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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 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 92037(Address of principal executive offices)
    
    (Zip Code)
 (858) 535-5400
(Registrants telephone number, including area code) No Change
(Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value
(Title of class) 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ As of June 30, 2004, the last day of the registrants second fiscal quarter of fiscal 2004,
the aggregate market value of the common stock held by non-affiliates of the registrant was
approximately $64.1 million, based on the last reported sale price on the preceding business day.
Shares of common stock held by each executive officer and director and by each person or group who
owns 10% or more of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes. The
number of outstanding shares of the registrants common stock as
of March 24, 2005 was
22,037,743 DOCUMENTS INCORPORATED BY REFERENCE: Certain information called for by Part III of this Form
10-K will either be filed with the Commission under Regulation 14A under the Securities Exchange
Act of 1934 or by amendment to this Form 10-K, in either case not later than 120 days after
December 31, 2004.




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STRATAGENE CORPORATION Annual Report on Form 10-K
Table of Contents PagePart I.Item 1. Business
    
    
    1Item 2. Properties
    
    
    5Item 3. Legal Proceedings
    
    
    6Item 4. Submission of Matters to a Vote of Security Holders
    
    
    7Part IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    8Item 6. Selected Financial Data
    
    
    8Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 8. Financial Statements and Supplementary Data
    
    
    30Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    57Item 9A. Controls and Procedures
    
    
    57Item 9B. Other Information
    
    
    57Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    58Item 11. Executive Compensation
    
    
    58Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    58Item 13. Certain Relationships and Related Transactions
    
    
    58Item 14. Principal Accountant Fees and Services
    
    
    58Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    59Signatures
    
    
    62Schedule II
    
    
    63EXHIBIT 10.17EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I. 
 Item 1. Business Overview Stratagene Corporation and subsidiaries, which we refer to collectively as Stratagene or the
Company, develop and manufacture biological products and instruments designed to improve the
speed and accuracy of life sciences research and medical diagnosis. Stratagene markets its products
to researchers at academic and government institutions and pharmaceutical, biotechnology and
industrial companies, in the U.S. and internationally. These researchers use Stratagenes products
to identify genes and proteins, study how cells are regulated by genes and proteins, determine the
molecular mechanisms of health and disease, search for new drug therapies, develop diagnostic
tests, and test the safety of compounds used in food and pharmaceuticals. Stratagene engages in business activity in two operating segments: Research Supplies and
Medical Diagnostics. The Company has marketed and sold its Research Supplies products for over 20
years, while the Medical Diagnostics products are a new addition to Stratagenes product portfolio
as a result of a merger with Hycor Biomedical Inc., or Hycor, in June 2004. Stratagenes Research Supplies products incorporate a diverse range of molecular biology
technologies used for gene transfer, gene and protein expression, gene cloning, protein and gene
functional analysis, nucleic acid and protein purification and analysis, microarrays, DNA
replication and nucleic acid quantification. Stratagenes Medical Diagnostics products focus on
allergy and autoimmune testing and urinalysis products. The Companys Research Supplies products
are manufactured in its facility near Austin, Texas, while its Diagnostics products are
manufactured in its Garden Grove, California facility. Stratagenes Research Supplies segment offers a broad portfolio of products in each of the
following three market categories:  
    Gene Analysis:Stratagenes gene analysis products, which accounted for 51.3%, 59.2%,
and 54.9% of total revenue in 2004, 2003 and 2002, respectively, help researchers study gene
activity, genetic code sequences, and gene dosage; as well as allow the purification and
amplification of nucleic acid sequences,
    Protein Analysis and Cell Biology:Stratagenes protein analysis and cell biology
products help researchers study signaling pathways within and between cells and tissues;
create, purify and measure proteins; and change the chemical composition of proteins.
These products accounted for approximately 15.2%, 15.1% and 15.3% of total revenue in 2004,
2003 and 2002, respectively.
    Gene Discovery:Stratagenes gene discovery products, which accounted for approximately
11.4%, 17.1% and 23.3% of total revenue in 2004, 2003 and 2002, respectively, help
researchers discover genes or find variations within DNA and RNA compositions.  Stratagenes
Medical Diagnostics segment, which reflects sales from the date of the Hycor merger
in June 2004 and, accordingly, does not reflects a full year of results, offers products in
the following areas:  
    Urinalysis:The KOVA Microscopic Urinalysis System is the Companys largest product line
in the Medical Diagnostics segment, accounting for approximately 7.4% of total revenue for
2004. The KOVA System provides laboratories with the capability to perform uniform and
reliable microscopic analyses of urine specimens. It is composed of plastic collection
containers, tubes and pipettes, patented microscopic slides, and human urine-based control
materials.
    Allergy:The Companys allergy diagnostic product line, which accounted for approximately
6.8% of total revenue for 2004, is a complete line of radioimmunoassay, or RIA, and
enzymatic immunoassay, or EIA, procedures to test for specific allergies to more than 1,000
different allergens such as grasses, weeds, trees, epidermals (i.e., animal hair), dust,
dust mites, molds, and foods. The Company also offers general screening tests. Unlike the
traditional prick puncture and intradermal testing methods of diagnosing allergies, the
Companys products permit a physician to diagnose allergies by testing a sample of the
patients blood for the presence of the specific IgE or IgG antibody, which reacts with the
corresponding allergen. This method has many advantages over the traditional methods of
allergy diagnosis, not the least of which is patient comfort.
    Autoimmune:The Companys autoimmune diagnostic product line, which accounted for
approximately 1.2% of total revenue in 2004, includes tests utilized for the diagnosis and
monitoring of autoimmune disorders such as rheumatoid arthritis and systemic lupus
erythematosus among others. Autoimmune diseases may be systemic or organ-specific and the
need for this type of diagnostic testing is expected to increase as the population ages and
primary care physicians are educated about autoimmune diseases. The Companys tests are
based on enzyme immunoassay technology in a microplate format. Unlike 1




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traditional methods like immunofluorescence, which requires a dedicated and highly trained
technologist to read slides manually through a microscope one at a time, the Companys
products can be automated either on the Companys HY-TEC instruments or on general microplate
processors.The Companys allergy and autoimmune product lines also include the HY-TEC 480 and HY-TEC 288
automated diagnostic systems which provide clinical laboratories with significant productivity
improvement capabilities. The HY-TEC systems include the instruments, software, and test
reagents necessary to perform allergy and autoimmune testing. The Company places a large
percentage of the HY-TEC systems on a reagent rental basis. A reagent rental transaction,
common to the diagnostic market, involves the placement of an instrument in the laboratories
of customers that pay for the system over an agreed contract period through the purchase of
test reagents. The Companys HY-TEC reagent rental program is similar in that instruments are
typically placed in use with direct customers and paid for over an agreed contract period
through the purchase of test reagents, but also includes the sale of some instruments to
distributors and direct customers. The typical contract period for the HY-TEC reagent rental
is between 3 and 5 years. The instruments that are sold to distributors are sold with a
minimal gross profit to assist them with their instrument placements, with the expectation
that the Company will earn a profit on the subsequent sales of reagents necessary to operate
the instrument. Stratagene believes that its competitive strengths position it to compete effectively within
the life sciences research and medical diagnostics products market. These strengths include
innovative product research and development, a diverse intellectual property portfolio, a
dedication to quality and customer service, effective sales and marketing, and an experienced
management team. Research and Development Stratagene believes that it has a strong scientific team. As of December 31, 2004,
Stratagenes research and development department had 65 employees, 25 of whom have Ph.Ds or M.Ds.
Stratagenes employees actively stay abreast of scientific and industry developments in an effort
to identify and acquire innovative technologies from researchers and research institutions
throughout the world. As of December 31, 2004, Stratagene owned approximately 160 patents and had
approximately 190 patent applications pending. Stratagene spent $10.8 million, $10.5 million and
$10.5 million on proprietary research and development activities during fiscal 2004, 2003 and 2002,
respectively. Stratagenes core strengths are in the areas of molecular biology, including gene cloning,
gene expression and gene libraries. Stratagene has focused research groups in DNA replication
factors, nucleic acid and protein purification, E. coli and mammalian genetics, polymerase chain
reaction (PCR) and quantitative PCR (QPCR), ribonucleic acid interference (RNAi), proteomics,
microarrays and bioinformatics. Sales and Marketing Stratagene currently markets its products in over 45 countries worldwide. Stratagene sells its
products directly to customers in the U.S., Canada, Germany, France, Japan, the United Kingdom and
14 other countries. In addition, Stratagene uses specialized distributors to market its products in
more than 25 other countries. As of December 31, 2004, Stratagene employed 112 highly trained and
skilled people in its sales and marketing department to market its products and provide customer
technical support and service. Over 60% of Stratagenes sales and marketing staff have degrees in
biological sciences and over 40% have advanced degrees. Stratagenes customers include most major pharmaceutical and biotechnology companies,
including Merck, Pfizer, Amgen and Genentech. Stratagene also serves almost all academic research
laboratories, including the United States National Institutes of Health, Harvard University,
Stanford University and the University of California system. Additionally, Stratagene serves the
two largest reference laboratories in the United States, Quest Diagnostics and Laboratory
Corporation of America (LabCorp). Quest Diagnostics standardizes their member and managed
laboratories on the Companys KOVA-Trol urinalysis controls, and Stratagene is the prime allergy
testing vendor to LabCorp. As a result of its long history of providing products to the molecular
biology research and diagnostics markets, Stratagene enjoys a high degree of brand awareness. Due to the highly technical nature of its products, Stratagene employs and trains scientists
to work as technical sales representatives. Each technical sales representative has an extensive
background in molecular biology, including time spent in the laboratory doing research prior to
being hired by the sales department. To guide the professional training of Stratagenes technical
sales representatives, Stratagene has developed a comprehensive product training and consultative
selling skills curriculum called Stratagene University. Technical sales representatives matriculate
through a series of courses to increase their product knowledge and develop the skills necessary to
assist customers in making informed buying decisions. Strong consultative skills, in-depth product
knowledge and a thorough understanding of molecular biology techniques and the research process
allow Stratagenes sales representatives to become advisors, acting in a consultative role with
their customers. Stratagenes technical sales representatives also 2




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seek to identify unmet market needs and opportunities for licensing and product development. Stratagenes marketing departments in San Diego, California and Garden Grove, California
combine various types of advertising media and methods to inform customers of new product
developments and enhancements to existing products. Stratagene advertises in many prominent
scientific journals, periodically publishes a product catalog, distributes quarterly Strategies
newsletters and conducts direct mail campaigns to researchers in the U.S. and Europe. Stratagene
also reaches a broad range of scientists by presenting at scientific seminars and exhibiting at
scientific meetings. Stratagenes web site allows researchers to learn about new products, view an on-line catalog,
place orders, download technical manuals and vector sequences, read Stratagenes newsletter and
subscribe to monthly announcements about new products and other pertinent scientific information.
In December 2004, the Stratagene web site logged approximately 143,000 visits. Stratagene currently
accepts orders on-line and is working to make its entire order fulfillment and billing processes
available to its customers electronically. As a result, Stratagene expects to be fully able to
support its customers as they seek to shift their purchasing from current conventional procurement
processes to e-commerce over the Internet. Manufacturing Stratagene maintains manufacturing facilities in San Diego, California, Garden Grove,
California, the Austin, Texas area and Edinburgh, Scotland. In June 2004, Stratagene decided to
move its remaining manufacturing operations at the San Diego facility to its Texas facility. The
move is expected to be completed by the end of the first quarter of 2005. Stratagenes Garden Grove
and Edinburgh facilities support its Medical Diagnostics products, while its Texas facility
supports the Research Supplies products. Stratagene has distribution and warehouse facilities in
Scotland, Germany, the Netherlands and Japan. Stratagene also provides instrument service
capabilities in its sites in Texas, Germany and the Netherlands. Manufacturing at both the
California and Texas facilities are supported by an integrated planning, purchasing and warehousing
system, which includes incoming materials inspection and quality assurance testing. New product
introductions, and existing product and process improvements are supported by a biological process
improvement department within the manufacturing sector. All products must meet or exceed rigid
quality control testing specifications. The Companys Garden Grove facility is registered as a manufacturer of medical devices and a
licensed biological manufacturer with the Food and Drug Administration, or FDA. To comply with FDA
requirements, the Company must manufacture its Medical Diagnostics products in conformance with the
FDAs medical device Good Manufacturing Practice regulations. The Companys existing Medical
Diagnostics products are also subject to certain pre-market notification requirements of the FDA. Patents and Proprietary Technologies Stratagene considers the protection of its proprietary technologies and products to be
important to the success of its business. Stratagene relies on a combination of patents, licenses,
trade secrets and trademarks to establish and protect its proprietary rights in its technologies
and products. Stratagenes product portfolio includes many products in which it has a proprietary
interest. As of December 31, 2004, Stratagene owned approximately 160 patents and had approximately
190 patent applications pending. Additionally, Stratagene has entered into over 60 licenses with
academic, government or commercial entities, which provide it with access to additional
technologies. To stimulate growth, Stratagene continued to invest in excess of 12% of revenues in
research and development during each of the prior two years. This investment in research and
development is designed to continue an accelerated rate of new intellectual property creation. Generally, patents issued in the U.S. have a term of 17 years from the date of issue for
patents issued from applications submitted prior to June 8, 1995 and 20 years from the date of
filing of the application in the case of patents issued from applications submitted on or after
June 8, 1995. Patents in most other countries have a term of 20 years from the date of filing the
patent application. Stratagenes material patents expire at various times between 2010 and 2017. As
the publication of discoveries in the scientific and/or patent literature tends to lag behind
actual discoveries by at least several months, there may be patent applications or scientific
discoveries Stratagene is not currently aware of. Accordingly, Stratagene cannot assure you that
patents will issue from any of its patent applications or from applications licensed to it. Stratagenes success depends to a significant degree upon its ability to develop proprietary
products and technologies. It is important to Stratagenes success that it adequately protects its
intellectual property associated with these products and technologies. Stratagene intends to
continue to file patent applications as it develops new products and technologies. Patents provide
some degree of protection for Stratagenes intellectual property. However, the assertion of patent
protection involves complex legal and factual determinations and is therefore uncertain and
expensive. See Factors that May Affect Future Results  Inability to Secure and Maintain
Intellectual Property Protection for Stratagenes Products and Technologies Could Adversely Affect
Stratagenes Ability to Compete and  Intellectual Property Litigation Could Seriously Harm
Stratagenes Business. 3




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Technology Licensing Products accounting for approximately 50% of Stratagenes total revenues in 2004 were sold
pursuant to license agreements. Under these agreements, Stratagene pays royalties to the licensor
based upon a percentage of the sales of the products containing or utilizing the licensed
technology and/or intellectual property rights. Stratagene believes that its ability to license new
technologies from third parties is and will continue to be important to its ability to offer new
products. There can be no assurance that Stratagene will be able to continue to successfully identify
new technologies developed by others. Even if Stratagene is able to successfully identify new
technologies of interest, it may not be able to negotiate a license on favorable terms, or at all.
See Factors that May Affect Future Results  Failure to License New Technologies Could Impair
Stratagenes New Product Development. Some of Stratagenes licenses may not run for the life of
the applicable patent. Stratagene may not be able to renew its existing licenses on favorable
terms, or at all. If Stratagene loses its rights to patented technology, it may need to redesign
its products or it may lose a competitive advantage. Potential competitors could license
technologies that Stratagene fails to license and potentially erode its market share for certain
products. See Factors that May Affect Future Results  Stratagene May Not be able to Renew its
Existing Licenses, which Could Prevent Stratagene from Selling Some of its Products. Competition The markets for Stratagenes products are highly competitive. Stratagene expects the intensity
of competition to increase. Stratagenes principal competitors in the Research Supplies segment
consist of the following:  
    Invitrogen Corporation
    GE (Amersham Pharmacia Biotech)
    Promega Corporation
    New England Biolabs
    Qiagen
    Roche Molecular Systems
    Applera (Applied Biosystems)
    Techne
    Biorad The Companys Medical Diagnostics product lines have several different competitors. The KOVA
Microscopic Urinalysis System has significant competition from at least two national diagnostic
product manufacturing and distribution companies that market products that perform similar
functions. Management believes that the Company is the leading supplier of standardized microscopic
urinalysis systems. Pharmacia, Inc. and Diagnostic Product Corporation have products that compete with the
Companys allergy diagnostic products. Many of Stratagenes competitors have greater financial, operational and sales and marketing
resources and more experience in research and development than Stratagene. These competitors and
other companies may have developed or could in the future develop new technologies that compete
with Stratagenes products or which could render its products obsolete. See Factors that May
Affect Future Results  The Markets for Stratagenes Products are Extremely Competitive and Subject
to Rapid Technological Change and If Stratagene Fails to Compete Effectively, Its Business May
Suffer. Stratagene believes that customers in its markets display a significant amount of loyalty to
their initial supplier of a particular product. Therefore, there is a significant competitive
advantage in being the first to introduce a new product to market. Accordingly, Stratagene believes
that to compete effectively, it will need to consistently be first to market with innovative new
research products and services. See Factors that May Affect Future Results  Stratagenes Future
Success Depends on the Timely Introduction of New Products and the Acceptance of These New Products
in the Marketplace. Government Regulation Stratagenes Research Supplies products are not subject to direct governmental regulation
other than the laws and regulations generally applicable to businesses in the jurisdictions in
which it operates, including those governing the handling and disposal of hazardous wastes and
other environmental matters. Stratagenes research and development activities involve the
controlled use of small amounts of hazardous materials, chemicals and radioactive compounds.
Although Stratagene believes that its safety procedures for handling and disposing of such
materials comply with applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an accident, Stratagene could
be held liable for resulting damages. Any such liability could have a material adverse effect on
Stratagene. However, Stratagene does not expect that compliance 4




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with the governmental regulations to which it is subject will have a material effect on its
capital expenditures, earnings or competitive position. Stratagenes Medical Diagnostics products are indirectly affected by government regulations
directed towards containing the cost of medical services and limiting the amount of reimbursement
to service providers. These types of regulations, which are applicable to both domestic and
international markets, will tend to limit growth rates in the Companys target markets for these
products. The Companys products, including the HY-TEC automated diagnostic system, are designed to
provide a cost effective solution to service providers, thereby aiding in the cost containment
efforts. However, the Company cannot predict the long-term effect on revenue growth resulting from
these regulations. The Companys Garden Grove facility is registered as a manufacturer of medical devices and a
licensed biological manufacturer with the FDA. To comply with FDA requirements, the Company must
manufacture its products in conformance with the FDAs medical device Good Manufacturing Practice
regulations. The Companys existing Medical Diagnostics products are also subject to certain
pre-market notification requirements of the FDA. The receipt, use, and disposal of radioactive materials are subject to licensing requirements
of the Nuclear Regulatory Commission, or NRC. The Company holds a radioactive materials license
from the NRC for its radioactive labeling activities and its facilities are inspected periodically
by the NRC. The Company would be adversely affected if it were unable to maintain its governmental
licenses or continue to comply with applicable federal and state regulations, but the Company does
not expect this to occur. The Company cannot predict whether future changes in government
regulations might substantially increase compliance costs, adversely affect the time required to
develop and introduce products, or limit or preclude the sale of its new products. Employees As of December 31, 2004, Stratagene employed 467 persons, of whom 55 hold Ph.D. or M.D.
degrees. As of that date, 65 employees were engaged in research and development, 112 in sales and
marketing, 220 in manufacturing and 70 in supporting business development, information services,
intellectual property, legal, finance, human resources and other functions. None of Stratagenes
employees are covered by collective bargaining agreements and Stratagene believes that it maintains
good relations with its employees. Available Information Our Internet address is www.stratagene.com. We make available free of charge through our
Internet web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission. 
 Item 2. Properties At December 31, 2004, the Company had the following facilities: Owned Facilities  
    Stratagene owns approximately 42 contiguous acres in the Austin, Texas area, where
during 1998 and 1999 it constructed an 85,000 square foot facility to support product
manufacturing activities, warehousing and distribution of its Research Supplies products.
    Stratagene also owns an approximately 6,000 square foot facility in Jackson Hole,
Wyoming, operated exclusively for research and development activities. Leased Facilities  
    San Diego, California  This facility is approximately 47,000 square feet and serves as
the Companys headquarters, as well as its base for marketing and product support
operations and research and development activities. This lease expires in September 2008
and Stratagene has the right to renew this lease for an additional five-year period. 5




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
    Garden Grove, California  This approximately 76,000 square foot facility is where the
Company manufactures its Medical Diagnostics products. The lease has a ten-year term and
expires in December 2007.
    Amsterdam, the Netherlands  This facility is approximately 7,300 square feet and
supports European sales and distribution of the Companys Research Supplies products. The
lease expires in August 2007.
    Ontario, Canada  This facility is approximately 2,200 square feet and supports research
and development. This lease expires in September 2005.
    Tokyo, Japan  This location has a small facility to support new sales and distribution
channels in Asia, as well as a warehouse. The leases for this facility cover approximately
2,500 square feet of space and expire in August 2006 and August 2007, respectively.
    Kassel, Germany  This facility is approximately 12,900 square feet and is used for
packaging, warehousing, and distributing the Companys Medical Diagnostics products. This
lease expires in March 2007.
    Edinburgh, Scotland  This facility is approximately 7,000 square feet and supports
research and development, manufacturing, warehousing, and distributing the Companys
Medical Diagnostics products. This lease expires in September 2006. In managements opinion, the Companys facilities and equipment are adequately maintained, in
good operating condition and adequate for the Companys present needs. The Company upgrades and
modernizes its facilities and equipment and expands its facilities as necessary to meet customer
and regulatory requirements. 
 Item 3. Legal Proceedings 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. Information on the most significant of these matters follows. 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 (1) that Stratagene willfully infringed
United States patent no. 4,981,797 for making, using and selling competent E. colicell products
and (2) 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 6




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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. This action is currently stayed pending
resolution of the Takara Bio litigation on the same patent, described below. Invitrogen has also
sought 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 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. The
partiesentered into a joint stipulation, effective as of December 1, 2004, to stay the
proceedings to continue to pursue settlement of this action. No trial date is currently set. Third Wave Technologies In September 2004, Stratagene was sued by Third Wave Technologies, Inc. in the United States
District Court for the Western District of Wisconsin. The complaint alleges that Stratagene
infringes United States patent nos. 6,348,314 and 6,090,543, and has induced or contributed to
infringement of the patents-in-suit, by making, using, importing, offering for sale or selling
assays employing cleavage of nucleic acids. Third Wave seeks a preliminary and permanent
injunction, monetary damages (compensatory and enhanced), and recovery of its attorneys fees and
costs. In October 2004, Stratagene filed its answer to the complaint responding that it does not
infringe a valid or enforceable claim of either patent. Stratagene has also asserted affirmative
defenses, including invalidity and unenforceability, and counterclaims of invalidity and
non-infringement. Stratagene is seeking an award of its fees and costs incurred in defending
itself in this action. Applera Corporation In November 2004, Stratagene received notice of a patent infringement suit filed by Applera
Corporation against it and other parties in the United States District Court for the District of
Connecticut for alleged infringement of U.S. patent no. 6,814,934. The Stratagene products alleged
to infringe are the Mx4000 and Mx3000P instruments and certain related reagents. In December 2004,
Stratagene filed its answer to the complaint responding that it does not infringe, directly or
indirectly, any valid and enforceable claim of the 934 patent and asserting related counterclaims
of invalidity and non-infringement. An estimate of the possible loss or range of loss cannot be
made at this time and Stratagene is unable to determine whether the outcome of the litigation could
have a material impact on its results of operations or financial condition in any future period. Ariadne
Genomics In
March 2005, the Company filed a demand for arbitration against
Ariadne Genomics for declaratory relief and damages relating to the
Exclusive Marketing and Distribution Agreement (the "Agreement")
between the parties. In particular, Stratagene seeks to confirm that
it holds the exclusive right to market, sell and distribute the
software products covered by the Agreement and all upgrades thereof
in any country or territory in the world, except Japan, for the
duration of the term of the Agreement.  Further, Stratagene seeks to
confirm that it is the party entitled to ownership and use of the
trademark "Pathway Assist" or, alternatively, that neither party may
use that name.  The matter is currently pending before the American
Arbitration Association of San Diego, California; the respondent has
not yet filed an answering statement or any cross claims. Other Legal Matters Pursuant to the terms of a litigation settlement in 2002, Stratagene is entitled to receive
35,290 shares of a European company. Stratagene received 11,763 shares in August 2004 and an
additional 11,764 shares in September 2004. These shares were sold and converted into cash upon
receipt, resulting in a gain of approximately $664,000 in other income during the quarter ended
September 30, 2004. Because of uncertainties in the collectibility of the remaining 11,763 shares,
the Company has not recorded any gain related to these remaining shares as of December 31, 2004. 
 Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of the fiscal year ended December 31, 2004, there were no matters
submitted to a vote of security holders. 7




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##### Table of Contents



PART II. 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Market Price of Common Stock Stratagenes common stock trades on The Nasdaq Stock Markets National Market under the symbol
STGN. The following table sets forth the range of high and low trading prices for the common stock
for the periods indicated as reported on the Nasdaq National Market. Stratagenes common stock did
not begin trading on the Nasdaq National Market until June 3, 2004, therefore, there is no
information provided for thefirst quarter of 2004. The prices do not include retail
markups, markdowns, or commissions. Year Ended December 31, 2004
    
    High
    
    
    Low2nd Quarter (commencing June 3, 2004)
    
    $
    12.00
    
    
    $
    7.513rd Quarter
    
    $
    8.53
    
    
    $
    5.904th Quarter
    
    $
    8.10
    
    
    $
    6.00
 On
March 24, 2005, the last reported sale of the Companys common stock on the Nasdaq National
Market was $8.05. There were 891 stockholders of record as of
March 24, 2005 with 22,037,743 shares
outstanding. No dividends have been paid to Stratagene stockholders during the past five years,
and the Company has no current intentions of paying cash dividends in the foreseeable future. The
Companys credit facilities also restrict the payment of dividends. Prior to June 2, 2004, the
Companys financials were presented on a combined basis with BioCrest Holdings, LLC, or BCH, since
BCH was in common control with Stratagene and substantially all of the BCH membership units were
held by certain Stratagene shareholders. The members of BCH did receive distributions. However,
since Stratagene acquired the BCH assets on June 2, 2004, no further distributions have been made. 
 Item 6. Selected Financial Data The following selected historical consolidated financial data as of and for the fiscal years
ended December 31, 2000, 2001, 2002, 2003 and 2004, presented below under the captions Operating
Results and Financial Position, have been derived from our audited consolidated financial
statements as of those dates and for those periods. The selected historical consolidated financial
data and notes should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial statements. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(a)(In thousands, except per share data)Operating Results(d)Product sales
    
    $
    84,813
    
    
    $
    69,703
    
    
    $
    64,512
    
    
    $
    59,955
    
    
    $
    54,979Net income
    
    
    7,438
    
    
    
    3,252
    
    
    
    505
    
    
    
    731
    
    
    
    1,984Basic earnings per share
    
    
    0.39
    
    
    
    0.21
    
    
    
    0.03
    
    
    
    0.04
    
    
    
    0.13Diluted earnings per share
    
    
    0.39
    
    
    
    0.21
    
    
    
    0.03
    
    
    
    0.04
    
    
    
    0.13Weighted average shares outstanding  basic
    
    
    19,308
    
    
    
    15,633
    
    
    
    15,634
    
    
    
    15,640
    
    
    
    15,594Weighted average shares outstanding  diluted
    
    
    19,313
    
    
    
    15,633
    
    
    
    15,634
    
    
    
    15,640
    
    
    
    15,838
 Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Financial PositionWorking capital
    
    $
    17,899
    
    
    $
    9,485
    
    
    $
    6,172
    
    
    $
    6,922
    
    
    $
    5,664Net property and equipment
    
    
    12,112
    
    
    
    10,321
    
    
    
    11,186
    
    
    
    11,583
    
    
    
    12,474Total assets(b)
    
    
    80,332
    
    
    
    38,588
    
    
    
    34,198
    
    
    
    34,229
    
    
    
    33,525Total debt
    
    
    9,707
    
    
    
    30,381
    
    
    
    30,469
    
    
    
    31,411
    
    
    
    32,404Total stockholders equity (deficit) (c)
    
    
    55,160
    
    
    
    (5,947
    )
    
    
    (8,248
    )
    
    
    (7,306
    )
    
    
    (7,637
    )
   (a)
    
    2000 net income includes credits of $584,307 in stock compensation charges in connection
with phantom stock rights and phantom stock option rights.(b)
    
    Includes goodwill of approximately $27,234,000 resulting from the merger with Hycor in June
2004.(c)
    
    Includes distributions to BCH members of $476,280, $544,707, $809,909, $400,000, and $400,000
for the years ended December 31, 2004 through 2000, respectively. Stratagene did not pay any
dividends during these periods. 8




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(d)
    
    Earnings per share information for the years ended December 31, 2000 through 2003 has been
calculated assuming the acquisition of substantially all of the assets of BioCrest by
Stratagene had occurred at the beginning of the first period presented, by dividing the
respective net income by the weighted average shares of Stratagene common stock for the
respective period. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Result of Operations The following information should be read in conjunction with the financial statements and the
related notes included in Item 8 of Part II of this Annual Report onForm 10-Kand with the
financial statements. The financial information for Stratagene includes the accounts and balances
of Stratagene Corporation and subsidiaries on a consolidated basis, and includes the results of
operations of Hycor Biomedical Inc. and subsidiaries since Stratagenes acquisition of Hycor on
June 2, 2004. This Managements Discussion and Analysis of Financial Condition and Results of Operations
and other sections of this Annual Report onForm 10-Kcontain forward-looking statements and
include assumptions concerning the Companys operations, future results and prospects. These
forward-looking statements are based on current expectations and are subject to a number of risks,
uncertainties and other factors. The Companys actual results could differ materially from those
expressed in or implied by these forward-looking statements as a result of various factors,
including those set forth below under the caption Factors that May Affect Future Results. The following discussion should be read in conjunction with the consolidated financial
statements and notes thereto. Overview Stratagene develops and manufactures biological products and instruments designed to improve
the speed and accuracy of life sciences research and medical diagnosis. Stratagene markets its
products to researchers at academic and government institutions and pharmaceutical, biotechnology
and industrial companies, in the U.S. and internationally. These researchers use Stratagenes
products to identify genes and proteins, study how cells are regulated by genes and proteins,
determine the molecular mechanisms of health and disease, search for new drug therapies, develop
diagnostic tests, and test the safety of compounds used in food and pharmaceuticals. Stratagene engages in business activity in two operating segments: Research Supplies and
Medical Diagnostics. The Company has marketed and sold its Research Supplies products for over 20
years, while the Medical Diagnostics products are a new addition to Stratagenes product portfolio
as a result of the merger with Hycor Biomedical Inc. in June 2004. 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, 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 has been recognized as a tax-free reorganization. Stratagene
filed a registration statement on Form S-4 (No. 333-109420) and related amendments in connection
with the transaction, which registration statement was declared effective by the Securities and
Exchange Commission on April 29, 2004. Stratagene incurred merger-related costs of approximately
$1.7 million, which were capitalized as a component of the purchase price. BCH Asset Acquisition Concurrently with the closing of the Hycor merger, Stratagene acquired substantially all of
the assets of BCH, including BCHs interests in its subsidiaries. In exchange, Stratagene forgave
all of the outstanding intercompany indebtedness owed by BCH and its subsidiaries to Stratagene of
approximately $5.4 million and assumed all of the other outstanding liabilities of BCH and its
subsidiaries of approximately $0.8 million. Because Stratagene and BCH are under common control,
with substantially all of the BCH membership units held by certain Stratagene shareholders, the
acquisition of BCH was recorded on a historical cost basis. As such, there was no adjustment of
BCHs assets and liabilities to fair value and no goodwill resulting from the purchase. As of
and for the year ended December 31, 2004, Stratagenes financial statements are presented on a
consolidated basis, which represents a change in reporting entity under Accounting Principles Board
Opinion 20, Accounting Changes. Previously combined statements are now presented on a consolidated
basis as a result of the transaction. There is no change to income for previous periods presented
on a combined basis. For income tax purposes, this transaction is considered a taxable pooling. The
financial statements reflect net deferred tax assets of $875,000 for differences between the tax
and book bases of assets and liabilities acquired by Stratagene. Prior to the acquisition date, Stratagene presented its financial statements on a
combined basis with BCH. BCH was a limited 9




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liability company treated as a partnership for income tax purposes; therefore, any related
income tax obligations were the responsibility of the members of BCH. As a result, the operations
of BCH did not reflect a provision for income taxes in the combined financial statements. Beginning
on June 2, 2004, the consolidated results of Stratagene, which includes the results of BCH,
includes a provision for income taxes. As part of the acquisition of BCH, Stratagene acquired BCHs interests in its subsidiaries,
which include Phenogenex, LLC, or Phenogenex, Iobion Informatics, LLC and subsidiaries, which the
Company refers to collectively as Iobion, and an investment in the joint venture consisting of a 49%
interest in a limited partnership that operates a research lab. The investment in a joint venture
is accounted for under the equity method. At the time of the acquisition, Stratagene owned 100% of Phenogenex and approximately 78% of
Iobion. The remaining 22% interest in Iobion was held by two individuals, one of which is now an
employee of Iobion and the other is a consultant to the Company. In October 2004, the Company
purchased the remaining 22% outstanding membership interests in Iobion owned by these individuals.
As a result of the purchase of these minority interests, Stratagene now owns 100% of Iobion. Total
cash consideration of $330,000 was paid and was recorded to intangible assets based on the fair
value of the assets and liabilities acquired. Basis of Presentation The financial information of the Company has been presented on a consolidated basis, and
includes the results of operations of Hycor Biomedical Inc. and subsidiaries since Hycor was
acquired by the Company on June 2, 2004. The financial information also includes the results of
operations of BCH, whose assets were acquired by the Company on June 2, 2004 and accordingly is
presented on a consolidated basis for all periods (See Note 3 to financial statements). Critical Accounting Policies and Estimates The Companys consolidated 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 consolidated financial statements and disclosures made in the accompanying
notes. Actual results could differ from those estimates. Revenue Recognition Revenue from research supplies, diagnostic and basic instrumentation product sales is
recognized under the provisions of Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition,
which is generally when products are shipped, title has transferred and risk of loss has passed. In
accordance with Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended
by SOP 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. The following table summarizes the types of deferred revenue and the timing of when that
revenue is recognized: 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.
 10




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The following table provides the percentage of the ending balance in deferred revenue that each
type of deferred revenue represents as of December 31 for each year presented: Type of deferred revenue
    
    2004
    
    2003Extended warranty, installation or maintenance agreement
    
    
    49
    %
    
    
    81
    %License agreements
    
    
    51
    %
    
    
    19
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 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. 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 products sold at the time
of such determination. Likewise, if Stratagenes inventory is determined to be undervalued, it may
have over-reported its cost of products 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 attempts 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 Statement of
Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes. Long-lived Assets The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 142,
Goodwill and Intangibles,and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.These Statements require that long-lived assets and certain identifiable intangible assets
be reviewed annually for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to the future net undiscounted cash
flows expected to be generated by the asset. With the acquisition of Hycor in the second quarter of
2004, Stratagene has substantial amortizable and non-amortizable long-lived assets (including
goodwill) that are reviewed for impairment quarterly and when there is an indication that the
carrying value of an asset may not be recoverable. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amounts of the
assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Royalties 11




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Stratagene enters into license agreements in the ordinary course of its business, which
require royalty payments based on specified product sales. These agreements cover the majority of
Stratagenes products. Since mid-2003, Stratagene has withheld payments to a license holder while
Stratagene evaluates a possible overpayment in the royalties paid in prior periods. Stratagene has
continued to record the estimated quarterly royalty payable under the patent license agreement and
reports this amount to the license holder. Management believes the royalty payments accrued are
determined in accordance with the patent license agreement. However, the Companys calculations of
royalty payments are subject to review by the license holder. Therefore, Stratagenes financial
position or results of operations could be materially affected if the license holder later
determines that the royalty calculation differs significantly from the amounts recorded by
Stratagene. As of December 31, 2004, the amount of accrued and unpaid royalties related to this
patent license agreement was $4.1 million. The patent underlying this royalty obligation expires in
the United States in March of 2005. The corresponding foreign patents will expire in 2006 and 2007.
Once the patents expire, Stratagene will no longer be required to pay royalties on future product
sales related to these PCR process patents, which will result in an approximately $450,000 per
quarter reduction in royalty expense beginning in the second quarter of 2005 and an additional
$150,000 reduction beginning in the second quarter of 2006. The Company anticipates that this
decrease in royalty expense will be partially offset by decreases in the average unit selling price
of products using the patented technology following the expiration of the patents. Warranties Stratagene warrants certain equipment against defects in workmanship or materials for a period
of one year from the date of purchase. Upon shipment of equipment sold that includes a warranty,
Stratagene establishes, as part of cost of products 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 and repair rates that
it has in the past. A significant increase in product return and repair rates could have a material
adverse impact on operating results for the period or periods in which such items materialize. Derivative Financial Instruments Stratagene accounts for derivative financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, and related literature,
which we refer to collectively 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 consolidated income statements. Research and Development Stratagene focuses its research and development efforts on developing products that use
innovative technologies in both the Research Supplies and Medical Diagnostics product lines.
Research and development costs are expensed as incurred. For the years ended December 31, 2004,
2003 and 2002, Stratagenes research and development expenses totaled approximately $10.8 million,
$10.5 million and $10.7 million, respectively, and it intends to spend between 12% and 14% of its
revenues on research and development activities for at least the next few years. 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 cover
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. 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. 12




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Results of Operations Twelve months ended December 31, 2004 compared to twelve months ended December 31, 2003 Product Sales Revenue increased $15.1 million or 21.7% in 2004 compared to 2003. This increase was primarily
attributable to the Company recording seven months of Hycors diagnostics product sales of $13.4
million as a result of the merger on June 2, 2004. Also contributing to the growth were increased
sales in QPCR, Mutagenesis and Bioinformatics product sales of $8.9 million offset by declines in
older technology products of $7.0 million. Sales in 2004 were also affected by the weakening dollar
resulting in a positive foreign exchange impact to foreign sales of $1.7 million, or 10%, and a
2.5% increase to total worldwide revenue when compared to 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 Gross margin decreased 1.4% from 66.8% in 2003 to 65.4% in 2004 primarily due to the blending
of the lower margin diagnostic products as a result of the merger with Hycor. In March 2005, a
patent under a significant royalty obligation will expire in the United States, reducing the
Companys royalty payments by approximately $450,000 per quarter beginning in the second quarter of
2005. The corresponding foreign patents will expire in 2006 and 2007, resulting in an additional
$150,000 per quarter reduction beginning in the second quarter of 2006. Research and Development Research and development expenses increased $0.3 million or 2.9% in 2004 compared to 2003.
This increase was due to the Company incurring seven months of Medical Diagnostics research and
development expenses of $0.9 million as a result of the merger with Hycor, offset by decreased
Research Supplies research and development expense of $0.6 million due to transitioning the Mx3000
effort from research and development to manufacturing in the third quarter of 2003 as well as
canceling certain research and development efforts. As a percentage of product sales, research and
development expenses decreased from 15.0% in 2003 to 12.7% in 2004 as a result of recognizing seven
months of Diagnostics revenue of $13.4 million in 2004 as a result of the Hycor merger. Stratagene
intends to continue spending approximately 12% to 14% of total revenues on research and development
for at least the next few years in an effort to accelerate new product introductions. Selling and Marketing Selling and marketing expenses increased $3.0 million or 20.1% in 2004 compared to 2003. As a
percentage of total revenue, selling and marketing expenses decreased slightly from 21.7% in 2003
to 21.4% in 2004. The increase in selling and marketing expenses was partially a result of
incurring $2.0 million of Hycor selling and marketing expenses during the seven month period since
the merger. Also contributing to the increase was the Companys continued build up of its Japanese
operations as well as an unfavorable foreign exchange impact of approximately $0.3 million.
Additionally, as a result of the merger with Hycor, Stratagene recorded amortizable intangible
assets related to trade names and customer contracts. These intangible assets are being amortized
to selling and marketing expenses over various periods ranging from one to five years beginning in
June of 2004. The related amortization expense included in selling and marketing was approximately
$0.2 million for the year ended December 31, 2004. Also included is approximately $53,000 of
non-cash stock compensation charges related to the amortization of unvested stock options assumed
in the Hycor merger. See Note 3 to the Companys consolidated financial statements for the year
ended December 31, 2004. General and Administrative General and administrative expenses increased by $5.3 million or 48.5% in 2004 compared to
2003. As a percentage of total revenue, general and administrative expenses increased from 15.8% in
2003 to 19.3% in 2004. The increased spending was primarily due to expenses of $2.4 million related
to bonuses Dr. Sorge received as a result of the merger with Hycor, $0.4 million of expenses
related to increased legal fees associated with patent litigation, approximately $1.0 million of
expense for additional costs related to public company oversight and seven months of general and
administrative expenses related to the Hycor operations of $1.5 million, which includes
approximately $0.2 million for the amortization of patents and non-cash stock compensation charges
related to the unvested stock options assumed in the merger with Hycor. 13




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Impairment of Long-Lived Assets Impairment of long-lived assets decreased by $49,000 or 37.2% in 2004 compared to 2003. This
expense relates to writing-off the remaining unamortized balances of patents that management
believes are not recoverable. Other Income (Expense), Net Total other income, net of expense, increased by $5.3 million or 112.0% in 2004 compared to
2003. As a result of the BCH asset acquisition, Stratagene has a 49% minority interest in a limited
partnership, which the Company refers to as the LP, that operates a research lab. On June 1, 2004,
prior to the BCH asset acquisition by the Company, the LP sold the assets related to its clinical
diagnostics business to a third party for approximately $4.5 million. The consolidated financial
statements for the year ended December 31, 2004 reflect a $1.8 million gain in equity in earnings
of joint venture for the Companys share of the realized gain on the sale of these assets. In
addition, the Company recorded $0.2 million fewer losses from its minority interest in the LP as a
result of the LPs normal operations when compared to the same period in 2003. On December 23, 2004, the Companys rights and interests in the LP were redeemed by the LP. In
return, the Company received cash consideration of approximately $1.0 million and recorded a
non-operating loss of approximately $0.2 million for the difference between the carrying basis in
the entity on December 23, 2004 and the consideration received. As a result of the redemption
transaction, the Company has rights to additional amounts realized by the LP from future royalty
streams and future clinical trial revenues. These amounts will be recorded as other non-operating
income in future periods when the amounts are known and the collection is assured. Also contributing to the net increase of other income was a reduction in interest expense of
$1.9 million in 2004 compared to 2003 resulting from the repayment of long-term debt obligations as
well as the refinancing of the Companys debt obligations in the first quarter of 2004, which
reduced the weighted average interest rate on outstanding borrowings. In addition, $9.0 million of
convertible subordinated notes were converted into shares of Stratagene common stock in connection
with the closing of the Hycor merger. The net increase in other income was also attributable to a gain of $0.7 million as a result
of payments in 2004 from a litigation settlement in 2002, as well as a decrease in foreign currency
transaction losses of $0.9 million as a result of the Companys hedging activities. Income Taxes Stratagene recorded $3.3 million of tax expense in 2004. The effective tax rate decreased from
36.7% in 2003 to 30.5% in 2004. The change in the effective tax rate was primarily a result of BCH
recording a gain in equity in earnings of a joint venture of $1.8 million related to the sale of
certain assets of the joint venture, in which BCH had a minority interest. Prior to the BCH asset
acquisition date, Stratagene and BCH presented their financial statements on a combined basis as a
result of being under common control and because substantially all the BCH membership units were
held by certain Stratagene shareholders. BCH consisted substantially of limited liability
companies that were treated as partnerships for income tax purposes; therefore, any related income
tax liabilities were the responsibility of the members of BCH. As a result, the operations of BCH
did not reflect a provision for income taxes prior to the acquisition date. The income taxes
attributable to the $1.8 million gain are the responsibility of the members of BCH and accordingly,
the consolidated financial statements do not include a provision for income taxes on this gain.
The change in the effective tax rate was offset by non-deductible foreign entity losses, for which
the company has established valuation allowances due to the uncertainty of recovery of these
foreign net operating losses. Stratagene recognizes state research and development and other credits when they are
generated. Excess credits for mature operating entities 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. Twelve months ended December 31, 2003 compared to twelve months ended December 31, 2002 Product Sales Revenue increased $5.2 million or 8.1% in 2003 compared to 2002. This growth was primarily
attributable to increases in QPCR and Mutagenesis product sales of $7.0 million offset by declines
in sales of older technology products of $4.0 million. Increased license and royalty income also
contributed $1.5 million to the revenue growth. Sales in 2003 were also affected by the weakening
dollar resulting in a positive foreign exchange impact to foreign sales of 20% and a 4% increase to
total worldwide revenue when compared to 2002. Stratagene expects that future revenue will depend
on a number of factors, including the market acceptance of new 14




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products, competitive conditions, currency fluctuations and the continued funding of customer
research budgets. Gross Margin Gross margin increased 1.8% from 65% in 2002 to 66.8% in 2003 primarily due to increased sales
of higher margin products. Research and Development Research and development expenses decreased $0.3 million or 2.4% in 2003 compared to 2002. As
a percentage of product sales, research and development expenses decreased from 16.6% in 2002 to
15.0% in 2003. The decrease resulted primarily from the cancellation of a research and development
project. Selling and Marketing Selling and marketing expenses decreased $1.6 million or 9.7% in 2003 compared to 2002. As a
percentage of total revenue, selling and marketing expenses decreased from 26.0% in 2002 to 21.7%
in 2003. The decrease in selling and marketing expenses resulted primarily from the consolidation
of instrumentation and biological sales initiatives of $1.3 million. In addition, the Company
recorded a nonrecurring expense of $0.3 million in 2002 related to stock compensation expense in
connection with the termination of an employees stock options. These savings were offset by an
unfavorable foreign exchange impact to foreign selling and marketing expenses of approximately $0.5
million. General and Administrative General and administrative expenses increased by $0.6 million or 5.3% in 2003 compared to
2002. As a percentage of total revenue, general and administrative expenses decreased from 16.2% in
2002 to 15.8% in 2003. This increase in spending was primarily due to further investment in
Stratagenes Asian operations and patent litigation. Impairment of Long-Lived Assets Impairment of long-lived assets increased by $75,000 or 132% in 2003 compared to 2002. This
expense relates to writing-off the remaining unamortized balances of patents that management
believes are not recoverable. Other Income (Expense), Net Total other income (expense), net increased in expense by $2.1 million or 82.0% in 2003
compared to 2002, as a result of increased interest expense of $0.9 million due to the interest
rate of the subordinated notes increasing from 10% to 15% in April 2003. In 2003 Stratagene also incurred increased losses on foreign currency transactions of $0.8
million as a result of its foreign currency hedging activities. Finally, Stratagene recognized a
$0.3 million reduction in the amount of income recorded from the equity in a joint venture with the
LP, which declined from income of $70,000 in 2002 to a loss of $0.2 million in 2003. The LP is a
medical reference lab. A large portion of its revenue is under contract for clinical trials and is
subject to fluctuations upon the expiration of the trials. The LPs revenue declined $0.2 million
in 2003 when compared to 2002 due to the expiration of the clinical trials, and the LP continues to
look for additional clinical trial contracts to replace those that expired. Also in 2003, the LP
incurred increased expenses in costs of product sold of $0.2 million, due to the increased cost of
test kits and lab supplies, and in sales and marketing expenses of $0.2 million as a result of
hiring a business development manager to focus on pharmaceutical sales and marketing initiatives.
Stratagenes financials reflect 49% of the LPs net income (loss). Income Taxes Stratagene recorded $1.9 million of tax expense in 2003. The effective tax rate decreased from
a 62.8% expense in 2002 to an expense of 36.7% in 2003. This decrease in the effective rate was
primarily due to BCH incurring higher expenses in 2002 due to increased investment in
bioinformatics, for which no income tax benefit can be recognized. BCH and its subsidiaries are
limited liability companies; therefore, any related income tax liabilities are the responsibility
of the members. As a result, the operations of BCH do not reflect a provision for income taxes.
Therefore, income taxes were 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. 15




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Liquidity and Capital Resources Stratagenes liquidity requirements have historically consisted of research and development
expenses, selling 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. For the twelve months ended December 31, 2004 and 2003, Stratagene generated net cash from
operating activities of $11.0 million and $7.7 million, respectively. Stratagene generated net
cash from investing activities of $4.1 million and used $2.3 million of net cash in its investing
activities for the twelve months ended December 31, 2004 and 2003, respectively. Cash acquired
related to the merger with Hycor, net of acquisition costs of $1.8 million, totaled $4.5 million
for the twelve months ended December 31, 2004. Cash distributions from a joint venture resulting
from the sale of certain assets of the joint venture and the sale of the Companys minority
interest in the joint venture totaled $2.0 million and $0 for the years ended December 31, 2004 and
2003, respectively. Capital expenditures and additions to patents for the twelve months ended
December 31, 2004 totaled $1.8 million and $1.3 million, respectively, as compared to $1.3 million
and $1.0 million, respectively, for the twelve months ended December 31, 2003. Stratagene used $12.6 million and $3.9 million in net cash for financing activities for the
twelve months ended December 31, 2004 and 2003, respectively, which included the repayment of $30.2
million and $4.9 million in debt offset by borrowings under the Companys credit facilities of
$18.0 million and $1.7 million, respectively. Based on managements review of Stratagenes accounts receivables, 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 years ended December 31, 2004 and 2003 was minimal and the allowance
decreased by approximately $0.3 million and $0.5 million, respectively. This decrease in expected
uncollectible accounts was due in part to continued collection efforts. No significant change to
future liquidity is anticipated. Collection
efforts with respect to accounts receivable provided cash of $0.9 million for the twelve months
ended December 31, 2004. For the twelve months ended December 31, 2003, strong sales of a new
instrumentation product increased accounts receivable by $1.9 million. Prepaids and other current assets provided cash of $1.5 million for the year ended December
31, 2004 due to allocation of merger related expenses to goodwill and additional paid-in capital in
connection with the Hycor merger. For the year ended December 31, 2003, prepaids and other current
assets used cash of $1.3 million as a result of expenses incurred related to the merger with Hycor. Capital expenditures for property and equipment during the twelve months ended December 31,
2004 and 2003 were approximately $1.8 million and $1.3 million, respectively. The Company
currently anticipates capital spending on property and equipment to be in the range of $1.5 million
to $2.0 million in fiscal 2005. Stratagene had cash, cash equivalents and restricted cash totaling $5.7 million and $2.7
million at December 31, 2004 and 2003, respectively, and working capital of $17.9 million and $9.5
million at December 31, 2004 and 2003, respectively. As of December 31, 2004, BioCrest Manufacturing, L.P., a consolidated subsidiary of
Stratagene, had approximately $9.7 million in total debt. This debt included approximately $5.0
million under a reducing revolving line of credit and $4.7 million in industrial revenue bonds. The obligations of BioCrest Manufacturing, L.P. under the reducing revolving line of credit
have been guaranteed by Stratagene and each of its wholly owned domestic subsidiaries. The
obligation is also generally secured by substantially all of the personal property assets of
Stratagene and each of its wholly owned domestic subsidiaries, as well as liens on the real
property and improvements related to Stratagenes Texas manufacturing facility. The reducing
revolving line of credit is also secured by a pledge of Stratagenes interest in Iobion
Informatics, LLC. Borrowings under the reducing revolving line of credit bear interest at a variable rate equal
to the one-month LIBOR rate plus 2.55%. The reducing revolving line of credit includes customary
but significant restrictions on the incurrence of additional debt, the payment of dividends,
acquisitions and capital expenditures above stated limits. The reducing revolving line of credit
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. As of December 31, 2004, the Company was not in compliance with its fixed charge coverage
ratio as a result of its election to prepay its term loan, which had a maturity date in 2006. The
Company obtained an amendment to the credit agreement subsequent to December 31, 2004, which cured
the violation. The Company was in compliance with all other covenants at December 31, 2004. 16




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The industrial revenue bonds 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 was 1.44% and 1.68% for the years ended December 31, 2004 and 2003,
respectively. Under the instrument governing the industrial revenue bonds, Stratagene was required
to make sinking fund payments of $870,000 per year through April 2004, and is required to make
sinking fund payments of $735,000 in April 2005, $240,000 per year through April 2021, and then
$175,000 in April 2022 when the bonds mature. Stratagene leases certain facilities and equipment under noncancelable operating leases, with
equipment leases expiring through January 2007 and facility leases for the Companys headquarters
in La Jolla and its offices in Garden Grove, California, Canada, the Netherlands, Germany, Scotland
and Japan expiring on various dates between September 30, 2005 and September 30, 2008. Stratagene has entered into employment agreements with certain of its officers which expire
from June 2006 to June 2007 and with salary ranges from approximately $181,000 to $450,000. These
agreements generally provide for severance benefits if the officer is terminated by Stratagene
other than for cause, as defined in the employment agreements. See Note 3 to the financial
statements for a summary of Dr. Sorges new employment agreement. 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.
At December 31, 2004, the purchase commitments covered by these various key raw materials and other
goods and services aggregate approximately $3,130,000 The following table summarizes the approximate future minimum payments under the above
contractual obligations at December 31, 2004: Payment Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsOperating leases
    
    $
    6,687,753
    
    
    $
    2,107,937
    
    
    $
    4,579,816
    
    
    
    
    
    
    
    Principal on long-term debt
    
    
    9,706,923
    
    
    
    735,000
    
    
    
    5,676,923
    
    
    $
    480,000
    
    
    $
    2,815,000Employment agreements
    
    
    1,358,753
    
    
    
    630,835
    
    
    
    727,918
    
    
    
    
    
    
    
    Other purchase commitments
    
    
    3,130,000
    
    
    
    3,130,000
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    20,883,429
    
    
    $
    6,603,772
    
    
    $
    10,985,657
    
    
    $
    480,000
    
    
    $
    2,815,000
 Assuming that long-term debt principal payments are made according to their respective
payment schedules, the future aggregate interest expense on long-term debt would be approximately
$1.3 million. Off-Balance Sheet Arrangements At December 31, 2004 and December 31, 2003, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance, variable interest or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. In addition, the Company does not engage in trading activities involving non-exchange
traded contracts. As such, the Company is not materially exposed to any financing, liquidity,
market or credit risk that could arise if it had engaged in such relationships. Other Commitments and Contingencies In connection with the closing of the Hycor merger, Stratagene entered into a new employment
agreement with the Chief Executive Officer, or the CEO, of the Company, pursuant to which, among
other things, the CEOs base annual salary was reduced from $1.1 million to $450,000, and the CEO
was granted an option to purchase 738,960 shares of Stratagene common stock at an exercise price of
$9.34 per share. The agreement provides for the CEOs base salary to be reviewed on at least an
annual basis by the compensation committee of the board of directors, which may also increase the
CEOs base salary from time to time in its discretion. It is anticipated that if the Company
establishes any general bonus program for senior executives based upon the attainment of
established goals, the CEO will be entitled to participate in such program on a basis at least
comparable to other senior executives. The CEO may also receive bonuses at the discretion of the
board of directors upon the recommendation of the compensation 17




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committee. 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. New Accounting Pronouncements Information regarding recent accounting pronouncements is contained in Note 2 to the
Consolidated Financial Statements for the year ended December 31, 2004, which note is incorporated
herein by this reference and is included as part of Item 8. Financial Statements and Supplementary
Data, to this Form 10-K. Cautionary Note Regarding Forward-Looking Statements Some of the statements in this Annual Report on Form 10-K, 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 Annual 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 include 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, potential declines in research
and development budgets or funding and the Companys ongoing ability to protect its own
intellectual property rights and to avoid violating the intellectual property rights of third
parties. Although Stratagene believes that the expectations reflected in its forward-looking statements
are reasonable, Stratagene cannot guarantee future results, events, levels of activity, performance
or achievement. Stratagene undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise,
unless required by law. Factors that May Affect Future Results It is important to carefully consider the following risks, together with other matters
described in this Form 10-K or in other documents referred to in this Form 10-K in evaluating
Stratagenes business and prospects. If any of the following risks occur, Stratagenes business,
financial condition or operating results could be harmed. In such case, the trading price of
Stratagenes common stock could decline. The risks described below are not the only risks
Stratagene faces. Additional risks not presently known to Stratagene or that Stratagene currently
deems immaterial may also impair business operations. Stratagenes future success depends on the timely introduction of new products and the
acceptance of these new products in the marketplace. Rapid technological change and frequent new product introductions are typical for the markets
Stratagene serves. Stratagenes future success will depend in large part on continuous, timely
development and introduction of new products that address evolving market requirements. Stratagene believes successful new product introductions provide a significant competitive
advantage because customers make an investment of time in selecting and learning to use new
products, and are reluctant to switch thereafter. To the extent that Stratagene fails to introduce
new and innovative products, it may lose market share to its competitors, which may be difficult to
regain. Any inability, for technological or other reasons, to successfully develop and introduce
new products could materially damage Stratagenes business. In the past Stratagene has experienced, and is likely to experience in the future, delays in
the development and introduction of products. Stratagene cannot assure you that it will keep pace
with the rapid rate of change in life sciences or medical diagnostic research, or that its new
products will adequately meet the requirements of the marketplace or achieve market acceptance.
Some of the factors affecting market acceptance of new products include: 18




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
    availability, quality and price relative to competitive products;
    the timing of introduction of the product relative to competitive products;
    customers opinions of the products utility;
    citation of the product in published research; and
    general trends in life sciences and medical diagnostics research. The markets for Stratagenes products are extremely competitive and subject to rapid
technological change and if Stratagene fails to compete effectively, its business may suffer. The markets for Stratagenes products are highly competitive. Stratagene competes with many
other suppliers of life sciences research products and medical diagnostics products. Many of
Stratagenes competitors have greater financial, operational and sales and marketing resources and
more experience in research and development than it does. These and other companies may have
developed or could in the future develop new technologies that compete with Stratagenes products
or even render Stratagenes products obsolete. Competition in Stratagenes markets is primarily
driven by:  
    product performance, features and reliability;
    price;
    timing of product introductions;
    ability to develop, maintain and protect proprietary products and technologies;
    sales and distribution capabilities;
    technical support and service; and
    breadth of product line. If a competitor develops or acquires superior technology or cost-effective alternatives to
Stratagenes products, Stratagenes business, financial condition and results of operations could
be materially adversely affected. Stratagenes competitors have in the past and may in the future compete by lowering prices.
Stratagene may respond by lowering its prices, which could reduce revenues and profits. Conversely,
failure to anticipate and respond to price competition may damage Stratagenes market share. In
addition, Stratagene must continually adapt to new marketing and distribution trends in order to
compete effectively. Stratagene believes that customers in its markets display a significant amount of loyalty to
their initial supplier of a particular product. Therefore, it may be difficult to make sales to
customers who have previously purchased products from Stratagenes competitors. To the extent
Stratagene is unable to be the first to develop and supply new products, its competitive position
may suffer. If Stratagenes existing license agreements are terminated, Stratagene may be prevented from
selling some of its products. Approximately 50% and 58% of Stratagenes revenue in 2004 and 2003, respectively, came from
products sold pursuant to license agreements. If Stratagene loses the rights to a patented
technology, it may be forced to stop selling some of its products or redesign its products and may
lose significant sources of revenues. In addition, potential competitors could license technologies
that Stratagene fails to license. The loss of a significant license could have a material adverse
effect on Stratagenes business. Stratagenes significant licenses include a license from Hoffman La Roche and Roche Molecular
Systems, Inc., which we refer to collectively as Roche, which includes rights to use PCR and Taq
polymerase in its research efforts and rights to manufacture, promote and sell products for PCR for
the research field of use, and a license from Applied Biosystems, which grants rights to promote
and sell thermal cyclers and temperature cycling instruments as authorized thermal cyclers for the
automated performance of PCR for the research field of use. Each of these license agreements
terminates upon the expiration of the last to expire underlying patent in each agreement. The
agreement with Roche is subject to early termination in the event of the bankruptcy or insolvency
of Stratagene. 19




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Roche may also terminate the agreement (1) for cause or (2) if a third party which is licensed
by Roche to manufacture products for use in PCR-based human diagnostics testing acquires more than
50% of the voting stock of the Stratagene subsidiary party to the agreement. Since mid-2003,
Stratagene has withheld royalty payments to Roche under this license agreement while it evaluates a
possible overpayment in the royalties paid in prior periods. Stratagene has continued to record the
estimated quarterly royalty payable under the patent license agreement and reports this amount to
Roche. Management believes that the royalties calculated and accrued are determined in accordance
with the terms of the patent license agreement. However, Stratagenes calculations of the royalties
are subject to review by Roche. Stratagenes financial position or results of operations could be
materially affected if the parties determine that the royalty calculation differs significantly
from the amounts recorded by Stratagene. Additionally, there can be no assurances that Stratagene
will recover any overpayment in royalties paid in prior periods. The PCR process patents underlying
this royalty obligation expire in the United States in March of 2005. The corresponding foreign
patents will expire in 2006 and 2007. Once the patents expire, Stratagene will no longer be
required to pay royalties on future product sales related to these PCR process patents. The
agreement with Applied Biosystems is subject to early termination in the event that all claims of
the underlying patents in the agreement are unenforceable or invalid. Applied Biosystems may also
terminate the license agreement (1) for cause, (2) upon a change in control of the Stratagene
subsidiary party to the license agreement or (3) in the event of the bankruptcy or insolvency of
Stratagene. Stratagene does not anticipate that either of these license agreements will terminate
in the near future. Stratagenes licenses also typically subject it to various commercialization, sublicensing and
other obligations. If Stratagene fails to comply with these requirements, it could lose important
rights under a license, such as the right to exclusivity in a specified market. In some cases,
Stratagene could also lose all rights under a license. In addition, the licensor could lose patent
protection for a number of reasons, including invalidity of the licensed patent. Stratagene
typically does not receive significant indemnification from a licensor against third party claims
of intellectual property infringement. Because Stratagenes quarterly revenue and operating results may vary significantly in future
periods, its stock price may decline. Stratagenes operating results have fluctuated in the past and may continue to fluctuate in
the future. In particular, Stratagene has historically seen slower sales in the fourth quarter as a
result of reduced purchases by academic and research institutions as well as the closing of such
facilities during the holiday period. Stratagenes revenues are unpredictable and may also
fluctuate due to changes in demand for its products, delays in development and introduction of new
products and new product introductions by Stratagenes competitors. A high proportion of
Stratagenes costs are fixed, due in part to significant research and development costs. Thus,
small declines in revenue could disproportionately affect operating results in a quarter and the
price of the Stratagene common stock may decline. Moreover, a variety of factors may affect
Stratagenes ability to make accurate forecasts regarding its operating results. Because of these
factors, Stratagenes operating results in one or more future quarters may fail to meet the
expectations of securities analysts or investors, which could also cause its stock price to
decline. Stratagenes founder, chairman of its board of directors, chief executive officer and
president exerts considerable control over it. As of December 31, 2004, Joseph A. Sorge, M.D., the founder, chairman of the board of
directors, chief executive officer and president of Stratagene, beneficially owned approximately
62% of Stratagenes outstanding common stock. As a result, Dr. Sorge controls all matters requiring
approval of its stockholders, including the election of directors and the approval of mergers or
other business combinations. Such a concentration of ownership may have the effect of delaying or
preventing transactions resulting in a change of control of Stratagene, including transactions
where stockholders might otherwise receive a premium for their shares over then current market
prices. Stratagene depends substantially on key employees, and the loss of the services of any of its
key employees or the failure to hire qualified employees could seriously damage Stratagenes
business. To a large degree, Stratagene is dependent on its founder, chairman of its board of directors,
chief executive officer and president, Joseph A. Sorge, M.D. Dr. Sorge has significant expertise in
the life sciences research market and has been instrumental in establishing and executing
Stratagenes business plan. The loss of Dr. Sorges services could have a material adverse effect
on Stratagenes business. Dr. Sorge has an existing employment agreement with Stratagene which
expires in June 2007, subject to automatic one year renewals unless either party provides timely
notice of non-renewal. Because Stratagenes products and services are highly technical in nature, only highly
qualified and trained scientists have the necessary skills to develop and market Stratagenes
products and provide Stratagenes services. As such, Stratagenes future success also will depend
in large part on the continued service of its key scientific and management personnel, including
research and development, customer service, marketing and sales staffs. Stratagene faces intense
competition for these professionals from its 20




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competitors, its customers and other companies throughout its industry. Stratagene does not
generally enter into employment agreements requiring these employees to continue in its employment
for any period of time. Any failure on Stratagenes part to hire, train and retain a sufficient
number of qualified professionals could seriously damage its business. Stratagenes indebtedness could limit its ability to operate its business, obtain additional
financing and pursue other business opportunities. As of December 31, 2004, Stratagene had approximately $9.7 million of outstanding
indebtedness, including approximately $5.0 million of borrowings under its reducing revolving line
of credit and approximately $4.7 million in principal amount of industrial revenue bonds.
Stratagenes indebtedness could have negative consequences for Stratagene, including the following:  
    Stratagene will need a substantial portion of its cash flow to pay the principal and
interest on its indebtedness, including indebtedness it may incur in the future;
    payments of Stratagenes indebtedness will reduce the funds that would otherwise be
available for its operations and future business opportunities;
    Stratagene may have greater debt burdens than its competitors, which may place
Stratagene at a competitive disadvantage;
    Stratagenes debt level may make it more vulnerable than its competitors to a downturn
in its business or the economy generally; and
    there would be a material adverse effect on Stratagenes business and financial
condition if Stratagene is unable to service its indebtedness or obtain additional
financing. Stratagene may not have financing for future capital requirements, which may prevent it from
addressing gaps in its product offerings or improving its technology. Although historically Stratagenes cash flow from operations has been sufficient to satisfy
working capital, capital expenditure and research and development requirements, in the future
Stratagene may need to incur additional debt or issue equity in order to fund these requirements as
well as to make acquisitions and other investments. Stratagenes senior credit facility restricts
the Companys ability to incur new debt. If Stratagene cannot obtain additional debt or equity
financing on acceptable terms or is limited with respect to incurring additional debt or issuing
equity, Stratagene may be unable to address gaps in its product offerings or improve its
technology, particularly through strategic acquisitions or investments. Stratagene may need to raise substantial amounts of money to fund a variety of future
activities integral to the development of its business, including but not limited to the following:  
    for research and development to successfully develop additional products;
    to file and prosecute patent applications and defend and assert patents to protect its technology;
    to retain qualified employees, particularly in light of intense competition for qualified scientists;
    to manufacture additional products itself or through third parties; and
    to acquire new technologies, products or companies. If Stratagene raises funds through the issuance of debt or equity, any debt securities or
preferred stock issued will have rights, preferences and privileges senior to those of holders of
the Stratagene common stock in the event of a liquidation. The terms of the debt securities may
impose restrictions on Stratagenes operations. If Stratagene raises funds through the issuance of
equity, this issuance would dilute the ownership interest of existing stockholders in Stratagene.
Stratagene expects to fund future acquisitions in part by issuing additional equity. If the price
of Stratagenes equity is low or volatile, it may not be able to acquire other companies. Inability to secure and maintain intellectual property protection for its products and
technologies could adversely affect Stratagenes ability to compete. Stratagenes success depends to a significant degree upon its ability to develop, maintain and
protect proprietary products and technologies. Stratagene files patent applications in the United
States and selectively in foreign countries as part of its strategy to protect its proprietary
products and technologies. However, patents provide only limited protection of Stratagenes
intellectual property. The assertion of patent protection involves complex legal and factual
determinations and is therefore uncertain and expensive. Stratagene cannot assure you that patents
will be granted with respect to any of its patent applications, that the scope of any of its issued
patents will be sufficiently broad to offer meaningful protection or that Stratagene will develop
additional proprietary 21




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technologies that are patentable. Stratagenes issued patents or patents licensed to it could
be successfully challenged, invalidated or circumvented so that Stratagenes patent rights would
not create an effective competitive barrier. The loss of a significant patent or the failure of a
patent to issue from a pending patent application that Stratagene considers significant could have
a material adverse effect on Stratagenes business. The laws governing the scope of patent coverage in the United States and abroad continue to
evolve, particularly in the life sciences area. The laws of some foreign countries may not protect
Stratagenes intellectual property rights to the same extent as United States laws. Stratagene
holds patents only in selected countries. Therefore, third parties can make, use and sell products
covered by its patents in some countries in which Stratagene does not have patent protection. Stratagene gives its customers the right to use some of its products under label licenses that
are for research purposes only. These licenses could be contested and no assurances can be given
that Stratagene would either be aware of an unauthorized use or be able to enforce these
restrictions in a cost-effective manner. Stratagene attempts to protect its trade secrets by entering into confidentiality agreements
with employees, consultants and third parties. However, these agreements might be breached and, if
they are, there may not be an adequate remedy available to Stratagene. Also, Stratagenes trade
secrets might become known to a third party through means other than by breach of its
confidentiality agreements, or they could be independently developed by Stratagenes competitors.
If Stratagenes trade secrets become known, its business and competitive position could be
adversely affected. Intellectual property litigation could seriously harm Stratagenes business. Litigation involving patents and other intellectual property rights is pervasive in the
biotechnology industry. Stratagene is aware that patents have been applied for and in some cases
issued to others claiming technologies that are closely related to its own technology. As a result,
Stratagene periodically receives notices of potential infringement of patents held by others.
Although Stratagene has generally been successful in resolving these types of claims, it may not be
able to do so in the future. While Stratagene takes steps to avoid infringing the patents of other
parties, Stratagene cannot assure investors that it will not be found to infringe these patents or
other proprietary rights of third parties. In the event of an intellectual property dispute, Stratagene may become involved in litigation
or arbitration. Litigation could involve proceedings in court as well as in the United States
Patent and Trademark Office or the International Trade Commission. Intellectual property litigation
can be extremely expensive and may divert managements time and resources away from Stratagenes
operations. Moreover, the outcome of any such litigation is inherently uncertain. Even a successful
outcome may take years to achieve and the costs associated with such litigation, in terms of
dollars spent and diversion of management time and resources, could seriously harm its business. Stratagene has been involved in patent disputes with third parties, a number of which remain
unresolved. For example, Stratagene is involved in litigation with Invitrogen Corporation regarding
patents relating to specified reverse transcriptase enzymes and certain competent cell products.
Stratagene is also involved in litigation with Third Wave Technologies regarding patents relating
to certain assays for detection of nucleic acids. Stratagene is also involved in litigation with
Applera Corporation regarding a patent relating to real-time PCR instrumentation and certain
related reagents. Stratagene is also involved in litigation with Invitrogen Corporation and Takara
Bio regarding one of Stratagenes patents relating to polymerase blend products. As part of the
patent infringement claims in these matters, the litigants are seeking monetary damages, injunctive
relief and attorneys fees. At the present time, Stratagene is unable to quantify the probability
or extent of any potential monetary recovery or exposure with respect to these matters. If a third party claims an intellectual property right to technology Stratagene uses,
Stratagene may be forced to discontinue an important product or product line, alter its products
and processes, pay license fees, pay damages for past infringement or cease certain activities.
Under these circumstances, Stratagene may attempt to obtain a license to this intellectual
property, but it may not be able to do so on commercially reasonable terms, or at all. Stratagene may spend resources on research and development projects without being able to
achieve an adequate return, if any, on its investment. It is important for Stratagene to continue to invest heavily in research and development.
However, because Stratagene competes in a relatively new and constantly evolving market, it may
pursue research and development projects that do not result in viable commercial products. In
addition, Stratagene has in the past, and may in the future, terminate research efforts in a
particular area after it has made substantial initial funding commitments in that area. Any failure
to translate research and development expenditures into successful new product introductions could
have an adverse effect on Stratagenes business. 22




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If Stratagene fails to manage its growth effectively, its business could suffer. A significant portion of Stratagenes historical revenue growth is attributable to internal
product development. Stratagene, being one of the smaller companies in its industry, is
particularly dependent on internal invention and product development to replace older products in
its product line. Stratagenes ability to achieve its expansion objectives and to manage its growth
effectively depends upon a variety of factors, including Stratagenes ability to internally develop
products, to attract and retain skilled employees, to successfully position and market its products
and to identify and acquire technologies and intellectual property rights from third parties. In
addition, Stratagene faces significant challenges and risks in building and managing its sales
team, including managing geographically dispersed sales efforts and adequately training its sales
people in the use and benefits of its products. To accommodate its growth and compete effectively,
Stratagene will be required to improve its information systems, create additional procedures and
controls and expand, train, motivate and manage its work force. Stratagenes future success will
depend in part on the ability of current and future management personnel to operate effectively,
both independently and as a group. Stratagene cannot be certain that its personnel, systems,
procedures and controls will be adequate to support its future operations. The price of the Stratagene common stock is expected to be volatile. The market price of the Stratagene common stock may be subject to significant fluctuations.
These fluctuations may occur, among other reasons, in response to:  
    quarterly fluctuations in Stratagenes operating and earnings per share results;
    technological innovations or new product introductions by Stratagene or its competitors;
    delays in the development and introduction of new products;
    disputes concerning patents, licenses or other proprietary rights;
    changes in earnings estimates by equity and market research analysts;
    sales of common stock by existing stockholders;
    loss of key personnel; and
    securities class actions or other litigation affecting Stratagene or other companies in its industry. Any failure to meet analysts expectations could have an adverse effect on the market price
for the Stratagene common stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to the operating performance of these
companies. In the past, following periods of volatility in the market price of a companys
securities, securities class action litigation has often been instituted against that company. If
similar litigation were instituted against Stratagene, it could result in substantial costs and a
diversion of Stratagenes managements attention and resources, which could have an adverse effect
on its business, financial condition and results of operations. In addition, Stratagene cannot
predict the extent to which investors interest in the Company will lead to a liquid trading market
in the Stratagene common stock. Future sales of currently outstanding shares of Stratagene common stock could adversely affect
Stratagenes stock price. As of December 31, 2004, Stratagene had approximately 22.0 million shares of common stock
outstanding. Of this amount, the 5,015,453 shares issued to the former Hycor stockholders in the
merger transaction with Hycor are freely tradable under the Securities Act, except for any shares
held by affiliates of Stratagene or Hycor, as the case may be, which may be sold from time to time
in accordance with the requirements of Rule 144 or Rule 145 of the Securities Act. In addition,
Stratagene has entered into a registration rights agreement with Dr. Sorge and certain of his
affiliates pursuant to which, at the request of Dr. Sorge and subject to specified conditions,
Stratagene will file a registration statement under the Securities Act covering 2,000,000 shares of
Stratagene common stock held by Dr. Sorge and specified trusts and partnerships controlled by Dr.
Sorge. Dr. Sorge and such trusts and partnerships are also entitled to register the remaining
approximately 11.3 million shares of Stratagene common stock held by them in specified situations.
The shares held by Dr. Sorge and such trusts and partnerships and the remaining shares of
Stratagene common stock held by the other stockholders of Stratagene prior to the Hycor merger may
also be sold from time to time in the public market subject to the requirements of Rule 144 under
the Securities Act. The sale by Stratagenes current stockholders of a substantial number of
shares, or the expectation that such sales may occur, could significantly reduce the market price
of the Stratagene common stock. 23




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Stratagene has also registered the shares of common stock that it may issue from time to time
under its employee benefits plans. As a result, these shares can be freely sold in the public
market upon issuance, subject to restrictions under the securities laws. If any of the Companys
stockholders cause a large number of securities to be sold in the public market, the sales could
reduce the trading price of the Stratagene common stock. These sales also could impede
Stratagenes ability to raise future capital. Reductions in research and development budgets or government funding may impact Stratagenes
sales. Fluctuations in the research and development budgets of Stratagenes customers could have a
significant effect on the demand for its products. Research and development budgets fluctuate due
to changes in available resources, spending priorities and institutional budgetary policies.
Stratagenes business could be seriously damaged by any significant decrease in research and
development expenditures by pharmaceutical and biotechnology companies, academic institutions or
government and private laboratories. A substantial portion of Stratagenes sales have been to researchers at universities,
government laboratories and private foundations whose funding is dependent upon grants from
government agencies, such as the United States National Institutes of Health. Although Stratagene
is not aware of any impending reductions in governmental grants, government funding of research and
development is subject to the political process and as a result the amount of available funding may
decrease. Stratagenes sales may be adversely affected if its customers delay purchases as a result
of uncertainties surrounding the approval of government budget proposals. A reduction in government
funding for the National Institutes of Health or other government research agencies could seriously
damage Stratagenes business. In recent years, the pharmaceutical and biotechnology industries have undergone substantial
consolidation. Further mergers or corporate consolidations in these industries could cause
Stratagene to lose existing customers and potential future customers. Pharmaceutical and
biotechnology companies have generally raised little money in the past few years, and some are low
on funds. Some of these companies have begun to reduce their research and development budgets in
recent years. It is possible that these biotechnology and pharmaceutical companies will continue to
reduce spending on research and development in the future and some companies may go out of business
entirely. In addition, health care reform and other changes in the regulatory environment affecting
these industries could have an adverse impact on research and development expenditures by
pharmaceutical and biotechnology companies, which would negatively impact Stratagenes business. Stratagenes academic customers generally receive funds from approved grants at particular
times of the year, as determined by the government. Grants have in the past been frozen for
extended periods or have otherwise become unavailable to various institutions without advance
notice. The timing of the receipt of grant funds affects the timing of purchase decisions by
Stratagenes customers and, as a result, can cause fluctuations in its sales and operating results. Failure to license new technologies could impair Stratagenes new product development. In order to meet the needs of its customers, Stratagene must develop a broad spectrum of
products. To build a product line, it is sometimes advantageous or necessary to license
technologies from third parties. As a result, Stratagene believes its ability to license new
technologies from third parties is and will continue to be important to its ability to offer new
products. Approximately 50% and 58% of Stratagenes revenues for 2004 and 2003, respectively, were
attributable to products manufactured or sold under licenses from third parties. From time to time, Stratagene is notified or becomes aware of patents held by third parties
that are related to technologies Stratagene is selling or may sell in the future. After a review of
these patents, Stratagene may attempt to obtain a license for these technologies from these third
parties. Stratagene can give no assurances that it will be able to negotiate licenses on
commercially reasonable terms, or at all. Stratagenes ability to gain access to technologies needed for new products and services
depends in part on its ability to convince inventors that it can successfully commercialize their
inventions. Stratagene can give no assurances that it will be able to continue to identify new
technologies developed by others or that it will be able to negotiate licenses on commercially
reasonable terms, or at all. Stratagene may acquire other businesses or form joint ventures that could decrease its
profitability, dilute your ownership in Stratagene, increase its debt or cause Stratagene to incur
significant expense. As part of Stratagenes business strategy, it intends to pursue acquisitions of other
complementary businesses and technology licensing arrangements. Stratagene also intends to pursue
strategic alliances that leverage its core technology and industry experience to expand its product
offerings and geographic presence. Stratagene has limited experience with respect to acquiring
other companies and limited experience with respect to the formation of collaborations, strategic
alliances and joint ventures. If Stratagene were to make any acquisitions, it may not be able to
integrate these acquisitions successfully into its existing business and Stratagene could 24




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assume unknown or contingent liabilities. Any future acquisitions by Stratagene also could
result in large and immediate write-offs or the incurrence of debt and contingent liabilities, any
of which could harm Stratagenes operating results. Integration of an acquired company also may
require management resources that otherwise would be available for ongoing development of
Stratagenes existing business. Stratagene may not identify or complete these transactions in a
timely manner, on a cost-effective basis, or at all, and Stratagene may not realize the anticipated
benefits of any acquisition, technology license or strategic alliance. The absence of qualified senior accounting personnel within Stratagenes finance department
during parts of 2002, 2003 and 2004 has resulted in diminished oversight of accounting information
and reports. In connection with the completion of its audit of, and the issuance of an unqualified report
on, Stratagenes financial statements for the year ended December 31, 2002, Deloitte & Touche LLP
issued a management letter identifying the absence of qualified senior accounting personnel within
Stratagenes finance department during parts of 2002 and 2003 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. Dr. Sorge served as
Stratagenes chief financial officer from the resignation of Stratagenes former chief financial
officer in September 2002 until the completion of the Hycor merger in June 2004. Dr. Sorge does
not have a degree in accounting or a certified public accountants license. In addition,
Stratagene did not have a director of accounting from May 2003, when its former director of
accounting resigned, until May 2004. In its management letter, Deloitte & Touche LLP indicated
that this lack of qualified senior staffing in Stratagenes finance department had resulted in a
diminished ability to record, process, summarize and report financial data on a timely and accurate
basis. Deloitte & Touche LLP recommended that Stratagene 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 relating 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. In connection with the closing of the
merger transaction with Hycor in June 2004, Reginald P. Jones became the chief financial officer of
the Company. In addition, in May 2004 the Company hired a new director of finance. Changes in distribution and purchasing methods by Stratagenes customers may force it to use
more expensive marketing and distribution channels. A number of Stratagenes customers have developed purchasing initiatives to reduce the number
of vendors they purchase from in order to lower their supply costs. In some cases, these customers
have established agreements with large distributors, which include discounts and the distributors
direct involvement with the purchasing process. These activities may force Stratagene to supply
these large distributors with its products at a discount to continue to reach its customers. For
similar reasons, many of Stratagenes larger customers, including the government, have requested
and may in the future request special pricing arrangements, including blanket purchase agreements.
To date, Stratagene does not believe that these special pricing arrangements have had a material
effect on either sales revenues or margins. However, in the future these agreements may limit
Stratagenes pricing flexibility, which could adversely impact its business, financial condition
and results of operations. In addition, if Stratagene loses one or more of its distributors and
cannot arrange suitable alternatives, its business could be adversely affected. Several of Stratagenes customers have requested that Stratagene sell its products through
third party, e-commerce web sites. While this trend does not seem to be growing, offering its
products through these web sites generally requires Stratagene to agree to offer volume-related
discounts and pay commissions on the sales made through these web sites to these third party
e-commerce providers. Consequently, margins on sales made through these third party web sites would
generally be lower than those on sales made through traditional channels. Stratagenes business may
be harmed as a result of these web sites or other sales methods that may be developed in the
future. Stratagene relies on third party manufacturers for raw materials and product components. Stratagene relies on third party manufacturers to supply many of its raw materials and product
components. Some of these components are only available from a single supplier or a limited group
of suppliers, either because the market for these components is too small to support multiple
suppliers or because the components are protected by patents, in which case there may only be a
single supplier for the covered components. Stratagenes reliance on outside vendors generally, and
a sole supplier or a limited group of suppliers in particular, involves several risks, including: 25




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
    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,
acquisition of the manufacturer by one of Stratagenes competitors, or other supply
constraints;
    delays and long lead times in receiving materials from vendors; and
    reduced control over quality and pricing of components. If a sole source third party supplier were to go out of business, Stratagene might be unable
to find a replacement for such source or it might take Stratagene several months to be able to make
the substances internally. If a sole source third party supplier were to be acquired by a
competitor, that competitor may elect not to sell to Stratagene in the future. Adverse developments affecting Stratagenes international operations or foreign currency
fluctuations could harm its results from operations. Including sales made by Stratagenes subsidiaries and distributors, its products are currently
marketed in over 45 countries throughout the world. Measured in U.S. dollars, Stratagenes 2004
product sales outside the United States represented 27% of its total sales. In addition,
approximately 12% of its total sales for 2004 were for products exported from the United States.
Stratagene expects that international sales will continue to account for a significant percentage
of its revenues for the foreseeable future, in part because Stratagene intends to expand its
international operations. There are a number of risks arising from Stratagenes international
business, including:  
    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 Stratagenes international distribution network and direct sales force;
    potential trade restrictions and exchange controls;
    import and export licensing requirements;
    longer accounts receivable collection cycles in certain foreign countries; and
    potential increased costs associated with overlapping tax structures. A significant portion of Stratagenes business is conducted in currencies other than the U.S.
dollar, which is its reporting currency. Stratagene recognizes foreign currency gains or losses
arising from its operations in the period incurred. As a result, currency fluctuations among the
U.S. dollar and the currencies in which Stratagene does business could adversely affect its results
of operations. Stratagene cannot predict the effects of exchange rate fluctuations upon its future
operating results because of the number of currencies involved, the variability of currency
exposures and the potential volatility of currency exchange rates. Stratagene engages in foreign
currency exchange hedging transactions to manage its foreign currency exposure, but it cannot
assure you that its strategies will adequately protect its operating results from the effects of
exchange rate fluctuations. Stratagenes activities involve hazardous materials and may subject it to costly environmental
liability. Stratagene uses hazardous materials, including phenol, chloroform and ethanol, and radioactive
isotopes in connection with its research and development activities, as well as in its
manufacturing processes and in evaluating the performance of various products. Stratagene is
subject to federal, state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of these materials and specified waste products. The risk of accidental
contamination of property or injury to individuals from these materials cannot be completely
eliminated. In the event of such an accident, Stratagene could be liable for any damages that
result, which could have a material adverse effect on its business, financial condition and results
of operations. Stratagene carries insurance for contamination resulting from the use of hazardous
materials with $25,000 limitations per incident with respect to pollution clean-up and removal and
radioactive contamination. Additionally, any accident could partially or completely shut down
Stratagenes research and manufacturing facilities and operations. Stratagene may also have to
incur substantial costs to comply with current or 26




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future environmental laws and regulations. Interruptions in its manufacturing operations could adversely impact Stratagenes ability to
effectively operate its business. Stratagene maintains manufacturing facilities in San Diego, California, Garden Grove,
California and in the Austin, Texas area. Damage to these facilities due to fire, earthquake or
other natural disaster, power loss, unauthorized entry or other events could cause an interruption
in the production of Stratagenes products. Stratagene does not have or plan to obtain earthquake
insurance. In late 1999 and early 2000 Stratagene opened a manufacturing facility outside of
Austin, Texas and moved over 100 jobs to that location. During the transition process, Stratagene
lost some key personnel who were important to certain manufacturing processes. As a result,
Stratagene was unable to manufacture certain products for a period of three to six months. Many of
the customers who wanted to purchase the affected products during this period switched to other
suppliers and Stratagene found it difficult to reacquire these customers once it was able to
manufacture the products again. Accordingly, Stratagene believes that a prolonged interruption in
its manufacturing operations could have a material adverse impact on Stratagenes ability to
effectively operate its business. If its biological products and instruments are not properly produced or manufactured,
Stratagene could incur substantial unexpected expenses, experience product returns and suffer
damage to its brand and reputation. Stratagenes biological products and instruments are complex and may be improperly produced or
manufactured. In the past, Stratagene has voluntarily recalled several of its products. In each
case, the problem was identified by Stratagene and corrected. If Stratagenes products need to be
recalled, it could experience decreased sales and loss of customers and market share. In addition,
a recall would divert managerial and financial resources and could harm Stratagenes reputation
with customers. If Stratagenes access to necessary tissue samples is restricted or ethical concerns
surrounding the use of genetic information become widespread, its business could suffer. Stratagene requires access to human and other tissue samples and other biological materials to
continue to develop its products. Stratagene competes with many other companies for these materials
and may not be able to obtain or maintain access to these materials on acceptable terms, or at all.
In addition, genetic testing has raised ethical issues regarding confidentiality and the
appropriate use of the resulting information. Governmental regulation in the United States and
foreign countries could limit access to, or use of, human and other tissue samples or restrict the
use of, or regulate, genetic testing. If Stratagene loses access to sufficient numbers or sources
of tissue samples, or if tighter restrictions are imposed on Stratagenes customers use of the
information generated from tissue samples, its business could suffer. Anti-takeover provisions of Stratagenes certificate of incorporation and bylaws and
provisions of Delaware law could delay or prevent a change of control that you may favor. Provisions of Stratagenes amended and restated certificate of incorporation and amended and
restated bylaws may discourage, delay or prevent a merger or other change of control that
stockholders may consider favorable or may impede the ability of the holders of Stratagenes common
stock to change Stratagenes management. The provisions of Stratagenes amended and restated
certificate of incorporation and amended and restated bylaws, among other things, authorize
Stratagenes board of directors to issue preferred stock in one or more series, without stockholder
approval. Because Stratagene has not chosen to be exempt from Section 203 of the Delaware General
Corporation Law, this provision could also delay or prevent a change of control that you favor.
Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated
with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware
corporation shall not engage in any business combination with that corporation, including by
merger, consolidation or acquisition of additional shares, for a three-year period following the
date on which that person or its affiliate crosses the 15 percent ownership threshold. Additionally, because Dr. Sorge owns approximately 62% of the Companys outstanding common
stock, he controls all matters requiring approval of Stratagenes stockholders. As a result, among
other things, Dr. Sorge must approve any merger or other business combination related to
Stratagene. 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Stratagenes financial instruments include cash and cash equivalents, investments and
long-term debt. At December 31, 2004, the carrying values of its financial instruments approximated
their fair values based on current market prices and rates. 27




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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 consolidated balance
sheets. Stratagenes international sales expose it to foreign currency risk in the ordinary course of
its business. Approximately 27%, 26% and 24% of Stratagenes revenue for 2004, 2003 and 2002,
respectively, was generated by its 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 consolidated financial statements.
Conversely, when the U.S. dollar strengthens, there is a negative effect. For the year ended
December 31, 2004, the net impact to Stratagenes reported sales from the effect of exchange rate
fluctuations was an increase of approximately $1.7 million, when compared to the exchange rates for
the year ended December 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, Swiss Franc and Japanese Yen. 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 December 31,
2003, Stratagene had outstanding foreign currency exchange contracts, with contract amounts of
$14.1 million. All futures contracts entered into for fiscal year 2004 were settled by year end,
and the Company had no pending futures contracts outstanding. Fair Value of Financial Instruments The carrying amounts of cash, marketable securities, 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. Based on the Companys short-term
investment portfolio at December 31, 2004, the Company believes that a 10% rise or fall in interest
rates would have had no material impact on its financial statements. The following table shows the average interest rate for the year ended December 31, 2004 for
each of Stratagenes long-term debt obligations: Average Interest Rate forthe Year EndedLong-term Debt Obligations
    
    December 31, 2004Reducing revolving line of credit
    
    
    4.08
    %Industrial revenue bonds
    
    
    1.44
    %
 Stratagenes interest income on marketable securities is dependent on the interest rate
attributable primarily to the debt securities 28




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purchased by Stratagene. Stratagene has categorized these securities as available for sale
and, as a result, they are stated at fair value. Marketable debt securities are available for
current operations and are classified in the consolidated balance sheet as current assets.
Unrealized holding gains and losses are included as a component of accumulated other comprehensive
income (loss), net of tax, until realized. 29




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Item 8. Financial Statements The following documents are filed as part of this report: PageReport of Independent Registered Public Accounting Firm for the years ended December 31, 2004, 2003
and 2002
    
    
    31Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    32Consolidated
Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    
    33Consolidated
Statements of Stockholders Equity (Deficit) for the years ended December 31, 2004, 2003 and 2002
    
    
    34Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    36Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002
    
    
    38
 30




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Stratagene Corporation: We have audited the accompanying consolidated balance sheets of Stratagene Corporation and
subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders equity
(deficit), and cash flows for each of the three years in the
period ended December 31, 2004. Our audits also included the financial statement schedule listed
in the Index at Item 15. These financial statements and the financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Stratagene Corporation and subsidiaries as of December 31, 2004
and 2003, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP San Diego, California
March 30, 2005 31




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,890,458
    
    
    $
    2,003,762Marketable debt securities
    
    
    197,125
    
    
    
    Cash  restricted related to bond indenture
    
    
    582,995
    
    
    
    658,587Foreign currency exchange contracts
    
    
    
    
    
    
    205,110Accounts receivable, less allowance for doubtful
accounts and sales returns of $766,772 and $990,849 at
December 31, 2004 and 2003, respectively
    
    
    11,059,464
    
    
    
    8,390,326Income taxes receivable
    
    
    269,861
    
    
    
    Inventories
    
    
    12,986,910
    
    
    
    7,729,655Deferred income tax assets
    
    
    2,002,013
    
    
    
    1,711,947Due from related party, current
    
    
    
    
    
    
    265,639Prepaid expenses and other current assets
    
    
    1,713,729
    
    
    
    2,702,233Total current assets
    
    
    33,702,555
    
    
    
    23,667,259Property and equipment, net
    
    
    12,111,957
    
    
    
    10,320,992Other assets
    
    
    541,091
    
    
    
    696,858Due from related party, less current portion
    
    
    
    
    
    
    451,630Deferred income tax assets
    
    
    217,102
    
    
    
    Goodwill
    
    
    27,234,214
    
    
    
    Intangible assets
    
    
    6,524,781
    
    
    
    2,984,009Investment in joint venture
    
    
    
    
    
    
    467,109Total assets
    
    $
    80,331,700
    
    
    $
    38,587,857LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    4,129,171
    
    
    $
    5,003,788Accrued expenses and other liabilities
    
    
    9,877,253
    
    
    
    5,332,114Current portion of long-term debt
    
    
    735,000
    
    
    
    920,062Due to related party, current
    
    
    
    
    
    
    268,200Deferred revenue, current
    
    
    1,062,288
    
    
    
    1,491,976Income taxes payable
    
    
    
    
    
    
    1,165,663Total current liabilities
    
    
    15,803,712
    
    
    
    14,181,803Deferred revenue
    
    
    395,881
    
    
    
    Long-term debt, less current portion
    
    
    8,971,923
    
    
    
    29,461,617Deferred income tax liabilities
    
    
    
    
    
    
    891,179Total liabilities
    
    
    25,171,516
    
    
    
    44,534,599Commitments and contingencies (Note 13)Stockholders equity (deficit):Preferred stock, $.0001 par value; 4,000,000 shares
authorized; no shares issued and outstanding at December
31, 2004 and 2003
    
    
    
    
    
    
    Common stock, $.0001 par value; 50,000,000 shares
authorized; 22,029,430 and 15,632,668 shares issued and
outstanding at December 31, 2004 and 2003, respectively
    
    
    2,203
    
    
    
    1,563Additional paid-in capital
    
    
    52,880,192
    
    
    
    1,821,202Unearned stock-based compensation
    
    
    (420,677
    )
    
    
    Retained earnings (accumulated deficit)
    
    
    3,514,811
    
    
    
    (3,447,340
    )Notes receivable from stockholders
    
    
    
    
    
    
    (3,356,309
    )Accumulated other comprehensive loss
    
    
    (816,345
    )
    
    
    (940,514
    )Treasury stock, at cost; no shares at December 31, 2004
and 7,040 shares at December 31, 2003
    
    
    
    
    
    
    (25,344
    )Total stockholders equity (deficit)
    
    
    55,160,184
    
    
    
    (5,946,742
    )Total liabilities and stockholders equity (deficit)
    
    $
    80,331,700
    
    
    $
    38,587,857
 See accompanying notes to consolidated financial statements. 32




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED
STATEMENTS OF INCOME
 Years ended December 31,2004
    
    
    2003
    
    
    2002Product sales
    
    $
    84,812,603
    
    
    $
    69,702,650
    
    
    $
    64,511,818Costs and expenses:Cost of products sold
    
    
    29,324,218
    
    
    
    23,145,014
    
    
    
    22,597,784Research and development
    
    
    10,754,317
    
    
    
    10,454,583
    
    
    
    10,710,153Selling and marketing
    
    
    18,180,822
    
    
    
    15,144,353
    
    
    
    16,768,132General and administrative
    
    
    16,335,605
    
    
    
    10,997,516
    
    
    
    10,445,865Impairment of long-lived assets
    
    
    82,446
    
    
    
    131,250
    
    
    
    56,629Total costs and expenses
    
    
    74,677,408
    
    
    
    59,872,716
    
    
    
    60,578,563Income from operations
    
    
    10,135,195
    
    
    
    9,829,934
    
    
    
    3,933,255Other income and expenses:Loss on foreign currency transactions
    
    
    (225,586
    )
    
    
    (1,151,145
    )
    
    
    (301,677
    )Equity in income (loss) of joint venture
    
    
    1,787,902
    
    
    
    (246,118
    )
    
    
    69,710Other income (loss), net
    
    
    495,237
    
    
    
    (9,874
    )
    
    
    35,768Interest expense
    
    
    (1,641,358
    )
    
    
    (3,526,235
    )
    
    
    (2,602,708
    )Interest income
    
    
    147,041
    
    
    
    240,820
    
    
    
    220,891Total other income (expense)
    
    
    563,236
    
    
    
    (4,692,552
    )
    
    
    (2,578,016
    )Income before income taxes
    
    
    10,698,431
    
    
    
    5,137,382
    
    
    
    1,355,239Income tax expense
    
    
    (3,260,000
    )
    
    
    (1,885,244
    )
    
    
    (850,640
    )Net income
    
    $
    7,438,431
    
    
    $
    3,252,138
    
    
    $
    504,599Earnings per share:Basic
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.03Diluted
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.03Weighted average shares:Basic
    
    
    19,307,564
    
    
    
    15,632,668
    
    
    
    15,632,668Diluted
    
    
    19,313,364
    
    
    
    15,632,668
    
    
    
    15,632,668
 See accompanying notes to consolidated financial statements. 33




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years Ended December 31, 2004, 2003 and 2002
 Additional
    
    
    Unearned
    
    
    (Accumulated)Common Stock
    
    
    Paid-in
    
    
    Stock-based
    
    
    Deficit) RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    EarningsBalance as of January 1, 2002
    
    
    15,639,708
    
    
    $
    1,564
    
    
    $
    1,751,079
    
    
    $
    
    
    
    $
    ($5,849,461
    )Repurchase of common stock
    
    
    (7,040
    )
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    Compensation expense from remeasurement of stock options
    
    
    
    
    
    
    
    
    
    
    24,097
    
    
    
    
    
    
    
    Adjustment to fair value for common shares subject to
variable accounting
    
    
    
    
    
    
    
    
    
    
    (26,568
    )
    
    
    
    
    
    
    Notes receivable from stockholders of Stratagene
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions paid to BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (809,909
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    504,599Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2002
    
    
    15,632,668
    
    
    
    1,563
    
    
    
    1,748,609
    
    
    
    
    
    
    
    (6,154,771
    )Compensation expense from remeasurement of stock options
    
    
    
    
    
    
    
    
    
    
    72,593
    
    
    
    
    
    
    
    Notes receivable from stockholders of Stratagene
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions paid to BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (544,707
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,252,138Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2003
    
    
    15,632,668
    
    
    
    1,563
    
    
    
    1,821,202
    
    
    
    
    
    
    
    (3,447,340
    )Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (25,344
    )
    
    
    
    
    
    
    Fair value of common shares issued resulting from Hycor
merger, plus value attributed to Hycor options assumed,
less registration costs of $105,234
    
    
    5,015,453
    
    
    
    502
    
    
    
    43,867,108
    
    
    
    
    
    
    
    Intrinsic value assigned to unvested options acquired in
the Hycor merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (781,622
    )
    
    
    Amortization of unvested options acquired in the Hycor
merger
    
    
    
    
    
    
    
    
    
    
    (28,619
    )
    
    
    360,945
    
    
    
    Common stock issued from conversion of subordinated debt
    
    
    1,753,604
    
    
    
    175
    
    
    
    9,179,825
    
    
    
    
    
    
    
    Common stock issued to an officer
    
    
    41,250
    
    
    
    4
    
    
    
    (4
    )
    
    
    
    
    
    
    Common stock issued for employee stock purchase plan
    
    
    25,856
    
    
    
    2
    
    
    
    157,020
    
    
    
    
    
    
    
    Common stock issued upon exercise of stock options
    
    
    127,382
    
    
    
    14
    
    
    
    176,283
    
    
    
    
    
    
    
    Tax benefit received from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    89,009
    
    
    
    
    
    
    
    Redemption of common stock for outstanding notes
receivable from officers
    
    
    (524,160
    )
    
    
    (53
    )
    
    
    (3,404,874
    )
    
    
    
    
    
    
    Redemption of common stock for outstanding notes
receivable from affiliates
    
    
    (42,623
    )
    
    
    (4
    )
    
    
    (276,874
    )
    
    
    
    
    
    
    Compensation expense from remeasurement of stock options
    
    
    
    
    
    
    
    
    
    
    101,172
    
    
    
    
    
    
    
    Compensation expense for non-employee stock options
    
    
    
    
    
    
    
    
    
    
    357,171
    
    
    
    
    
    
    
    Interest accretion on notes receivable from stockholders
of Stratagene
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment in full of notes receivable from stockholders of
Stratagene
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions paid to BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (476,280
    )Deferred tax asset applicable to asset acquisition of BCH
    
    
    
    
    
    
    
    
    
    
    874,495
    
    
    
    
    
    
    
    Redemption of interests from BCH members
    
    
    
    
    
    
    
    
    
    
    (7,378
    )
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,438,431Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2004
    
    
    22,029,430
    
    
    $
    2,203
    
    
    $
    52,880,192
    
    
    $
    (420,677
    )
    
    $
    3,514,811
 (Continued) 34




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years Ended December 31, 2004, 2003 and 2002 Notes
    
    
    AccumulatedReceivable
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalFrom
    
    
    Comprehensive
    
    
    Treasury Stock
    
    
    StockholdersStockholders
    
    
    Income (loss)
    
    
    Shares
    
    
    Amount
    
    
    Equity (Deficit)Balance as of January 1, 2002
    
    $
    (3,038,464
    )
    
    $
    (170,885
    )
    
    
    
    
    
    $
    
    
    
    $
    (7,306,167
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    7,040
    
    
    
    (25,344
    )
    
    
    (25,344
    )Compensation expense from remeasurement of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,097Adjustment to fair value for common shares subject to
variable accounting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,568
    )Notes receivable from stockholders of Stratagene
    
    
    (138,331
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (138,331
    )Distributions paid to BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (809,909
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    504,599Foreign currency translation
    
    
    
    
    
    
    (470,832
    )
    
    
    
    
    
    
    
    
    
    
    (470,832
    )Balance as of December 31, 2002
    
    
    (3,176,795
    )
    
    
    (641,717
    )
    
    
    7,040
    
    
    
    (25,344
    )
    
    
    (8,248,455
    )Compensation expense from remeasurement of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,593Notes receivable from stockholders of Stratagene
    
    
    (179,514
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (179,514
    )Distributions paid to BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (544,707
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,252,138Foreign currency translation
    
    
    
    
    
    
    (298,797
    )
    
    
    
    
    
    
    
    
    
    
    (298,797
    )Balance as of December 31, 2003
    
    
    (3,356,309
    )
    
    
    (940,514
    )
    
    
    7,040
    
    
    
    (25,344
    )
    
    
    (5,946,742
    )Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (7,040
    )
    
    
    25,344
    
    
    
    Fair value of common shares issued resulting from Hycor
merger, plus value attributed to Hycor options assumed,
less registration costs of $105,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,867,610Intrinsic value assigned to unvested options acquired in
the Hycor merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (781,622
    )Amortization of unvested options acquired in the Hycor
merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332,326Common stock issued from conversion of subordinated debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,180,000Common stock issued to an officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued for employee stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,022Common stock issued upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,297Tax benefit received from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,009Redemption of common stock for outstanding notes
receivable from officers
    
    
    3,289,181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,746
    )Redemption of common stock for outstanding notes
receivable from affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (276,878
    )Compensation expense from remeasurement of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,172Compensation expense for non-employee stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    357,171Interest accretion on notes receivable from stockholders
of Stratagene
    
    
    (83,132
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,132
    )Payment in full of notes receivable from stockholders of
Stratagene
    
    
    150,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,260Distributions paid to BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (476,280
    )Deferred tax asset applicable to asset acquisition of BCH
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    874,495Redemption of interests from BCH members
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,378
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,438,431Foreign currency translation
    
    
    
    
    
    
    124,019
    
    
    
    
    
    
    
    
    
    
    
    124,019Unrealized gain on securities
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Balance as of December 31, 2004
    
    $
    
    
    
    $
    (816,345
    )
    
    
    
    
    
    $
    
    
    
    $
    55,160,184
 (Concluded) See accompanying notes to consolidated financial statements. 35




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STRATAGENE CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    7,438,431
    
    
    $
    3,252,138
    
    
    $
    504,599Adjustments to reconcile net income to net cash provided by operating
activities:Equity in (income) loss of joint venture
    
    
    (1,787,902
    )
    
    
    246,118
    
    
    
    (69,710
    )Depreciation and amortization
    
    
    3,240,721
    
    
    
    2,715,611
    
    
    
    2,613,758Impairment of long-lived assets
    
    
    82,446
    
    
    
    131,250
    
    
    
    56,629Stock-based compensation
    
    
    903,236
    
    
    
    72,593
    
    
    
    (2,471
    )Bad debt expense
    
    
    (295,809
    )
    
    
    323,116
    
    
    
    114,297Excess and obsolete inventory expense
    
    
    (395,462
    )
    
    
    721,442
    
    
    
    1,137,304Loss on redemption of partnership interest
    
    
    242,959
    
    
    
    
    
    
    
    Loss on disposal of assets
    
    
    13,979
    
    
    
    19,037
    
    
    
    37,909Interest accrued on notes receivable from stockholders
    
    
    (83,134
    )
    
    
    (179,514
    )
    
    
    (138,331
    )Accretion of interest on long-term debt
    
    
    740,842
    
    
    
    3,236,143
    
    
    
    2,220,711Deferred income taxes
    
    
    476,646
    
    
    
    548,473
    
    
    
    94,347Changes in assets and liabilities (net of impact of merger with Hycor):Foreign currency exchange contracts
    
    
    205,110
    
    
    
    28,299
    
    
    
    147,779Accounts receivable
    
    
    937,805
    
    
    
    (1,925,063
    )
    
    
    662,063Inventories
    
    
    8,852
    
    
    
    (1,681,098
    )
    
    
    (521,197
    )Prepaid expenses and other current assets
    
    
    1,464,657
    
    
    
    (1,275,047
    )
    
    
    (280,249
    )Due from related party
    
    
    96,642
    
    
    
    (108,418
    )
    
    
    (680,978
    )Due to related party
    
    
    451,630
    
    
    
    
    
    
    
    Income taxes receivable
    
    
    (4,680
    )
    
    
    (93,804
    )
    
    
    90,659Other assets
    
    
    195,929
    
    
    
    (14,508
    )
    
    
    (45,736
    )Accounts payable
    
    
    (1,392,321
    )
    
    
    939,904
    
    
    
    332,400Accrued expenses and other liabilities
    
    
    442,296
    
    
    
    1,438,277
    
    
    
    (446,507
    )Deferred revenue
    
    
    (73,926
    )
    
    
    (193,020
    )
    
    
    1,048,815Deferred compensation to employees
    
    
    (268,200
    )
    
    
    (1,062,980
    )
    
    
    220,597Income taxes payable
    
    
    (1,727,563
    )
    
    
    554,429
    
    
    
    (157,248
    )Net cash provided by operating activities
    
    
    10,913,184
    
    
    
    7,693,378
    
    
    
    6,939,440Cash flows from investing activities:Cash acquired in merger, net of acquisition costs
    
    
    4,520,153
    
    
    
    
    
    
    
    Proceeds from maturities of marketable debt securities
    
    
    699,847
    
    
    
    
    
    
    
    Purchases of property and equipment
    
    
    (1,796,755
    )
    
    
    (1,319,768
    )
    
    
    (1,802,364
    )Additions to intangible assets
    
    
    (1,309,391
    )
    
    
    (1,047,814
    )
    
    
    (992,094
    )Redemption of BCH member interests
    
    
    (7,378
    )
    
    
    
    
    
    
    Changes in restricted cash
    
    
    (28,878
    )
    
    
    19,117
    
    
    
    (5,498
    )Cash distributions from joint venture
    
    
    2,012,052
    
    
    
    
    
    
    
    294,000Net cash provided by (used in) investing activities
    
    
    4,089,650
    
    
    
    (2,348,465
    )
    
    
    (2,505,956
    )
 (Continued) 36




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from financing activities:Principal payments on long-term debt
    
    
    (23,203,760
    )
    
    
    (4,071,616
    )
    
    
    (3,191,428
    )Issuance of long-term debt
    
    
    6,000,000
    
    
    
    748,342
    
    
    
    28,237Borrowings under line of credit
    
    
    11,977,647
    
    
    
    900,000
    
    
    
    1,000,000Payments under line of credit
    
    
    (7,040,724
    )
    
    
    (900,000
    )
    
    
    (1,000,000
    )Distributions to BCH members
    
    
    (476,280
    )
    
    
    (544,707
    )
    
    
    (809,909
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (25,344
    )Proceeds from issuance of common stock
    
    
    176,283
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (12,566,834
    )
    
    
    (3,867,981
    )
    
    
    (3,998,444
    )Effects of foreign currency exchange rates on cash
    
    
    450,696
    
    
    
    (681,062
    )
    
    
    (844,160
    )Net increase (decrease) in cash
    
    
    2,886,696
    
    
    
    795,870
    
    
    
    (409,120
    )Cash at beginning of period
    
    
    2,003,762
    
    
    
    1,207,892
    
    
    
    1,617,012Cash at end of period
    
    $
    4,890,458
    
    
    $
    2,003,762
    
    
    $
    1,207,892Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    1,350,652
    
    
    $
    2,106,371
    
    
    $
    227,417Income taxes
    
    $
    4,067,514
    
    
    $
    876,446
    
    
    $
    1,024,607Non-cash financing activities:Shares of common stock issued in exchange for the outstanding
shares of Hycor and fair value of $3,331,223 assigned to the
Hycor options assumed
    
    $
    43,972,844
    
    
    $
    
    
    
    $
    Shares of common stock issued with respect to the conversion of
outstanding debt
    
    $
    9,180,000
    
    
    $
    
    
    
    $
    Redemption of common stock for outstanding notes receivable
from stockholders
    
    $
    (3,681,805
    )
    
    $
    
    
    
    $
    Deferred taxes recorded in connection with BCH asset purchase
    
    $
    874,495
    
    
    $
    
    
    
    $
    Settlement of note receivable through repurchase of common stock
    
    $
    
    
    
    $
    
    
    
    $
    25,590
 (Concluded) See accompanying notes to consolidated financial statements. 37




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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Years Ended December 31, 2004, 2003 and 2002
 1. The Company and Its Business Description of Business- Stratagene Corporation (Stratagene or the Company) develops and
manufactures biological products and instruments designed to improve the speed and accuracy of life
sciences research and medical diagnosis. Stratagene markets its products to researchers at academic
and government institutions and pharmaceutical, biotechnology and industrial companies, in the U.S.
and internationally. These researchers use Stratagenes products to identify genes and proteins,
study how cells are regulated by genes and proteins, determine the molecular mechanisms of health
and disease, search for new drug therapies, develop diagnostic tests, and test the safety of
compounds used in food and pharmaceuticals. Stratagene engages in business activity in two operating segments: Research Supplies and
Medical Diagnostics. The Company has marketed and sold its Research Supplies products for over 20
years, while the Medical Diagnostics products are a new addition to Stratagenes product portfolio
as a result of a merger with Hycor Biomedical Inc. in June 2004. (See Note 3) Basis of Presentation-The financial information of the Company has been presented on a
consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and
subsidiaries (Hycor) since Hycor was acquired by the Company on June 2, 2004. The financial
information also includes the results of operations of BioCrest Holdings, LLC (BCH), whose assets
were acquired by the Company on June 2, 2004. Prior to the acquisition, BCH was under common
control with Stratagene, and substantially all of the BCH membership units were held by certain
Stratagene shareholders. The acquisition of the BCH assets has been presented as a change in
reporting entity. Accordingly, the financial statements of Stratagene and BCH are presented on a
consolidated basis for all periods. (See Note 3) 2. Summary of Significant Accounting Policies Principles of Consolidation- The consolidated financial statements of Stratagene include the
accounts of Stratagene Corporation and all of its wholly owned subsidiaries. Intercompany balances
and transactions have been eliminated as appropriate in the consolidation of Stratagene. 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 consolidated financial statements and
disclosures made in the accompanying notes. Actual results could differ from those estimates. Restricted Cash- Restricted cash totaled $582,995 and $658,587 at December 31, 2004 and 2003,
respectively. Total interest earned on restricted cash was $2,623, $3,398 and $5,397 for the years
ended December 31, 2004, 2003 and 2002, respectively. Restricted cash deposits relate to the
sinking fund payments required under the reimbursement agreement relating to the Bastrop County
bonds. The Company makes monthly deposits into the sinking fund account. Each April, the sinking
fund deposits are then used to make the required annual payment. An annual payment of $735,000 is
required in April 2005, reducing to $240,000 annually through April 2021 and to $175,000 in April
2022 when the bonds mature. Marketable Securities-Stratagene accounts for marketable securities pursuant to Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities.At December 31, 2004 and 2003, marketable debt securities have been categorized
as available for sale and, as a result, are stated at fair value. Marketable debt securities are
available for current operations and are classified in the consolidated balance sheet as current
assets. Unrealized holding gains and losses are included as a component of accumulated other
comprehensive income (loss), net of tax, until realized. Inventories- 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. 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 and obsolete inventories have
historically been within expectations and the provisions established. 38




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##### Table of Contents



Inventories include the following at December 31, 2004
    
    
    2003Raw materials and supplies
    
    $
    5,710,213
    
    
    $
    4,314,445Work-in-process
    
    
    3,067,593
    
    
    
    1,612,335Finished goods
    
    
    4,209,104
    
    
    
    1,802,875Total
    
    $
    12,986,910
    
    
    $
    7,729,655
 Research and Development Costs- Research and development costs are expensed in the period
incurred. Property and Equipment Property and equipment are stated at cost. Depreciation of furniture
and equipment, autos and trucks is calculated using the straight-line method based upon an
estimated useful life of three to five years. Buildings are depreciated over 25 years using the
straight-line method. Leasehold improvements are amortized using the straight-line method over the
shorter of the lease or estimated useful life of the asset, generally five years. Property and equipment are summarized as follows: 2004
    
    
    2003Land
    
    $
    607,890
    
    
    $
    607,890Building
    
    
    8,749,192
    
    
    
    8,701,349Furniture and equipment
    
    
    13,891,305
    
    
    
    11,219,018Leasehold improvements
    
    
    821,344
    
    
    
    267,796Vehicles
    
    
    184,702
    
    
    
    245,301Construction in process
    
    
    333,475
    
    
    
    24,587,908
    
    
    
    21,041,354Less accumulated depreciation
    
    
    (12,475,951
    )
    
    
    (10,720,362
    )Total
    
    $
    12,111,957
    
    
    $
    10,320,992
 Intangibles- Intangible assets include long-lived assets associated with the merger with
Hycor in June 2004. Intangibles also include costs incurred in connection with patent
applications, consisting principally of legal fees. Amortization is calculated using the
straight-line method over the estimated useful lives of the patents, generally seven years.
Amortization expense totaled $875,967, $359,419, and $403,824 for the years ended December 31,
2004, 2003 and 2002, respectively. Notes Receivable from Stockholders- At December 31, 2003, Stratagene had unsecured notes
receivable totaling $3,356,309 from stockholders of Stratagene, primarily for the exercise of
Stratagene options for common stock and to replace certain other previously outstanding notes.
These notes bear interest at rates ranging from prime (4.00% at December 31, 2003) to 5.91%. All
obligations under such stockholder notes were satisfied during 2004 and there were no amounts
receivable under such stockholder notes at December 31, 2004. Revenue Recognition- Revenue from biological products and basic instrumentation products is
recognized under the provisions of SAB No. 104, Revenue Recognition,which is generally when
products are shipped, title has transferred and risk of loss has passed. In accordance with SOP No.
97-2, Software Revenue Recognition,as amended by SOP 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. The following table summarizes the types of deferred revenue and the timing of when that
revenue is recognized: 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
 39




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##### Table of Contents



The following table provides the percentage of the ending balance in deferred revenue that each
type of deferred revenue represents as of December 31 for each year presented: Type of deferred revenue
    
    2004

    
    2003Extended warranty, installation or maintenance agreement
    
    
    49
    %
    
    
    81
    %License agreements
    
    
    51
    %
    
    
    19
    %Total deferred revenue
    
    
    100
    %
    
    
    100
    %
 Warranty- The Company warrants certain equipment against defects in workmanship or materials
for a period of one year from the date of purchase. Upon shipment of equipment sold that includes a
warranty, the Company establishes, as part of cost of products sold, a provision for the expected
costs of such warranty. Accrued warranty activity for the years ended December 31, 2004 and 2003 is as follows: 2004
    
    
    2003Balance at beginning of year
    
    $
    596,788
    
    
    $
    564,000Charged to costs and expenses
    
    
    540,185
    
    
    
    534,197Reductions of accrued warranty
    
    
    (803,696
    )
    
    
    (501,409
    )Balance at end of year
    
    $
    333,277
    
    
    $
    596,788
 Income Taxes- Stratagene and its subsidiaries record income taxes using the asset and
liability method of accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment date. Historically, BCH consisted of limited liability companies that were treated as partnerships
for income tax purposes; therefore, any related income tax liabilities were the responsibility of
the members. As a result, the operations of BCH did not reflect a provision for income taxes until
these limited liability companies were acquired when Stratagene acquired the assets of BCH in June
2004. Since June 2004, income taxes have been recorded based on the net income or loss of the
limited liability companies. Foreign Currency Translation/Transaction- The accounts of foreign subsidiaries and affiliates
of the Company 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 consolidated balance sheets. Realized gains or losses from
foreign currency transactions are included in operations as incurred. Derivative Financial Instruments- As part of distributing its products, the Company regularly
enters into intercompany transactions with its foreign subsidiaries. The Companys currency
exposures vary, but are primarily concentrated in the Euro, British Pound, Swiss Franc and Japanese
Yen. Accordingly, the Company periodically enters into foreign currency exchange futures contracts
to mitigate foreign currency risk on its European revenues. The Company manages its exposure over a
maximum of twelve months. At December 31, 2003, the Company had outstanding foreign currency
exchange contracts with contract amounts of $14,064,850. All futures contracts entered into for
fiscal year 2004 were settled by year end, and the Company had no pending futures contracts
outstanding as of December 31, 2004. In the past, the Companys derivative instruments have not qualified for hedge accounting in
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,as
amended (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 statement of operations. The Company does not enter into derivative instruments
for trading or speculative purposes. Fair Value of Financial Instruments- The carrying amounts of cash, restricted cash, accounts
receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, other
current liabilities, and line 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. Impairment of Long-Lived Assets- The Company accounts for long-lived assets in accordance
with the provisions of SFAS No. 142, Goodwill and Intangibles,and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.These 40




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Statements require that long-lived assets and
certain identifiable intangible assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Goodwill and non-amortizable intangible assets are reviewed for
impairment annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
the asset to the future net undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amounts of the assets exceed the fair values of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Accounting for Stock-Based Compensation- The Company accounts for its stock-based
compensation in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued
to Employees,as amended, and FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation. Pro forma information regarding net income is required by 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 fair value method of SFAS No. 123. Under SFAS No. 123, the
fair value of stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ from the Companys
stock option awards. The value for Stratagene employee stock options was estimated at the dates of
grant using the minimum value method of SFAS No. 123 from the inception date of the applicable
stock option plan through June 2, 2004 and fair value for all option grants made subsequent to that
date using the Black-Scholes pricing model. Fair value for Hycor employee stock options assumed by
Stratagene in the Hycor merger was estimated at the dates of grant using the Black-Scholes pricing
model for all option grants. The following weighted average assumptions were used for the years
ended December 31, 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Risk free interest rate
    
    
    4.0
    %
    
    
    3.4
    %
    
    
    3.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility factor
    
    
    45
    %
    
    
    0
    %
    
    
    0
    %Expected life (in years)
    
    6 years
    
    6 years
    
    6 yearsResulting average fair value
    
    $
    3.69
    
    
    $
    0.00
    
    
    $
    0.00
 If the computed fair values of the stock options granted in 2004, 2003 and 2002 had been
amortized to expense over the vesting period of the awards, pro forma net income would have been as
follows: Twelve Months Ended December 31,2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    7,438,431
    
    
    $
    3,252,138
    
    
    $
    504,599Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects
    
    
    64,751
    
    
    
    47,346
    
    
    
    (26,568
    )Stock-based compensation
expense determined under
SFAS No. 123 for all
awards, net of related tax
effects
    
    
    (821,573
    )
    
    
    (4,917
    )
    
    
    (14,915
    )Pro forma net income
    
    $
    6,681,609
    
    
    $
    3,294,567
    
    
    $
    463,116Earnings per common share:Basic  as reported
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.03Basic  pro forma
    
    $
    0.35
    
    
    $
    0.21
    
    
    $
    0.05Diluted  as reported
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.03Diluted  pro forma
    
    $
    0.35
    
    
    $
    0.21
    
    
    $
    0.05
 Charges for options granted to non-employees have been determined in accordance with SFAS No.
123 and 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 estimated fair value of
the consideration received or the estimated 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. Segment Reporting- The Company currently operates in two operating segments: Research
Supplies and Medical Diagnostics. Recent Accounting Pronouncements-In December 2003, the Securities and Exchange Commission
released 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 Emerging Issues Task Force (EITF)
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.The adoption of SAB No.
104 did not have a 41




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##### Table of Contents



material impact on the Companys revenue recognition policies, or its financial
position or results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4,to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). SFAS No. 151 requires that such items be recognized
as current-period charges regardless of whether they meet the so abnormal criterion outlined in
Accounting Research Bulletin (ARB) No. 43. SFAS No. 151 also introduces the concept of normal
capacity and requires the allocation of fixed production overhead to inventory based on the normal
capacity of the production facilities. Unallocated overhead must be recognized as an expense in
the period in which such costs are incurred. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company expects that the adoption of SFAS
No. 151 will not have a material impact on its financial position or results of operations. In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which will be
effective for public companies as of the first interim or annual reporting period that begins after
June 15, 2005. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The new standard requires
that the compensation cost relating to share-based payments be recognized in financial statements
at fair value. As such, reporting employee stock options under the intrinsic value-based method
prescribed by APB No. 25 will no longer be allowed. The Company has historically elected to use the
intrinsic value method and has not recognized expense for employee stock options granted. The
Company has not yet determined the impact that adopting SFAS
No. 123R will have on the financial
results of the Company in future periods. In December 2004, the FASB staff issued FASB Staff Position (FSP) SFAS No. 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004,to provide
guidance on the application of SFAS No. 109 to the provision within the American Jobs Creation Act
of 2004 (the Act) that provides tax relief to U.S. domestic manufacturers. The FSP states that
the manufacturers deduction provided for under the Act should be accounted for as a special
deduction in accordance with SFAS No. 109 and not as a tax rate reduction. A special deduction is
accounted for by recording the benefit of the deduction in the year in which it can be taken in the
Companys tax return, and not by adjusting deferred tax assets and liabilities in the period of the
Acts enactment (which would have been done if the deduction on qualified production activities
were treated as a change in enacted tax rates). The proposed FSP also reminds companies that the
special deduction should be considered by an enterprise in (a) measuring deferred taxes when the
enterprise is subject to graduated tax rates and (b) assessing whether a valuation allowance is
necessary as required by SFAS No. 109. The FSP is effective upon issuance. In accordance with the
FSP, the Company will record the benefit, if any, of the tax deduction in the year in which the
deduction becomes available. In December 2004, the FASB staff issued FSP FAS No. 109-2, Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,to
provide accounting and disclosure guidance for the repatriation provisions included in the Act. The
Act introduced a special limited-time dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer. As a result, an issue has arisen as to whether an enterprise
should be allowed additional time beyond the financial reporting period in which the Act was
enacted to evaluate the effects of the Act on its plan for reinvestment or repatriation of foreign
earnings for purposes of applying SFAS No. 109. The FSP is effective upon issuance. The Company has
not yet completed its evaluation of this aspect of the Act and will complete its review in
connection with the preparation of its corporate tax returns. Reclassification Certain reclassifications have been made to conform prior period financial
information to the current presentation. 3. Business Combinations 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 were the following:  
    the combination of Stratagenes molecular diagnostics technology and Hycors Good
Manufacturing Practice (GMP) approved facilities and U.S. Food and Drug Administration
(FDA) experience allows the Company to enter the medical diagnostics market;
    potential growth from increased earnings and revenue;
    expanded access to capital markets; and 42




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
    diversified customer base and product lines. As a result of the merger, Hycors former shareholders received 0.6158 of a share of
Stratagene common stock in exchange for each share of Hycor common stock, plus cash for fractional
shares. 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. In accordance with Emerging Issues
Task Force (EITF) No. 99-12, Determining the Measurement Date for the Market Price for an
Acquirer of Securities Issued in a Business Combination,the market price was determined based on
an average of the closing prices of the Hycor stock for the trading days nearest July 24, 2003, the
date on which the merger agreement was originally signed. Using the 0.6158 exchange ratio,
5,015,453 shares of Stratagene common stock were issued to the former Hycor stockholders in
connection with the merger and 655 fractional shares were redeemed through a cash payment by
Stratagene. Stratagene also assumed each outstanding option to purchase shares of Hycor common stock
issued under the stock option plans of Hycor, whether or not then exercisable, on substantially the
same terms and conditions as were applicable
prior to the merger date, except that  
    the options are now exercisable for shares of Stratagene common stock, and
    the number of shares of Stratagene common stock that may be purchased are equal to the
number of shares of Hycor common stock underlying the option multiplied by 0.6158, rounded
down to the nearest whole number. The stock option plans of Hycor include the following:  
    the Hycor Biomedical Inc. 2001 Stock Option Plan;
    the Hycor Biomedical Inc. 1992 Incentive Stock Plan; and
    the Hycor Biomedical Inc. Nonqualified Stock Option Plan for Non-Employee Directors, as amended. The exercise price per share for the Stratagene common stock issuable under each Hycor option
equals the per share exercise price of the Hycor common stock purchasable under the Hycor option
divided by the exchange ratio of 0.6158, rounded up to the nearest whole cent. Stratagene has reserved for issuance a number of shares of Stratagene common stock at least
equal to the number of shares of Stratagene common stock that are issuable upon the exercise of
options assumed by Stratagene in connection with the Hycor merger. Stratagene assumed options to
purchase an aggregate of 756,822 shares of Stratagene common stock in connection with the merger. The total purchase consideration for the acquisition of Hycor was $45,714,053, based on the
following components: Purchase consideration:Fair value of 5,015,453 Stratagene common shares issued at $8.10 per share
    
    $
    40,641,622Fair value of Hycor fractional shares acquired with cash
    
    
    6,120Fair value of Hycor common stock options assumed
    
    
    3,331,223Merger related costs
    
    
    1,735,088Total purchase consideration
    
    $
    45,714,053
 43




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The following represents an allocation of the purchase price to the acquired assets and the
assumed liabilities of Hycor. Stratagene considered a number of factors in its determination of the
allocation of purchase price, including the results of a third-party valuation. Stratagene
completed its final analysis of the purchase price allocation related to the Hycor merger in the
fourth quarter of 2004 and recorded an adjustment to increase deferred tax assets by $619,509 based
on the completion of the tax returns as of the merger date. The offset of $619,509 was reflected
in goodwill. Purchase price allocation:Current assets
    
    $
    15,631,593Property and equipment
    
    
    2,269,676Goodwill
    
    
    27,234,214Other non-amortizable intangible assets
    
    
    1,575,000Amortizable intangible assets
    
    
    1,669,000Unearned stock-based compensation for unvested stock options assumed
    
    
    781,622Deferred tax assets, net
    
    
    1,024,239Total assets acquired
    
    
    50,185,344Total liabilities assumed
    
    
    (4,471,291
    )Net assets acquired
    
    $
    45,714,053
 Goodwill represents the excess of the purchase price over the fair value of the tangible and
identifiable intangible assets. The other non-amortizable intangible assets represent $1,575,000
for a trade name with an indefinite life. The amortizable intangible assets include $480,000 for
patents and trademarks, which will be amortized over 1 to 5 years, and $1,189,000 for contractually
based customer relationships, which will be amortized over 1 to 5 years. Unearned stock-based compensation for unvested Hycor stock options assumed is the sum of the
intrinsic value of each unvested stock option assumed by Stratagene in the merger with Hycor. The
unvested portion of the assumed options will be amortized over the remaining vesting period using
the graded vesting method prescribed under FASB Interpretation (FIN) No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans. 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.
Joseph A. Sorge, Stratagenes Chief Executive Officer (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 Dr. Sorges note receivable to the Company, which
was $3,351,311 at June 2, 2004, including interest. Dr. Sorge satisfied the remaining
portion of his shareholder note receivable on June 2, 2004 by tendering an aggregate of
524,160 shares of common stock to Stratagene at a price of approximately $6.50 per share.
The share price was based on Hycors stock price of approximately $4.00 at the time
Stratagene and Hycor agreed on the repurchase, 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 amount of approximately $1,670,000, which was
evidenced by a promissory note with a 39-month term and an interest rate of 3.89% per
annum. This promissory note was paid in full by Stratagene in December 2004.
    Stratagene entered into a new employment agreement with Dr. Sorge, pursuant to which,
among other things, 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 contract provides for Dr.
Sorges base salary to be reviewed on at least an annual basis by the compensation
committee of the board of directors, which may also increase Dr. Sorges base salary from
time to time in its discretion. It is anticipated that if the Company establishes any
general bonus program for senior executives based upon the
attainment of established goals, Dr. Sorge will be entitled to participate in such program
on a basis at least comparable to other senior executives. Dr. Sorge may also receive
bonuses at the discretion of the board of directors upon the recommendation of the
compensation committee. 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. 44




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
    In accordance with the terms of the instrument governing its then outstanding
subordinated notes, Stratagene converted $9.0 million in principal amount of the
subordinated notes into 1,753,604 shares of Stratagene common stock. As a result of the
conversion, there are no subordinated notes outstanding subsequent to the merger. Pro Forma Information The results of operations of Hycor have been included in the accompanying consolidated
financial statements of Stratagene from the date of acquisition. However, the following unaudited
pro forma information assumes that the June 2, 2004 Hycor merger occurred on January 1, 2004 and
2003, respectively. These unaudited pro forma results have been prepared for comparative purposes
only and are not indicative of the results of operations that would have actually resulted had the
acquisition been in effect as of the periods indicated above, or of future results of operations.
The unaudited pro forma results for the years ended December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Revenues
    
    $
    93,779,136
    
    
    $
    89,459,683Net income
    
    $
    8,715,988
    
    
    $
    6,692,972Earnings per share:Basic
    
    $
    0.40
    
    
    $
    0.31Diluted
    
    $
    0.40
    
    
    $
    0.30Weighted average shares:Basic
    
    
    21,909,391
    
    
    
    21,790,580Diluted
    
    
    21,915,191
    
    
    
    22,032,381
 The unaudited pro forma information presented above has been adjusted for charges for
material, nonrecurring items that include the following:  
    removing interest income on shareholder loans that were paid off upon the closing of the merger;
    removing interest expense on subordinated debt that converted to common stock upon the closing of the merger;
    recording amortization expense on acquired other intangible assets;
    recording amortization expense on unearned stock-based compensation for assumed stock options;
    reducing the CEOs salary pursuant to a new employment agreement effective on the merger date;
    removing Hycors merger related costs incurred in the periods presented; and
    recording the tax provision adjustment to the pro forma statement of operations at the statutory rate of 36%. BCH Acquisition Concurrently with the closing of the Hycor merger, Stratagene acquired substantially all of
the assets of BCH, including BCHs interests in its subsidiaries. In exchange, Stratagene forgave
all of the outstanding intercompany indebtedness owed by BCH and its subsidiaries to Stratagene of
approximately $5.4 million and assumed all of the other outstanding liabilities of BCH and its
subsidiaries of approximately $0.8 million. Because Stratagene and BCH were under common control,
and substantially all of the BCH membership units were held by certain Stratagene shareholders, the
acquisition of BCH was recorded on a historical cost basis. As such, there was no adjustment of
BCHs assets and liabilities to fair value and no goodwill resulting from the purchase. As of and
for the periods ended December 31, 2004, Stratagenes financial statements are presented on a
consolidated basis, which represents a change in reporting entity under Accounting Principles Board
(APB) Opinion No. 20, Accounting Changes. Previously combined statements are now
presented on a consolidated basis as a result of the transaction. There is no change to income
for previous periods presented on a combined basis. For tax purposes, this transaction is
considered a taxable pooling. The financial statements reflect net deferred tax assets of
approximately $875,000 for differences between the tax and book basis of assets and liabilities
acquired by Stratagene. Prior to the acquisition date, Stratagene presented its financial statements on a combined
basis with BCH. BCH consisted substantially of limited liability companies that were treated as
partnerships for income tax purposes; therefore, any related income tax liabilities were the
responsibility of the members of BCH. As a result, the operations of BCH did not reflect a
provision for income taxes in the combined financial statements, including its share of the $1.8
million gain in equity in earnings of a joint venture on June 1, 2004. (See Note 15) Beginning on
June 2, 2004, the consolidated results of Stratagene, which includes the results of BCH, include a
provision for income taxes. As part of the BCH acquisition, Stratagene acquired BCHs interests in its subsidiaries, which
include Phenogenex, LLC 45




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(Phenogenex), Iobion Informatics, LLC and subsidiaries (Iobion) and an investment in
a joint venture consisting of a 49% interest in a limited partnership that operates a research lab.
The investment is accounted for under the equity method. As a result of the acquisition, Stratagene owned 100% of Phenogenex and approximately 78% of
Iobion. The remaining 22% interest in Iobion was represented by membership units held by two
individuals, one of which is now an employee of Iobion and one is a consultant to the Company. In
October 2004, the Company purchased the remaining 22% outstanding membership interests in Iobion
owned by these individuals. As a result of the purchase of these minority interests, Stratagene now
owns 100% of Iobion. Total cash consideration of $330,000 and an intangible asset of $330,000 was recorded and is being
amortized to expense over 36 months. 4. Earnings Per Share (EPS) Basic EPS is based on the weighted-average number of shares outstanding during the periods,
while diluted EPS additionally includes the dilutive effects of the Companys outstanding options
computed using the treasury stock method. The number of shares used in computing EPS is as
follows: Twelve Months Ended December 31,2004
    
    
    2003
    
    
    2002Weighted average shares:Basic
    
    
    19,307,564
    
    
    
    15,632,668
    
    
    
    15,632,668Effect of dilutive common stock options
    
    
    5,800
    
    
    
    
    
    
    
    Diluted
    
    
    19,313,364
    
    
    
    15,632,668
    
    
    
    15,632,668
 Options outstanding totaling 2,338,395, 1,660,338 and 1,709,448 for the years ended December
31, 2004, 2003 and 2002, respectively, were excluded from the calculations of earnings per common
share, as their effect would have been antidilutive. 5.Intangible Assets and Goodwill The following sets forth the Companys intangible assets by major asset class: December 31, 2004
    
    
    December 31, 2003Useful 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
    
    $
    7,303,757
    
    
    $
    3,324,128
    
    
    $
    3,979,629
    
    
    $
    5,651,019
    
    
    $
    2,667,010
    
    
    $
    2,984,009Amortizable intangible assets
    
    1 - 5 years
    
    
    1,189,000
    
    
    
    218,848
    
    
    
    970,152
    
    
    
    
    
    
    
    
    
    
    
    Intangible assets not subject to amortization:Non-amortizable intangible assets
    
    
    
    
    
    
    1,575,000
    
    
    
    
    
    
    
    1,575,000
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    
    
    
    
    27,234,214
    
    
    
    
    
    
    
    27,234,214
    
    
    
    
    
    
    
    
    
    
    
    $
    37,301,971
    
    
    $
    3,542,976
    
    
    $
    33,758,995
    
    
    $
    5,651,019
    
    
    $
    2,667,010
    
    
    $
    2,984,009
 Amortizable patents and other includes costs incurred in connection with patent
applications, which consist principally of legal fees. Amortizable intangible assets,
non-amortizable intangible assets and goodwill were established in connection with the merger with
Hycor (see Note 3). Amortization expense totaled $875,967, $359,419 and $403,824 for the years ended December 31,
2004, 2003 and 2002, respectively. Amortization expense in each of the next five fiscal years is
expected to be as follows: Year
    
    Amount2005
    
    $
    774,7662006
    
    
    722,9502007
    
    
    630,2462008
    
    
    458,5432009
    
    
    369,484Thereafter
    
    
    1,993,792Total
    
    $
    4,949,781
 46




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6. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: December 31,2004
    
    
    2003Accrued compensation
    
    $
    3,008,605
    
    
    $
    1,302,102Accrued royalties
    
    
    4,825,246
    
    
    
    2,310,744Warranty
    
    
    333,277
    
    
    
    596,788Other accrued expenses and liabilities
    
    
    1,710,125
    
    
    
    1,122,480Total
    
    $
    9,877,253
    
    
    $
    5,332,114
 See Note 13, Commitments and Contingencies, Royalty Payments. 7. Long-Term Debt The Company has debt instruments bearing interest at variable rates (up to 4.95% as of
December 31, 2004), most of which are guaranteed by Stratagene and secured by substantially all of
the assets of Stratagene. The outstanding debt 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 debt instruments also restrict the
payments of dividends to the Companys stockholders. As of December 31, 2004, the Company was not
in compliance with its fixed charge coverage ratio as a result of its election to prepay its term
loan, which had a maturity date in 2006. The Company obtained an amendment to the credit agreement
subsequent to December 31, 2004, which cured the violation. The Company was in compliance with all
other covenants at December 31, 2004. Long-term debt and line of credit consist of the following : December 31,2004
    
    
    2003Reducing revolving line of
credit not to exceed $9,000,000
bearing interest at LIBOR plus
2.55% (4.95% at December 31, 2004;
4.08% average rate for fiscal
2004); matures January 31, 2007;
availability reduces $250,000 per
month beginning May 31, 2006; debt
held by subsidiary of the Company,
guaranteed by the Company and
secured by substantially all of its
assets
    
    $
    4,956,923
    
    
    
    Convertible subordinated notes
bearing interest at 15%. $9,000,000
converted into 1,753,604 shares of
common stock upon the closing of
the merger with Hycor (see Note 3)
    
    
    
    
    
    $
    23,985,101Debt held by subsidiary of the
Company from bond indenture
agreement with Bastrop County,
Texas in the original principal
amount of $9,100,000, at an average
interest rate of 1.44% and 1.68%
for the years ended December 31,
2004 and 2003, respectively (2.1%
and 1.65% at December 31, 2004 and
2003, respectively); sinking fund
payment of $735,000 required in
April 2005, reducing to $240,000
per year through April 2021, and
then to $175,000 in April 2022 when
the bonds mature; proceeds are
restricted to the purchase of land,
building and equipment
    
    
    4,750,000
    
    
    
    5,620,000Phenogenex promissory note totaling
$637,500 and bearing interest at
7.5%; thirty-five monthly payments
of $5,179 beginning July 2003, with
a final payment of $596,938 due
June 2006; secured by certain real
property located in Jackson,
Wyoming, which is the location of
the Phenogenex operations; note was
paid in full in July 2004
    
    
    
    
    
    
    630,074Vehicle financing totaling
$156,486, interest up to 4.5%;
notes paid in full during September
2004
    
    
    
    
    
    
    146,5049,706,923
    
    
    
    30,381,679Current portion of long-term debt
    
    
    735,000
    
    
    
    920,062Long-term debt, less current portion
    
    $
    8,971,923
    
    
    $
    29,461,617
 47




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The aggregate maturities of long-term debt principal payments for each of the five years
subsequent to December 31, 2004 are as follows: PrincipalPaymentLess than one year
    
    $
    735,000One year
    
    
    240,000Two years
    
    
    5,196,923Three years
    
    
    240,000Four years
    
    
    240,000Thereafter
    
    
    3,055,000Total
    
    $
    9,706,923
 8. Comprehensive Income Components of comprehensive income, net of income taxes, were as follows: Twelve Months Ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    7,438,431
    
    
    $
    3,252,138
    
    
    $
    504,599Foreign currency translation gain (loss)
    
    
    124,019
    
    
    
    (298,797
    )
    
    
    (470,832
    )Unrealized gains on securities
    
    
    150
    
    
    
    
    
    
    
    Comprehensive income, net of tax
    
    $
    7,562,600
    
    
    $
    2,953,341
    
    
    $
    33,767
 9. Related Party Transactions Activity for related parties during 2004, 2003, and 2002 is as follows: The Company had a promissory note in the amount of $240,000 due from two stockholders, one of
which is an officer and director of the Company. The note was secured by a second deed of trust on
certain real property located in San Diego County, California and bears interest at 8%, compounded
annually. Principal and interest were due August 12, 2002. Upon failure to pay the note at
maturity in 2002, the note provided for the interest rate to become 10%, compounded annually, on
the entire remaining principal balance. At December 31, 2003, the outstanding balance of this note,
net of interest paid, was $265,639. The note was paid in full in June 2004 (see Note 3). Total
interest income for this note was $ 11,240, $23,913 and $11,089 for the years ended December 31, 2004, 2003 and 2002,
respectively. A second promissory note in the amount of $250,000 with the same parties was also
outstanding. This note was secured by a second mortgage on certain real property located in Wyoming
and bore interest at 8%, compounded annually. Principal and interest was due upon the earlier of
the sale of the related property or July 9, 2005. The second mortgage provided that the Company
may, at its option, release the indebtedness, extend the due date, alter the terms of payment of
the note, or alter, substitute or release property securing the indebtedness. At December 31, 2003,
the outstanding balance of this note was $280,736, and the note was paid in full in December 2004.
Total interest income for the years ended December 31, 2004, 2003 and 2002 was $21,686, $21,014 and
$9,722, respectively. The Company had an unsecured note from a former employee totaling $55,122 at December 31,
2003, including interest, which was included in due from related party. The loan bears interest at
5% and was due on December 30, 2003. Total interest earned on this note was $0, $2,500 and $2,506
for the years ended December 31, 2004, 2003 and 2002, respectively. The Company fully reserved the
outstanding balance on this note as of December 31, 2003. Additional amounts due from related parties totaled $170,895 at December 31, 2003. Total
interest earned on these notes was $1,553, $3,519 and $3,315 for the years ended December 31, 2004,
2003 and 2002, respectively. These amounts are comprised of an unsecured loan and a receivable due
from a stockholder of Stratagene. The unsecured loan totaled $40,580 at December 31, 2003,
including interest. The loan bore interest at 6% and was due on August 15, 2001. The note was paid
in full in June 2004. The receivable totaled $130,315 at December 31, 2003, including interest.
This receivable was paid in full in June 2004. See Note 3 for further information on the
additional amounts with related parties. In June 2004, the Company entered into a promissory note payable to an officer of the Company
in the principal amount of approximately $1,670,000. The promissory note had a 39-month term and an
interest rate of 3.89% per annum. In December 2004, the Board of Directors approved the pre-payment
in full of the outstanding principal and interest under the promissory note. Total interest paid
for the year ended December 31, 2004 totaled $33,898. In June 2004, Dr. Sorge entered into a lock-up agreement with Hycor. Dr. Sorge agreed to vote
all of the shares of Stratagene 48




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common stock he controls in favor of the merger with Hycor and in favor of a slate of
directors containing two nominees for the board of directors of Stratagene recommended by the board
of directors of Hycor. Dr. Sorge also agreed to use his
reasonable best efforts to provide that one
or more of the Hycor nominees are members of the audit, compensation and nominating committees of
the Stratagene board of directors until after the second annual meeting of Stratagene after the
closing of the merger. 10. Stockholders Equity Stratagenes Common Stock Each share of common stock is entitled to one vote. The holders of
common stock are also entitled to receive dividends out of legally available funds when declared by
the board of directors, subject to the rights of any preferred stock. In July 2003, the Board of Directors approved a 1 for 2 reverse stock split of Stratagenes
common stock. Financial and share data appropriately reflect this reverse stock split. Registration Rights Agreement In relation to the merger with Hycor in June 2004, Stratagene
entered into a registration rights agreement with Dr. Sorge, pursuant to which Dr. Sorge was
granted the right, subject to certain conditions, to require the registration of 2,000,000 shares
of Stratagene common stock controlled by Dr. Sorge or one of his affiliates and customary piggyback
registration rights to participate in other registrations. Stock Options In 1996, Stratagene adopted a non-qualified stock option plan (the Option
Plan), which provides for the grant of options to employees of Stratagene or a subsidiary of
Stratagene to purchase up to 2,000,000 shares of Class B common stock at exercise prices of not
less than the fair value of the Class B common stock. Options under the Option Plan vest over a
period determined by Stratagenes Board of Directors, but not longer than five years and three
months after the grant date. In 2000, the Board of Directors offered all 1996 stock option plan
holders who held Class B common stock options that were to expire in April 2001 the right to
receive deferred compensation in consideration of their agreement to terminate the April 2001
options. The holders of these options received deferred compensation of $4.00 per share of Class B
common stock less the stock option exercise price, plus accrued interest of 6.25% per annum.
Interest was payable annually, with the principal payable in one lump sum on December 31, 2003. On
December 31, 2003, the deferred compensation was paid in full including interest. In 2002, the Company offered an employee who held Class B common stock options that had
expired the right to receive deferred compensation in consideration for terminating the options.
The holder of the options received deferred compensation of $268,200, plus accrued interest of
6.25% per annum. Interest was payable annually, with the principal payable in one lump sum on June
30, 2004. The Company recognized selling and marketing compensation expense of $268,200 in 2002 and
paid the principal in full on June 30, 2004. Also in 2002, the Company granted an employee options
to purchase up to 59,550 shares of common stock based on the achievement of certain performance
requirements. Because the number of options that will ultimately be issued was unknown at the grant
date, the award was accounted for as variable. Stock compensation expense related to these options
was $0 in 2004, 2003 and 2002, as the performance requirements had not been met. These options
were terminated in connection with an amendment to the individuals employment agreement. 2000 Stock Option Plan, as amended and restated In 2000, Stratagene adopted a non-qualified
stock option plan (Plan), which provides for the grant of options to employees of Stratagene or a
subsidiary of Stratagene and BCH or a subsidiary of BCH to purchase up to 2,000,000 shares of
common stock at exercise prices of not less than the fair value of the common stock. Options under
the 2000 Plan vest over a period determined by Stratagenes Board of Directors, but not longer than
five years. The options expire seven years after the grant date. In 2000, the Board of Directors approved the Plan, a form of Non-Qualified Stock Option
Agreement (Option Agreement) to be used with the Plan, and the granting of options, effective
December 31, 2000, to purchase an aggregate of 1,272,543 shares of common stock subject to the
execution of the Option Agreements. For the years ended December 31, 2004, 2003 and 2002, options
to purchase additional shares of common stock totaling 0, 335,871 and 200,978, respectively, were
granted, subject to execution of the Option Agreements, in employment offer letters or by special
grant of the Plan Administrator pursuant to the Plan. In 2004, prior to the completion of the merger with Hycor, Stratagene amended and restated its
existing 2000 stock option plan. As amended and restated, the stock option plan permits the
issuance of options to purchase an aggregate of 3,000,000 shares of common stock. Options under
the amended and restated 2000 plan vest over a period determined by Stratagenes Board of
Directors, but not longer than five years. The options expire ten years after the grant date. In accordance with APB No. 25, the Company records compensation expense based on the fair
value of stock-based awards to non-employees. The fair value for these options is based on the
Black-Scholes pricing model using the assumptions described in Note 2, Accounting for Stock-Based
Compensation. The Company recognized $357,171, $25,235 and $24,097 of stock-based compensation
expense, which has been recorded in research and development expense for the years ended December
31, 2004, 2003 49




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and 2002, respectively. 2004 Independent Directors Option Plan In June 2004, the Company adopted a directors stock
option plan for its independent directors. Approximately 300,000 shares of the Companys common
stock have been reserved for issuance under this plan. The independent directors each received an
automatic award of an option to purchase 20,000 shares of common stock under the directors stock
option plan upon initial appointment or election to the Companys board of directors and,
thereafter, will receive an automatic award of an option to purchase up to 10,000 shares of common
stock at each annual meeting occurring during their term as a member of Stratagenes board of
directors. The options vest in three equal annual installments on the anniversary date of such
grant and expire ten years after the grant date. The price per share of these options shall equal
100% of the fair market value of a share of common stock on the date the option was granted. The following table summarizes option activity for all plans: Weighted-averageExerciseOptions
    
    
    PriceOutstanding, January 1, 2002
    
    
    1,682,942
    
    
    $
    10.66Granted
    
    
    200,978
    
    
    
    10.82Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (350,591
    )
    
    
    11.72Outstanding, December 31, 2002
    
    
    1,533,329
    
    
    $
    10.44Granted
    
    
    335,870
    
    
    
    8.44Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (420,177
    )
    
    
    9.00Outstanding, December 31, 2003
    
    
    1,449,022
    
    
    $
    10.34Options assumed from Hycor in the merger
    
    
    756,822
    
    
    
    5.34Granted
    
    
    1,514,960
    
    
    
    8.75Exercised
    
    
    (184,829
    )
    
    
    3.34Forfeited
    
    
    (540,566
    )
    
    
    10.05Outstanding, December 31, 2004
    
    
    2,995,409
    
    
    $
    8.76
 The following table summarizes information about Stratagene stock options outstanding as
of December 31, 2004: Options Outstanding
    
    
    Options ExercisableNumber
    
    
    Weighted-
    
    
    
    
    
    
    NumberOutstanding
    
    
    average
    
    
    Weighted-
    
    
    Exercisable
    
    
    Weighted-as of
    
    
    Remaining
    
    
    average
    
    
    as of
    
    
    averageDecember 31,
    
    
    Contractual
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseRange of Exercise Prices
    
    2004
    
    
    Life (in Years)
    
    
    Price
    
    
    2004
    
    
    Price$1.63-$8.00
    
    
    674,445
    
    
    
    5.24
    
    
    $
    5.89
    
    
    
    363,323
    
    
    $
    5.43$8.11
    
    
    536,250
    
    
    
    9.46
    
    
    
    8.11
    
    
    
    60,750
    
    
    
    8.11$8.47-$9.00
    
    
    260,500
    
    
    
    7.47
    
    
    
    8.59
    
    
    
    56,125
    
    
    
    9.00$9.34
    
    
    818,960
    
    
    
    9.42
    
    
    
    9.34
    
    
    
    
    
    
    
    $9.60-$11.50
    
    
    237,572
    
    
    
    2.97
    
    
    
    10.14
    
    
    
    200,220
    
    
    
    10.12$12.00
    
    
    467,682
    
    
    
    3.30
    
    
    
    12.00
    
    
    
    345,024
    
    
    
    12.002,995,409
    
    
    
    6.85
    
    
    $
    8.76
    
    
    
    1,025,442
    
    
    $
    8.91
 In April 2004, 41,250 shares were delivered to an officer on a deferred basis pursuant to
an option exercised in 2001. During 2004, 2003 and 2002, the Company recognized $101,172, $47,346
and $(26,568) of general and administrative expense (benefit) associated with this transaction,
respectively. Employee Stock Purchase Plan In June 2004, the Company adopted the Stratagene Corporation
Employee Stock Purchase Plan (ESPP) that provides for the issuance of up to 1,000,000 shares of
the Companys common stock. The ESPP is intended to qualify under Section 423 of the Internal
Revenue Code and is for the benefit of qualifying employees as designated by the board of
directors. Under the terms of the ESPP, purchases are made quarterly. Participating employees may
elect to have a maximum of 15% of their compensation, up to a maximum of $25,000 of the fair market
value of the common stock per calendar year, withheld through payroll deductions to purchase shares
of common stock under the ESPP. The price of the common stock purchased under the ESPP will be
equal to 85% of the fair market value of the common stock on the offering or purchase date,
whichever is lower. The initial quarterly purchase period began on July 1, 2004. During 2004,
25,856 shares of common stock were issued under the ESPP from proceeds of $157,022. 50




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11. Phantom Stock Plan Through December 2000, Stratagene California had a phantom stock plan whereby employees with
one year of service could receive their bonus in the form of cash or phantom stock. On December 20, 2000, the Company terminated its phantom stock plan and canceled the
outstanding phantom stock rights and phantom stock option rights. Each holder of phantom stock
received aggregate consideration of $4.40 per phantom stock right, payable in cash or a promissory
note, plus accrued interest of 6.25% per annum. Total cash payments for the year ended December 31,
2000 were $191,214 and total note obligations were $217,229 payable in one lump sum on December 31,
2003 with interest paid annually. On December 31, 2003, these notes were paid in full, including
interest. Each holder of phantom stock option rights received consideration of $4.40 per phantom
stock option right less the applicable phantom stock option exercise price, payable in cash or
deferred compensation, plus accrued interest of 6.25% per annum. Total cash payments for the year
ended December 31, 2000 were $359,790 and total deferred compensation was $536,266 payable in one
lump sum on December 31, 2003 with interest paid annually. On December 31, 2003, the deferred
compensation was paid in full, including interest. 12. Income Taxes Components of income tax expense of the Company are as follows: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    2,617,912
    
    
    $
    1,345,136
    
    
    $
    796,871State
    
    
    174,550
    
    
    
    58,142
    
    
    
    (16,673
    )Foreign
    
    
    38,906
    
    
    
    15,696
    
    
    
    9,4132,831,368
    
    
    
    1,418,974
    
    
    
    789,611Deferred:Federal
    
    
    450,792
    
    
    
    461,825
    
    
    
    112,488State
    
    
    (22,160
    )
    
    
    8,522
    
    
    
    (83,098
    )Foreign
    
    
    
    
    
    
    (4,077
    )
    
    
    31,639428,632
    
    
    
    466,270
    
    
    
    61,029Income tax expense
    
    $
    3,260,000
    
    
    $
    1,885,244
    
    
    $
    850,640
 The actual income taxes differ from the expected income taxes (computed by applying the
federal income tax rate of 34% to the Companys earnings before income taxes) as follows: 2004
    
    
    2003
    
    
    2002Computed expected federal income taxes of the Company
    
    $
    3,637,467
    
    
    $
    1,746,710
    
    
    $
    454,790Foreign operations, net of tax
    
    
    253,118
    
    
    
    (115,922
    )
    
    
    (72,179
    )State income taxes, net of federal benefit
    
    
    93,727
    
    
    
    43,999
    
    
    
    (34,116
    )General business credits
    
    
    (185,191
    )
    
    
    (165,677
    )
    
    
    (170,751
    )BCH (income) loss not included in corporate group
    
    
    (570,689
    )
    
    
    288,523
    
    
    
    560,582Non-deductible expenses and other, net
    
    
    31,568
    
    
    
    87,611
    
    
    
    112,314$
    3,260,000
    
    
    $
    1,885,244
    
    
    $
    850,640
 The Company estimates a provision for income taxes for all tax jurisdictions in which it
operates. During 2004, Stratagene merged with Hycor and will file consolidated tax returns that
include the results of operations of Hycor subsequent to the merger date. In connection with the
allocation of purchase price to the net assets of Hycor, Stratagene recorded the fair value of the
Hycor deferred tax assets as of the merger date. The net deferred tax assets of Hycor were
approximately $2.5 million and primarily related to net operating loss (NOL) carryforwards,
research and other credits and temporary differences between the book and tax basis of the Hycor
net assets recorded at the merger date. These net operating losses and credits are subject to an
annual limitation by Section 382 of the Internal Revenue Code and have a 20 year life. Stratagene
believes that the Hycor NOLs and other credits recorded under purchase accounting will be realized
within the carryforward periods. 51




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Deferred income taxes result from temporary differences between the tax basis of an asset or a
liability and its reported amount in the accompanying consolidated balance sheets. The components
of deferred tax assets and liabilities at December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Deferred tax assets:Accounts receivable
    
    $
    284,631
    
    
    $
    363,089Inventories
    
    
    1,372,872
    
    
    
    800,706Accrued expenses and other liabilities
    
    
    1,139,405
    
    
    
    700,968Long-term debt, net
    
    
    49,311
    
    
    
    59,936General business credits
    
    
    1,675,539
    
    
    
    501,320Net operating losses
    
    
    2,292,062
    
    
    
    168,317Deferred tax assets
    
    
    6,813,820
    
    
    
    2,594,336Deferred tax liabilities:State taxes
    
    
    (379,753
    )
    
    
    (177,156
    )Patents
    
    
    (983,241
    )
    
    
    (828,464
    )Property and equipment
    
    
    (315,108
    )
    
    
    (767,948
    )Acquired intangibles and other
    
    
    (908,063
    )
    
    
    (2,586,165
    )
    
    
    (1,773,568
    )Valuation allowance
    
    
    (2,008,540
    )
    
    
    Net deferred tax assets
    
    $
    2,219,115
    
    
    $
    820,768
 At December 31, 2004, the Company had approximately $900,000 of federal NOL carryforwards,
approximately $500,000 of federal research credits and approximately $1,100,000 of state research
credits. Utilization of a portion of the federal NOLs has been limited due to a change in ownership
by Section 382 of the Internal Revenue Code. The Company recognizes state research 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 utilized. The state
research credits have an indefinite carryforward period. At December 31, 2004, the Company had $5,400,000 of foreign NOL carryforwards. These foreign
NOLs have an indefinite carryforward period. The Company has established a valuation allowance for
the full amount of the foreign NOLs based on an evaluation of the history of operating
profitability of each operation and the projection of the future taxable income for each entity.
Approximately $1.4 million of the valuation allowance relates to acquired NOLs, which to the extent
recognized in the future will result in a reduction of goodwill. Concurrent with the closing of the Hycor merger, the Company acquired the assets of BCH, which
consists of substantially limited liability companies that are treated as partnerships for income
tax purposes. Through the acquisition date, any related income tax liabilities were the
responsibility of the members of BCH, and the Company did not reflect a provision for income taxes.
Beginning on June 2, 2004, Stratagene has provided a provision for income taxes in the consolidated
statements for the results of operations of BCH. 13. Commitments and Contingencies Operating Lease Commitments The Company leases certain facilities and equipment under
noncancelable operating leases, with equipment leases expiring through January 2007 and facility
leases for the Companys headquarters in La Jolla and its other offices expiring on various dates
between September 30, 2005 and September 30, 2008. Total rental expense under all operating leases
was $1,686,494, $1,215,123 and $1,458,755 in 2004, 2003 and 2002, respectively. Future minimum
lease payments under noncancelable operating leases are as follows: Future MinimumPayment2005
    
    $
    2,107,9372006
    
    
    2,029,8672007
    
    
    1,783,0012008
    
    
    766,9482009
    
    
    Total
    
    $
    6,687,753
 License Agreements In connection with its research and development efforts, Stratagene has
entered into various license agreements with unrelated third parties which provide Stratagene with
rights to develop, produce and market products using certain technologies and patent rights
maintained by the third parties. The terms of the various agreements require Stratagene to pay
royalties ranging from 1% to 30% of sales on products which have been produced using the
technologies. Such agreements generally provide 52




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for terms that commence upon execution and continue until expiration of the last patent
relative to the technology. During 2004, 2003 and 2002, royalty expenses under the aforementioned
license agreements were approximately $4,281,000, $3,805,000 and $4,376,000, respectively, and were
included in cost of products sold in the accompanying consolidated statements of operations. Royalty Payments Accrued expenses and other liabilities at December 31, 2004 and 2003
include $4.1 million and $1.7 million, respectively, of accrued royalties due to an unrelated third
party license holder for estimated royalties due from the second quarter of 2003 through the
respective balance sheet date. The Company has accrued royalties under this patent license
agreement based on an estimate of the amounts payable in accordance with the terms of the patent
license agreement. The Companys calculations of royalty payments are subject to review by the
license holder. Beginning in the second half of 2003, such royalty payments have been withheld by
the Company while the Company evaluates a possible overpayment of royalties paid in prior periods.
However, no assurances can be made that the Company will recover any of the overpayments.
Stratagenes financial position or results of operations could be materially affected if the
parties subsequently determine that the royalty calculation differs significantly from the amounts
recorded by Stratagene. The patent underlying this royalty obligation expires in the United States
in March 2005. The corresponding foreign patents will expire in 2006 and 2007. Once the patents
expire, Stratagene will no longer be required to pay royalties on future product sales related to
these PCR process patents, which will result in an approximately $450,000 per quarter reduction in
royalty expense beginning in the second quarter of 2005 and an additional $150,000 reduction
beginning in the second quarter of 2006. The Company anticipates that this decrease in royalty
expense will be partially offset by decreases in the average unit selling price of products using
the patented technology following the expiration of the patents. 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. Information on the most significant of these matters follows. 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 (1) that Stratagene willfully infringed
United States patent no. 4,981,797 for making, using and selling competent E. colicell products
and (2) 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. This action is currently stayed
pending resolution of the Takara Bio litigation on the same patent, described below. Invitrogen
has also sought re-examination of the 772 patent with the United States Patent and Trademark
Office. 53




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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 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. The
partiesentered into a joint stipulation, effective as of December 1, 2004, to stay the
proceedings to continue to pursue settlement of this action. No trial date is currently set. Third Wave Technologies In September 2004, Stratagene was sued by Third Wave Technologies, Inc. in the United States
District Court for the Western District of Wisconsin. The complaint alleges that Stratagene
infringes United States patent nos. 6,348,314 and 6,090,543, and has induced or contributed to
infringement of the patents-in-suit, by making, using, importing, offering for sale or selling
assays employing cleavage of nucleic acids. Third Wave seeks a preliminary and permanent
injunction, monetary damages (compensatory and enhanced), and recovery of its attorneys fees and
costs. In October 2004, Stratagene filed its answer to the complaint responding that it does not
infringe a valid or enforceable claim of either patent. Stratagene has also asserted affirmative
defenses, including invalidity and unenforceability, and counterclaims of invalidity and
non-infringement. Stratagene is seeking an award of its fees and costs incurred in defending
itself in this action. Applera Corporation In November 2004, Stratagene received notice of a patent infringement suit filed by Applera
Corporation against it and other parties in the United States District Court for the District of
Connecticut for alleged infringement of U.S. patent no. 6,814,934. The Stratagene products alleged
to infringe are the Mx4000 and Mx3000P instruments and certain related reagents. In December 2004,
Stratagene filed its answer to the complaint responding that it does not infringe, directly or
indirectly, any valid and enforceable claim of the 934 patent and asserting related counterclaims
of invalidity and non-infringement. An estimate of the possible loss or range of loss cannot be
made at this time and Stratagene is unable to determine whether the outcome of the litigation could
have a material impact on its results of operations or financial condition in any future period. Ariadne
Genomics In
March 2005, the Company filed a demand for arbitration against
Ariadne Genomics for declaratory relief and damages relating to the
Exclusive Marketing and Distribution Agreement (the "Agreement")
between the parties. In particular, Stratagene seeks to confirm that
it holds the exclusive right to market, sell and distribute the
software products covered by the Agreement and all upgrades thereof
in any country or territory in the world, except Japan, for the
duration of the term of the Agreement.  Further, Stratagene seeks to
confirm that it is the party entitled to ownership and use of the
trademark "Pathway Assist" or, alternatively, that neither party may
use that name.  The matter is currently pending before the American
Arbitration Association of San Diego, California; the respondent has
not yet filed an answering statement or any cross claims. Other Legal Matters Pursuant to the terms of a litigation settlement in 2002, Stratagene is entitled to receive
35,290 shares of a European company. Stratagene received 11,763 shares in August 2004 and an
additional 11,764 shares in September 2004. These shares were sold and converted into cash upon
receipt, resulting in a gain of approximately $664,000 in other income during the quarter ended
September 30, 2004. Because of uncertainties in the collectibility of the remaining 11,763 shares,
the Company has not recorded any gain related to these remaining shares as of December 31, 2004. 401(k)Savings Plan The Company has a qualified 401(k) Employee Savings Plan (the Savings
Plan) available to substantially all full-time employees over the age of 21. The Company matches 25% of the contributions of employees with one to three years of service
up to a maximum of $1,000, 25% of the contributions of employees with three to six years of service
up to a maximum of $1,750, and 30% of the contributions of employees with six or more years of
service up to a maximum of $2,500. The contributions vest immediately. The company matching expense
for the years ended December 31, 2004, 2003 and 2002 was $242,669, $194,621 and $185,138,
respectively. Employment Agreements Stratagene has entered into employment agreements with certain of its
officers, which expire from June 2006 to June 2007 with salary ranges from approximately $181,000
to $450,000. These agreements generally provide for severance benefits if the officer is terminated
by Stratagene other than for cause, as defined in the employment agreements. See Note 3 for a
summary of Dr. Sorges new employment agreement. Manufacturing move to Texas In June 2004, the Company made the decision to move the
remaining manufacturing operations it conducts in San Diego, California to its primary
manufacturing facility near Austin, Texas. The products affected by this move represent
approximately 30% of total product sales for the twelve months ended December 31, 2004. As a
result of the move, the 54




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Company will incur relocation and severance costs for employees affected by the transition. In
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the
Company has estimated the employee severance costs associated with the move and has charged those
costs to expense ratably over the future service period. Management has estimated the costs to be
approximately $110,000, which will be recognized as expense from July 2004 through March 2005.
Approximately $73,000 of expense was recorded in 2004. The entire estimated obligation is expected
to be paid by the Company at the end of the first quarter of 2005. 14. Segment Information The Company operates in two business segments: research supplies and medical diagnostics. The
segment information provided for the years ended December 31, 2004, 2003 and 2002 includes only
seven months of medical diagnostics segment information in 2004, due to the establishment of
separate reporting segments by the Company in connection with the Hycor merger on June 2, 2004. Twelve Months EndedDecember 31, 2004Research
    
    
    MedicalSupplies
    
    
    Diagnostics
    
    
    TotalProduct sales from external customers
    
    $
    71,460,980
    
    
    $
    13,351,623
    
    
    $
    84,812,603Income before income taxes (1)
    
    $
    7,188,899
    
    
    $
    3,509,532
    
    
    $
    10,698,431
 Twelve Months EndedDecember 31, 2003Research
    
    
    MedicalSupplies
    
    
    Diagnostics
    
    
    TotalProduct sales from external customers
    
    $
    69,702,650
    
    
    $
    
    
    
    $
    69,702,650Income before income taxes (1)
    
    $
    5,137,382
    
    
    $
    
    
    
    $
    5,137,382
 Twelve Months EndedDecember 31, 2002Research
    
    
    MedicalSupplies
    
    
    Diagnostics
    
    
    TotalProduct sales from external customers
    
    $
    64,511,818
    
    
    $
    
    
    
    $
    64,511,818Income before income taxes (1)
    
    $
    1,335,239
    
    
    $
    
    
    
    $
    1,335,239
   (1)
    
    Income before income taxes related to the Research Supplies segment includes impairment
charges on long-lived assets and the equity in income (loss) of joint venture. At December 31, 2004 and 2003, total assets for each business segment were as follows: 2004
    
    
    2003Research
    
    
    Medical
    
    
    
    
    
    
    Research
    
    
    MedicalSupplies
    
    
    Diagnostics
    
    
    Total
    
    
    Supplies
    
    
    Diagnostics
    
    
    TotalTotal assets
    
    $
    38,202,779
    
    
    $
    42,128,921
    
    
    $
    80,331,700
    
    
    $
    38,587,857
    
    
    $
    
    
    
    $
    38,587,857
 Information about the Companys products by market category and operations by geographic
location for the years ended December 31, 2004, 2003 and 2002 is shown below: Market Category Information:
    
    2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %Product sales by market categories:Genetic analysis
    
    $
    43,592,400
    
    
    
    51.4
    %
    
    $
    41,258,877
    
    
    
    59.2
    %
    
    $
    35,394,269
    
    
    
    54.9
    %Protein analysis and cell biology
    
    
    12,909,065
    
    
    
    15.2
    %
    
    
    10,561,318
    
    
    
    15.1
    %
    
    
    9,885,292
    
    
    
    15.3
    %Gene discovery
    
    
    9,661,546
    
    
    
    11.4
    %
    
    
    11,921,401
    
    
    
    17.1
    %
    
    
    15,026,034
    
    
    
    23.3
    %Urinalysis
    
    
    6,265,786
    
    
    
    7.4
    %
    
    
    
    
    
    
    
    
    
    
    Allergy
    
    
    5,811,118
    
    
    
    6.8
    %
    
    
    
    
    
    
    
    
    
    
    Autoimmune
    
    
    985,103
    
    
    
    1.2
    %
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    5,587,585
    
    
    
    6.6
    %
    
    
    5,961,054
    
    
    
    8.6
    %
    
    
    4,206,223
    
    
    
    6.5
    %$
    84,812,603
    
    
    
    100
    %
    
    $
    69,702,650
    
    
    
    100.0
    %
    
    $
    64,511,818
    
    
    
    100.0
    %
 55




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##### Table of Contents



Geographic Information:
    
    2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %Product sales by geographic region(a):U.S
    
    $
    61,335,195
    
    
    
    72.3
    %
    
    $
    51,889,266
    
    
    
    74.4
    %
    
    $
    49,224,467
    
    
    
    76.3
    %Netherlands
    
    
    19,048,552
    
    
    
    22.5
    %
    
    
    17,813,384
    
    
    
    25.6
    %
    
    
    15,287,351
    
    
    
    23.7
    %Japan
    
    
    1,187,017
    
    
    
    1.4
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Scotland
    
    
    1,128,987
    
    
    
    1.3
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %Germany
    
    
    2,112,852
    
    
    
    2.5
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %$
    84,812,603
    
    
    
    100.0
    %
    
    $
    69,702,650
    
    
    
    100.0
    %
    
    $
    64,511,818
    
    
    
    100.0
    %
 (a) Product sales by geographic region are presented based on the shipping point of the product. Long-lived assets by geographic region at December 31, 2004 and 2003 are as follows: 2004
    
    
    2003U.S
    
    $
    45,643,613
    
    
    $
    13,565,885Netherlands
    
    
    202,736
    
    
    
    285,021Japan
    
    
    199,137
    
    
    
    150,953Scotland
    
    
    117,296
    
    
    
    Germany
    
    
    249,261
    
    
    
    $
    46,412,043
    
    
    $
    14,001,859
 15. Transactions in Joint Venture Until December of 2004, the Company had a 49% minority interest in a limited partnership
(LP) that operated a research lab. This investment was accounted for using the equity method of
accounting. On June 1, 2004, prior to the BCH asset acquisition by the Company (Note 3), the LP
sold the assets related to its clinical diagnostics business to a third party for approximately
$4.5 million. The consolidated financial statements reflect a $1.8 million gain in equity in
earnings of joint venture for BCHs share of the realized gain on the sale of these assets. The
taxes attributable to the gain are the responsibility of the members of BCH and accordingly, the
consolidated financial statements do not include a provision for income taxes on this $1.8 million
gain. The LP made a partial distribution of the cash proceeds 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
$476,280. On December 23, 2004, the Companys rights and interests in the LP were redeemed by the LP. In
return, the Company received cash consideration of approximately $1.0 million and recorded a
non-operating loss of approximately $0.2 million for the difference between the carrying basis in
the entity on December 23, 2004 and the consideration received. As a result of the redemption
transaction, the Company has rights to additional amounts realized by the LP from future royalty
streams and future clinical trial revenues. These amounts will be recorded by the Company as other
non-operating income in future periods when the amounts are known and the collection is assured. 16. Selected Quarterly Data (unaudited) Quarterly financial data for the year ended December 31, 2004 is as follows: First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenue
    
    $
    19,422,022
    
    
    $
    19,746,529
    
    
    $
    23,076,572
    
    
    $
    22,567,480Gross profit
    
    
    13,496,437
    
    
    
    12,621,319
    
    
    
    14,989,050
    
    
    
    14,381,579Net income
    
    
    2,073,912
    
    
    
    1,459,277
    
    
    
    2,208,794
    
    
    
    1,696,448Basic net income per share
    
    $
    0.13
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.08Diluted net income per share
    
    $
    0.13
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.08
 56




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##### Table of Contents



Quarterly financial data for the year ended December 31, 2003 is as follows: First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal revenue
    
    $
    16,875,658
    
    
    $
    17,025,245
    
    
    $
    16,870,659
    
    
    $
    18,931,088Gross profit
    
    
    11,582,829
    
    
    
    11,791,621
    
    
    
    11,190,891
    
    
    
    11,992,295Net income
    
    
    1,274,675
    
    
    
    1,132,197
    
    
    
    607,880
    
    
    
    237,386Basic net income per share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.02Diluted net income per share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.02
 
   Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure None. 
 Item 9A. 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 Annual 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 Companys fourth fiscal quarter 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 registered 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. In connection with the closing of the merger transaction with Hycor in June 2004, Reginald P.
Jones, the former chief financial officer of Hycor, 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. 
 Item 9B. Other Information None. 57




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##### Table of Contents



PART III. 
 Item 10. Directors and Executive Officers of the Registrant The information required by this item will be contained in Stratagenes definitive proxy
statement to be filed with the Securities and Exchange Commission in connection with the Annual
Meeting of our Stockholders (the Proxy Statement), which is expected to be filed not later than
120 days after the end of the fiscal year ended December 31, 2004, and which is incorporated in
this report by reference. 
 Item 11. Executive Compensation The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference; provided, however, that the Compensation Committee Report
on Executive Compensation and the Performance Graph (1) shall not be deemed incorporated by
reference in this Annual Report on Form 10-K and (2) shall not otherwise be deemed filed as part
of this Annual Report on Form 10-K. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference. 
 Item 13. Certain Relationships and Related Transactions The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference. 
 Item 14. Principal Accountant Fees and Services The information required by this item will be set forth in the Proxy Statement and is
incorporated in this report by reference. 58




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##### Table of Contents



PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a) List the following documents filed as a part of this report: 1. Financial statements. The Consolidated Financial Statements required by this Item are included in Part II, Item 8 of
this Annual Report on Form 10-K beginning on page 30. 2. List of financial statement schedules. The financial statement schedules listed under Item 15(c) hereof are filed as part of this
Annual Report on Form 10-K. 3. List of exhibits. The exhibits listed under Item 15(b) hereof are filed as part of this Annual Report on Form
10-K. (b) Exhibits. The following exhibits are filed with this Annual Report on Form 10-K: ExhibitNumber
    
    Description2.1(1)
    
    Agreement and Plan of Reorganization dated as of July 24, 2003 by and among
the registrant, SHC Acquisition Sub, Inc. and Hycor Biomedical Inc.2.2(1)
    
    Amendment No. 1 to Agreement and Plan of Reorganization dated as of December
29, 2003 by and among the registrant, SHC Acquisition Sub, Inc. and Hycor
Biomedical Inc.2.3(1)
    
    Amendment No. 2 to Agreement and Plan of Reorganization dated as of February
25, 2004 by and among the registrant, SHC Acquisition Sub, Inc. and Hycor
Biomedical Inc.3.1(2)
    
    Second Amended and Restated Certificate of Incorporation of the registrant3.2(2)
    
    Amended and Restated Bylaws of the registrant4.1(1)
    
    Specimen common stock certificate of the registrant4.2(2)
    
    Registration Rights Agreement dated as of June 2, 2004 by and among the
registrant and Dr. Joseph A. Sorge, the J. A. Sorge Trust I, the J. A. Sorge
Trust II, the J. A. Sorge Trust III, the J. A. Sorge Trust IV, Biosense
Partners, L.P. and the Joseph A. Sorge Charitable Remainder Trust dated
December 26, 20024.3(1)
    
    Form of Lock-up Agreement executed by Dr. Joseph A. Sorge for the benefit of
Hycor Biomedical Inc.10.1(3) #
    
    The Year 2000 Stock Option Plan of the registrant, as amended and restated10.2(3) #
    
    The 2004 Independent Directors Option Plan of the registrant10.3(3) #
    
    Employee Stock Purchase Plan of the registrant10.4(3) #
    
    Hycor Biomedical Inc. 2001 Stock Option Plan10.5(3) #
    
    Hycor Biomedical Inc. 1992 Incentive Stock Plan10.6(3) #
    
    Hycor Biomedical Inc. Nonqualified Stock Option Plan For Non-Employee Directors10.7(2) #
    
    Amended and Restated Employment Agreement dated as of June 2, 2004 by and
between the registrant and Dr. Joseph A. Sorge10.8(1) #
    
    Amended Employment Agreement dated as of September 1, 2002 by and between the
registrant and
 59




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##### Table of Contents



ExhibitNumber
    
    DescriptionJohn R. Pouk10.9(4) #
    
    First Amendment to Restated Employment Agreement dated as of January 27, 2005
by and between the registrant and John R. Pouk10.10(1)
    
    Loan Agreement dated as of April 1, 1997 by and between Bastrop County
Industrial Development Corporation and BioCrest Manufacturing, L.P., a wholly
owned subsidiary of the registrant10.11(1) 
    
    Thermal Cycler Supplier Authorization Agreement dated as of January 1, 1995 by
and between The Perkin-Elmer Corporation and Stratagene California (formerly
known as Stratagene), a wholly owned subsidiary of the registrant10.12(1) 
    
    Patent License Agreement dated as of July 26, 1994 by and between Roche
Molecular Systems, P. Hoffmann-La Roche Ltd. and Stratagene California
(formerly known as Stratagene), a wholly owned subsidiary of the registrant10.13(1)
    
    Lease Agreement by and between Slough TPSP LLC and Stratagene California
(formerly known as Stratagene), a wholly owned subsidiary of the registrant,
for 11011 North Torrey Pines Road, La Jolla, California10.14(1)
    
    Credit Agreement dated as of January 21, 2004 by and among Merrill Lynch
Business Financial Services Inc., the registrant, BioCrest Holdings, L.L.C.
and BioCrest Manufacturing, L.P.10.15(5)
    
    Amendment No. 1 to Credit Agreement dated as of May 26, 2004 by and among
Merrill Lynch Business Financial Services Inc., the registrant, BioCrest
Holdings, L.L.C. and BioCrest Manufacturing, L.P.10.16(5)
    
    Amendment No. 2 to Credit Agreement dated as of September 28, 2004 by and
among Merrill Lynch Business Financial Services Inc., the registrant, BioCrest
Holdings, L.L.C. and BioCrest Manufacturing, L.P.10.17
    
    Amendment No. 3 to Credit Agreement dated as of February 24, 2005 by and among
Merrill Lynch Business Financial Services Inc., the registrant, BioCrest
Holdings, L.L.C. and BioCrest Manufacturing, L.P.21.1
    
    List of subsidiaries of the registrant23.1
    
    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14
promulgated under the Securities Exchange Act of 193432.1*
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as created by Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    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
   (1)
    
    Incorporated by reference to the Registration Statement on Form S-4 (No. 333-109420) filed on
October 2, 2003, as amended.(2)
    
    Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended June 30,
2004.(3)
    
    Incorporated by reference to the Registration Statement on Form S-8 (No. 333-116544) filed on
June 16, 2004.(4)
    
    Incorporated by reference to the Current Report on Form 8-K filed on February 1, 2005.(5)
    
    Incorporated by reference to the Quarterly Report on Form 10-Q for the period ended September
30, 2004.#
    
    Indicates a management contract or compensatory plan or arrangement.
    
    Certain confidential portions of this exhibit were omitted by means of
redacting a portion of the text. An unredacted version of this
exhibit was filed separately with the Secretary of the Commission
pursuant to the registrants Application Requesting Confidential
Treatment pursuant to Rule 406 under the Securities Act. 60




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##### Table of Contents



*
    
    These certifications are being furnished solely to accompany this annual report pursuant to
18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Exchange Act
and are not to be incorporated by reference into any filing of Stratagene Corporation, whether
made before or after the date hereof, regardless of any general incorporation language in such
filing. (c) Financial Statement Schedules. The following financial statement schedule is filed as part of this Annual Report on Form 10-K: Schedule Number
    
    Description
    
    PageII
    
    Valuation and Qualifying Accounts
    
    
    63
 61




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: March 30, 2005
    
    STRATAGENE CORPORATIONBy:
    
    /s/ Joseph A. SorgeJoseph A. Sorge, M.D.Chairman of the Board, Chief Executive Officer and PresidentBy:
    
    /s/ Reginald P. JonesReginald P. JonesSenior Vice President and Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ Joseph A. Sorge

Joseph A, Sorge, M.D.
    
    Chairman of the
Board, Chief
Executive Officer
and President
(Principal
Executive Officer)
    
    March 30, 2005/s/ Reginald P. Jones

Reginald P. Jones
    
    Senior Vice
President and Chief
Financial Officer
(Principal
Financial Officer
and Principal
Accounting Officer)
    
    March 30, 2005/s/ Carlton J. Eibl

Carlton J. Eibl
    
    Director
    
    March 30, 2005/s/ Robert C. Manion

Robert C. Manion
    
    Director
    
    March 30, 2005/s/ J. David Tholen

J. David Tholen
    
    Director
    
    March 30, 2005/s/ John C. Reed

John C. Reed
    
    Director
    
    March 30, 2005
 62




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##### Table of Contents



Schedule II STRATAGENE CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Balance at
    
    
    Charged toBeginning
    
    
    Costs and
    
    
    
    
    
    
    Balance atof Year
    
    
    Expenses
    
    
    Deductions
    
    
    End of YearAllowance for doubtful accounts receivable2002
    
    
    396,198
    
    
    
    124,857
    
    
    
    3,474
    
    
    
    517,5812003
    
    
    517,581
    
    
    
    473,503
    
    
    
    235
    
    
    
    990,8492004
    
    
    990,849
    
    
    
    (220,734
    )
    
    
    3,343
    
    
    
    766,772Allowance for excess, obsolete
and short-dated inventories2002
    
    
    1,523,364
    
    
    
    814,664
    
    
    
    465,908
    
    
    
    1,872,1212003
    
    
    1,872,121
    
    
    
    494,931
    
    
    
    552,765
    
    
    
    1,814,2872004
    
    
    1,814,287
    
    
    
    1,730,830
    
    
    
    216,117
    
    
    
    3,329,000
 63