Neither Dawson nor anyone else at Teltronics ever argued with Beagan's methods. And why should they? His tactics worked. In 1976, the company's sales climbed to about $5.2 million, up 25% from the previous year.
But Teltronics was now hooked in an endless cycle of loans and purchase requirements. Even so, when Beagan heard what had happened to Ericsson's Miami distributors -- they had been taken over, allegedly because they had fallen behind on their trade payments to the Swedish manufacturer -- he shrugged off the news. Beagan assumed he had nothing to worry about because he had an influential friend in Sigge Malmstrom, the head of L M Ericsson Telecommunications.
The two men were, according to the people who worked for them, like father and son. "They were so close," Dawson recalls, "that when Sigge had a major operation and they didn't expect him to survive, there were only two people outside of the family who stayed waiting for Sigge to come out of the operating room. That was Ed Lavin [Teltronics's sales manager] and Ed Beagan. I could never imagine Sigge doing anything to Ed Beagan."
Neither could Beagan. Besides, Teltronics was growing quickly. By 1977 it had expanded its market area from New York City to all of Long Island, with Jack Dawson in charge of the new territory.
Ericsson, presumably as a gesture of goodwill, offered Dawson free office space, although that turned out to be a table in the Swedish corporation's cafeteria. "Still, it was a start," Dawson says.
At Ericsson, however, Dawson began to hear unsettling rumors that Teltronics wasn't paying its bills. As Teltronics's man, Dawson had to field questions from Ericsson executives: Why isn't Teltronics selling more PABXs on Long Island? Why aren't sales doubling?
At the time, Teltronics owed Citibank a whopping $3.7 million, and it had asked Ericsson to back a loan for an additional $1.9 million. But Ericsson took its time in responding to this request. The Swedish company had begun to grow concerned about the health of its key U.S. distributor at a time when Ericsson, facing stiff competition from a new generation of electronic PABXs, could ill afford a financially weak sales operation. Ericsson's sales to Teltronics accounted for 63% of its total U.S. PABX orders in the first half of 1977. Jorgen Lind, an Ericsson internal auditor in Stockholm, was dispatched to New York in August to "form a general opinion" of Teltronics and "investigate the appropriateness" of Ericsson's role as a guarantor of additional bank loans.
His report to Ericsson management praised Teltronics's marketing organization, but was sharply critical of Beagan as a businessman. "He seems . . . to be [a man] possessed by the 'American dream' to succeed and to do it quickly," Lind wrote. "There is a risk present in that he, in order to achieve this goal, will throw himself into quite risky affairs and expand much too quickly."
Teltronics, Lind concluded, needed $2.8 million in additional financing in the coming year. Lind quoted Beagan as saying that if this money was not provided through Ericsson-backed loans, Teltronics's alternatives were to undertake a public stock offering or to borrow from Ericsson's competitors (which would then require that Teltronics market their PABXs).
Should Ericsson consider an equity investment in Teltronics? Lind asked. He arrived at no conclusions, but the issue of an equity investment by Ericsson began to haunt the companies' relationship.
Two months after Lind filed his report, Teltronics borrowed $2.8 million from Nordic American Banking Corp., a subsidiary of a Swedish bank that provided banking services to Ericsson, with the amount to be drawn in several installments. But several provisions were added to the agreement between the bank and Teltronics. Among them: Teltronics must buy switching equipment from Ericsson at not less than 175% the amount of guaranteed loans. Beagan denies it, but an Ericsson lawyer says that Beagan himself had suggested a higher percentage. "He hoped to induce us to guarantee the additional loans," says Robinson B. Lacy, a lawyer at Sullivan & Cromwell, the New York City firm representing Ericsson.
In February, Beagan sent off his 1978 budget to Ericsson, as required. In it, he estimated revenues of $19.3 million (nearly double 1977 revenues), and called for a hefty $2.7 million in new loans. It was clear that Teltronics's financial situation had begun to deteriorate.
So had its relationship with Ericsson. One reason for the rift, Beagan and Dawson charge, was Teltronics's move into the Massachusetts market. The action, taken without prior consultation with its Swedish supplier, brought the small company into head-to-head competition with Ericsson's Boston operation (Ericsson New England) and caused Teltronics to run up another $1.7 million in bank loans.
Malmstrom, Beagan claims, was infuriated by Teltronics's expansion into Ericsson New England's territory, and ordered Beagan to close Teltronics's Boston office. Although Ericsson denies it, Beagan says that he and Malmstrom exchanged verbal barbs and that their friendship collapsed shortly thereafter.
Among the first people to feel the impact of the split was Dawson. He began to be treated at Ericsson headquarters like an unwanted guest. "I remember holding a sales meeting on a Tuesday morning at my table," he recalls. "Five or six people were smoking, and there were ashes on the table. I had a secretary come up to me and say, 'You have to clean [the ashes] off the table.' I wound up cleaning the table, just to keep peace in the family."
Ericsson was more concerned about cleaning up Teltronics's balance sheet. Complaining about Teltronics's slowness in paying for the equipment it ordered, Ericsson pressed for tighter controls over the small company's finances. In March, Ericsson got a lock-box agreement that it had been seeking for Teltronics's lease customers. It would give Ericsson control of Teltronics's lease payment cash flow if the smaller company defaulted on its Ericsson-backed loans.
The lock-box arrangement annoyed Beagan, as did Ericsson's rejection of his request for backing of additional loans. The Swedish company, Beagan was told, wanted Teltronics to pay on its Ericsson account. Ericsson also wanted Teltronics to slow down its growth so that the small company could curtail its appetite for cash.
