##### 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 June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-50786
 STRATAGENE CORPORATION
  Delaware
(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 August 9, 2006Common Stock, $0.0001 Par Value
    
    22,410,599




---



##### 



PagePart I. Financial InformationItem 1.
    
    Financial Statements
    
    3Consolidated Balance Sheets as of June 30, 2006 (unaudited) and December 31, 2005
    
    3Consolidated
Statements of Operations for the Three and Six Months Ended June 30, 2006 (unaudited) and2005 (unaudited)
    
    4Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2006 (unaudited) and2005 (unaudited)
    
    5Notes to Unaudited Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    29Item 4.
    
    Controls and Procedures
    
    30Part II. Other Information
    
    32Item 1.
    
    Legal Proceedings
    
    32Item 1A.
    
    Risk Factors
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    43Item 6.
    
    Exhibits
    
    44Signatures
    
    45EXHIBIT 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
 June 30,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,157,154
    
    
    $
    40,508,365Restricted cash
    
    
    21,396,352
    
    
    
    192,388Accounts receivable, less allowance for doubtful
accounts and sales returns of $525,235 and
$580,182 at June 30, 2006 and December 31, 2005,
respectively
    
    
    13,468,359
    
    
    
    11,530,214Income taxes receivable
    
    
    259,984
    
    
    
    1,520,466Inventories
    
    
    12,889,872
    
    
    
    13,249,815Deferred income tax assets
    
    
    12,996,467
    
    
    
    10,003,948Prepaid expenses and other current assets
    
    
    2,661,272
    
    
    
    2,134,828Total current assets
    
    
    75,829,460
    
    
    
    79,140,024Property and equipment, net
    
    
    10,986,224
    
    
    
    11,266,939Other assets
    
    
    474,800
    
    
    
    395,453Goodwill
    
    
    27,234,214
    
    
    
    27,234,214Intangible assets
    
    
    6,555,804
    
    
    
    6,645,137Total assets
    
    $
    121,080,502
    
    
    $
    124,681,767LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,074,958
    
    
    $
    5,373,865Dividend payable
    
    
    
    
    
    
    5,571,321Accrued expenses and other liabilities
    
    
    50,319,396
    
    
    
    42,776,252Current portion of long-term debt
    
    
    240,000
    
    
    
    5,740,000Deferred revenue, current
    
    
    1,217,834
    
    
    
    736,142Total current liabilities
    
    
    57,852,188
    
    
    
    60,197,580Deferred revenue
    
    
    568,297
    
    
    
    315,634Long-term debt, less current portion
    
    
    3,535,000
    
    
    
    3,775,000Deferred income tax liabilities
    
    
    1,621,030
    
    
    
    1,621,040Other liabilities
    
    
    259,976
    
    
    
    282,287Total liabilities
    
    
    63,836,491
    
    
    
    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 June 30, 2006 and December 31,
2005
    
    
    
    
    
    
    Common stock, $.0001 par value; 50,000,000
shares authorized; 22,410,599 and 22,319,250
shares issued and outstanding at June 30, 2006
and December 31, 2005, respectively
    
    
    2,241
    
    
    
    2,232Additional paid-in capital
    
    
    55,424,858
    
    
    
    54,398,471Unearned stock-based compensation
    
    
    (15,876
    )
    
    
    (48,294
    )Retained earnings
    
    
    3,089,179
    
    
    
    5,731,260Accumulated other comprehensive loss
    
    
    (1,256,391
    )
    
    
    (1,593,443
    )Total stockholders equity
    
    
    57,244,011
    
    
    
    58,490,226Total liabilities and stockholders equity
    
    $
    121,080,502
    
    
    $
    124,681,767
  3




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesProduct sales
    
    $
    23,117,022
    
    
    $
    24,595,429
    
    
    $
    46,874,675
    
    
    $
    48,808,997Royalty revenue
    
    
    286,529
    
    
    
    295,966
    
    
    
    784,370
    
    
    
    682,438Total revenue
    
    
    23,403,551
    
    
    
    24,891,395
    
    
    
    47,659,045
    
    
    
    49,491,435Costs and expenses:Cost of product sales
    
    
    8,286,376
    
    
    
    8,693,241
    
    
    
    16,749,796
    
    
    
    17,159,269Research and development
    
    
    3,107,750
    
    
    
    2,860,652
    
    
    
    6,496,562
    
    
    
    5,749,262Selling and marketing
    
    
    5,553,705
    
    
    
    5,420,910
    
    
    
    11,123,299
    
    
    
    10,413,616General and administrative
    
    
    4,485,102
    
    
    
    4,932,163
    
    
    
    9,489,354
    
    
    
    9,038,550Litigation charges
    
    
    7,932,966
    
    
    
    
    
    
    
    8,056,024
    
    
    
    Other operating expenses
    
    
    20,889
    
    
    
    
    
    
    
    68,489
    
    
    
    20,025Total operating costs and expenses
    
    
    29,386,788
    
    
    
    21,906,966
    
    
    
    51,983,524
    
    
    
    42,380,722Income (loss) from operations
    
    
    (5,983,237
    )
    
    
    2,984,429
    
    
    
    (4,324,479
    )
    
    
    7,110,713Other non-operating income and expenses:Loss on foreign currency transactions
    
    
    (29,472
    )
    
    
    (4,722
    )
    
    
    (52,950
    )
    
    
    (118,572
    )Other income (expense), net
    
    
    (18,956
    )
    
    
    (20,084
    )
    
    
    28,382
    
    
    
    512,623Interest expense
    
    
    (276,307
    )
    
    
    (58,909
    )
    
    
    (589,484
    )
    
    
    (157,952
    )Interest income
    
    
    302,862
    
    
    
    3,962
    
    
    
    590,867
    
    
    
    9,083Total other non-operating income (expense)
    
    
    (21,873
    )
    
    
    (79,753
    )
    
    
    (23,185
    )
    
    
    245,182Income (loss) before income taxes
    
    
    (6,005,110
    )
    
    
    2,904,676
    
    
    
    (4,347,664
    )
    
    
    7,355,895Income tax (expense) benefit
    
    
    2,259,999
    
    
    
    (767,232
    )
    
    
    1,705,583
    
    
    
    (2,283,159
    )Net income
    
    $
    (3,745,111
    )
    
    $
    2,137,444
    
    
    $
    (2,642,081
    )
    
    $
    5,072,736Earnings per share:Basic
    
    $
    (0.17
    )
    
    $
    0.10
    
    
    $
    (0.12
    )
    
    $
    0.23Diluted
    
    $
    (0.17
    )
    
    $
    0.10
    
    
    $
    (0.12
    )
    
    $
    0.23Weighted average shares:Basic
    
    
    22,382,732
    
    
    
    22,056,129
    
    
    
    22,353,817
    
    
    
    22,043,800Diluted
    
    
    22,382,732
    
    
    
    22,230,127
    
    
    
    22,353,817
    
    
    
    22,170,835
  4




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2006
    
    
    2005(unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    (2,642,081
    )
    
    $
    5,072,736Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    1,801,934
    
    
    
    1,857,496Stock-based compensation
    
    
    322,619
    
    
    
    338,688Impairment of long-lived assets
    
    
    68,488
    
    
    
    20,025Bad debt expense
    
    
    48,038
    
    
    
    (154,448
    )Excess and obsolete inventory (recovery) expense
    
    
    (116,068
    )
    
    
    326,238Loss on disposal of assets
    
    
    61,048
    
    
    
    4,531Deferred income taxes
    
    
    (2,992,520
    )
    
    
    16,827Changes in assets and liabilities:Accounts receivable
    
    
    (1,817,148
    )
    
    
    (886,567
    )Inventories
    
    
    633,133
    
    
    
    (1,479,219
    )Prepaid expenses and other current assets
    
    
    (518,269
    )
    
    
    (1,085,574
    )Income taxes receivable
    
    
    1,312,902
    
    
    
    Other assets
    
    
    (73,180
    )
    
    
    (29,140
    )Accounts payable
    
    
    728,440
    
    
    
    1,373,830Accrued expenses and other liabilities
    
    
    7,367,092
    
    
    
    1,261,265Deferred revenue
    
    
    720,798
    
    
    
    (123,122
    )Other liabilities
    
    
    (22,310
    )
    
    
    284,754Income taxes payable
    
    
    
    
    
    
    242,215Net cash provided by operating activities
    
    
    4,882,916
    
    
    
    7,040,535Cash flows from investing activities:Purchases of property and equipment
    
    
    (883,646
    )
    
    
    (816,927
    )Additions to intangible assets
    
    
    (652,933
    )
    
    
    (749,012
    )Proceeds from maturities of marketable debt securities
    
    
    
    
    
    
    130,000Changes in restricted cash
    
    
    (21,203,964
    )
    
    
    511,210Net cash used in investing activities
    
    
    (22,740,543
    )
    
    
    (924,729
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (240,000
    )
    
    
    (735,000
    )Borrowings under line of credit
    
    
    9,030
    
    
    
    45,957Payments under line of credit
    
    
    (5,509,030
    )
    
    
    (4,902,429
    )Distributions to shareholders
    
    
    (5,571,321
    )
    
    
    Proceeds from issuance of common stock
    
    
    663,113
    
    
    
    289,992Net cash used in financing activities
    
    
    (10,648,208
    )
    
    
    (5,301,480
    )Effects of foreign currency exchange rates on cash
    
    
    154,624
    
    
    
    (93,618
    )Net increase (decrease) in cash
    
    
    (28,351,211
    )
    
    
    720,708Cash and cash equivalents at beginning of period
    
    
    40,508,365
    
    
    
    4,890,458Cash and cash equivalents at end of period
    
    $
    12,157,154
    
    
    $
    5,611,166Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    95,807
    
    
    $
    113,030Income taxes
    
    $
    32,103
    
    
    $
    1,858,500
  5




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
 1. Basis of Presentation
      Reclassification 
 New
Accounting Pronouncements  Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109. Accounting for Income
Taxes,
 2. Earnings Per Share (EPS)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Weighted average shares:Basic
    
    
    22,382,732
    
    
    
    22,056,129
    
    
    
    22,353,817
    
    
    
    22,043,800Effect of dilutive common stock options
    
    
    
    
    
    
    173,998
    
    
    
    
    
    
    
    127,035Diluted
    
    
    22,382,732
    
    
    
    22,230,127
    
    
    
    22,353,817
    
    
    
    22,170,835
  6




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##### Table of Contents



3. Accounting for Share-Based Compensation
 Share-Based Payment
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
 Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards
 Share-Based Compensation Information under SFAS No. 123(R)
 Accounting for Stock Appreciation Rights and Other
Variable Stock Option and Award Plans
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Options
    
    ESPP
    
    Options
    
    ESPPRisk free interest rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    4.8
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    45
    %
    
    
    45
    %
    
    
    45
    %
    
    
    45
    %Expected life (in years)
    
    4.8 years
    
    0.25 years
    
    4.8 years
    
    0.25 yearsPre-vesting forfeiture rate
    
    
    7
    %
    
    NA
    
    
    7
    %
    
    NA
  7




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##### Table of Contents



Share-Based Payment,
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006
    
    
    2006Capitalized to inventory
    
    $
    12,197
    
    
    $
    21,693Cost of product sales
    
    
    22,318
    
    
    
    38,005Research and development
    
    
    35,919
    
    
    
    69,231Selling and marketing
    
    
    36,976
    
    
    
    70,183General and administrative
    
    
    93,680
    
    
    
    181,774Share-based compensation expense before taxes
    
    
    188,893
    
    
    
    359,193Related income tax benefits
    
    
    (63,279
    )
    
    
    (120,330
    )Share-based compensation expense after taxes
    
    $
    125,614
    
    
    $
    238,863Net share-based compensation expense, per common share:Basic
    
    $
    0.01
    
    
    $
    0.01Diluted
    
    $
    0.01
    
    
    $
    0.01
 Pro Forma Information under SFAS No.123(R) for Periods Prior to Fiscal 2006
   8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005Net income as reported
    
    $
    2,137,444
    
    
    $
    5,072,736Stock-based compensation expense
determined under SFAS No. 123 for
all awards, net of related tax
effects
    
    
    (49,407
    )
    
    
    (2,146,512
    )Pro forma net income
    
    $
    2,088,037
    
    
    $
    2,926,224Earnings per common share:Basic  as reported
    
    $
    0.10
    
    
    $
    0.23Basic  pro forma
    
    $
    0.09
    
    
    $
    0.13Diluted  as reported
    
    $
    0.10
    
    
    $
    0.23Diluted  pro forma
    
    $
    0.09
    
    
    $
    0.13
 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
 4. Balance Sheet Information
 Restricted Cash
  Commitments and Contingencies  Legal.
  9




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##### Table of Contents



Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    5,152,066
    
    
    $
    4,955,062Work-in-process
    
    
    3,101,307
    
    
    
    3,854,153Finished goods
    
    
    4,636,499
    
    
    
    4,440,600Total
    
    $
    12,889,872
    
    
    $
    13,249,815
 Intangible Assets and Goodwill
  June 30, 2006
    
    
    December 31, 2005Useful Life
    
    
    
    
    
    
    Accumulated
    
    
    Net Book
    
    
    
    
    
    
    Accumulated
    
    
    Net Book(Years)
    
    
    Gross
    
    
    Amortization
    
    
    Value
    
    
    Gross
    
    
    Amortization
    
    
    ValueIntangible assets subject to amortization:Amortizable patents and other
    
    2  7 years
    
    $
    9,234,813
    
    
    $
    4,765,553
    
    
    $
    4,469,260
    
    
    $
    8,696,142
    
    
    $
    4,284,418
    
    
    $
    4,411,724Amortizable intangible assets
    
    1  5 years
    
    $
    1,189,000
    
    
    $
    677,456
    
    
    $
    511,544
    
    
    $
    1,189,000
    
    
    $
    530,587
    
    
    $
    658,413Intangible assets not subject to amortization:Non-amortizable intangible assets
    
    
    
    
    
    $
    1,575,000
    
    
    $
    
    
    
    $
    1,575,000
    
    
    $
    1,575,000
    
    
    $
    
    
    
    $
    1,575,000Goodwill
    
    
    
    
    
    $
    27,234,214
    
    
    $
    
    
    
    $
    27,234,214
    
    
    $
    27,234,214
    
    
    $
    
    
    
    $
    27,234,214$
    39,233,027
    
    
    $
    5,443,009
    
    
    $
    33,790,018
    
    
    $
    38,694,356
    
    
    $
    4,815,005
    
    
    $
    33,879,351
   Accrued Expenses and Other Liabilities
  June 30,
    
    
    December 31,2006
    
    
    2005Accrued compensation
    
    $
    2,234,632
    
    
    $
    3,406,685Accrued royalties
    
    
    17,137,458
    
    
    
    17,208,443Litigation accruals
    
    
    29,101,124
    
    
    
    20,600,352Warranty
    
    
    210,303
    
    
    
    233,299Other accrued expenses and liabilities
    
    
    1,635,879
    
    
    
    1,327,473Total
    
    $
    50,319,396
    
    
    $
    42,776,252
 10




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##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,418
    
    
    
    
    
    
    
    
    
    
    
    32,418Common stock issued
pursuant to employee stock
purchase plan
    
    
    33,467
    
    
    
    3
    
    
    
    214,141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214,144Common stock issued upon
exercise of stock options
    
    
    57,882
    
    
    
    6
    
    
    
    448,963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    448,969Tax benefit received from
the exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    51,302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,302Compensation expense for
non-employee stock options
    
    
    
    
    
    
    
    
    
    
    (68,905
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,905
    )Compensation expense for
employee stock options and
employee stock purchase
plan
    
    
    
    
    
    
    
    
    
    
    380,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    380,886Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,642,081
    )
    
    
    
    
    
    
    (2,642,081
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337,052
    
    
    
    337,052Balance as of June 30, 2006
    
    
    22,410,599
    
    
    $
    2,241
    
    
    $
    55,424,858
    
    
    $
    (15,876
    )
    
    $
    3,089,179
    
    
    $
    (1,256,391
    )
    
    $
    57,244,011
  6. Stock Benefit Plans
 2000 Stock Option Plan, as amended and restated
  2004 Independent Directors Option Plan
 Stratagene Corporation 2006 Equity Incentive Award Plan (the 2006 Plan)
 11




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##### Table of Contents




    
    5% of the Companys outstanding capital stock on such January 1;
    
    750,000 shares; or
    
    an amount determined by the Companys board of directors.
    Weighted-averageExerciseOptions
    
    PriceOutstanding, December 31, 2005
    
    
    2,670,598
    
    
    $
    8.98Granted
    
    
    515,250
    
    
    
    6.84Exercised
    
    
    (63,875
    )
    
    
    8.00Forfeited
    
    
    (214,935
    )
    
    
    8.19Outstanding, June 30, 2006
    
    
    2,907,038
    
    
    $
    8.68Exercisable June 30, 2006
    
    
    2,019,815
    
    
    $
    9.19
    Options Outstanding
    
    Options ExercisableNumber
    
    Weighted-
    
    
    
    
    
    NumberOutstanding
    
    average
    
    Weighted-
    
    Exercisable
    
    Weighted-as of
    
    Remaining
    
    average
    
    as of
    
    averageJune 30,
    
    Contractual
    
    Exercise
    
    June 30,
    
    ExerciseRange of Exercise Prices
    
    2006
    
    Life (in Years)
    
    Price
    
    2006
    
    Price$1.63 - $8.05
    
    
    830,255
    
    
    
    7.95
    
    
    $
    6.63
    
    
    
    258,464
    
    
    $
    6.31$8.06 - $8.11
    
    
    430,650
    
    
    
    7.96
    
    
    
    8.11
    
    
    
    388,650
    
    
    
    8.11$8.47 - $9.20
    
    
    318,250
    
    
    
    8.37
    
    
    
    8.65
    
    
    
    103,066
    
    
    
    8.64$9.34
    
    
    798,960
    
    
    
    7.93
    
    
    
    9.34
    
    
    
    778,962
    
    
    
    9.34$9.60 - $11.50
    
    
    164,272
    
    
    
    4.66
    
    
    
    10.05
    
    
    
    126,022
    
    
    
    9.90$12.00
    
    
    364,651
    
    
    
    1.76
    
    
    
    12.00
    
    
    
    364,651
    
    
    
    12.002,907,038
    
    
    
    7.03
    
    
    $
    8.68
    
    
    
    2,019,815
    
    
    $
    9.19
 12




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##### Table of Contents



Employee Stock Purchase Plan
 7. Comprehensive Income
  Three Months Ended,
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (3,745,111
    )
    
    $
    2,137,444
    
    
    $
    (2,642,081
    )
    
    $
    5,072,736Foreign currency translation gain (loss)
    
    
    258,335
    
    
    
    (454,980
    )
    
    
    337,052
    
    
    
    (709,962
    )Unrealized gains (losses) on marketable
debt securities
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    (365
    )Comprehensive income (loss), net of tax
    
    $
    (3,486,776
    )
    
    $
    1,682,583
    
    
    $
    (2,305,029
    )
    
    $
    4,362,409
 8. Commitments and Contingencies
 Royalty Payments 
 Corporate Collaboration 
 13




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Revenue Arrangements with Multiple Deliverables,
   Legal
 Invitrogen Corporation
  14




---



##### Table of Contents



E.
coli Accounting for Contingencies, Reasonable Estimation of the Amount of a Loss, an
Interpretation of FASB Statement No. 5
  Takara Bio
  15




---



##### Table of Contents



Third Wave Technologies
 Accounting for Contingencies.
  ®
 16




---



##### Table of Contents



Applera Corporation
   Ariadne Genomics
  Other Legal Matters
  17




---



##### Table of Contents



9. Segment Information
  Three Months Ended
    
    Three Months EndedJune 30, 2006
    
    June 30, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from
external customers
    
    $
    17,233,279
    
    
    $
    6,170,272
    
    
    $
    23,403,551
    
    
    $
    18,589,728
    
    
    $
    6,301,667
    
    
    $
    24,891,395Income before income taxes
    
    $
    (7,529,261
    )
    
    $
    1,524,151
    
    
    $
    (6,005,110
    )
    
    $
    1,165,781
    
    
    $
    1,738,895
    
    
    $
    2,904,676
 Six Months Ended
    
    Six Months EndedJune 30, 2006
    
    June 30, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalProduct sales from
external customers
    
    $
    35,565,146
    
    
    $
    12,093,899
    
    
    $
    47,659,045
    
    
    $
    37,500,848
    
    
    $
    11,990,587
    
    
    $
    49,491,435Income before income taxes
    
    $
    (7,533,256
    )
    
    $
    3,185,592
    
    
    $
    (4,347,664
    )
    
    $
    4,220,908
    
    
    $
    3,134,987
    
    
    $
    7,355,895
  June 30, 2006
    
    December 31, 2005Research
    
    Clinical
    
    
    
    
    
    Research
    
    ClinicalSupplies
    
    Diagnostics
    
    Total
    
    Supplies
    
    Diagnostics
    
    TotalTotal assets
    
    $
    78,805,949
    
    
    $
    42,274,553
    
    
    $
    121,080,502
    
    
    $
    82,611,880
    
    
    $
    42,069,887
    
    
    $
    124,681,767
 18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following information should be read in conjunction with the financial statements and the
related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the
financial statements and related notes included in our Annual Report on Form 10-K for the year
ended December 31, 2005. Our financial information includes the accounts and balances of Stratagene
Corporation and its subsidiaries on a consolidated basis.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations
and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements and
include assumptions concerning our operations, future results and prospects. These forward-looking
statements are based on current expectations and are subject to a number of risks, uncertainties
and other factors. Our actual results could differ materially from those expressed in or implied by
these forward-looking statements as a result of various factors, including those set forth below
under Risk Factors.
 Cautionary Note Regarding Forward-Looking Statements
   Overview
   19




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Basis of Presentation
  Critical Accounting Policies and Estimates
  Use of Estimates
  Share-Based Compensation
      20




---



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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.Collaboration agreements  milestone
payments
    
    Recognized over the period that the
specified services or products are
delivered and accepted by the
customer.
  June 30,
    
    December 31,Type of deferred revenue
    
    2006
    
    2005Extended warranty, installation or maintenance agreement
    
    
    40
    %
    
    
    59
    %License agreements
    
    
    34
    %
    
    
    41
    %Collaboration agreements  milestone payments
    
    
    26
    %
    
    
    0
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 Revenue Arrangements with Multiple Deliverables,
  21




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##### Table of Contents



Accounts Receivable
  Inventories
   Deferred Taxes
  Long-lived Assets
 Goodwill
and Intangibles, Accounting for the Impairment or Disposal of Long-Lived Assets.
 Royalties
  22




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##### Table of Contents



Warranties
  Research and Development
    Results of Operations
 Three months ended June 30, 2006 compared to three months ended June 30, 2005
 Revenues
  23




---



##### Table of Contents



Cost of product sales
  Research and Development Expenses
   Selling and Marketing Expenses
  General and Administrative Expenses
  Litigation Charges
  Total Other Income (Expense), Net
  24




---



##### Table of Contents



Income Taxes
   Six months ended June 30, 2006 compared to six months ended June 30, 2005
 Revenues
  Cost of product sales
  Research and Development Expenses
  Selling and Marketing Expenses
  25




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##### Table of Contents



General and Administrative Expenses
  Litigation Charges
  Total Other Income (Expense), Net
  Income Taxes
  Liquidity and Capital Resources
     26




---



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27




---



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Contractual Obligations
      28




---



##### Table of Contents



Payment Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    4,502,174
    
    
    $
    1,969,071
    
    
    $
    2,533,103
    
    
    
    
    
    
    
    Principal under reducing
revolving line of credit (1)
    
    
    5,500,000
    
    
    
    5,500,000
    
    
    
    
    
    
    
    
    
    
    
    Principal on long-term debt
    
    
    4,015,000
    
    
    
    240,000
    
    
    
    720,000
    
    
    
    480,000
    
    
    
    2,575,000Collaborative agreements
    
    
    3,200,000
    
    
    
    1,500,000
    
    
    
    1,700,000
    
    
    
    
    
    
    
    Employment agreements
    
    
    794,382
    
    
    
    597,507
    
    
    
    196,875
    
    
    
    
    
    
    
    Other purchase commitments
    
    
    3,056,000
    
    
    
    3,056,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    21,067,556
    
    
    $
    12,862,578
    
    
    $
    5,149,978
    
    
    $
    480,000
    
    
    $
    2,575,000
 
 (1)
    
    The principal due under the reducing revolving line of credit was paid in full on
January 3, 2006.  Off-Balance Sheet Arrangements
  New Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Translation/Transaction
   29




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##### Table of Contents



Fair Value of Financial Instruments
  Interest Rates
   Average Interest Rate for
    
    Average Interest Rate forthe Three Months Ended
    
    the Six Months EndedLong-term Debt Obligations
    
    June 30, 2006
    
    June 30, 2006Reducing revolving line of credit
    
    
    7.64
    %
    
    
    7.40
    %Industrial revenue bonds
    
    
    3.69
    %
    
    
    3.47
    %
  
 Item 4. Controls and Procedures
   30




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Changes in Internal Control
  31




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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;
 32




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##### Table of Contents




    
    ability to develop, maintain and protect proprietary products and technologies;
    
    sales and distribution capabilities;
    
    technical support and service; and
    
    breadth of product line.
    We may be prevented from selling some of our products if our existing license agreements are
terminated.
   
    
    a license from Applera Corporation (which license was assigned to Applera from Hoffman La
Roche and Roche Molecular Systems, Inc. in 2005) granting us, among other rights, the right
to manufacture, promote and sell certain products for use in the research field in a process
referred to as the PCR process; and
    
    a license from Applied Biosystems, which grants us rights to manufacture, promote and
sell thermal cyclers (certain laboratory instruments capable of generating and maintaining
specific temperatures for a defined period of time) under certain patents for use in the
research field.
    33




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##### Table of Contents



Because our quarterly revenue and operating results may vary significantly in future periods,
our stock price may decline.
  Our founder, chairman of our board of directors, chief executive officer and president exerts
considerable control over our business.
  We depend substantially on key employees, and losing the services of any of our key employees
or failing to hire qualified employees could seriously damage our business.
   Our indebtedness could limit our ability to operate our business, obtain additional financing
and pursue other business opportunities.
  34




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##### Table of Contents




    
    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.
  35




---



##### Table of Contents



We are currently, and could in the future be, subject to lawsuits, arbitrations, and other
legal actions, particularly involving claims for infringement of patents and other intellectual
property rights.
     36




---



##### Table of Contents



We may spend resources on research and development projects without being able to achieve an
adequate return, if any, on our investment.
  Our business could suffer if we fail to manage our growth effectively.
  Our stock price could be adversely affected if we are unable to implement and maintain
effective internal control over financial reporting.
  37




---



##### Table of Contents



The price of our common stock is expected to be volatile.
  
    
    quarterly fluctuations in our operating and earnings per share results;
    
    technological innovations or new product introductions by us or our competitors;
    
    delays in developing and introducing new products;
    
    disputes concerning patents, licenses or other proprietary rights;
    
    changes in earnings estimates by equity and market research analysts;
    
    sales of common stock by existing stockholders;
    
    loss of key personnel; and
    
    securities class actions or other litigation affecting us or other companies in our industry.
 38




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##### Table of Contents



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.
   39




---



##### Table of Contents



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.
  40




---



##### Table of Contents



We rely on third party manufacturers for raw materials and product components.
  
    
    an inability to obtain an adequate supply of required components due to manufacturing
capacity constraints, the discontinuance of a product by a third-party manufacturer, or an
acquisition of the manufacturer by one of our competitors or other supply constraints;
    
    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.
 41




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##### Table of Contents



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.
  42




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##### Table of Contents



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.
    
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    To elect five directors to hold office until the 2007 Annual Meeting of Stockholders:
 Votes AgainstVotes For
    
    or WithheldJoseph A. Sorge, M.D.
    
    
    20,133,489
    
    
    
    931,917Carlton J. Eibl
    
    
    20,465,784
    
    
    
    599,622Peter Ellman
    
    
    20,389,315
    
    
    
    676,091Robert C. Manion
    
    
    20,620,600
    
    
    
    444,806John C. Reed
    
    
    20,625,306
    
    
    
    440,100
 2.
    
    To approve the Stratagene 2006 Equity Incentive Award Plan:
 Votes AgainstVotes For
    
    or Withheld
    
    Votes Abstained14,361,370
    
    
    3,768,067
    
    
    
    2,935,969
  43




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    Description3.1
    
    Second Amended and Restated Certificate of Incorporation of the registrant *3.2
    
    Amended and Restated Bylaws of the registrant*10.1
    
    Stratagene Corporation 2006 Equity Incentive Award Plan**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 to the Registration Statement on Form S-8 (No.
333-135720) filed on July 12, 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. 44




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SIGNATURES
  STRATAGENE CORPORATIONDate: August 10, 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: August 10, 2006
    By:
    /s/ Steve R. MartinSteve R. MartinVice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer) 45