Ex-Auditor Says Questions Grew at Premier Laser

Premier Laser Systems Inc.’s former auditor said it recommended that an internal investigation into the company’s finances for its last fiscal year be expanded to include questionable transactions in early 1997 as well.

The Irvine-based maker of dental and medical lasers did not follow that advice, prompting Ernst & Young to resign as Premier’s auditor last month, the accounting firm said in documents filed with the Securities and Exchange Commission.

The firm’s explanation was in response to Premier’s account of Ernst & Young’s resignation that was filed earlier this month with the SEC.

Premier has been on a downward slide since mid-April, when it said its revenue for its fiscal third quarter ended Dec. 31 would be restated, and its revenue for the fourth quarter ended March 31 would be lower than expected after subtracting about $7 million that it had booked as sales to a major distributor, Henry Schein Inc. in Melville, N.Y. Schein said it never ordered the lasers in question.

In its letter to Premier, which was also filed with the SEC, Ernst & Young said that by April 21 it had concluded that $2.4 million of Premier’s reported revenue for its fiscal third quarter was inappropriate and that the financial statements for the period should be restated.

Ernst & Young said it discovered that Premier was logging revenue for dental lasers that had been moved to the warehouse of a freight forwarder in Irvine, but which the distributor said it didn’t order.

The distributor didn’t take delivery of the lasers in the Irvine warehouse, Ernst & Young wrote in the letter. The accounting firm said Premier had no written documentation to support its assertion that Schein had requested an arrangement under which it would be billed for products that had not been shipped. There also were no documents showing any fixed schedules for delivery or payment, the accounting firm added.

Ernst & Young said it agreed to Premier’s request to reconsider its stand, but that the company didn’t provide any new information to alter its conclusion that the revenue was reported inappropriately.

The accounting firm recommended that a committee of independent directors and attorneys be formed to investigate. It wanted the committee to look into transactions recorded by Premier in the first three quarters of fiscal 1998 and the previous fiscal year. Ernst & Young said it identified “specific revenue transactions recorded on or about March 31, 1997” that prompted it to recommend the broader investigation.

By May 22, the day it resigned as Premier’s auditor, the investigation had remained limited to the $2.4 million in disputed sales in the fiscal 1998 third quarter, Ernst & Young said in the letter.

“The March 1997 transactions were sales that were not collected by March 1998 that we believe should be investigated,” Ernst & Young spokesman Don Howarth said. The firm declined to elaborate.

When it resigned, Ernst & Young also withdrew its report on Premier’s financial results for the fiscal year ended March 31, 1997. Premier has not yet reported final results for fiscal 1998.

In its SEC filing, Premier said it believed “the investigation was conducted in full compliance with the former auditor’s recommendations.” It said it was willing to expand the investigation, but that the committee had been limited, in part, because it didn’t have “timely and complete access” to Ernst & Young’s paperwork. The company declined to comment further Monday.

A year ago, the company was riding high on the promise of a new dental laser, the first to receive federal approval for treating tooth decay in place of some painful drilling procedures.

Now Premier is a defendant in several shareholder lawsuits that accuse it of violating securities laws and misleading investors. Premier’s stock lost more than 60% of its value from mid-March to May 22, when it last traded at $4.19 a share. Nasdaq has suspended trading in the company’s stock while it reviews information it requested from Premier.