FEDERAL PRISON INDUSTRIES, INC. (FPI) BOARD OF DIRECTORS DECISION ON GLOVES The Board of Directors for Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's production of gloves. As required by statute, FPI staff prepared a comprehensive impact study, which analyzed the potential impact that FPI's expansion of production may have on the private sector. FPI staff announced, in the January 3, 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 market impact study; and invited public comment on its proposal. The proposal called for: (1) approval to open a fourth glove factory at the Federal Correctional Institution in Waseca, Minnesota; (2) an increased sales level of $14 million by the year 2001; and (3) the ratification of previously achieved production levels which exceeded guidelines, and were consequently unauthorized, back in 1992. Copies of the impact study analyzing the proposal to expand production of gloves were sent directly to the principal trade associations, various manufacturers, organized labor, and other interested parties. FPI staff received written comments on its proposal from numerous sources, including Members of Congress, the Federal Glove Contractors Coalition (FGCC) -- a coalition of glove manufacturers representing the industry, and UNITE -- the union that represents employees in the glove industry. In response to those comments, and the concerns raised regarding the impact of imports on the domestic glove industry, FPI staff significantly modified its request. In its revised proposal dated May 9, 1997, FPI staff withdrew the original proposal to open a fourth glove factory, and instead requested that the Board approve production at a level of $10.1 million in FY 1997, which was below their original 1997 plan, with an allowance thereafter only for inflation. FPI staff submitted all such information to the Board of Directors for consideration. Because of continuing concerns expressed by the industry, FPI staff simultaneously negotiated with the industry and labor representatives in an effort to arrive at a mutually agreeable solution. These negotiations culminated in a jointly crafted proposal which was submitted to the Board (copy attached). Members of the Board reviewed all of the materials and heard in-person comments from an industry representative, and two Members of Congress (Congressman Peter Hoekstra from Michigan and Congresswoman Carolyn Maloney from New York) at an FPI Board of Directors meeting held in Washington, D.C. on June 17, 1997. The Board of Directors wishes to thank all parties who took the time and made the effort to comment. The written and oral comments were informative in developing a clearer picture of all the relevant issues. The Board of Directors is called on by statute to determine a production level which will result in FPI's 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 written record as well as oral presentations made before the Board. Historic and Future Compliance Issues. At the hearing, there was discussion of what steps the Board and FPI staff have taken to determine whether other unauthorized production may have occurred and what has been done to prevent future recurrence of such situations. Regarding other potential historic violations, soon after learning about the unauthorized increase in production of dorm and quarters furniture, over a year ago, the Board retained the services of its independent auditing firm, Urbach, Kahn, and Werlin (UKW), to conduct a historic review to determine whether there are any other such instances. The report from UKW is expected later this year and will be made publicly available. With regard to future compliance, several steps have been initiated. First, FPI staff have updated and issued specific policy and procedures to all factories and Central Office managers to make clear what information must be monitored and why compliance is essential. Training on these procedures has been provided at national training meetings for Associate Wardens and Superintendents of Industries and Business Managers. Each factory's annual production plan is reviewed for compliance with the regulations before approval by the FPI Chief Operating Officer and Board of Directors. Any proposed changes to this plan are reviewed by the Senior Program Managers and the Planning, Research, and Activation staff before approval. In order to respond to the evolution of Federal data and to improve the common sense application of the procedures, new rules were developed and published in March, 1997. These rules simplify the means of defining, monitoring, and gauging the impact of FPI's production. We have also asked UKW to provide us with any recommendations for additional rule changes they might deem appropriate. Finally, the Board has taken steps to monitor future production to ensure continued compliance. UKW will incorporate in their future audits a provision to review for guidelines compliance. Similarly, FPI staff have included this area for assessment by the Bureau of Prisons' Program Review staff, which conducts independent internal reviews of all functional areas, including FPI, both in the field and Central Office. Ratification Issue On the question of ratification, the Board wants to state unequivocally that under no circumstances, does it sanction or condone any FPI production outside authorized levels. Because there was so much concern about the historical violation, and how this mistake occurred, on the part of the witnesses and the Board, we requested FPI staff provide the Board with a detailed explanation of this issue. The Board considers the response accurate and credible and has incorporated it into this decision as an attachment. Having carefully analyzed the information regarding unauthorized production, the Board concludes that the expansion was inadvertent, unintentional, and relatively minor. These mitigating circumstances notwithstanding, theBoard, as reflected in this decision, has set lower future production levels to take into account the historic unauthorized glove production. Base Year for Authorized FPI Production. Several witnesses at the hearing suggested that the base year for determining FPI production levels prior to its unauthorized expansion was FY 1990, with a sales level of $5.0 million. FPI glove sales in FY 1990 actually dipped from the 1989 level of $5.75 million, before rising to $6.1 million in 1991. Due to Gulf War demand, FPI market share actually declined in 1991, and FPI production was within authorized levels. Thus, 1991 is the proper year for authorized production and was so used by the Board in determining future levels of FPI production. Effect of Imports on the Glove Industry. The record before us clearly demonstrates that this is an industry in which the domination of the market by imports has indeed had a major impact. Moreover, there is little or no commercial market available to the companies represented bythe Glove Coalition. As a result the industry is severely challenged, irrespective of FPI's presence, to maintain its existing base. As noted at the hearing, compounding this is the fact that the Buy American Act allows the civilian sector of the Federal government to purchase import gloves, should the price differential between domestic and foreign products exceed 12 percent. Board Decision After final review of the entire record, the Board hereby authorizes FPI production of gloves at the following levels (The increases each year represent approximately 3% annually for inflation): FY 1997 Board-Authorized Level $7.1 million, Joint Agreement $7.4 million; FY 1998 Board-Authorized Level $7.3 million, Joint Agreement $7.6 million; FY 1999 Board-Authorized Level $7.5 million, Joint Agreement $7.9 million; FY 2000 Board-Authorized Level $7.8 million, Joint Agreement $8.1 million; FY 2001 Board-Authorized Level $8.0 million, Joint Agreement $8.3 million; FY 2002 Board-Authorized Level $8.2 million, JointAgreement $8.6 million; FY 2003 Board-Authorized Level $8.5 million, Joint Agreement $8.8 million; FY 2004 Board-Authorized Level $8.7 million, Joint Agreement $9.1 million; FY 2005 Board-Authorized Level $9.0 million, Joint Agreement $9.4 million; FY 2006 Board-Authorized Level $9.3 million, Joint Agreement $9.7 million; Total 10-year Sales: Board-Authorized Level $81.4 million, Joint Agreement $84.9 million. For purposes of comparison, the table above illustrates both the Board-approved threshold, and the amount previously agreed to by the industry coalition in the joint agreement. The Board recognizes that sales levels may experience minor fluctuations above or below these target amounts each year, since contract awards and delivery shipments may overlap from one year to the next. It is, therefore, understood and authorized that FPI may exceed the annual limits by insubstantial amounts, so long as the aggregate over the 10 year period does not exceed $81.4 million. For ease of reference and tracking, it is the decision of the Board of Directors to use sales dollars, rather than market share, as a measure of expansion. In order to maintain a steady flow of work so as to keep the factories running and to allow FPI to plan production, the Board stipulates the following. In regard to the 20 percent cap on DOD glove requirements (for gloves other than those produced 100% by FPI) referenced in the joint agreement between FPI and industry, the number can be based on 20% or less of the annual estimated purchase requirement provided by DPSC to FPI. However, if at the end of the fiscal year the amount sold by FPI to DPSC for a certain type of glove represents more than 20% of DPSC's actual purchases for that type of glove for the same time period, there will be an adjustment by an equivalent reduction in the following year. Further, the Board wants to clarify and update a number referenced in the joint agreement reached between FPI and the industry regarding the recent awards made by DPSC for the light dutyflexor glove. The agreement references 420,000 units as the purchase requirement for these gloves. The actual number of gloves awarded by DPSC was 576,000 units, 336,000 of which were awarded to the private sector. With the exception of (1) the reduced annual sales levels; (2) the application of the 10-year cap of $81.4 million approved by the Board; (3) the use of annual estimated purchase requirements as the base for calculating the 20% cap on DOD gloves; and (4) the clarification of DPSC's recent purchase requirement for the flexor glove; as outlined above, all other provisions outlined in the joint agreement reached between FPI and the Coalition will be incorporated by reference to, and hereby made part of, this decision. While we are sensitive to the details worked out between FPI and the glove industry in the joint agreement, the Board incorporated in its decision provisions which we consider to be sensible tools, mindful of the fact that some flexibility is required in any production operation andthat no agreement should result in additional burdens being placed on the customer. The Board believes that the sales level it has authorized represents a reasonable share of the federal market and will not impose an undue burden of competition on the glove industry. The Board would like to emphasize that the level of annual production approved is less than the sales level jointly agreed upon by FPI and the FGCC. That level, specifically $7.4 million, represents the $6.1 million level of FPI production back in 1991, adjusted by 3 percent annually for inflation, prior to the time the unauthorized expansion occurred. Thus, the Board's decision to ratify at a level of $7.1 million constitutes a further roll back of FPI production to a level less than its previously authorized level of production achieved in 1991. In ratifying FPI production at a lower level than the amount agreed to by the industry, the Board has attempted to acknowledge that this industry has been heavily impacted by an increasing levelof imports. This factor has made this industry highly vulnerable, and this differentiates the glove industry from other instances of prior unauthorized FPI expanded production, such as occurred in dormitory and quarters furniture and office seating, which are healthier industries. The roll back imposed by the Board will amount to $3.5 million in additional sales returned to the private sector over the next 10 years. This dollar amount of sales substantially exceeds the $2.2 million of sales achieved by FPI, after adjusting for inflation, that was unauthorized during the 5-year period from 1992 through 1996. The Board believes this decision demonstrates its commitment to the industry, appropriately addresses the issue of FPI production levels in the future, and compensates for any unintended impact that may have occurred due to FPI's production above its authorized levels in the past. The Board acknowledges the mutual good faith negotiations which resulted in the detailed concessions by FPI staff in the joint agreement. This includes areas such as a limited share of production of specific glove types; detailed reporting requirements to the industry; extension of the agreement from 5 to 10 years; pairage caps; customer limitations; and so on. This level of detail far exceeds what the Board would normally require of the FPI staff in their good faith administration of our decisions. As a matter of course, the Board would discourage such restrictive detail in the future. Not only is it unnecessarily burdensome, it impedes the normal flexibilities necessary in any production environment and increases the potential for future technical violations of the agreement by the FPI staff despite their best efforts to comply. As noted in previous Board decisions, the Board again would offer that 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, will amend FPI's authorized production levels. The Board would like to commend the actions of FPI staff, the Coalition, and labor, for working together to arrive at a mutually crafted agreement that all parties agreed to abide by. It is our hope that such collaborative efforts between FPI, industry, and labor can continue in this, as well as other industry areas potentially affected by future FPI growth proposals. Decided this 17th day of July, 1997. For the Board: Joseph M. Aragon, Chairman Attachment -- Summary of Federal Prison Industries Unauthorized Expansion in Glove Production The original guidelines rules (which were subsequently revised) are controlling for both the glove study and FPI's historic production of gloves. Under those rules, a significant expansion of production isdefined in two sequential steps. The first is an increased capacity in the form of an increase of 10% or more in the number of production inmates, equipment, or factory space. When one of these increases was planned, the rules next required that an analysis be performed to determine whether the increased production intended to be derived from the increased capacity would result in FPI's market share for the particular product exceeding certain thresholds, as defined in the rules. If so, a market study was required, with input from the private sector and culminating in a hearing before the Board. Thus, in application, the original rules required the FPI staff to ask themselves two questions: (1) "Is there a planned increase in production capacity of 10% or more?"; (2) "Will this intended capacity increase elevate FPI's market share to levels where a market study is required?" Under the original rules, depending on the answers to these questions, the appropriate course of action could be determined, as follows: Answer Scenario #1 -- Question #1-Yes, Question #2-Yes, Market Study Required-Yes; Answer Scenario #2 -- Question #1-Yes, Question #2-No, Market Study Required-No; Answer Scenario #3 -- Question #1-No, Question #2-Yes, Market Study Required-No; Answer Scenario #4 -- Question #1-No, Question #2-No, Market Study Required-No. In 1992, FPI was making gloves at Ray Brook, New York; Sandstone, Minnesota; and Safford, Arizona. At Safford, towels were also simultaneously being produced. During that year, towel production fell off and in order to prevent idleness, many of the Safford inmates working on towels were assigned to gloves. Although the total number of inmates assigned to the Safford textile factory did not increase, the total number subsequently assigned to glove production resulted in more than a 10% increase. Had this situation been more closely monitored, it would have been reported to the Central Office and the aforementioned sequential questions could have been answered. Despite a significant increase in assigned inmates, Safford's glove sales in 1992 only increased by approximately $40,000. Thus, if the only increase in sales had been from Safford, the analysis might likely have resulted in answer Scenario #2. In 1992, due to unexpected forest fire activity, FPI was inundated with exigency glove orders from the U.S. Forest Service. These gloves were produced at Sandstone, Minnesota. That year, Sandstone increased its glove sales by nearly $1 million, representing virtually all of FPI's 1992 sales increase. Sandstone did not, however, increase its capacity or the number of inmates but achieved the higher sales by overtime and improved production efficiencies. Thus, taken by itself, Sandstone's situation would have resulted in answer Scenario #3. It has been FPI's consistent practice to make guidelines evaluations corporation-wide by product, rather than one factory at a time. Thus, although taken individually, neither factory's production would have required a market study, when glove production is taken as a whole, it is clear that answer Scenario #1 would apply. Collectively, although the market share increase was less than 5%, under Scenario #1, a study should have been performed. FPI staff have summarized these results at the request of the Board to clarify the sequence of events, and familiarize interested parties with the complexity of the previous rules.

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