On May 5, 1996, about 1445 eastern daylight time, a Cessna U206G floatplane, N9702Z, registered to Key West Seaplane Service, Inc., was substantially damaged during a forced landing in the Gulf of Mexico shortly after takeoff from Fort Jefferson, Dry Tortugas Island, Florida. Visual meteorological conditions prevailed at the time and a DVFR flight plan was filed for the 14 CFR Part 135 nonscheduled, domestic, passenger flight. The commercial-rated pilot and five passengers were not injured. The flight originated about 10 minutes earlier from a seaplane base located at the fort. The pilot stated that during cruise flight at 24 inches manifold pressure and 2,450 rpm, about 500 feet above the water, he observed that the oil temperature was near the "high" side. He verified that the cowl flaps were open and the engine momentarily ran rough then quit and the propeller stopped. He landed the airplane on top of a swell in heavy seas and the airplane then bounced, touched down, and remained upright for about 10-15 minutes. The right float which was damaged began filling with water and the airplane began to list. All passengers donned personal flotation devices, exited the airplane which later rolled inverted and sank. The airplane was not recovered. The pilot and several of the passengers reported that there was no oil on the windscreen following the engine malfunction. The pilot further stated that after the engine malfunction, he was unable to contact the pilot of another airplane that was scheduled to depart the fort shortly after his flight departed. According to company personnel, the planned flight was calculated to be 45 minutes. At 1625, the Miami Automated Flight Service Station contacted the Key West Coast Guard Station to advise that the flight was overdue. The Coast Guard, Navy, and civilian airplanes dispatched by the operator launched a search. The pilot of a civilian airplane first spotted the airplane and occupants and dropped a raft. The occupants were rescued by the Coast Guard 3 hours 20 minutes after the forced landing. Review of the engine maintenance records revealed that the engine was rebuilt/zero timed on June 14, 1994, by the engine manufacturer, and it was installed in the accident airplane on January 15, 1995. The engine was operated for 6.9 hours on mineral oil then the remainder of the time using 15W50 oil. Oil samples were recorded as being taken every oil change and the results of the last six are an attachment to this report. The engine logbook also indicates that on April 4, 1996, the No. 1 cylinder was replaced. The engine had accumulated 1,032.9 hours since rebuild.