1019-00005 · Whitmore Aerospace LLC · Lender Notification

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CONFIDENTIAL

CALDERWOOD & HARKNESS LLP Attorneys at Law

600 Lexington Avenue, 28th Floor New York, New York 10022

Telephone: (212) 884-7500 Facsimile: (212) 884-7501 www.calderwoodharkness.com

December 5, 2022

Via Email and Sundial Data Systems

Mr. David Kreutz Senior Vice President, Defense & Aerospace Lending Ridgeline National Bank, N.A. 300 Wilson Boulevard Arlington, Virginia 22201

Re: Supplemental Notice Under Section 6.07(b) of the Senior Secured Revolving Credit Agreement dated March 15, 2021 — Whitmore Aerospace LLC; Declaratory Judgment Action Filed Against Hargrove-Dalton Defense Systems, Inc.

Dear Mr. Kreutz:

We write on behalf of our client, Whitmore Aerospace LLC ("WAL" or the "Borrower"), to supplement WAL's initial notice letter dated September 28, 2022 (the "Initial Notice"), delivered pursuant to Section 6.07(b) of the Senior Secured Revolving Credit Agreement dated as of March 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among Whitmore Aerospace LLC, as borrower, Ridgeline National Bank, N.A. ("Ridgeline"), as administrative agent (in such capacity, the "Administrative Agent"), and the several financial institutions party thereto from time to time as syndicate lenders (collectively, the "Lenders"). Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Credit Agreement. As you are aware, the Credit Agreement provides for a $75,000,000 senior secured revolving credit facility (the "Facility") in favor of the Borrower.

As set forth in the Initial Notice, WAL disclosed to the Administrative Agent and the Lenders the receipt of a formal indemnification demand in the amount of $14,726,583 (the "Indemnification Demand") from Hargrove-Dalton Defense Systems, Inc. ("HDDS"), arising under Section 11.4 of the Teaming Agreement dated June 12, 2019, between WAL and HDDS (the "Teaming Agreement"). The Indemnification Demand was issued by HDDS on September 9, 2022, and relates to cost overruns identified by the Defense Contract Management Agency ("DCMA") on the Advanced Tactical Airframe Program ("ATAP") under Prime Contract No. FA8620-19-C-0337 (the "Prime Contract"). Because the amount of the Indemnification Demand exceeds the $5,000,000 reporting threshold established under Section 6.07(b) of the Credit Agreement, WAL was and remains obligated to provide notice of this matter to the Administrative Agent and the Lenders.

The purpose of this supplemental letter is to notify the Administrative Agent and the Lenders of a significant development in this matter: the filing of a declaratory judgment action by WAL against HDDS in the United States District Court for the Southern District of New York. The details of the filing, the claims asserted, the relief sought, and related matters are set forth below.

I. Filing of the Declaratory Judgment Action

On November 28, 2022, WAL filed a Verified Complaint for Declaratory Judgment (the "Complaint") in the United States District Court for the Southern District of New York. The full case caption is as follows:

Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB (S.D.N.Y.)

The action has been assigned to the Honorable Richard M. Brannigan, United States District Judge, with the Honorable Allison P. Kurtz, United States Magistrate Judge, assigned to handle pretrial matters and discovery-related disputes.

The Complaint was filed under the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202, which authorizes federal courts to declare the rights and other legal relations of interested parties in cases of actual controversy. WAL is the plaintiff in this action. HDDS is the sole defendant. HDDS is a Delaware corporation with its principal place of business at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. Subject-matter jurisdiction is predicated on diversity of citizenship under 28 U.S.C. § 1332(a), given the complete diversity between WAL (a Virginia limited liability company with its principal place of business in Chantilly, Virginia) and HDDS (a Delaware corporation headquartered in Bethesda, Maryland), and the amount in controversy exceeding $75,000.

The United States District Court for the Southern District of New York was selected as the forum for this action in accordance with the mandatory forum-selection clause set forth in Section 18.2 of the Teaming Agreement, which provides that "[a]ny dispute, controversy, or claim arising out of or relating to this Agreement, or the breach, termination, or validity thereof, shall be brought exclusively in the United States District Court for the Southern District of New York, or, if such court lacks subject-matter jurisdiction, in the Supreme Court of the State of New York, New York County." Both WAL and HDDS consented to personal jurisdiction in such courts under Section 18.2 of the Teaming Agreement. Additionally, the substantive claims asserted in the Complaint are governed by the laws of the State of New York, without regard to conflicts-of-law principles, as specified in Section 18.1 of the Teaming Agreement.

A conformed copy of the Verified Complaint (together with the Civil Cover Sheet filed therewith) and the Summons issued to HDDS are enclosed herewith as described in the enclosures listed at the conclusion of this letter.

II. Summary of Claims and Relief Sought

The Complaint advances three principal claims for declaratory relief. In particular, WAL seeks a judicial declaration as follows:

(1) That Section 11.4 of the Teaming Agreement dated June 12, 2019 does not obligate WAL to indemnify HDDS for the $14,726,583 in cost overruns identified in the Contracting Officer's Preliminary Determination ("COPD") dated August 1, 2022, issued by DCMA under Prime Contract No. FA8620-19-C-0337 (the Advanced Tactical Airframe Program). WAL's position is that the COPD is a preliminary administrative finding and does not constitute a final cost disallowance or a determination of contractual liability as between the teaming-agreement parties. WAL further contends that the indemnification obligation under Section 11.4 does not arise unless and until there has been a formal disallowance and final determination of the amount of any disallowed costs attributable to WAL's work.

(2) That even if Section 11.4 of the Teaming Agreement is applicable to the cost overruns identified in the COPD, WAL's indemnification obligation extends only to overruns that were "caused by" WAL's acts or omissions, as expressly provided in Section 11.4(b) of the Teaming Agreement. The factual record, including contemporaneous project documentation, progress reports, and correspondence between the parties, establishes that the cost overruns in question were caused by acts, omissions, and circumstances attributable to HDDS and/or force-majeure events entirely outside WAL's control. Specifically, WAL's Complaint identifies the following root causes:

(a) Titanium Raw-Material Cost Escalation — Approximately $4.2 million of the identified overruns were caused by an extraordinary escalation in the market price of aerospace-grade titanium (Ti-6Al-4V) during the 2021–2022 period, driven by global supply-chain disruptions and sanctions-related trade restrictions on titanium sourced from the Russian Federation. This constitutes a force-majeure event or, at minimum, a supervening event outside the scope of WAL's indemnification obligation.

(b) Non-Conforming Machining Tolerances Attributable to HDDS-Supplied Engineering Specifications — Approximately $5.1 million of the overruns resulted from rework necessitated by machining tolerance non-conformances. WAL contends that these non-conformances were directly traceable to deficiencies and ambiguities in the engineering specifications and technical data packages furnished by HDDS to WAL under the Teaming Agreement, not to any failure by WAL in its manufacturing processes.

(c) Schedule Delays Caused by HDDS's Late Delivery of Government-Furnished Equipment — Approximately $2.3 million in idle-labor and schedule-delay charges resulted from HDDS's failure to timely deliver government-furnished equipment ("GFE") to WAL's Chantilly manufacturing facility. WAL's fabrication schedule was contingent upon the timely receipt of GFE, and the delays in delivery caused WAL's production line to stand down, generating significant idle-labor costs that HDDS now seeks to shift to WAL.

(d) Engineering Change Proposal Implementation Costs — Approximately $1.2 million was attributable to the implementation of engineering change proposals directed by HDDS during the course of program performance. WAL contends that these costs were the result of customer-directed changes rather than WAL performance deficiencies.

(3) That HDDS's Indemnification Demand for $14,726,583 is overbroad because it includes $1,909,142 in cost overruns attributable to work packages other than Work Package 4 ("WP-4"), the titanium structural assembly work package that was assigned to WAL under the Teaming Agreement. According to the COPD itself, only $12,817,441 — representing approximately 87.03% of the total COPD amount — was attributed to WP-4. The remaining $1,909,142 pertains to work packages for which WAL bears no contractual responsibility whatsoever. WAL contends that, even under HDDS's own reading of the indemnification clause, there is no contractual basis for HDDS to seek indemnification from WAL for cost overruns arising in work packages assigned to other subcontractors or performed by HDDS itself.

The total amount in controversy in the declaratory judgment action is $14,726,583, which corresponds to the full amount of the Indemnification Demand set forth in HDDS's letter dated September 9, 2022. For the avoidance of doubt, WAL notes the existence of the aggregate liability cap set forth in Section 11.5 of the Teaming Agreement, which limits WAL's total aggregate liability arising under the indemnification provisions of Section 11 to 120% of the value of WAL's Work Package under the Teaming Agreement. The value of WAL's Work Package (WP-4) under the Teaming Agreement is $74,160,000, yielding an aggregate liability cap of $88,992,000 ($74,160,000 × 1.20 = $88,992,000). While this cap is substantially in excess of the current $14,726,583 demand, WAL notes it here for completeness, as the cap may become relevant if HDDS seeks to expand its claims in the course of the litigation. The actual amount presently at issue, however, is the $14,726,583 Indemnification Demand.

III. Anticipated Counterclaim by HDDS

Based on the tenor and content of the pre-litigation correspondence between the parties, WAL anticipates that HDDS will file an answer to the Complaint and assert a counterclaim against WAL seeking contractual indemnification for the full $14,726,583 in cost overruns identified in the COPD, together with attorneys' fees and costs of the action. HDDS is expected to base its counterclaim on Section 11.4 of the Teaming Agreement and to seek recovery of its legal fees under Section 11.6 of the Teaming Agreement, which provides for the recovery of reasonable attorneys' fees by the prevailing party in any action arising under the indemnification provisions of Section 11.

HDDS is represented in this matter by Leonard Trager, Esq. and Megan Forsythe, Esq. of Voss, Trager & Kendall LLP, located at 900 17th Street NW, Suite 800, Washington, D.C. 20006. Based on communications with opposing counsel, it is WAL's understanding that HDDS maintains the position that all WP-4-related overruns — and, indeed, the entirety of the $14,726,583 COPD amount, including the $1,909,142 attributed to non-WP-4 work packages — are WAL's responsibility under the indemnification clause. WAL vigorously disputes this characterization, as set forth in the Complaint and described further below.

HDDS has not yet been served with the Summons and Complaint as of the date of this letter. Service is anticipated to be effectuated within the next seven to ten business days. Under the Federal Rules of Civil Procedure, HDDS will have twenty-one (21) days from the date of service to file a responsive pleading, unless an extension of time is agreed upon by the parties or granted by the Court.

IV. Background on the Underlying Government Contract Dispute

For the benefit of the Administrative Agent and the Lenders, WAL provides the following summary of the underlying government contract dispute that gave rise to the Indemnification Demand and, ultimately, to the declaratory judgment action.

On August 1, 2022, DCMA issued a Contracting Officer's Preliminary Determination (the "COPD") under Prime Contract No. FA8620-19-C-0337, identifying $14,726,583 in cost overruns on the Advanced Tactical Airframe Program. The COPD was issued by Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, and was directed to HDDS in its capacity as the prime contractor on the ATAP program. The COPD categorized the overruns by root cause and work package assignment as follows:

Of the total $14,726,583, DCMA attributed $12,817,441 to Work Package 4, the titanium structural assemblies work package assigned to WAL under the Teaming Agreement. The remaining $1,909,142 was attributed to other work packages not assigned to WAL.

On October 15, 2022, HDDS filed a formal response to the COPD and submitted a Request for Contracting Officer's Final Decision ("COFD") under the Contract Disputes Act, 41 U.S.C. §§ 7101–7109. In its submission, HDDS disputed certain aspects of DCMA's cost allocation and root-cause analysis. That administrative review remains pending before Lt. Col. Vickers, and no Contracting Officer's Final Decision has been issued as of the date of this letter. WAL is monitoring the administrative proceedings through its government contracts regulatory counsel, Ashford & Reeves LLP.

For additional context, the Prime Contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following key financial parameters:

• Target Cost: $412,000,000

• Target Fee: 8% ($32,960,000)

• Ceiling Price: $470,000,000

• Share Ratio (Overrun): 80/20 (Government/Contractor)

• Share Ratio (Underrun): 60/40 (Government/Contractor)

Given the CPIF structure, the cost overruns at issue do not necessarily represent dollar-for-dollar losses to HDDS, as the Government bears a significant share of cost overruns under the incentive-fee formula. However, HDDS has taken the position that the Indemnification Demand represents the gross overrun amount prior to the application of the share ratio, and that the allocation of the Government's share is a matter between HDDS and the Government under the Prime Contract, separate and apart from HDDS's indemnification rights against WAL under the Teaming Agreement. WAL disputes this position.

V. Pre-Litigation Dispute Resolution Steps Exhausted

Before filing the declaratory judgment action, WAL undertook all contractually required pre-litigation dispute resolution steps under Section 18.3 of the Teaming Agreement, which provides for senior executive negotiations as a condition precedent to the institution of litigation.

In accordance with Section 18.3, senior executive negotiations were conducted between Marcus J. Whitmore, Chief Executive Officer of WAL, and William Fong, Senior Vice President, Contracts & Procurement, of HDDS, on two occasions:

• September 30, 2022 — Initial meeting at WAL's offices in Chantilly, Virginia, at which the parties exchanged their respective positions on the Indemnification Demand and the COPD findings. No resolution was reached.

• October 14, 2022 — Follow-up meeting conducted via secure videoconference, at which the parties reviewed supplemental documentation and explored potential interim arrangements. The meeting concluded without agreement on any material terms.

Following the failure of senior executive negotiations, WAL proposed mediation of the dispute. On October 21, 2022, WAL's General Counsel, Gregory Poole, transmitted a written mediation proposal to HDDS's outside counsel at Voss, Trager & Kendall LLP, offering to submit the dispute to mediation before the CPR Institute for Dispute Resolution or such other neutral forum as the parties might agree upon. On October 28, 2022, HDDS declined WAL's mediation proposal, characterizing the mediation clause in Section 18.3(b) of the Teaming Agreement as permissive rather than mandatory and stating that HDDS did not believe mediation would be productive in light of the parties' entrenched positions.

Having exhausted all available pre-litigation dispute resolution steps, WAL proceeded to file the declaratory judgment action on November 28, 2022.

VI. WAL's Assessment of Its Legal Position

Without waiving any applicable attorney-client privilege, work-product protection, or other applicable privilege or protection, and without intending that the statements contained herein constitute admissions or concessions of any kind, WAL advises the Administrative Agent and the Lenders that WAL believes it has strong and meritorious defenses to the Indemnification Demand asserted by HDDS. In summary, WAL's position is as follows:

(a) The cost overruns identified in the COPD were not "caused by" WAL's acts or omissions within the meaning of Section 11.4(b) of the Teaming Agreement. The record — including contemporaneous project documentation, engineering change orders, material procurement records, and schedule analyses — supports WAL's contention that the overruns resulted from circumstances attributable to HDDS, the United States Government, and external market forces, rather than from any performance deficiency by WAL.

(b) HDDS's Indemnification Demand improperly includes $1,909,142 in non-WP-4 cost overruns for which WAL has no contractual responsibility. The inclusion of these amounts is unsupported by the terms of the Teaming Agreement or the COPD itself.

(c) The DCMA finding is a preliminary determination only. No Contracting Officer's Final Decision has been issued, and no formal cost disallowance has been entered. The COPD does not constitute a binding determination of liability as between WAL and HDDS under the Teaming Agreement.

The filing of the declaratory judgment action is a protective measure undertaken to obtain judicial clarity on WAL's contractual obligations under the Teaming Agreement and to preserve WAL's rights in the face of HDDS's demand. WAL intends to prosecute the action vigorously and will keep the Administrative Agent and the Lenders apprised of material developments.

VII. Insurance Coverage Status

WAL has taken steps to pursue available insurance coverage in connection with the Indemnification Demand. On September 22, 2022, WAL tendered the HDDS indemnity demand to its insurer, Meridian Surety & Insurance Group ("Meridian"), under both of the following policies:

• Directors & Officers Liability Policy — Policy No. MSI-DO-2022-07814, with an aggregate limit of liability of $10,000,000 and a retention of $250,000.

• Commercial General Liability Policy — Policy No. MSI-CGL-2021-33291, with an aggregate limit of liability of $25,000,000 and a self-insured retention of $500,000.

On November 1, 2022, Meridian issued a reservation-of-rights letter in response to WAL's tender (the "ROR Letter"). In the ROR Letter, Meridian reserved its rights to deny coverage on the basis of, among other grounds, the contractual-liability exclusion (applicable to both policies) and the government-contract exclusion (applicable to the CGL policy). Meridian has not issued a definitive coverage determination as of the date of this letter and is not currently providing a defense to WAL or funding any portion of the costs associated with the declaratory judgment action. WAL continues to engage with Meridian on coverage issues and will provide the Administrative Agent with further updates if and when Meridian's coverage position is clarified.

VIII. Financial Statement Treatment

WAL has consulted with its independent auditor, Pinnacle Advisory Partners LLC ("Pinnacle"), regarding the appropriate financial-statement treatment of the indemnity contingency arising from the HDDS Indemnification Demand. Under Accounting Standards Codification Topic 450, Contingencies ("ASC 450"), Pinnacle and WAL have determined that the contingency is appropriately classified as "reasonably possible" but not "probable" at this time. Accordingly, the potential liability has been disclosed as a contingent liability of up to approximately $14.7 million in the footnotes to WAL's financial statements for the relevant reporting period. No accrual has been recorded in WAL's financial statements, as the criteria for recognition of a loss contingency under ASC 450-20-25-2 (i.e., that the loss be both probable and reasonably estimable) have not been met. WAL will continue to reassess the classification of this contingency in consultation with Pinnacle as the litigation and the DCMA administrative review progress, and will update its financial-statement disclosures as appropriate.

IX. Current Status of the Credit Facility

WAL hereby confirms to the Administrative Agent and the Lenders that, as of the date of this letter, no Event of Default (as defined in Article VIII of the Credit Agreement) has occurred or is continuing under the Credit Agreement. WAL is in compliance with all financial covenants, reporting obligations, and other conditions set forth in the Credit Agreement.

The credit facility remains fully available to the Borrower in accordance with its terms. As of the date of this letter, the current aggregate principal amount of revolving loans outstanding under the Facility is $31,200,000 of the $75,000,000 total commitment. WAL has no reason to believe that the matters described in this letter will give rise to an Event of Default or otherwise impair WAL's ability to meet its obligations under the Credit Agreement.

X. Representation and Counsel

WAL is represented in the declaratory judgment action, Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB (S.D.N.Y.), by this firm, Calderwood & Harkness LLP, through its New York and Washington, D.C. offices. The engagement team consists of the following attorneys:

• Priya Anand — Responsible Partner (New York)

• Douglas Carmichael — Billing Partner (New York)

• Patrick Gallagher — Lead Associate (New York)

• Simone Laroche — Working Associate (Washington, D.C.)

In addition, WAL has engaged Ashford & Reeves LLP as government contracts regulatory counsel to advise WAL on the pending DCMA administrative review and related government contract regulatory matters. The Ashford & Reeves team consists of:

• Harold Reeves — Senior Partner (Washington, D.C.)

• Natalie Cheng — Associate (Washington, D.C.)

All substantive communications from the Administrative Agent or the Lenders regarding the matters described in this letter should be directed to Douglas Carmichael at Calderwood & Harkness LLP, or to Gregory Poole, General Counsel and Vice President of Legal Affairs, Whitmore Aerospace LLC, whose contact information is set forth below.

XI. Enclosures

Enclosed herewith for the records of the Administrative Agent and the Lenders, please find the following documents:

1. Conformed copy of the Verified Complaint for Declaratory Judgment filed by Whitmore Aerospace LLC on November 28, 2022, in the United States District Court for the Southern District of New York, Case No. 1:22-cv-10147-RMB, together with the Civil Cover Sheet (JS 44) filed therewith.

2. Copy of the Summons issued to Hargrove-Dalton Defense Systems, Inc. by the Clerk of the United States District Court for the Southern District of New York.

XII. Continuing Notification Commitment

WAL reaffirms its commitment to provide the Administrative Agent and the Lenders with timely supplemental notices as material developments occur in the declaratory judgment action, in any counterclaim asserted by HDDS, or in the underlying DCMA administrative review, consistent with WAL's obligations under Section 6.07(b) of the Credit Agreement. Such supplemental notices will be provided promptly following the occurrence of any material development, including without limitation: (i) the filing by HDDS of an answer or counterclaim; (ii) the issuance of any significant pretrial ruling or order; (iii) the entry of a Contracting Officer's Final Decision by DCMA; (iv) any change in the insurance coverage status; (v) any change in the ASC 450 classification of the contingency; and (vi) any settlement discussions or proposals.

Should you have any questions regarding the matters described in this letter or the enclosed documents, please do not hesitate to contact the undersigned at (212) 884-7533 or dcarmichael@calderwoodharkness.com, or Gregory Poole, General Counsel and Vice President of Legal Affairs of Whitmore Aerospace LLC, at (703) 461-2800 or gpoole@whitmoreaero.com.

We appreciate your continued support of Whitmore Aerospace LLC and your attention to this matter.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Douglas Carmichael Partner Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 884-7533

Email: dcarmichael@calderwoodharkness.com

Enclosures:

1. Verified Complaint for Declaratory Judgment (with Civil Cover Sheet), filed November 28, 2022

2. Summons issued to Hargrove-Dalton Defense Systems, Inc.

cc:

Gregory Poole, Esq. General Counsel and Vice President of Legal Affairs Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151

Priya Anand, Esq. Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022

Elaine Whitmore Co-Founder and Chief Financial Officer Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151

Root Cause Category	Approximate Amount
Titanium raw-material cost escalation	~$4,200,000
Rework due to non-conforming machining tolerances	~$5,100,000
Schedule delays causing idle-labor charges	~$2,300,000
Engineering change proposal implementation costs	~$1,200,000
Other / Non-WP-4 Work Package overruns	$1,909,142
Total COPD Amount	$14,726,583

CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Attorneys at Law
600 Lexington Avenue, 28th Floor New York, New York 10022
Telephone: (212) 884-7500 Facsimile: (212) 884-7501 www.calderwoodharkness.com
December 5, 2022
Via Email and Sundial Data Systems
Mr. David Kreutz Senior Vice President, Defense & Aerospace Lending Ridgeline National Bank, N.A. 300 Wilson Boulevard Arlington, Virginia 22201
Re: Supplemental Notice Under Section 6.07(b) of the Senior Secured Revolving Credit Agreement dated March 15, 2021 — Whitmore Aerospace LLC; Declaratory Judgment Action Filed Against Hargrove-Dalton Defense Systems, Inc.
Dear Mr. Kreutz:
We write on behalf of our client, Whitmore Aerospace LLC ("WAL" or the "Borrower"), to supplement WAL's initial notice letter dated September 28, 2022 (the "Initial Notice"), delivered pursuant to Section 6.07(b) of the Senior Secured Revolving Credit Agreement dated as of March 15, 2021 (as amended, restated, supplemented, or otherwise modified from time to time, the "Credit Agreement"), among Whitmore Aerospace LLC, as borrower, Ridgeline National Bank, N.A. ("Ridgeline"), as administrative agent (in such capacity, the "Administrative Agent"), and the several financial institutions party thereto from time to time as syndicate lenders (collectively, the "Lenders"). Capitalized terms used but not otherwise defined herein have the meanings ascribed to them in the Credit Agreement. As you are aware, the Credit Agreement provides for a $75,000,000 senior secured revolving credit facility (the "Facility") in favor of the Borrower.
As set forth in the Initial Notice, WAL disclosed to the Administrative Agent and the Lenders the receipt of a formal indemnification demand in the amount of $14,726,583 (the "Indemnification Demand") from Hargrove-Dalton Defense Systems, Inc. ("HDDS"), arising under Section 11.4 of the Teaming Agreement dated June 12, 2019, between WAL and HDDS (the "Teaming Agreement"). The Indemnification Demand was issued by HDDS on September 9, 2022, and relates to cost overruns identified by the Defense Contract Management Agency ("DCMA") on the Advanced Tactical Airframe Program ("ATAP") under Prime Contract No. FA8620-19-C-0337 (the "Prime Contract"). Because the amount of the Indemnification Demand exceeds the $5,000,000 reporting threshold established under Section 6.07(b) of the Credit Agreement, WAL was and remains obligated to provide notice of this matter to the Administrative Agent and the Lenders.
The purpose of this supplemental letter is to notify the Administrative Agent and the Lenders of a significant development in this matter: the filing of a declaratory judgment action by WAL against HDDS in the United States District Court for the Southern District of New York. The details of the filing, the claims asserted, the relief sought, and related matters are set forth below.
I. Filing of the Declaratory Judgment Action
On November 28, 2022, WAL filed a Verified Complaint for Declaratory Judgment (the "Complaint") in the United States District Court for the Southern District of New York. The full case caption is as follows:
Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB (S.D.N.Y.)
The action has been assigned to the Honorable Richard M. Brannigan, United States District Judge, with the Honorable Allison P. Kurtz, United States Magistrate Judge, assigned to handle pretrial matters and discovery-related disputes.
The Complaint was filed under the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202, which authorizes federal courts to declare the rights and other legal relations of interested parties in cases of actual controversy. WAL is the plaintiff in this action. HDDS is the sole defendant. HDDS is a Delaware corporation with its principal place of business at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. Subject-matter jurisdiction is predicated on diversity of citizenship under 28 U.S.C. § 1332(a), given the complete diversity between WAL (a Virginia limited liability company with its principal place of business in Chantilly, Virginia) and HDDS (a Delaware corporation headquartered in Bethesda, Maryland), and the amount in controversy exceeding $75,000.
The United States District Court for the Southern District of New York was selected as the forum for this action in accordance with the mandatory forum-selection clause set forth in Section 18.2 of the Teaming Agreement, which provides that "[a]ny dispute, controversy, or claim arising out of or relating to this Agreement, or the breach, termination, or validity thereof, shall be brought exclusively in the United States District Court for the Southern District of New York, or, if such court lacks subject-matter jurisdiction, in the Supreme Court of the State of New York, New York County." Both WAL and HDDS consented to personal jurisdiction in such courts under Section 18.2 of the Teaming Agreement. Additionally, the substantive claims asserted in the Complaint are governed by the laws of the State of New York, without regard to conflicts-of-law principles, as specified in Section 18.1 of the Teaming Agreement.
A conformed copy of the Verified Complaint (together with the Civil Cover Sheet filed therewith) and the Summons issued to HDDS are enclosed herewith as described in the enclosures listed at the conclusion of this letter.
II. Summary of Claims and Relief Sought
The Complaint advances three principal claims for declaratory relief. In particular, WAL seeks a judicial declaration as follows:
(1) That Section 11.4 of the Teaming Agreement dated June 12, 2019 does not obligate WAL to indemnify HDDS for the $14,726,583 in cost overruns identified in the Contracting Officer's Preliminary Determination ("COPD") dated August 1, 2022, issued by DCMA under Prime Contract No. FA8620-19-C-0337 (the Advanced Tactical Airframe Program). WAL's position is that the COPD is a preliminary administrative finding and does not constitute a final cost disallowance or a determination of contractual liability as between the teaming-agreement parties. WAL further contends that the indemnification obligation under Section 11.4 does not arise unless and until there has been a formal disallowance and final determination of the amount of any disallowed costs attributable to WAL's work.
(2) That even if Section 11.4 of the Teaming Agreement is applicable to the cost overruns identified in the COPD, WAL's indemnification obligation extends only to overruns that were "caused by" WAL's acts or omissions, as expressly provided in Section 11.4(b) of the Teaming Agreement. The factual record, including contemporaneous project documentation, progress reports, and correspondence between the parties, establishes that the cost overruns in question were caused by acts, omissions, and circumstances attributable to HDDS and/or force-majeure events entirely outside WAL's control. Specifically, WAL's Complaint identifies the following root causes:
(a) Titanium Raw-Material Cost Escalation — Approximately $4.2 million of the identified overruns were caused by an extraordinary escalation in the market price of aerospace-grade titanium (Ti-6Al-4V) during the 2021–2022 period, driven by global supply-chain disruptions and sanctions-related trade restrictions on titanium sourced from the Russian Federation. This constitutes a force-majeure event or, at minimum, a supervening event outside the scope of WAL's indemnification obligation.
(b) Non-Conforming Machining Tolerances Attributable to HDDS-Supplied Engineering Specifications — Approximately $5.1 million of the overruns resulted from rework necessitated by machining tolerance non-conformances. WAL contends that these non-conformances were directly traceable to deficiencies and ambiguities in the engineering specifications and technical data packages furnished by HDDS to WAL under the Teaming Agreement, not to any failure by WAL in its manufacturing processes.
(c) Schedule Delays Caused by HDDS's Late Delivery of Government-Furnished Equipment — Approximately $2.3 million in idle-labor and schedule-delay charges resulted from HDDS's failure to timely deliver government-furnished equipment ("GFE") to WAL's Chantilly manufacturing facility. WAL's fabrication schedule was contingent upon the timely receipt of GFE, and the delays in delivery caused WAL's production line to stand down, generating significant idle-labor costs that HDDS now seeks to shift to WAL.
(d) Engineering Change Proposal Implementation Costs — Approximately $1.2 million was attributable to the implementation of engineering change proposals directed by HDDS during the course of program performance. WAL contends that these costs were the result of customer-directed changes rather than WAL performance deficiencies.
(3) That HDDS's Indemnification Demand for $14,726,583 is overbroad because it includes $1,909,142 in cost overruns attributable to work packages other than Work Package 4 ("WP-4"), the titanium structural assembly work package that was assigned to WAL under the Teaming Agreement. According to the COPD itself, only $12,817,441 — representing approximately 87.03% of the total COPD amount — was attributed to WP-4. The remaining $1,909,142 pertains to work packages for which WAL bears no contractual responsibility whatsoever. WAL contends that, even under HDDS's own reading of the indemnification clause, there is no contractual basis for HDDS to seek indemnification from WAL for cost overruns arising in work packages assigned to other subcontractors or performed by HDDS itself.
The total amount in controversy in the declaratory judgment action is $14,726,583, which corresponds to the full amount of the Indemnification Demand set forth in HDDS's letter dated September 9, 2022. For the avoidance of doubt, WAL notes the existence of the aggregate liability cap set forth in Section 11.5 of the Teaming Agreement, which limits WAL's total aggregate liability arising under the indemnification provisions of Section 11 to 120% of the value of WAL's Work Package under the Teaming Agreement. The value of WAL's Work Package (WP-4) under the Teaming Agreement is $74,160,000, yielding an aggregate liability cap of $88,992,000 ($74,160,000 × 1.20 = $88,992,000). While this cap is substantially in excess of the current $14,726,583 demand, WAL notes it here for completeness, as the cap may become relevant if HDDS seeks to expand its claims in the course of the litigation. The actual amount presently at issue, however, is the $14,726,583 Indemnification Demand.
III. Anticipated Counterclaim by HDDS
Based on the tenor and content of the pre-litigation correspondence between the parties, WAL anticipates that HDDS will file an answer to the Complaint and assert a counterclaim against WAL seeking contractual indemnification for the full $14,726,583 in cost overruns identified in the COPD, together with attorneys' fees and costs of the action. HDDS is expected to base its counterclaim on Section 11.4 of the Teaming Agreement and to seek recovery of its legal fees under Section 11.6 of the Teaming Agreement, which provides for the recovery of reasonable attorneys' fees by the prevailing party in any action arising under the indemnification provisions of Section 11.
HDDS is represented in this matter by Leonard Trager, Esq. and Megan Forsythe, Esq. of Voss, Trager & Kendall LLP, located at 900 17th Street NW, Suite 800, Washington, D.C. 20006. Based on communications with opposing counsel, it is WAL's understanding that HDDS maintains the position that all WP-4-related overruns — and, indeed, the entirety of the $14,726,583 COPD amount, including the $1,909,142 attributed to non-WP-4 work packages — are WAL's responsibility under the indemnification clause. WAL vigorously disputes this characterization, as set forth in the Complaint and described further below.
HDDS has not yet been served with the Summons and Complaint as of the date of this letter. Service is anticipated to be effectuated within the next seven to ten business days. Under the Federal Rules of Civil Procedure, HDDS will have twenty-one (21) days from the date of service to file a responsive pleading, unless an extension of time is agreed upon by the parties or granted by the Court.
IV. Background on the Underlying Government Contract Dispute
For the benefit of the Administrative Agent and the Lenders, WAL provides the following summary of the underlying government contract dispute that gave rise to the Indemnification Demand and, ultimately, to the declaratory judgment action.
On August 1, 2022, DCMA issued a Contracting Officer's Preliminary Determination (the "COPD") under Prime Contract No. FA8620-19-C-0337, identifying $14,726,583 in cost overruns on the Advanced Tactical Airframe Program. The COPD was issued by Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, and was directed to HDDS in its capacity as the prime contractor on the ATAP program. The COPD categorized the overruns by root cause and work package assignment as follows:
Of the total $14,726,583, DCMA attributed $12,817,441 to Work Package 4, the titanium structural assemblies work package assigned to WAL under the Teaming Agreement. The remaining $1,909,142 was attributed to other work packages not assigned to WAL.
On October 15, 2022, HDDS filed a formal response to the COPD and submitted a Request for Contracting Officer's Final Decision ("COFD") under the Contract Disputes Act, 41 U.S.C. §§ 7101–7109. In its submission, HDDS disputed certain aspects of DCMA's cost allocation and root-cause analysis. That administrative review remains pending before Lt. Col. Vickers, and no Contracting Officer's Final Decision has been issued as of the date of this letter. WAL is monitoring the administrative proceedings through its government contracts regulatory counsel, Ashford & Reeves LLP.
For additional context, the Prime Contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following key financial parameters:
• Target Cost: $412,000,000
• Target Fee: 8% ($32,960,000)
• Ceiling Price: $470,000,000
• Share Ratio (Overrun): 80/20 (Government/Contractor)
• Share Ratio (Underrun): 60/40 (Government/Contractor)
Given the CPIF structure, the cost overruns at issue do not necessarily represent dollar-for-dollar losses to HDDS, as the Government bears a significant share of cost overruns under the incentive-fee formula. However, HDDS has taken the position that the Indemnification Demand represents the gross overrun amount prior to the application of the share ratio, and that the allocation of the Government's share is a matter between HDDS and the Government under the Prime Contract, separate and apart from HDDS's indemnification rights against WAL under the Teaming Agreement. WAL disputes this position.
V. Pre-Litigation Dispute Resolution Steps Exhausted
Before filing the declaratory judgment action, WAL undertook all contractually required pre-litigation dispute resolution steps under Section 18.3 of the Teaming Agreement, which provides for senior executive negotiations as a condition precedent to the institution of litigation.
In accordance with Section 18.3, senior executive negotiations were conducted between Marcus J. Whitmore, Chief Executive Officer of WAL, and William Fong, Senior Vice President, Contracts & Procurement, of HDDS, on two occasions:
• September 30, 2022 — Initial meeting at WAL's offices in Chantilly, Virginia, at which the parties exchanged their respective positions on the Indemnification Demand and the COPD findings. No resolution was reached.
• October 14, 2022 — Follow-up meeting conducted via secure videoconference, at which the parties reviewed supplemental documentation and explored potential interim arrangements. The meeting concluded without agreement on any material terms.
Following the failure of senior executive negotiations, WAL proposed mediation of the dispute. On October 21, 2022, WAL's General Counsel, Gregory Poole, transmitted a written mediation proposal to HDDS's outside counsel at Voss, Trager & Kendall LLP, offering to submit the dispute to mediation before the CPR Institute for Dispute Resolution or such other neutral forum as the parties might agree upon. On October 28, 2022, HDDS declined WAL's mediation proposal, characterizing the mediation clause in Section 18.3(b) of the Teaming Agreement as permissive rather than mandatory and stating that HDDS did not believe mediation would be productive in light of the parties' entrenched positions.
Having exhausted all available pre-litigation dispute resolution steps, WAL proceeded to file the declaratory judgment action on November 28, 2022.
VI. WAL's Assessment of Its Legal Position
Without waiving any applicable attorney-client privilege, work-product protection, or other applicable privilege or protection, and without intending that the statements contained herein constitute admissions or concessions of any kind, WAL advises the Administrative Agent and the Lenders that WAL believes it has strong and meritorious defenses to the Indemnification Demand asserted by HDDS. In summary, WAL's position is as follows:
(a) The cost overruns identified in the COPD were not "caused by" WAL's acts or omissions within the meaning of Section 11.4(b) of the Teaming Agreement. The record — including contemporaneous project documentation, engineering change orders, material procurement records, and schedule analyses — supports WAL's contention that the overruns resulted from circumstances attributable to HDDS, the United States Government, and external market forces, rather than from any performance deficiency by WAL.
(b) HDDS's Indemnification Demand improperly includes $1,909,142 in non-WP-4 cost overruns for which WAL has no contractual responsibility. The inclusion of these amounts is unsupported by the terms of the Teaming Agreement or the COPD itself.
(c) The DCMA finding is a preliminary determination only. No Contracting Officer's Final Decision has been issued, and no formal cost disallowance has been entered. The COPD does not constitute a binding determination of liability as between WAL and HDDS under the Teaming Agreement.
The filing of the declaratory judgment action is a protective measure undertaken to obtain judicial clarity on WAL's contractual obligations under the Teaming Agreement and to preserve WAL's rights in the face of HDDS's demand. WAL intends to prosecute the action vigorously and will keep the Administrative Agent and the Lenders apprised of material developments.
VII. Insurance Coverage Status
WAL has taken steps to pursue available insurance coverage in connection with the Indemnification Demand. On September 22, 2022, WAL tendered the HDDS indemnity demand to its insurer, Meridian Surety & Insurance Group ("Meridian"), under both of the following policies:
• Directors & Officers Liability Policy — Policy No. MSI-DO-2022-07814, with an aggregate limit of liability of $10,000,000 and a retention of $250,000.
• Commercial General Liability Policy — Policy No. MSI-CGL-2021-33291, with an aggregate limit of liability of $25,000,000 and a self-insured retention of $500,000.
On November 1, 2022, Meridian issued a reservation-of-rights letter in response to WAL's tender (the "ROR Letter"). In the ROR Letter, Meridian reserved its rights to deny coverage on the basis of, among other grounds, the contractual-liability exclusion (applicable to both policies) and the government-contract exclusion (applicable to the CGL policy). Meridian has not issued a definitive coverage determination as of the date of this letter and is not currently providing a defense to WAL or funding any portion of the costs associated with the declaratory judgment action. WAL continues to engage with Meridian on coverage issues and will provide the Administrative Agent with further updates if and when Meridian's coverage position is clarified.
VIII. Financial Statement Treatment
WAL has consulted with its independent auditor, Pinnacle Advisory Partners LLC ("Pinnacle"), regarding the appropriate financial-statement treatment of the indemnity contingency arising from the HDDS Indemnification Demand. Under Accounting Standards Codification Topic 450, Contingencies ("ASC 450"), Pinnacle and WAL have determined that the contingency is appropriately classified as "reasonably possible" but not "probable" at this time. Accordingly, the potential liability has been disclosed as a contingent liability of up to approximately $14.7 million in the footnotes to WAL's financial statements for the relevant reporting period. No accrual has been recorded in WAL's financial statements, as the criteria for recognition of a loss contingency under ASC 450-20-25-2 (i.e., that the loss be both probable and reasonably estimable) have not been met. WAL will continue to reassess the classification of this contingency in consultation with Pinnacle as the litigation and the DCMA administrative review progress, and will update its financial-statement disclosures as appropriate.
IX. Current Status of the Credit Facility
WAL hereby confirms to the Administrative Agent and the Lenders that, as of the date of this letter, no Event of Default (as defined in Article VIII of the Credit Agreement) has occurred or is continuing under the Credit Agreement. WAL is in compliance with all financial covenants, reporting obligations, and other conditions set forth in the Credit Agreement.
The credit facility remains fully available to the Borrower in accordance with its terms. As of the date of this letter, the current aggregate principal amount of revolving loans outstanding under the Facility is $31,200,000 of the $75,000,000 total commitment. WAL has no reason to believe that the matters described in this letter will give rise to an Event of Default or otherwise impair WAL's ability to meet its obligations under the Credit Agreement.
X. Representation and Counsel
WAL is represented in the declaratory judgment action, Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB (S.D.N.Y.), by this firm, Calderwood & Harkness LLP, through its New York and Washington, D.C. offices. The engagement team consists of the following attorneys:
• Priya Anand — Responsible Partner (New York)
• Douglas Carmichael — Billing Partner (New York)
• Patrick Gallagher — Lead Associate (New York)
• Simone Laroche — Working Associate (Washington, D.C.)
In addition, WAL has engaged Ashford & Reeves LLP as government contracts regulatory counsel to advise WAL on the pending DCMA administrative review and related government contract regulatory matters. The Ashford & Reeves team consists of:
• Harold Reeves — Senior Partner (Washington, D.C.)
• Natalie Cheng — Associate (Washington, D.C.)
All substantive communications from the Administrative Agent or the Lenders regarding the matters described in this letter should be directed to Douglas Carmichael at Calderwood & Harkness LLP, or to Gregory Poole, General Counsel and Vice President of Legal Affairs, Whitmore Aerospace LLC, whose contact information is set forth below.
XI. Enclosures
Enclosed herewith for the records of the Administrative Agent and the Lenders, please find the following documents:
1. Conformed copy of the Verified Complaint for Declaratory Judgment filed by Whitmore Aerospace LLC on November 28, 2022, in the United States District Court for the Southern District of New York, Case No. 1:22-cv-10147-RMB, together with the Civil Cover Sheet (JS 44) filed therewith.
2. Copy of the Summons issued to Hargrove-Dalton Defense Systems, Inc. by the Clerk of the United States District Court for the Southern District of New York.
XII. Continuing Notification Commitment
WAL reaffirms its commitment to provide the Administrative Agent and the Lenders with timely supplemental notices as material developments occur in the declaratory judgment action, in any counterclaim asserted by HDDS, or in the underlying DCMA administrative review, consistent with WAL's obligations under Section 6.07(b) of the Credit Agreement. Such supplemental notices will be provided promptly following the occurrence of any material development, including without limitation: (i) the filing by HDDS of an answer or counterclaim; (ii) the issuance of any significant pretrial ruling or order; (iii) the entry of a Contracting Officer's Final Decision by DCMA; (iv) any change in the insurance coverage status; (v) any change in the ASC 450 classification of the contingency; and (vi) any settlement discussions or proposals.
Should you have any questions regarding the matters described in this letter or the enclosed documents, please do not hesitate to contact the undersigned at (212) 884-7533 or dcarmichael@calderwoodharkness.com, or Gregory Poole, General Counsel and Vice President of Legal Affairs of Whitmore Aerospace LLC, at (703) 461-2800 or gpoole@whitmoreaero.com.
We appreciate your continued support of Whitmore Aerospace LLC and your attention to this matter.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Douglas Carmichael Partner Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022 Telephone: (212) 884-7533
Email: dcarmichael@calderwoodharkness.com
Enclosures:
1. Verified Complaint for Declaratory Judgment (with Civil Cover Sheet), filed November 28, 2022
2. Summons issued to Hargrove-Dalton Defense Systems, Inc.
cc:
Gregory Poole, Esq. General Counsel and Vice President of Legal Affairs Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151
Priya Anand, Esq. Calderwood & Harkness LLP 600 Lexington Avenue, 28th Floor New York, New York 10022
Elaine Whitmore Co-Founder and Chief Financial Officer Whitmore Aerospace LLC 4200 Commerce Park Drive, Suite 600 Chantilly, Virginia 20151
Root Cause Category | Approximate Amount
Titanium raw-material cost escalation | ~$4,200,000
Rework due to non-conforming machining tolerances | ~$5,100,000
Schedule delays causing idle-labor charges | ~$2,300,000
Engineering change proposal implementation costs | ~$1,200,000
Other / Non-WP-4 Work Package overruns | $1,909,142
Total COPD Amount | $14,726,583

CONFIDENTIAL

CALDERWOOD & HARKNESS LLP

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