FPI BOARD OF DIRECTORS EXPANSION OF OFFICE SEATING, PART II OF II POC: Federal Prison Industries, Inc., 320 First Street, NW, Washington, DC 20534 Attention: Manager, Planning, Research and Activation. FEDERAL MARKET In its current proposal, FPI asks for authority to expand office seating production from $54.4 million (FY 1995) to $110 million (FY 2001). Representatives of private industry argue that the Federal office seating market is anticipating little growth, due largely to downsizing of the Federal work force, and that expanded production by FPI would result in assumption of an unreasonable share of the market and the imposition of an undue burden on private industry. The market impact study reflects that sales in the Federal market continued to grow during the first half of the 1990's, despite an overall 5% decline in the size of the Federal civilian work force. This leads the Board to conclude that Federal demand for office seating is not directly related to Federal employment levels. There are several reasons why this is so. First, the workplace, both Federal and commercial, has placed a premium on a more health working environment. Ergonomics products, particularly seating, should offset any loss the market may experience due to a slowing down of Federal employment. In addition, the replacement market continues to be active. This is due in part to the reorganizations and consolidations of existing offices and agencies and the relocation of personnel. At least one commenter who supplies the Federal market with seating products indicated they anticipate 4 percent growth. BIFMA itself projects at least 4 percent growth in the office furniture market, including seating, without differentiating between the Federal and non-Federal sectors. Despite FPI's proposed expansion to $110 million in sales by 2001, sales opportunities will continue to grow, although modestly, for private sector vendors competing in the Federal market. In FY 1996, $197.5 million in Federal sales will be available to private sector vendors. By 2001, approximately $209.3 million dollars in Federal procurements will be available to private sector vendors, based on an estimated 4 percent growth in this product. FPI's proposed expansion to $110 million by 2001 is projected to comprise a total Federal market share of 34.4% by 2001. Although this figure represents an increase in FPI's market share, due to the increasing size of the total seating market, private sector manufacturers will experience continued opportunities to increase sales from their current levels. TOTAL DOMESTIC MARKET The size of the total domestic market for office seating is also projected to increase. FPI will supply only $110 million of an estimated $3 billion total domestic office seating market, or 3.7% of the total domestic market. It is clear that the total domestic market for office seating products is substantial. Since office seating for the Federal and non-Federal markets are totally interchangeable, suppliers of these products have access to a huge and growing market which FPI does not. It is clear that there are ample increased sales opportunities in the private sector. This is supported by the fact that even large companies, who furnish the bulk of seating products supplied to the Federal government, only have a small portion of their total sales consisting of sales to the Federal government. The Board would also like to emphasize that the office seating industry is dominated by a small number of large firms. Although dozens of companies manufacture office seating, less than 2% of the largest firms supply approximately 40% of the industry's value of shipments. The Board notes that this phenomenon applies to the Federal market as well. Ten vendors supplying the Federal market account for more than one-half of all Federal buys from the private sector. It is the Board's finding that large manufacturers supply a disproportionate share of the Federal office seating market. POTENTIAL IMPACT OF FPI'S PROPOSAL ON JOBS The industry has consistently maintained that sales by FPI will lead to job displacement in the industry in which FPI operates. Contrary to assertions made by the industry, however, the Board finds that, in assessing the likelihood of this impact, several compelling factors must be considered which mitigate, or negate, such an impact. As explained in the impact study, any impact would be dispersed across the numerous manufacturers in the industry. Over the last few years, the office furniture industry has been increasing its sales and its number of production workers. In a growing industry that is adding workers, it is unlikely FPI's increase would cause existing workers to be displaced. Rather, the impact of FPI's proposal would only be to private firms from further increasing their already strong rate of growth. Another factor that would serve to mitigate any impact of FPI's proposal is the graduated nature of the ramp-up period for the production levels proposed. If the Board approves production at the full level FPI has requested, FPI would not produce at that level until the year 2001, giving private industry ample time to plan and adjust accordingly. Taking both the Federal and commercial markets into account, $611 million of new annual sales opportunities will be available to the private sector over the same five year period FPI is seeking to meet its growth needs. While it is not inconceivable that there would be job losses in the office seating area, these losses will in all likelihood result from automation, mergers, and other economic and market factors unrelated to FPI. PRODUCTION LEVELS It is the finding of the Board that growth in the office seating industry will more than offset FPI's increase in Federal market share. Based on the above, the Board believes that the sales levels proposed by FPI represents a reasonable share of the market and that production at these levels will not impose an undue burden of competition on the industry. Therefore, the Board authorizes FPI to expand production of office seating at the following levels. FY 1996 $65 million; FY 1997 $75 million; FY 1998 $90 million; FY 1999 $95 million; FY 2000 $100 million; FY 2001 $110 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 six-year period does not exceed the six-year approved total of $535 million. Even though 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, rather than market share, as the measure of expansion. In addition to its current and semi-annual publication of sales data in the COMMERCE BUSINESS DAILY, FPI will compile its sales in office seating at the end of each fiscal year, and make a copy of this information available to the industry trade association. Should the industry believe that circumstances such as, but not limited to, the overall industry growth rate or Federal government purchases 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 30th day of September, 1996.

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