SecProbe.io

CORRESP
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filename1.htm

September 08, 2005

Mr. Jim B. Rosenberg

United States Securities and
Exchange Commission

Division of Corporation Finance

100 F Street, N.E.

Washington, DC 20549-0801

Mr. Todd Sherman

United States Securities and
Exchange Commission

Division of Corporation Finance

450 Fifth Street, N.W.

Washington, DC 20549-0801

Re:  NBTY, Inc. (“NBTY” or the “Company”) -
File No. 1-31788

Dear Mr. Rosenberg and Mr. Sherman:

We
are writing this letter in response to your letter dated July 26, 2005
regarding your review of NBTY’s response letter dated July 11, 2005.   We
have provided our responses keyed to each comment raised in your letter in
order to facilitate your review.

SEC Question:

Management’s Discussion
and Analysis of Financial Condition and Results of Operations

Critical Accounting
Policies and Estimates

Revenue Recognition, page 23

1.     We are considering your response
to prior comment 2 including your supplemental response dated July 11,
2005.  Please provide us the following
information in a disclosure-type format to help us evaluate the adequacy of
your proposed disclosure:

•      Please provide a rollforward schedule for each
type of accrual included in the promotional program incentive accrual amount
for each fiscal year presented.

NBTY Response (dollars in thousands)

The Company budgets,
controls and accounts for all promotional incentive activities through one
program and therefore does not have various types of accruals.  The Company’s accrual for promotional program
incentives reflects all promotions extended to individual customers at the end
of each reporting period.  The following
represents a rollfoward of the promotional program incentive accrual for fiscal
2004 and 2003:

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  Column A

  Column B

  Column C

  Column D

  Column E

  Additions

  Description

  Balance at

  beginning

  of period

  Charged to

  costs and

  expenses

  Charged to

  Other

  Accounts

  Deductions

  Balance at

  end of

  period

  Fiscal year
  ended September 30, 2004 Promotional program incentive accrual:

  $

  23,185

  $

  14,310

  $

  —

  $

  —

  $

  37,495

  Fiscal year
  ended September 30, 2003 Promotional program incentive accrual:

  $

  3,549

  $

  875

  $

  18,761

  $

  —

  $

  23,185

The Company plans to include
the above rollforward in Schedule II of future Form 10-K filings.

SEC Question:

•      Please reconcile the rollforward of the product
return accrual for fiscal 2004 and 2003 contained in your supplemental response
to comment 2(e) dated July 11, 2005 to the amounts in Schedule II
on page S-1 of your fiscal 2004 10-K.
Please explain to us why the amounts in your rollforward schedule are
significantly different from the amounts in the financial statement schedule.

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NBTY Response (dollars in thousands)

  Column A

  Column B

  Column C

  Column D

  Column E

  Additions

  Description

  Balance at

  beginning

  of period

  Charged to

  costs and

  expenses

  Charged to

  Other

  Accounts

  Deductions

  Balance at

  end of

  period

  Fiscal year ended September 30, 2004:

  Per Schedule II
  on Form 10-K:

  Sales
  returns and allowances

  $

  30,498

  $

  20,365

  $

  —

  $

  (4,260

  )

  $

  46,603

  Less:

  Promotional program incentive accrual
  previously included above

  (23,185

  )

  (14,310

  )

  —

  —

  (37,495

  )

  Sales
  returns accrual

  7,313

  6,055

  —

  (4,260

  )

  9,108

  Returns
  netted against charges in Schedule II

  —

  35,986

  —

  (35,986

  )

  —

  Per July 11,
  2005 response letter:

  Sales
  returns accrual

  $

  7,313

  $

  42,041

  $

  —

  $

  (40,246

  )

  $

  9,108

  Fiscal year ended September 30, 2003:

  Per Schedule II
  on Form 10-K:

  Sales
  returns and allowances

  $

  4,532

  $

  875

  $

  27,684

  $

  (2,593

  )

  $

  30,498

  Less:

  Promotional program incentive accrual
  previously included above

  (3,549

  )

  (875

  )

  (18,761

  )

  —

  (23,185

  )

  Sales
  returns accrual

  983

  —

  8,923

  (2,593

  )

  7,313

  Returns
  netted against charges in Schedule II

  —

  7,932

  544

  (8,476

  )

  —

  Per July 11,
  2005 response letter:

  Sales
  returns accrual

  $

  983

  $

  7,932

  $

  9,467

  $

  (11,069

  )

  $

  7,313

The additions and deductions
for the sales returns accrual reflected in the supplemental response to comment
2(e) dated July 11, 2005 represent the actual activity. The additions
and deductions disclosed in the fiscal 2004 10-K differ because the sales
returns were netted against the charges as reflected in the column headed
“Colum C-Charged to costs and expenses” in the table above.  In both presentations, the sales returns
accrual beginning and ending balances are the same; only the presentation of
the activity varied.  In future Form 10-K
filings, the Company plans to present its activity on a gross basis, rather
than a net basis.

Based upon further
consideration and review of the Company’s Schedule II on page S-1 of
our fiscal 2004 10-K, the Company proposes to prospectively change its
presentation to separately disclose the rollforward of activity in the sales
returns accrual (on a gross basis) and the promotional program incentive
accrual for the fiscal years ended September 30, 2004 and September 30,
2003.  This change will be reflected in
the Company’s upcoming filing of its Form 10-K for the fiscal year ending September 30,
2005.

SEC Question:

•      Your supplemental response to comment 2(e) dated
July 11, 2005 states that the Company does not have the ability to track
returns by fiscal period of the original sale.
In light of your inability to distinguish activity between current and prior
periods, please explain to us how you can determine, and how your auditors are
able to agree, for any period end, that the financial statements were fairly
stated,

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that no material errors were made, and that you can reasonably estimate
the deductions from gross sales identified as critical accounting estimates.

NBTY Response

The Company believes, and its independent auditors
agree, that appropriate data is available that allows the Company to reasonably
estimate the level of product returns expected from current sales activities.  Paragraph 6.f. of SFAS 48 requires that “[t]he
amount of future returns can be reasonably estimated.”  Paragraph 20 of SFAS 48 further states that “…the
Board recognizes that detailed record keeping for returns for each product line
might be costly in some cases; this Statement permits reasonable aggregations
and approximations of product returns.”  The
Company believes it is able to make reasonable estimates of expected sales
returns, as contemplated by the requirements of SFAS 48, based upon the data
and monitoring processes described below.

SFAS 48 does not require specific or detailed
tracking of sales returns by period of original sale.  Further, because of the Company’s accrual
process which is articulated in detail in our July 11, 2005 letter to the
Staff and as further described below, the Company does not believe such
information would result in a material change to the Company’s accrual for
sales returns.

Information available to the Company includes:

•      A 25-year history of sales and returns.

•      The Company’s continuous monitoring of
customers’ inventory in order to prevent excessive customer-owned inventory in
the distribution channel.  The direct
monitoring of inventory held by the Company’s largest customers and estimates
of inventory held by the Company’s smaller customers based upon information
provided by its sales force.

•      Monitoring and evaluating the Company’s open
return authorizations given to customers in order to accrue returns that have
been authorized but not yet physically received.

•      The Company identifying significant changes
in buying trends by analyzing point-of-sale retail data gathered from its more
than 1,200 retail outlets in operation, which are used, when appropriate, to
adjust reserves for product returns.

Historic product return estimates are periodically
compared to current information described above in order to refine the accuracy
of the return accrual methodology.

As a result of this process, the Company believes
that the sales returns accrual reflected on its balance sheet is fairly stated
each quarter-end and the change in the accrual is correctly recorded on its
income statement each quarter.  As also
described in our July 11, 2005 letter to the Staff, our sensitivity
analysis relating to a one percent change in estimated accrual percentages
would not result in a material change to the sales return accrual during each
of the pervious two years.  The Company
believes it has sufficient information and knowledge of their customers and of
industry trends and conditions, as described above, to recognize if returns
were going to be materially different than the historical return rates utilized
in our accrual calculations.  Therefore,
the Company believes that any additional information

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relating to specific tracking of sales returns by
period of originating sales, would not result in a material change to the sales
returns accrual.

SEC Question:

Liquidity and Capital Resources

EBITDA, page 36-37

2.     We have read your response to
prior comment 3; however, we continue to believe that non-GAAP measures, such
as EBlTDA, that eliminate recurring items are not permissible unless management
reasonably believes the financial impact of these items will disappear or
become immaterial within a near-term finite period.  Since the items excluded from EBITDA are
significant components of your business, the financial impact of these items
will not disappear or become immaterial in the future. While Item 10(e) of
Regulation S-K does not expressly prohibit the removal of recurring items,
Answer 8 of “Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures” indicates that registrants must meet the burden of demonstrating the
usefulness of any measure that excludes recurring items, especially if that
measure is used to evaluate performance. The Answer to Question 8 of the
Non-GAAP FAQ further states it is permissible, and may be necessary, to
identify, discuss, and analyze material items, whether they are recurring or
non-recurring in MD&A and it may be necessary to discuss the nature of such
items and their significance to an investor in evaluating the company’s results
of operations. We believe that material items such as depreciation,
amortization, interest expense, and income taxes should be discussed in
MD&A but should not be eliminated or adjusted in connection with a non-GAAP
measure.  Please tell us how you plan to
delete EBITDA as a supplementary non-GAAP operating performance measure in your
filings or provide additional supplemental information to demonstrate why these
measures provide useful information to investors.

NBTY Response

The FAQ release indicates that EBITDA is an
appropriate performance measure where it provides useful information to
investors.  In this regard, the Company
receives numerous questions from the investment community concerning EBITDA
generated by the Company and its various business segments.  These questions arise in every earnings and
analyst conference call and at every conference where Company representatives
are present.  The general public,
institutional investors and analysts consider EBITDA to be relevant to their
understanding of the Company’s performance.
Moreover, the Company’s credit arrangements which are described in its
SEC filings contain a number of covenants that are EBITDA related.  We believe this indicates the utility of this
information and, therefore the Company believes it is important to include EBITDA
disclosures in its SEC filings.

If the Company were to delete discussions of EBITDA
from its public filings, the Company would receive numerous EBITDA questions
during earnings calls and in other settings.
The Company would be forced to (a) provide such EBITDA information
orally and (b) file reports on Form 8-K for the EBITDA information
provided to analysts and investors in order to comply with securities
laws.  As a result, given the attention
paid to Form 8-K filings, EBITDA information might actually be given more
prominence in the market as compared with the supplemental nature of EBITDA
disclosure in the Company’s current public filings.

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Since EBITDA information is continually requested
and discussed, the Company feels it pertinent to provide EBITDA information to
the entire investor community, rather than provide such information to
particular investors who request it.  The
Company feels the best way to provide the investing community with the same
EBITDA information at the same time is through the Company’s public filings.

Moreover, the Company believes it provides
appropriate disclosure concerning its use of EBITDA as required by the FAQ
release.  The Company provides EBITDA as
a supplemental operating measure in its SEC filings subsequent to applicable
GAAP financial statement disclosures.
These EBITDA disclosures are not given any more prominence in the Company’s
SEC filings than GAAP measures.  In fact,
all discussion of EBITDA is located at the end of the MD&A section.  Moreover, the Company expressly states in its
SEC filings that “EBITDA… should not be considered in isolation of, or as a
substitute for or superior to, other measures of financial performance prepared
in accordance with GAAP…In addition, the Company’s definition of EBITDA is not
necessarily comparable to similarly titled measures reported by other
companies.”  Therefore, the Company
believes that the investing public is properly instructed as to the relative
significance of its EBITDA discussions.

In addition, in response to your original letter we have
provided and will continue to provide disclosures in all future filings where
EBITDA is referenced, which will discuss the material limitations that EBITDA
has when it is provided as a supplemental non-GAAP operating measure. The
Company will continue to enhance its filings with the same disclosure from page 46
of the June 30, 2005 10-Q that EBITDA as a non-GAAP supplemental operating
measure has the following material limitations:

•      “It does not include interest expense. Because the Company borrowed
money to finance its operations, interest expense is a necessary and ongoing
part of its costs and has assisted in generating revenue. Therefore, any
measure that excludes interest has material limitations.

•      It does not include taxes. Because the payment of taxes is a necessary
and ongoing part of operations, any measure that excludes taxes has material
limitations.

•      It does not include depreciation and amortization expense. Because the
Company uses capital assets, depreciation and amortization expense is a
necessary element of costs and ability to generate revenue. Therefore, any
measure that excludes depreciation and amortization expense has material
limitations.”

SEC Question:

3.     Further, your Form 10-Q for
the quarter ended March 31, 2005 discloses that EBITDA as being the
primary measure used by the Company’s chief decision maker to evaluate the
ongoing performance of its segments and operating units.  This disclosure appears to be inconsistent
with your disclosure, in the segment information note in your Form 10-K
that the primary measures of performance are net sales and pre-tax operating
income or loss (prior to corporate allocations) of each segment.   It appears that you should either eliminate
your disclosure of EBITDA as a segment measure in MD&A or revise your segment
information in the notes to the consolidated financial statements to disclose
EBITDA as a segment measure of performance.
Please provide us in a disclosure-type format how you plan to eliminate
this inconsistency.

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