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Weekly UpdatesAFTER THE DEATH OF ITS FOUNDER in 2005, J.M. Products ,Inc. of Little Rock, once one of the country s largest manufacturers of ethnic hair care products, lost its shine.
Without Ernest Joshua Sr., who started the company in the early 1970s and ended up in the Arkansas Business Hall of Fame, J.M. Products has suffered through one bad year after another, culminating with a Chapter 11 bankruptcy petition filed April 23.
Problems include:
* Allegations that the management started misappropriating employees' tax withholding money in 2006 to fund the business. J.M. owed the IRS more than $1.1 million as of the end of June, bankruptcy records showed.
* An explosion at its Little Rock plant in October 2007 that resulted in $2.5 million worth of back orders.
* A net loss of $1.08 million in 2007, a loss of $769,000 in 2008 and a loss of $148,000 through the first two quarters of 2009.
* A decline in the black hair care market, as more African-Americans are opting for natural hairstyles.
At the time of the petition for bankruptcy reorganization protection, J.M. Products had $20.1 million in assets and $14.6 million in debt. But even the bankruptcy hasn't gone well for J.M.
One of the company's bankruptcy attorneys, James E. Smith Jr. of Little Rock, quit after about a month, citing differences with J.M. (Smith declined to comment for this article.) And one of J.M.'s largest creditors, Bank of America, asked U.S. Bankruptcy Court Judge James Mixon to appoint a Chapter 11 trustee in the case, citing what it called J.M.'s mismanagement.
The bank accused J.M. of managing the company to the benefit of the Joshua family, not the creditors. Bank of America also complained, in its motion filed July 1, that J.M. had failed to keep accurate books and had used cash without consent for the court or the bank.
On July 24, Mixon agreed to appoint a trustee, who hadn't been named as of Thursday, to manage the company's affairs.
Ernest Joshua's son, Michael Joshua, who is the president of the company, recently left a voice-mail message for Arkansas Business. "As you know," he said, "we're in Chapter 11 reorganization, and a lot of my time right now has been devoted towards pulling the company through this process." Because he was "so busy making sure that we can get the company reorganized," he said he wanted to postpone any interview.
Neither Joshua nor his bankruptcy attorney, Sheila Campbell of Little Rock, returned calls for further comment.
American Dream
Born in Jacksonville in 1928, Ernest Joshua Sr. built a company that became one of the nation's top ethnic hair care products manufacturers.
After Joshua was discharged from the Army in 1949, he married and moved to Chicago. (His widow, Thelma Joshua, is listed as the current CEO of J.M. Products) He used the G.I. Bill to attend college in Chicago, where he studied chemistry and business.
"I learned how to read a balance sheet and keep books," Joshua told Arkansas Business in 1987. "But my real learning was out there on the streets."
Joshua saw the potential for the black hair care market, a market that was untapped at the time.
He launched his first company, Raval Products, in 1971 in Illinois. Within two years, however, it was sold to a Los Angeles company, whose owners wanted Joshua to help manage the company. So he headed to California.
But the management job didn't work out, and Joshua left to start J.M. Products in 1973 in Los Angeles. Joshua worked around the clock and drove endless miles to sell his hair tonic to beauty parlors, barbershops and salon supply shops.
"I was working all the time, not eating right, staying generally rundown," he said. He also was going broke in Southern California.
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Joshua packed up the company and moved it "home" to Little Rock in 1977. Another benefit to the relocation was the greater concentration of African-Americans in the South than out West.
"When I came to Little Rock, I didn't have any money," Joshua said. "All I had was confidence."
He opened a store in Little Rock, and sales leaped from $28,000 in 1978 to $70,000 in 1980.
With dazzling speed, the company's sales took off after J.M.'s first factory was built in Little Rock in 1981. Sales hit $3 million in 1985.
"My father knew in his heart that if he worked hard and reinvested his profits in his business, that his company would grow," Michael Joshua told Arkansas Business in 1995. "He took risks like all entrepreneurs do, but they were calculated risks. And he never took risks that would have jeopardized the business. He knew he had employees counting on those paychecks every Friday."
Changes
By 1995, Ernest Joshua Sr. was semi-retired. His son, Michael Joshua, was the president, and business was going strong.
The company's sales hit $30 million in 1995, and it had 125 employees, with 20 of them members of the Joshua family. (Several members of the Joshuas still have ties to the business, according to the company's bankruptcy filing. In 2008, Thelma Joshua was paid $192,000; Michael Joshua earned $141,500; the salary of Thelma's daughter-in-law Martha Joshua was $106,600; Thelma and Ernest Joshua's son, Ernest Joshua Jr., who is a vice president, received $89,200; Sandra Givens, the daughter of Thelma and Ernest Joshua Sr., received $81,300; and Mary Joshua, the granddaughter of Thelma and Ernest Joshua Sr., received $46,700.)
In 1995, five products in J.M.'s Isoplus line--aerosol oil sheen, 24-hour holding spray, "wrap" setting lotion, castor oil conditioner and the original hair and scalp conditioner--were the country's market leaders in their categories, Michael Joshua told Arkansas Business.
Most of J.M.'s products were being sold in discount retail and grocery chains.
And blacks were spending more money. Between 1990 and 2006, black buying power increased from $318 billion to $799 billion, according to a 2007 report by Mintel International, a market research firm based in Chicago. There was more good news for J.M.: Although African-Americans made up only 13 percent of the American population, they accounted for 30 percent of the hair care spending.
"This, in addition to growth in both buying power and population, has led large multinational companies to enter the black hair care market as they realize the potential of black purchasing," the Mintel report said.
In 2003, sales of black hair care items were $137 million at food, drug and mass merchandisers, not including Wal-Mart Stores Inc. In 2005, sales reached $144.7 million, according to the Mintel report.
Death in the Family
On Sept. 22, 2005, Ernest Joshua Sr. died at the age of 77. A year after his death, the Sam M. Walton College of Business at the University of Arkansas announced that Joshua and Thelma Joshua would be inducted into the Arkansas Business Hall of Fame in 2007.
The Hall of Fame noted that they were the first Arkansans to be honored by President Ronald Reagan for their achievements as small-business people.
But while the Joshuas were preparing to enter the Hall of Fame, J.M. was having financial trouble, according to Bank of America's motion for a Chapter 11 trustee for J.M.
Bank of America said that in 2006 J.M. started using its employees' tax withholding money, which should have gone to the IRS, to fund its operating losses and business expenses.
"This misappropriation continued for several years," Bank of America said in its July 1 filing.
However, the big blow to the company came on the evening of Oct. 11, 2007, when an explosion occurred inside the Little Rock plant and set fire to its back room. The northeast section of the roof collapsed.
The fire possibly started from a buildup or leakage of gas propellant, according to a report by the Little Rock Fire Department. The building didn't burn to the ground, however. The fire department report listed $250,000 in fire damage, causing the company more headaches.
Michael Joshua blames that incident for leading the company down the path to bankruptcy.
"We had basically turned the company around" at the time, he said during a bankruptcy hearing on June 12.
Joshua said that J.M. had been shedding some of its businesses and operations that weren't "financially sound or standing on their own." But the fire forced the company to farm out its manufacturing of products, he said.
"The manufacturing couldn't be done in a timely manner by our vendors to meet the demand of our customers," Joshua said.
Soon, the orders were piling up.
"I think at the end of 2007, we had over $2.5 million in back orders that had not been shipped out to retailers," Joshua said. "So we struggled with that, actually all the way through July 2008, when we were finally able to get the aerosol manufacturing portion of that facility back on line."
The company's CFO, Jon Fritch, said during the June 12 bankruptcy hearing that when J.M. was out of stock of its items, retailers would place another company's products on the shelves.
"You end up losing sales or position, and that's part of what's happened over the last couple of years," Fritch said.
In addition, the black hair care products market has been dwindling. It peaked at $151.5 million in 2007, the Mintel report said.
A June 2007 Mintel report said the trend in black hair care was toward a more natural style, resulting in less damage to hair from chemical processes. The trend has led to lower sales of relaxers, which is a significant portion of the black hair care market.
Sales of black hair care products are estimated at $147.6 million for this year at food, drug and mass merchandisers, not including Wal-Mart Stores Inc., the Mintel report said.
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