Material Sciences Corporation

SECURITIES EXCHANGE ACT OF 1934
Release No. 41930 / September 28, 1999

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1176 / September 28, 1999

ADMINISTRATIVE PROCEEDING
File No. 3-10041

_____________________________
)
In the Matter of: )
) ORDER INSTITUTING
) CEASE-AND-DESIST PROCEEDINGS
) PURSUANT TO SECTION 21C OF THE
MATERIAL SCIENCES ) SECURITIES EXCHANGE ACT OF
CORPORATION ) 1934, MAKING FINDINGS AND
) IMPOSING A CEASE-AND-DESIST
Respondent ) ORDER
_____________________________ )

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Material Sciences Corporation ("MSC").

II.

In anticipation of the institution of these cease-and-desist proceedings, Respondent has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of this proceeding, and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it, which is admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease and Desist Order ("Order").

III.

On the basis of this Order and the Offer submitted by Respondent, the Commission makes the following findings1 :

1. MSC is a Delaware corporation headquartered in Elk Grove Village, Illinois. MSC is a technology-based manufacturer of continuously processed coated and specialty engineered materials and services. Since November 1995, MSC has consisted of four operating units, including a wholly-owned subsidiary, MSC Laminates and Composites Inc. ("Laminates Division"). Prior to that time, the Elk Grove Village, Illinois operations of Pre Finish Metals ("PFM") and the Laminates Division were contained in one unit, PFM. In November 1995, MSC split Elk Grove Village operations into two separate operating units, PFM-Elk Grove Village and the Laminates Division. MSC's stock is registered pursuant to Section 12(b) of the Exchange Act, and is listed on the New York Stock Exchange.

2. During the period March 1, 1995 through February 28, 1997, the Plant Controller at MSC's Laminates Division recorded erroneous entries on MSC's books, records, and accounts, as described in Paragraphs 3 through 7 below. As a result of these erroneous entries, MSC's inventory and accounts payable records were inaccurate or overstated. These improper accounting entries caused MSC to file an inaccurate Form 10-K with the Commission, which overstated MSC's earnings for fiscal year ended 1996. The reported net earnings for that year were $11,979,000 and the restated net earnings were $8,497,000. These improper entries also caused MSC to file inaccurate Forms 10-Q with the Commission for the first, second, and third quarters of fiscal years ended l996 and 1997, which overstated MSC's quarterly net earnings. The reported net earnings for the first quarter of fiscal 1996 were $4,866,000 and the restated net earnings were $3,152,000. The reported net earnings for the second quarter of fiscal 1996 were $4,066,000 and the restated net earnings were $3,519,000. The reported net earnings for the third quarter of fiscal 1996 were $333,000 and the restated net earnings were a loss of $670,000. The reported net earnings for the first quarter of fiscal 1997 were $4,621,000 and the restated net earnings were $3,969,000. The reported net earnings for the second quarter of fiscal 1997 were $4,532,000 and the restated net earnings were $4,248,000. The reported net earnings for the third quarter of fiscal 1997 were $4,880,000 and the restated net earnings were $4,243,000.

3. Beginning in the last quarter of fiscal year ended 1995 through fiscal year ended 1997, the Plant Controller at MSC's Laminates Division stopped reconciling the work in process inventory and instead entered false general journal entries into the division's general ledger. These false journal entries debited Finished Goods Inventory account and credited Cost of Sales. The effect of these improper general journal entries was to inflate artificially the book value of the inventory on hand and to understate the cost of sales thereby creating a paper increase in MSC's pre-tax earnings.

4. The Plant Controller at MSC also falsified the books and records for accounts payable. During fiscal year ended 1997, the Plant Controller at MSC's Laminates Division entered false numbers in the general ledger journal. These false general journal entries debited Accounts Payable and credited Cost of Sales. These entries in turn caused MSC to overstate its pre-tax earnings.

5. For fiscal year ended 1996, MSC filed an inaccurate Form 10-K with the Commission. The Form 10-K contained financial statements that overstated MSC's earnings for fiscal year ended 1996.

6. MSC also filed inaccurate Forms 10-Q with the Commission for the first, second, and third quarters of fiscal years ended 1996 and 1997. The Forms 10-Q contained financial statements that overstated MSC's quarterly earnings.

7. During fiscal years ended 1995, 1996, and 1997, MSC failed to implement and maintain proper and adequate internal accounting controls. MSC's internal accounting controls were inadequate to detect the false entries made by MSC's Plant Controller because MSC failed to reconcile or analyze its general ledger accounts to ensure that transactions were properly recorded and account balances properly stated. MSC also failed to revise its policies and procedures manual which could have ensured that accounting policies and procedures were segregated properly. In addition, MSC's computer system needed to be updated to eliminate the need to make manual adjustments to inventory valuation. Although it did not contribute to the overstatement of inventory in this instance, MSC's computer system also lacked safeguards to prevent inappropriate manual computer entry of general ledger information.

8. MSC committed or caused violations of Section 13(a) by failing to file with the Commission information and documents in accordance with the rules and regulations prescribed by the Commission.

9. MSC committed or caused violations of Section 13(b)(2)(A) by failing to make and keep books, records, and accounts, which, in reasonable detail, would accurately and fairly reflect its transactions and dispositions of its assets.

10. MSC committed or caused violations of Section 13(b)(2)(B) by failing to devise and maintain an adequate system of internal accounting controls.

11. MSC committed or caused violations of Rule 12b-20 by failing to include material information that would make required statements not misleading.

12. MSC committed or caused violations of Rule 13a-1 by filing with the Commission false and misleading annual statements.

13. MSC committed or caused violations of Rule 13a-13 by filing with the Commission false and misleading quarterly statements.

IV.

IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that :

Respondent MSC shall cease and desist from committing or causing any violation and any future violation of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.

IT IS FURTHER ORDERED, that MSC will comply with its undertakings requiring each person occupying the following positions as of the date of entry of this order to submit to forty hours of educational classes and seminars on the subject of accounting policies and procedures and internal accounting controls within one year from the date the Order is entered: Chief Financial Officer, Chief Accounting Officer, Group Vice President and General Manager of the Laminates Division, and all Division Controllers. Such classes must qualify for continuing professional educational credits as defined by the American Institute of Certified Public Accountants. Upon completion, MSC will submit to the Commission a sworn statement indicating the classes taken, the dates completed, and the personnel involved.

By the Commission

Jonathan G. Katz
Secretary

FOOTNOTES

-[1]- The findings herein are made pursuant to MSC's Offer and are not binding on any other person or entity named as a respondent in this or any other proceeding.