(Page 1) This Memorandum of Understanding ("MOU") is entered into this Sixth day of February 1990 by and among the United States of America acting by and through the Civil Division of the Department of Justice ("DOJ"), the Department of Transportation ("DOT") acting by and through the United States Coast Guard ("USCG"), and AVCO Corporation, Textron Lycoming Division ("AVCO") (collectively referred to as the "Parties"). This MOU sets forth the contemplated terms and conditions of a proposed Settlement Agreement (the "Settlement Agreement") which the Parties intend to present to authorized officials of DOJ, the USCG, and AVCO for approval. Pursuant to the foregoing, the Parties agree as follows:

1. The Settlement Agreement will be entered into based upon the following facts:

a. On June 14, 1979, Aerospatiale Helicopter Corporation ("AHC") and the USCG entered into Contract No. DOT CG 80513A for the production and delivery of 90 Short Range Recovery ("SRR") helicopters. On April 1, 1980, AHC and AVCO, in turn, entered into Subcontract No. CG 80-9-1 for the production and delivery of 180 LTS 101-750 A-1 engines for inclusion into the SRR helicopters.

b. On October 1, 1985, AHC and AVCO entered into Letter Agreement No. A85C366G1005 for the conversion of certain LTS 101-750 A-1 engines, produced pursuant to Subcontract No. CG 80-3-1, to LTS 101-7%0 B-2 engines. (Page 2)

c. The USCG and AVCO also entered into contracts and purchase orders for the supply of spare LTS 101 engines and spare parts for such engines.

d. On various dates, some or all of the contracts, subcontracts, and purchase orders referred to above were modified.

e. An action (initiated by the "Relator") in the name of the United States concerning these contracts and subcontracts was filed under seal in the United States District Court for the Northern District of Texas (the "Relator lawsuit"). The Relator lawsuit alleges that, in connection with these contracts and subcontracts, AHC and AVCO acted in violation of the civil False Claims Act, 31 U.S.C. §§ 3729-33 (1982 & Supp. IV 1986).

f. DOJ has conducted an investigation of AVCO's performance of these contracts, subcontracts, and purchase orders, which included investigation of the allegations against AVCO set forth in the Relator Lawsuit. As a result of its investigation, DOJ maintains that AVCO acted in violation of the civil False Claims Act and common law, and also is liable contractually to the USCG under the above contracts, subcontracts, and purchase orders.

g. AVCO denies wrongdoing of any kind whatsoever and specifically, with respect to the above contracts, subcontracts, and purchase orders, denies that it acted in violation of the civil False Claims Act or common law, or that it is liable contractually to the USCG. (Page 3)

h. The parties are entering into this Settlement Agreement to avoid the expense, delay, and inconvenience of protracted litigation relating to the conduct alleged in subparagraphs 1(e) and 1(f).

a. At the time the Settlement Agreement becomes effective, pay seventeen million dollars (U.S.$17,000,000.00) to the United States. This amount will accrue simple interest until paid from November 2, 1989, payable to the United States at the rate of 7.81 percent per year as established by the United States Treasury 52-week bill auction rate in effect on November 2, 1989.

b. Enter into a "Power By The Hour" ("PBH") contract covering all USCG-owned LTS 101 engines. The PBH contract will consist of the following primary terms and conditions, as well as other terms and conditions mutually agreeable to AVCO and the USCG: (Page 4)

(1) The PBH program will consist of a base contract, plus one year options covering a total continuous period of seventy-two (72) months with up to seven contract periods which will not bridge fiscal years.

(2) The form of the contract shall be an indefinite quantity supply contract.

(3) The PBH rate will be as follows:


Months 01 - 12.....85.00 $/Hr.
Months 13 - 24.....82.60 $/Hr.
Months 25 - 36.....80.20 $/Hr.
Months 37 - 48.....77.80 $/Hr.
Months 49 - 60.....75.40 $/Hr.
Months 61 - 72.....73.00 $/Hr.

(4) All dollars are 1989 U.S. dollars and are subject to escalation based upon an index to be agreed upon and included in the PBH contract.

(5) The USCG pays the PBH fee with respect to a engine when that engine is shipped back to the USCG following depot visit at the applicable PBH rate multiplied by the hours accumulated on the engine since the previous depot visit.

(6) For the purpose of determining the initial PBH fee on an engine, AVCO recognizes the last AR&SC depot visit as the initial depot visit commencing the PBH program.

(7) The USCG will not pay a program exit fee.

(8) The USCG guarantees a minimum of 80,000 PBH hours for each twelve-month period, prorated for the base (Page 5)contract period and any subsequent contract, period less than twelve (12) months. If the total number of PBH hours billed to the USCG for any period is less than the minimum, the USCG will nonetheless pay for the minimum number of PBH hours for that period.

(9) All shipping costs are the responsibility of the USCG.

(10) PBH will be offered to the USCG on an annual basis at a fair and reasonable price after the expiration of the 72-month period.

(11) AVCO will provide parts and labor for field and depot maintenance, except as described below:

(a) USCG field labor will be provided free of charge to AVCO when available, although the USCG does not guarantee its availability; and

(b) Line maintenance and consumables will not be provided by AVCO (specific definitions of "line maintenance" and "consumable" to be mutually agreed upon by the USCG and AVCO).

(12) Depot maintenance will be conducted at an AVCO-designated facility.

(13) AVCO will provide factory and other training to USCG mechanics free of charge for the duration of the PBH contract.

(14) In the event of an engine "failure" which is defined as any required unscheduled maintenance action which (Page 6) prevents the engine from being airworthy, USCG maintenance officers (or other cognizant USCG personnel) will decide whether the engine will be removed from aircraft. Within one week after AVCO receives notice of the failure, AVCO will disposition the engine for "on-site repair" or "return to depot." AVCO will complete any "on-site repair" within thirty (30) calendar days after AVCO receives notice of the failure. If either disposition or repair is not completed within these periods, the USCG will have the unilateral right to ship the engine to depot.

(15) AVCO will have configuration management responsibility for engines, except that the rebladable power turbine and associated nozzle will be installed in all USCG-owned engines between January 1, 1990 and July 1, 1991. PBH rates will include the hardware and installation costs of the rebladable PT rotor and associated nozzle, as well as all labor and materials necessary for compliance with all Airworthiness Directives and AVCO Mandatory Service Bulletins. Consistent with the above commitments, AVCO will attempt to supply the rebladable power turbine and associated nozzle in 250 of the USCG-owned engines by December 31, 1990, and will attempt to supply these items in the remaining USCG-owned engines by April 1, l991.

(16) The USCG will have the opportunity for the duration of the PBH contract to provide technical comments and customer guidance regarding the engine at quarterly program reviews held pursuant to either the AVCO-USCG Sustaining (Page 7) Engineering Contract (Contract NO. DOT CG 23018-D-20001) or other agreed upon formats.

(17) The USCG may terminate for convenience any existing spare parts orders (but not engine orders) placed but not yet delivered without incurring liability for terminating such orders. This prerogative will exist up until the date of PBH contract award, but does not apply to orders placed after the execution of this MOU.

(18) The AVCO depot capacity for USCG engines will be at a rate that will allow 40 engines per month to be repaired on a 60-calendar-day turnaround basis.

(19) Engines determined to have excluded damage will be included in the PBH program. The USCG will be liable for incremental charges for those specifically damaged and excluded parts and associated labor, in addition to the PBH payment for the engines. The "incremental charges' will be determined by standard proration methods utilized in the standard commercial PBH contract.

(20) Exclusions from the PBX program will be made for: abuse (includes excessive corrosion, excessive erosion, heavy FOD, etc. -- to be clarified as to extent in the PBH contract); battle damage; non-engine-caused submersion; and external damage.

(21) Engines will be overhauled and repaired in accordance with commercial FAA standards and regulations. A USCG contracting officer's technical representative will perform (Page 8) appropriate inspection and acceptance procedures for the USCG in accordance with FAA standards and regulations, in lieu of any DCAS inspections (which the USCG will waive).

(22) AVCO will supply office space and telephone service at the depot site for the USCG contracting officer's technical representative.

(23) AVCO will supply up to five (5) field service representatives to the USCG at no cost and will pay all their travel and other incidental expenses. The senior representative will serve as the field liaison administrator and will be located at AR&SC during the "Transition" and "Start-up" Periods which are defined below in subparagraph 2(b)(26) and subparagraph 2(c). After the Transition and Start-up Periods, and throughout the PBH contract, AVCO will provide a field operations liaison service on a regular basis to AR&SC. This service will include presence at AR&SC of Lycoming field service personnel as often as is reasonably necessary to facilitate communication between AVCO and the USCG. The USCG will provide office space and telephone service at AR&SC for AVCO field service personnel.

(24) AVCO depot turnaround time, following completion of the six-month Start-up Period (defined below), is not to exceed 60 calendar days dock to dock. In the event AVCO fails to meet this timetable, liquidated damages will be assessed based on the price of the depot visit for the specific engine. Liquidated damages shall be assessed against AVCO in the amount of O.5% (of the depot visit price) per calendar day for days 61-90 (Page 9), and in the amount of 1$ (of the depot visit price) per calendar day for days 91 and above. For any specific engine, the maximum liguidated damages shall be 100% of the depot visit price. The Parties agree that the liquidated damages formula set forth in this paragraph is fair and reasonable and not a penalty. The parties agree not to contest the validity of the liguidated damages provision set forth above.

(25) The USCG will be responsible for logistics of engine distribution and availability at all operation sites.

(26) The PBH contract shall become effective upon its execution, at which time a "Start-up" Period, not to exceed six months, shall commence. During this period AVCO will notify the USCG as to the number of engines it can accept for repair at an AVCO-designated facility. Engines not accepted by AVCO will be repaired by the USCG at its own facility. Not later than the end of the "Start-up" Period AVCO shall be responsible for performing all necessary depot repairs at its designated facilities. During the "Start-up" Period:

(a) AVCO will give the USCG a 10% discount from the PBH rate for any engines repaired at AR&SC.

(b) AVCO will be responsible to provide at no expense to the USCG any parts required to maintain the engines in accordance with the PBH contract.

(c) At the beginning of the Start-up Period, the USCG will make available to and place in the control of AVCO all AVCO-approved usable LTS 101 material in USCG inventory as (Page 10) GFP (government furnished parts)under the PBH contract. All GFP will be on an "as is" basis. AVCO will bear risk of loss for such material in accordance with the FAR Clause 52.245-2 (w/o Alt) which will be included in the PBH contract. AVCO will be relieved of property control for such material in accordance with FAR 45.503(a)(2), but will account for such material only to the extent that the USCG shall be informed of the quantity, mix and value of inventory in AVCO's control but not yet withdrawn for consumption. In accordance with FAR 52.245-2(d), AVCO will be relieved of the requirement that all inventory made available be used in the performance of the PBH contract. In the event of a Default Termination of the PBH contract before the end of the first option period, AVCO shall return to the USCG any unused inventory. In such a case, if the value of the unused inventory plus price reduction (set forth in "subparagraph (d) below) actually credited against AVCO PBH billings at the time of default exceed the value of the GFP (as defined in subparagraph (d)(2) below), the USCG will reimburse AVCO the difference to the extent it exceeds the USCG's damages incurred on account of default. Otherwise, such difference shall reduce the USCG's damages incurred on account of default. In all other circumstances, AVCO shall retain any unused inventory at the end of the PBH contract.
(d) In consideration for the availability of GFP, AVCO Will provide a price reduction for the base contract period and succeeding option years in the following manner: (Page 11)

(1) AVCO will provide a price reduction for the base contract period equal to 90% of the prorate minimum PBH hours multiplied by the hourly rate for that period. Such price reduction shall not exceed the value of the GFP as defined in subparagraph (d)(2) below.

(2) AVCO will provide a price reduction for each succeeding option year (if exercised), based on the minimum PBH hours multiplied by the applicable rate, such that, when added to the price reduction in (d)(l) above, the total price reduction is equal to the value of the GFP. Value of the GFP is defined as USCG LIFO prices from AVCO for all AVCO-supplied new hardware and negotiated prices for all AVCO-approved used-serviceable hardware.

(e) In the event that an option year is not exercised or for any reason the USCG does not receive or is unable to use the total price reduction contemplated by (d)(l) and (2), then such portion of the total price reduction that the USCG has not received or is unable to use shall become a contract debt in accordance with FAR 32.6. Under no circumstances will the price reduction, contract debt, or combination thereof exceed the value of the GFP as defined above.

(f) AVCO agrees not to assert the USCG's failure to comply with the provisions of the Debt Collection Act or any regulations promulgated thereunder as a defense to any action to collect or set-off a debt arising under subparagraph (e). (Page 12)

(27) During the Start-up Period while some engines will be repaired by the USCG, AVCO will make its best reasonable efforts to provide material so that the USCG can meet a 60 calendar-day turnaround. To assist these efforts, the USCG, within seven (7) calendar days of the execution of the MOU, will provide AVCO inventory and consumption data on all LTS 101 parts; and AVCO, within fourteen (14) calendar days thereafter, will complete an inventory and needs analysis and initiate company sponsored orders for material, to meet parts demands during the Start-up Period.

(28) The USCG will agree in the PBH contract that the USCG will release and hold AVCO harmless from any claim resulting from USCG maintenance of its engines or the failure of USCG owned engines, which have not yet been overhauled by AVCO, to meet FAA-approved configuration.

c. Perform the following "Transition Period" agreement with the USCG. The Transition Period, which in no event is to exceed 180 days, is to commence with the execution by the Parties of this MOU and is to terminate on the earlier of the date of execution of the PBH contract or the expiration of the 180-day period. During the "Transition Period":

(1) AVCO will incur the obligation to repair five engines per month prorated for partial months. Repair Of such engines, in lieu of any claim for continuing damages, will be effected at no cost to the USCG on a 60-calendar-day (Page 13) turnaround basis and will be performed in accordance with commercial FAA standards and regulations.

(2) The Parties agree that engines accepted for Transition Period depot repair will be engines requiring scheduled depot maintenance or repair.

(3) AVCO will employ its best reasonable efforts to accept engines for repair as the obligation arises. Engines that AVCO is unable to accept for repair shall constitute a fixed and continuing obligation and must be repaired within twelve (12) months from when the obligation accrues but in no event more than eighteen (18) months from the execution by the Parties of the MOU.

d. Agree that costs (as defined in FAR 31.205-47(a)) incurred by, or allocated to, AVCO in connection with this proceeding (including (1) the defense of the Relator Lawsuit; (2) AVCO's investigation of the factual circumstances underlying the allegations in this proceeding; (3) the negotiation of this Settlement Agreement or any other proposed resolution of this proceeding; and (4) any payments made by AVCO, pursuant to subparagraph 2(a) above) shall be unallowable costs for government contract cost accounting purposes. AVCO will agree not to charge such costs directly or indirectly to its contracts with the United States, and will agree to account for such costs in accordance with CAS 405.

e. Agree that specifically excluded and reserved from the scope and terms of the Settlement Agreement are: (1) any (Page 14) claims arising under the Internal Revenue Code, Title 26, United States Code; (2) any claims for the enforcement of the terms of the Settlement Agreement; and (3) any civil or administrative claims not based on any of the conduct falling within tbe scope of the first ten lines of Paragraph 2, above.

a. Ensure that the proper pleadings are filed seeking the dismissal with prejudice of the Relator lawsuit.

b. Agree in the Settlement Agreement that any and all civil claims or administrative damages claims that have been or could have been brought by the United States against AVCO, including its parent corporation and the present and former officers, directors, employees, agents, subsidiaries, affiliates successors and assigns of AVCO and its parent corporation, based on any of the conduct that was the subject of the investigation identified in subparagraph l(f) above, as well as any and all civil claims or administrative damages claims based on conduct occurring after the date of the Settlement Agreement, provided that the same type of conduct was ongoing (i.e., other than on an isolated basis) during and was the subject of the investigation identified in subparagraph l(f), are waived and released. Specifically excluded from this subparagraph are: (1) any claims arising under the Interna1 Revenue Code, Title 26, United States Code; (2) any claim for the enforcement of the terms of the Set~lement Asreement; and (3) any civil or administrative claims not based on any of the conduct falling within the scope of the (Page 15) waiver and release 1anquaqe set forth above in the immediately preceding sentence.

a. Agree in the Settlement Agreement that any and all civil or administrative claims thst have been or could have been brought by the USCG against AVCO, including its parent corporation and the present and former officers, directors, employees, agents, subsidiaries, affiliates, successors and assigns of AVCO and its parent corporation, based on any of the conduct that was the subject of the investigation identified in subparagraph 1(f) above, as well as any and all civil or administrative claims based on conduct occurring after the date of the Settlement Agreement, provided that the same type of conduct was ongoing (i.e., other than on an isolated basis) during and was the subject of the investigation identified in subparagraph l(f), are waived and released. Specifically excluded from the scope and terms of this Settlement Agreement are any civil or administrative claims not based on any of the conduct falling within the scope of the waiver and release language set forth above in the immediately preceding sentence.

b. Agree in the Settlement Agreement that the Settlement Agreement satisfies fully the interests, rights, and obligations of the USCG concerning the "present responsibility" of AVCO, including its parent corporation and the present and former offices, directors, employees, agents, subsidiaries, affiliates, successors and assigns of AVCO and its parent (Page 16) corporation, based on any of the conduct falling within the scope of the waiver and release language set forth above in the first sentence of subparagraph 4(a), and that the "present responsibility" of those entities and persons to receive federal contracts is not affected by such conduct.

c. Agree in the Settlement Agreement that it shall not suspend or debar AVCO, including its parent corporation and the present and former officers, directors, employees, agents, agencies, affiliates, successors and assigns of AVCO and its parent corporation, based on any of the conduct falling within the scope of the waiver and release language set forth above in the first sentence of subparagraph 4(a).

5. DOJ and the USCG recognize and acknowledge that, in advance of a formal, binding Settlement Agreement and PBH contract, AVCO will be incurring significant costs in performing the Transition Period agreement and in preparing to commence the PBH program. The Parties agree that this aknowledgment is not to be construed as a constructive contract.

6. The Parties agree to use their best reasonable efforts to execute the Settlement Agreement at the earliest practicable date and that the Settlement Agreement will not be executed unless and until:

a. The Relator has agreed that any and all civil or administrstive claims that have been or could have been brought by the Relator against AVCO, including its parent corporation and the present and former officers, directors, employees, agents, (Page 17) subsidiaries, affliates, successors and assigns of AVCO and its parent corporation, based on any of the conduct that was the subject of the investigation identified in subparagraph l(f) above, as well as any and all civil or administrative claims based on conduct occurring after the date of the Settlement Agreement, provided that the same type of conduct was ongoing (i.e., other than on an isolated basis) during and was the subject of the investigation identified in subparagraph l(f), are waived and released.

b. The United States Attorney's Office for the Northern District of Texas has provided AVCO with a declination letter concerning criminal liability as to AVCO, including its parent corporation and the present and former officers. directors, employees, agents, subsidiaries, affiliates, successors and assigns of AVCO and its parent corporation, based on any of the conduct falling within the scope of the waiver and release language set forth above in the first sentence of subparagraph 3(b).

c. AHC has agreed that any and all civil or administrative claims that have been or could have been brought by AHC against AVCO, including its parent corporation and the present and former officers, directors, employees, agents, subsidiaries, affiliates, successors and assigns of AVCO and its parent corporation, relating to the SRR Program contractual relationship between AHC and AVCO or any of the conduct that was the subject of the investigation identified in subparagraph l(f) (Page 18) above, as well as any and all civil or administrative claims based on conduct occurring after the date of the Settlement Agreement, provided that the same type of conduct was ongoing (i.e., other than on an isolated basis) during and was the subject of the investigation identified in subparagraph l(f), are waived and released.

d. AVCO has agreed that any and all civil or administrative claims that have been or could have been brought by AVCO against AHC, including its parent corporation and the present and former officers, directors, employees, agents, subsidiaries, affiliates, successors and assigns of AHC and its parent corporation, relating to the SRR Program contractual relationship between AHC and AVCO or any of the conduct that was the subject of the investigation identified in subparagraph l(f) above, as well as any and all civil or administrative claims based on conduct occurring after the date of the Settlement Agreement, provided that the same type of conduct was ongoing (i.e., other than on an isolated basis) during and was the subject of the investigation identified in subparagraph l(f), are waived and released.

e. AVCO has agreed that any and all civil or administrative claims that have been or could have been brought against the United States, the USCG, or any present or former agents, employees, or officers of the United States or the USCG, relating to any of the conduct that was the subject of the investigation identified in subparagraph l(f) above, or the (Page 19) conduct of the investigation itself, are waived and released; and AVCO has also agreed to waive and release any and all claims against such parties based on: (1) the termination of the 750 A-3 program; (2) Modification Nos. 175, 200, Proposed Modification Nos. 221, 234, and PIO 089-618 of the prime contract; and (3) any unpaid invoices from 1985 through June 1989 relating to the SRR Program.

f. The terms and conditions set forth in the Settlement Agreement shall have been approved by the necessary approval authorities of DOJ and the USCG and by the Board of Directors of AVCO and its parent corporation. The Parties will use their best reasonable efforts to obtain such approvals promptly, to that the Settlement Agreement will be executed without delay.

7. The Settlement Agreement will not become effective unless and until: (1) a final order has been entered "conditioned only upon the payment of the monies identified above in subparagraph 2(a)) dismissing with prejudice the Relator lawsuit against AVCO; and (2) the PBH contract, after having been approved by the necessary approva1 authorities of the OSCG and by the Board of Directors of AVCO and its parent corporation, has been awarded. As set forth in subparagraph 2(a) above, at the time the Settlement Agreement becomes effective, AVCO will pay seventeen million dollars (U.S. $17,000,000) plus accrued interest to the United States. (Page 20)

8. Upon execution of the Settlement Agreement, DOJ will make its best reasonable efforts to return to AVCO all copies of AVCO documents in DOJ's possession that were obtained pursuant to a Department of Transportation Office of Inspector General ("DOT-OIG") subpoena issued on or about August 22, 1988. Also, DOJ will make its best reasonable efforts to secure the return to AVCO of any AVCO documents in the possession of the DOT-DIG that were obtained pursuant to the August 22, 1988 subpoena. Both DOJ and DOT-DIG reserve the right to retain only copies of such materials that are necessary to document the government's conduct of this investigation and its decision to enter into the Settlement Agreement.

9. Nothing in this MOU constitutes an admission on the part of AVCO, the USCG, or DOJ. Similarly, nothing in the Settlement Agreement will constitute an admission by AVCO, the USCG, or DOJ.

10. Nothing in this MOU constitutes a release or waiver of any civil or administrative claims that the United States, by and through DOJ or the USCG, might assert against AHC or any other party other than AVCO.

11. Nothing in the Settlement Agreement is intended to effect whatever rights and defenses that AVCO, the USCG, DOJ, or a third party may have (except for a fraud action by DOJ or the USCG against AVCO based on any of the conduct falling within the scope of the first sentence of each of subparagraphs 3(b) and 4(a) above, such a fraud action being hereby waived and released (Page 21) in any tort action brought by a third party for damages or injury allegedly caused by a USCG-owned LTS101 engine.

12. All parties will use their best reasonable efforts to execute the Settlement Agreement and PBH contract at the earliest practible date.