Star Scientific Files Quarterly Financial Report

    Business Editors/Technology Editors

    CHESTER, Va.--(BUSINESS WIRE)--May 9, 2005--Star Scientific, Inc. (NASDAQ: STSI) today filed its quarterly report on Form 10-Q with the Securities and Exchange Commission. The company reported that during first quarter 2005 it experienced a reduction in revenue of $0.2 million at the same time that its gross profit increased by $0.9 million, when compared with first quarter 2004. There was a net loss of $7.0 million in the first quarter compared with a $2.7 million loss for the same quarter in 2004. The first-quarter loss was due in part to a $3.4 million non-cash charge related to the conversion of debt to equity by Manchester Securities, which occurred in January 2005.
    As of March 31, 2005 the company had working capital of roughly $19.5 million and $22.4 million in cash and cash equivalents, compared with a working capital deficit of $1.3 million and $7.7 million in cash on March 31, 2004. Long-term debt was reduced by 30.4% between March 2004 and 2005, from $34.2 million to $23.8 million, primarily due to the conversion of $9.0 million of debt to equity.
    Net sales decreased 1.5%, from $17.2 million for the quarter ended March 31, 2004, with 509 million cigarettes sold, to $17.0 million for the quarter ended March 31, 2005, on volume of 409 million cigarettes sold. The reduction in volume was due in part to the decision in 2004 to increase price to improve the margin on cigarette sales. The price increase also reflects the company's need to begin funding its share of payments under the recent tobacco buyout legislation. These results are indicative of the very competitive and price-sensitive environment in the four non-MSA states where sales efforts increasingly are concentrated. Star has approximately $37.1 million in escrow in the 46 MSA states, which includes deposits of $3.9 million for 2004 sales, the bulk of which were made in April 2005.
    During the first quarter of 2005 Star raised $18.0 million through the sale of common shares of the company's stock and warrants for additional shares. As the company indicated in the press release that announced that sale, the proceeds of the sale will be used to fund litigation cost connected to Star's patent infringement case against RJ Reynolds Tobacco Company, Inc. (RJR), and for other working capital needs. At the conclusion of the bench trial on RJR's allegation of inequitable conduct in February the presiding judge, Honorable Marvin J. Garbis, stated that he would issue his ruling on the bench trial at the same time as decisions on two limited summary judgment motions that RJR filed in late January. Briefing on those motions was concluded on March 11, and the company currently awaits these rulings.

    This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company has tried, whenever possible, to identify these forward-looking statements using words such as "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. These statements reflect the Company's current beliefs and are based upon information currently available to it. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and contingencies include, without limitation, the challenges inherent in new product development initiatives, particularly in the smokeless tobacco area, the uncertainties inherent in the progress of scientific research, the Company's ability to raise the capital necessary to maintain its business, potential disputes concerning the Company's intellectual property, risks associated with litigation regarding such intellectual property, potential delays in obtaining any necessary government approvals of the Company's low-TSNA tobacco products, market acceptance of the Company's new smokeless tobacco products, competition from companies with greater resources than the Company, the Company's decision not to join the Master Settlement Agreement ("MSA"), the effect of state statutes adopted under the MSA and any subsequent modification of the MSA, and the Company's dependence on key employees and on its strategic relationships with Brown & Williamson Tobacco Corporation in light of its combination with RJ Reynolds Tobacco Company, Inc. The impact of potential litigation, if initiated against or by individual states that have adopted the MSA, could be materially adverse to the Company.
    See additional discussion under "Factors That May Affect Future Results" in the Company's Registration Statement on Form S-3, as filed with the Securities and Exchange Commission on April 28, 2005, and other factors detailed from time to time in the Company's other filings with the Securities and Exchange Commission, available at www.sec.gov. The Company undertakes no obligation to update or advise upon any such forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

    About Star Scientific

    Star Scientific is a technology-oriented tobacco company with a toxin reduction mission. It is engaged in the development of tobacco products that deliver fewer carcinogenic toxins (principally tobacco specific nitrosamines, or TSNAs), through the utilization of the innovative StarCured(R) tobacco curing technology, and in sublicensing that technology to others. Star Scientific has a Corporate and Sales Office in Chester, VA, an Executive, Scientific & Regulatory Affairs office in Bethesda, MD, and manufacturing and tobacco processing facilities in Chase City and in Petersburg, VA.

    See Star's website at: http://www.starscientific.com

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CONTACT: Star Scientific, Inc. Sara Troy Machir, 301-654-8300

KEYWORD: VIRGINIA MARYLAND INDUSTRY KEYWORD: MEDICAL PHARMACEUTICAL FOODS/BEVERAGES RETAIL BIOTECHNOLOGY EARNINGS SOURCE: Star Scientific, Inc.

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