UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number: 000-50786

STRATAGENE CORPORATION

11011 North Torrey Pines Road, La Jolla, CA 92037
(Address of principal executive offices)            (Zip Code)

Registrant’s telephone number, including area code (858) 535-5400

No Change
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [    ]   No [X]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [    ]   No [X]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

STRATAGENE CORPORATION AND SUBSIDIARIES AND
BIOCREST HOLDINGS, LLC AND SUBSIDIARIES

COMBINED BALANCE SHEETS
(unaudited)

See accompanying notes to unaudited combined financial statements.

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STRATAGENE CORPORATION AND SUBSIDIARIES AND
BIOCREST HOLDINGS, LLC AND SUBSIDIARIES

COMBINED INCOME STATEMENTS
(unaudited)

See accompanying notes to unaudited combined financial statements.

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STRATAGENE CORPORATION AND SUBSIDIARIES
AND BIOCREST HOLDINGS, LLC AND SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to unaudited combined financial statements.

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STRATAGENE CORPORATION AND SUBSIDIARIES
AND BIOCREST HOLDINGS, LLC AND SUBSIDIARIES

NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
March 31, 2004

1. Basis of Presentation

     The combined financial statements of Stratagene Corporation and its subsidiaries and BioCrest Holdings, LLC and its subsidiaries (“BCH”) (collectively, “Stratagene” or the “Company”) for the three months ended March 31, 2004 and 2003 are unaudited. These financial statements include all adjustments that, in the opinion of management, are necessary to present fairly the combined financial position of the Company as of March 31, 2004 and the combined results of operations and cash flows of the Company for the three months ended March 31, 2004 and 2003.

     The financial information of the Company has been presented on a combined basis, due to common control and management. As of March 31, 2004, approximately 90% of Stratagene and 86% of BCH were controlled, directly or indirectly, by Dr. Joseph A. Sorge, who is the chief operating decision maker for both entities. Substantially all of the remaining interests are represented by stakeholders common to both Stratagene and BCH. In addition to such common ownership and management, the operations of BCH are complementary to Stratagene Corporation’s operations, and certain of the entities included within the combined, consolidated financial statements perform services for, or on behalf of, other entities, within the combined group.

     These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements but reflect all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented.

     The results of operations for any interim period are not necessarily indicative of results to be expected for the full year. See discussion of subsequent events, including the Hycor Biomedical Inc. (“Hycor”) merger, in Note 7.

     These combined financial statements should be read in conjunction with the combined financial statements and notes thereto included in Amendment No. 3 to the registration statement on Form S-4 filed by Stratagene on April 29, 2004 with the SEC.

2. Accounting for Stock-Based Compensation

     The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, as amended, and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation.

     Pro forma information regarding net income is required by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-based Compensation (“SFAS No. 123”), and has been determined as if the Company had accounted for its employee stock options under the minimum value method of SFAS No. 123. The estimated weighted average fair value at grant date for the options granted for the three months ended March 31, 2004 and 2003 was de minimis.

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company’s stock had not been publicly traded, the expected stock price volatility was effectively zero based on the minimum value method. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

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     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company’s pro forma information for stock options is as follows:

     Charges for options granted to non-employees have been determined in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees are periodically re-measured as the underlying options vest and are included in additional paid-in capital in the financial statements.

3. Balance Sheet Information

     Inventory

     Inventories consist primarily of biological products and instruments and are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventories consist of the following:

     Intangible Assets

     Intangible assets, net primarily includes costs incurred in connection with patent applications, consisting principally of legal fees. The following sets forth the intangible assets by major asset class. The information provided below is prior to the announced merger with Hycor. See Note 7.

     Amortization expense totaled $101,641 and $117,241 for the three months ended March 31, 2004 and 2003, respectively. Amortization expense in each of the next five fiscal years is expected to be as follows:

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4. Long-Term Debt and Line of Credit

     The Company has several debt instruments bearing interest at rates ranging up to 15%, most of which are guaranteed by Stratagene and BCH and secured by substantially all of the assets of Stratagene and BCH. Many of the instruments contain restrictive covenants requiring the Company to maintain certain financial ratios, including minimum debt service coverage ratios, fixed charge coverage ratios and tangible net worth. The Company was in compliance with all covenants at March 31, 2004. Long-term debt and line of credit consist of the following:

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     The aggregate maturities of long-term debt principal payments for each of the five years subsequent to March 31, 2004 are as follows:

5. Commitments and Contingencies

     Legal — Stratagene is a party to litigation in the ordinary course of business. Due to the uncertainties inherent in litigation, no assurances can be given as to the outcome of these proceedings. If any of these matters were resolved in a manner unfavorable to Stratagene, its business, financial condition and results of operations could be materially harmed. Additionally, favorable outcomes or gain contingencies that may result from these matters, if any, are not recognized until they are realized.

     Invitrogen Corporation

     In June 2000, Stratagene was sued by Invitrogen Corporation (formerly Life Technologies, Inc.) in the United States District Court for the District of Maryland. The complaint alleges that Stratagene willfully infringed United States patent no. 6,063,608 (and United States patent nos. 5,244,797 and 5,405,776) for making, using and selling products derived from, using or containing RNase H minus reverse transcriptase enzymes. Invitrogen’s motion for a preliminary injunction was denied and the case was stayed pending a trial in a related action involving Invitrogen and a third party regarding the same patents. Invitrogen appealed the denial of an injunction and the stay to the Federal Circuit Court of Appeals. In February 2002, the Federal Circuit Court of Appeals affirmed the district court’s decision. In September 2003, Invitrogen filed a consent to judgment in the related action that the asserted patents were invalid. Accordingly, the case against Stratagene remains administratively stayed pending Invitrogen’s appeal.

     In addition, in March 2001, Stratagene was sued by Invitrogen in the United States District Court for the Western District of Texas. Invitrogen alleges (i) that Stratagene willfully infringed United States patent no. 4,981,797 for making, using and selling competent E. coli cell products and (ii) damages of up to approximately $22.0 million. In November 2001, the district court granted Stratagene’s motion for summary judgment, finding that the ‘797 patent was not infringed by Stratagene. Invitrogen appealed the judgment to the Federal Circuit Court of Appeals which, in May 2003, reversed the district court’s decision in part and remanded the case for further proceedings. In January 2004, in response to a pending summary judgment motion, the district court ruled that Invitrogen’s ‘797 patent was invalid under 35 U.S.C § 102(b). More specifically, the district court found that Invitrogen had used the patented process claimed in the ‘797 patent for commercial purposes for more than one year prior to the filing date of the patent. Having found the ‘797 patent invalid, the district court indicated there was no need for a trial. Invitrogen is currently appealing the district court’s ruling.

     In November 2001, Stratagene filed a complaint in the United States District Court for the District of Maryland charging Invitrogen with willful infringement and inducing others to infringe United States patent no. 5,556,772 for making, using, selling and offering for sale certain polymerase blend products. Stratagene seeks a permanent injunction against continued infringement as well as monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified. A trial is currently scheduled to begin in March 2005. Invitrogen has filed requests for re-examination of the ‘772 patent with the United States Patent and Trademark Office.

     Takara Bio

     In November 2002, Stratagene filed a complaint in the United States District Court for the District of Maryland charging Takara Bio with willful infringement and inducing others to infringe United States patent no. 5,556,772 for making, using, selling and offering for sale certain polymerase blend products. Stratagene seeks a permanent injunction, monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will

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ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified. Takara filed a counterclaim in a separate action in the United States District Court for the Southern District of California. By its counterclaim, Takara seeks joint ownership of Stratagene’s ‘772 patent. In June 2003, Stratagene successfully moved to transfer the California action to Maryland. In August 2003, the Maryland district court denied Takara’s motion to dismiss or transfer the complaint, and the cases have been consolidated for pretrial and trial. No trial date has been set.

     Employment Contracts — Stratagene has entered into employment contracts with certain of its officers. These contracts generally provide for severance benefits if the officer is terminated by Stratagene other than for cause, as defined in the employment contracts.

6. New Accounting Pronouncements

     In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, which was revised in December 2003. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The revised interpretation, known as “FIN 46(R),” requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46(R) apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after December 31, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN 46(R) did not have a material impact on the Company’s results of operations or financial position.

     In May 2003, the FASB issued Statement No. 149, Amendments of Statement No. 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). This statement amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did not have a material effect on the Company’s results of operations or financial position.

     In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS No. 150”). This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, with certain exceptions. The adoption of SFAS No. 150 did not have a material effect on the Company’s results of operations or financial position.

     In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 104 clarifies existing guidance regarding revenues for contracts which contain multiple deliverables to make it consistent with EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The adoption of SAB No. 104 did not have a material impact on the Company’s revenue recognition policies, nor its financial position or results of operations.

7. Subsequent Events

Hycor Merger

     On June 2, 2004, Stratagene acquired all of the outstanding shares of Hycor through a merger of a wholly owned subsidiary of Stratagene with Hycor, with Hycor surviving as a wholly owned subsidiary of Stratagene. Hycor engages in researching, developing, manufacturing, and marketing medical diagnostic products throughout the United States and in many foreign countries. The primary reasons for the merger are the following:

	•		Potential growth from increased earnings and revenue;
	•		Expanded access to the capital markets;
	•		Diversified customer base and product lines; and

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•

Expected cost savings by eliminating overlap in expenses and capitalizing on the two companies’ international distribution synergies, particularly in Germany and Japan.

     As a result of the merger, the former holders of the Hycor common stock received 0.6158 of a share of Stratagene common stock in exchange for each share of Hycor common stock. The fair value of the consideration exchanged in the merger has been calculated based upon the fair value of Hycor’s publicly-traded common shares, as their fair value was determined to be more clearly evident than that of Stratagene’s common shares. Total purchase consideration of $48,540,242 was determined based upon 8,146,129 shares of Hycor common stock outstanding as of June 2, 2004, using a $5.75 per share value as of that date, plus an estimated $1,700,000 of merger related costs expected to be incurred by Stratagene. As of March 31, 2004, the Company has incurred approximately $1,500,000 of such costs, which are recorded in prepaid and other current assets on the balance sheet.

     Using the 0.6158 exchange ratio, 5,016,386 shares of Stratagene common stock were issued to the Hycor stockholders in connection with the merger.

     The following represents the preliminary allocation of the purchase price to the acquired assets and the assumed liabilities of Hycor using historical balances as of March 31, 2004. Stratagene is in the process of obtaining third-party valuations of Hycor’s tangible and intangible assets; therefore, the allocation of the purchase price is subject to adjustment.

     Goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets. The preliminary estimate for other non-amortizable intangible assets consists of $3,000,000 for trade names.

     The preliminary estimate for other amortizable intangible assets includes $677,783 for patents and $2,400,000 for contractually based customer relationships having an estimated life of 8 to 12 years. Amortization of other amortizable intangible assets will be provided over an estimated average useful life of 10 years.

     In connection with the merger, the following events occurred on June 2, 2004:

•		Stratagene forgave $390,000 of the shareholder note receivable due to Stratagene by Dr. Sorge and paid the income taxes related to the forgiveness, which resulted in a charge to Stratagene of $650,000. This forgiveness was applied to reduce the note receivable, which was $3,351,311 at June 2, 2004. Dr. Sorge satisfied the remaining portion of his shareholder note receivable by tendering a sufficient number of shares of common stock to Stratagene to allow for the repayment of the remaining principal, interest and taxes due on the shareholder note receivable. On June 2, 2004, Stratagene redeemed 524,160 shares of common stock from Dr. Sorge at a price of approximately $6.50 per share, which price was based on Hycor’s stock price of approximately $4.00 at the time Stratagene and Hycor agreed on the repurchase price, adjusted for the exchange ratio.
•		In addition, another shareholder paid off the balance of her note, which was $276,877 at June 2, 2004, including interest, by tendering 42,623 shares of common stock to Stratagene at a price of approximately $6.50 per share. This price was based on Hycor’s stock price of approximately $4.00 at the time Stratagene and Hycor agreed on the repurchase price, adjusted for the exchange ratio.
•		Dr. Sorge received a bonus in the aggregate amount of approximately $1.8 million, which will be paid pursuant to the terms of a promissory note over a 39-month term.
•		Stratagene entered into a new employment contract with Dr. Sorge, pursuant to which, among other things,

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Dr. Sorge’s base annual salary was reduced from $1.1 million to $450,000, and Dr. Sorge was granted an option to purchase 738,960 shares of Stratagene common stock at an exercise price of $9.34 per share. The new employment agreement has an initial term of three years and is subject to successive one year renewals unless either party provides a notice of non-renewal at least 30 days prior to the termination of the then current term.

•

Stratagene converted $9.0 million in principal amount of the subordinated notes, pursuant to their terms, into 1,753,604 shares of common stock. In April 2004, the Company paid in full the outstanding principal and interest on all of the remaining non-convertible notes in the amount of $621,679. As a result of the conversion and the repayment, there are no subordinated notes outstanding subsequent to the merger.

     The results of operations of Hycor will be included in the financial statements of Stratagene beginning on June 3, 2004.

BCH Acquisition

     Concurrently with the closing of the Hycor merger, Stratagene acquired substantially all of the assets of BCH. In exchange, Stratagene forgave all of the outstanding intercompany indebtedness owed by BCH and its subsidiaries to Stratagene and its subsidiaries (which as of March 31, 2004, was approximately $5.4 million) and assumed all of the other outstanding liabilities of BCH and its subsidiaries (which as of March 31, 2004, were approximately $1.2 million).

     Because Stratagene and BCH are under common control, the acquisition of BCH is recorded on a historical cost basis. As such, there is no adjustment of BCH assets and liabilities to fair value, and no goodwill resulting from the purchase and there is no effect on the combined financial statements from this acquisition as all intercompany balances are eliminated in the combination.

Sale of Certain Assets in Joint Venture

     The Company, through the acquisition of BCH, has a 49% minority interest in a limited partnership (“LP”) that operates a research lab. On June 1, 2004, the LP sold the assets related to its clinical diagnostics business to a third party for approximately $4.5 million. The Company expects to realize a gain on the sale of approximately $1.9 million, which will be recorded in other income in the second quarter of 2004. As a result, the Company (through BCH) will receive 49% of the net proceeds from the sale, of which the LP made a partial distribution to BCH on June 1, 2004. In turn, BCH made a distribution to its members to pay for the taxes related to the sale in the amount of approximately $475,000. The LP will distribute the remaining portion of BCH’s net proceeds once the related accounting has been finalized. Management believes that there will be no further distributions to the BCH members, as the distribution made on June 1, 2004 was for estimated taxes on the entire transaction.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following information should be read in conjunction with the financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the financial statements and related notes for the year ended December 31, 2003 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Amendment No. 3 to the Company’s registration statement on Form S-4 filed with the Securities and Exchange Commission on April 29, 2004. The financial information for Stratagene includes the accounts and balances of Stratagene Corporation and subsidiaries and BioCrest Holdings, LLC and subsidiaries on a combined basis, due to common control and management.

     This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements and include assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties, and other factors. The Company’s actual results could differ materially from those expressed in or implied by these forward-looking statements as a result of various factors, including those described below under the caption “Cautionary Note Regarding Forward-Looking Statements” and set forth under the heading “Risk Factors” in Amendment No. 3 to the Company’s registration statement on Form S-4 filed with the Securities and Exchange Commission on April 29, 2004.

Overview

     Since Stratagene’s inception in 1984, it has been engaged in developing, manufacturing and marketing products used to conduct molecular biology research. A substantial majority of its revenue comes from the sale of these products, with the remainder coming from research grants, net shipping revenue and other sources. In 2003, approximately 38%, 50% and 4% of product sales were in the areas of genetic technologies; nucleic acid and protein purification and analysis; and genomics, proteomics, and bioinformatics, respectively. Stratagene’s products are used for research purposes and the use of these products is not regulated by the U.S. Food and Drug Administration or by any comparable international organization.

     Stratagene manufactures its products in facilities near Austin, Texas and in San Diego, California. Stratagene’s sales activities are primarily conducted through a dedicated direct sales organization in North America and Europe. Approximately 11% of its product sales in 2003 were to international distributors in selected countries in Europe and Asia, who resell them to researchers. Certain products manufactured by Stratagene in the United States are sold to Stratagene’s Netherlands branch for subsequent sale to their customers in Europe. Total product sales outside the U.S. accounted for approximately 26% of total product sales in 2003. In August 2003, Stratagene also opened a new facility in Japan to establish direct sales and distribution channels in Asia. The Japan facility recorded its first sale in the first quarter of 2004.

     Stratagene markets its products to academic and government institutions and pharmaceutical, biotechnology and industrial companies. Historically, a substantial portion of product sales have been to researchers at these academic and government institutions.

     Stratagene anticipates that its results of operations may fluctuate from quarter to quarter and will be difficult to predict. The timing and degree of fluctuations will depend upon several factors, including:

	•		the ability to successfully and timely develop and introduce new products;
	•		introductions of competing technologies or products;
	•		changes in customer research budgets and government funding of life sciences research;
	•		the ability to manufacture its products efficiently; and
	•		the ability to control or adjust research and development, sales and marketing, and general and administrative expenses in response to changes in revenue.

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     In particular, Stratagene’s fourth quarter results have historically been adversely affected by slower sales as a result of reduced purchases by academic and research institutions, due in part to the closing of these facilities during the holiday period, and changes in product mix which typically result in a higher concentration of sales of lower margin products, such as instrumentation products. In addition, Stratagene has fewer production days in the fourth quarter due to Stratagene’s own shut down during the holidays.

Merger with Hycor

     On June 2, 2004, Stratagene acquired all of the outstanding shares of Hycor Biomedical Inc. through a merger of a wholly owned subsidiary of Stratagene with Hycor, with Hycor continuing as a wholly owned subsidiary of Stratagene. Pursuant to the merger agreement, Hycor’s stockholders received 0.6158 of a share of Stratagene common stock in exchange for each share of Hycor common stock, plus cash for any fractional shares. The merger will be recognized as a tax-free reorganization. Stratagene filed a registration statement on Form S-4 (No. 333-109420) related to the transaction, which was declared effective by the Securities and Exchange Commission on April 29, 2004.

     The combined company offers diagnostic products and life sciences research tool product lines to the global academic, pharmaceutical, and clinical and government laboratory markets. Stratagene is expected to be impacted by merger-related costs of approximately $1.7 million, consisting of professional fees and other miscellaneous expenses. As of March 31, 2004, Stratagene has incurred approximately $1.5 million of merger-related costs, which are being capitalized on the balance sheet. The remainder will be recognized in the second quarter of 2004.

Crit