Raiders Of The Lost Arp

Alan R. Pearlman never really understood the world of rock music; for him, it was groupies, drugs, and inarticulate musicians. Pearlman, 57, an engineer who had been weaned on classical piano and had spent five years designing amplifiers for the Apollo and Gemini space programs, found pop musicians inexplicable at best and flabbergasting at worst.

One of his favorite anecdotes says it best: "Back in the '60s, Columbia came out with a record called 'Switched-on Bach,' one of the best-selling records of all time, done by somebody named Walter Carlos. . . . More recently, the same person did the sound track for the movie Tron. Now the name is Wendy Carlos."

Pearlman shakes his head in wonder, a crimped smile betraying the anxiety he feels when he considers the implications of the transformation from Walter to Wendy or when he contemplates the fate of Arp Instruments Inc., which he founded in the late 1960s and which quickly became the premier manufacturer of musical synthesizers, instruments able to produce electronic music.

Arp was once a supplier to the stars, providing instruments for Herbie Hancock, Paul McCartney, Stevie Wonder, and Elton John and for such groups as the Bee Gees, Santana, Kiss, the Who, and Earth Wind & Fire. From its inception, Arp was on the cutting edge of technology, and by the mid-'70s it enjoyed preeminence in the marketplace. It had 40% of the $25 million market -- surpassing R. A. Moog lnc., the company that had created the first practical musical synthesizer. But by 198 1, Pearlman's Lexington, Mass., company was dead, the victim of miscalculation and the worst form of mismanagement: no management at all.

Pearlman is now attempting to recover face, his fortune, and his faith in free enterprise, with Selva Systems lnc., a startup company that will manufacture microcomputer graphics software. As chief executive officer of Selva, he sits in a small office one flight up from a store that sells electronic kits in Wellesley, Mass. -- only about 10 miles from the site of Arp's luxurious 50,000-square-foot plant.

"We still have a roof over our heads, and if this company goes, we'll keep it; if it doesn't, we won't," notes Pearlman, who lost $1 million in paper assets and, for a while, his peace of mind, because of what happened at Arp.

A brilliant engineer, Pearlman cofounded Nexus Research Laboratory lnc., a maker of solid-state analog modules (precision circuits used in amplifiers and test equipment, for example), and nurtured it to a solid $4 million sales status before selling out to Teledyne lnc. in 1967. Aroused by "Switched-On Bach," the first major recording hit to feature a synthesizer, he returned to an earlier interest, electronic music. In 1948, as a student at Worcester Polytechnic Institute, he had written a paper on the subject, saying: "The electronic instrument's value is chiefly as a novelty. With greater attention on the part of the engineer to the needs of the musician, the day may not be too remote when the electronic instrument may take its place. . . as a versatile, powerful, and expressive instrument."

Twenty years later, Pearlman made the leap from theory to reality. "1 went into the basement," he says, "and did some playing around." His tinkering yielded promising sounds and a new company.

With $100,000 of his own money and $100,000 from a small group of investors, Pearlman set up Arp in 1969, and in 1970 the company built and showed its first instrument, the 2000. Creating notes electronically, rather than mechanically, had been achieved experimentally within a few years of the invention of the vacuum tube in 1904, and the ancestor of today's keyboard synthesizer made its debut in 1928. But it was not until 1965, when R. A. Moog was founded in Trumansburg, N.Y., that the first commercial synthesizer was made. By 1969, Moog owned the market.

The Arp 2000, however, enjoyed a distinct advantage. The oscillators used by Moog to produce tones tended to drift, which necessitated frequent retuning and made live performances impractical. "We were better at analog electronics," explains Pearlman, "and knew how to keep the oscillators in tune."

Arp had a promising first product, but it was entering a volatile and risky market in which it had no expertise. "At Nexus, I had dealt, for the most part, with other engineers," Pearlman says wistfully. "We spoke the same language and were basically the same sort of people. The musical-instruments business was alien -- I never understood the people."

The company revolved around, and was essentially shaped by, three individuals: Pearlman, chairman of the board; Lewis G. Pollock, legal counsel and chairman of the executive committee; and David Friend, who was president from 1977 to 1980. Each brought distinctive backgrounds, personalities, and goals to the project. Pearlman was the soft-spoken engineer, a man wed to technology but seduced by business. At Nexus, he had made the daily decisions, a chore he hoped to escape at Arp. "I thought, in starting a new company, that I could get others to do it," he says. "I wanted to do long-range R&D, long-range marketing."

Pollock, who had represented Nexus in its merger with Teledyne and had a management consulting contract with Arp, was known as "the entrepreneur's lawyer" but might better have been dubbed the "entrepreneur/lawyer." Although never an officer of Arp, he spent an inordinate amount of time overseeing the company's fortunes. "I'll bet if you looked at his time log, you'd find that he put in 40 hours a week at Arp," says Joseph Mancuso, the author of 14 books on business, a consultant to more than 340 companies, and a former professor of management who was an Arp director for three years. "If any one person ran Arp, and that's debatable," says one insider, "then Pollock was that person."

Friend was the whiz kid, a talented and ambitious young man with a background in engineering and music but none in business. Discovered by Pollock through an article in the Yale University alumni magazine, he was recruited from graduate school at Princeton; at 21, he was the youngest member of Arp's inner circle. The three men sat on Arp's board, along with two outside directors brought in by Pollock, and made up the executive committee, which ran the company. Created by the board at Pollock's suggestion, the committee -- an unusual form of management for a small business -- was entrusted with its operation.

The egos and goals of the three frequently clashed, and their management skills were open to question -- none had ever run a "glamour" company before. Pearlman, in his ivory tower of long-range planning, was initially blind to the severe shortcomings of his management team.

And there were other problems. From the outset, Arp was undercapitalized. In 1973, the company went public, raising $750,000. "We needed the money," says Pearlman. "There was a critical mass we had to achieve in order to pull ahead." In 1973 and 1974, Arp borrowed a total of $600,000 in the form of convertible debentures. In addition, it had an ongoing line of credit with First National Bank of Boston, primarily to cover inventory and to finance receivables. "It was always a borderline company in terms of cash flow " notes Friend. "It lived from hand to mouth the entire time I was there."