##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 92037
(Address of principal executive offices)            (Zip Code) Registrants telephone number, including area code (858) 535-5400 No Change
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [
   ]   No [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [    ]   No [X] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Class
    
    Outstanding at June 8, 2004Common Stock, $0.0001 Par Value
    
    21,877,125




---



##### 










STRATAGENE
CORPORATION
Quarterly Report on Form 10-Q

Part I. Financial InformationItem 1. Financial StatementsCombined Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003 (unaudited)
    
    
    3Combined Income Statements for the Three Months Ended
March 31, 2004 (unaudited) and 2003 (unaudited)
    
    
    4Combined Statements of Cash Flows for the Three Months
Ended March 31, 2004 (unaudited) and 2003 (unaudited)
    
    
    5Notes to Unaudited Combined Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21Part II. Other InformationItem 1. Legal Proceedings
    
    
    23Item 6. Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    24
 Note: Items 2, 3, 4 and 5 of Part II are omitted because they
are not applicable. Page 2




---



##### 



PART I. FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS STRATAGENE CORPORATION AND SUBSIDIARIES AND
BIOCREST HOLDINGS, LLC AND SUBSIDIARIES 
 COMBINED BALANCE SHEETS
(unaudited) March 31, 2004
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,066,462
    
    
    $
    2,003,762Cash  restricted related to bond indenture
    
    
    874,585
    
    
    
    658,587Foreign currency exchange contracts
    
    
    378,531
    
    
    
    205,110Accounts receivable, less allowance for doubtful accounts of $845,404 at
March 31, 2004 and $990,849 at December 31, 2003
    
    
    8,736,407
    
    
    
    8,390,326Inventories
    
    
    7,975,022
    
    
    
    7,729,655Deferred income tax assets
    
    
    1,687,782
    
    
    
    1,711,947Due from related party, current
    
    
    272,250
    
    
    
    265,639Prepaid expenses and other current assets
    
    
    3,277,198
    
    
    
    2,702,233Total current assets
    
    
    26,268,237
    
    
    
    23,667,259Property and equipment, net
    
    
    9,988,583
    
    
    
    10,320,992Other assets
    
    
    558,054
    
    
    
    696,858Due from related party
    
    
    464,576
    
    
    
    451,630Intangible assets, net
    
    
    3,081,873
    
    
    
    2,984,009Investment in joint venture
    
    
    442,895
    
    
    
    467,109Total assets
    
    $
    40,804,218
    
    
    $
    38,587,857LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    4,302,490
    
    
    $
    5,003,788Accrued compensation
    
    
    1,929,931
    
    
    
    1,302,102Accrued royalties
    
    
    2,573,173
    
    
    
    2,310,744Accrued expenses and other liabilities
    
    
    1,149,664
    
    
    
    1,122,480Current portion of long-term debt
    
    
    3,586,743
    
    
    
    920,062Deferred compensation
    
    
    268,200
    
    
    
    268,200Deferred revenue, current
    
    
    937,291
    
    
    
    1,491,976Income taxes payable
    
    
    1,706,800
    
    
    
    1,165,663Warranty liability
    
    
    549,199
    
    
    
    596,788Total current liabilities
    
    
    17,003,491
    
    
    
    14,181,803Deferred revenue
    
    
    337,076
    
    
    
    Long-term debt, less current portion
    
    
    26,488,850
    
    
    
    29,461,617Deferred income tax liabilities
    
    
    893,102
    
    
    
    891,179Total liabilities
    
    
    44,722,519
    
    
    
    44,534,599Commitments and contingencies (Note 5)Stockholders (and members) deficit:Stratagene preferred stock, $.0001 par value; 4,000,000 shares authorized;
no shares issued and outstanding at March 31, 2004 and December 31, 2003
    
    
    
    
    
    
    Stratagene common stock, $.0001 par value; 50,000,000 shares authorized;
15,632,668 shares issued and outstanding at March 31, 2004 and December 31,
2003
    
    
    1,563
    
    
    
    1,563Additional paid-in capital
    
    
    1,862,358
    
    
    
    1,821,202Accumulated deficit
    
    
    (1,373,428
    )
    
    
    (3,447,340
    )Notes receivable from stockholders
    
    
    (3,404,050
    )
    
    
    (3,356,309
    )Accumulated other comprehensive loss
    
    
    (979,400
    )
    
    
    (940,510
    )Total stockholders (and members) deficit
    
    
    (3,892,957
    )
    
    
    (5,921,398
    )Treasury stock, at cost; 7,040 shares at March 31, 2004 and December 31, 2003
    
    
    (25,344
    )
    
    
    (25,344
    )Total stockholders (and members) deficit
    
    
    (3,918,301
    )
    
    
    (5,946,742
    )Total liabilities and stockholders (members) deficit
    
    $
    40,804,218
    
    
    $
    38,587,857
 See accompanying notes to unaudited combined financial statements. Page 3




---



##### 



STRATAGENE CORPORATION AND SUBSIDIARIES AND
BIOCREST HOLDINGS, LLC AND SUBSIDIARIES 
 COMBINED INCOME STATEMENTS
(unaudited) Three Months EndedMarch 31,2004
    
    2003Product sales
    
    $
    19,422,022
    
    
    $
    16,875,658Costs and expenses:Cost of products sold
    
    
    5,925,585
    
    
    
    5,292,829Research and development
    
    
    2,520,613
    
    
    
    2,838,159Selling and marketing
    
    
    4,054,463
    
    
    
    3,985,702General and administrative
    
    
    3,093,867
    
    
    
    2,325,858Impairment of long-lived assets
    
    
    51,238
    
    
    
    Total costs and expenses
    
    
    15,645,766
    
    
    
    14,442,548Income from operations
    
    
    3,776,256
    
    
    
    2,433,110Other income and expenses:Gain (loss) on foreign currency transactions
    
    
    (129,301
    )
    
    
    158,526Equity in loss of joint venture
    
    
    (24,214
    )
    
    
    (47,637
    )Other income, net
    
    
    84,762
    
    
    
    4,301Interest expense
    
    
    (693,773
    )
    
    
    (662,624
    )Interest income
    
    
    67,478
    
    
    
    58,647Total other expenses
    
    
    (695,048
    )
    
    
    (488,787
    )Income before income taxes
    
    
    3,081,208
    
    
    
    1,944,323Income tax expense
    
    
    (1,007,296
    )
    
    
    (669,648
    )Net income
    
    $
    2,073,912
    
    
    $
    1,274,675
 See accompanying notes to unaudited combined financial statements. Page 4




---



##### 



STRATAGENE CORPORATION AND SUBSIDIARIES
AND BIOCREST HOLDINGS, LLC AND SUBSIDIARIES 
 COMBINED STATEMENTS OF CASH FLOWS
(unaudited) Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    2,073,912
    
    
    $
    1,274,675Equity in loss of joint venture
    
    
    24,214
    
    
    
    47,637Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    629,668
    
    
    
    704,798Impairment of long-lived assets
    
    
    51,238
    
    
    
    Stock compensation
    
    
    41,155
    
    
    
    Loss on disposal of assets
    
    
    1,107
    
    
    
    Interest accrued on notes receivable from stockholders
    
    
    (47,741
    )
    
    
    (41,611
    )Accretion of interest on long-term debt
    
    
    509,787
    
    
    
    585,928Deferred income taxes
    
    
    24,165
    
    
    
    227,238Changes in assets and liabilities:Foreign currency exchange contracts
    
    
    (173,421
    )
    
    
    (16,700
    )Accounts receivable, net
    
    
    (419,947
    )
    
    
    (1,304,225
    )Inventories
    
    
    (265,163
    )
    
    
    (15,602
    )Prepaid expenses and other current assets
    
    
    (580,617
    )
    
    
    (158,719
    )Due from related party
    
    
    (19,557
    )
    
    
    (74,755
    )Income taxes receivable
    
    
    
    
    
    
    (67,937
    )Other assets
    
    
    138,041
    
    
    
    227,683Accounts payable
    
    
    (756,581
    )
    
    
    (1,174,796
    )Accrued royalties
    
    
    262,429
    
    
    
    (184,672
    )Accrued expenses and other liabilities
    
    
    735,949
    
    
    
    552,309Deferred revenue and warranty liability
    
    
    (256,149
    )
    
    
    34,057Income taxes payable
    
    
    541,649
    
    
    
    487,868Net cash provided by operating activities
    
    
    2,514,138
    
    
    
    1,103,176Cash flows from investing activities:Purchases of property and equipment
    
    
    (166,499
    )
    
    
    (354,993
    )Additions to intangible assets
    
    
    (283,435
    )
    
    
    (196,629
    )Changes in restricted cash
    
    
    (215,999
    )
    
    
    (219,176
    )Net cash used in investing activities
    
    
    (665,933
    )
    
    
    (770,798
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (14,944,645
    )
    
    
    (839,054
    )Issuance of long-term debt
    
    
    6,000,000
    
    
    
    Borrowings under line of credit
    
    
    8,128,773
    
    
    
    450,000Distribution payments to BCH members
    
    
    
    
    
    
    (121,284
    )Net cash used in financing activities
    
    
    (815,872
    )
    
    
    (510,338
    )Effects of foreign currency exchange rates on cash
    
    
    30,367
    
    
    
    (111,889
    )Net increase (decrease) in cash
    
    
    1,062,700
    
    
    
    (289,849
    )Cash at beginning of period
    
    
    2,003,762
    
    
    
    1,207,892Cash at end of period
    
    $
    3,066,462
    
    
    $
    918,043Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    55,963
    
    
    $
    9,444Income taxes
    
    $
    443,963
    
    
    $
    
 See accompanying notes to unaudited combined financial statements. Page 5




---



##### 



STRATAGENE CORPORATION AND SUBSIDIARIES
AND BIOCREST HOLDINGS, LLC AND SUBSIDIARIES 
 NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
March 31, 2004 1. Basis of Presentation The combined financial statements of Stratagene Corporation and its
subsidiaries and BioCrest Holdings, LLC and its subsidiaries (BCH)
(collectively, Stratagene or the Company) for the three months ended March
31, 2004 and 2003 are unaudited. These financial statements include all
adjustments that, in the opinion of management, are necessary to present fairly
the combined financial position of the Company as of March 31, 2004 and the
combined results of operations and cash flows of the Company for the three
months ended March 31, 2004 and 2003. The financial information of the Company has been presented on a combined
basis, due to common control and management. As of March 31, 2004,
approximately 90% of Stratagene and 86% of BCH were controlled, directly or
indirectly, by Dr. Joseph A. Sorge, who is the chief operating decision maker
for both entities. Substantially all of the remaining interests are represented
by stakeholders common to both Stratagene and BCH. In addition to such common
ownership and management, the operations of BCH are complementary to Stratagene
Corporations operations, and certain of the entities included within the
combined, consolidated financial statements perform services for, or on behalf
of, other entities, within the combined group. These statements have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC) and do not include all the
information and note disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements but
reflect all adjustments (consisting only of normal recurring accruals)
necessary for the fair presentation of the financial position, results of
operations and cash flows for the periods and dates presented. The results of operations for any interim period are not necessarily
indicative of results to be expected for the full year. See discussion of
subsequent events, including the Hycor Biomedical Inc. (Hycor) merger, in
Note 7. These combined financial statements should be read in conjunction with the
combined financial statements and notes thereto included in Amendment No. 3 to
the registration statement on Form S-4 filed by Stratagene on April 29, 2004
with the SEC. 2. Accounting for Stock-Based Compensation The Company accounts for its stock-based compensation in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees,as amended, and Financial Accounting
Standards Board (FASB) Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. Pro forma information regarding net income is required by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-based
Compensation(SFAS No. 123), and has been determined as if the Company had
accounted for its employee stock options under the minimum value method of SFAS
No. 123. The estimated weighted average fair value at grant date for the
options granted for the three months ended March 31, 2004 and 2003 was de
minimis. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Since the Companys stock had not been publicly traded, the
expected stock price volatility was effectively zero based on the minimum value
method. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options. Page 6




---



##### 



For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Companys pro forma information for stock options is as follows: Three Months EndedMarch 31,2004
    
    2003Net income as reported
    
    $
    2,073,912
    
    
    $
    1,274,675Stock-based employee compensation expense included in reported net income
    
    
    35,765
    
    
    
    Stock-based compensation expense determined under minimum value based
method for all awards, net of related tax effects
    
    
    (1,255
    )
    
    
    (150
    )Pro forma net income
    
    $
    2,108,422
    
    
    $
    1,274,525
 Charges for options granted to non-employees have been determined in
accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,as the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured. Deferred charges for options
granted to non-employees are periodically re-measured as the underlying options
vest and are included in additional paid-in capital in the financial
statements. 3. Balance Sheet Information Inventory Inventories consist primarily of biological products and instruments and
are stated at the lower of cost or market. Cost is determined on a first-in,
first-out basis. Inventories consist of the following: March 31,
    
    December 31,2004
    
    2003Raw materials and supplies
    
    $
    4,484,506
    
    
    $
    4,314,445Work-in-process
    
    
    1,355,031
    
    
    
    1,612,335Finished goods
    
    
    2,135,485
    
    
    
    1,802,875Total
    
    $
    7,975,022
    
    
    $
    7,729,655
 Intangible Assets Intangible assets, net primarily includes costs incurred in connection
with patent applications, consisting principally of legal fees.
The following sets forth the intangible assets by major asset class. The
information provided below is prior to the announced merger with Hycor. See
Note 7. March 31, 2004
    
    December 31, 2003Useful Life
    
    
    
    
    
    Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net Book(Years)
    
    Gross
    
    Amortization
    
    Value
    
    Gross
    
    Amortization
    
    ValueAmortizing patents
    
    Approximatelyand other
    
    7 years
    
    $
    5,850,524
    
    
    $
    2,768,651
    
    
    $
    3,081,873
    
    
    $
    5,651,019
    
    
    $
    2,667,010
    
    
    $
    2,984,009
 Amortization expense totaled $101,641 and $117,241 for the three months
ended March 31, 2004 and 2003, respectively. Amortization expense in each of
the next five fiscal years is expected to be as follows: Year
    
    Amount2004
    
    $
    506,3012005
    
    
    484,5142006
    
    
    431,0012007
    
    
    351,9992008
    
    
    267,261$
    2,041,076
 Page 7




---



##### 



4. Long-Term Debt and Line of Credit The Company has several debt instruments bearing interest at rates ranging
up to 15%, most of which are guaranteed by Stratagene and BCH and secured by
substantially all of the assets of Stratagene and BCH. Many of the instruments
contain restrictive covenants requiring the Company to maintain certain
financial ratios, including minimum debt service coverage ratios, fixed charge
coverage ratios and tangible net worth. The Company was in compliance with all
covenants at March 31, 2004. Long-term debt and line of credit consist of the
following: March 31,
    
    December 31,2004
    
    2003Term loan in the amount of $6,000,000 bearing interest at prime plus 1% (5.0%
at March 31, 2004)
    
    $
    5,777,778
    
    
    $
    Reducing revolving line of credit not to exceed $9,000,000 bearing interest
at LIBOR plus 2.55% (3.64% at March 31, 2004)
    
    
    8,128,773
    
    
    
    Convertible subordinated notes bearing interest at 15%, with $9,000,000
converting to common stock upon the closing of the merger with Hycor (see
Note 7)
    
    
    9,784,843
    
    
    
    23,985,101Debt from bond indenture agreement with Bastrop County, Texas in the original
principal amount of $9,100,000, at an average interest rate of 1.47% for the
three months ended March 31, 2004 (1.50% at March 31, 2004 and 1.65% at
December 31, 2003)
    
    
    5,620,000
    
    
    
    5,620,000Phenogenex promissory note totaling $637,500 and bearing interest at 7.5%
    
    
    626,461
    
    
    
    630,074Vehicle financing totaling $156,486 and bearing interest at rates up to 4.5%
    
    
    137,738
    
    
    
    146,50430,075,593
    
    
    
    30,381,679Current portion of long-term debt
    
    
    3,586,743
    
    
    
    920,062Long-term debt, less current portion
    
    $
    26,488,850
    
    
    $
    29,461,617
 Page 8




---



##### 



The aggregate maturities of long-term debt principal payments for each of
the five years subsequent to March 31, 2004 are as follows: PrincipalPaymentLess than one year
    
    $
    3,586,743One year
    
    
    2,950,082Two years
    
    
    9,434,117Three years
    
    
    10,050,493Four years
    
    
    264,159Thereafter
    
    
    3,790,000Total
    
    $
    30,075,593
 5. Commitments and Contingencies Legal Stratagene is a party to litigation in the ordinary course of
business. Due to the uncertainties inherent in litigation, no assurances can be
given as to the outcome of these proceedings. If any of these matters were
resolved in a manner unfavorable to Stratagene, its business, financial
condition and results of operations could be materially harmed. Additionally,
favorable outcomes or gain contingencies that may result from these matters, if
any, are not recognized until they are realized. Invitrogen Corporation In June 2000, Stratagene was sued by Invitrogen Corporation (formerly Life
Technologies, Inc.) in the United States District Court for the District of
Maryland. The complaint alleges that Stratagene willfully infringed United
States patent no. 6,063,608 (and United States patent nos. 5,244,797 and
5,405,776) for making, using and selling products derived from, using or
containing RNase H minus reverse transcriptase enzymes. Invitrogens motion for
a preliminary injunction was denied and the case was stayed pending a trial in
a related action involving Invitrogen and a third party regarding the same
patents. Invitrogen appealed the denial of an injunction and the stay to the
Federal Circuit Court of Appeals. In February 2002, the Federal Circuit Court
of Appeals affirmed the district courts decision. In September 2003,
Invitrogen filed a consent to judgment in the related action that the asserted
patents were invalid. Accordingly, the case against Stratagene remains
administratively stayed pending Invitrogens appeal. In addition, in March 2001, Stratagene was sued by Invitrogen in the
United States District Court for the Western District of Texas. Invitrogen
alleges (i) that Stratagene willfully infringed United States patent no. 4,981,797
for making, using and selling competent E. colicell products
and (ii) damages of up to approximately $22.0 million. In November 2001, the district
court granted Stratagenes motion for summary judgment, finding that the 797
patent was not infringed by Stratagene. Invitrogen appealed the judgment to the
Federal Circuit Court of Appeals which, in May 2003, reversed the district
courts decision in part and remanded the case for further proceedings. In
January 2004, in response to a pending summary judgment motion, the district
court ruled that Invitrogens 797 patent was invalid under 35 U.S.C § 102(b).
More specifically, the district court found that Invitrogen had used the
patented process claimed in the 797 patent for commercial purposes for more
than one year prior to the filing date of the patent. Having found the 797
patent invalid, the district court indicated there was no need for a trial.
Invitrogen is currently appealing the district courts ruling. In November 2001, Stratagene filed a complaint in the United States
District Court for the District of Maryland charging Invitrogen with willful
infringement and inducing others to infringe United States patent no. 5,556,772
for making, using, selling and offering for sale certain polymerase blend
products. Stratagene seeks a permanent injunction against continued
infringement as well as monetary damages (compensatory and enhanced) and
recovery of its attorneys fees and costs. Given the nature of patent
litigation, at the present time Stratagene is unable to quantify the amount of
remuneration it will ultimately seek in this proceeding or the likelihood of
recovering any portion of such remuneration once quantified. A trial is
currently scheduled to begin in March 2005. Invitrogen has filed requests for
re-examination of the 772 patent with the United States Patent and Trademark
Office. Takara Bio In November 2002, Stratagene filed a complaint in the United States
District Court for the District of Maryland charging Takara Bio with willful
infringement and inducing others to infringe United States patent no. 5,556,772
for making, using, selling and offering for sale certain polymerase blend
products. Stratagene seeks a permanent injunction, monetary damages
(compensatory and enhanced) and recovery of its attorneys fees and costs.
Given the nature of patent litigation, at the present time Stratagene is unable
to quantify the amount of remuneration it will Page 9




---



##### 



ultimately seek in this proceeding or the likelihood of recovering any
portion of such remuneration once quantified. Takara filed a counterclaim in a
separate action in the United States District Court for the Southern District
of California. By its counterclaim, Takara seeks joint ownership of
Stratagenes 772 patent. In June 2003, Stratagene successfully moved to
transfer the California action to Maryland. In August 2003, the Maryland
district court denied Takaras motion to dismiss or transfer the complaint, and
the cases have been consolidated for pretrial and trial. No trial date has been
set. Employment Contracts Stratagene has entered into employment contracts
with certain of its officers. These contracts generally provide for severance
benefits if the officer is terminated by Stratagene other than for cause, as
defined in the employment contracts. 6. New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities,which was revised in December
2003. In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. The revised interpretation, known as FIN 46(R), requires
certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN 46(R) apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after December
31, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The adoption of FIN 46(R) did not have a
material impact on the Companys results of operations or financial position. In May 2003, the FASB issued Statement No. 149, Amendments of Statement
No. 133 on Derivative Instruments and Hedging Activities(SFAS No. 149). This
statement amends and clarifies the financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did
not have a material effect on the Companys results of operations or financial
position. In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS No. 150). This statement established standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective for the first interim period beginning after June 15, 2003, with
certain exceptions. The adoption of SFAS No. 150 did not have a material effect
on the Companys results of operations or financial position. In December 2003, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition,which supersedes SAB
No. 101, Revenue Recognition in Financial Statements.SAB No. 104 clarifies
existing guidance regarding revenues for contracts which contain multiple
deliverables to make it consistent with EITF No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables.The adoption of SAB No. 104 did not
have a material impact on the Companys revenue recognition policies, nor its
financial position or results of operations. 7. Subsequent Events Hycor Merger On June 2, 2004, Stratagene acquired all of the outstanding shares of
Hycor through a merger of a wholly owned subsidiary of Stratagene with Hycor,
with Hycor surviving as a wholly owned subsidiary of Stratagene. Hycor engages
in researching, developing, manufacturing, and marketing medical diagnostic
products throughout the United States and in many foreign countries. The
primary reasons for the merger are the following:  
    
    Potential growth from increased earnings and revenue;
    
    Expanded access to the capital markets;
    
    Diversified customer base and product lines; and Page 10




---



##### 




    Expected cost savings by eliminating overlap in expenses and
capitalizing on the two companies international distribution
synergies, particularly in Germany and Japan. As a result of the merger, the former holders of the Hycor common stock
received 0.6158 of a share of Stratagene common stock in exchange for each
share of Hycor common stock. The fair value of the consideration exchanged in
the merger has been calculated based upon the fair value of Hycors
publicly-traded common shares, as their fair value was determined to be more
clearly evident than that of Stratagenes common shares. Total purchase
consideration of $48,540,242 was determined based upon 8,146,129 shares of
Hycor common stock outstanding as of June 2, 2004, using a $5.75 per share
value as of that date, plus an estimated $1,700,000 of merger related costs
expected to be incurred by Stratagene. As of March 31, 2004, the Company
has incurred approximately $1,500,000 of such costs, which are recorded in prepaid
and other current assets on the balance sheet. Using the 0.6158 exchange ratio, 5,016,386 shares of Stratagene common
stock were issued to the Hycor stockholders in connection with the
merger. The following represents the preliminary allocation of the purchase price
to the acquired assets and the assumed liabilities of Hycor using historical
balances as of March 31, 2004. Stratagene is in the process of obtaining
third-party valuations of Hycors tangible and intangible assets; therefore,
the allocation of the purchase price is subject to adjustment. Purchase price allocation:Current assets
    
    $
    14,459,786Property and equipment, net
    
    
    1,998,318Goodwill
    
    
    28,650,147Deferred tax assets, net
    
    
    149,151Other non-amortizable intangible assets
    
    
    3,000,000Other amortizable intangible assets
    
    
    3,077,783Total assets acquired
    
    
    51,335,185Current liabilities
    
    
    (2,794,943
    )Total liabilities assumed
    
    
    (2,794,943
    )Net assets acquired
    
    $
    48,540,242
 Goodwill represents the excess of the purchase price over the fair value
of the tangible and identifiable intangible assets. The preliminary estimate
for other non-amortizable intangible assets consists of $3,000,000 for trade
names. The preliminary estimate for other amortizable intangible assets includes
$677,783 for patents and $2,400,000 for contractually based customer
relationships having an estimated life of 8 to 12 years. Amortization of other
amortizable intangible assets will be provided over an estimated average useful
life of 10 years. In connection with the merger, the following events occurred on June 2,
2004:  
    
    Stratagene forgave $390,000 of the shareholder note receivable due to
Stratagene by Dr. Sorge and paid the income taxes related to the
forgiveness, which resulted in a charge to Stratagene of $650,000. This
forgiveness was applied to reduce the note receivable, which was
$3,351,311 at June 2, 2004. Dr. Sorge satisfied the remaining portion of
his shareholder note receivable by tendering a sufficient number of
shares of common stock to Stratagene to allow for the repayment of the
remaining principal, interest and taxes due on the shareholder note
receivable. On June 2, 2004, Stratagene redeemed 524,160 shares of
common stock from Dr. Sorge at a price of approximately $6.50 per share,
which price was based on Hycors stock price of approximately $4.00 at
the time Stratagene and Hycor agreed on the repurchase price, adjusted
for the exchange ratio.
    
    In addition, another shareholder paid off the balance of her note,
which was $276,877 at June 2, 2004, including interest, by tendering
42,623 shares of common stock to Stratagene at a price of approximately $6.50 per
share. This price was based on Hycors stock price of approximately
$4.00 at the time Stratagene and Hycor agreed on the repurchase price,
adjusted for the exchange ratio.
    
    Dr. Sorge received a bonus in the aggregate amount of approximately
$1.8 million, which will be paid pursuant to the terms of a promissory
note over a 39-month term.
    
    Stratagene entered into a new employment contract with Dr. Sorge,
pursuant to which, among other things, Page 11




---



##### 



Dr. Sorges base annual salary was reduced from $1.1 million to $450,000,
and Dr. Sorge was granted an option to purchase 738,960 shares of
Stratagene common stock at an exercise price of $9.34 per share. The new employment agreement has an initial term
of three years and is subject to successive one year renewals unless either
party provides a notice of non-renewal at least 30 days prior to the
termination of the then current term.  
    
    Stratagene converted $9.0 million in principal amount of the
subordinated notes, pursuant to their terms, into 1,753,604 shares of common stock. In April 2004,
the Company paid in full the outstanding principal and interest on all
of the remaining non-convertible notes in the amount of $621,679. As a
result of the conversion and the repayment, there are no subordinated
notes outstanding subsequent to the merger. The results of operations of Hycor will be included in the financial
statements of Stratagene beginning on June 3, 2004. BCH Acquisition Concurrently with the closing of the Hycor merger, Stratagene acquired
substantially all of the assets of BCH. In exchange, Stratagene forgave all of
the outstanding intercompany indebtedness owed by BCH and its subsidiaries to
Stratagene and its subsidiaries (which as of March 31, 2004, was approximately
$5.4 million) and assumed all of the other outstanding liabilities of BCH and
its subsidiaries (which as of March 31, 2004, were approximately $1.2
million). Because Stratagene and BCH are under common control, the acquisition of
BCH is recorded on a historical cost basis. As such, there is no adjustment of
BCH assets and liabilities to fair value, and no goodwill resulting from the
purchase and there is no effect on the combined financial statements from this
acquisition as all intercompany balances are eliminated in the combination. Sale of Certain Assets in Joint Venture The
Company, through the acquisition of BCH, has a 49% minority interest in a limited partnership (LP) that
operates a research lab. On June 1, 2004, the LP sold the assets related to
its clinical diagnostics business to a third party for approximately $4.5
million. The Company expects to realize a gain on the sale of approximately
$1.9 million, which will be recorded in other income in the second quarter of
2004. As a result, the Company (through BCH) will receive 49% of the net
proceeds from the sale, of which the LP made a partial distribution to BCH on
June 1, 2004. In turn, BCH made a distribution to its members to pay for the
taxes related to the sale in the amount of approximately $475,000. The LP will
distribute the remaining portion of BCHs net proceeds once the related
accounting has been finalized. Management believes that there will be no
further distributions to the BCH members, as the distribution made on June 1,
2004 was for estimated taxes on the entire transaction. Page 12




---



##### 



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 onForm 10-Qand with the financial statements and related notes for the
year ended December 31, 2003 and the related Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in
Amendment No. 3 to the Companys registration statement onForm S-4filed with
the Securities and Exchange Commission on April 29, 2004. The financial
information for Stratagene includes the accounts and balances of Stratagene
Corporation and subsidiaries and BioCrest Holdings, LLC and subsidiaries on a
combined basis, due to common control and management. 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 described below
under the caption Cautionary Note Regarding Forward-Looking Statements and
set forth under the heading Risk Factors in Amendment No. 3 to the Companys
registration statement onForm S-4filed with the Securities and Exchange
Commission on April 29, 2004. Overview Since Stratagenes inception in 1984, it has been engaged in developing,
manufacturing and marketing products used to conduct molecular biology
research. A substantial majority of its revenue comes from the sale of these
products, with the remainder coming from research grants, net shipping revenue
and other sources. In 2003, approximately 38%, 50% and 4% of product sales
were in the areas of genetic technologies; nucleic acid and protein
purification and analysis; and genomics, proteomics, and bioinformatics,
respectively. Stratagenes products are used for research purposes and the use
of these products is not regulated by the U.S. Food and Drug Administration or
by any comparable international organization. Stratagene manufactures its products in facilities near Austin, Texas and
in San Diego, California. Stratagenes sales activities are primarily
conducted through a dedicated direct sales organization in North America and
Europe. Approximately 11% of its product sales in 2003 were to international
distributors in selected countries in Europe and Asia, who resell them to
researchers. Certain products manufactured by Stratagene in the United States
are sold to Stratagenes Netherlands branch for subsequent sale to their
customers in Europe. Total product sales outside the U.S. accounted for
approximately 26% of total product sales in 2003. In August 2003, Stratagene
also opened a new facility in Japan to establish direct sales and distribution
channels in Asia. The Japan facility recorded its first sale in the first
quarter of 2004. Stratagene markets its products to academic and government institutions
and pharmaceutical, biotechnology and industrial companies. Historically, a
substantial portion of product sales have been to researchers at these academic
and government institutions. Stratagene anticipates that its results of operations may fluctuate from
quarter to quarter and will be difficult to predict. The timing and degree of
fluctuations will depend upon several factors, including:  
    
    the ability to successfully and timely develop and introduce new products;
    
    introductions of competing technologies or products;
    
    changes in customer research budgets and government funding of life sciences research;
    
    the ability to manufacture its products efficiently; and
    
    the ability to control or adjust research and
development, sales and marketing, and general and administrative
expenses in response to changes in revenue. Page 13




---



##### 



In particular, Stratagenes fourth quarter results have historically been
adversely affected by slower sales as a result of reduced purchases by academic
and research institutions, due in part to the closing of these facilities
during the holiday period, and changes in product mix which typically result in
a higher concentration of sales of lower margin products, such as
instrumentation products. In addition, Stratagene has fewer production days in
the fourth quarter due to Stratagenes own shut down during the holidays. Merger with Hycor On June 2, 2004, Stratagene acquired all of the outstanding shares of
Hycor Biomedical Inc. through a merger of a wholly owned subsidiary of
Stratagene with Hycor, with Hycor continuing as a wholly owned subsidiary of
Stratagene. Pursuant to the merger agreement, Hycors stockholders received
0.6158 of a share of Stratagene common stock in exchange for each share of
Hycor common stock, plus cash for any fractional shares. The merger will be
recognized as a tax-free reorganization. Stratagene filed a registration
statement on Form S-4 (No. 333-109420) related to the transaction, which was
declared effective by the Securities and Exchange Commission on April 29, 2004. The combined company offers diagnostic products and life sciences research
tool product lines to the global academic, pharmaceutical, and clinical and
government laboratory markets. Stratagene is expected to be impacted by
merger-related costs of approximately $1.7 million, consisting of professional
fees and other miscellaneous expenses. As of March 31, 2004, Stratagene has
incurred approximately $1.5 million of merger-related costs, which are being
capitalized on the balance sheet. The remainder will be recognized in the
second quarter of 2004. Critical Accounting Policies and Estimates The Companys combined financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
and management is required to make certain estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. The significant accounting policies that the Company
believes are the most critical to aid in fully understanding and evaluating its
reported financial results include the following: Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the combined
financial statements and disclosures made in the accompanying notes. Actual
results could differ from those estimates. Revenue Recognition Revenue from biological products and basic instrumentation products is
recognized under the provisions of SAB No. 104, which is generally when
products are shipped, title has transferred and risk of loss has passed. In
accordance with Statement of Position No. 97-2, Software Revenue Recognition,
as amended by Statement of Position No. 98-9, for instrumentation products
where software is a key component, revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collectibility is probable. Generally, these criteria
are met at the time product is shipped and title has transferred. When
contractual acceptance clauses exist, revenue is recognized upon satisfaction
of such clauses. Contract research service revenues are earned and recognized
in accordance with contract provisions. Government grant revenues related to
research activities are recognized when earned, generally as related research
activities occur. Amounts received in advance of performance or acceptance are
recorded as deferred revenue. Accounts Receivable Stratagene performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers current
creditworthiness. Stratagene continuously monitors collections and payments
from customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have
been identified. Stratagenes credit losses have historically been within
expectations and the provisions established. Page 14




---



##### 



Inventories Inventories are valued at the lower of the actual cost to purchase and/or
manufacture the inventory or the current estimated market value of the
inventory. Stratagene regularly reviews inventory quantities on hand and
records a provision for excess and obsolete inventory on specifically
identified items based primarily on an estimated forecast of product demand and
production requirements. Stratagenes losses from disposal of excess or
obsolete inventory have historically been within expectations and the
provisions established. However, Stratagenes estimates of future product
demand may prove to be inaccurate, in which case Stratagene may have
understated or overstated the provision required for excess and obsolete
inventory. In addition, rapid technological change or new product development
could result in an increase in the quantity of obsolete inventory on hand. In
the future, if Stratagenes inventory is determined to be overvalued, it would
be required to recognize such costs in its cost of goods sold at the time of
such determination. Likewise, if Stratagenes inventory is determined to be
undervalued, it may have over-reported its costs of goods sold in previous
periods and would be required to recognize such additional operating income at
the time of sale. Additionally, Stratagenes manufacturing costs and inventory carrying
costs are dependent on managements accurate estimates of customer demand for
Stratagenes products. A significant increase in the demand for Stratagenes
products could result in a short-term increase in the cost of inventory
purchases, while a significant decrease in demand could result in an increase
in the amount of excess inventory quantities on hand and increase the expense
of storing and maintaining the inventory until it is sold. As a result,
although management makes every effort to maximize the accuracy of its
forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of Stratagenes inventory and its reported operating results. Deferred Taxes Stratagenes deferred tax assets relate primarily to prior operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Deferred taxes are also recognized
for differences between the financial statement carrying amounts and the tax
basis of assets and liabilities. Stratagene evaluates a variety of factors in
determining the amount of deferred income assets to be recognized pursuant to
SFAS No. 109, Accounting for Income Taxes. Warranties Stratagene warrants certain equipment against defects in workmanship or
materials for a period of one year from the date of purchase. Upon recognition
of the sale of equipment sold that includes a warranty, Stratagene establishes,
as part of cost of goods sold, a provision for the expected costs of such
warranty. While Stratagenes warranty costs have historically not been
significant, Stratagene cannot guarantee that it will continue to experience
the same warranty return rates that it has in the past. A significant increase
in product return rates could have a material adverse impact on operating
results for the period or periods in which such returns materialize. Derivative Financial Instruments On January 1, 2001, Stratagene adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, which we refer to as
SFAS No. 133. Stratagene enters into derivative instruments to reduce the risk
of foreign currency fluctuations; however, such derivative instruments do not
qualify for hedge accounting under the provisions of SFAS No. 133. Accordingly,
both unrealized and realized gains or losses resulting from changes in fair
value are recognized as incurred in gain (loss) on foreign currency
transactions in the current period income statement. Research and Development Stratagene focuses its research and development efforts on developing
products that use innovative technologies, primarily in the areas of: genetic
technologies; nucleic acid and protein purification and analysis; and genomics,
proteomics and bioinformatics. In 2003, Stratagene spent $1,275,368,
$6,461,645 and $2,717,571 in the areas of genetic technologies; nucleic acid
and protein purification and analysis; and genomics, proteomics and
bioinformatics, respectively. Page 15




---



##### 



Stratagenes numerous research and development initiatives are generally
ongoing. Some of the efforts are for new product technologies, while others
are designed to support an existing product or products relating to one of
Stratagenes more than 2,500 stock keeping units, which are represented in
approximately 75 existing product categories. In addition, the funds used by
Stratagene in its research and development activities are allocated among the
various technologies and products in which Stratagene is currently involved and
are not concentrated to one specific product or product line. Since 1997,
Stratagene has spent over $67 million on its research and development efforts
and intends to spend between 14% and 16% of its revenues on research and
development activities for at least the next few years. Stratagene does not provide forward-looking estimates of costs and time to
complete any of its individual ongoing research and development projects
because none of such projects are material to the company on an individual
basis. In addition, any such estimates would be subject to a number of risks
and uncertainties, including Stratagenes ability to predict the outcome of
complex research, competition from other entities of which Stratagene may
become aware in future periods, predictions of market potential from products
that may be derived from Stratagenes research and development efforts and
Stratagenes ability to recruit and retain personnel with the necessary
knowledge and skills to perform the required research activities. Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,
2003 Revenue increased $2.5 million or 15% during the three months ended March
31, 2004 compared to the three months ended March 31, 2003. This growth was
primarily attributable to increased sales of the QPCR product line of $2.7
million. Also contributing were increases in the sales of
mutagenesis kits and bioinformatics software of $0.6 million. Sales during the
three months ended March 31, 2004 were also affected by the weakening dollar
resulting in a positive foreign exchange impact to foreign sales of 16.3% and a
4.4% increase to total worldwide revenue when compared to the three months
ended March 31, 2003. Approximately 45% of the growth was attributable to the
shipment of backordered products ordered in 2003. Stratagene expects that
future revenue will depend on a number of factors, including the market
acceptance of new products, competitive conditions, currency fluctuations and
the continued funding of customer research budgets. Gross margin increased 0.9% from 68.6% for the three months ended March
31, 2003 to 69.5% for the three months ended March 31, 2004 primarily due to
increased sales of higher margin products and cost reductions to certain
instrumentation products. Research and development expenses decreased $0.3 million or 11.2% for the
three months ended March 31, 2004 compared to the same period in 2003. As a
percentage of product sales, research and development expenses decreased from
16.8% for the three months ended March 31, 2003 to 12.9% for the three months
ended March 31, 2004. The decrease was primarily due to transitioning the
Mx3000P instrument from research and development to manufacturing in
the third
quarter of 2003. Stratagene intends to continue spending significant amounts on
research and development in the future in an effort to accelerate new product
introductions. Stratagene expects that research and development
expenses, as a percentage of revenues will remain relatively constant. Selling and marketing expense decreased $0.1 million or 1.7% for the three
months ended March 31, 2004 compared to the same period in 2003. As a
percentage of total revenue, selling and marketing expenses decreased from
23.6% for the three months ended March 31, 2003 to 20.9% for the same period in
2004. In the future, Stratagene expects to slightly increase its spending on
selling and marketing as a percentage of revenues in an effort to increase
market penetration and to support new product launches. General and administrative expenses increased by $0.8 million or 33.0% for
the three months ended March 31, 2004 compared to the same period in 2003. As a
percentage of total revenue, general and administrative expenses increased from
13.8% for the three months ended March 31, 2003 to 16.0% for the same period in
2004. The increase in spending was primarily due to increased legal costs
associated with entering into new credit facilities and patent litigation. In
the future, Stratagene anticipates that general and administrative spending
will decrease as a percentage of revenues. Impairment of long-lived assets was $0.1 million and $0 for the three
months ended March 31, 2004 and 2003, respectively. This expense relates to
writing-off the remaining unamortized balances of patents that
management believes are not recoverable. Page 16




---



##### 



Total other income (expense), net increased in expense by $0.2 million or
42.2% for the three months ended March 31, 2004 compared to the same period in
2003. This increase was primarily due to foreign currency transaction losses
related to the Companys European operations. Stratagene recorded $1.0 million of tax expense in 2004. The effective tax
rate decreased from 34.4% for the three months ended March 31, 2003 to 32.7%
for the same period in 2004. BCH and its subsidiaries are limited liability
companies; therefore, any related income tax liabilities are the responsibility
of the members of BCH. As a result, the operations of BCH do not reflect a
provision for income taxes. Therefore, income taxes are recorded only on
Stratagene and its subsidiaries. Stratagene recognizes state research and
development and other credits when they are generated. Excess credits are
recognized and will be used to offset future taxable income as management
believes it is more likely than not that the credits will be realized. Liquidity and Capital Resources Stratagenes liquidity requirements have historically consisted of
research and development expenses, sales and marketing expenses, debt service,
capital expenditures, working capital and general corporate purposes. These
expenses have been funded primarily through cash from operations, supplemented
with borrowings under credit facilities and other debt instruments. Stratagene generated net cash from operating activities of $2.5 million
and $1.1 million for the three months ended March 31, 2004 and 2003,
respectively, and used $0.7 million and $0.8 million of net cash in its
investing activities for the three months ended March 31, 2004 and 2003,
respectively. Capital expenditures and additions to patents for the three
months ended March 31, 2004 totaled $0.2 million and $0.3 million,
respectively, as compared to $0.4 million and $0.2 million for the three months
ended March 31, 2003, respectively. Stratagene used $0.8 million in net cash
for financing activities for the three months ended March 31, 2004, which
included the repayment of $14.9 million in debt offset by
borrowings under the Companys new credit facilities of $14.1 million described further below. For the three months ended
March 31, 2003, Stratagene used $0.5 million for financing activities, which
included the repayment of $0.8 million in debt offset by borrowings under a
line of credit of $0.5 million. Based on a review of Stratagenes accounts receivable, an allowance for
doubtful accounts is accrued, however, Stratagene does not write off individual
accounts receivable until substantially all avenues of legal recourse to
collect the outstanding amount have been exhausted. The actual write-off for
the three months ended March 31, 2004 was minimal and the allowance decreased
by approximately $0.1 million. This decrease in expected uncollectible accounts
was due in part to continued collection efforts. No significant change to
future liquidity is anticipated. Accounts receivable used cash of $0.4 million for the three months ended
March 31, 2004 due primarily to strong sales in the first quarter. Days sales
outstanding, or DSOs, decreased year over year from 41 to 38 days largely as a
result of collection efforts. For the three months ended March 31, 2003,
accounts receivable used cash of $1.3 million primarily due to strong sales in
the first quarter of 2003. Inventory used cash of $0.3 million for the three months ended March 31,
2004 as Stratagene increased its inventory levels primarily related to its
Mx3000P instrumentation product. For the three months ended March 31, 2003, the
effect on cash from inventory was insignificant. Prepaid expenses and other current assets used cash of $0.6 million for
the three months ended March 31, 2004 primarily due to professional fees
related to the Hycor merger and bank fees related to the Companys new credit
facility. Prepaid expenses and other current assets used cash of $0.2 million
for the three months ended March 31, 2004 primarily related to prepaid
licenses. Accounts payable used cash of $0.8 million for the three months ended
March 31, 2004 primarily due to the payment of increased inventory purchases
and reversal of year-end accruals. For the three months ended March 31, 2003,
accounts payable used cash of $1.2 million due to inventory purchases resulting
from ramping up to launch a new instrumentation product in the second quarter
of 2003 and the reversal of year-end accruals. Accrued royalty expense provided a source of cash of $0.3 million for the
three months ended March 31, 2004, which includes amounts that
may be paid to a third party after resolution of a licensing matter.
For the three months ended March 31, 2003, the payment of accrued royalties used cash of $0.2
million. Page 17




---



##### 



Accrued expenses and other liabilities provided a source of cash of $0.7
million for the three months ended March 31, 2004 due to increased litigation,
bonus and severance accruals. For the three months ended March 31, 2003,
accrued expenses and other liabilities provided a source of cash of $0.6
million due to increased compensation accruals. Income taxes payable provided a source of cash of $0.5 million for the
three months ended March 31, 2004 and 2003 due to Stratagenes increase in net
income. Total capital expenditures during the three months ended March 31, 2004
and 2003 were approximately $0.4 million and $0.5 million, respectively. For
fiscal 2004, Stratagene currently anticipates capital spending on property and
equipment to be in the range of $1.0 million to $1.5 million. Stratagene had cash, cash equivalents and restricted cash totaling $3.9
million and $2.6 million at March 31, 2004 and December 31, 2003, respectively,
and working capital of $9.3 million and $9.5 million at March 31, 2004 and
December 31, 2003, respectively. As of March 31, 2004, Stratagene had approximately $30.1 million in total
debt. This debt included approximately $5.8 million in senior term debt, $8.1
million under Stratagenes reducing revolving line of credit, $9.8 million in
subordinated notes and $5.6 million in industrial revenue bonds issued by
BioCrest Manufacturing, a subsidiary of Stratagene. On January 21, 2004, Stratagene, BioCrest Manufacturing, L.P., and BioCrest
Holdings, LLC entered into a senior credit agreement and related documents with
Merrill Lynch Business Financial Services Inc., which is referred to
in this Form 10-Q as MLBFS,
pursuant to which MLBFS made various credit facilities available to BioCrest
Manufacturing. The senior credit facility consists of (1) a $4.0 million
one-year revolving borrowing base facility, (2) a $9.0 million three-year
reducing revolving facility, (3) a $6.0 million 27-month term loan and (4) a
one-year letter of credit facility to support the industrial revenue bonds
issued by BioCrest Manufacturing. On January 23, 2004, Stratagene borrowed
approximately $14.1 million of the aggregate availability under the reducing
revolving facility and the term loan, of which $14.0 million was used to pay
down the principal amount of the subordinated notes and the remaining amount
was used to pay various MLBFS and other third party fees. Stratagene paid all
amounts due and owing under the non-convertible subordinated notes in March and
April 2004 and the convertible subordinated notes were converted into an
aggregate of 1,753,604 shares of Stratagene common stock upon the closing of the merger
transaction with Hycor. As a result, all of the Companys obligations under
the subordinated notes have been satisfied and there are no subordinated notes
currently outstanding subsequent to the merger. The obligations of BioCrest Manufacturing under the senior credit facility
have been guaranteed by each of Stratagene and BioCrest Holdings and each of
their wholly owned domestic subsidiaries. The obligations are also generally
secured by substantially all of the personal property assets of Stratagene and
BioCrest Holdings and each of their wholly owned domestic subsidiaries, as well
as liens on the real property and improvements related to Stratagenes Texas
manufacturing facility. The senior credit facility is also secured by a pledge
of BioCrest Holdings 78% interest in Iobion Informatics. In addition,
Stratagenes CEO personally guaranteed the obligations of BioCrest
Manufacturing under the senior credit facility. This personal guarantee will
terminate as a result of the closing of the merger with Hycor. Borrowings under the senior credit facility bear interest (1) in the case
of the one-year revolving facility, at a variable rate equal to the one-month
LIBOR rate plus 2.40%, (2) in the case of the three-year reducing revolving
facility, at a variable rate equal to the one-month LIBOR rate plus 2.55%, and
(3) in the case of the term loan, at a variable rate equal to the prime rate
plus 1.00%. The senior credit facility includes customary but significant
restrictions on the incurrence of additional debt, the payment of dividends,
acquisitions and capital expenditures above stated limits. The senior credit
facility also contains restrictive covenants requiring the Company to maintain
certain financial ratios, including minimum debt service coverage ratios, fixed
charge coverage ratios and tangible net worth. The Company was in compliance
with all covenants as of March 31, 2004. The industrial revenue bonds issued by BioCrest Manufacturing are secured
by land, building and equipment acquired in Bastrop County, Texas with the
proceeds from the issuance of the bonds. The average interest rate on the
industrial revenue bonds for fiscal 2003 was 1.68%, and for fiscal 2002 it was
2.26%. Under the instrument governing the industrial revenue bonds, Stratagene
was required to make sinking fund payments of $870,000 per Page 18




---



##### 



year through April 2004, and is required to make sinking fund payments of
$735,000 through April 2005, $240,000 per year through April 2021, and then
$175,000 through April 2022 when the bonds mature. Stratagene leases certain facilities and equipment under noncancelable
operating leases, with equipment leases expiring in August 2006 and facility
leases for the companys headquarters in La Jolla and its offices in Canada,
the Netherlands and Japan expiring on September 30, 2008, December 31, 2004,
August 31, 2007 and August 7, 2006, respectively. In addition, in the normal course of operations, Stratagene enters into
purchase obligations with various vendors and suppliers of various key raw
materials and other goods and services through purchase orders or other
documentation. Such obligations are generally outstanding for periods of less
than one year and are settled by cash payments upon delivery of goods and
services. The purchase commitments covered by these various key raw materials
and other goods and services aggregate approximately $1,683,000 for 2004. The following table summarizes the approximate future minimum payments
under the above contractual obligations at March 31, 2004. Payment Due by PeriodLess than
    
    1-3
    
    4-5
    
    After 5Contractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    YearsOperating Leases
    
    $
    5,061,462
    
    
    $
    1,166,121
    
    
    $
    3,384,043
    
    
    $
    511,298
    
    
    $
    Long-term Debt
    
    
    30,075,593
    
    
    
    3,586,743
    
    
    
    22,434,692
    
    
    
    504,158
    
    
    
    3,550,000Deferred compensation
    
    
    268,200
    
    
    
    268,200
    
    
    
    
    
    
    
    
    
    
    
    Other Purchase Commitments
    
    
    1,683,000
    
    
    
    1,683,000
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    $
    37,088,255
    
    
    $
    6,704,064
    
    
    $
    25,818,735
    
    
    $
    1,015,456
    
    
    $
    3,550,000
 Other Commitments and Contingencies Stratagene has entered into employment contracts with certain of its
officers. These contracts generally provide for severance benefits if the
officer is terminated by Stratagene other than for cause (as defined in the
employment contracts). New Accounting
Pronouncements Information regarding recent accounting pronouncements is contained in
Note 6 to the Combined Financial Statements for the period ended March 31,
2004, which note is incorporated herein by this reference and is included as
part of Item 1. Financial Statements, to this Form 10-Q. Cautionary Note Regarding Forward-Looking Statements Some of the statements in this Quarterly Report on Form 10-Q, including,
but not limited to, this Managements Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These statements are
therefore entitled to the protection of the safe harbor provisions of these
laws. Stratagene generally identifies forward-looking statements in this
Quarterly Report by using words like believe, intend, target, expect,
estimate, may, should, plan, project, contemplate, anticipate,
predict or similar expressions. You can also identify forward-looking
statements by discussions of strategies, plans or intentions. These statements
involve known and unknown risks, uncertainties and other factors that may cause
the Companys actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements. These factors, such as the absence of a public market for the
Stratagene common stock prior to the Hycor merger, the challenges of
integrating Stratagene and Hycor, Stratagenes ability to introduce new
products and the acceptance of these products by the marketplace, competition,
the inability to sell products as a result of the termination of license
agreements, fluctuations in operating results, dependence on key employees,
Stratagenes substantial indebtedness, future capital requirements, the
possibility of unproductive research and development projects, ability to
manage growth, price volatility of Stratagenes common stock, the impact of
future sales of common stock on Stratagenes stock price and potential declines
in research and development budgets or funding, are discussed from time to time
in the reports filed by Stratagene with the Securities and Exchange Commission,
including the Form S-4 Registration Statement relating to the merger
transaction with Hycor. Page 19




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk Stratagenes financial instruments include cash and cash equivalents,
investments and long-term debt. At December 31, 2003, the carrying values of
its financial instruments approximated their fair values based on current
market prices and rates. Foreign Currency Translation/Transaction The accounts of foreign subsidiaries and affiliates of Stratagene are
measured using the local currency as the functional currency. For these
operations, assets and liabilities are translated into U.S. dollars at
period-end exchange rates, and income and expense accounts are translated at
average monthly exchange rates. Net translation gains or losses are excluded
from net income and reflected in accumulated other comprehensive income (loss)
in the accompanying combined balance sheets. Stratagenes international sales expose it to foreign currency risk in the
ordinary course of its business. Approximately 27.3% and 25.8% of Stratagenes
revenue for the three months ended March 31, 2004 and 2003, respectively, was
generated by Stratagenes foreign subsidiaries. The foreign subsidiaries sell
products in various local currencies that are collected at future dates and
purchase raw materials and finished goods in both U.S. dollars and local
currencies. Accordingly, Stratagene is exposed to transaction gains and losses
that could result from changes in foreign currency exchange rates. Realized
gains and losses from foreign currency transactions are included in operations
as incurred. For financial reporting purposes, the foreign subsidiaries income
statements are translated from the local currency into U.S. dollars at the
exchange rates in effect during the reporting period. When the local currency
strengthens compared to the U.S. dollar, there is a positive effect on the
foreign subsidiaries sales as reported in Stratagenes combined financial
statements. Conversely, when the U.S. dollar strengthens, there is a negative
effect. For the three months ended March 31, 2004, the net impact to
Stratagenes reported sales from the effect of exchange rate fluctuations was
an increase of approximately $0.7 million when compared to the exchange rates
for the three months ended March 31, 2003. For the three months ended March 31,
2004, the net impact to Stratagenes reported operating expenses from the
effect of exchange rate fluctuations was an increase of approximately $0.5
million when compared to rates for the three months ended March 31, 2003. Derivative Financial Instruments As part of distributing its products, Stratagene regularly enters into
intercompany transactions with its foreign subsidiaries. Stratagenes currency
exposures vary, but are primarily concentrated in the Euro, British Pound and
Swiss Franc.Stratagene periodically enters into derivative instruments to
mitigate foreign currency risk on its European revenues, however, such
derivative instruments do not qualify for hedge accounting under the provisions
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended. Accordingly, both unrealized and realized gains or losses resulting
from changes in fair value are recognized as incurred in gain (loss) on foreign
currency transactions in the current period income statement. Stratagene manages its foreign currency exposure over a maximum of 12
months. At March 31, 2004 and 2003, Stratagene had outstanding foreign currency
exchange contracts, maturing through June 2004 and 2003, with contract amounts
of $10.0 million and $9.4 million, respectively. Fair Value of Financial Instruments The carrying amounts of cash, restricted cash, foreign currency exchange
contracts, accounts receivable, prepaid expenses and other current assets,
accounts payable, accrued expenses, other current liabilities, and lines of
credit are considered to be representative of their respective fair values
because of the short-term nature of these financial instruments. The carrying
amount of the long-term debt is a reasonable estimate of fair value, as the
loans have terms based on market rates. Interest Rates Stratagenes cash and cash equivalents are generally invested in money
market accounts and short-term debt instruments of highly rated credit issuers.
Stratagene limits the amount of credit exposure to any one issuer and seeks to
improve the safety and likelihood of preservation of its invested funds by
limiting default risk and market risk. Page 20




---



##### 



The following table shows the average interest rate for the three months
ended March 31, 2004 for each of Stratagenes long-term debt obligations: Average Interest Rate forthe Three Months EndedLong-term Debt Obligations
    
    March 31, 2004Term debt
    
    
    5.0
    %Reducing revolving line of credit
    
    
    3.64
    %Revolving line of credit
    
    
    3.49
    %Subordinated notes
    
    
    15
    %Industrial revenue bond
    
    
    1.47
    %Phenogenex promissory note
    
    
    7.5
    %Vehicle financing
    
    0% to 4.5%
 Stratagenes interest income on long-term investments is dependent on the
interest rate attributable primarily to the debt securities purchased by
Stratagene. Since Stratagene generally holds these securities to maturity,
changes in interest rates are not expected to have a material impact on the
value of Stratagenes portfolio. 
 Item 4. Controls and Procedures The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the reports filed by the
Company pursuant to the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that such
information is accumulated and communicated to management, including the
Companys Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and in reaching a reasonable level of assurance, management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. The Company carried out an evaluation, under the supervision and with the
participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of the period
covered by this Quarterly Report. Based on the foregoing, the Companys Chief
Executive Officer and Chief Financial Officer concluded that, except as noted
below under Changes in Internal Control, the Companys disclosure controls
and procedures were effective at the reasonable assurance level. Changes in Internal Control There have been no changes in the Companys internal control over
financial reporting during the period covered by this Quarterly Report that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. However, as disclosed in the Companys registration statement on Form S-4
relating to the merger transaction with Hycor, in connection with its audits of
the Companys fiscal 2002 and 2003 financial statements, Deloitte & Touche LLP,
the Companys independent public accounting firm, identified the absence of
qualified senior accounting personnel within the Companys finance department
during parts of 2002, 2003 and 2004 as a reportable condition pursuant to
standards established by the American Institute of Certified Public
Accountants. A reportable condition is a significant deficiency in the
design or operation of internal control that could adversely affect an entitys
ability to record, process, summarize and report financial data consistent with
the assertions of management in the financial statements. Deloitte & Touche
LLP indicated that this lack of qualified senior staffing in the Companys
finance department resulted in a diminished ability to record, process,
summarize and report financial data on a timely and accurate basis.
Accordingly, Deloitte & Touche LLP recommended that the Company hire qualified
senior accounting personnel, including a chief financial officer and a director
of finance, to ensure that accounting information and records are prepared and
reviewed in a timely manner. As disclosed in the Companys registration
statement on Form S-4 related to the Hycor merger transaction, Stratagene
stated that it intended that Reginald P. Jones, the then chief financial
officer of Hycor, would become the chief financial officer of the Company
following the merger and that the Company would also hire a director of
finance. Page 21




---



##### 



In connection with the closing of the merger transaction with Hycor,
Reginald P. Jones became the chief financial officer of the Company. In
addition, in May 2004 the Company hired a new director of finance. As a result
of the hiring of Reginald P. Jones as the Companys new chief financial officer
in connection with the closing of the merger and the other additions made to
the Companys finance department in 2004, the Company is confident that it has
taken the appropriate steps to remedy the reportable condition described above. Page 22




---



##### 



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Information regarding legal proceedings is contained in Note 5 to the
Combined Financial Statements for the period ended March 31, 2004, which note
is incorporated herein by this reference and is included as part of Item 1.
Financial Statements, to this Form 10-Q. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
    
    Exhibit 31.1:
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 31.2:
    
    Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.Exhibit 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. *Exhibit 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. *
 * Pursuant to Commission Release No. 33-8238, this certification will be
treated as accompanying this Quarterly Report on Form 10-Q and not filed as
part of such report for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended, or otherwise subject to the liability of Section 18 of the
Securities Exchange Act of 1934, as amended, and this certification will not be
deemed to be incorporated by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except
to the extent that the registrant specifically incorporates it by reference. (b) Reports on Form 8-K:        None Page 23




---



##### 



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. STRATAGENE CORPORATION Date:  June 14, 2004
    By:
    /s/ Joseph A. SorgeJoseph A. Sorge, M.DChairman of the Board and Chief Executive
Officer
 (Principal Executive Officer) Date:  June 14, 2004
    By:
    /s/ Reginald P. JonesReginald P. JonesSenior Vice President and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer) Page 24