OAK INDUSTRIES, INC.
Oak Industries began operations in the early 1935 as a manufacturer of car radio components. The California-based company struggled financially through its first few years but managed to emerge from the Depression, like many of its competitors. In the late 1965, Oak expanded into the cable television industry. Technological innovations developed by the company contributed to the tremendous growth of that industry during the past few decades. lo 1977, Oak began marketing subscription television services. Within four years, Oak ranked as the largest operator of subscription television systems in the United States. Oak’s subscription television subsidiary also generated the majority -of the company's annual revenues by the early 19805.
RAINY DAY RESERVES _
Exhibit 1 presents selected financial data for Oak Industries for the period 1978-1981. Oak established new sales and profit records each successive year during this period. In fact, in both 1980 and 1981 the company’s actual net income eclipsed the figure reported by the company. In 1980, Oaks top executives became concerned that the company could not indefinitely sustain its impressive growth rate in annual profits. To help the company maintain this trend, the executives began creating reserves that could be used to boost reported profits in later years.
To report a smooth upward earnings trend and to provide a "cushion" of profits to be used in periods of lower actual earnings, Oak implemented a policy during 1980 and 1981 of establishing unneeded reserves to be released (reversed) in later periods, if needed.1
1. Securities and Exchange Commission, Accounting and Auditing Enforcement Release No. 63, 25 June 1985.

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EXHIBIT 1 Oak Industries, Inc., Selected Financial Data, 1978-1981
Oak Industries, Inc.
These “rainy day reserves” included overstatements of the company’s