FPI BOARD OF DIRECTOR'S DECISION ON T-SHIRTS The Board of Directors of Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to expand production of T-shirts. As required by statute, FPI prepared a comprehensive impact study, which analyzed the potential impact that FPI's production may have on the private sector. FPI announced, in the October 15, 1997, edition of the Commerce Business Daily, its plans to present this proposal to the Board of Directors; described the procedures for obtaining a copy of the impact study; and invited public comment on its proposal. Copies of the impact study analyzing the proposal to significantly expand production of T-shirts were sent directly to the principal trade associations, various manufacturers, and other interested parties. FPI received written comments on its proposal from several sources, prepared responses to those comments, and submitted all such information to FPI's Board of Directors, along with its request to significantly expand production of T-shirts. Members of the Board reviewed all of the materials and heard in-person comments from industry representatives at an FPI Board of Directors meeting held in Washington, D.C. on February 12, 1998. The Board of Directors wishes to thank those parties who took the time and effort to comment. The industry's written and oral comments were helpful in developing a clearer picture of the industry and its concerns. The Board of Directors is required by statute to determine a production level which will result in FPI assuming no more than a reasonable share of the market and not unduly impacting the industry. In reaching our decision, we have relied on the entire record, including the impact study, written comments submitted and oral presentations by three individuals at the Board meeting. On the basis of all the information it is the Board's decision to approve FPI's request to expand production of T-shirts at the levels requested in the impact study. In reaching this decision, the Board carefully reviewed all of the informationpresented regarding the market for T-shirts. Below is a summary of the Board's assessment and findings. The Board of Directors approves FPI's request to combine the FSC codes for T-shirts (8415, Special Purpose Clothing and 8420, Men's Underwear and Nightwear) for purposes of defining what constitutes the specific product, T-shirts. The Board of Directors believes that the items (underwear and long or short sleeved outerwear T-shirts) are so similar in composition and method of production that they should be considered as one specific product. At the recommendation of commenters, the Board of Directors directs that FPI specifically not engage in production of white T-shirts, which was one of the areas of special concern expressed by industry. Potential FPI Impact It is the judgment of the Board of Directors that the sales levels requested by FPI will not place an undue burden upon the T-shirt industry or labor. This judgement is based on the record, including the following conclusions: FPI does not planto increase market share past prior levels until 1999. At that time, market share would increase not to exceed the maximum production levels provided for in the indefinite quantity contracts FPI customers have provided for the grey Physical Fitness Uniform (PFU) T-shirts and the minimum/maximum quantity contract FPI's customer has awarded for brown undershirts. A representative from the law firm of Verner, Liipfert, Bernhard, McPherson, and Hand, representing the Puerto Rico Economic Development Administration expressed concern that FPI's entry into the brown T-shirt market has resulted in lost sales for the Olympic Mills Corporation of Guaynabo, Puerto Rico. Concern was also expressed that FPI is also impacting potential Olympic Mills sales. The Board acknowledges that Olympic Mills was the sole supplier of brown T-shirts to the Defense Supply Center Philadelphia (DSCP) at one time; however DSCP decided what vendors would receive new contracts in its most recent award. DSCP awarded four contracts for the brown T-shirts: two to mandatory source providers -FPI and National Industries for the Blind (NIB) as well as two to private sector manufacturers -- M. J. Soffe and Union Underwear. Contracts awarded to the private industry providers were directed to these sources by DSCP. Thus, the fact that DSCP chose not to award any portion of its requirement to Olympic Mills is an issue that is best addressed between these two parties. Historic Compliance Issues At the hearing there was discussion concerning FPI's prior sales levels of T-shirts and the assertion was made by commenters that FPI violated its authorized production levels between 1992 and 1994 when FPI T-shirt sales increased from $3.5 million in 1992, to $4.5 million in 1993, and subsequently to $5.9 million in 1994. The original industry involvement guidelines, which were in effect during the time of the increases, stipulated that an increase in sales of a product constituted a significant expansion if certain capacity triggers were met which resulted in the sales increase. Although FPI's sales of T-shirts increased, it did not do so on the basis of increased capacity due to space, equipment, or inmates employed; therefore, the guidelines were not triggered. Based on the difficulties in computing and tracking capacity increases to determine if there is a significant expansion, FPI with the input of private sector representatives, revised the guidelines process in 1997 so that significant expansions are determined based on sales increases rather than capacity. FPI avoided any significant increases in production and when it was discovered that the increased demand for grey PFU T-shirts, in conjunction with the award of the brown T-shirt contract, would trigger the guidelines, FPI advised DSCP that FPI could not fulfill the total amount of the brown T-shirt procurement. FPI's sales of T-shirts would not have triggered the guidelines for significant expansion if DSCP had not increased its basic requirements for the PFU T-shirt as described in their December 23, 1997, letter to Robert C. Grieser. Reasonable Share of the Market During the hearing, reference was made to testimony by J. Michael Quinlan, former Director, Federal Bureau of Prisons to the Subcommittee on Courts, Civil Liberties, and Administration of Justice of the Committee of the Judiciary. The testimony was presented on February 23, 1988, in connection with H.R. 4021, a bill to authorize FPI to borrow money from the U. S. Treasury to fund needed construction. Mr. Quinlan was responding to questioning from the subcommittee, concerning what share of the federal market was appropriate for FPI. Mr. Quinlan testified as follows: "We are very sensitive to both the mandate of Congress and the law and to our status in the industrial community. We do not want to take more of the market share than we should have under any circumstances . . . No UNICOR business would take more than 15% of the Federal market share when there are other businesses in the community that are competing for that business." As Mr. Quinlan also pointed out in his testimony, at that time FPI conducted periodic product reviews before it entered a particular market to ensure it did not have an adverse impact on that market. At the time Mr. Quinlan made those comments in 1988, FPI did not measure the size of the federal market for a particular product with precision. In fact, in testimony presented by another witness (Testimony, page 49) it was recommended that FPI refine the way it measures economic impact and provide advance public notice and an opportunity to comment on plans to expand product lines, so that all companies that may be affected would have an opportunity to be heard. Subsequently, the Congress enacted a statute and, with industry input, FPI adopted a regulation, neither of which incorporated any fixed market share measure. Instead, the law and regulation provide that the determination of "reasonable market share" be determined by the Board of Directors on a product by product basis. The current practice has made it possible to refine measurements and incorporate industry input so that rather than an across the board rule of thumb, a far more sensitive mechanism exists, by which market determinations are individualized. Go-to-War Items The American Apparel Manufacturers Association (AAMA) expressed concern that FPI was producing 100% of certain go-to-war items and would further increase its market share to 100% on other such items. During the Board meeting, the specific products orally identified by commenters were Battle Dress Uniforms (BDUs) and helmets. A review of FPI sales indicates that FPI does not have 100% of the federal market for BDUs. As for helmets, FPI has a 100% share of the market since it is the only remaining source of supply to DOD. Due to the sporadic buys of helmets by DOD, private manufacturers did not maintain the equipment or capability to produce helmets on an as needed basis. FPI is the only manufacturer that maintained its equipment when DOD orders declined to almost nil. Following the Board meeting, at the Board's request, the AAMA provided its listing of go-to-war items and its estimate of FPI's market share of these items. FPI has worked with DSCP to assure that its operations are conducted in a way that does not significantly impact the supplier base for DSCP. In a letter to DSCP, FPI has previously reiterated its commitment not to produce 100% of any requirement unless so desired by the customer. This will ensure that DSCP continues to have secondary sources of supply in the private sector. The Board believes that this policy addresses industry concerns and hereby affirms FPI's continue adherence to this policy. To ensure that this policy remains acceptable to DSCP, the Board directed FPI's Chief Operating Officer, Steve Schwalb, to follow-up with the customer. Steve Schwalb spoke with the DSCP Deputy Commander, George Allen, regarding any possible concerns of FPI producing 100% of any go-to-war items. Deputy Commander Allen indicated that whenever FPI has 100% market share of a particular item it is because DSCP has either specifically requested that FPI be the sole supplier or that the situation has developed over time and DSCP has no objection to FPI's high market share. He also indicated that at this time DSCP is satisfied with FPI having 100% of selected items and is happy with its current relationship with FPI, as any issues which arise are amicably resolved. Deputy Commander Allen also indicated that DSCP has commercial vendors that have 100% of selected go-to-war items. In each instance the decision is based on what is in the best interests of DSCP from a cost, vendor reliability, and industrial base maintenance perspective. Diversification During the hearing, there were also comments made that FPI should diversify its product mix. One of FPI's mandates is to limit its burden on any industry. That is why FPI is extremely diversified and offers approximately 70 specific products and services, as classified by four-digit Federal Supply Classification (FSC) codes in areas such as furniture, graphics and services, metals, electronics, as well as textiles. However, FPI is also diversified within the textiles area because it produces a variety of products such as bags, protective clothing, work clothing, sheets and towels. In addition, to lessen the impact on traditional industries, FPI is making every effort to pursue opportunities in subcontracting, expansion of services, recycling, and vertical integration. Each of these represents job opportunities in non-traditional areas and does not rely on mandatory source. PRODUCTION LEVELS It is the finding of the Board that sales levels proposed by FPI for T-shirts represents a reasonable share of the market and that proposed production at these levels will not impose an undue burden of competition on the industry. Therefore, the Board authorizes FPI to produce T-shirts at the following levels. FY 1998 -- $ 6.5 million FY 1999 -- 13.5 million FY 2000 -- 13.9 million FY 2001 -- 14.3 million FY 2002 -- 14.7 million The Board recognizes that it is difficult to achieve exact levels each year. It is therefore understood that FPI may exceed the annual limits by insubstantial amounts, so long as the aggregate over the five-year period does not exceed the five-year approved total of $ 62.9 million. While the sales levels equate to projected market share, as reflected in the study, primarily for ease of reference and tracking, it is the decision of the Board to use sales dollars as the measure for expansion. Should the industry believe that circumstances have changed sufficiently that FPI's authorized production is having a substantially greater impact than anticipated in this decision, the industry is invited to provide, at their convenience, such written information to the Board. The Board will carefully review this information and, if warranted, may reconsider the issue. Decided on this 10th day of April, 1998. For the Board: Joseph M. Aragon, Chairman

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