Premier Laser Loses Its Outside Auditor

In another setback for Premier Laser Systems Inc., the Irvine-based maker of dental and medical lasers said its outside auditor has quit.

The resignation of Ernst & Young LLP is the latest blow to Premier, which a year ago was riding high on the promise of a breakthrough dental laser that was being touted as a harbinger of painless sessions in the dentist’s chair.

Last month, the company said that a dispute with a major distributor could force it to lower its revenue for the second half of fiscal 1998 by $7 million. Premier has also been slapped with a shareholder lawsuit that accuses the company of misleading investors.

Now, Ernst & Young’s resignation leaves Premier with the task of finding a new accountant to audit the company’s financial results for its fiscal year ended March 31, 1998--the year in which the disputed sales occurred. In resigning, Ernst & Young also withdrew its financial report for Premier’s previous fiscal year ended March 31, 1997.

Trading of Premier’s shares was halted Tuesday morning. Since mid-March, the company’s Nasdaq-traded stock has tumbled more than 60%, closing Friday at $4.19 a share.

Colette Cozean, Premier’s chief executive, said in a prepared statement that she was “extremely disappointed with Ernst & Young’s decision.”

At Ernst & Young’s urging, she said, Premier had formed a special committee of independent directors, assisted by lawyers and another accounting firm, to review the company’s accounting issues and its dispute with distributor Henry Schein Inc.

But Don Howarth, an Ernst & Young partner in New York, said his firm had “serious disagreements” with Premier. “We specifically disagreed with the limited scope and breadth of the internal investigation,” he added. He would not elaborate, but said that a more detailed account will be filed later with the Securities and Exchange Commission.

A year ago, Premier became the first company to receive federal approval to sell a dental laser that could be used to treat tooth decay. The approval was considered an important development in dentistry. In December, Premier entered a marketing agreement with Schein, a large health care products distributor based in Melville, N.Y.

But last month, Premier said its revenue for its third quarter would be restated, and its fourth-quarter revenue would be lower than expected, after subtracting about $7 million that Premier had booked as sales to Schein. The distributor says it never ordered the lasers in question.

Dan Caruso, Premier’s executive vice president, said the company is continuing to negotiate with Schein and is “hopeful” a resolution will be reached soon. Premier is also talking with other distributors, and continues to sell lasers through its internal sales force and through manufacturers’ representatives, he said.

Premier also sells ophthalmic lasers, which have not been affected by the dispute with Schein, Caruso said.

Meanwhile, Premier faces a shareholder lawsuit filed earlier this month in U.S. District Court in Santa Ana. The suit, which seeks class-action status, accuses the company of violating securities laws by issuing misleading information about its laser sales to Schein in an attempt to inflate its stock. Premier has denied the allegations, and says it will fight the complaint.

Analyst John R. Doss at the investment firm Dominick & Dominick in New York said he was puzzled by Premier’s troubles. “This all seems like a terrible mess,” he said. “I don’t know how many strikes one gets before they’re out.”

But analyst Bill Relyea at Josephthal & Co. in New York remained optimistic that Premier’s problems could be resolved. He attributed the dispute with Schein to miscommunication, and said the company’s products remain attractive.

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Problems at Premier

Trading in Premier Laser’s stock was halted Tuesday after the firm announced its independent auditor had resigned. The stock closed at $4.19 Friday, a decline of more than 50% since May 1997, when one of its lasers won Food and Drug Administration approval for treatment of tooth decay. Monthly closing stock prices and key events since the FDA approval:

Stock Trend

Friday’s close $4.19

Key Events

1997

May 7: Food and Drug Administration approves use of Premier erbium laser directly on teeth as replacement for painful dental drilling; share price rockets in rapid trading.

May 20: Rival firm American Dental Technologies says it holds the patents to type of technology Premier used to develop its laser.

October: Utah-based BriteSmile files patent infringement suit, claiming Premier used its technology in developing a separate argon laser tooth-whitening system.

1998

April: Stock price drops 20% after Premier announces dispute with a major distributor could force it to lower revenue by $7 million for fiscal third quarter.

May 5: Shareholder files suit accusing Premier of inflating stock price by issuing misleading information about laser sales.

May 26: Premier announces Ernst & Young LLP resigned as independent auditor and has withdrawn financial report for fiscal year ended March 31, 1997.

Source: Bloomberg News, Times reports; Researched by JANICE JONES DODDS / Los Angeles Times