Ernst & Young Environmental and Labor Practice Audit

What follows is an identical reproduction of the audit. All errors in the text reflect the original. Page numbers have been omitted.

Certified Public Accountants 22A Nguyen Van Troi Q. Phu Nhuan T.P. Ho Chi Minh S.R. of Vietnam

Phone: 84 8 8447655 84 8 8447961 Fax: 84 8 8447960

13 January 1997

Mr. Tien Nguyen

Labor Practices Manager

Nike, Inc.

7th Floor, Landmark Building

5B Ton Duc Thang

District 1, Ho Chi Minh City

Vietnam

Dear Mr. Tien,

Re: Environmental and Labor Practice Audit

I enclosed our report on the environmental and labor practice audit conducted at the Tae Kwang Vina Industrial Ltd. Co. upon the request of management of Nike, Inc.

I am looking forward in working with you on the other factories of Nike, Inc. in Vietnam.

Please do not hesitate to contact us should you require further clarification on the above.

Kind regards,

Nike, Inc.

Environmental and Labor Practice Audit

Certified Public Accountants 22A Nguyen Van Troi Q. Phu Nhuan T.P. Ho Chi Minh S.R. of Vietnam

Phone: 84 8 8447655 84 8 8447961 Fax: 84 8 8447960

6 January 1997

Mr. George Southrey

General Manager

Nike, Inc.

7th Floor, Landmark Building

5B Ton Duc Thang

District 1, Ho Chi Minh City

Vietnam

Dear Mr. Southrey,

As requested, Ernst & Young has performed certain procedures relating to production facility compliance with certain aspects of the NIKE, INC. Memorandum of Understanding (a copy is attached as Exhibit A) with respect to TAE KWANG VINA INDUSTRIAL LTD. CO. located in Bien Hoa Industrial Zone II, Bien Hoa City, South of Vietnam. The following summarizes the key results of our work.

BACKGROUND OF THE FACTORY

The construction of the factory was completed by April 1995 and installation of machinery commences thereafter. Actual production from varying departments started from May to July 1995 and intitial production for Nike completed shoes was shipped August 1995. Additional assembly lines are installed from April to September 1996. There are 10 lines running as of December 1996.

The total Vietnamese workers as of December 1996 was approximately 10,000. (200 office staff; 335 supervisory levels and 9,465 worker). The average age of the workers ranges from 18 to 24. Majority of them are recruited from Bien Hoa City and adjacent cities within 10 km distance from the factory. The factory is following the minimum wage per month as set at by the Vietnamese government to be US$40.

The workers are required to work the standard daily working hour of 8 hours a day, 6 days a week or 48 hours a week. An overtime work is currently planned everyday on the following departments: cutting;
stitching and assembly. A 150% overtime rate is applied for every one hour overtime. There are currently two shifts required for the following departments: O/S press, PU pouring, phylon press and embroidery.

Nike, Inc.
Environmental and Labor Practice Audit

I. Compliance with Vietnam labor requirements and practices

You requested us to perform certain specific procedures with respect to the Factory's payroll procedures and the results were as follows:

1. We randomly selected 50 workers from the payroll register provided to us during October 1996 and determined that all selected workers were older than 15, the minimum age of employment as determined by the
   government.

2. Employees tested received salary above the minimum salary that is 40 USD per month for workers in provinces and within the level set by VT. The minimum wage is 40 USD per month for provinces, 45 USD per
   month at Ho Chi Minh City and Hanoi.

3. We noted 48 cases where workers were required to work above the maximum working hours.

4. VT's night shift working hours is currently 8 hours (7 working hours and 1 rest hour). VT's salary payment for night shift workers is calculated as follows: (7 working hours x 135% of the day time
   payment) + (1 hour rest time x 100% of the day time payment). As stipulated by laws in Vietnam, the 1 hour rest time should be multiplied by 135% of the day time payment, because the resting hour should be considered as working hours according to Article 71 (breaktime) of the Labor Code.

5. Salary and overtime are paid on 10th of the following month. Coefficients of overtime in day shift, night shift, holiday were properly applied.

6. Social insurance, health insurance and income tax are withheld properly as required by the law.

7. Annual leave were granted as required by the law.

8. The Law doesn't set out the maximum working hour per week or per month (including overtime) but based on the following stipulation: should not exceed 4 hours/day and should not exceed 200 hours/year.
   Employees due to workload exceeds these minimum overtime hours allowed.

9. Out general review of the personnel register as of October 1996 indicated that there are 104 persons under 18 which contradicts VT's policy.

10. We learned that the workers trade union is still being organized by the management and the workers.

11. We also gathered the following based on a the report dated September 21, 1996 from the Ministry of Labor, Invalid and Social Affairs (MLISA) who also did a sampling testing covering 500 employees:

• There were 50 employees without any indication of salary payment, 85 without stipulating form of agreement (Labor contract) in which duration, specific or seasonal job assignment clearly stated.

• There were cases were expired labor agreements were not re-registered.

• There were 20 cases of eligible employees who worked for Company more than a year but were not paid severance when they left the Company.

• It was also reported that there were several previous heavy disciplinary measures not in compliance with the provisions on the labor code such as the managers of the section once could fire many employees without permission of general office and in some cases the punishment did not match the mistake. At present, there is existence of the money punishment for the workers violating code of section such as talking during working hours.

• Non-establishment of a detailed salary scheme applicable to specific levels of employees' skill.

• Failure to obtain adequate labor permit to foreigners.

• Average basic salary per person per month: 499,652 VND (USD45)

• Average working time per person per month: 267 hours (33.5 days)

  (The actual working time for October 1996 was not available. We recalculated based on the salary and coefficients).

II. Production facility compliance and waste tracking system

Generally, production facility and waste tracking system in VT comply with NIKE's requirements and Vietnamese Environmental Regulations. However, improvements can be done on the following points noted to
comply more with the Vietnamese Environmental Regulations and to improve the environmental and working condition of the employees.

Ventilation

1. In Stitching shop, the number of workers is enormous (approximately 2,000 persons) but there are only 4 main doors which are not sufficient. The electrical ventilators and natural air booths can not
   reduce too much heat and dust inside.

2. In Mixing chemical warehouse, ventilation system (cyclones) does not work efficiently and requires repair to reduce dust of harmful chemical powders that can affect workers' health.

3. In P.U. Shop, harmful fume (caused by Toluene used for out-sole cleaning) needs more of VT's attention.

Water supply

Water supply system is totally dependent on SONADEZI (Water Supply System from Bien Hoa Industrial Zone II), the factory's water supply is still inadequate. The available stored water volume can be used only for
production (cooling system). There is no adequate water reserved for comfort use of workers.

Chemical storage

In general, the storage houses are located in isolated position away from working places. They are well ventilated. All materials are stored in labeled drums. However, in TPR (Printing) Shop, harmful chemicals are stored together with flammable fuels near the working place. Inks boxes stay about I meters far from working desks.

Protective equipment (PE)

Personal protective equipment (gloves, masks) are not daily provided. In many places, workers do not wear protective equipment for reasons cited by the workers as follows:

1. Protective equipment are inconvenient in performance of their work.
2. Ventilation in shops are not adequate causing more discomfort for wearing PE.
3. Absence of strict implementation of PE's usage.
4. The workers' inadequate understanding of the harmful effect of chemicals.

Black smoke fumed from the stack

Firing non-reusable garbage in combustors caused exhaustion of black smoke into the air. The company should consider that matter and accelerate measures and application to reduce black smoke.

Dust

Dust in Mixing Shop exceeded the standard 10 times (based on inspection done by VT under the contract between VT and the Ho Chi Minh City University of Technology- called Environment Impact Assessment Report).

Dust concentrators are available but they are inadequate to meet the dust requirements of the factory.

Harmful use of chemicals

Measures should be taken in using Toluene for sole cleaning both VT authority and workers.

Measures taken by V.T regarding Toluene:

According to Nike's Chemical Procedures, V.T needs more consideration while storing, handling and using Toluene because it is flammable and it is harmful to one's health. Protective equipment are as follows: safety glasses, lab coat, vent hood, proper gloves, and class b extinguishers.

In storing chemical, VT strictly followed procedures:

• Keep away from heat (isolated warehouse, Toluene containers being used are kept far from production line)

• Avoid contact with eyes, skin, clothing. Avoid breathing vapor. V.T stipulates users to read and follow procedures posted on containers.

• Storing area is cool, dry, well ventilated, flammable liquid stage area. (Except in TPR Shop)

Despite the above, usage of Toluene still poses some problems:

• Absence of safety glasses totally in the whole factory
• Absence of proper gloves (TPR Shop, PU Shop use only cotton-fiber gloves)
• Vent hood is used but rarely in production process. The reasons
  are already cited above.

III. Compliance with permits and requirements by Nike, Inc.

VT has complied with Code of Conduct and Memorandum of Understanding as required by NIKE.

IV. Employees health and safety measures

Fire equipment and instruction

• The fire extinguishers are easily accessible except in cafeteria I and some fire extinguishers in Boiler shop. The equipment are not attached to the wall but lying on the floor surrounded by other
  stuffs.

• There is checking of fire fighting and prevention periodically held by Local Fire Department.

• There's a fire brigade of 60 employees in the factory and regular training.

• In some departments such as Stockfit I, Stitching, Phylon: though there are signs of fire extinguisher, we cannot locate them. Per discussion with the management, 15 fire extinguishers are regular refilled, thus, we do not see them on site (for more than one week).

• Instruction for fire are well-positioned and easily readable by employees.

• Water Barrels, sand barrels are located near the doors of each section.

• Fire points around the factory (2-3 points per building structure) and near the hazardous places such as warehouse, flammable sections.

Written safety policies:

The instructions for the use of machine are adequate and attached on machines (in Vietnamese and Korean) and easily readable by the users.

There are general written safety policies posted everywhere in sections and easily readable by employees. However, specific safety instructions in hazardous places such as Press, Mixing, Roller section are not displayed adequately. Mr. Tran Thanh Hai (Director Assistant II) said that these safety instructions are used for training new employees. It is important that employees in these sections are guided by the safety instructions.

Electrical and fuse boxes are well-maintained and installed.

Chemical safety

1. More then half of employees in Mixing, Roller, P.U., Stockfit, lamination, TPR (sections using chemical) do not wear protective equipment (mask and gloves) even in highly-hazardous places where the
   concentration of chemical dust, fumes exceeded the standard frequently.

2. In Stockfit section where the employees can smell Toluene fumes, only thin cotton mask and gloves are available while according to requirements of NIKE, mask, protective suite, polyvinyl gloves are
   essential.

3. Chemical information sheets and standardized chemical information sheets are not found in Mixing, Roller and TPR sections.

4. The employees just know such chemicals are harmful for their health but they do not know what these chemicals are and how to deal with them because the employee have no training on chemicals.

5. Generally, chemicals are properly situated in the factory, spaced adequately except one warehouse whose location is close two tanks of F.O, D.O about 25m.

6. There are no training on proper handling of chemicals for related employees in daily exposed to chemicals.

Doors

Opened during working hours except embroidery section (Air Conditioner used).

The number of door in new building structure is more than that in two old others (about 12/8) meanwhile the number of employees in two old ones is larger than in the new building.

Training for new employees:

On the job training applied. As investigated, there's a high rate of labor accidents caused by carelessness of employees.

Electricity system

Throughout the factory, the electricity system of factory is well-maintained and installed. Electric cables are wired up to 4m above the floor and well-covered with thick-rubber in all sections.

The fuse boxes are covered with thick metal caps and accessed only by authorized person.

Hazardous machines

Production machines in the factory are new (year of production 1995) and in good condition. They have stable covers and the contents are separated from the users.

Cafeteria

1. As noted by Hygiene- Anti epidemic Center of Dong Nai and as a prevalent request of employees, there must be at least 30 electric fans to be installed for eating area and 5 stand-fans for cooking area. No measure is taken up to now. As discussed with the management they are still considering this as they do not encourage employees to stay long in the cafeteria due to inability to accommodate all employees in the cafeteria.

2. The garbage containers do not have covers.

Labor environment

On 12/06/96, the Health Care Center of Dong Nai checked the labor environment condition of the Company. Following are the results:

1. Heat: The permitted standard is 28oC while the heat level at Pressing, Boiler and Assembly room is from 32-33oC.

2. Noise: The permitted standard is 85-90dB(A). The noise in the Cutting, Pressing, Rotary P.U, and Assembly exceeds the standard (85-101 dB(A)). If the noise is 90 dB(A), the working time can not exceed 8 hours/day. At present, working time at the above sections is 9 hours/day.

3. Dust and Toxic fumes:

• Toluene: the level at Assembly I-sole fit, Assembly Ultra Violet, Sole sinking, Attaching room of Stockfit section; Sole fit Ultra Violet, Attaching room of Assembly line and Mixing section exceeded the standard from 6 to 177 times.

• Aceton: the level at Assembly I-sole fit, Assembly Ultra Violet, Attaching room of Stockfit section; Sole fit of Ultra Violet of Assembly line exceeded the standard from 6 to 18 times.

Recommendations are as follows:

1. Equip the employees working in areas with noise > 85dB(A) with earplugs.

2. Employees working in Mixing, Roller, P.U section need adequate equipment such as protective glasses, mask (professional), long sleeved shirt, polyvinyl gloves.

3. Toluene and Aceton in Stockfit section exceed many times to standard. The Company must equip ventilation system and fumes treatment system.

4. The Company must prepare the list of chemicals used in details and the solution to deal with them then submit the list to Hygiene & Anti-epidemic Center in order to be notarized and approved.

Medical issues

1. Medical room of the factory has 3 staff (1 doctor, 2 nurses). According to chief of medical room, the number of staff is not sufficient to serve such a large number of employees.

2. There is regular medical check-up in the factory -2 times/year, 3 or 4 times for employees in special section as Mixing, Roller. This regular check-up bases on random basic (200-300 employees/time).

3. Per result of checking health by Hygiene - Anti Epidemic Center of Dong Nai dated 21 May 1996 on the sample of 165 employees from Mixing, P.U, Roller sections, there are 128 employees (77.57%) getting
   respiratory disease and 7 employees (4.24%) getting heart disease (not resulting from working condition). The report said that employees getting diseases of heart, allergy, respiratory should not work in chemical-involved labor environment.

4. We have checked the change of working place of some employees getting the above diseases and working in chemical environment and found that they are still working in the same section (based on payroll register).

Refer to Attachment I

Labor accident

From 1st April 1996 to 30 October 1996, there are 73 cases of labor accidents is the carelessness of employees. There are 2 accidents in which 32 cases happened at pressing section. The major reason of most accidents caused by "the employees inadequate understanding to operate the machine".

Safety Committee: non-existent.

V. Adequacy of the Insurance Coverage of Employees

Though the company has complied with the minimum required insurance (social insurance and health insurance) as regulated by Vietnamese Law, it is however further recommended that life or accident insurance be availed for employees working in sections where accidents are prevalent. Due to the working conditions described above, a more comprehensive insurance coverage for employees is recommended.

VI. Interviews with Selected Employees

See results on Attachment II.

The procedures we have performed were those that you specifically instructed us to perform. Accordingly, we make no comment as to the sufficiency of these procedures for your purposes.

We take this opportunity to place on record our appreciation for the assistance and co-operation provided by the management and staffs of Nike and VT during the performance of our work.

Yours sincerely,

Nike, Inc.

Environmental and Labor Practice Audit

Memorandum of Understanding

1. Government regulation of business.

   (Subcontractors/Suppliers) certifies compliance with all applicable local government regulations regarding minimum wage; overtime; child labor laws; provisions for pregnancy and menstrual leave; provisions for vacation and holidays' and mandatory retirement benefits.

2. Safety and health.

   (Subcontractors/Suppliers) certifies compliance with all applicable local governement regulations regarding occupational health and safety.

3. Worker insurance.

   (Subcontractors/Suppliers) certifies compliance with all applicable local government regulations regarding occupational health and safety.

4. Forced labor.

   (Subcontractors/Suppliers) certifies that it and its supplies and contractors do not use any form of forced labor -prison or otherwise.

5. Environment.

   (Subcontractors/Suppliers) certifies compliance with all applicable local environmental regulations, and adheres to Nike's own broader environemental practices, including the prohibition on the use of chloro-fluoro-carbons (CFCs), the release of which could contribute to depletion of the earth's ozone layer.

6. Equal opportunity

   (Subcontractors/Suppliers) certifies that it does not discriminate in hiring, salary, benefits, advancement, termination or retirement on the basis of gender, race, religion, age, sexual preference or ethnic origin.

7. Documentation and inspection.

   (Subcontractors/Suppliers) agrees to maintain on file such documentation as may be needed to demonstrate compliance with the certifications in this Memorandum of understanding, and further agrees to make these documents available for Nike's inspection upon request.

Nike, Inc.
Environmental and Labor Practice Audit

Attachment I

Source: The information on the working place of employees with sickness were obtained from the payroll register. The information on the worker's diseases were obtained from the Summary of Regular Check-up of
Employees dated 21 May 1996.

Nike, Inc.

Environmental and Labor Practice Audit

Attachment II

INTERVIEW RESULTS

We interviewed 50 workers of VT factory which were randomly selected.

The key results of the interview are as follows:

• The interviewees came from the following department:

  • 24 Stitching
  • 6 Stockfit
  • 5 Assembly
  • 4 Roller
  • 3 PU
  • 2 Pressing
  • 6 Other Departments

Of which:

• Sex: 41 workers are female and 9 workers are male

• Home-land: 27 workers are from the North, 4 workers are from the Central, 19 workers are from Southern provinces of Vietnam.

• Residence: 8 workers are living in rented house (rental payments ranges from 50,000 to 70,000 VND/month). The remaining 42 persons are living with their family.

• Marital status: 45 workers are single, 5 persons are married of which one worker was divorced.

• Children: The children of married workers ranges from 1 to 2 aged from 1 to 6 years old.

• Transportation means: 7 workers use public transport car for which they pay 60,000 VND/month, 6 workers go to the factory on foot, 34 workers by bicycle and 3 workers by motorbike.

• Savings: 27 workers can still save money from their earnings (ranging from 5% to 30% of their monthly revenue). The rest does not have savings.

• Use of their revenue - 40 workers consume their revenue to feed family (ranges from 30% to 100% of their salary). The remaining 10 workers must not submit money to their family.

• Dependents to feed: 43 workers have no dependents, 7 workers have from 1 to 2 dependents (parents, younger brothers and sisters).

• Family: 43% of their parents are farmers, 25% are retired, 6% died, 26% are teachers and small merchants.

• Seniority: 32 workers of interviewed workers have worked in the factory more than 1 year, 18 workers were employed in the factory less than a year.

• Earnings: Their basic salary varies depending on their seniority in the factory. For employees that have worked for more than a year, basic salary is VND 525,000 (USD 47.7), less than 1
  years down to 6 months: VND 470,000 (USD 42.7), less than 6 months: VND 440,000 (USD 40).

  Their total earnings (basic salary + overtime remuneration) ranges from VND 600,000 (USD 54.5) to VND 750,000 (USD 68.1) except in special sections (pressing, PU - about VND 800,000 (USD 72.7) and in boiler (VND 1,200,00) - (USD 109).

  • 10 workers of the interviewed workers said that their salary is not enough for them, while 40 workers are satisfied with their salary.

  • 4 interviewed worker receive toxic allowance in which all interviewed workers commented that the factory's toxic - hard working allowance of VND 40,000 was inadequate.

• Overtime works:

  • 46 workers opined that working overtime hours are acceptable while 4 workers do not appreciate working overtime because of their living conditions (old parents and young children to be taken care of, hard transportation at night time).

  • 47 workers have worked overtime (overtime work is required in an average of 1 or 2 weeks for a month); 3 workers do not work overtime, they are mainly in Pressing Shop for there is no overtime required in this department.

  • 15 workers do not want to work overtime on Sunday.

• Communication:

  • 50 workers of the interviewees can exchange their ideas during working time but talking is limited for their productivity.

  • 40 workers do not read NIKE's Code of Conduct even do not know exactly what NIKE is.

• Punishment: Out of the 50 workers interviewed, 9 persons experienced to be punished, out of which, 7 were punished for their day-off of personal reasons in the form of money, sudden sickness, wedding, funeral, children sickness and without management permit, 7 workers find their punishment unfair (They have asked for leave but team leaders (Vietnamese) do not report to the chief of department or the chief of department do not agree).

• Satisfaction: 41 workers opined that they like their works and remuneration, 45 workers are not satisfied with the factory's cafeteria (hot and crowded), and 15 workers are not satisfied with the working condition (hot, stuffy).

Nike, Inc.
Environmental and Labor Practice Audit

• 110 Trade Justice
• 183 Environment
• 204 Manufacturing