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Letters Of Testimony by Former QMA President

May 01, 2010

Below is the statement by former President of Quartz Mountain Aerospace (QMA), Altus Oklahoma, on false tax credit claims. I forwarded John's email to the following Oklahoma State House Oversight Committee members. The letter of testimony was sent after the 1,500 Oklahoma Tax Commission emails were uncovered, and prior to the committees annual meeting with Tony Mastin, Executive Director of the Oklahoma Tax Committee. View. This letter was ignored.

Confidential - for the use of this committee.

Attached is a statement, from John Daniel former general manager, Quartz Mountain Aerospace (formerly Luscombe Aircraft company). You will find this information very informative and useful for your committee's current work.

FYI, John, has long been a most important source of information, but preferred to remain anonymous. Understanding the importance of your work, John, was willing to step forward and provide this statement only yesterday.

John was QMA GM from early 2001 until October 2007. The essence of John`s statement is found in paragraph 7.

"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 is not true, we never received that kind of money."

While John only alludes to the $221 million claim that was well publicized in early 2006 when lawmakers were passing SB 1577 to ostensibly close the loophole, his statement covers all claims 2003 to 2006.

While information is not available for all the claims we do have evidence for the $221 million 2005 claim and two claims of investing another $222 million in QMA during 2006; Altus Venture $200,000,000

Affinity Ventures $21,635,000. This totals $443 million in known claims yet only $32 million was invested.

Lastly, I personally contacted Dawn Cash at OTC on several occasion between March 16 and 26 2009 to provide this information and asked that OTC investigated. Although, Dawn informed me the matter would be looked into, several means have revealed this was totally ignored. It is well documented in OTC emails Mike Reynolds obtained, that OTC was in the process of issuing, $ millions in tax refund checks for these very tax credits, when I informed Dawn. Yet OTC continued issuing tax refund checks to at an accelerated pace, after Dawn was informed.

In that context I would ask you please keep the identity of the source confidential, at least for now. I am sure John would be willing to discuss any questions directly, and I can get you in contact with John.


Letter of testimony, provided Oklahoma State House Government Oversight Committee Members

Samson Ray

From: John Daniel, former president of Quartz Mountain Aerospace

Provided House Oversight Committee, May 2, 2010, prior to Tony Mastin's (Head of Oklahoma Tax Commission) annual appearance before the Committee. Committee never used, and left to those to explain why.

Nick, as best that I can remember:

I arrived at LAC in Jan. of 2001 we were using funds from a First State Bank (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. This also was from locals and some investment funds in OKC.

Comment added: This $9 million was pre-tax credits and came from a different set of investors which received no tax credits for their $9 million, but stock in the company. More on convertible debenture below.

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 and were overdrawn at Paul's bank, FSB. (Approx. $160K)

We started receiving money from the Tax credits about that time, small amounts, $500K-$1,000K. 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 October of 2004 we received about $ 2 million from Tax Credits, which was the largest amount we had ever received at one time. I believe that $500K of that was from Affinity Ventures. Most all of the $2 million was used to pay FSB loans and overdrafts. That was all we received until July of 2005.

Comment added: Although Tax credits usage can be spread over several years the credits can only be claimed for the year the money is actually invested.

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, pay the City of Altus the loans we owed them.

Comment added: Repaying interest on previous Capital funds obligations is not a proper use of the tax credits.

In Oct. of 2007 when I left we still had about $1.5 million of those funds in the bank and were well along with production, having completed 4 aircraft and established/filled the production line. Paid off all debts (except OIFA ~$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 is not true, we never received that kind of money.

I was told (2003?-2004?) that Paul and Don had arranged for a large loan (~$x$x$x$x$ million) that was put into a LAC/QMA account that was there only for Tax Credits and that we, LAC/QMA, had no access to it nor could we use any of those funds. They were solely in a LAC/QMA account to earn 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.) I repeatedly tried to get Paul 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" (Paul's terminology-we had that much in the account for collateral and we had a loan for that amount.) We could only use them if we wanted to finance the sale of Aircraft, our own GMAC if you will. (We never even attempted to do that, so the funds may not have even been there in 2007).

Comment added: By definition and practice to qualify as an investment is money must be made available to business management to use as they deem necessary to operate and grow a business.

We did write some checks to cover interest on that loan. However I never saw the funds, and if they were ever there they eventually disappeared.

Comment added: As I understand this was interest on a loan that not only of no benefit to QMA; but was not real money that would ever be available.

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 Matt Griffith that chaired these proceedings had to use a 2 or 3 page checklist to make sure all the `legal" bases were covered.

I and one other (name removed for privacy) were the only LAC/QMA employees in attendance at any of the `Closings" Paul Doughty, Don Anderson, Bill Grissom, and Matt Griffith were at all the `Closings" as I remember. Bob Mc Donald was at only one when we received money from Affinity Ventures.

Comment added: Bob (Robert McDonald) owned Affinity Ventures and was head of Capital West Securities, while Paul Doughty managed Affinity Ventures.

The $32 million that was received by LAC/QMA 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 but it is just about what it takes to get and aircraft certified and production set up and running. (early estimates ran from $50 Million to $75 million, by really watching our pennies we were able to get it done for ~$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. Joe Courtney and I estimated at one point that there had been ~$16 million in `Management Fees" over this time period (2003-2006), that would have been better had it gone to LAC/QMA as working Capital. It would have sped things up and got us to the market quicker….Maybe even have saved the company!

Comment added: The $16 million comes from the fact fees are charged on the entire falsely claimed amount. Meaning the ventures, like QMA, suffer an additional penalty when used for false claims.

I don't know if Tax Credits were used after I left, but it sounds like a lot of fake loans were keeping the company going until the debt got to be over $16 million and they had to close the doors… failed……etc.

Comment added: In summary, I submit that anytime a public officials is a party to and justifies actions of this nature that officials is failing to serve the interest of the public while serving to benefit those receiving tax credits.

Nick, I hope this helps. JSD

John Daniel

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