ISETAN TELLS COURT THAT BARNEYS LIED ABOUT ITS FINANCES

Byline: Jeff Siegel

NEW YORK — Isetan Co. Ltd., the global business partner of Barneys New York, has broken the short-lived truce between the two companies by accusing the retailer of fraudulently inducing it to make $180 million in loans.
Amid industry talk of a possible deal on the table for Isetan to take control of Barneys and an apparent warming of relations between the often-battling partners, Isetan began a new attack, charging in court that Barneys lied about its financial health.
In past letters, Isetan attorneys had accused Barneys of inducing Isetan to make the loans by misrepresenting its financial condition, but this latest development marks the first time Isetan made the charges in court.
The papers were filed in court March 14, but not made public until Tuesday. In the papers, Isetan accused Barneys of:
* Presenting a financial report showing a 1993 pre-tax profit of more than $19.5 million. Isetan said it learned later that the chain actually lost money that year.
* Claiming the $180 million in loans were needed merely to cover temporary cash flow problems related to store construction, when they were actually caused by “deep-rooted financial problems.”
* Undertaking corporate actions without holding board meetings and funneling money from all of the various operating divisions through one bank account “without proper accounting entries and for inadequate or no consideration.”
Barneys did not return calls seeking comment on Isetan’s latest charges. A spokeswoman said late Tuesday that Barneys was putting together a response, but it probably would not be ready until today.
In its angry 77-page answer to Barneys’ January complaint accusing Isetan of unfairly siphoning off $50 million from the retailer, Isetan said it bankrolled the construction of the three Barneys’ flagship stores, despite a series of delays and cost overruns, based on Barneys’ “misrepresentation of [its] financial condition and operating results.”
Isetan said the three flagship stores — in Chicago, Beverly Hills and Madison Avenue — were built with the idea that Isetan would receive rent on the three properties, plus an unspecified percentage of the stores’ gross sales.
Barneys, which claims Isetan’s capital infusions were simply equity investments, filed its complaint in bankruptcy court in January to recover from Isetan $50 million it says its business partner “unfairly” withdrew from the company.
Isetan’s response seeks repayment of the $180 million in loans plus $10 million in punitive damages. Isetan said in its court filing that while Barneys always represented itself as a strong and profitable operation, the retailer was actually struggling “at least as early as fiscal 1993.”
Barneys’ alleged efforts to camouflage its deep-rooted financial problems were “designed to induce Isetan and Isetan of America to make loans and other expenditures to assist Barneys to overcome purportedly temporary cash flow problems related to store construction and expansion,” Isetan charged.
Time and again, Isetan charges, Barneys promised to repay short-term loans, only to renege on those promises.
For example, Isetan pointed out that shortly after the construction of the Madison Avenue store in fall 1993, co-chief executive officer Robert Pressman provided Isetan with “glowing statements” about Barneys’ profitability, with one presentation showing pre-tax earnings at over $19 million.
These statements, Isetan said, were finally proven to be false on the eve of Barneys’ bankruptcy in January, when Barneys provided Isetan with certain “real” numbers that proved Barneys’ financial situation was a mess.
Isetan said the true picture of Barneys’ finances “expose Barneys under Pressman management as an entity burdened with an impossible cost structure, due largely to inflated employee and administrative costs.”
Isetan said Barneys lost money in fiscal 1993 “and continued to lose at an accelerating rate in 1994.” Isetan did not, however, provide Barneys’ actual results.
While Barneys continued to drown in red ink, Isetan contends the retailer continued to mislead it about the rapidly deteriorating state of its finances in order to convince Isetan to pour even more money into Barneys.
“Through false and fraudulent representations backed up by false financial statements provided to Isetan…Barneys induced Isetan to extend ‘temporary’ loans and other benefits to itself and its affiliates on an emergency basis,” Isetan charged.
Barneys also convinced Isetan to continue to lend it money by dangling the idea that Barneys would consider restructuring the loans by giving Isetan an equity interest in the retailer’s operations.
Those discussions, Isetan noted, were “founded on the false representations of Barneys and its Pressman management that Barneys was an efficient, profitable and valuable enterprise, with substantial profits and potential for greater profit, and that an equity interest in Barneys would be a desirable investment.”
On Dec. 28, 1993, Isetan charges, Robert Pressman, in order to secure two loans totalling $54 million, brushed aside press reports of Barneys’ late payments to the trade and represented that 1993 would be Barneys’ “best year in its 70-year history.” Isetan charges Barneys lost money in 1993.
Again on Feb. 4, 1994, Isetan charges, Robert Pressman approached Isetan for a $27 million loan, purportedly to cover construction cost overruns on the Beverly Hills and Madison Avenue stores. Wary, Isetan asked for assurances and Pressman offered an option to purchase 49.9 percent of the downtown addresses owned by Barneys, consisting of numbers 138 through 140 West 17th Street. While some of the lots on the overall downtown store site are leased, the Pressmans own part of the property. Robert Pressman estimated the value to be worth $35 million, the suit charges.
Isetan eventually loaned Barneys $20 million but thereafter couldn’t gain assurances of its collateral because Barneys subsequently refused access to its books.
Isetan ultimately provided Barneys with even more loans that Isetan said has “greatly augmented the Chapter 11 estate” of Barneys by making sure that the loans went to pay off “critical costs” of the business, notably the opening of Barneys’ Beverly Hills and Madison Avenue stores.
The flagship stores are now the most productive of Barneys units, Isetan said, accounting for more than half of Barneys’ sales and an even greater percentage of gross margin and profits.
By November 1995, Isetan said Barneys was so desperate for money that it allowed Isetan a close inspection of its numbers. The inspection revealed a “financial and operating condition far worse than could have been imagined,” Isetan said.
Isetan said the loans it made to Barneys are “valid and enforceable obligations” and have been carefully documented.
The Japan-based investment firm explained that it failed to detect that Barneys was on shaky financial footing until November 1995 because the Pressman’s were very reluctant to provide details of Barneys’ operations and continued to maintain that Barneys was going great guns.
The latest suit comes at a time when Isetan and Barneys, according to sources, are discussing a deal that would have Isetan buying Barneys and having the Pressmans run the day-to-day operations.
Meanwhile, Barneys and Isetan are scheduled to meet with Stephen Case, the court-appointed mediator, on April 1 to continue discussions toward a settlement of the rent dispute. It will be John Brincko’s first meeting with Case since the bankruptcy court on March 22 approved his appointment as Barneys’ senior Chapter 11 restructuring officer.
Barneys, which claims it doesn’t owe rent on the three flagship stores because Isetan is an equity partner, reached an agreement with Isetan to submit the rent issue to the mediator.
The agreement is scheduled to run through April 19. — Fairchild News Service

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