Federal Prison Industries, Inc
Annual Report 2009

Commemorating 75 Years of “Changing Lives”

Table of Contents

Mission Statement
2

A Message from the Board of Directors

6

75 Years of “Changing Lives” — A Message from the Director

8

A Message from the Chief Operating Officer

10

Industrial Programs, Locations, Inmate Employment, and Net Sales

12

Fiscal Year 2009 Recap

14

Starting Over

22

Management’s Discussion and Analysis

29

Office of the Inspector General Commentary and Summary

30

Independent Auditors’ Reports

40

Financial Statements

43

Notes to the Financial Statements

75 years of changing lives

It is the mission of Federal Prison Industries, Inc. (FPI) to

employ and provide job skills training to the greatest

practicable number of inmates confined within the

Federal Bureau of Prisons; contribute to the safety and

security of our Nation’s federal correctional facilities by

keeping inmates constructively occupied; provide

market-quality products and services; operate in a self-

sustaining manner; and minimize FPI’s impact on private

business and labor.

Embracing the ideas of early prison reformers, President Franklin D. Roosevelt
saw the need for a program that would instill the value of a good work ethic
and its positive impact on success after incarceration. FPI continues to carry on
the legacy envisioned by these leaders.

F P I A N N UA L R E P O R T 2 0 0 9 1

A Message from the Board of Directors

The Federal Prison Industries’ Board of Directors proudly presents the Fiscal Year 2009 Annual
Report, celebrating 75 years of changing lives.
As a result of the vision and perseverance of its founders three quarters of a century ago,
and the tireless support of proponents such as Chief Justice Warren E. Burger, an advocate of
educational and industrial programs, the Federal Prison Industries (FPI) program has
transformed the lives of thousands. Each year approximately 40,000 federal offenders are
released back into our communities by the Federal Bureau of Prisons. Our mission is to
prepare each FPI program participant for a successful reentry into society.
The FPI program is instrumental in breaking the cycle of crime. Without sufficient marketable
job training, work experience and life skills preparation, the ex-offender’s ability to adapt to
the world-at-large may be so overwhelming that the path of least resistance — a return to
crime — may be taken.
FPI facilitates the offender’s transformation to law-abiding citizen by teaching highly valued
workforce skills. And by promoting personal responsibility and accountability, we believe that
FPI has consistently achieved measurable success. For instance, released FPI inmates show a
significant reduction in recidivism when compared to similar inmates who did not participate
in the program. Moreover, the impact of reduced recidivism has been shown to have an even
greater positive impact on the minority population.
The ability to find a stable, adequate source of income upon release from prison is a critical
factor for a successful transition back to the community. Attorney General Eric Holder, in his
recent address to the Vera Institute of Justice, advised that 40 percent of former federal
prisoners are rearrested within three years of release. Given this statistic, even a modest
reduction in the recidivism rate would prevent thousands of crimes and save taxpayer dollars.
The Board accepts this opportunity as a challenge to build skills and to better prepare
inmates for future reentry success.
As Board members, like our predecessors before us, our core belief is that the decisions and
oversight responsibilities entrusted to us make a positive impact on people’s lives, and
contribute towards the overall well-being of our society. Looking back to 1934, it is
interesting to note that many of the challenges faced by FPI’s framers — the elimination of
inmate idleness, program self-sufficiency, the safety and security of our prisons, and the
creation of meaningful job skills training for federal inmates — continue to exist today.
We applaud FPI’s staff for pursuing new initiatives and innovative inmate work opportunities
during the 2009 Fiscal Year. This year, the Lean Six Sigma methodology was implemented as
the organization’s corporate-wide approach to continuous improvement. As a result,
improvements in service, product quality and efficiency have enabled FPI to significantly
reduce waste.
2 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

The expansion into the renewable energy sector is exciting, and we are very pleased with
FPI’s newest “green” product offering on its Schedule of Products: Photovoltaic (solar) Panels.
We recognize that new opportunities such as those in the renewable energy sector, as well as
the exposure and training of inmates in Lean Six Sigma processes, will strengthen and
broaden FPI’s continued reentry goals.
Given our Nation’s economic climate and employment trends of recent years, FPI has faced
the realities of lagging earnings, as well as the loss of valuable inmate jobs. The Board and
FPI leadership have made a concerted effort to ensure that FPI’s revenue stream remains
sufficient to cover its operating expenses. This year, FPI undertook the decisive corrective
actions that we felt were necessary to prevent further erosion of operating cash. This
included the downsizing and consolidation of several operations, and the closure of several
FPI factories. The closures included discontinuing FPI’s wood dorm and quarters furniture
operations which, at the height of activity during the mid-1990s, employed more than 800
inmates. Despite the financial challenges presented in Fiscal Year 2009, we are committed to
our mission to employ and provide job skills training to the greatest practical number of
inmates.
Since 1934, FPI has been a program that truly works in every sense of the word, predicated
on the dignity and value of the human spirit. If the voices of Boards past could be heard
among us today to recognize FPI’s 75 years of changing lives, they would surely join us in a
resounding, “Well done!”

THE BOARD OF DIRECTORS FOR FEDERAL PRISON INDUSTRIES, INC.

David D. Spears
Chairman

Donald R. Elliott
Vice Chairman

Franklin G. Gale

Audrey J. Roberts

Lee J. Lofthus

Represents
Agriculture

Represents
Industry

Represents
Labor

Represents
Retailers and
Consumers

Represents
the Attorney
General

F P I A N N UA L R E P O R T 2 0 0 9 3

A tireless advocate for prison reform, Chief Justice Warren E. Burger
believed that Federal Prison Industries provides offenders meaningful
work skills to set a positive course for a productive future.

4 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

I have changed so much that my outlook on life is
clear. I want to be part of the solution instead of part
of the problem. I realized that it’s because of my years
in UNICOR that I owe this change. I just pray that in
the future I get a chance to show my skills and
changes to the outside world.

—inmate E. Alvarez
FCI Loretto, Pennsylvania

F P I A N N UA L R E P O R T 2 0 0 9 5

A Message from the Director

75 YEARS OF CHANGING LIVES

I am honored, as Director of the Federal Bureau of Prisons, and as Chief Executive Officer
of Federal Prison Industries, Inc. (FPI), to join with FPI’s Board of Directors in presenting
the Annual Report for Fiscal Year 2009, which marks the 75th year since President
Franklin Roosevelt signed legislation creating this wholly-owned government
corporation. Warren E. Burger, our Nation’s 15th Chief Justice and tireless advocate of
prison reform once said, “It makes no sense to put people in prison and not train them
to do something constructive.”
In 1934, Bureau of Prisons Director, Sanford Bates and Assistant Director, James Bennett
crafted a comprehensive plan for the operation of Federal Prison Industries, Inc. FPI’s
statute struck a balance between private sector interests and correctional goals, involved
virtually no taxpayer support, helped ensure prison safety, and provided federal inmates
positive work experiences and training opportunities fundamental to success upon
release.
Initially, FPI operations consisted of only a textile mill, shoe factory and broom and brush
operation. By its second year, FPI branched out into other sectors including mattress,
clothing and furniture production; a woolen mill, foundry and brick plant followed in
subsequent years. Public opposition to prison industries expanded as well. FPI has
endured over the decades and continues to embrace and build upon the ideals of its
founders.
Professional research validates that inmates who participate in prison industries and
vocational training programs are substantially less likely to return to prison, and are
more likely to obtain employment, upon release from prison.
FPI provides inmates with opportunities to engage in productive, meaningful work which
benefits the inmates and their families, the taxpaying public, businesses, labor
organizations, and the criminal justice system. In addition, FPI assists the Bureau to
manage federal prisons in a cost-effective, productive and humane manner by reducing
idleness and its associated problems.

6 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

Unlike many government programs, FPI does not rely upon taxpayer funding to support
its operations. FPI covers all operating costs and expenses (including wages for staff and
inmates) with revenue generated from the sale of its products and services. FPI customers
are primarily agencies of the Federal Government.
Today, FPI provides meaningful work for approximately 19,000 federal inmates in
numerous industrial and services operations in more than 71 locations around the
country.
I cannot emphasize enough the crucial role FPI has played throughout the last 75 years in
responding to the needs of the Bureau of Prisons, the Federal Government, FPI’s
customers, inmates and the communities to which they return. I extend my sincere
appreciation and deep gratitude for the unwavering support and dedication of staff —
past, present and future — in upholding the tenets of FPI’s program.

Harley G. Lappin
Director,
Federal Bureau of Prisons
Chief Executive Officer,
Federal Prison Industries

F P I A N N UA L R E P O R T 2 0 0 9 7

A Message from the
Chief Operating Officer

This year, Federal Prison Industries, Inc. (FPI), widely known by our trade name, UNICOR,
commemorates 75 years of “changing lives.” While this essential Bureau of Prisons program
has evolved exponentially over the decades, its core purpose has not changed. The pro-social
values that comprise FPI’s core ideology influence our everyday business decisions,
relationships and strategies.
We are in the business of “changing lives,” and this precept shapes the way we view
business. FPI’s performance is not gauged by a balance sheet alone. Its success depends first
and foremost on the social benefits provided to inmates and our society. FPI operates at no
cost to taxpayers, creates private sector jobs indirectly, reduces our Nation’s criminal justice
costs, improves public safety and, through life and job skills training, provides federal
inmates a “second chance” to become productive members of our communities upon release
from prison.
Over the last fiscal year, UNICOR has faced mounting challenges resulting from prior
legislative changes and procurement directives, increased competitive pressures, and a soft
economic climate. This year’s Annual Report clearly reflects a significant reduction in earnings
from the past few years.
In light of the negative earnings in FY 2009 and the continued unstable economic trends, FPI
implemented numerous cost containment initiatives to minimize losses. While beneficial,
these measures fell short of our objective to reverse negative earnings. Consequently, we
made some extremely difficult decisions to reduce excess production capacity and associated
levels of staff and inmates working in UNICOR, in order to realign operations with our short
and longer term business goals.
Ultimately, we closed or downsized factories impacting 19 of our locations. These initiatives
were tremendously sensitive, given the many dedicated FPI staff whose jobs were directly
affected by our decisions. Nevertheless, such measures were necessary to eliminate costs in
those areas where sales were insufficient to support operations. We anticipate that the
actions taken will reduce operating costs by nearly $16 million annually, although the full
impact of these savings will not be realized until late 2010.
Tomorrow’s successes are built upon today’s understanding and strategies. For 75 years, FPI
has helped inmates acquire a basic work ethic and job skills. Today, however, the market is
shifting, and many jobs requiring minimal technical skills are migrating overseas. Therefore,
to prepare inmates for future employer demands, we recognize the need to develop more
opportunities in emerging industries such as the environmental and alternative energy
sectors. To this end, we are exploring and pursuing these sectors to support future inmate
reentry, to enable the organization to remain solid, financially, and to support the Federal
Government’s greening initiatives.

8 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

As the Federal Government curtails expenses through energy conservation and eco-sensitive
practices, and the world moves toward renewable energy sources, waste and pollution
prevention, the up-and-coming industries guiding America to reach its goals will require
thousands of skilled workers. The environmental era holds significant potential for federal
inmates to become technically proficient in areas such as zero waste to landfill
manufacturing, closed loop recycling, environmental testing, and reclamation and rebuilding
programs. We have already begun this journey.
We will continue to carefully monitor the corporation’s financial position and, like our
predecessors who weathered tough economic times and challenges over the decades, we too
will continue to successfully fulfill FPI’s mission and emerge even stronger in the years to
follow.

We are in the business of "changing lives,"
and this precept shapes the way
we view business.

Paul M. Laird
Chief Operating Officer
Federal Prison Industries

F P I A N N UA L R E P O R T 2 0 0 9 9

Industrial Programs, Locations,
Inmate Employment and
Net Sales as of September 30, 2009

Recycling Activities

Industrial Products

Fleet Management/
Vehicular Components

Atwater, CA
Elkton, OH
Fort Dix, NJ
Leavenworth, KS
Lewisburg, PA
Marianna, FL
Texarkana, TX
Tucson, AZ

Butner, NC
Cumberland, MD
El Reno, OK
Lompoc, CA
Pekin, IL
Terminal Island, CA
Texarkana, TX

Bastrop, TX
Bennettsville, SC
Gilmer, WV
Herlong, CA
La Tuna, TX
Terre Haute, IN
Three Rivers, TX
Victorville, CA

Inmates Employed*

860

1,049

1,809

Net Sales**

$9.2

$31.5

$261.2

Some locations have multiple plants.
*There are an additional 256 inmates working in Customer Service, Accounts Payable, and Product Support. The total
number of inmates who worked for Federal Prison Industries as of September 30, 2009, was 18,972 (this includes 3,894
inmates employed in support positions).
**Dollars in millions

10 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

Office Furniture

Services

Electronics

Clothing & Textiles

Allenwood, PA
Ashland, KY
Beckley, WV
Coleman, FL
Florence, CO
Forrest City, AR
Milan, MI
Schuylkill, PA
Talladega, AL

Alderson, WV
Bryan, TX
Butner, NC
Canaan, PA
Carswell, TX
Dublin, CA
Eglin, FL
Elkton, OH
Fort Dix, NJ
Leavenworth, KS
Marianna, FL
McCreary, KY
Montgomery, AL
Morgantown, WV
Petersburg, VA
Sandstone, MN
Sheridan, OR
Tallahassee, FL

Beaumont, TX
Big Spring, TX
Danbury, CT
Englewood, CO
Fairton, NJ
Lexington, KY
Lompoc, CA
Loretto, PA
Marion, IL
McKean, PA
Memphis, TN
Otisville, NY
Oxford, WI
Phoenix, AZ

Atlanta, GA
Beaumont, TX
Big Sandy, KY
Butner, NC
Edgefield, SC
Fort Dix, NJ
Greenville, IL
Hazelton, WV
Jesup, GA
Leavenworth, KS
Lee, VA
Manchester, KY
Miami, FL
Oakdale, LA
Pollock, LA
Ray Brook, NY
Safford, AZ
Sandstone, MN
Seagoville, TX
Terre Haute, IN
Waseca, MN
Yazoo City, MS

3,158

2,761

2,574

6,505

$130.1

$33.1

$161.5

$262.7 Net Sales**

Inmates Employed*

F P I A N N UA L R E P O R T 2 0 0 9 11

Fiscal Year 2009 Recap

Distribution of FPI’s Revenues
• Inmate Workers: 18,972
• Percent of Eligible
(medically able/sentenced)
Population Employed: 16%
• Employment Goal: 25%
• Inmate Pay Rates: 23 cents to

79.7 %
purchase of
materials and
supplies from
private sector
vendors

$1.15 per hour
• Factories: 98 factories at 71
locations

16.7 %
staff salaries
3.6 %
inmate pay
(some of which is used
to meet financial
obligations and for
commissary purchases
of products that are
supplied by
local vendors)

Fiscal Year 2009 vs. 2008 Comparison
MILLIONS OF DOLLARS

2009

2008

Net sales

$885.3

$854.3

Net income

($35.9)

$3.1

Sales dollars spent on purchases from private sector

$576.7

$578.9

Inmates employed

18,972

21,836

12 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

Annual and Projected Inmate Employment

30,000
28,000
26,000
24,000

23,152
21,836

21,778

22,000

21,205
20,274
19,337

20,000

9/30

02

03

04

20,038*

19,720
18,972

05

06

07

08

09

10

Total institutions activated FY 2003 through FY 2009: 17
* Projected

Annual Inmate Populations and Projections
213,242

220,000

208,745
200,020

200,000

201,668

192,584
187,394
179,895

180,000

172,499
163,436

160,000
140,000

9/30

02

03

04

05

06

07

08

09

10

* Projected

F P I A N N UA L R E P O R T 2 0 0 9 13

UNICOR taught me that a mature
adult works and pays his own way
in life...and anything worth
having is worth working for.
— inmate J. Green,
USP Pollock

14 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

S TA R T I N G O V E R

More than 40,000 inmates are released each year from federal prisons. Eventually, 98 percent
of the entire federal inmate population will be released. As they return to our communities,
too many will be minimally prepared, at best, to re-establish their lives in a modern society,
having spent five, ten, perhaps twenty years away from the world we know. Many factors
influence whether these men and women successfully reenter their communities, the most
prolific one being the ability to obtain sustainable employment. That’s where Federal Prison
Industries, Inc. (FPI) plays a key role.
For the last 75 years, FPI, widely known by its trade name, UNICOR, has facilitated the
offender’s transition from federal inmate to law-abiding citizen. More succinctly, FPI has
helped those lacking positive initiative become productive citizens. We accomplish this by
providing a platform of job skills training and productive work experience to enhance the
offender’s prospects of securing meaningful post-release employment.
Our Annual Report theme, “75 Years of Changing Lives,” could not be more fitting in
describing FPI’s true merits. It inherently teaches the value of earning a paycheck and
represents a “second chance” for a brighter future to those who participate in the program.
In recognition of FPI’s 75th milestone, a number of federal inmates in correctional institutions
across the country, volunteered to take part in an essay contest to share their thoughts about
the program. The essay’s theme was “What UNICOR Means to Me.”
Excerpts from several essays appear throughout this Report and provide an “insider glimpse”
of the many ways FPI continues to impact so many lives, both within and beyond prison
walls.
The “Yesterday and Today” insights which follow, speak volumes about FPI’s unique story.
We believe they will leave an indelible impression of the role this critical correctional
program continues to play as an investment in all our futures.

F P I A N N UA L R E P O R T 2 0 0 9 15

Starting Over continued

The typical inmate entering federal prison has an 8th grade education, will serve a ten-year
sentence for a drug-related offense, and has never held a steady job. Inmates who volunteer
to work in UNICOR learn and practice the most valuable skill of all: How to work.
Low self-esteem is replaced with confidence, inspiring inmates to succeed after years of
struggle.

Yesterday:

When I got off the bus at FCI Oakdale, on that cold January wintry evening back in 1998, I
was a tewenty-two year old who had no previous work history, no purpose, no goals, and no
aspirations, and I was a newly convicted felon who had no high school diploma. My life was
hollow inside like a piece of rotten wood.

Today:

UNICOR changed my life in many ways...When I first came into the federal system, I tested on
a third grade level, but with the constant encouragement from various UNICOR supervisors, I
was able to work extremely hard to earn my G.E.D. and have taken several self-study courses.
For the past decade, I have made responsibility my first priority... When I encounter other
inmates who appear to be in a stagnant place of uncertainty, I try to share with them the
benefits of working in the UNICOR factories and the gratifying impact it had on my personal
life.
— inmate F. Smith, FCC Forrest City , Arkansas

For those inmates who take personal responsibility to rebuild their lives during incarceration,
the odds for success upon release from prison are significantly increased. The work and life
skills federal inmates acquire unleash a potential most never knew they had.

16 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

Yesterday:

By the time my first day in UNICOR was over, I was tired, but also felt a strange sense of
relaxation. For the first time in my recent memory, I felt as if I had done something
constructive with my time.

Today:

During this journey of self-improvement, I have gone from a Junior Draftsman, to a Team
Leader, and ultimately, to where I am now — the Department Trainer.
Today, I am still learning, improving, and I am even more motivated about getting out,
knowing that I have prepared myself for the real world. I have spent long hours studying
computer software, which was not easy. But something worth learning never is...
I believe that the fundamental difference between success and recidivism is education and
job skills training, and thanks to the drafting department in UNICOR, I have gained both.
Prison time does not have to mean “dead time.”
— inmate A. Sims, FCI Englewood, Colorado

No matter what the job, the fundamental cornerstone of a successful employee — a positive
work ethic — is a critical trait employers seek when hiring individuals: being a dependable
team player, accepting supervisory direction, and taking pride in a job well-done. UNICOR
helps develop and solidify this foundation.
Yesterday:

Like thousands of inmates I had a prison job. However, sweeping and mopping, buffing floors
and picking up trash was far from rewarding work. Every day was a repeat of the day before.
Time moved at a snail’s pace. Each morning those floors looked as if I had not done a
thing, and I would gather together a broom, a mop and a bucket and do it all over again,
and again, and again...

Today:

Being a part of UNICOR has raised my self-esteem to levels unfelt in years... I have learned to
work alongside people of various races and intellects. Now I see and understand the benefits
diversity brings to an organization. People coming from different backgrounds offer several
possible solutions to a problem, and our working together to achieve a common goal helps
bring us together outside of work, which eases tensions on the yard...
My days (as a metal fabricator) are fulfilling now, and I look forward to going to work as
part of a team, where I help produce a valuable piece of machinery that will be a
functioning part of my nation’s armed forces long after I am released...I look forward to
being a productive citizen, working in a trade I learned in UNICOR.
— inmate T. Kinerk, FCI Herlong, California

F P I A N N UA L R E P O R T 2 0 0 9 17

Starting Over continued

For every inmate who commits an offense, other people’s lives are disrupted and, at times,
impaired. UNICOR’s societal benefits reach far and wide, extending well beyond the confines
of prison. Inmates who work in UNICOR operations are required to pay up to one half of
their earnings toward crime victim restitution to fulfill outstanding legal obligations and/or
to help support their families. Historically, up to $3 million has been deducted from inmate
wages each year to help satisfy these obligations.

Yesterday:

There I was, sitting in USP Terre Haute, listening to my new cell mate ramble on and on
about my new environment. I listened for awhile and then tuned him out, lost in my own
anxious thoughts. How did I end up here? What about my children, my family, my friends;
especially my mother? How am I going to survive under these conditions? Too many
questions, not enough answers.

Today:

...The unique enabling financial benefits of working in UNICOR have proven to be priceless. I
have been able to send my children birthday and Christmas gifts, buy needed shoes, coats
and school materials, remain in frequent contact with them, assist with monthly bills, and
be a positive influence in their lives. To my children, my name is still “Daddy” after all these
years... UNICOR has not only sustained me during my incarceration, but will help me to
balance my future. To this end, UNICOR has enabled me to fully pay off my $10,000 court
assessment and fine; a truly incredible accomplishment. UNICOR has truly lived up to its
mission statement in my life.
— inmate J. Shorter, FCI Butner-Medium, North Carolina

The collateral consequences of reentry touch everyone — not just the former offender who
faces numerous challenges and critical choices along the road toward a productive life after
prison. As a society, we are all impacted by the sheer volume of releasing offenders and the
associated high rates of recidivism, leading to destabilized communities, rising
unemployment, public health concerns, disenfranchisement, and a revolving environment of
escalating crime. Yet, it need not be this way. As one inmate said...

18 F P I A N N UA L R E P O R T 2 0 0 9

75 years of changing lives

UNICOR has changed my life in a positive fashion by giving me an avenue to follow which,
with hard work and a drive to succeed, will lead me to that very second chance we all wish
for. On my own, I could never be sure what the future would hold in store for me, but with
UNICOR as a partner, lending a hand in my rehabilitation process, I know I can pay my
debt to society and still come out with the confidence and values necessary to return to a
clean and proper life. It’s that knowledge, made possible by UNICOR, that has had a truly
prolific and positive change on my life, and eventually will be the key to my success.

We do not profess to hold all the answers. To this end, FPI works with other Bureau of
Prisons components, such as the Inmate Transition Branch, which helps improve federal
inmates’ employment prospects by strengthening their job interview and resume
development skills through a nationwide mock job fairs program. FPI also collaborates with
organizations such as the National Correctional Industries Association (NCIA), to share and
validate ideas and management concepts in line with Today’s realities, with emphasis on
improved offender reentry and public safety in the years to come.
Since 1934, Federal Prison Industries has been a government program that works in every
sense of the word, providing residual benefits: a reduction in government spending, a
strengthened U.S. economy, as well as improved safety and security throughout our Nation’s
correctional facilities and neighborhoods. As inmate S. Ford (FCI Greenville, Illinois) so aptly
summarized...
My cup is raised in toast to your 75th anniversary, UNICOR. Your success has been mine, and
may there be many years of it to come.

F P I A N N UA L R E P O R T 2 0 0 9 19

20 F P I A N N UA L R E P O R T 2 0 0 9

F P I A N N UA L R E P O R T 2 0 0 9 21

Management’s Discussion
and Analysis

GENERAL
Mission
It is the mission of Federal Prison Industries, Inc. (FPI) to employ and provide job skills training to the greatest
practicable number of inmates confined within the Federal Prison System, to contribute to the safety and security
of our federal correctional facilities by keeping inmates constructively occupied, to provide inmates with work
experience, training and skills, to produce market-priced quality goods and services, to operate in a self-sustaining
manner and minimize FPI’s economic impact on private business and labor.
Organizational Structure of Federal Prison Industries, Inc.
FPI is a wholly-owned government corporation created by Congress in 1934. FPI is authorized to operate industries
in federal correctional institutions and disciplinary barracks (18 U.S.C. § 4121 to § 4129). The Director of the Federal
Bureau of Prisons (BOP), who has jurisdiction over all federal correctional institutions, is the Chief Executive Officer.
General management of FPI is provided by the Chief Operating Officer who also serves as an Assistant Director for
the BOP.
In fiscal year 2009, FPI operated in seven business segments: Clothing and Textiles, Electronics, Fleet Management
and Vehicular Components, Industrial Products, Office Furniture, Recycling, and Services. FPI has industrial
operations at 98 factories located at 71 prison locations representing approximately 16% of the work eligible
inmate population as of September 30, 2009. Factories are operated by FPI supervisors and managers, who train
and oversee the work of inmates. The factories utilize raw material and component parts purchased from the
private sector to produce finished goods. Orders for goods and services are obtained through marketing and sales
efforts managed by FPI staff. Some products and all services are provided on a non-mandatory, preferred source
basis.
FPI processes primarily all customer orders through a centralized customer service center at the Lexington,
Kentucky facility. Vendor payments are processed at a centralized accounts payable center at the Butner, North
Carolina facility. In addition, FPI performs product development, testing and costing at its facility in Englewood,
Colorado.
Financial Structure
FPI operates as a revolving fund and does not receive an annual appropriation. The majority of revenues are
derived from the sale of products and services to other federal departments, agencies, and bureaus. Operating
expenses such as the cost of raw materials and supplies, inmate wages, staff salaries, and capital expenditures are
applied against these revenues resulting in operating income or loss, which is reapplied toward operating costs for
future production. In this regard, FPI makes capital investments in buildings and improvements, machinery, and
equipment as necessary in the conduct of its industrial operation.
While FPI does business with the majority of federal departments, agencies and bureaus, FPI’s largest federal
government customers include the Department of Defense (DOD), the Department of Homeland Security (DHS),
the Department of Justice (DOJ), the General Services Administration (GSA), and the Department of the Army
(DOA).

22 F P I A N N UA L R E P O R T 2 0 0 9

CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of FPI’s financial condition, results of operations, liquidity and capital resources are
based upon FPI’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting
principles based on accounting standards issued by the Financial Accounting Standards Board (FASB), the private sector
standards-setting body. These generally accepted accounting principles require FPI management to make estimates and
judgments that affect the reported amount of assets, liabilities, revenues and expenses. In this regard, FPI management
evaluates the estimates on an on-going basis, including those related to product returns, bad debt, inventories, long-lived
assets, and contingencies and litigation. FPI bases its estimates upon historical experience and various other assumptions
that FPI believes are reasonable under the circumstances. The actual results may differ from these estimates when
assumptions or conditions change.
FPI believes that some of its accounting policies involve complex or higher degrees of judgment than its other accounting
policies. The following accounting policies have been identified by FPI management as being critical and therefore
require more significant estimates or reliance on a higher degree of judgment on the part of FPI management.
Revenue recognition: Revenue is generally recognized when 1) delivery has occurred or services have been rendered, 2)
persuasive evidence of an arrangement exists, 3) there is a fixed or determinable price, and 4) collectability is reasonably
assured. Revenue from contracts that specify a customer acceptance criteria is not recognized until either customer
acceptance is obtained or upon completion of the contract. Provisions for anticipated contract losses are recognized at
the time they become evident. Sales returns are primarily replaced with like items and are recorded as they occur.
Revenue is recognized on multiple element (numerous stages of product delivery, set up, and installation) agreements as
a single unit of accounting for manufactured items when the product has been accepted by the customer. Revenue for
services provided on behalf of FPI is recognized when the service provider presents a valid invoice including a customer
acceptance or completion notice.
Allowance for doubtful accounts receivable: The allowance for doubtful accounts is based upon an analysis of several
factors including payment trends, historical write off experience, credit quality for non-governmental accounts, and
specific analysis of collectability of an account. During the course of time, these factors may change which will cause the
allowance level to adjust accordingly. As part of their analysis, customer accounts determined to be unlikely to be paid
are recorded as a charge to bad debt expense in the income statement and the allowance account is increased. When it
becomes certain that a customer account will not be paid, the receivable is written off by removing the balance from
accounts receivable.
As of September 30, 2009 and September 30, 2008, FPI had established an allowance for bad debt in the amount of $.35
million and $.99 million on accounts receivable balances of $56.06 million and $45.86 million, respectively.
Inventory valuation: FPI maintains its inventory primarily for the manufacture of goods for sale to its customers. FPI’s
inventory is composed of three categories: Raw Materials, Work-in-Process, and Finished Goods. These categories are
generally defined by FPI as follows: Raw Materials consist of materials that have been acquired and are available for the
production cycle, Work-in-Process is composed of materials that have moved into the production process and have some
measurable amount of labor and overhead added by FPI, Finished Goods are materials with FPI added labor and
overhead that have completed the production cycle and are awaiting sale to customers.
Raw material inventory value is based upon moving average cost. Inventories are valued at the lower of average cost or
market value (LCM) and include materials, labor and manufacturing overhead. Market value is calculated on the basis of
the contractual or anticipated selling price, less allowance for administrative expenses. FPI values its finished goods and
sub-assembly items at a standard cost that is periodically adjusted to approximate actual cost. FPI has established
inventory allowances to account for LCM adjustments and excess and/or obsolete items that may not be utilized in future
periods. This valuation method approximates historical cost.
F P I A N N UA L R E P O R T 2 0 0 9 23

P R O G R A M VA L U E S
FPI’s mission is to employ and provide job skills training to the greatest practicable number of inmates in BOP facilities
necessary to ensure the safe and secure operation of such institutions, and in doing so, to produce market priced, quality
goods and services in a self-sustaining manner that minimizes the potential impact on private business and labor.
The goal of FPI is to reduce undesirable inmate idleness by providing a full-time work program for inmate populations
(goal of approximately 25 percent of “work eligible” inmates). Many of the inmates do not have marketable skills. FPI
provides a program of constructive industrial work and services wherein job skills can be developed and work habits
acquired.
As with most governmental programs, the real value of the entity is not readily measured in dollars and cents and is not
always contained in the financial reports. FPI has existed as an effective correctional program for 75 years. In the course
of the years, FPI has positively impacted the lives of countless inmates and staff members that reside and work in the
Bureau of Prisons and the surrounding local communities in which we live.
It is impossible to quantify the extent to which FPI’s success has prevented inmate unrest that would have been costly in
lives as well as dollars. In the face of an escalating inmate population and an increasing percentage of inmates with
histories of violence, FPI’s programs have helped ease tension and avert volatile situations, thereby protecting lives and
federal property. Prisons without meaningful activities for inmates are dangerous prisons, and dangerous prisons are
expensive prisons. The work and education programs of FPI have played an essential role in protecting lives, preserving
stability and saving money in America’s federal prisons.
At the same time, FPI has met its other goal of offering opportunities for inmates who want to take the personal
responsibility for rehabilitating themselves. Most inmates eventually will be returned to society; industrial and
educational programs can help them to steer clear of criminal activity after release. FPI plays a vital role in management
of inmates, and also improves the likelihood that inmates will remain crime-free upon their release from BOP custody. A
comprehensive study conducted by the BOP demonstrated that FPI provides inmates with an opportunity to develop work
ethics and skills, contributes substantially to lower recidivism and increases job-related success of inmates upon release.
This study, recognized as one of the most comprehensive studies on recidivism, indicates that inmates involved in FPI
work programs and educational programs are substantially less likely to return to prison. The impact on the lives of
people who live in the communities in which these inmates will return is immeasurable. Countless lives are spared the
devastating impact of continued criminal activity.
Since coming into existence in the 1930s, FPI has been a reliable defense supplier, especially in times of surge demands.
FPI has received a number of awards for its outstanding performance as a supplier to the DOD.

A N A LY S I S O F F I N A N C I A L S TAT E M E N T S
Cash and Investments
Total Cash decreased $87.1 million, $25.4 million of which was the result of a decrease in cash advances. FPI’s cash
advances are primarily for the purchase of inventory in support of the Fleet Management and Vehicular Components
vehicle retrofitting operation. The change in cash advances represents less than one half of an average month’s sales and
is not deemed to be a significant change. Other major factors in the overall change in cash include a $35.9 million loss, an
increase in Accounts Receivable of $10.8, an increase in Inventories of $14.1 million and an overall decrease in liabilities
of $36.9 million.

24 F P I A N N UA L R E P O R T 2 0 0 9

Accounts Receivable
The Accounts Receivable balance increased $10.8 million during fiscal year 2009, primarily as a result of a strong month in
sales revenue ($76.7 million) in September, a significant portion of which occurred in the latter part of the month. The
Accounts Receivable balance of $55.7 million as of September 30, 2009 represents only 72.7 percent of the month’s sales
revenue. FPI collection efforts continued to improve during FY 2009. FPI was successful in maintaining its days to collect
through enhanced results in the areas of electronic funds transfer and IPAC collections from the DOD. FPI’s average days
to collect for the year was approximately 25. The Accounts Receivable balance (over sixty day old category) decreased
$2.9 million (51%) as of September 30, 2009 compared to September 30, 2008.
Inventory
Inventory increased by $14.1 million during fiscal year 2009. FPI placed an increased emphasis on inventory reduction
during the second half of fiscal year 2009. Significant reductions were achieved as a whole in the majority of the business
segments. The increase was primarily due to production of finished goods for the solar panel operation. These levels
should subside once shipments begin in the first quarter of fiscal year 2010. The Textiles business segment had a total of
$26.6 million in inventory as of September 30, 2009 compared to $24.3 million as of September 30, 2008. This increase is
attributable to the continued growth in the Textiles segment’s sales and in support of the $125.8 million in backlog as of
September 30, 2009.
Other Assets
In fiscal year 2009, other assets decreased by $2.6 million. During fiscal year 2008, FPI established a program to produce
solar panels. Suppliers of solar panel raw materials require customers to advance funds to purchase materials. As of
September 30, 2009, FPI has $4.7 million of outstanding advances for solar panel raw materials compared to $7.9 million
as of September 30, 2008. Also included in other assets is $0.9 million of accumulated costs paid by FPI for partial
completion of customer and vendor contracts.
Liabilities
Total Liabilities decreased by $36.9 million during fiscal year 2009. Decreases were primarily in Accounts Payable and
Deferred Revenue. Accounts Payable decreased $20.0 million during fiscal year 2009. The decrease is reflective of FPI’s
efforts to reduce costs and inventory during the second half of the year and the discontinuation of the customer
incentive program. Also a factor in the decrease is the timing of the final vendor payment run which was completed
three days later in fiscal year 2009 than was in fiscal year 2008. Deferred Revenue decreased $17.6 million during fiscal
year 2009. This 8.4 percent decrease represents a change in customer advances payable on hand primarily for the
retrofitting of vehicles for the DHS. The decrease is insignificant considering the volume of the business segment which
recorded $261.2 million in sales during fiscal year 2009.
Revenue, Cost of Revenue and Net Loss
Total Revenue increased by $17.3 million while total cost of revenue increased by $32.8 million. The higher cost to
revenue ratio is due primarily to an ongoing shift in the source of revenues from the Electronics business segment to
other less profitable business segments. In comparison to fiscal year 2008, fiscal year 2009 sales revenue for the Electronics
business segment decreased by $57.3 million. A significant portion of this decrease is relative to a decline in military
orders for Single Channel Ground-Air Radio System kits and helmets. Contributing to the increased cost to revenue ratio
is excess capacity in the Electronics factories. FPI has initiated deactivation of one Electronics factory which is scheduled to

F P I A N N UA L R E P O R T 2 0 0 9 25

cease operations in the first quarter of fiscal year 2010. In addition, a new product line (Solar Panels) began production in
one factory during 2009 and is expected to record sales revenue in the first quarter 2010. The Clothing and Textiles and
Fleet Management and Vehicular Components business segments had a strong year for revenues. In comparison to fiscal
year 2008, 2009 sales revenue for the Clothing and Textiles business segment increased by $59.0 million. While the
Clothing and Textiles business segment was FPI’s most significant source of earnings during fiscal year 2009, its earnings
rate of 13.8 percent was typically lower than the earnings rate for the Electronics business segment during peak war time
production (fiscal years 2004 through 2007). The Fleet Management and Vehicular Components business segment
increased sales revenue in fiscal year 2009 by $32.1 million in comparison to fiscal year 2008 and was $104.9 million more
than fiscal year 2007. Growth in this segment is attributable to the retrofitted vehicles products sold to the DHS. While
this segment continues to grow, the earnings rate is low (4.4 percent in 2009) due to the high cost of the raw materials –
primarily vehicles. Due to declining interest rates, FPI earned $10.7 million less on cash investments in fiscal 2009
compared to fiscal year 2008. Additionally, during fiscal year 2009 FPI incurred approximately $7.7 million in losses on the
disposition of assets as a result of factory closures.
Business Segments
In fiscal year 2009, FPI’s businesses were organized, managed and internally reported as seven operating segments based
on products and services. These segments are Clothing and Textiles; Electronics; Fleet Management and Vehicular
Components; Industrial Products; Office Furniture; Recycling; and Services. FPI is not dependent on any single product as
a primary revenue source; however, it is dependent on the federal government market for the sale of its products. FPI’s
net industrial income (earnings) at the Business Segment level consist of sales offset by cost of goods sold and under /over
applied overhead. FPI’s net sales and earnings for the fiscal years ended September 30, 2009 and 2008 for each of its
current business segments is presented for comparative purposes:

26 F P I A N N UA L R E P O R T 2 0 0 9

Business Segment
Clothing and Textiles
Sales

Fiscal Year
2009

2008

$262,686

$203,644

$36,165

$21,500

$161,525

$218,848

$6,224

$29,683

$261,242

$229,168

$11,566

$12,761

Sales

$31,533

$26,921

Earnings

($4,969)

($5,277)

$130,088

$129,572

($2,994)

$2,434

Sales

$9,212

$10,505

Earnings

($308)

$829

Sales

$33,069

$35,621

Earnings

($8,070)

($1,583)

$889,355

$854,279

$37,614

$60,347

Earnings
Electronics
Sales
Earnings
Fleet Management and Vehicular Components
Sales
Earnings
Industrial Products

Office Furniture
Sales
Earnings
Recycling

Services

Corporate Total
Sales
Earnings

Liquidity and Capital Resources
During fiscal year 2009, FPI’s net loss of $35.9 million contributed to a substantial reduction in its cash position,
compared with $3.1 million in earnings in fiscal year 2008. However, FPI’s cash still remains strong as a result of the
last several years of DHS demand combined with fiscal years 2004-2007 DOD demand. Factory earnings are expected
to increase to $70.0 million in fiscal year 2010 in comparison to $37.6 million in fiscal year 2009. In fiscal year 2010,
FPI’s cash (excludes advances) is expected to decrease $10.1 million compared to a decrease of $61.7 million in fiscal
year 2009. Reductions in costs and investments in property, plant, and equipment were instituted in FPI’s fiscal year
2010 operating plan.
Possible Future Effects of Existing Events and Conditions
FPI's Recycling business segment is involved in the disassembly of components that may contain heavy metals. FPI
management is committed to operating its recycling program in a manner that is safe and fully compliant with all
applicable laws and regulations. Toward this end, FPI has established Standard Operating Procedures, sought input

F P I A N N UA L R E P O R T 2 0 0 9 27

from regulatory agencies such as Occupational Safety and Health Administration (OSHA) and Environmental
Protection Agency (EPA), and contracted for testing, inspection and technical advice with private companies with
appropriate expertise.
The Office of the Inspector General (OIG) continues its on-going health and safety investigation of FPI’s recycling of
electronics equipment and expects it to be completed in FY 2010. As part of this investigation, the OIG has been
collaborating with a team of occupational health and safety experts from various Federal agencies, including the
Federal Occupational Health Service (FOH), the Occupational Safety and Health Administration (OSHA), and the
National Institute of Occupational Safety and Health (NIOSH). This team has visited the FPI recycling plants and
collected data to review its compliance with health and safety regulations applicable to electronics recycling and to
ensure that FPI has adequately protected staff and inmates from hazards in their work environments. The FOH team
has made several recommendations concerning FPI’s recycling facilities and has been seeking to implement
appropriate measures based on recommendations received thus far. In addition, the Recycling business segment is
planning to review its Standard Operating Procedures based on these recommendations and update if appropriate.
FPI expects to receive a final report in FY2010.
During fiscal year 2010, FPI will continue to accelerate its efforts to become an environmentally-friendly corporation
in both the products it makes, and the raw materials it procures. FPI’s ultimate goal in the ‘greening effort’ is to set
the standard of environmental stewardship.
In its fiscal year 2008, Management Discussion and Analysis, FPI reported a possible return to a tentative fiscal
position once demand for products in support of the war subsides. Demand for these products gradually, but
significantly declined over the course of fiscal year 2009. During fiscal year 2009, FPI faced many financial and
operational challenges. While overall demand for FPI’s products and services remained strong, profit margins were
significantly lower than planned as the result of a product mix that included fewer high profit margin items typically
produced for the war effort. As many of our competitors experienced a downturn in their business, competition for
government business increased, pushing prices and profit margins lower. Adverse legislation in recent years has made
it significantly easier for private sector companies to increase its market share at FPI’s expense. Increases in material
prices and the cost of carrying excess production capacity and inventory also impacted FPI’s profitability. The state of
the economy yielded another unexpected turn in that interest rates severely declined, becoming nearly non-existent.
Historically, FPI has earned significant income from interest earned by investing its cash reserves. Investment income
earned in fiscal year 2009 was $423 thousand dollars compared to $11.1 million in fiscal year 2008.
FPI identified these trends early in the year and instituted aggressive cost containment measures to minimize the
overall impact on its financial position. These measures included a reduction in budgeted general and administrative
and actual overhead expenses and a reduction in plans for investment in property, plant and equipment. In order to
achieve these goals, it was necessary to close or downsize 19 factories and reduce staff and inmate employment.
Additionally, during fiscal year 2009, FPI placed an increased emphasis on marketing strategies. Additional reductions
in costs and investment were instituted in FPI’s fiscal year 2010 operating plan. FPI is working diligently to secure
additional legislative authorities to support its mission and offset legislation that is having an impact on the
program. These cost containment, capacity reduction, marketing and legislative initiatives have FPI well positioned to
capitalize on the opportunities we anticipate in the new year.
FPI has historically focused on cost containment measures, which has allowed it to build sufficient cash reserves
during prosperous periods. While FPI incurred a significant reduction in cash during fiscal year 2009, it still maintains
a considerable reserve. FPI is confident that by maintaining these initiatives, it will continue to meet its mission
challenges of maintaining a ‘self-sufficient’ fiscal position and providing adequate inmate employment levels. FPI
anticipates that it will continue to sustain itself.

28 F P I A N N UA L R E P O R T 2 0 0 9

Office of the Inspector General
Commentary and Summary

This audit report contains the Annual Management Report of the Federal Prison Industries,
Inc. (FPI) for the fiscal years (FY) ended September 30, 2009, and September 30, 2008. In
accordance with the Government Corporation Control Act, as amended (31 U.S.C. §9105), and
under the direction of the Office of the Inspector General (OIG), KPMG LLP performed the
audit in accordance with U.S. generally accepted government auditing standards. The audit
resulted in an unqualified opinion on the FY 2009 financial statements. An unqualified
opinion means that the financial statements present fairly, in all material respects, the
financial position and the results of the entity’s operations in conformity with U.S. generally
accepted accounting principles. For FY 2008, the FPI also received an unqualified opinion on
its financial statements.
KPMG LLP also issued reports on internal control and on compliance and other matters. For
FY 2009, the Independent Auditors’ Report on Internal Control over Financial Reporting
identified one significant deficiency. The significant deficiency relates to vulnerabilities
identified in the FPI’s financial management. Specifically, improvements are needed in the
FPI’s inventory count controls. In the FY 2009 Report on Compliance and Other Matters, the
auditors identified no instances of significant non-compliance with applicable laws and
regulations.
The OIG reviewed KPMG LLP’s reports and related documentation and made necessary
inquires of its representatives. Our review, as differentiated from an audit in accordance
with U.S. generally accepted government auditing standards, was not intended to enable us
to express, and we do not express, an opinion on the FPI’s financial statements, conclusions
about the effectiveness of internal control, conclusions on whether the FPI’s financial
management systems substantially complied with the Federal Financial Management Integrity
Act of 1996, or conclusions on compliance with laws and regulations. KPMG LLP is
responsible for the attached auditors’ reports dated November 6, 2009, and the conclusions
expressed in the reports. However, our review disclosed no instances where KPMG LLP did
not comply, in all material respects, with U.S. generally accepted government auditing
standards.

F P I A N N UA L R E P O R T 2 0 0 9 29

KPMG LLP
2001 M Street. NW
Washington, DC 20036

Independent Auditors' Report on Financial Sta tements
Inspector General
U.S. Department of Justice
Harley G. Lappin, Chief Executive Officer
Board of Directors
Federal Prison Industries, Inc.
u.S. Department of Justice
We have audited the accompanying balance sheets of the u .S. Department of Justice Federal Prison
industries, Inc. (FPI) as of September 3D, 2009 and 2008, and the related statements of operat ions and
cumulative results of operations, and cash flows (hereinafter referred to as "financial statements") for the
years then ended. These financial statements are the responsibility of FPI 's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with audit ing standards generally accepted in the United States of
America and the auditing standards appl icable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the Uni ted States. These standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes consideration of internal control over fina ncial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effecti veness of the FPI's internal control over financial reporting.
Accordingly. we express no such opinion. An audit also incl udes examining, on a test basis, evidence
supporting the amounts and disclosures in the finan cial statements, assessing the accounting principles used
and significant estimates made by management, as well as eval uating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fa irly. in all material respects, the
financ ial position of the U.S. Department of Justice Federal Prison lndustries, Inc. as of September 30,
2009 and 2008, and the results of its operations and cash fl ows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
The infonnation in the Management 's Discussion and Analysis is not a required part of the fina ncial
statements, but is supplementary information required by U.S. generally accepted accounting principles.
We have appl ied certain limited procedures, which consisted principally of inqu iries of management
regardi ng the methods of measurement and presentation of thi s inFormation. However, we did not audit
this information and, accordingly, we express no opi nion on it.

Independent Auditors' Report on Financial Statements
Page 2

In accordance with Government Auditing Siandards, we have al so issued our reports dated November 6,
2009, on our consideration of the FP l' s internal control over financial reporting and our tests of its
compliance with certain provisions of laws, regulations, contracts, and other matters. The purpose of those
reports is to describe the scope of our testing of internal control over financial reporting and compliance
and the results of that testing, and not to provide an opinion on the intemal control over financial reporting
or on compliance. Those reports are an integral part of an audit perfonned in accordance with Government
Auditing Standards and should be read in conjunction with thi s report in assessing the results of our audits.

November 6, 2009

KPMG LLP
2001 M Street, NW
Washington, DC 20036

Independent Auditors' Report on Internal Control over Financial Reporting
Inspector General
U.S. Department of Justice
Harley G. Lappin, Chief Executive Officer
Board of Directors
Federal Prison Industries, Inc.
U.S. Department of Justice
We have audi ted the balance sheets of the U.S. Department of Justice Federal Pri son Industries, Inc. (FPI)
as of September 30, 2009 and 2008, and the related statements of operations and cumulative resul ts of
operations, and cash flow s (hereinafter referred to as "finan cial statements") for the years then ended, and
have issued our report thereon dated November 6, 2009.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America and the auditing standards appl icable to financial audits contained in Government Auditi ng
Standards, issued by the Comptroller General of the United States. These standards require that we plan
and perfonn the audits to obtain reasonable assurance about whether the financial statements are free of
material mi sstatement.
-The management of FPr is responsible for establ ishing and maintaining effective internal control. In
planning and perfonning our fisca l year 2009 audit, we considered the FP I's internal control over finan cial
reporting by obtaining an understanding of the FPI' s internal control, detennining whether internal controls
had been placed in operation, assessing control risk, and perfonning tests of controls as a bas is for
designing our auditing procedures for the purpose of ex pressing our opinion on the fin ancial statements.
To achieve thi s purpose, we did not test all internal controls relevant to operating objectives as broadly
defined by the Federal Managers' Fil1ancial/ntegrity Acf oj /982. The objective of our audit was not to
express an opinion on the effectiveness of the FPl's internal control over financial reporting. Accordingly,
we do not express an opinion on the effectiveness of the FPI's internal control over financ ial reponing.
Our consideration of internal control over financia l reponing was for the li mited purpose described in the
preced ing paragraph and was not designed to identify all deficiencies in the internal control over finan cial
reporting that might be defi ciencies, significant deficiencies, or material weaknesses.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the nonnal course of perfonning their assigned function s, to prevent, or
detect and correct mi sstatements on a timely basis. A significant defi ciency is a deficiency, or a
combination of deficienc ies, in internal control that is less severe than a material weakness, yet important
enough to merit attention by those charged with governance. A material weakness is a defi ciency, or
combination of deficiencies, in internal control. such that there is a reasonable possibility that a material
misstatement of the entity's fin ancial statements will not be prevented, or detected and corrected on a
timely basis.

independent Auditors ' Report on Internal Control over Financial Reporting
Page 2

In our fi scal year 2009 audit, we did not identi fy any defi ciencies in internal control over fin ancial
reporti ng that we consider to be material weaknesses, as defined above. However, we identified
deficiencies in internal control over fin ancial reporting that we consider to be a significant defi ciency and
that are described in Exhibit I. Exhibi t II presents the status of prior years ' find ings and recommendations.
The FPI 's responses to the find ings identified in our aud it are presented in the Exhibi t I. We did not audit
the FPI 's responses and, accordingly, we express no opinion on them.
Th is report is intended solely for the information and use of the FPl' s management, the U.S. Department of
Justice Office of the Inspector General , OMB, the U.S. Government Accountabi lity Office, and the U.S.
Congress and is not intended to be and should not be used by anyone other than these specified parties .

November 6, 2009

EXHmlT I
SIG NIFICANT DEFIC IENCY

IMPROVE MENT S ARE NEEDE D IN INV ENTORY CO NTROLS

During the 2009 audit we observed and tested the inventory cycle count process and the annual Work In
Process (WI P) inventory counts. We noted that the inventory cycle count process lacked proper
segregation of duties, was incorrect ly performed, and lacked adequate documentation to support the weekly
cycle count. In addi tion, the WIP inventory count process lacked proper segregation of duties and was
incorrectly performed.
During our review of the inventory cycle count process, we observed one individual generate the inventory
stock listing from the SAP Millennium system inventory count, supervise the inventory count, and record
the results in SAP. In another instance we noted that the individuals did not perform a physical inventory
count of the materials and goods in stock. Instead, they incorrectly compared the inventory stock listing
generated from SAP to inventory stock listings. In addition, in reviewing cycle count documentation we
identified cycle counts perfomled lacking proper segregation of duties, inventory count adjustments
recorded to the general ledger that were not properly reviewed and authorized, and periods of time when
cycle counts were not performed weekly or the cycle count documentation was not maintained.
During our review of the wrp inventory counts we identified a count performed lacking proper segregation
of duties. This count team consisted of one individual, which did not provide for the verification of the
accuracy of the counts. In another instance, proper procedures were not followed. The count team
performed the work in process inventory whil e referring to SAP reports that identi fi ed inventory rather than
perfonning the count only through observation to ensure the count was "bl ind" to the amounts mai ntained
in SAP.
As a result of these weaknesses, differences in the quantities of stock in raw materials, sub-assembly, work
in process, and fi nished goods from the quanti ties and amounts recorded in the ledger may not be identified
through the performance of the inventory counts and the general ledger may not be adjusted accurately for
the inventory count resu lts.
FP I Program Statement Number 8331.02, "Physiclllll1vemories - FPf' dated November I, 2000, states
"Random (inventory) counts are to be performed weekly unless otherw ise waived by the Controller. The
A W(I&E)/SOI is to ensure that only qualified personne l who are not otherwise involved in in ventory
control or record-keeping perform the physical inventory. Two-member teams are to be used to perform
the physical inventory. Each member must count each item independently to ensure count integrity.
lnventory teams may use printouts containing warehouse stock location, unit of issue, nomenclature for
recording counts, and identifying stock items that have been counted. However, these printouts are not to
contain the actual item counts. The AW/(l&E)/SOI is to review all inventory discrepancies and
adj ustments to the inventory records."
The FPl factory and warehouse personnel, in performing inventory counts, may not always maintain an
awareness of the proper segregation of duties necessary in the superv ision and perfomlance of inventory
counts and the necessity of properly identify ing stock. The fPI management and staff responsible fo r
documenting, recordi ng, and maintaining the inventory count results may not always maintain an
awareness of the proper controls necessary for the review and authorization of inventory adj ustment entries

resulting from the inventory process or the need to maintain complete files documenting the performance
of inventory counts.

We recommend that FPI:
1. Emphasize the importance of adhering to the proper segregation of duties regarding inventory coum
duties for both the cycle counts and the work in process inventory counts, the necessity to perform
these inventory counts properly. the requirement for proper review and authorization of adjusting
entries resulting from the inventory counts, and the need to maintain complete files documenting the
performance and results of inventory counts.
Management Response:
FP I's management concurs with the recommendation and is developing an Inventory Management
Corrective Action plan that will be implemented during the month of December.
2. Consider review ing and testing the adequacy of the performance of inventory counts. FPI management
may consider utilizing the Program Review Division or utilizing headquarters management and staff to
observe and document the perfonnance of inventory counts in order to identify perfonnance matters for
improving the inventory count processes.

Management Response:
FPI's management concurs with the recommendation and is developing an Inventory Management
Corrective Action plan that will be implemented during the month of December.

EXHIBIT"
STATUS OF PRIOR YEARS' FINDINGS AND RECOMMENDATIONS

As required by Government Auditing Standards issued by the Comptroller General of the United States,
and by OMB Bulletin No. 07-04, Audit Requirements for Federal Financial Staremellls. as amended, we
have reviewed the status of prior years' findings and recommendations'. The fo llowing table provides our
assessment of the progress FPI has made in correcting the previously identified significant deficiency. We
also provide the Office of the Inspector General report number where the deficiency was reported, our
recommendation for improvement, and the status of the condition as of the end of fiscal year 2009;
Report

Annual

Financia l
Statement
Fiscal
Year 2007
Report No.
08-10

Annual
Financial
Statemen t
Fiscal
Year 2008
Report No.
09-10

Reportable
Condition

Recommendation

Status

Improvements
are needed in
FPl's Financial
Management
Systems' General
Controls.

Recommendation No.6: Use a Secure Sockets
Layer (SSL) wrapper to encrypt unsecured
protocol (FTP.etc.)transmissions.

Completed·

Improvements
are needed in
FPl's Finaocia l
Management
Systems' General
Controls.

Recommendation No. I: Develop policies and
procedures to govern the control of network
configuration file s, copying of network
configuration files using secure copy
application FTP, andmanagementofport
security.

Completed

Recommendation No.2: Perform and
document monthly audits to ensure the
impl ementation of the newly developed policies
and procedures.

Completed

Recommendation No. 3: Reassess the roles
and responsibil ities of the Authorization, Aud it,
Licensing, and Compliance (AALC) group;
adjust and communicate as appropriate. In
addition, the communication should also
emphasize the importance of following the
approved procedures that have been instituted
by the FP I Chief Information Officer.

Compl eted

Report

Reportable
Condition

Recommendation

Status

Recommendation No.4: Revise. the
documented procedures for the account
management process and establish clear roles
and responsibilities related to account
management. The revised procedures shouJd
incl ude requesting, establishing, and recertification and di sablement of user access.

Compl eted

Recommendation No. 5: Distribute the revised
procedures authorized and approved by
stakeholders to the appropriate responsible
parties.

Compl eted

Recommendation No.6: Revise and maintain
documentation addressing segregation of duties
and the associated mitigating controls.

Completed

Recommendation No.7: Implement an
automated account management solution to
enforce segregati on of duti es rules and alert
management of any conflicts that arise.

Compl eted

Reco mmendation No. 8: Ensure that default
config uration settings and default passwords are
removed pri or to new services being introduced
into the IS environm ent.

Completed *

Recommendation No. 9: Continue to scan the
IS environment for default confi guration
settings and default passwords. make the
appropriate changes, and update the applicable
baseline config urations and documentation .

Completed *

• Sufficient progress has been made in addressing th is findin g and the related recommendation such that the
remaining risk of misstatement no longer merits the anention by those charged with governance. Therefore. the
cond ition has been downgraded to a defi ciency in internal control.

KPMG llP
2001 M Street. NW
Washington, DC 20036

Independent Auditors' Report on Compliance and Other Matters
Inspector General
U.S. Department of Justice
Harley G. Lappin, Chief Executive Officer
Board of Directors
Federal Pri son Industri es, Inc.
United States Department of Justice
We have audited the balance sheets of the U.S. Department of Justice Federal Prison Industries, Inc. (F PI)
as of September 30, 2009 and 2008, and the related statements of operations and cumulative results of
operations, and cash flows (hereinafter referred to as "financial statements") for the years then ended, and
have issued our report thereon dated November 6, 2009.
We· conducted our audits in accordance with auditing standards general.1y accepted in the United States of
America and the auditing standards applicable to finan cial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. These standards require that we plan
and perfonn the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement.
The management of the FPI is responsible for complying with laws, regulations, and contracts appli cable to
the FPI. As part of obtaining reasonable assurance about whether the FPI 's fisca l year 2009 financial
statements are free of material misstatement. we perfonned tests of the FPl 's compli ance with certain
provisions of laws, regulations, and contracts, noncomplian ce with which could have a direct and material
effect on the detennination of the finan cial statement amounts, and certain provisions of other laws and
regulations specified in OMB Bull etin No. 07-04, including the provisions referred to in Section 803 (a) of
the Federal Financial Managemelll Improvement Act of 1996 (FFMIA). We limited our tests of
compliance to the provisions described in the preceding sentence, and we did not test compliance with all
laws, regulations, and contracts appli cable to the FPI. However, providing an opinion on compli ance with
those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.
The results of our tests of compliance described in the preceding paragraph of this report, exclusive of
those referred to in FFMIA, di sclosed no instances of noncompliance or other matters that are required to
be reported herein under Government Auditing Standards or OMB Bulletin No. 07-04.
The results of our tests of FFMIA disclosed no instances in which the FP1 's fi nancial management systems
did not substantially comply with the ( L) Federal fina ncial management systems requirements,
(2) applicable Federal accounting standards, and (3) United States Government Standard General Ledger at
the transaction level.

Independent Auditors' Report on Compliance and Other Matters
Page 2

This report is intended solely for the in fonnatio n and use of the FPI ' s management, the U.S. Department of
Justice Office of the Inspector General , OMB, the U.S. Government Accountability Office, and the U.S.
Congress and is not intended to be and should not be used by anyone other than these specitied parties.

November 6, 2009

Federal Prison Industries, Inc.
Balance Sheets

As of September 30,
(DOLLARS IN THOUSANDS)

2009

2008

Assets
Current:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Other assets

$ 285,559
55,712
264,232
5,962

$ 372,691
44,869
250,116
8,587

Total current assets

611,465

676,263

Property, plant and equipment, net

123,684

131,651

$ 735,149

$ 807,914

Current:
Accounts payable
Deferred revenue
Accrued salaries and wages
Accrued annual leave
Other accrued expenses

$ 48,103
191,314
11,484
10,363
11,780

$ 68,068
208,911
11,506
10,291
13,097

Total current liabilities

273,044

311,873

FECA actuarial liability

13,943

12,010

Total Liabilities

286,987

323,883

4,176
443,986
448,162

4,176
479,855
484,031

$ 735,149

$ 807,914

Total Assets
Liabilities and United States Government Equity

United States Government Equity
Initial capital
Cumulative results of operations
Total United States Government Equity
Total Liabilities and United States Government Equity

The accompanying notes are an integral part of these financial statements.

40 F P I A N N UA L R E P O R T 2 0 0 9

Federal Prison Industries, Inc.
Statements of Operations and
Cumulative Results of Operations

Fiscal years ended September 30,
(DOLLARS IN THOUSANDS)

2009

Revenue:
Net sales
Other revenue

2008

$ 885,265
97,962

$ 854,279
111,670

983,227

965,949

Cost of revenue:
Cost of sales
Cost of other revenue

833,083
101,829

786,131
115,934

Total Cost of Revenue

934,912

902,065

Total revenue

Gross profit
Operating expenses:
Sales and marketing
General and administrative

48,315

63,884

6,364
120,241

6,692
106,246

Total operating expenses

126,605

112,938

Loss from operations
Interest income
Interest expense
Other income, net

(78,290)
423
(17)
42,015

(49,054)
11,144
(15)
41,044

Net income (loss)

(35,869)

3,119

Cumulative results of operations, beginning of fiscal year

479,855

476,736

$ 443,986

$ 479,855

Cumulative results of operations, end of fiscal year

The accompanying notes are an integral part of these financial statements.

F P I A N N UA L R E P O R T 2 0 0 9 41

Federal Prison Industries, Inc.
Statements of Cash Flows

Fiscal years ended September 30,
(DOLLARS IN THOUSANDS)

2009

2008

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Loss on disposal of property, plant and equipment
Changes in:
Accounts receivable
Inventories
Other assets
Accounts payable and accrued expenses
Deferred revenue
Net cash provided by operating activities

$ (35,869)

$

3,119

10,739
7,970

9,775
134

(10,843)
(14,116)
2,625
(19,299)
(17,597)

23,392
(68,893)
(6,571)
4,345
22,130

(76,390)

(12,569)

(8,972)
(1,770)

(9,685)
(2,145)

(10,742)

(11,830)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment
Construction-in-progress of plant facilities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payment of Note Payable

(20,000)
-

Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of fiscal year
Cash and cash equivalents, end of fiscal year

-

(20,000)

(87,132)
372,691
$ 285,559

(44,399)
417,090
$ 372,691

The accompanying notes are an integral part of these financial statements.

42 F P I A N N UA L R E P O R T 2 0 0 9

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

Note 1. Organization and Mission
Federal Prison Industries, Inc. (FPI) was established in 1934 by an act of the United States Congress. FPI operates
under the trade name UNICOR, as a wholly-owned federal government corporation within the Department of
Justice, and functions under the direction and control of a Board of Directors, (the “Board”). Members of the
Board are appointed by the President of the United States of America and represent retailers and consumers,
agriculture, industry, labor, the Attorney General, and the Secretary of Defense. FPI’s statutory mandate is to
provide employment and training for inmates in the Federal Prison System while remaining self-sufficient through
the sale of its products and services.
FPI’s federal government customers include departments (percent of Revenue shown in parenthesis), agencies and
bureaus such as the Department of Defense (47%), the Department of Homeland Security (25%), the Department
of Justice (6%), the Department of the Army (4%), and the General Services Administration (3%). These and
other federal organizations are required to purchase products from FPI, if its products meet the customer’s price,
quality, and delivery standards, under a mandatory source preference specified in FPI’s enabling statute and the
Federal Acquisition Regulation.
FPI has industrial operations at 98 and 109 factories located at 71 and 76 prison facilities that employed 18,972
and 21,836 inmates representing approximately 16% and 17% of the work eligible inmate population as of
September 30, 2009 and September 30, 2008, respectively.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting
FPI transactions are recorded on the accrual basis of accounting. Under the accrual basis, revenues are recorded
when earned and expenses are recorded when incurred, regardless of when the cash is exchanged.
Basis of Presentation
FPI has historically prepared its external financial statements in conformity with U.S. generally accepted
accounting principles based on accounting standards issued by the Financial Accounting Standards Board (FASB),
the private sector standards-setting body. The Federal Accounting Standards Advisory Board (FASAB) has been
designated as the standards-setting body for federal financial reporting entities with respect to the establishment
of US GAAP. FASAB allows certain government agencies to utilize FASB standards for Financial Statement
presentations.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Cash and Cash Equivalents
FPI considers all highly liquid investments purchased with an original maturity of three months or less to be cash

F P I A N N UA L R E P O R T 2 0 0 9 43

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

equivalents. FPI limits its investment activities and cash equivalents to short-term overnight repurchase
agreements with the Bureau of Public Debt of the United States Treasury. The market value of these overnight
repurchase agreements is equivalent to cost.
Accounts Receivable / Concentration of Credit Risk
Financial instruments that potentially subject FPI to concentrations of credit risk consist primarily of accounts
receivable. FPI sells products and services to various federal government departments, agencies and bureaus, as
well as certain private sector companies, without requiring collateral. Accounts receivable consists of amounts
due from those entities and is stated net of an allowance for doubtful accounts.
FPI routinely assesses the payment histories of its federal customers and the financial strength of its private sector
customers and maintains allowances for anticipated losses as they become evident. In this regard, an insignificant
amount of accounts receivable remained past due at September 30, 2009 and September 30, 2008. A majority of
these past due items relate to billings to various entities within Department of Defense (DOD) who rely on the
Defense Finance and Accounting Service (DFAS) to process vendor payments. Historically, customer payments
processed through DFAS have generally taken longer to receive than payments from other federal and private
sector customers. FPI believes that ultimately, a majority of its past-due accounts receivable are fully collectable.
The amount due FPI, net of allowances, from DOD for the fiscal years ended September 30, 2009 and 2008 was
$38,037 and $31,148 respectively.
While federal accounts receivable are normally fully collectible in accordance with federal law, FPI has established
an allowance for future losses against its federal accounts receivable to account for potential billing errors related
to pricing and customer discounts, as well as instances of expired or cancelled funding from its federally
appropriated customers. At September 30, 2009 and 2008, FPI’s allowance for doubtful accounts is stated at
approximately $345 and $990, respectively, of which approximately $285 and $891, respectively, represents the
amounts allocated against federal accounts receivable.
Inventories
FPI maintains its inventory primarily for the manufacture of goods for sale to its customers. FPI’s inventory is
composed of three categories: Raw Materials, Work-in-Process, and Finished Goods. These categories are generally
defined by FPI as follows: Raw Materials consist of materials that have been acquired and are available for the
production cycle, Work-in-Process is composed of materials that have moved into the production process and have
some measurable amount of labor and overhead added by FPI, Finished Goods are materials with FPI added labor
and overhead that have completed the production cycle and are awaiting sale to customers.
Raw material inventory value is based upon moving average cost. Inventories are valued at the lower of average
cost or market value (LCM) and include materials, labor and manufacturing overhead. Market value is calculated
on the basis of the contractual or anticipated selling price, less allowance for administrative expenses. FPI values
its finished goods and sub-assembly items at a standard cost that is periodically adjusted to approximate actual
cost. FPI has established inventory allowances to account for LCM adjustments and excess and/or obsolete items
that may not be utilized in future periods. This valuation method approximates historical cost.
Advances to Vendors
FPI generally does not offer advances to the public, however, where warranted, FPI will on occasion make an
advance to a vendor upon their request. Historically, these advances have been insignificant and made primarily
to the Industries for the Blind. During 2008, FPI established a pilot program to produce solar panels in
44 F P I A N N UA L R E P O R T 2 0 0 9

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

anticipation of an expanding federal market as a result of Executive Order 13423 “Strengthening Federal
Environmental, Energy, and Transportation Management,” which requires federal agencies to improve energy
efficiencies by the year 2015. Customarily, suppliers of the raw materials to produce solar panels require advances
to procure their own materials. Prior to issuing any advances to a vendor, the Centralized Accounts Receivable
section performs a review as though they were a public customer, to include performing a due diligence review to
assess risk and a review of applicant financial statements. A letter of credit is obtained as needed based on the
results of this review. The FPI Controller approves advances prior to their disbursement. Advances are reduced by
offset to the vendor invoice as goods are delivered.
Revenue Recognition
FPI sells a wide range of products and services to a diversified base of customers, primarily governmental
departments, agencies and bureaus. Revenue is generally recognized when delivery has occurred or services have
been rendered, persuasive evidence of an arrangement exists, there is a fixed or determinable price, and
collectability is reasonably assured. Revenue from contracts that require customer acceptance are not recognized
until either customer acceptance is obtained, or upon completion of the contract. Provisions for anticipated
contract losses are recognized at the time they become evident. Sales returns are primarily replaced with like
items and are recorded as they occur.
Revenue is recognized on multiple element agreements as a single unit of accounting for manufactured items
when the product has been accepted by the customer. Revenue for services provided on behalf of FPI is
recognized when the service provider presents a valid invoice including a customer acceptance or completion
notice.
FPI records as other revenue the shipping and handling costs that have been billed to our customers, installation
costs for FPI products, and items procured for its customers as part of procurement services provided by the
Interagency Solutions and Procurement Branch. The cost of providing this service is recorded as a cost of other
revenue.
Deferred revenue is comprised of customer cash advances, which have been paid to FPI prior to the
manufacturing of goods, delivery of goods, or performance of services.
Other income is comprised primarily of imputed financing for retirement, health benefits and life
insurance (Note 8).
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed
using the straight-line method over the following estimated useful lives:
Machinery & Equipment
Computer Hardware
Computer Software
Building & Improvements

Years
5 –.25
5 –.10
3 –.5
24 –.40

Upon retirement or disposition of property and equipment, the related gain or loss is reflected in the statements
of operations. Repairs and maintenance costs are expensed as incurred.

F P I A N N UA L R E P O R T 2 0 0 9 45

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

Taxes
As a wholly-owned corporation of the federal government, FPI is exempt from federal and state income taxes,
gross receipts tax, and property taxes.
Reclassifications
Certain fiscal year 2008 financial statement line items have been reclassified to conform with the current year
presentation.
Note 3. Accounts Receivable, Net
Accounts receivable, net consists of the following:
As of September 30,
Intragovernmental billed receivables
Private sector billed receivables
Less allowance for doubtful accounts
Accounts receivable, net

2009
$ 47,083
8,974
56,057
345

2008
$ 37,388
8,471
45,859
990

$ 55,712

$ 44,869

FPI incurred bad debt expense of $(530) and $1,097, respectively, for the fiscal years ended September 30, 2009
and 2008.
FPI incurred minimal direct accounts receivable write-offs during fiscal year 2009. The net downward adjustment
of $645 to allowance for doubtful accounts during fiscal year 2009 resulted in negative bad debt expense. FPI’s
accounting policy regarding the recording of allowance for doubtful accounts is discussed in note 2 — Accounts
Receivable / Concentration of Credit Risk.

Note 4. Inventories, Net
Inventories, net consist of the following:
As of September 30,
Raw materials
Raw materials – vehicles
Work-in-process
Finished sub-assemblies
Finished goods
Finished goods – acceptance contracts
Less inventory allowance
Inventories, net

46 F P I A N N UA L R E P O R T 2 0 0 9

2009
$ 75,114
91,890
41,916
8,577
38,050
20,899
276,446
12,214

2008
$ 51,631
96,656
44,318
12,351
37,883
21,777
264,616
14,500

$ 264,232

$ 250,116

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

$91,890 of FPI’s fiscal year 2009 and $96,656 of FPI’s fiscal year 2008, raw materials balance represents vehicles and
component parts for use in the Fleet Management and Vehicular Components business group’s retrofit product
line. A majority of that inventory balance has been contracted on behalf of the Customs and Border Protection
and Bureau of Immigration and Customs Enforcement of the Department of Homeland Security (DHS) for retrofit
services that are performed by FPI. As part of an interagency agreement, DHS provides advance funding to FPI to
procure these vehicles. Revenue is recognized by FPI at the time of shipment of retrofitted vehicles to DHS.
$20,899 of FPI’s fiscal year 2009 and $21,777 of FPI’s fiscal year 2008 finished goods balance represents goods that
have been shipped to customers or their agents, but for which revenue has not been recognized because of
acceptance criteria within the customer contract. The balances as of September 30, 2009 and September 30, 2008
are primarily systems furniture installations and destination acceptance contracts shipped after the cutoff date for
revenue recognition.
Included in total inventories as of September 30, 2009, is $22,752 in raw materials, work-in-process and finished
goods in support of the newly activated solar panels product line. Additionally, FPI has entered into firm
purchase commitments for solar panel materials totaling $173,159; $80,364 for fiscal year 2010, $53,845 for fiscal
year 2011, $11,550 for fiscal year 2012, and an additional $27,400 for fiscal years 2010 through 2014. Solar panel
sales revenue is anticipated to begin in the first quarter of fiscal year 2010.
Note 5. Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following:
As of September 30,
Buildings and improvements
Machinery and equipment
Computer hardware
Computer software

Factory construction-in-progress

2009
$ 181,290
105,401
1,872
6,304
294,867
173,001
121,866
1,818

2008
$ 187,431
112,374
1,660
5,778
307,243
181,328
125,915
5,736

Property, plant and equipment, net

$ 123,684

$ 131,651

Less accumulated depreciation

Depreciation and amortization expense approximated $10,739 and $9,775 for the fiscal years ended September
30, 2009 and 2008, respectively. During fiscal year 2009, FPI invested $10,742 for the purchase and construction of
property, plant and equipment. Additionally, during fiscal year 2009, FPI deactivated factories in an effort to
reduce excess factory capacity. As a result of these deactivations, FPI incurred losses on property plant and
equipment of $7,746.

F P I A N N UA L R E P O R T 2 0 0 9 47

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

Note 6. Other Accrued Expenses
Other accrued expenses consist of the following:
As of September 30,
Materials in transit
Relocation Travel Expense
FECA liabilities – current portion
Financial audit expense
Telecommnication Expense
Utilities
Warranty expense
Other expense

2009
$ 1,580
2,191
1,643
549
1,174
1,401
478
2,764

2008
$ 642
2,713
1,489
307
473
1,026
471
5,976

Other accrued expenses

$ 11,780

$ 13,097

Included in other expense as of September 30, 2009 and September 30, 2008 are accruals for Intra-Departmental
agreements of $73 and $2,399 and accruals for vendor invoices of $1,486 and $1,201, respectively.
Note 7. Business Segments
FPI’s businesses are organized, managed and internally reported as seven operating segments based on products
and services. These segments are Clothing and Textiles; Electronics; Fleet Management and Vehicular
Components; Industrial Products; Office Furniture; Recycling; and Services. These segments represent virtually all
of FPI’s product lines. FPI is not dependent on any single product as a primary revenue source; however, it is
dependent on the federal government market for the sale of its products and services. Fiscal Year 2009 net sales
of $885,265 included $(4,090) recorded to FPI’s Corporate Office. FPI’s net sales for the fiscal years ended
September 30, 2009 and 2008 for each of its business segments is presented for comparative purposes:
Net Sales
For the years ended September 30,

2009

2008

Clothing and Textiles
Electronics
Fleet Management and Vehicular Components
Industrial Products
Office Furniture
Recycling
Services

$ 262,686
161,525
261,242
31,533
130,088
9,212
33,069

$ 203,644
218,848
229,168
26,921
129,572
10,505
35,621

Net sales

$ 889,355

$ 854,279

Business Segment

Regulatory Compliance
FPI’s ability to add or to expand production of a specified product is regulated by the Federal Prison Industries
Reform Act (“the Act”). The Act provides specific guidelines to FPI regarding its methodology for evaluating and
reporting new or expanded products, including requiring FPI to provide direct notice to trade associations and
48 F P I A N N UA L R E P O R T 2 0 0 9

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

interested parties of such actions. Finally, publication of annual decisions of the FPI Board of Directors and semiannual sales disclosures are mandated under the Act.
Note 8. Intra-Department of Justice (DOJ) / Intragovernmental Financial Activities
FPI’s financial activities interact with and are dependent upon those of DOJ and the federal government as a
whole. The following is a discussion of certain intra-DOJ and intragovernmental activities and their relationship
with FPI:
Relationship with the Federal Bureau of Prisons
FPI and the Federal Bureau of Prisons (BOP) have a unique relationship in that the nature of their respective
missions requires the sharing of facilities and responsibilities relative to the custody, training and employment of
federal inmates. The Director of the BOP serves as the Chief Executive Officer of FPI and the Chief Operating
Officer of FPI serves as an Assistant Director of the BOP. The BOP provides land to FPI for the construction of its
manufacturing facilities and both FPI and BOP share certain facilities, generally at no cost to FPI. In accordance
with Managerial Cost Accounting Concepts a reasonable estimate of these costs as provided by the BOP is
included in general expense and other income of FPI for the fiscal years ended September 30, 2009 and 2008,
respectively.
Self Insurance
In accordance with federal government policy, FPI is uninsured with respect to property damage, product liability,
and other customary business loss exposures. Losses incurred are absorbed as a current operating expense of FPI
or, if they are induced by factors related to FPI’s relationship with the Federal Prison System, may be reimbursed
by BOP. Certain other costs, principally relating to personal injury claims, are paid directly by the federal
government.
Federal Employees Compensation Act
The Federal Employees Compensation Act (FECA) provides income and medical cost protection to cover federal
civilian employees injured on the job, employees who have incurred a work-related occupational disease, and
beneficiaries of employees whose death is attributable to a job related injury or occupational disease. The United
States Department of Labor (DOL), which administers FECA, annually charges each federal agency and
department for its applicable portion of claims and benefits paid in the preceding year. As of September 30, 2009
and September 30, 2008, the accrued FECA liabilities as charged to FPI, approximated $1,643 and $1,489,
respectively.
DOL also calculates the liability of the federal government for future claims and benefits, which includes the
estimated liability of death, disability, medical, and other approved costs. Future claims and benefits are
determined from an actuarial extrapolation, utilizing historical benefit payment patterns and calculations of
projected future benefit payments discounted to current value over a 23.5 year period. FPI’s estimated future
liability approximated $13,943 and $12,010 at September 30, 2009 and 2008, respectively.

F P I A N N UA L R E P O R T 2 0 0 9 49

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

Retirement
Substantially all of FPI’s civilian employees are covered under either the Civil Service Retirement System (CSRS) or
the Federal Employees Retirement System (FERS). For employees covered under CSRS (those employees hired
prior to January 1, 1984), FPI contributed approximately 7.0 percent (for normal retirement) or 7.5 percent (for
hazardous duty retirement) of each employee’s salary. CSRS covered employees do not have Federal Insurance
Contributions Act (FICA) withholdings and, thus, are not fully eligible to receive Social Security benefits. For
employees covered by the FERS, (generally those employees hired on or after January 1, 1984), FPI contributed
(for normal retirement) 11.2 percent for fiscal years ended September 30, 2009 and September 30, 2008. FPI
contributed (for hazardous retirement) 24.9 percent for fiscal years ended September 30, 2009 and September 30,
2008.
Under FERS, employees also receive retirement benefits from Social Security and, if applicable, benefits from a
defined contribution plan (thrift). Under the thrift plan, an employee may contribute (tax deferred) to an
investment fund, up to $16,500 of salary for the fiscal year ended September 30, 2009 and $15,500 for the fiscal
year ended September 30, 2008. FPI then matches this amount up to 4 percent, in addition to an automatic 1
percent that is contributed for all FERS employees. Those employees, which elected to remain under CSRS after
January 1, 1984, continue to receive benefits in place, and may also contribute (tax deferred) up to 10 percent of
their salary to the thrift plan, but with no matching amount contributed by FPI.
CSRS and FERS are multi-employer plans. Although FPI funds a portion of pension benefits relating to its
employees, and provides for the necessary payroll withholdings, it does not maintain or report information with
respect to the assets of the plans, nor does it report actuarial data with respect to accumulated plan benefits or
the pension liability relative to its employees. The reporting of such amounts is the responsibility of the United
States Office of Personnel Management (OPM).
FPI’s contribution to both plans approximated $32,325 and $31,585 for the fiscal years ended September 30, 2009
and 2008, respectively.
FPI must recognize its share of the cost of providing pension benefits to eligible employees utilizing cost factors
determined by the OPM. Included in general and administrative expense is approximately $1,043 and $1,274 in
the fiscal years ended September 30, 2009 and 2008, respectively, with an offsetting credit to other income on the
Statements of Operations and Cumulative Results of Operations.
Health Benefits and Life Insurance
FPI, through the OPM, offers health and life insurance plans under which premium costs for health care are
shared between FPI and the employees. A substantial portion of life insurance premiums are paid for by
employees. Amounts paid by FPI for health benefits and life insurance approximated $10,667 and $10,253 for the
fiscal years ended September 30, 2009 and 2008, respectively.
OPM also provides health care and life insurance benefits for FPI’s retired employees. FPI must recognize an
expense related to its share of the cost of such post-retirement health benefits and life insurance on a current
basis (while its employees are still working), with an offsetting credit to other income. Costs in this regard, which
50 F P I A N N UA L R E P O R T 2 0 0 9

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

approximated $8,365 and $7,628 during the fiscal years ended September 30, 2009 and 2008, respectively, were
determined by OPM utilizing cost factors used to estimate the cost of providing post-retirement benefits to
current employees. However, because of the offsetting credit, which is reflected as other income on the
Statements of Operations and Cumulative Results of Operations, the recording of these costs has no impact on
reported net income or cash flows.
Future post-retirement health care and life insurance benefit costs are not reflected as a liability on FPI’s financial
statements, as such costs are expected to be funded in future periods by OPM.

Note 9. Sales and Marketing, General and Administrative Expenses
Sales and marketing, general and administrative expenses consist of the following:
Sales and marketing, general and administrative expenses
Fiscal years ended September 30,
Salaries, wages and benefits
Permanent change of station expense
Purchases of minor equipment
Contract services
Bad debt expense
Credit card services
Travel
Customer Incentives Expense
Personal Computer Expense
Depreciation
Gain on disposition of assets
Loss on Disposition of Assets
Telecommunication Expense
Other Expense
Imputed pension costs (Note 8)
Imputed post-retirement health
care and life insurance cost (Note 8)
Imputed Operating Costs
Sales and marketing, general
and administrative expenses

2009

2008

$ 47,893
2,604
1,076
10,282
(516)
1,051
2,646
3,508
2,033
(52)
7,970
3,097
7,251
1,043

$ 43,278
3,745
1,224
11,045
1,097
2,893
3,516
736
1,651
(8)
134
2,550
4,612
1,274

8,365
28,354

7,628
27,563

$ 126,605

$ 112,938

Other expense is comprised primarily of inmate wages, maintenance agreements, civilian accident compensation
(FECA), financial audit expenses, distributions to factory operations, and certain sales and marketing expenses.
Contract services consist primarily of consulting and sales and marketing fees. Salaries, wages and benefits are
shown net of the imputed financing offsetting credit (Note 8).

F P I A N N UA L R E P O R T 2 0 0 9 51

Fiscal Years 2009 and 2008
Notes to Financial Statements
(DOLLARS IN THOUSANDS)

Note 10. Commitments and Contingencies
Legal Contingencies
FPI is involved in various legal actions, including administrative proceedings, lawsuits, and claims. In the opinion
of the organization’s legal counsel and management, these suits are without substantial merit and should not
result in judgments, which in the aggregate would have a material adverse effect on the organization’s financial
statements.
Lease Commitments
FPI leases certain facilities, machinery, vehicles and office equipment under noncancelable capital and operating
lease agreements that expire over future periods. Many of these lease agreements provide FPI with the option
(after initial lease term) to either purchase the leased item at the then fair value or to renew the lease for
additional periods of time. As of September 30, 2009, future capital lease payments due and future operating
lease commitments total $189 and $172, respectively.
Product Warranty
FPI offers its customers a promise of an “Escape Proof Guarantee” on the products it manufactures. FPI has
analyzed the historical pattern of warranty returns and the adequacy of the warranty returns and allowances. In
this regard, FPI has established an estimate of future warranty returns related to current period product revenue.
Changes in aggregate product warranty liability
Fiscal years ended September 30,

2009

2008

Balance at the beginning of the period
Accruals for warranties issued during the period
Settlements made (in cash or in kind) during the period

$ 471
377
(370)

$ 453
375
(357)

Balance at the end of the period

$ 478

$ 471

Congressional Limitation on Administrative Expenses
Congress has imposed an annual spending limit on certain administrative expenses relating to FPI’s central office
management. These costs include salaries for management personnel, travel expenses and supplies. The
following is a comparison of actual expenses to the limitation imposed:
Congressional limitation on administrative expenses
Fiscal years ended September 30,

2009

2008

Congressional limitation on expenses

$ 2,328

$ 2,328

Expenses incurred subject to Congressional limitation

$ 2,323

$ 2,089

52 F P I A N N UA L R E P O R T 2 0 0 9

UNICOR has given me a solid foundation for a positive future,
and it gives me immense joy to hear work call each morning...
In retrospect, I'm thankful for the lessons I've learned, all I've
accomplished, and look forward to going home, fully capable
to succeed, thanks to UNICOR.

—inmate L. Rogers
USP Atwater, California

U.S. Department of Justice
Federal Prison Industries, Inc.

(800) 827-3168
unicor.gov

This Annual Report was printed at the UNICOR Print Plant, Federal Correctional Institution, Petersburg, VA
CATAR2009

Printed on recycled
paper