Ailing firm vows to repay bondholders

Another longtime Spokane financial company is struggling and may fold.

Pacific Security Companies Inc. sold unsecured bonds to Spokane investors over the years and invested the money in real estate ventures.

Started by the late Wayne Guthrie and now managed by his son David, the company in many ways resembles Metropolitan Mortgage & Securities Inc.

Despite their parallel business models, though, the similarities end there, David Guthrie said.

Pacific Security is selling off assets and intends to make bondholders whole.

There are 180 people in the Spokane area holding about $6.4 million in unsecured bonds issued by the 47-year-old company.

Letters were mailed last week to Pacific Security’s investors outlining the troubled firm’s strategy, including its voluntary motion to be put under the watch of a court-approved receiver to oversee the company and protect investors’ interests.

“My only objective right now is that this ordeal is handled in a professional, fair and compassionate way,” Guthrie said. “I’m trying to get the bondholders paid in full.”

The company has sold unsecured bonds, called debentures, to Spokane residents for 35 years and never has missed an interest payment.

Guthrie urged investors not to panic. “I’m taking calls personally, and I’m not running away,” he said. “This is different than Metropolitan.

“While there may be comparisons, I want people to know we have been conservative in our accounting, and we’ve voluntarily sought the appointment of a receiver.”

Spokane attorney Barry Davidson has been named receiver in the case, which is on file in Spokane County Superior Court.

“We think bondholders will be made whole, or close to it,” Davidson said. “This was done to protect Pacific’s assets and get the money to creditors.”

Trouble started in 2001

Pacific Security’s downfall can be traced to 2001.

The company lost $1.3 million in 1999, but Guthrie said he moved quickly to boost the bottom line.

By the first part of 2001, the company had turned around and posted a $200,000 profit, Guthrie said.

Then the terrorist attacks of Sept. 11 wrecked the economy nationwide. Partly in response, US Bank pulled Pacific Security’s credit line, as well as those for other higher-risk companies. The Spokane firm had tapped $13.5 million of its credit line with the big bank and now had 45 days to repay.

Guthrie notified Washington Mutual, with which Pacific Security also had a credit line, of his company’s problems with US Bank. Within a week, Washington Mutual also called its credit line and demanded that the Spokane firm repay $11.5 million.

“I lost $25 million in lines of credit, which was the source of our liquidity and helped us make commercial loans that in turn helped us be profitable,” Guthrie said.

Around the same time, regulators at the state Department of Financial Institutions notified Pacific Security it could not issue new debenture bonds.

Greg Toms, chief of registration for DFI’s securities division, said last week that a close eye was kept on Pacific Security.

“We discussed the bad financial condition the company was in,” he said, adding that DFI is charged with ensuring debenture companies such as Pacific have the ability to repay investors.

Guthrie believes that DFI was especially cautious, perhaps too much so, because of its adversarial relationship with Metropolitan over the years.

Today, Pacific is one of only two debenture companies operating in Washington. The other is in Bellingham.

Without credit lines and bond sales to raise money, Pacific Security was forced to begin selling its assets, such as downtown Spokane buildings, to repay the banks. Selling property during the economic downturn was a money loser, Guthrie said. Guthrie said he tried to form a bank as a new source of money. The company considered selling preferred stock. Neither proposal worked.

Pacific Security even tried to launch a mortgage subsidiary, but such a business wouldn’t deliver the emergency cash needed to satisfy banks.

“It’s been a real challenge,” Guthrie said, noting he contacted 16 different banks to try to set up new lines of credit.

“The environment within the banking world at that time just wouldn’t allow it to happen,” he said. “Banks were vigilant as they eliminated exposure to higher-risk clients (like Pacific Security).”

If Pacific can successfully pay bondholders and other creditors, Guthrie hopes he can find a business partner and rebuild the company.

The business has about $800,000 cash on hand, expects a $1.5 million cash infusion within the next two weeks, and believes it has the assets necessary to meet its obligations.

Family legacy

The death of his father last year has made Pacific’s downfall especially painful for Guthrie. “This company represents the life’s work of my dad,” Guthrie said. “That’s what makes this terribly disappointing and very difficult.”

Wayne Guthrie was a Spokane business leader with local political aspirations, serving on the City Council but losing three bids to become mayor.

His Guthrie Construction company started in the 1940s and built thousands of homes in postwar Spokane and the Northwest. In 1957, he founded Pacific Security.

Homebuilding remained the company’s focus until the mid-1960s, when it evolved into a mortgage financing firm.

It began selling debentures in 1969, using the unsecured bonds as a cash source to finance its business activities.

In the 1970s, Pacific Security began buying seller-financed real estate notes at discount prices. This was the same business Metropolitan was largely engaged in at the time.

Pacific Security also began investing in commercial properties such as the downtown Peyton building at 10 N. Post St., and the Hutton building at 9 S. Washington St.

During the late 1980s, Pacific Security was managed by Wayne Guthrie’s sons, John and Robert Guthrie. John Guthrie left in 1988, and Robert steered the company into property development.

Robert Guthrie left the company in 1991 and Wayne Guthrie, then 71, took back the reins.

According to a report filed with the U.S. Securities and Exchange Commission, family disputes erupted and consumed company money and time throughout the 1990s.

After protracted litigation, Pacific Security agreed to settle claims with minority shareholders, including Robert Guthrie, John Guthrie and their sister, Linda Guthrie.

The settlement included the redemption of common stock for nearly $1.7 million plus attorney fees. David Guthrie was named president and CEO in 1999.

New focus

During the 1990s, Pacific focused more on its investment properties and bought the Pier 1 Imports building at 101 W. North River Drive and other commercial buildings.

The company developed the Birdies Golf Center on the North Side, which featured a 56-tee driving range, pro shop and 8,000-square-foot putting green. The golf project was never profitable, and in 1998 Pacific Security sold off the pieces and built the Cornerstone Office Building.

In 1998, Pacific Security formed Cornerstone Realty Advisors, which returned the company to its core business of real estate lending.

The company made high-risk bridge loans using money from its credit lines with US Bank and Washington Mutual.

When the credit lines were called by the banks, Pacific began selling assets.

Among them: The Hutton building was sold in March 2002 for $3.5 million.

The Pier 1 building sold for $3.7 million in December 2003. The Peyton building sold in June 2004 for $5.8 million.

Guthrie said the company will continue to do everything necessary to pay bondholders. The company once had about 25 employees. It now has four.

“In hindsight, you look back and, sure, you would do some things differently,” he said. “But I can say that I worked as hard as I could have and did everything I could.

“Sometimes things are out of your control.”