A Winchester, Ky., company learned a costly lesson that profits don't always lie on distant shores.

The Freeman Corp. tried to export white oak veneer to Japan, but it turned out to be a financial disaster that threatened the survival of the 83-year-old company.The price of that lesson included two years of expensive legal battles with an international giant, Tomen Corp.; the loss of 90 jobs at Freeman's Winchester plant; and cancellation of expected purchases of white oak in eastern Kentucky.

Freeman said it became a pawn in a failed business plan between Tomen and another Japanese firm. To extricate itself, Tomen sent Japanese inspectors to Winchester who rejected almost all of the products on grounds that they didn't measure up to quality standards.

Although Tomen denied wrongdoing, a U.S. District Court jury in Ashland found in favor of the Kentucky company this summer and awarded $6.5 million in damages to Freeman.

Company chairman Eugene E. Freeman Jr. said that in the future he'll insist on a written contract before the company does any work or spends any money.

"But I think the real lesson is the old one: "If it looks too good to be true, it probably is,' "

However, the Freeman-Tomen dispute may have marred Kentucky's image as a good place to do business in the eyes of Japanese companies.

"The question is: Would they even want to come back and do business in

Kentucky? The answer is no. I think this experience left a bad taste in their mouth," said Lexington attorney Danny C. Reeves, who represented Tomen and its U.S. subsidiary, Tomen America Inc., in the case.

The award from the federal jury in July covered most of Freeman's losses, but jurors didn't grant punitive damages.

The Tomen-Freeman project began in January 1989 when executives from Tomen and

Kyodo Plywood and Veneer Co. toured the Winchester plant. They were visiting U.S. companies, looking for a supplier of veneer for hardwood flooring that would be made by Kyodo in Japan.

Freeman finalized a deal with Tomen in October 1989.

Kyodo needed veneer because it was developing a machine, known as the Shonai Splicer, that was expected to sharply reduce the cost of oak flooring by eliminating most of the manual labor needed to produce it. Oak flooring is in high demand from Western oriented Japanese consumers.

But Freeman's lawyer, D. Duane Cook, argued at the trial that Tomen and Kyodo learned before the production started at Winchester that the Shonai Splicer would not work, and that Kyodo needed no more than 25 percent of Freeman's output.

In general, the deal with Freeman called for Tomen to help pay for an expansion of the Winchester plant. The Japanese eventually would invest about $1 million of the $3 million cost of construction and equipment.

Tomen also agreed to buy all rotary veneer produced by the plant in its first six months and then try to find buyers for the plant's output for the next 4 1/2 years.

Production started in November 1990, but the plant operated only about 30 days during the next few months until Tomen asked for a halt in production in March 1991.

"They did . . . what many unethical buyers do when they don't need the volume," Mr. Cook told the jury. "They complained about the quality."

The Japanese inspectors at the plant rejected nearly all of the veneer, claiming it was cracked or too thin or too dry. Only seven trailer loads were exported, and they were rejected in Japan.

Freeman filed suit in July 1991, accusing Tomen of breaking the contract the companies had signed.

Mr. Reeves argued during the trial that Freeman Corp. was under such

financial pressure that it had made poor decisions about the start of production. He told the jury that since it was unable to produce high-quality veneer, Freeman could survive only by collecting damages from Tomen.

An independent expert examined veneer produced at the Winchester plant and testified that it met Kyodo standards.