Zila Reports First Quarter Results

PHOENIX--(BUSINESS WIRE)--Dec. 17, 2002--Zila, Inc. (Nasdaq:ZILA), today reported strong revenue growth for the first quarter of its 2003 fiscal year, while restructuring costs and strategic investments in marketing, product development, the OraTest(R) clinical trial and the launch of ViziLite(TM) led to a larger net loss, compared with the prior-year period.
Zila said that its revenues increased 20.7 percent to $10.7 million in its fiscal first quarter ended October 31, 2002, compared to $8.9 million for the same period the prior year. Strong sales of Zila Nutraceuticals' Ester-C(R) products were the principal factor.

Net loss for the fiscal quarter was $1.6 million or $0.04 per share this year, compared with $927,000, or $0.02 per share, last year. Included in last year's quarter is approximately $300,000 of goodwill amortization that was not included in the quarter ended October 31, 2002. EBITDA from continuing operations, which Zila defines as earnings from continuing operations before interest, taxes, depreciation and amortization, was a negative $950,000 in the first quarter this year compared with a positive $56,000 last year.

First-quarter 2003 results included $880,000 in restructuring expenses (severance, recruitment and associated legal costs). There were no similar costs in the first quarter of 2002. Excluding those costs, Zila's net loss for the first quarter of 2003 would have been $729,000, or $0.02 per share.

Zila's Chairman, President and CEO Dr. Doug Burkett indicated that results for the first quarter were on track with Zila's plan. Zila's results for the quarter were driven by its strategy to:

-- restructure the team to build Zila's future ($880,000 in

-- capture strong seasonal demand for its key pharmaceutical and
nutraceutical products with stepped-up marketing and selling
(an increase of $470,000 vs. last year's quarter); and

-- develop, test and launch new products, including OraTest(R)
(an increase of $276,000 in Phase III clinical trial costs vs.
last year's quarter), and the ViziLite(TM) program ($501,000
in development and marketing costs, of which $166,000 is
included in the marketing/selling cost increase noted above).
Zila also accrued an additional $207,000 in audit related costs in the first quarter of fiscal 2003 compared to the prior year. The increase resulted from responding to issues raised by the SEC in its comment letter and the financial restatements.

"These consolidated results are in-line with where we expected to be at this stage in our new strategic plan," Dr. Burkett said. "Restructuring is expensive. We have reduced our workforce by approximately one-third in recent months -- and we have hired several new, talented leaders to help us achieve our aggressive goals. Overall there has been a fifteen percent net reduction in staff at Zila. This costly process was critical to our overall strategy."

Dr. Burkett added that a strong marketing program is also costly, but just as important. "We have new advertising messages that emphasize even more strongly the key advantages of our pharmaceutical and nutraceutical products during the fall and winter months, when demand for both Ester-C(R) vitamins and Zilactin cold and canker sore medications is strongest."

Dr. Burkett noted that ad spending will likely taper off in the spring. If revenues continue to grow as expected, profitability should improve as the fiscal year progresses. He reiterated the company's goal of breakeven to positive EBITDA for fiscal 2003.

Zila Nutraceuticals Group: Revenues, which include sales of its Ester-C(R) ingredient, increased 37.4 percent to a record $6.5 million in the first quarter of fiscal 2003, compared with $4.7 million in the year-earlier quarter. Sales of Ester-C(R) products alone increased 48.7 percent, due in large part to a single sale to a major customer. Sales and marketing expenses increased $206,000 vs. last year's quarter. Gross margin for the group was 66.8 percent for the quarter versus 60.9 percent in the first quarter last year.

Zila Pharmaceuticals Group: Revenues were $4.2 million for the first quarter, approximately equal to the year-earlier period. Sales of Peridex(R) oral rinse and IST(TM) oral swabs increased, while sales of Zilactin(R) cold sore and canker sore products decreased. Launch of the new ViziLite(TM) product resulted in new expenses in FY03 of $501,000 compared to no such ViziLite(TM) costs in FY02. Pharmaceuticals' gross margin decreased to 55.3 percent from 74.9 percent, principally because of higher IST sales as a percentage of the Group's sales and approximately $185,000 in non-recurring costs associated with changing manufacturers and bringing some manufacturing in-house.

Zila Biotechnology Group: This new reporting group consists of the OraTest(R) product, expenses related to clinical trials for OraTest(R), and the Tolonium Chloride technology. Quarterly revenues for the group were nominal. Zila curtailed sales operations in the United Kingdom, where the OraTest(R) product is cleared for sale, to focus on its domestic opportunities. Operating expenses for the Biotechnology Group were $816,000 for the quarter, down 4.2 percent from $852,000 in the first quarter of fiscal 2002, despite an increase in FY03 spending on the Phase III OraTest clinical trial of $276,000. Zila has decided to transition the trial to a new global contract research organization ("CRO") and expects to finalize an agreement with a new CRO within the next several days.

On October 24, 2002, Zila announced that it would restate its financial results for fiscal 2000, 2001, and for the first three quarters of fiscal 2002. The restatements are reflected in all prior-period results in this news release and in the accompanying financial tables.

On December 13, Zila announced the nomination of three new Board members in addition to four individuals from Zila's current Board to stand for election at the Annual Meeting of Shareholders to be held on January 14, 2002. The new nominees are former congressman John Porter, former ADA president Dr. Tim Rose and financial specialist Morris Aaron. Doug Burkett, Ph.D., Mike Lesser, Chris Johnson and Kevin Tourek were renominated.

Zila will hold an investor conference call at 9:00 a.m. MST (11:00 a.m. EST) on December 17, 2002, to discuss its fiscal first-quarter results. To participate, call 800/967-7135 ten minutes before the scheduled start of the call and ask for conference ID number 514068. A tape replay of the call will be available beginning two hours after the call through Thursday, December 19, 2002 by dialing 888/203-1112 and giving the conference ID number. The call also will be broadcast over the Internet. To connect, enter ZILA at http://www.opencompany.info, or follow links at http://www.zila.com or http://irbyctc.com.

About Zila

Zila, Inc., headquartered in Phoenix, is an international provider of healthcare and biotechnology products for dental/medical professionals and consumers. Zila has three business units: Zila Pharmaceuticals, marketer of Zilactin(R), The Medicated Oral Bandage(TM), Peridex(R) prescription mouth rinse and ViziLite(TM) oral examination kits, and manufacturer of patented swabs at Innovative Swab Technologies; Zila Nutraceuticals (Inter-Cal Nutraceuticals), manufacturer of patented Ester-C(R) branded products and Palmettx(R) Saw Palmetto; and Zila Biotechnology, developer of OraTest(R) oral cancer detection products and Zila(R) Tolonium Chloride technologies for cancer and pre-cancer detection and treatment. For more information, visit www.zila.com.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based largely on Zila's expectations or forecasts of future events, can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond the Company's control. Therefore, actual results could differ materially from the forward-looking statements contained herein. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this press release will, in fact, transpire or prove to be accurate. For a more detailed description of these and other cautionary factors that may affect Zila's future results, please refer to Zila's Form 10-K and 10-K/A for its fiscal year ended July 31, 2002, and its Form 10-Q for the quarter ended October 31, 2002, filed with the Securities and Exchange Commission.

Information included in the press release is presented using methods management utilizes to measure performance of its operations. The information is supplemental to results presented under accounting principles generally accepted in the United States of America (GAAP). Refer to the attached tables for a reconciliation of the supplemental information to GAAP.

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