FPI BOARD OF DIRECTORS' DECISION ON LAWN AND GARDEN EQUIPMENT The Board of Directors of Federal Prison Industries, Inc. (FPI) now issues its decision regarding FPI's proposal to initiate production of lawn and garden equipment. As required by statute, FPI prepared a comprehensive impact study, which analyzed the potential impact that FPI's production may have on the private sector. FPI announced, in the May 29, 1998, edition of the Commerce Business Daily, its plans to present this proposal to the Board of Directors; described the procedures for obtaining a copy of the impact study; and invited public comment on its proposal. Copies of the impact study analyzing the proposal to produce lawn and garden equipment were sent directly to the principal trade associations, various manufacturers, and other interested parties. FPI received written comments on its proposal from seven sources, prepared responses to those comments, and submitted all such information to FPI's Board of Directors, along with its request to produce lawn and garden equipment. Members of the Board reviewed all of the materials and heard in-person comments from industry representatives at an FPI Board of Directors meeting held in Washington, D.C. on October 20, 1998. The Board of Directors wishes to thank all parties who took the time and made the effort to comment. The industry's written and oral comments were helpful in developing a clearer picture of the industry and its concerns. The Board of Directors is called on by statute to make a determination as to whether production in the lawn and garden equipment industry would result in FPI's assuming no more than a reasonable share of the market and not unduly impact the industry. In reaching our decision, we have relied on the entire record, including the impact study, written comments submitted and the oral presentations by four individuals at the Board meeting. On the basis of all the information before us, it is the Board's decision to approve FPI's request to manufacture lawn and garden equipment. In approving this request, the Board drew conclusions about key issues and established certain conditions, which are outlined below. One of the first issues from the private sector was the impact on private sector jobs. A representative from John Deere's Worldwide Commercial and Consumer Equipment Division from Horicon, Wisconsin stated that if FPI and the Ariens Company entered a partnership, John Deere would lose five jobs. The Board recognizes that John Deere is a multi-billion dollar company that sells lawn and garden equipment as well as agricultural and construction equipment. The Board also recognizes that this division in Horicon, Wisconsin has increased employment due to growth it has experienced over the last three years. Within the month of October, this division hired 160 new wage workers with 60 to 70 more planned for the near future. Based on the size of the Federal market and the size of the domestic market, the Board does not foresee John Deere having to displace any employees. FPI's proposal is to gradually increase market share over a five year span, to obtain 47% of the Federal market that equals sales of $9.6 million by the year 2003. The Federal market for lawn and garden equipment is estimated to be $17.9 million in 1998 and up to $20 million in 2003, which is less than one percent of the domestic market. The domestic market in 1998 is estimated to be $5.7 billion and estimated to reach $6.8 billion in the year 2003. The lawn and garden industry sells to the commercial and residential markets and does not rely solely on the Federal market. During the public hearing, two representatives for the industry stated that they thought that $20 million for the Federal market was under estimated. The question was asked as to how the partnership between FPI and the Ariens Company came about. The Ariens Company responded to the Commerce Business Daily (CBD) announcement dated February 2, 1998, requesting new products and/or services for partnerships between private companies and FPI. The Ariens Company approached FPI with a proposal to partner to manufacture lawn and garden equipment. The John Deere representative also raised the issue of FPI having an advantage with lower labor costs. Although FPI does not pay all of the same types of expenses as private sector manufacturers, FPI incurs substantial overhead costs that are unique to operating in a prison setting and that the private sector does not have to bear. FPI overhead consists of, but is not limited to, inspections of incoming and outgoing products, security, and tool control. Along with a lower overhead, the private sector also has advantages in job skills, work efficiency, and available markets. In the private sector, most employees have prior job skills or work experience. In FPI, most inmates have little, if any, job skills or work experience prior to working in FPI. FPI must be labor-intensive in order to employ the largest number of inmates possible. The private sector uses automation, technology and equipment to produce products at a rapid pace. The private sector has the ability to sell to consumers, commercial entities, or government agencies (local, state, and Federal). FPI can only sell to Federal government agencies. FPI has fewer advantages than the private sector and additional overhead costs and still must follow the same regulatory requirements as the private sector. Another issue was the growth of the overall lawn and garden equipment market. FPI noted that growth predictions for this industry are difficult to determine due to many unpredictable factors. For example, weather plays a major role on the industry as a whole. Representatives from the industry estimated a market growth rate of 2% per year for a total increase of 10% in five years. It was further noted that the commercial sector of the market is expanding more rapidly than the residential market segment, and is responsible for most of the market growth. The Federal market, which FPI is seeking to enter, is classified under the commercial sector of the market, the segment responsible for the industry's growth. FPI market share would not affect the residential market. In the impact study, FPI estimated the Federal market to increase by 2.5% each year solely on inflation. The Board recognizes the difficulty in determining the estimated size of the Federal market and has approved the following levels for FPI for lawn and garden equipment: FY 1998 -- estimated Federal market $17,949,021, proposed FPI Sales $0, approved FPI sales $0; FY 1999 -- estimated Federal market $17,949,021, proposed FPI Sales $3,700,000, approved FPI sales $3,600,000; FY 2000 -- estimated Federal market $17,949,021, proposed FPI Sales $5,100,000, approved FPI sales $4,800,000; FY 2001 -- estimated Federal market $17,949,021, proposed FPI Sales $6,800,000, approved FPI sales $6,300,000; FY 2002 -- estimated Federal market $17,949,021, proposed FPI Sales $8,000,000, approved FPI sales $7,200,000; FY 2003 -- estimated Federal market $17,949,021, proposed FPI Sales $9,600,000, approved FPI sales $8,400,000; Due to the fact that growthfor the lawn and garden equipment market is hard to predict, the Board has decided to use a conservative figure, and has directed that the estimated 1998 Federal market be used as the size of the total Federal market from 1998 through 2003. This does not include any growth linked to sales or inflation for the upcoming years. The Board recognizes that it is difficult to achieve exact levels each year. It is therefore understood that FPI may exceed the annual limits by insubstantial amounts, so long as the aggregate over the five year period does not exceed the five year approved total of $30.3 million. While the sales levels equate to projected market share, as reflected in the study, primarily for ease of reference and tracking, it is the decision of the Board to use sales dollars to measure FPI's market share. Should any party believe that circumstances such as (but not limited to) overall industry growth or Federal procurements have changed sufficiently that FPI's authorized production is having a substantially greater impact than anticipated in this decision, that party may provide such written information to the Board. The Board will then review the information and, if warranted in light of the information supplied, reexamine FPI's authorized production levels. It is noted that Director Richard Womack, Labor representative, for a variety of reasons, does not concur with the decision to manufacture lawn and garden equipment. The Board voted 5 to 1 to approve this proposal. Decided on this 30th day of November, 1998. For the Board: Joseph M. Aragon, Chairman Posted 12/11/98 (W-SN279536).

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