Bally Points Finger at Former CEO and CFO

As a result of an internal investigation, the Audit Committee of Bally Total Fitness has pointed the blame for some of the company’s multiple accounting errors on Lee Hillman, the company’s chairman and CEO from 1996 to 2002, and on John Dwyer, chief financial officer from 1996 to 2004.

Bally Total Fitness has been wracked by problems stemming from accounting issues, including the restatement of financial statements from Jan. 1, 2000 through the first quarter of 2004 (the company plans to file these restatements by July 31, 2005). The company also is being investigated by the Securities and Exchange Commission (SEC) for issues relating to its accounting methods.

The company’s Audit Committee said that Hillman and Dwyer, both of whom were employed as certified public accountants by Bally’s former auditors Ernst & Young before their employment with Bally, were responsible for multiple accounting errors in the company’s financial statements and created a culture within the accounting and finance groups that encouraged aggressive accounting. In addition, the committee said that certain accounting policies and positions were suggested and implemented without a reasonable empirical basis and that Dwyer made a false and misleading statement to the SEC.

As a result of the findings, Bally has stopped severance payments to Hillman, who is currently president of Liberation Investment Advisory Group LLC, and Dwyer.

The investigation also found improper conduct on the part of Ted Noncek, the company’s vice president and controller from 2001 to 2005, and Geoff Scheitlin, vice president and treasurer of the company and former controller from 1997 to 2001. Both Noncek and Scheitlin were terminated after the investigation. The company has asked Noncek to consult with the company on a short-term basis to help with completion of the ongoing audits.

The investigation did not specifically examine Ernst & Young, which formerly was the auditor for the company. However, the committee stated that it believed that the firm made several errors in the course of its work. The company is evaluating its legal options with respect to Ernst & Young.

The investigation did find errors in the company’s rationale for and implementation of its deferral of membership acquisition costs under Bally’s prior accounting method. The investigation also concluded that the company took aggressively optimistic positions on several matters related to the analysis of the adequacy of the allowance for doubtful accounts, which were without a reasonable empirical basis.

Separately, as a result of the investigation and Bally’s efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002, the company has identified deficiencies in its internal controls over financial reporting. A number of these deficiencies, either individually or in the aggregate, constitute material weaknesses in its internal controls over financial reporting, the company said.

The investigation, which took five months to complete, was led by former SEC attorney Herbert F. Janick III of Bingham McCutchen LLP. Forensic audit work was conducted by PricewaterhouseCoopers LLP. Results of the investigation have been reported to the SEC.

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