##### 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 March 31, 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
(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 o þ
 o þ
  Class
    
    Outstanding at May 10, 2006Common Stock, $0.0001 Par Value
    
    22,390,730




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##### 



PagePart I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Income Statements for the Three Months Ended March 31, 2006 (unaudited) and
2005 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28Part II. Other InformationItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 6. Exhibits
    
    
    40Signatures
    
    
    41Exhibit 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
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,204,736
    
    
    $
    40,508,365Restricted cash
    
    
    21,428,078
    
    
    
    192,388Accounts receivable, less allowance for doubtful
accounts and sales returns of $607,930 and
$580,182 at March 31, 2006 and December 31,
2005, respectively
    
    
    13,018,588
    
    
    
    11,530,214Income taxes receivable
    
    
    954,626
    
    
    
    1,520,466Inventories
    
    
    13,246,330
    
    
    
    13,249,815Deferred income tax assets
    
    
    10,003,948
    
    
    
    10,003,948Prepaid expenses and other current assets
    
    
    2,376,374
    
    
    
    2,134,828Total current assets
    
    
    70,232,680
    
    
    
    79,140,024Property and equipment, net
    
    
    11,116,233
    
    
    
    11,266,939Other assets
    
    
    480,378
    
    
    
    395,453Goodwill
    
    
    27,234,214
    
    
    
    27,234,214Intangible assets
    
    
    6,402,276
    
    
    
    6,645,137Total assets
    
    $
    115,465,781
    
    
    $
    124,681,767LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,788,807
    
    
    $
    5,373,865Dividend payable
    
    
    
    
    
    
    5,571,321Accrued expenses and other liabilities
    
    
    41,406,349
    
    
    
    42,776,252Current portion of long-term debt
    
    
    249,030
    
    
    
    5,740,000Deferred revenue, current
    
    
    745,051
    
    
    
    736,142Total current liabilities
    
    
    49,189,237
    
    
    
    60,197,580Deferred revenue
    
    
    395,203
    
    
    
    315,634Long-term debt, less current portion
    
    
    3,775,000
    
    
    
    3,775,000Deferred income tax liabilities
    
    
    1,621,030
    
    
    
    1,621,040Other liabilities
    
    
    256,625
    
    
    
    282,287Total liabilities
    
    
    55,237,095
    
    
    
    66,191,541Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $.0001 par value; 4,000,000
shares authorized; no shares issued and
outstanding at March 31, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $.0001 par value; 50,000,000
shares authorized; 22,353,323 and 22,319,250
shares issued and outstanding at March 31, 2006
and December 31, 2005, respectively
    
    
    2,235
    
    
    
    2,232Additional paid-in capital
    
    
    54,931,758
    
    
    
    54,398,471Unearned stock-based compensation
    
    
    (24,870
    )
    
    
    (48,294
    )Retained earnings
    
    
    6,834,289
    
    
    
    5,731,260Accumulated other comprehensive loss
    
    
    (1,514,726
    )
    
    
    (1,593,443
    )Total stockholders equity
    
    
    60,228,686
    
    
    
    58,490,226Total liabilities and stockholders equity
    
    $
    115,465,781
    
    
    $
    124,681,767
  3




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED INCOME STATEMENTS
 Three Months EndedMarch 31,2006
    
    
    2005(unaudited)Revenues:Product sales
    
    
    $23,402,653
    
    
    
    $24,213,569Royalty
revenue
    
    
    497,841
    
    
    
    386,471Contract revenue
    
    
    355,000
    
    
    
    Total revenue
    
    
    24,255,494
    
    
    
    24,600,040Costs and expenses:Cost of
product sales
    
    
    8,463,420
    
    
    
    8,466,028Research and development
    
    
    3,388,812
    
    
    
    2,888,610Selling and marketing
    
    
    5,569,594
    
    
    
    4,992,706General and administrative
    
    
    5,004,253
    
    
    
    4,106,387Other operating expenses
    
    
    170,658
    
    
    
    20,025Total operating costs and expenses
    
    
    22,596,737
    
    
    
    20,473,756Income from operations
    
    
    1,658,757
    
    
    
    4,126,284Other non-operating income and expenses:Loss on foreign currency transactions
    
    
    (23,478
    )
    
    
    (113,850
    )Other income, net
    
    
    47,338
    
    
    
    532,707Interest expense
    
    
    (313,177
    )
    
    
    (99,043
    )Interest income
    
    
    288,005
    
    
    
    5,121Total other non-operating income (expense)
    
    
    (1,312
    )
    
    
    324,935Income before income taxes
    
    
    1,657,445
    
    
    
    4,451,219Income tax expense
    
    
    (554,416
    )
    
    
    (1,515,927
    )Net income
    
    $
    1,103,029
    
    
    $
    2,935,292Earnings per share:Basic
    
    $
    0.05
    
    
    $
    0.13Diluted
    
    $
    0.05
    
    
    $
    0.13Weighted average shares:Basic
    
    
    22,324,580
    
    
    
    22,031,472Diluted
    
    
    22,715,131
    
    
    
    22,130,834
  4




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2006
    
    
    2005(unaudited)Cash flows from operating activities:Net income
    
    $
    1,103,029
    
    
    $
    2,935,292Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    889,776
    
    
    
    955,513Stock-based compensation
    
    
    252,183
    
    
    
    179,460Impairment of long-lived assets
    
    
    47,599
    
    
    
    20,025Bad debt expense
    
    
    55,115
    
    
    
    (53,176
    )Excess and obsolete inventory expense
    
    
    30,619
    
    
    
    115,784Loss on disposal of assets
    
    
    31,924
    
    
    
    3,095Accretion of interest on long-term debt
    
    
    
    
    
    
    (3,513
    )Deferred income taxes
    
    
    
    
    
    
    16,761Changes in assets and liabilities:Accounts receivable
    
    
    (1,594,916
    )
    
    
    (1,203,684
    )Inventories
    
    
    21,534
    
    
    
    (781,562
    )Prepaid expenses and other current assets
    
    
    (222,980
    )
    
    
    (554,759
    )Income taxes receivable
    
    
    566,918
    
    
    
    Other assets
    
    
    (67,089
    )
    
    
    (80,411
    )Accounts payable
    
    
    1,448,838
    
    
    
    633,897Accrued expenses and other liabilities
    
    
    (1,436,112
    )
    
    
    (287,438
    )Deferred revenue
    
    
    87,287
    
    
    
    (19,654
    )Other liabilities
    
    
    (25,661
    )
    
    
    302,914Income taxes payable
    
    
    27,991
    
    
    
    1,268,617Net cash provided by operating activities
    
    
    1,216,055
    
    
    
    3,447,161Cash flows from investing activities:Purchases of property and equipment
    
    
    (427,545
    )
    
    
    (391,582
    )Additions to intangible assets
    
    
    (141,460
    )
    
    
    (320,898
    )Proceeds from maturities of marketable debt securities
    
    
    
    
    
    
    130,000Changes in restricted cash
    
    
    (21,235,689
    )
    
    
    (162,679
    )Net cash used in investing activities
    
    
    (21,804,694
    )
    
    
    (745,159
    )Cash flows from financing activities:Payments under line of credit
    
    
    (5,500,000
    )
    
    
    (3,750,000
    )Distributions to shareholders
    
    
    (5,571,321
    )
    
    
    Proceeds from issuance of common stock
    
    
    266,492
    
    
    
    95,983Net cash used in financing activities
    
    
    (10,804,829
    )
    
    
    (3,654,017
    )Effects of foreign currency exchange rates on cash
    
    
    89,839
    
    
    
    (17,000
    )Net decrease in cash
    
    
    (31,303,629
    )
    
    
    (969,015
    )Cash and cash equivalents at beginning of period
    
    
    40,508,365
    
    
    
    4,890,458Cash and cash equivalents at end of period
    
    $
    9,204,736
    
    
    $
    3,921,443Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    35,773
    
    
    $
    75,678Income taxes
    
    $
    2,974
    
    
    $
    46,684
  5




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2006
 1. Basis of Presentation
      2. Earnings Per Share (EPS)
  Three Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005Weighted average shares:Basic
    
    
    22,324,580
    
    
    
    22,031,472Effect of dilutive common stock options
    
    
    390,551
    
    
    
    99,362Diluted
    
    
    22,715,131
    
    
    
    22,130,834
  3. Accounting for Share-Based Compensation
 Share-Based Payment
 6




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Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
 Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards
 Share-Based Compensation Information under SFAS No. 123(R)
 Accounting for Stock Appreciation Rights and Other
Variable Stock Option and Award Plans
  Options
    
    ESPPRisk free interest rate
    
    
    4.6
    %
    
    
    4.5
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    45
    %
    
    
    45
    %Expected life (in years)
    
    6.2 years
    
    0.24 yearsPost-vesting forfeiture rate
    
    
    7
    %
    
    NA
 Share-Based Payment,
 7




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##### Table of Contents



Three MonthsEndedMarch 31,2006Capitalized to inventory
    
    $
    9,496Cost of
product sales
    
    
    15,687Research and development
    
    
    33,312Selling and marketing
    
    
    33,207General and administrative
    
    
    88,093Share-based compensation expense before taxes
    
    
    170,299Related income tax benefits
    
    
    (56,965
    )Share-based compensation expense after taxes
    
    $
    113,334Net share-based compensation expense, per common share:Basic
    
    $
    0.01Diluted
    
    $
    0.01
 Pro Forma Information under SFAS No.123(R) for Periods Prior to Fiscal 2006
   Three Months EndedMarch 31,2005Net income as reported
    
    $
    2,935,292Stock-based compensation expense determined under SFAS
No. 123 for all awards, net of related tax effects
    
    
    (2,099,119
    )Pro forma net income
    
    $
    836,173Earnings per common share:Basic  as reported
    
    $
    0.13Basic  pro forma
    
    $
    0.04Diluted  as reported
    
    $
    0.13Diluted  pro forma
    
    $
    0.04
 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
 8




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##### Table of Contents



4. Balance Sheet Information
 Restricted Cash
  Commitments and Contingencies  Legal.
  Inventories
  March 31,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    5,222,565
    
    
    $
    4,955,062Work-in-process
    
    
    3,410,626
    
    
    
    3,854,153Finished goods
    
    
    4,613,139
    
    
    
    4,440,600Total
    
    $
    13,246,330
    
    
    $
    13,249,815
 Intangible Assets and Goodwill
  March 31, 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
    
    $
    8,753,128
    
    
    $
    4,506,331
    
    
    $
    4,246,797
    
    
    $
    8,696,142
    
    
    $
    4,284,418
    
    
    $
    4,411,724Amortizable intangible assets
    
    1 - 5 years
    
    $
    1,189,000
    
    
    $
    608,521
    
    
    $
    580,479
    
    
    $
    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$
    38,751,342
    
    
    $
    5,114,852
    
    
    $
    33,636,490
    
    
    $
    38,694,356
    
    
    $
    4,815,005
    
    
    $
    33,879,351
  9




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##### Table of Contents



Accrued Expenses and Other Liabilities
  March 31,
    
    
    December 31,2006
    
    
    2005Accrued compensation
    
    $
    1,798,339
    
    
    $
    3,406,685Accrued royalties
    
    
    16,976,264
    
    
    
    17,208,443Litigation accrual
    
    
    20,939,975
    
    
    
    20,600,352Warranty
    
    
    216,872
    
    
    
    233,299Other accrued expenses and liabilities
    
    
    1,474,899
    
    
    
    1,327,473Total
    
    $
    41,406,349
    
    
    $
    42,776,252
 5. 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, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,424
    
    
    
    
    
    
    
    
    
    
    
    23,424Common stock issued
pursuant to employee stock
purchase plan
    
    
    13,598
    
    
    
    1
    
    
    
    115,990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,991Common stock issued upon
exercise of stock options
    
    
    20,475
    
    
    
    2
    
    
    
    150,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,501Tax benefit received from
the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    28,574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,574Compensation expense for
non-employee stock options
    
    
    
    
    
    
    
    
    
    
    58,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,429Compensation expense for
employee stock options and
employee stock purchase
plan
    
    
    
    
    
    
    
    
    
    
    179,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,795Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103,029
    
    
    
    
    
    
    
    1,103,029Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,717
    
    
    
    78,717Balance as of March 31, 2006
    
    
    22,353,323
    
    
    $
    2,235
    
    
    $
    54,931,758
    
    
    $
    (24,870
    )
    
    $
    6,834,289
    
    
    $
    (1,514,726
    )
    
    $
    60,228,686
  6. Stock Benefit Plans
 2000 Stock Option Plan, as amended and restated
 10




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2004 Independent Directors Option Plan
 Stratagene Corporation 2006 Equity Incentive Award Plan (the 2006 Plan)
  
    
    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.
   11




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##### Table of Contents



Weighted-averageExerciseOptions
    
    
    PriceOutstanding, December 31, 2005
    
    
    2,670,598
    
    
    $
    8.98Granted
    
    
    31,500
    
    
    
    10.54Exercised
    
    
    (26,468
    )
    
    
    7.95Forfeited
    
    
    (53,333
    )
    
    
    9.42Outstanding, March 31, 2006
    
    
    2,622,297
    
    
    $
    9.00Exercisable March 31, 2006
    
    
    2,064,335
    
    
    $
    9.16
   Weighted-AverageGrant DateOptions
    
    
    Fair ValueNonvested, December 31, 2005
    
    
    604,773
    
    
    $
    3.10Granted
    
    
    31,500
    
    
    
    4.72Vested
    
    
    (40,277
    )
    
    
    .74Forfeited
    
    
    (38,034
    )
    
    
    3.44Nonvested, March 31, 2006
    
    
    557,962
    
    
    $
    3.34
   Options Outstanding
    
    
    Options ExercisableNumber
    
    
    Weighted-
    
    
    
    
    
    
    NumberOutstanding
    
    
    average
    
    
    Weighted-
    
    
    Exercisable
    
    
    Weighted-as of
    
    
    Remaining
    
    
    average
    
    
    as of
    
    
    averageMarch 31,
    
    
    Contractual
    
    
    Exercise
    
    
    March 31,
    
    
    ExerciseRange of Exercise Prices
    
    2006
    
    
    Life (in Years)
    
    
    Price
    
    
    2006
    
    
    Price$1.63-$8.05
    
    
    486,619
    
    
    
    4.05
    
    
    $
    6.92
    
    
    
    371,656
    
    
    $
    6.93$8.11
    
    
    464,650
    
    
    
    8.21
    
    
    
    8.11
    
    
    
    408,650
    
    
    
    8.11$8.47-$9.20
    
    
    339,250
    
    
    
    8.66
    
    
    
    8.65
    
    
    
    30,500
    
    
    
    8.78$9.34
    
    
    798,960
    
    
    
    8.18
    
    
    
    9.34
    
    
    
    758,961
    
    
    
    9.34$9.60-$11.50
    
    
    164,272
    
    
    
    4.91
    
    
    
    10.05
    
    
    
    126,022
    
    
    
    9.90$12.00
    
    
    368,546
    
    
    
    2.01
    
    
    
    12.00
    
    
    
    368,546
    
    
    
    12.002,622,297
    
    
    
    6.41
    
    
    $
    9.00
    
    
    
    2,064,335
    
    
    $
    9.16
 Employee Stock Purchase Plan
 12




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##### Table of Contents



7. Comprehensive Income
  Three Months EndedMarch 31,
    
    
    March 312006
    
    
    2005Net income
    
    $
    1,103,029
    
    
    $
    2,935,292Foreign currency translation gain (loss)
    
    
    78,717
    
    
    
    (254,982
    )Unrealized gains (losses) on marketable debt securities
    
    
    
    
    
    
    (484
    )Comprehensive income, net of tax
    
    $
    1,181,746
    
    
    $
    2,679,826
 8. Commitments and Contingencies
 Royalty Payments 
 Corporate Collaboration 
  Revenue Arrangements with Multiple Deliverables,
   13




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Legal
 Invitrogen Corporation
  E.
coli
 14




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Takara Bio
  Third Wave Technologies
  15




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Accounting for
Contingencies.
  ®
 Applera Corporation
   Ariadne Genomics
  16




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Other Legal Matters
  9. Segment Information
  Three Months Ended
    Three Months EndedMarch 31, 2006
    March 31, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from external customers
    
    $
    18,331,867
    
    
    $
    5,923,627
    
    
    $
    24,255,494
    
    
    $
    18,911,120
    
    
    $
    5,688,920
    
    
    $
    24,600,040Income before income taxes
    
    $
    (11,154
    )
    
    $
    1,668,599
    
    
    $
    1,657,445
    
    
    $
    3,055,127
    
    
    $
    1,396,092
    
    
    $
    4,451,219
  March 31, 2006
    
    December 31, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalTotal assets
    
    $
    73,609,051
    
    
    $
    41,856,730
    
    
    $
    115,465,781
    
    
    $
    82,611,880
    
    
    $
    42,069,887
    
    
    $
    124,681,767
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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 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 andits 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
   18




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Basis of Presentation
  Critical Accounting Policies and Estimates
  Use of Estimates
  Share-Based Compensation.
      19




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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.
  Type of deferred revenue
    
    2006
    
    2005Extended warranty, installation or maintenance agreement
    
    
    59
    %
    
    
    59
    %License agreements
    
    
    41
    %
    
    
    41
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 Revenue Arrangements with Multiple Deliverables,
  20




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Accounts Receivable
  Inventories
   Deferred Taxes
 Accounting for Income Taxes
 Long-lived Assets
 Goodwill
and Intangibles, Accounting for the Impairment or Disposal of Long-Lived Assets.
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Royalties
  Warranties
  Research and Development
    Results of Operations
 Three months ended March 31, 2006 compared to three months ended March 31, 2005
 22




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Revenues
    Cost
of product sales
  Research and Development Expenses
   Selling and Marketing Expenses
  General and Administrative Expenses
  23




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Other operating expenses
  Total Other Income (Expense), Net
  Income Taxes
   Liquidity and Capital Resources
    24




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Contractual Obligations
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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
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Translation/Transaction
    Fair Value of Financial Instruments
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Interest Rates
   Average Interest Rate forthe Three Months EndedLong-term Debt Obligations
    
    March 31, 2006Reducing revolving line of credit
    
    
    7.16
    %Industrial revenue bonds
    
    
    3.24
    %
  
 Item 4. Controls and Procedures
   Changes in Internal Control
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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 rapid technological
change and if we fail to compete effectively, our business may suffer.
  
    
    product performance, features and reliability;
    
    price;
    
    timing of product introductions;
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
    
    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.
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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.
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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 prevent us from
addressing gaps in our product offerings or improving our technology.
   
    
    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; and
    
    to acquire new technologies, products or companies.
  Our inability to secure and maintain intellectual property protection for our products and
technologies could adversely affect our ability to compete.
  32




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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.
     33




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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.
  34




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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;
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
    
    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.
   Reductions in research and development budgets or government funding may impact our sales.
    36




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Failure to license new technologies could impair our new product development.
    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.
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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, an
acquisition of the manufacturer by one of our 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 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.
  38




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Our activities involve hazardous materials and may subject our business to costly
environmental liability.
  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.
  39




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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
    
    Form of Employment Agreement, dated March 10, 2006, with Steve
R. Martin, David A. Weber and John R. Pouk**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.**
    
    Incorporated by reference from the Current Report on Form 8-K filed March 15,
2006.***
    
    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. 40




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SIGNATURES
  STRATAGENE CORPORATIONDate: May 15, 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: May 15, 2006
    By:
    /s/ Steve R. MartinSteve R. MartinVice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 41