SecProbe.io

CORRESP
1
filename1.htm

    secresponseletter10nov09.htm

    RULE
12B-4 AND COMMISSION RULE 83 (17 CFR 200.83) FOIA CONFIDENTIAL TREATMENT
REQUESTED BY COVENANT TRANSPORTATION GROUP, INC. FOR CERTAIN PORTIONS OF THIS
LETTER

    November
10, 2009

    United
States Securities and Exchange Commission

    Division
of Corporation Finance

    100 F
Street, NE, Mail Stop 3561

    Washington,
D.C. 20549-3561

    Attention:  Mr.
David R. Humphrey, Branch Chief

    Ms.
Beverly A. Singleton, Staff Accountant

    Re:  Covenant
Transportation Group, Inc. (the “Company”)

Form 10-K for the year ended December 31, 2008 (“Form 10-K” or
“filing”)

    Filed
March 31, 2009

File Number: 000-24960

    Dear Mr.
Humphrey and Ms. Singleton:

    This
letter responds to your letter dated November 3, 2009, in which you set forth
comments of the United States Securities and Exchange Commission (the
“Commission”), Division of Corporation Finance’s staff (the “Staff”) relating to
the financial statements and related disclosures included in the Form 10-K
and Form 10-Q’s as of and for the periods ended March 31, 2009 and June 30,
2009.  For ease of reference, we have reproduced the Staff’s comments
in their entirety.

              1.

              Management’s
      Discussion and Analysis

    Recent Results and Year-End
Financial Condition, page 21

    SEC
Comment:

    Refer
to your narrative discussion and table disclosure of the non-GAAP measure of net
loss, without the impairment charges, and related loss per
share.  Please delete this and any other references of non-GAAP
financial measures from filed documents such as your Forms 10-K and
10-Q.  You may choose instead, for example, to discuss and disclose
the dollar (or percentage) impact the impairment charges had on (or contributed
to) your GAAP results of operations, without presenting such non-GAAP totals
that excluded these charges.  Please revise in future
filings.  We do not accept non-GAAP financial measures with titles or
descriptions confusingly similar to titles or descriptions used for GAAP
financial measures, including “Non-GAAP Basis Net Loss Excluding Impairment
Charges.”

    Response:

    In future
filings, the Company will not present non-GAAP financial measures with titles or
descriptions similar to titles or descriptions used for GAAP financial measures
or related

          United
States Securities and Exchange Commission

          Division
of Corporate Finance

          November
10, 2009

          Page
2

          RULE
12B-4 AND COMMISSION RULE 83 (17 CFR 200.83) FOIA CONFIDENTIAL TREATMENT
REQUESTED BY COVENANT TRANSPORTATION GROUP, INC. FOR CERTAIN PORTIONS OF THIS
LETTER

    tabular
reconciliations of GAAP financial measures to non-GAAP measures. Rather, asset
impairment charges or other charges that management believes to be unusual and
that affect the comparability of the Company’s results to prior periods will be
disclosed in a manner that details the impact such charges had on our GAAP
results of operations.

              2.

              Note
      1.  Summary of Significant Accounting Policies, page
      49

    SEC
Comment:

    Refer
to your discussion of “Segment Information” on page 53.  We note that
you have elected to aggregate the results of your reporting segments in fiscal
2007 and 2008.  We have reviewed your support for this presentation,
as provided in your response letter dated August 16, 2005.  In view of
your current structure and activities, including the acquisition of Star in
fiscal 2006, we are not persuaded that your current presentation of a single
reporting segment (or the two reporting segments represented in your subsequent
Form 10-Q) is appropriate.  It appears to us that the presentation of
separate information may provide useful information to
investors.  Please address whether and how each of your three
nonbrokerage subsidiaries has similar operating characteristics and, if you
believe that they do, provide numerical support for your
conclusion.  In addition, please address their similarity in the five
relevant areas (such as products and processes, type of customer, methods used
to provide services etc.)  Finally, please provide us with a copy of
the most recent operating results and/or reports used by your chief operating
decision maker to make decisions about resources to be allocated and to assess
performance.  We may have further comments upon review of your
response.

    Response:

    Covenant
Transportation Group, Inc. (“CTG”) has two reportable segments: Asset-Based
Truckload Services (“Truckload”) and our Brokerage Services, also known as
Covenant Transport Solutions, Inc. (“Solutions").

    As
detailed below, the Truckload segment consists of three asset-based operating
fleets that are aggregated because they have similar economic characteristics
and meet the aggregation criteria of Financial Accounts Standards Codification
(“ASC”) 280, “Segment Reporting” (f/k/a SFAS No. 131).  The three
operating fleets that comprise our Truckload segment are as follows: (i)
Covenant Transport, Inc. which provides expedited long haul, dedicated, and
regional solo-driver service; (ii) Southern Refrigerated Transportation, Inc.,
or SRT, which provides primarily long-haul and regional temperature-controlled
service; and (iii) Star Transportation, Inc., which provides regional
solo-driver service.

    The
Solutions segment provides freight brokerage service directly and through
freight brokerage agents who are paid a commission for the freight they provide.
The brokerage operation has helped us continue to serve customers when we lacked
capacity in a given area or when the load has not met the operating profile of
our Truckload segment.

    Management
concluded that each of the three asset-based fleets is an operating segment as
defined by ASC 280; given each of the three subsidiaries has the following
characteristics:

          United
States Securities and Exchange Commission

          Division
of Corporate Finance

          November
10, 2009

          Page
3

          RULE
12B-4 AND COMMISSION RULE 83 (17 CFR 200.83) FOIA CONFIDENTIAL TREATMENT
REQUESTED BY COVENANT TRANSPORTATION GROUP, INC. FOR CERTAIN PORTIONS OF THIS
LETTER

              a)

              Engages
      in business activities from which it may earn revenues and incur expenses
      (including revenues and expenses relating to transactions with other
      components of the same enterprise);

              b)

              Operating
      results of the component are regularly reviewed by the enterprise's chief
      operating decision maker (“CODM”) to make decisions about resources to be
      allocated to the segment and assess its performance;
  and

              c)

              For
      which discrete financial information is
  available.

    As it
relates to management’s aggregation of these operating segments for reporting
purposes, management evaluated the criteria provided in ASC 280-10-50-11 and
notes that the operating segments have similar operating characteristics. ASC
280 details that similar operating characteristics include producing comparable
long-term average gross margins.  Management believes the historical
operating ratio analysis discussed below and in Attachment #1 supports that the
long-term operating results of each of the three asset-based businesses are
similar.

    [The
Company hereby requests confidential treatment of Attachments #1 and #2 pursuant
to Commission Rule 83 (17 C.F.R. §200.83).  Attachments #1 and #2 have
been mailed to the Commission, are provided in response to the Staff’s comments,
and are submitted as a supplemental submission under Rule 12b-4 under the
Securities Exchange Act of 1934, which submission requests that the materials be
returned to the Company in accordance with Rule 12b-4.]

    Additionally,
as detailed below, the operating characteristics are similar in each of the
following areas:

              a)

              Nature of product and
      services – Each of the asset-based fleets has the same nature of
      services (i.e. over-the-road truckload freight transportation) to
      customers throughout much of the United
States.

              b)

              Nature of the production
      process – None of the asset-based fleets have a production
      process.

              c)

              Type or class of customer for
      their products and services – Each of the asset-based fleets has
      the same class of customer (i.e. shippers of truckload quantities in
      non-local movements). This is supported by the fact that approximately one
      hundred of the Company’s customers engage in business with a combination
      of the operating fleets, including larger customers such as General
      Electric, Coca Cola, Bridgestone, Wal-Mart, Schering-Plough, Georgia
      Pacific, etc.  Many customers are not sure which subsidiary will
      haul a load until the morning of the shipment, which many times is based
      on which subsidiary happens to have the closest available open
      truck.  Additionally, the days sales outstanding for the
      subsidiaries is consistent given the similar customer profiles, noting
      that the average since December 31, 2007 is 37 days for Covenant, 36 days
      for Star and 42 days for SRT,
respectively.

              d)

              Methods used to distribute
      their products or provide their services - Each of the asset-based
      fleets uses the same methods to provide their services, which are
      primarily asset-based truckload carriers that use the same types of
      tractors, trailers, drivers, dispatching, billing, collecting, and
      marketing. This is supported by the fact that in January of 2007, the
      Company significantly decreased its refrigerated service
      offering

          United
States Securities and Exchange Commission

          Division
of Corporate Finance

          November
10, 2009

          Page
4

          RULE
12B-4 AND COMMISSION RULE 83 (17 CFR 200.83) FOIA CONFIDENTIAL TREATMENT
REQUESTED BY COVENANT TRANSPORTATION GROUP, INC. FOR CERTAIN PORTIONS OF THIS
LETTER

    within
the Covenant operating subsidiary by transitioning 250 of the trucks, along with
the related trailers, drivers, etc. into the SRT
subsidiary.  Additionally, in January of 2009, the Company transferred
approximately 50 Star tractors to the SRT subsidiary.  Management
believes the movement of equipment and drivers between operating fleets supports
the commonality of the nature of the related businesses and the methods employed
to provide their services.

              e)

              The nature of the regulatory
      environment – Each of the asset-based fleets is regulated under the
      same federal and state regulatory agencies and governmental authorities,
      principally the Federal Motor Carriers Safety Administration, United
      States Department of Transportation and similar state
      agencies.

    Other
examples that support the fact that the business are all the same include the
transfer of a number of auxiliary power units from Covenant tractors to Star
tractors in fiscal 2009, in an effort to help better manage Star’s fuel mileage.
Further, the Company’s revenue equipment and fuel are purchased centrally and
the related tractors are ordered with substantially the same specifications and
the fuel networks used by the subsidiaries are consistent. Additionally, each of
the subsidiaries uses the others’ shops to repair equipment and trailers are
routinely swapped to facilitate efficiencies if one subsidiary has available
trailers in an area where another subsidiary has demand for the
units.

    Based on
the foregoing, the Company concluded that the asset-based operating segments
meet the aggregation criteria discussed above and as such are appropriately
presented as one reportable segment, in accordance with the provisions of ASC
280.

    Additionally,
pursuant to your request, attached are certain of the operating reports that are
used by David Parker, (the Company’s founder, CEO, President and majority
shareholder) who is the Company’s CODM, to make decisions about resource
allocation and to assess performance. Below is a summary of each report,
including the related purpose and distribution.

    Attachment
#1 Operating Ratio
Analysis – The purpose of the analysis is to compare each subsidiary’s
operating ratio (the Company’s and asset-based truckload industry’s main measure
of profitability, which is defined as operating expenses, net of fuel surcharge
revenue, divided by freight revenue) both for the current quarter and to provide
a retrospective review of prior periods. The related document is reviewed by
CTG’s executive management, including the CODM, to assess performance and
performance improvement.  Additionally, the analysis is used to
determine resource allocation, as evidenced by a decision to increase the number
of units at SRT in 2007 and 2009 as a result of their improved operating results
when compared to the other asset-based subsidiaries. The related analysis is
also provided to the Company’s Board of Directors in their quarterly board
meeting materials.  As detailed in the attachment, the operating
ratios at each of the three asset-based fleets are consistent and generally
change in the same pattern based on the cyclical nature of the truckload
business and changes on the overall economic environment. Management believes
that the current, historic and future gross margins of the operating segments
are similar, thus supporting the fact that they have similar economic
characteristics.

    Attachment
#2 Operating Report –
The purpose of this operating report is to monitor the weekly, monthly and
year-to-date revenue and certain related statistics and is

          United
States Securities and Exchange Commission

          Division
of Corporate Finance

          November
10, 2009

          Page
5

          RULE
12B-4 AND COMMISSION RULE 83 (17 CFR 200.83) FOIA CONFIDENTIAL TREATMENT
REQUESTED BY COVENANT TRANSPORTATION GROUP, INC. FOR CERTAIN PORTIONS OF THIS
LETTER

    prepared
weekly by each subsidiary.  Attachment #2 sets forth the categories of
information set forth in the report.  The report is distributed to
CTG’s executive management and the CODM, along with financial and operational
management.  The operating reports of the asset-based subsidiaries are
consolidated to summarize the related activity for the Truckload segment, which
excludes Solutions. The chief operating decision maker uses these reports (i.e.
individual subsidiary operating reports and combined Truckload report) to assess
performance and make investment allocation decisions, primarily as it relates to
the utilization and placement of revenue equipment.

    [The
Company hereby requests confidential treatment of Attachments #1 and #2 pursuant
to Commission Rule 83 (17 C.F.R. §200.83).  Attachments #1 and #2 have
been mailed to the Commission, are provided in response to the Staff’s comments,
and are submitted as a supplemental submission under Rule 12b-4 under the
Securities Exchange Act of 1934, which submission requests that the materials be
returned to the Company in accordance with Rule 12b-4.]

    3.  Liquidity and Capital
Resources, page 24

      SEC
Comment:

    On
an ongoing basis, as applicable, please discuss the business reasons for, and
the implications of, your working capital deficit.

    Response:

    In future
filings, the Company will, if applicable, discuss the business reasons for, and
the implications of, any working capital deficit.

    Given the
Company has a working capital deficit at September 30, 2009, we have included
the following discussion in the Liquidity and Capital Resources section of the
related Form 10-Q:

    We had a
working capital (total current assets less total current liabilities) deficit of
$29,681,000 at Sept