FEDERAL PRISON INDUSTRIES, BOARD OF DIRECTORS DECISION, OFFICE SEATING, PART I OF II PARTS POC: Federal Prison Industries, Inc., 320 First Street, NW, Washington, DC 20534 Attention: Manager, Planning, Research and Activation!! The Board of Directors for Federal Prisons Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to significantly expand its production of office seating. As required by statute, FPI prepared a comprehensive impact study, which analyzed the potential impact, if any, that FPI's production may have on the private sector. FPI announced, in the March 22, 1996 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 expand production of office seating were sent directly to the principal trade association, various manufacturers, and other interested parties. Prior to the preparation of the market study, FPI contacted relevant industries and organizations to obtain information about potential impact on organized labor and the office seating industry resulting from FPI's proposed expansion in this product. Their views have been incorporated into the record. 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. The Board members reviewed all of the materials and heard in-person comments from industry representatives at an FPI Board of Directors meeting held in Ann Arbor, Michigan. The Board of Directors thanks all parties who took the time and made the effort to comment. Both written and oral comments were helpful in developing a clearer picture of the industry and its concerns. The Board of Directors is called on by statute to make a determination as to whether an expanded production of office seating would result in FPI assuming more than a reasonable market share or unduly impact the office seating industry. Background. FPI's market study, and its expansion proposal based on the market study, aggregated several Standard Industrial Classification (SIC) codes which encompass office seating. As explained in the market study, in the 1992 Census of Manufacturers, the Bureau of the Census eliminated all seven-digit SIC codes within SIC industry 2521 (wood office furniture) and 2522 (office furniture, except wood). As a result of this new classification scheme, the most specific categories now available are the four-digit industry code 2521 (``wood office furniture'') and five-digit SIC 25221 (``office seating, except wood''). FPI's market study based its calculations on these broader SIC codes as the seven-digit codes are no longer available. In order to determine the size of the total market, FPI relied on data collected by the office furniture industry, and then determined what percentage of the office furniture industry is represented by office seating. The industry's trade association, The Business and Institutional Furniture Manufacturing Association (BIFMA), asserts that approximately 25% of all office furniture sales consist of office seating. FPI used this estimate to gauge its market presence in the office seating market. The Board agrees that this mode of inquiry is a fair interpretation of the total office seating market. With this in mind, the Board approves of the product definition utilized in the market impact study. FPI's Previous Expansion: As a preliminary matter, FPI has brought to the attention of the Board in its market study that it underwent a ``significant expansion'' in office seating, without first seeking Board approval as required by 18 U.S.C. 4122(b). This unauthorized expansion was inadvertent. In particular, the Board notes the expanded production between 1990 and 1995 resulted in an increase in sales from $22.8 million to $54.4 million. FPI's inmate workers during this period increased approximately 20%, from 661 to 790. Taken together, this amounts to a ``significant expansion'' as defined by U.S.C. 4122. This increase appears to have occurred due in part to ambiguities in the current definition of significant expansion, and in part to difficulties with monitoring expansion. In connection with another earlier instance of unauthorized expansion, the Board has undertaken a review of expansion in all FPI product lines since implementation of the guidelines, being conducted by independent auditors. It has also instructed FPI to work with the private sector in development of new guidelines definitions, so as to clarify indicators of expansion. The question, now, however, is how to deal with this situation in the context of office seating. Any analysis and decision must begin with FPI's statute, which provides that FPI should have no more than a reasonable share of the market, and should not unduly impact on any single private industry. Any remedial action will be predicated on what extent, if any, the statute has been violated in these two very important aspects. FPI's Federal Market Share. First, did the expansion result in FPI assuming more than a reasonable share of the federal market? Federal office seating sales rose from $163 million in 1990 to $252.4 million dollars in 1995, an increase of 55%. Between 1990 and 1994 (the last year in which FPDC data was available at the time the study was published), FPI's market share ranged from 14.6% to 22.8%. However, despite FPI's increased sales and market share, the private sector actually experienced a significant increase in Federal sales. This was due to the growth of the Federal market during that time. Thus, although FPI did expand production, we conclude that FPI did not gain an unreasonable share of the market. Private Sector Sales. Additionally, the non-Federal market experienced a similar increase in sales between 1991 and 1994. For example, after FPI supplied its market in 1991, approximately $1.77 billion in office seating sales were left for private sector manufacturers. By 1994, private sector sales jumped to approximately $2.14 billion. Thus, private sector manufacturers realized a considerable increase in both Federal and non-Federal sales during the period of 1991 to 1994, despite FPI's expansion. We conclude that under these circumstances, based on market performance since 1991, the industry has not been adversely affected, and that FPI's market share is reasonable. The Board therefore approves FPI's request to ratify its sales levels achieved, subsequent to and as a result of, its expanded capacity during 1991 and 1992. FPI's Current Expansion Proposal: Size of the Federal Office Seating Market. While BIFMA contested the size of the Federal office furniture market at the hearing, the Board concurs with FPI's assessment of the Federal office furniture market as being slightly over $1 billion, based on the detailed methodology used for deriving the size of the market as outlined in the study. BIFMA provided no basis to support a smaller figure, other than its contention that they had discussed lower figures with FPI on an earlier occasion. FPI has provided the detail in the study, to the satisfaction of the Board, as to the reasons the market was determined to be larger than the previous figures discussed with BIFMA, and notified BIFMA, who provided no information to the contrary. BIFMA and FPI are in agreement that seating products represent approximately 25 percent of the office furniture market.

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