"They decided to go for $4 million in the first year," says Pearlman. "Our R&D budget was almost $500,000, and most of it went into the guitar synthesizer. Not only that, we also started to buy inventory for $4 million a year."
The notion that a $7 million company could sell $4 million worth of an as-yet-untested product struck Pearlman as rather naive. "On the basis of objective reasoning, rather than 'bandwagon emotions,' " he wrote the board, "it seems that we are planning to spend over 25% of our 1977R&D money...to make a product which... is more likely to be a disaster than not.
Friend's contagious enthusiasm carried the day, but Pearlman's premonition proved more accurate. Avatar flopped. Although it extended the synthesizer's virtuosity to guitar players -- putting brass, reed, and percussive instruments, as well as sound effects (wind, rain, explosions) at their fingertips -- it didn't do it well enough. Players had difficulty producing a clean sound and disliked the high price tag. And, once the lackluster sales were documented, the Avatar was marketed as a loser. "What you want to do is create a demand," Mancuso says. "But they were begging people to buy it. If you bought two of them, you got a deal. A guy bought six, they shipped him seven -- that kind of marketing."
Arp sold only $1 million worth of Avatars in the two-year life span of the synthesizer. "In 1979, we had an operating loss of about $700,000 and an inventory writeoff of about $300,000," says Pearlman. "So, essentially, we blew our brains out on that instrument."
In the meantime, Mancuso had been desperately trying to peddle the company. "I was trying like hell to sell it," he says with a laugh. "I thought one day I'd slip a letter under their hands and have them sign it -- 'Ha, ha, we fooled you, it's sold! ' They'd have been a lot better off." Mancuso got as far as an informal offer of $10 per share from Gulf & Western Manufacturing Co., when the stock was trading at about $4 per share. But the board remained intransigent. For his efforts, Mancuso was fired.
The same disunity and political infighting that had spawned Avatar prevented the sale of the company. Pearlman, more and more confident that insolvency awaited, was eager to explore the possibility, but he wasn't able to. The board passed a motion prohibiting any officer from talking to a prospective buyer until the offer had been cleared by Arp's law firm, that is, Pollock. Pearlman found himself reduced to holding an "unofficial" meeting with an interested party at Boston's Logan Airport.
Feelers from CBS Musical Instruments were accorded cool and, according to one insider, occasionally arrogant responses.
But, even then, with its cash reserves depleted and time fast running out before the company went under, Arp was not without options. "We could have cut our losses," sighs Pearlman. "We could have said, 'We'll rent out half the building, we'll go very lean, we'll operate in a survival mode.' The biggest mistake was thinking we could turn it around by playing catch-up."
In 1979, Arp introduced a 16-voice electric piano, a versatile and sexy instrument with lots of appeal. "It was supposed to rescue us," says Pearlman. But a switch on the piano failed -- "It was one of those things that went up too fast because we didn't have the time or money to do it right," he admits. "When you left the unit, say, in the back of a hot car, Mylar insulation in the switch would melt." The pianos began to come back in for repairs nearly as quickly as Arp shipped them out.
"The company's sales plummeted, repair costs went up -- all sorts of things started going wrong at that point," recalls Pearlman. That year, the board asked Friend, who had masterminded and pushed Avatar and become president non grata in the process, to resign.
Pearlman returned as president, and another "bailout" product was developed -- Chroma, a remarkable, microcomputer-operated polyphonic synthesizer, which, in fact, would eventually prove quite profitable for another company (see box). But it was too late for Arp. Suppliers were providing parts on a COD-only basis, First National Bank was making angry noises, and, instead of coming to grips with its destiny, management was trying to keep the show going with sleight of hand. Desperately trying to turn 1980 into a breakeveri year, Pearlman lent Arp $168,000 so it could ship a $1 million backlog in November and December. "In January, we discovered that we had created a $300,000 loss," he recounts with obvious regret.
Eventually, Arp found itself pushed beyond desperation; frantic to stay alive, it began playing games with money. Vicepresident of engineering Philip Dodds, who later helped First National unravel Arp's tangled finances, explains that "we were shipping units to dealers with the promise that, if they didn't sell them, we'd take them back and credit them... for the purpose of inflating receivables. The purpose was to generate enough cash flow to get to the point where the practice wouldn 't be necessary."
When First National -- which Arp owed $1.8 million, including nearly $1 million in receivables financing -- found out, it decided to pull the plug.
The bank took Arp to court. After listening to First National and the company's other creditors, the judge appointed a trustee to oversee Arp's liquidation. On May 13, 1981, the trustee took over and on September 11 presided over the sale of all of the company's tangible and intangible assets.
CBS Musical Instruments acquired Arp's inventory for $300,000, and, for an additional $50,000, picked up the manufacturing rights to Chroma and Arp's electric piano. CBS sold more than $3 million worth of Chromas in its first year.
Stockholders and creditors lost more than $4 million when Arp went under; Pearlman and members of his family lost a total of nearly $500,000 in cash.
David Friend, now chairman of Computer Pictures Corp., a Boston-based computer graphics company, maintains a studied indifference to the Arp affair. "We were in a risky business, and we made one bad move," he explains, referring to Avatar. "On top of that, we had some lousy management that blew away what little we had -- that was the end of the ball game."
Pollock prefers to place Arp's failure in a broader context by citing "companies with larger resources, market conditions, and worldwide competition" as elements that contributed to its demise. When pressed, he concedes that Avatar was the critical factor.
Mancuso has a simpler explanation. "Among the three of them, I couldn't get one full-time chief executive officer," he says. "Alone, they're each worth about 0.4 on a scale of 1 to 10; together, they add up to about a 2."
"There was no reason that Arp should ever have gone out of business," says Mancuso. "It's a sin. It's a tragedy to see a beautiful little company, and 200 jobs, go under because of bad management. . . . All three of them -- honest to God -- they should physically have to go to jail and serve six months for screwing up a beautiful thing like that."
