Pentek, Inc. v. Meininger

695 A.2d 812, 1997 Pa. Super. LEXIS 1286
CourtSuperior Court of Pennsylvania
DecidedMay 19, 1997
StatusPublished
Cited by2 cases

This text of 695 A.2d 812 (Pentek, Inc. v. Meininger) is published on Counsel Stack Legal Research, covering Superior Court of Pennsylvania primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Pentek, Inc. v. Meininger, 695 A.2d 812, 1997 Pa. Super. LEXIS 1286 (Pa. Ct. App. 1997).

Opinion

OLSZEWSKI, Judge:

The issues that this case brings before this Court range from nuclear to contractual meltdown. Shortly after the 1979 nuclear accident at Three Mile Island (TMI), Richard Meininger was directed by his employer, EG & G Idaho, to conduct tests on behalf of the U.S. Department of Energy at the TMI plant to determine how certain equipment survived the catastrophe intact. In the course of his studies, Meininger made the acquaintance of Sheldon Lefkowitz, president of Pentek, Inc., who was conducting similar experiments for one of Pentek’s customers.

While working at the TMI plant, Meininger utilized a computer program/device known as the Electrical Circuit Characterization and Diagnostic System (ECAD) in order to survey the remote damage inside the reactor itself. The ECAD system, although workable and accurate, was quite complex and required intimate scientific and computer knowledge to be used.

Following his engagement at TMI, Mein-inger approached several industry sources with a proposal designed to make the ECAD system more user-friendly and, thus, commercially available to other nuclear plant owners as a routine maintenance program.

In the summer of 1986, Pentek agreed to fund the ECAD improvement project, and on July 1, 1986, the parties entered into an employment contract which outlined their respective duties and obligations. Under the terms of the agreement, Meininger, as program manager, agreed to work towards the marketing, improvement and commercialization of the ECAD system.

As an incentive towards achievement of this goal, the parties agreed that once ECAD sales reached $250,000 per year, a company separate from Pentek would be created that would be solely devoted to marketing and selling the ECAD system. Contingent upon proper funding, as delineated in the agreement, Pentek would hold fifty-one percent of the new corporation’s stock and Meininger would hold the remaining forty-nine percent.

Further, the contract provided that, upon commencement of his employment, Meininger would receive sixty-five shares of Pentek stock. This stock was to be sold back to Pentek upon Meininger’s termination. The parties agreed that the value of the stock would be determined by Pentek’s accountant [814]*814in accordance with generally accepted accounting principles.

During the following three years, the ECAD improvement and commercialization project progressed smoothly. The most notable change to the ECAD system involved re-writing the computer program from the BASIC to the Turbo Pascal language. This translation made the system more commercially attractive, and both parties anticipated a sizable surge in industry interest and sales.

Sometime in 1989, however, a disagreement ensued as to whether ECAD sales were sufficient to trigger the spin-off corporation. As a consequence of this, Meininger resigned from Pentek on December 5, 1989. Several months thereafter, Pentek notified Meininger that, based upon its accountant’s internal audit, the book value of Meininger’s sixty-five shares of Pentek stock totaled $4,061.85. Meininger balked at the accuracy of this sum, alleging that the audit was not conducted in accordance with generally accepted accounting principles, as per the contract terms. Consequently, until an independent audit was performed, Meininger refused to tender his shares to Pentek.

Pentek then commenced the instant action in the court of common pleas of Lebanon County, seeking an order requiring Meininger to surrender his Pentek shares for the value previously determined by its accountant. Meininger reasserted his contention that an independent accounting was necessary in order to determine the true book value of the shares. Additionally, Meininger filed a cross-claim seeking, in part, a judicial determination that ECAD sales met the required $250,000 earnings point prior to Meininger’s termination, thus mandating the creation of an independent subsidiary corporation in which Meininger would hold forty-nine percent of the stock.

Following a two-day bench trial, the Honorable John C. Tywalk entered a decree nisi which, inter alia, found that the ECAD system achieved “technological feasibility” prior to Meininger’s employment with Pentek and that the technological feasibility date utilized by Pentek’s accountant was incorrect. As a consequence of this, the court ordered an independent accounting of Pentek’s records and directed that Pentek’s costs be expensed or capitalized with reference to the technological feasibility date determined by the court. Additionally, finding that Pentek act-, ed in bad faith and deliberately undervalued Meininger’s stock, the court ordered that Pentek pay for the independent audit. Finally, finding that the required $250,000 threshold was never met, the court denied Meininger’s cross-claim.

Meininger arid Pentek filed post-trial motions to the decree nisi. By order dated March 18, 1996, the court denied all of the motions. Both parties then filed timely appeals.

In its first issue on appeal, Pentek avers that the trial court erred in finding that the ECAD system achieved technological feasibility as of May, 1986. Specifically, Pentek asserts that the trial court abused its discretion by disregarding the opinions of both parties’ accounting experts as to when technological feasibility occurred and that the court’s ultimate finding is, therefore, not supported by competent evidence.

This issue was hotly contested during trial because the value of Meininger’s stock is directly tied to the date at which technological feasibility was achieved. That is, according to generally accepted accounting principles, costs incurred prior to technological feasibility are generally expensed, while costs incurred subsequent to technological feasibility are generally capitalized. The rationale for this principle is that research and development costs incurred prior to technological feasibility have no alternative future uses.

Both parties’ experts testified that it is difficult to determine with precision the date upon which a product reaches this important point, and, although the accountants ultimately reached different conclusions, they agreed on the test to be applied when making this inquiry. According to the Financial Accounting Standards Board (FASB), computer software reaches technological feasibility when there is either a working model or a detailed program design.

Pentek’s accountant and expert witness, Ronald Scanlon, testified that the ECAD sys[815]*815tem acWeved technological feasibility in October of 1987. Scanlon based his opinion on the fact that the first sale of an ECAD system programmed in Turbo Paschal, instead of BASIC, occurred in the fail of 1987. Prior to this sale, Scanlon maintained, the ECAD system had not met either of the requirements for technological feasibility outlined in Statement of Financial Authority Standard (SFAS) No. 86 because the reprogramming required a complete overhaul of the system.

Conversely, Meininger’s expert, Brian Am-erman, testified that Meininger had a detailed program design prior to entering into his employment contract and that the test for technological feasibility was already established upon the commencement of Meininger’s employment with Pentek. Therefore, because Meininger was hired in July of 1986 and Pentek’s new fiscal year began in November of 1986, costs incurred from November, 1986, onward should have been capitalized.

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Bluebook (online)
695 A.2d 812, 1997 Pa. Super. LEXIS 1286, Counsel Stack Legal Research, https://law.counselstack.com/opinion/pentek-inc-v-meininger-pasuperct-1997.