    96,642Due to related party
    
    
    
    
    
    
    451,630Income taxes receivable
    
    
    
    
    
    
    (9,851
    )Other assets
    
    
    (6,995
    )
    
    
    155,880Accounts payable
    
    
    4,275,420
    
    
    
    (1,605,034
    )Accrued expenses and other liabilities
    
    
    651,927
    
    
    
    388,990Deferred revenue
    
    
    (391,509
    )
    
    
    (221,085
    )Other liabilities
    
    
    261,744
    
    
    
    Income taxes payable
    
    
    372,627
    
    
    
    430,466Net cash provided by operating activities
    
    
    10,996,410
    
    
    
    7,848,181Cash flows from investing activities:Cash acquired in merger, net of acquisition costs
    
    
    
    
    
    
    4,520,153Proceeds from maturities of marketable debt securities
    
    
    130,000
    
    
    
    330,000Purchases of property and equipment
    
    
    (1,207,035
    )
    
    
    (867,017
    )Additions to intangible assets
    
    
    (1,110,695
    )
    
    
    (872,093
    )Redemption of BCH member interests
    
    
    
    
    
    
    (7,378
    )Changes in restricted cash
    
    
    450,024
    
    
    
    237,637Cash distributions from joint venture
    
    
    
    
    
    
    1,000,000Net cash (used in) provided by investing activities
    
    
    (1,737,706
    )
    
    
    4,341,302
 (Continued)
 5




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STRATAGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from financing activities:Principal payments on long-term debt
    
    
    (735,000
    )
    
    
    (18,744,012
    )Issuance of long-term debt
    
    
    
    
    
    
    6,000,000Borrowings under line of credit
    
    
    46,620
    
    
    
    8,184,669Payments under line of credit
    
    
    (5,003,544
    )
    
    
    (5,000,000
    )Distributions to BCH members
    
    
    
    
    
    
    (476,280
    )Proceeds from issuance of common stock
    
    
    497,728
    
    
    
    176,284Net cash used in financing activities
    
    
    (5,194,196
    )
    
    
    (9,859,339
    )Effects of foreign currency exchange rates on cash
    
    
    (165,953
    )
    
    
    216,078Net increase in cash
    
    
    3,898,555
    
    
    
    2,546,222Cash and cash equivalents at beginning of period
    
    
    4,890,458
    
    
    
    2,003,762Cash and cash equivalents at end of period
    
    $
    8,789,013
    
    
    $
    4,549,984Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    133,901
    
    
    $
    905,236Income taxes
    
    $
    2,118,753
    
    
    $
    3,085,483Non-cash investing and financing activities:Shares of common stock issued in exchange for the outstanding shares of
Hycor and fair value of $3,331,223 assigned to the Hycor options assumed
    
    $
    
    
    
    $
    43,972,844Shares of common stock issued with respect to the conversion of
outstanding debt
    
    $
    
    
    
    $
    9,180,000Redemption of common stock for outstanding notes receivable from
stockholder
    
    $
    
    
    
    $
    (2,899,181
    )Redemption of common stock for outstanding note receivable from stockholder
    
    $
    
    
    
    $
    (276,878
    )Deferred taxes recorded in connection with BCH asset purchase
    
    $
    
    
    
    $
    750,000
 (Concluded)
  6




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2005
 1. Basis of Presentation
       7




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##### Table of Contents



2. Proforma Financial Information
  Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004(pro forma)Revenues
    
    $
    73,187,318
    
    
    $
    71,211,656Net income
    
    $
    5,761,164
    
    
    $
    7,019,540Earnings per share:Basic
    
    $
    0.26
    
    
    $
    0.32Diluted
    
    $
    0.26
    
    
    $
    0.32Weighted average shares:Basic
    
    
    22,076,654
    
    
    
    21,876,343Diluted
    
    
    22,203,286
    
    
    
    21,879,604
  
    
    removing interest income on shareholder loans that were paid off upon the closing of
the merger;
    
    removing interest expense on subordinated debt that converted to common stock upon
the closing of the merger;
    
    recording amortization expense on acquired other intangible assets;
    
    recording amortization expense on unearned stock-based compensation for assumed stock options;
    
    reducing the CEOs salary pursuant to a new employment agreement effective on the merger date;
    
    removing Hycors merger related costs incurred in the periods presented; and
    
    recording the tax provision adjustment to the pro forma statement of operations at
the statutory rate of 36%.
 3. Earnings Per Share (EPS)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Weighted average shares:Basic
    
    
    22,141,647
    
    
    
    21,941,806
    
    
    
    22,076,654
    
    
    
    18,398,266Effect of dilutive common stock options
    
    
    139,600
    
    
    
    136,127
    
    
    
    126,632
    
    
    
    3,261Diluted
    
    
    22,281,247
    
    
    
    22,077,933
    
    
    
    22,203,286
    
    
    
    18,401,527
  8




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##### Table of Contents



4. Accounting for Stock-Based Compensation
 Accounting for Stock Issued to Employees, Accounting for
Certain Transactions Involving Stock Compensation.
 Accounting for Stock-based Compensation Accounting for Stock Appreciation Rights
and Other Variable Stock Option and Award Plans
 2005
    
    
    2004Risk free interest rate
    
    
    4.0
    %
    
    
    4.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    45
    %
    
    
    45
    %Expected life (in years)
    
    3-6 years
    
    3-6 yearsWeighted average fair value
    
    $
    3.35
    
    
    $
    3.69
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income as reported
    
    $
    688,428
    
    
    $
    2,208,794
    
    
    $
    5,761,164
    
    
    $
    5,741,983Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects
    
    
    
    
    
    
    (28,779
    )
    
    
    
    
    
    
    64,751Stock-based compensation
expense determined under
SFAS No. 123 for all
awards, net of related tax
effects
    
    
    (97,828
    )
    
    
    (393,006
    )
    
    
    (2,244,340
    )
    
    
    (487,666
    )Pro forma net income
    
    $
    590,600
    
    
    $
    1,787,009
    
    
    $
    3,516,824
    
    
    $
    5,319,068Earnings per common share:Basic  as reported
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.26
    
    
    $
    0.31Basic  pro forma
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.16
    
    
    $
    0.29Diluted  as reported
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.26
    
    
    $
    0.31Diluted  pro forma
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.16
    
    
    $
    0.29
  9




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Share-Based Payment
 Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 5. Balance Sheet Information
 Inventories
  September 30,
    
    
    December 31,2005
    
    
    2004Raw materials and supplies
    
    $
    5,604,213
    
    
    $
    5,710,213Work-in-process
    
    
    3,833,213
    
    
    
    3,067,593Finished goods
    
    
    4,529,938
    
    
    
    4,209,104Total
    
    $
    13,967,364
    
    
    $
    12,986,910
 Intangible Assets and Goodwill
  September 30, 2005
    
    
    December 31, 2004Useful 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
    
    $
    8,393,909
    
    
    $
    4,050,893
    
    
    $
    4,343,016
    
    
    $
    7,303,757
    
    
    $
    3,324,128
    
    
    $
    3,979,629Amortizable intangible assets
    
    1  5 years
    
    $
    1,189,000
    
    
    $
    452,652
    
    
    $
    736,348
    
    
    $
    1,189,000
    
    
    $
    218,848
    
    
    $
    970,152Intangible 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$
    38,392,123
    
    
    $
    4,503,545
    
    
    $
    33,888,578
    
    
    $
    37,301,971
    
    
    $
    3,542,976
    
    
    $
    33,758,995
  10




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Accrued Expenses and Other Liabilities
  September 30,
    
    
    December 31,2005
    
    
    2004Accrued compensation
    
    $
    2,751,298
    
    
    $
    3,008,605Accrued royalties
    
    
    6,325,357
    
    
    
    4,825,246Warranty
    
    
    279,426
    
    
    
    333,277Other accrued expenses and liabilities
    
    
    1,015,086
    
    
    
    1,710,125Total
    
    $
    10,371,167
    
    
    $
    9,877,253
 6. Stockholders Equity
  Additional
    
    
    Unearned
    
    
    
    
    
    
    Accumulated Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Stock-based
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Loss
    
    
    EquityBalance as of January 1, 2005
    
    
    22,029,430
    
    
    $
    2,203
    
    
    $
    52,880,192
    
    
    $
    (420,677
    )
    
    $
    3,514,811
    
    
    $
    (816,345
    )
    
    $
    55,160,184Amortization of unvested
options acquired in the
Hycor merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273,062
    
    
    
    
    
    
    
    
    
    
    
    273,062Adjustment to stock-based
compensation for terminated
employees
    
    
    
    
    
    
    
    
    
    
    (42,998
    )
    
    
    42,998
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued pursuant
to employee stock purchase
plan
    
    
    38,600
    
    
    
    3
    
    
    
    275,254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,257Common stock issued upon
exercise of stock options
    
    
    118,660
    
    
    
    13
    
    
    
    222,457
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222,470Tax benefit received from
the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    36,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,553Compensation expense for
non-employee stock options
    
    
    
    
    
    
    
    
    
    
    135,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    135,036Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,761,164
    
    
    
    
    
    
    
    5,761,164Foreign
currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (733,487
    )
    
    
    (733,487
    )Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    (183
    )Balance as of September 30, 2005
    
    
    22,186,690
    
    
    $
    2,219
    
    
    $
    53,506,494
    
    
    $
    (104,617
    )
    
    $
    9,275,975
    
    
    $
    (1,550,015
    )
    
    $
    61,130,056
 7. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    688,428
    
    
    $
    2,208,794
    
    
    $
    5,761,164
    
    
    $
    5,741,983Foreign currency translation gain (loss)
    
    
    (23,525
    )
    
    
    61,945
    
    
    
    (733,487
    )
    
    
    (279,919
    )Unrealized gains (losses) on marketable debt securities
    
    
    182
    
    
    
    263
    
    
    
    (183
    )
    
    
    996Comprehensive income, net of tax
    
    $
    665,085
    
    
    $
    2,271,002
    
    
    $
    5,027,494
    
    
    $
    5,463,060
 11




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8. Commitments and Contingencies
 Royalty Payments 
 Legal
 Invitrogen Corporation
  E. coli
 12




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##### Table of Contents



Takara Bio
  Third Wave Technologies
 Accounting for
Contingencies, Reasonable Estimation of the Amount of a
Loss, an Interpretation of FASB Statement No. 5
 13




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##### Table of Contents



®
 Applera Corporation
   Ariadne Genomics
  Other Legal Matters
  9. New Accounting Pronouncements
 Inventory Costs, an amendment of ARB No. 43,
Chapter 4,
 14




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##### Table of Contents



Share-Based Payment Accounting for Stock-Based Compensation Accounting for
Stock Issued to Employees
 Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004,
 Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,
  Accounting Changes and Error Corrections.
 10. Segment Information
  15




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Three Months Ended
    
    Three Months EndedSeptember 30, 2005
    
    September 30, 2004Research
    
    Medical
    
    
    
    
    
    Research
    
    MedicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    18,073,567
    
    
    $
    5,622,316
    
    
    $
    23,695,883
    
    
    $
    17,464,014
    
    
    $
    5,612,558
    
    
    $
    23,076,572Income before income taxes
    
    $
    (622,705
    )
    
    $
    1,660,533
    
    
    $
    1,037,828
    
    
    $
    2,808,044
    
    
    $
    1,264,258
    
    
    $
    4,072,302
 Nine Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2004Research
    
    Medical
    
    
    
    
    
    Research
    
    MedicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    55,574,414
    
    
    $
    17,612,904
    
    
    $
    73,187,318
    
    
    $
    54,539,575
    
    
    $
    7,705,548
    
    
    $
    62,245,123Income before income taxes
    
    $
    3,760,693
    
    
    $
    4,633,030
    
    
    $
    8,393,723
    
    
    $
    6,718,930
    
    
    $
    1,880,417
    
    
    $
    8,599,347
  September 30, 2005
    
    December 31, 2004Research
    
    Medical
    
    
    
    
    
    Research
    
    MedicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalTotal assets
    
    $
    44,058,522
    
    
    $
    41,168,086
    
    
    $
    85,226,608
    
    
    $
    38,202,779
    
    
    $
    42,128,921
    
    
    $
    80,331,700
 11. Subsequent Events
    16




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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 the Companys Annual Report on Form 10-K for the
year ended December 31, 2004. The financial information for Stratagene includes the accounts and
balances of Stratagene Corporation and subsidiaries on a consolidated basis, and includes the
results of operations of Hycor Biomedical Inc. and subsidiaries since Stratagenes acquisition of
Hycor on June 2, 2004.
 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 the Companys 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. The Companys 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 the caption Factors that May Affect Future Results.
 Overview
   Merger with Hycor
  BCH Asset Acquisition
   17




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Basis of Presentation
   Critical Accounting Policies and Estimates
  Use of Estimates
  Revenue Recognition
 Revenue Recognition, Software Revenue Recognition
 18




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##### Table of Contents



Type of deferred revenue
    
    When recognizedExtended warranty, installation or maintenance agreements
    
    Recognized over the term of the contract, generally 12
months. In
most cases, these contracts are 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.
  September 30,
    
    December 31,Type of deferred revenue
    
    2005
    
    2004Extended
warranty, installation or maintenance agreements
    
    
    46
    %
    
    
    49
    %License agreements
    
    
    54
    %
    
    
    51
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 Accounts Receivable
  Inventories
   19




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##### Table of Contents



Deferred Taxes
 Accounting
for Income Taxes
 Long-lived Assets
 Goodwill and Intangibles, Accounting for the Impairment or Disposal of Long-Lived
Assets.
 Royalties
  Warranties
  Research and Development
  20




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Results of Operations
 Three months ended September 30, 2005 compared to three months ended September 30, 2004
 Revenues
   Gross Profit
  Research and Development Expenses
  21




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##### Table of Contents



Selling and Marketing Expenses
  General and Administrative Expenses
  Total Other Income (Expense), Net
  Income Taxes
   Nine months ended September 30, 2005 compared to nine months ended September 30, 2004
 Revenues
  22




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Gross Profit
  Research and Development Expenses
  Selling and Marketing Expenses
  General and Administrative Expenses
  Total Other Income (Expense), Net
  23




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Income Taxes
    Liquidity and Capital Resources
      24




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25




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##### Table of Contents



Payment Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    6,687,753
    
    
    $
    2,107,937
    
    
    $
    4,579,816
    
    
    
    
    
    
    
    Principal on long-term debt (1)
    
    
    9,706,923
    
    
    
    735,000
    
    
    
    5,676,923
    
    
    $
    480,000
    
    
    $
    2,815,000Employment agreements
    
    
    1,358,753
    
    
    
    630,835
    
    
    
    727,918
    
    
    
    
    
    
    
    Other purchase commitments
    
    
    3,130,000
    
    
    
    3,130,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    20,883,429
    
    
    $
    6,603,772
    
    
    $
    10,984,657
    
    
    $
    480,000
    
    
    $
    2,815,000
 
 (1)
    
    At September 30, 2005, total long-term debt was $4.0 million due to principal payments on
indebtedness made during 2005. Off-Balance Sheet Arrangements
  Other Commitments and Contingencies
  New Accounting Pronouncements
  Cautionary Note Regarding Forward-Looking Statements
  26




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##### Table of Contents



Factors that May Affect Future Results
  Stratagenes 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 introduction of 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 medical diagnostics research.
 27




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##### Table of Contents



The markets for Stratagenes products are extremely competitive and subject to rapid
technological change and if Stratagene fails to compete effectively, its business may suffer.
  
    
    product performance, features and reliability;
    
    price;
    
    timing of product introductions;
    
    ability to develop, maintain and protect proprietary products and technologies;
    
    sales and distribution capabilities;
    
    technical support and service; and
    
    breadth of product line.
    If Stratagenes existing license agreements are terminated, Stratagene may be prevented from
selling some of its products.
    28




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##### Table of Contents



Because Stratagenes quarterly revenue and operating results may vary significantly in future
periods, its stock price may decline.
  Stratagenes founder, chairman of its board of directors, chief executive officer and
president exerts considerable control over it.
  Stratagene depends substantially on key employees, and the loss of the services of any of its
key employees or the failure to hire qualified employees could seriously damage Stratagenes
business.
  29




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##### Table of Contents



Stratagenes indebtedness could limit its ability to operate its business, obtain additional
financing and pursue other business opportunities.
  
    
    Stratagene will need a portion of its cash flow to pay the principal and interest on its
indebtedness, including indebtedness it may incur in the future;
    
    payments of Stratagenes indebtedness will reduce the funds that would otherwise be
available for its operations and future business opportunities;
    
    Stratagene may have greater relative debt burdens than its competitors, which may place
Stratagene at a competitive disadvantage;
    
    Stratagenes debt level may make it more vulnerable than its competitors to a downturn in
its business or the economy generally; and
    
    there would be a material adverse effect on Stratagenes business and financial condition
if Stratagene is unable to service its indebtedness or obtain additional financing.
 Stratagene may not have financing for future capital requirements, which may prevent it from
addressing gaps in its product offerings or improving its technology.
   
    
    for research and development to successfully develop additional products;
    
    to file and prosecute patent applications and defend and assert patents to protect its technology;
    
    to retain qualified employees, particularly in light of intense competition for qualified scientists;
    
    to manufacture additional products itself or through third parties; and
    
    to acquire new technologies, products or companies.
  30




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##### Table of Contents



Inability to secure and maintain intellectual property protection for its products and
technologies could adversely affect Stratagenes ability to compete.
     Intellectual property litigation could seriously harm Stratagenes business.
    31




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##### Table of Contents



Stratagene may spend resources on research and development projects without being able to
achieve an adequate return, if any, on its investment.
  If Stratagene fails to manage its growth effectively, its business could suffer.
  If Stratagene is unable to implement and maintain effective internal control over financial
reporting, its stock price could be adversely affected.
  32




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##### Table of Contents



The price of the Stratagene common stock is expected to be volatile.
  
    
    quarterly fluctuations in Stratagenes operating and earnings per share results;
    
    technological innovations or new product introductions by Stratagene or its competitors;
 33




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##### Table of Contents




    
    delays in the development and introduction of 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 Stratagene or other companies in its industry.
  Future sales of currently outstanding shares of Stratagene common stock could adversely affect
Stratagenes stock price.
   Reductions in research and development budgets or government funding may impact Stratagenes
sales.
   34




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##### Table of Contents



Failure to license new technologies could impair Stratagenes new product development.
    Stratagene may acquire other businesses or form joint ventures that could decrease its
profitability, dilute your ownership in Stratagene, increase its debt or cause
Stratagene to incur significant expense.
  Changes in distribution and purchasing methods by Stratagenes customers may force it to use
more expensive marketing and distribution channels.
 35




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##### Table of Contents



Stratagene relies 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, an
acquisition of the manufacturer by one of Stratagenes competitors or other supply
constraints;
    
    delays and long lead times in receiving materials from vendors; and
    
    reduced control over quality and pricing of components.
  Adverse developments affecting Stratagenes international operations or foreign currency
fluctuations could harm its 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;
 36




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##### Table of Contents




    
    more limited protection for intellectual property rights in some countries;
    
    changes in Stratagenes 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.
  Stratagenes activities involve hazardous materials and may subject it to costly environmental
liability.
  Interruptions in its manufacturing operations could adversely impact Stratagenes ability to
effectively operate its business.
  If its biological products and instruments are not properly produced or manufactured,
Stratagene could incur substantial unexpected expenses, experience product returns and suffer
damage to its brand and reputation.
  37




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##### Table of Contents



If Stratagenes access to necessary tissue samples is restricted or ethical concerns
surrounding the use of genetic information become widespread, its business could suffer.
  Anti-takeover provisions of Stratagenes certificate of incorporation and bylaws and
provisions of Delaware law could delay or prevent a change of control that you may favor.
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Foreign Currency Translation/Transaction
    38




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##### Table of Contents



Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities,
  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, 2005
    
    September 30, 2005Reducing revolving line of credit
    
    
    6.1
    %
    
    
    5.7
    %Industrial revenue bonds
    
    
    2.5
    %
    
    
    2.4
    %
  
 Item 4. Controls and Procedures
  39




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Changes in Internal Control
  40




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    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.**
 
 **
    
    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. 41




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SIGNATURES
  STRATAGENE CORPORATIONDate: November 10, 2005
    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 10, 2005
    By:
    /s/ Steve R. MartinSteve R. MartinVice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 42