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Company Profile: Pencil Pusher

Gino Pala, an unlit but well-chomped cigar resting on his desk, knows well the storied history of his pencil company, Dixon Ticonderoga. On his office wall is a framed invoice from 1857 for a gross of pencils. Price: $20.50. Today, a gross of low-end pencils sells for just $5 to $6; premium Ticonderogas sell for just $12 to $13. "Something's wrong," he says.

Pala also is well-versed in pencil facts -- that the shelf life of an eraser is a year-and-a-half before it dries out and crumbles with use, for instance. What Pala hopes he knows is how to erase the company's troubles. As recently as 2001, Dixon's auditors questioned whether the debt-laden company could go on.

From his office in a brick building overlooking I-4 in Heathrow, just north of Orlando, Pala details his plan for a prosperous future for the company and its lines of pencils, crayons, markers and paints. He has refinanced the debt and expects that moving production to Mexico and China will boost cash. "It should get better as we go along," he says.

Pala can hope. He's been hoping for years. The son of Italian immigrants, he quit school at 15 to support his family after his father died. He drove a produce truck, did a hitch in the Army and, upon turning 21, took over management of Pala's Cafe, the family tavern in Wilmington, Del. It was the kind of place where "when a guy walks in on Saturday morning, he knows you'd have to put him out by the end of the day -- drunk," Pala recalls, fondly. "I could handle myself pretty well in those days."

Movers and shakers also drank at Pala's. Through one, he got a real estate tip, assembled an investment group and doubled everyone's money. Next, he and his investors acquired stakes in public companies, bid for control and made a bundle when the companies bought his shares to get rid of him. "We were playing greenmail when it didn't have a name," he says.

Then in 1978, Pala won a bid. He took over Vero Beach-based Bryn Mawr, which had been incorporated in 1795 to build a turnpike from Philadelphia to Lancaster, Pa. One hundred and eighty years after its founding, the company owned a bus company in New Jersey and some restaurants and camper parks in Florida. Pala moved to Vero Beach, sold assets and developed 152 condos in Vero. His group gained $10 million on a $1.5-million investment.

GINO PALA
Salary: $278,800.
Holdings value: 948,095 shares valued at $2.99 million.
Diversions: Golf, a 19 handicap. "You know what my problem is now that I've got old? I stand too close to it after I hit it."
Sideline: Pala bid for the Tampa Bay Buccaneers in 1995. "I couldn't even buy the football now."
Pencils: Dixon can make 864 million pencils a year but doesn't disclose its actual production.Getting into pencils
Flush, Pala bid for the venerable Joseph Dixon Crucible Co. in Jersey City, N.J., founded in the 1820s by American inventor-industrialist Joseph Dixon. Dixon's successors had built the company into a conglomerate that made kiln bricks for glass makers and refined graphite and provided products to heavy industry. It also made crayons and pencils -- notably the premium Ticonderoga.

Pala, looking at Dixon in 1983, remembered the Ticonderoga from his school-boy days. What he saw was an attractive, if money-losing company, with roughly half of its $55 million in revenue from strong consumer brands, half from old-line industry, "a lot of assets and no debt."

It also had trouble ahead, but Pala didn't see that. With $18 million borrowed from Citicorp and $9 million in Drexel Burnham Lambert junk bonds, Pala had Bryn Mawr buy Dixon and renamed it for its most recognizable product. "And I haven't made any money since," he says.

Well, almost. Initially, the stock went to $18 as Pala took bold steps. He immediately got out of crucibles and paid off the junk bonds. He used lower cost debt to acquire other consumer brands and drive up revenue.

But Dixon's remaining industrial businesses couldn't compete with firms abroad, and Pala unloaded them, their employees and their smokestacks. Then, in the late 1990s, Dixon's consumer brands began to struggle.

Dixon's best market for its pencils, Prang crayons and other products is schools, which it reaches through wholesalers. But the market contracted as schools, which used to purchase those supplies for students, stopped buying them and pushed supply purchasing onto parents, who bought cheap imports. Chinese pencils sell for $2 a gross.

The price per pencil U.S. makers receive fell throughout the 1990s. Imports now outsell here the 2.7 billion pencils produced by U.S. makers, Pala says. The mass-merchant category "is completely dominated now by pencils coming in from China," says Robert Waller of the Writing Instrument Manufacturers Association. The number of U.S. pencil makers has declined to five from 23 in the last century.

Even though the U.S. government imposed anti-dumping duties on Chinese pencils for using Chinese government subsidies to sell below cost, imports are still increasing, Waller says.

A bright spot for Pala has been the Ticonderoga, which Pala reckons leads its nearest premium rival by 2 to 1 and has at least half the premium market. "The brand has held its own. The accountant or the teacher who uses a pencil a lot will pay you for that," Pala says.

But the premium market is only a fifth of the industry, and the company's stock has retreated to $3 a share.

Moving out
In 1999, Pala began consolidating production in Mexico, where Dixon had some operations since 1964, and to China, where it had a factory for making pencil wood in full production by 2002. Pala closed the company's crayon factory in Ohio in February, throwing 120 people out of work, some of whose great-great grandfathers had made crayons there.

In 1996, Dixon had 1,240 workers companywide, 796 of them in the U.S. Today, it has 1,300 workers, with only 300 in the U.S. Except for the Ticonderoga and some niche products made in Missouri, Dixon now makes all its products outside the country.

The Dixon balance sheet also has suffered. The Mexico and China moves cost $8.5 million over the last four years and engendered inventory troubles that led Dixon to default in 2001 on its debt. Pala refinanced, and through the company's first nine months made a $751,712 profit on $61.7 million in revenue, up from a $58,058 profit on $63.6 million in revenue the year before.

Dixon still has total debt of $67.6 million against $25 million in equity. And it has market challenges. The highest demand for its products comes at back-to-school time, but retailers insist on using pencils and crayons as loss leaders. "We can't make money where we're supposed to make money," Pala complains.

Pala has plans: Become the quality choice for private label production by convincing retailers that want their own pencil brand to go with Dixon; use Dixon's new low-cost basis to sell into Central America and Europe; and form ties with outsourcers that provide corporations with their office supply needs.

"All the mistakes"
Florida Trend, in 1988, found Pala "gruff and blustery." Fifteen years later, he's personable and self-deprecating, occasionally fingering the cigar as he talks. "You don't have enough time for all the mistakes I've made," he sighs, before detailing his regrets about personnel decisions. "I feel sorry for shareholders. I haven't done my job as well as I should have." He and his family are the largest shareholders with a third of the company.

Pala turns 76 this month, though he looks easily 15 years younger. His happy reminiscences about introducing hoagies at Pala's Cafe decades ago come across as more vital than recent maneuvers in pencils and crayons. "As soon as I see this straightened out, I'll be history," he says. "It's a young man's business." (Son-in-law Richard Joyce became his co-CEO in 1999.)

Pala, musing, offers a thought: "It must be a good company because we did everything we could do to it to kill it dead, and it's still going."

The Pencil Through the Years
Duke University engineering professor Henry Petroski wrote a history of the development of the pencil. Here's a timeline based on his book, "The Pencil," and on others' work:

1500s: Through the late 1500s, writing is done with styluses, quill pens, slates and lead wrapped in paper or held in various devices. Peniculus is the Latin word for brush.

1564: A deposit of graphite, called plumbago, Latin for 'that which acts like lead,' is unearthed in England. The deposit can be used without refining for writing, and England becomes the world leader in pencil making for most of the next 300 years.

1600s: Cabinet makers and other craftsmen find they can make a writing instrument by encasing sticks of graphite in cedar. The cases are octagonal, hexagonal, square and round, depending on the craftsman's skill.

1794: France is cut off from England's graphite during the Napoleonic Wars. Nicolas-Jacques Conte discovers that powdered graphite can be mixed with clay, put into molds and fired to make a quality pencil. Conte grades the hardness of his mixtures with numbers -- 1, 2, etc., a process still used today.

1847: Tariffs protect the young U.S. pencil industry for decades.

1858: Hyman Lipman of Philadelphia seeks a patent for attaching an eraser to a pencil.

1866: Dixon obtains a patent on a machine that can make 132 pencils per minute.

1870s: The U.S. buys 20 million pencils a year. At 5 cents a pencil, it's a $1-million business. There are laments that since everyone throws away the last quarter of a pencil, the nation wastes $250,000 a year.

1893: The yellow Koh-I-Noor pencil is introduced by its Austrian makers at the Columbian Exposition in Chicago. Others imitate the color, which is associated with the Orient, now the source of the finest pencil graphite. "It's a sort of racist allusion," says Petroski. Premium pencils, such as the Mongol, are given Asian names.

1900s: Some feared that allowing students the means to correct mistakes would lead to more mistakes, but by early in the century, nine of 10 pencils in the U.S. have erasers. The hexagonal shape dominates over round because nine hexagonal pencils can be made from the same wood it takes to make eight round ones.

1913: Dixon introduces the Ticonderoga pencil, named for the site of its graphite mine and the Revolutionary War American victory.

1920s: Japanese competition threatens the U.S. industry. Of the 23 U.S. pencil makers, the Big Four -- Eagle, Eberhard Faber, American Lead and Dixon -- have more production capacity than Europe's Big Three. They push for tariff protection.

1941: The attack on Pearl Harbor prompts the manufacturer of the premium Mikado to change its name to Mirado.

Mid-1900s: The No. 2 becomes the pencil for taking standardized tests. It doesn't smear and can be erased but also leaves enough graphite on the test form for electrical scanners to register. (Graphite conducts electricity.)

1954: The federal government brings a price-fixing suit against the Big Four for increasing the price of the nickel pencil to 6 cents in 1953.

1976: The Smithsonian estimates America produced its 100 billionth pencil. U.S. pencil makers churn out 2.5 billion per year.

Sources: The Pencil: A History of Design and Circumstance by Henry Petroski; The Best of Its Kind: The Incredible American Heritage of the Dixon Ticonderoga Company by Brenda J. Elliott; and the Gale Group.


Florida's role in pencil making
With Europe deforested, pencil makers in the 1800s turned to the American South for red cedar. In particular, they gravitated to Florida, where wood growing on the Cedar Keys was "soft and close-grained and ... so superior for the purpose" -- as a contemporary account put it -- that European pencil makers opened mills on the then-bustling northwest Florida islands.

Eberhard Faber bought large tracts of land around the Cedar Keys and established a pencil mill on the island called Atsena Otie Key. During its heyday in the 1880s, the Cedar Keys were home to 5,000 people, and the community was the largest port on Florida's west coast. But business moved south toward Tampa after most of the cedars were harvested. In 1896, a hurricane struck Atsena Otie, destroying many of the mills and factories and forcing the town to move one island inland, to today's Cedar Key.

Dixon Crucible had a mill in Tampa by the 1870s and later at Crystal River. Dixon stayed in Florida into the early 20th century, years after other pencil makers pulled out. By 1910, U.S. manufacturers complained to the government that there was not enough red cedar left in America to supply their needs.

- Mike Vogel and Cynthia Barnett