Second letter of testimony from John Daniel the president of Quartz Mountain Aerospace (QMA)
QMA was at the center of Oklahoma's 2006 Tax Credit Abuse Controversy during John Daniel's tenure as president. John Daniel's first letter of testimony was sent to the Oklahoma State House of Representatives, State Government Oversight Committee, but ignored. View
Letter published in Altus Times
John Daniel's Letter to the Editor involves Oklahoma Tax Credits, the former First State Bank (not the current First State Bank of Altus, a branch of the Herring Bank) and Luscombe Aircraft Corporation / Quartz Mountain Aerospace (LAC/QMA). For information on Prowling Owl, see the web site http:prowlingowl.com. This web site states that it is "dedicated to exposing fraud, scams, embezzlement, and such involving public money."
Letter to the Editor
The Prowling Owl is right!
By John Daniel
Altus Times, May 10, 2010
My name is John Daniel and I was president and Chief Operation Officer for Luscombe Aircraft Corporation / Quartz Mountain Aerospace (LAC/QMA) for almost seven years. During that time we were always struggling for money. I had read the Prowling Owl a few times and didn't think he knew what he was talking about. I was too busy trying to get LAC up and running. Now that we have seen all that has happened to LAC and I have had time to look back and re-read some of the Prowling Owl's words, I have come to the realization that he was right about the funds we did and didn't get.
With the funds we did get we were able to get to the final goal: we had four aircraft complete and sold; we had the production line up and running at the rate of one airplane per month. All of our bills and debts were paid and we were ready to start making money. That changed in late 2007, but that is another story.
When I arrived at LAC in Jan. of 2001 they were using funds from a (former) FSB loan that was a Participation loan from investors, mostly from the board members and the local community. We converted that to a $9 million Convertible Debenture by raising another $4 million to add to the $5 million that had been raised before I got there. (People invest in a Convertible Debenture knowing that if the interest is paid on their money before the debenture expires their funds will be converted to common stock in the company) These investments were also from locals, earlier investors, and some investment funds in OKC. We used that money until the end of 2002 when we received the Type Certificate for the 11E aircraft from the FAA, but we had used it all (approximately $160,000) and were overdrawn at FSB.
We started receiving money from the (Oklahoma) Tax credits about that time, small amounts, $500,000-$1,000,000. We kept getting enough to keep the company alive, pay some debt, and our overdraft charges at FSB, but not enough to really progress forward into production.
In Oct. 2004 we received about $2 million from Tax Credits, which was the largest amount we had ever received at one time. I believe that $500,000 of that was from Affinity Ventures. Almost all of the $2 million was used to pay FSB loans and overdrafts. That was all we received until July 2005. Once again we were badly overdrawn at FSB.
From July 2005 to early 2006 we had several funding events, closings every month or two until early 2006 from Tax Credits. The largest of those we received was over $6 million in one chunk. We were able to pay the interest on the Convertible Debenture and convert that $9 million to stock, and pay the City of Altus the loans we owed them.
In Oct. 2007 when I left we still had about $1.5 million of Tax Credit funds in the bank and were well along with production, having completed four aircraft and established / filled the production line. We had paid off all debts (except Oklahoma Industrial Finance Authority, about $1 million) and were current with all of our suppliers.
All of the funding from Tax Credits amounted to $32 million over the years from 2003 to 2006. This was the money that LAC/QMA actually received to operate on. The $221 million that was claimed to have been invested in LAC/QMA for working capital was not true; we never received that kind of money and we never had control of and could not use those funds, which means they were never really invested.
So how did that happen and where is the $221 million? I was told that Altus Ventures had arranged for a large loan (about $x$x$x$x$ million) that was put into a LAC/QMA account, originally we were told we would be able to purchase new production equipment with the funds, then not, and then it was available for a leasing aircraft business, then not. The rules and definitions changed...morphed...almost daily, as they worked through it with the Oklahoma Tax Commission (OTC). Finally I was told that it was there only for Tax Credits and that we, LAC/QMA, had no access to it nor could we use any of those funds.
A "cash on cash" debt transaction would qualify as an "investment" under the statute was an OTC ruling that was made during these discussions between the OTC and Altus Ventures, and it was off to the races. After the OTC ruling we were again told the funds were solely in an LAC/QMA account to earn Tax Credits, that amount of investment would qualify Altus Ventures over $$$$$ million in tax credits. Early in this process I signed a note for $189 million, not as guarantor but I guess to show that the money went into a special LAC/QMA account as an investment.
I repeatedly tried to get FSB to allow me to use some of those funds to increase production but was told they really didn't belong to LAC/QMA. It was "cash on cash." That was Altus Ventures' terminology. We had that much in the account for collateral and we had a loan for that amount, if we used any of the funds we had no way to pay the loan.
We did write checks to cover interest on that loan. However I never saw the funds, and if they were ever there they eventually disappeared. I still don't know how the journal entries were made on the QMA books to record the transactions...on the front end and on the back end. I know a lot of QMA financial business was handled directly by FSB.
I wish I had better recollection on specific dates and amounts, we were never allowed to leave a closing with the paperwork, it was to be all gathered, collated, and sent out by Altus Ventures. The whole closing process was so complex and complicated that we, LAC/QMA, had a hard time keeping up with the paper and checks that went back and forth across the table. In fact the Altus Ventures Lawyer that chaired these proceedings had to use a 2 or 3 page checklist to make sure all the legal bases were covered.
I was the only LAC/QMA employee in attendance at all of the closings. As I remember all of the Altus Ventures officers and their lawyer were always there. Capital West was represented at the only one when we received money from Affinity Ventures.
The $32 million that we received from tax credits was what we used as operating capital. That plus the $9 million debenture are the only funds we ever had to work with. That seems like a lot of money, but it is just about what it takes to get an aircraft certified and production set up and running. Early estimates ran from $50 million to $75 million. By really watching our pennies, and staying lean and mean we were able to get it done for about $41 million.
At every closing, there was money from the tax credits that went to Altus Ventures for "Management Fees" to continue bringing more capital in and have professional money managers talking care of us dumb airplane guys. I estimated at one point that there had been about $16 million in Management Fees over this time period (2003-2006). That would have been better served had it gone to LAC/QMA as working capital. It would have sped things up and gotten us to the market quicker. Maybe even have saved the company!
It is really sad what happened to the company that so many believed in and worked so hard for. Employees were left unpaid; bank loans unpaid; suppliers unpaid; and a lot of bad will generated throughout the aviation community and most especially the Altus community.
I don't know if Tax Credits were used after I left (Oct. 2007), but it sounds like a lot of bad or fake loans were keeping the company going until the debt got to be over $16 million and they had to close the doors. The bank (the former FSB) failed, QMA filed Bankruptcy, the Auction, Etc.
The failure of the company was impacted by the economic break down but it could have survived. The real cause of the failure was bad decisions on the part of upper management to include the Directors. With any common sense and knowledge of the aircraft industry, they would have known that a slow, but sure start up was best for the long haul. Instead of going into debt millions of dollars to increase the production rate, they should have had a plan that conserved money and kept things at a survival level until the economy had time to recover, but as I said earlier that is another story.
So, Mr. Prowling Owl, I take back what I said about you not knowing what you were talking about! It is amazing that you have been able to figure all of this out. It is an extremely complicated scam. I can only hope that the Oklahoma government will see what you are saying and take action to close down this money machine that is lining the pockets of all involved with tax payer money, and not being used as it should be, to get new industry and new jobs into Oklahoma.