• The $17 million cash payment reimburses the government for damages incurred in buying and maintaining the LTS-101. Calculation of actual damages is quite complex and often subjective.

• The HH-65A major system acquisition contract did not contain an explicit warranty nor guarantee of engine service life

• The reliability and durability of the LTS-101 has been so poor that is reasonable to assume that it was not contract compliant regardless of the specific language of the contract.

• there were a number of False Claims Act allegations of criminal fraud that despite significant litigative risk may have yielded punitive damages to the government as well as other legal remedies.

• Textron-Lycoming's acceptance of provisioning oriented forecast failure rates as minimum acceptable performance was a major concession.

• Coast Guard consumption data and the derived experienced service lives are very soft, and would have been extremely difficult to prove in a strict legal environment.

• Given that actual historic damages are extremely difficult to quantify and prove, the $l7 million cash settlement represents a very fair offer that exceeds any reasonable estimation of single damages.

• This cash amount will not convey to the Coast Guard. Instead it will be paid to the U.S. Treasury to reimburse theoretical incremental appropriations that were necessary to support the LTS101. All other terms of the settlement were constructed to insure that the Coast Guard receives the benefit of the bargain.

• 5. Future damages are prevented by the "Power by the Hour" (PBTH) fixed price maintenance contract.

• Historical damages could continue to accrue between signing the conceptual settlement agreement and award of the PBTH contract. To prevent this from occurring I insisted upon a transition period with its own method of preventing damage to the Coast Guard.

• During the transition period, which commences immediately upon signing the settlement M.O.U. and extending until award of the PBTH contract, Textron-Lycoming will perform 5 no cost engine overhauls per month. This transition period shall not exceed 6 months.

• Between the cash settlement and the transition period, the Coast Guard is thus assumed to be made whole as it commences the PBTH period.

• The meat of the settlement for the Coast Guard is the six year, commercial derivative PBTH agreement.

• PBTH is a common commercial fixed price per engine hour maintenance agreement utilized to guarantee future support costs for potentially risky turbine engine maintenance.

• The very unsettling past and uncertain future of the LTS101 make a PBTH agreement highly advantageous. Normally the military would not be offered a PBTH agreement. The Coast Guard specifically requested this arrangement as part of any potential settlement.

• And, this price includes all field and depot parts and depot labor, thus effectively negating any future expenditure on virtually all LTS-101 spare parts.

• The fixed rate includes the cost of developing and implementing the very expensive technical modifications that should mature the engine. A recent estimate for the initial incorporation of the planned product improvements in the Coast Guard fleet was $45 million.

• Terms discussed above, combined with the five free field service representatives, allow the Coast Guard to cancel or greatly reduce the expensive sustaining engineering contract for the LTS101.

• Current estimates of internal Coast Guard depot costs to support the LTS101 are based upon the existing pricing agreements for spare parts.

• To replace the HH-65A with a leased aircraft, e.g. an Aerospatiale SA-365N1 (the closest commercial equivalent aircraft), would cost $42K/month plus $500/hour or approximately: [($42K/mo) / (30 days/mo) = $1,400/day] = [($500/hr) x (1.68 hrs/day) = $ 840/day] = TOTAL = $2,240/day It is unreasonable to attribute the entire aircraft dry lease cost to any one part, e.g. the engine, since it may be feasible to cannibalize aircraft to mitigate loss of aircraft availability. This effect is more significant for short term loss of engine availability than for long term. The agreed upon liquidated damages rates consider these effects, and fall within the cost to the Coast Guard of dry leasing an equivalent replacement aircraft.

• The PBTH agreement transfers most of the current and future economic and technical risk to Textron-Lycoming.

• The agreement provides for a Coast Guard COTR in-plant at Textron-Lycoming to provide quality oversight. The normal provisions of the government inspection clause would also apply.

• The ability to transfer for credit all existing inventories of LTSl0l material at the initiation of contract performance is an extremely attractive provision. While this provision may be difficult to execute, it has tremendous economic value and should be pursued vigorously.

• If the PBTH arrangement is very effective at supporting the LTS101, we may desire to continue the arrangement for the life of the LTS101. To address these concerns, Textron-Lycoming has agreed to offer PBTH contracts on an annual basis, at "market rates" beyond the six years governed by the settlement.

• It's in the interest of all parties to resume enhanced field level maintenance for the LTS101. The agreement intends to effect this while requiring Textron-Lycoming responsibility for material and technical direction, and presenting escape clauses to preclude Coast Guard breach for operational decisions or non-availability of field level labor.

11. The M.O.U. documents the conceptual agreement between the Coast Guard, Textron-Lycoming and the Department of Justice. If conflicts arise during contract negotiations, Mr. Kuintzle and I are available to explain the intent of our conceptual agreement. Like any bilateral negotiated settlement, this agreement contains some compromises between the parties. I believe that it is overall very fair, and offers the optimum probability of effective and economic LTS101 support and technical development.

____(Signature)____
T. W. SECHLER

Copy:
Mr. Vogel, U. S. Department of Justice
LT Dinlcola, Chief, Contracting Branch, ARSC
CDR Foley, Commandant (G-EAE-3)