The idea appeared fail-proof.
It was the summer of 1988, and a handful of Maryland's business and political elite thought they had a solution to the panic that was driving beach-goers away from syringe-littered ocean shores.
They'd collect all the trash from local hospitals and burn it in a new, massive incinerator at Hawkins Point in South Baltimore, a prototype for others they'd build across the country.
They thought they'd clean up. And not just the beaches.
But today Medical Waste Associates Inc. is in a crisis. It survives only on the forbearance of its creditors, and its owners are banking on a sale to save the plant.
Much is riding on the sale negotiations. If creditors force the plant to close, MWA's Baltimore-area hospital customers -- already under pressure to hold down costs -- could end up paying millions of dollars more each year to dispose of their infectious waste.
Meanwhile, hospitals across the country, put off by MWA's troubles, continue burning waste in smaller, polluting incinerators or sending it to landfills.
One question lingers: How did a venture with such potential turn into such a mess?
After all, its five founders included such supposedly savvy people as William Boucher III, former head of the Greater Baltimore Committee; Thomas D. McKewen, former head of the Maryland Environmental Service; and the late state Sen. Harry J. McGuirk.
The answer is that the group thought they could pull off the
classic 1980s deal that used borrowed money to chase quick profits. But an overload of debt, compounded by over-optimistic assumptions, technical failures and mismanagement, derailed their dream.
In nearly four years of operation, the nation's largest infectious waste incinerator has driven away its hospital customers, has been caught illegally importing out-of-state waste and has paid thousands of dollars to settle state pollution charges.
At the same time, it paid the original partners -- who invested less than $100 apiece for their 7 percent to 8 percent stakes -- hundreds of thousands of dollars in salaries even though the company has defaulted on about $27 million of debts to everyone from its laundry service to bondholders.
"It makes me angry," said Betty Krysiak of the accounts receivable department of Lord Baltimore Laundry Inc., which has been owed more than $21,000 for three years. "If they could afford to pay themselves that much, why not pay us?"
But Neil J. Ruther, one of the original partners and general counsel to Medical Waste, blames the problems on bad luck and a contractor who bollixed the construction.
He and the other partners have done nothing wrong, he insisted.
"You couldn't have bought that expertise for that," he said. "I have worked for three years for free."
He still believes MWA will work.
"This is a great plant and a great idea," he said. "This is the wave of the future."
At first glance, the MWA partners are an unlikely collection.
Mr. McKewen, a soft-spoken engineer, had been in charge of developing landfills for the state in the 1970s. Since the early 1980s, he had been trying to start a waste incinerator business.
Mr. Boucher, the outgoing scion of a Baltimore tobacconist, spent 25 years as the first head of the powerful GBC before starting and selling a public relations firm and then branching into real estate development. He had helped finance Harry Hughes' gubernatorial campaigns in the 1970s and 1980s.
Mr. McGuirk, a South Baltimore politico nicknamed "Soft Shoes" for his smooth manner in the halls of power, had once run against Mr. Hughes and was working for Gov. William Donald Schaefer in the late 1980s.
Mr. Ruther was a specialist in commercial law at Ober Kaler Grimes & Shriver who quit to focus on his business ventures.
The fifth was Andrew H. Kaufman, a developer with ties to AlvinSherman, owner of a large Florida homebuilding company.
What the five had in common were connections -- to political power and to money.
They knew whom to call, and how to get what they needed from government: everything from the land for the incinerator, which was owned by the city, to state environmental permits and permission to sell tax-free revenue bonds.
And they would use their business connections to find investors willing to kick in cash.
Mr. Kaufman helped bring on Mr. Sherman, then owner of Development Corp. of America. Three companies associated with Mr. Sherman and his family were given 54 percent of MWA in return for loans of more than $1 million.
And the Baltimoreans brought on a group of three wealthy black investors: Otis Warren Jr., a prominent Baltimore developer; Raymond V. Haysbert Sr., chairman of Parks Sausage Co.; and Theo Rodgers, a developer, each contributed $100,000 in 1989 in return for a total 6 percent share.
Mr. Warren said the founders told him they wanted to include minorities in MWA's ownership, and persuaded him MWA was a goldeninvestment. But now he fears his group will lose money.
"We all thought we were going to get rich," Mr. Warren said. "I feel ripped off."
Even critics of the group concede that their goal was worthy.
Maryland hospitals were in the midst of a crisis in 1988. As a result of the growing AIDS scare, companies that disposed of infectious hospital waste -- anything that had touched a patient -- were charging as much as $800 a ton.
And Baltimore Refuse Energy Systems Co., which had been charging about $50 a ton to burn the non-infectious trash, had stopped accepting all hospital refuse after finding some infectious waste mixed in.
So the Maryland Hospital Association formed a committee to find a permanent solution.
The MHA group, headed by Ronald Peterson, now president of Johns Hopkins' Bayview Hospital, concluded that an incinerator which would accept all hospital waste was best.
Before the MHA panel started looking for bidders, though, the MWA founders offered to build to its specifications.
The deal they worked out called for local hospitals to sign 20-year contracts to pay MWA at least $300 a ton for all their waste, with an assurance of minimal price increases over the period.
The hospitals were glad to pay a premium for the hassle-free disposal, Mr. Peterson said.
"But it's been one hassle after another," he said.
In hindsight, those familiar with the project said, there were signs of trouble from the very start.
One example: the deal to buy the Hawkins Point site from the city.
Because the city wanted to help the local hospitals, it agreed to sell five acres for $343,700 -- at the low end of a city valuation that topped out at $450,000 -- to a separate company owned by Mr. Boucher and Mr. Ruther as long as they didn't turn around and sell the land for a profit.
Land sold for $2 million
But within weeks, they seemed to have violated at least the spirit of that agreement when they sold the land to MWA for $2 million.
There was no "profit" built into that price, Mr. Ruther said. Instead, he said, he and Mr. Boucher were repaying themselves for development costs and their time.
But John Hentschell, the city's real estate officer at the time, said that may be splitting legal hairs.
"No one was supposed to make a profit," said Mr. Hentschell. "They may have done so indirectly."
That was only the beginning.
Recognizing their ignorance about incinerators, the founders decided to hire experts to build and operate the plant.
They picked Richmond, Va.-based Consumat Systems Inc., a financially wobbly company that had never built a system like the one MWA planned.
But the founders overlooked those red flags because Consumat had built more than 2,000 incinerators and was operating a burner in Harford County.
As Consumat started construction in 1990, the founders, buoyed by their initial success at winning contracts with 18 hospitals and dreaming of expansion, tried to make a quick profit by selling a 75 percent share to private investors for $45 million. That would have been enough to pay off the $24 million worth of tax-free bonds they had floated for the project, and still leave $21 million, some of which could be used to start plants elsewhere. And they would have retained a hefty equity stake in the Baltimore plant.
But no one bit.
They tried again in July 1991, just two months after the plant began operating. They told potential investors MWA had contracts to burn 65 tons a day at $300 a ton, and expected to take several dozen more tons a day at the spot-market price of up to $600 a ton.
In the prospectus, they projected that in 1992, the first full year of operation, they'd take in as much as $12.1 million, and pay out about $6.6 million in operating costs and $8.2 million in debt service, leaving a deficit of around $2.7 million. But they planned to win over a few more hospitals and make a net profit by 1994. By 1998, they projected MWA would be making a net profit of more than $5 million a year.
That rosy scenario unraveled almost immediately.
In the fall of 1991, Consumat, after months of struggling to make the plant's high-tech conveyor system work, ran out of money and pulled out. It left with about $4 million in unpaid contractors' bills.
MWA estimates it spent more than $1 million fixing and finishing the plant.
Costs underestimated
Consumat's attorney, William Waddell, acknowledges his client underestimated the costs. But he said the incinerator's woes were compounded by the founders' decision not to contribute much equity and instead fund the project with debt.
Indeed, the plant cost much more to run than MWA had budgeted -- $650,000 a month rather than the $275,000 originally projected.
That shortfall had prompted Consumat, and the managers hired after its departure, to ignore the city law that limited them to burning waste from Baltimore and three surrounding counties.
When the city discovered MWA had been importing as much as 30 tons a day from out of state, it sued to shut down the plant. MWA countersued, racking up big legal bills.
In November 1992, as the city was working out a compromise with MWA, City Auditor Allan L. Reynolds attempted to analyze the company's finances.
But he couldn't find where much of MWA's money had gone; no one in the company had made any entries in the account books for five months.
What he was able to piece together was troubling. For example, the auditors found that the company had paid at least $300,000 to the partners as salaries, even as suppliers were going unpaid.
The city and MWA settled their dispute last summer with an agreement that allowed MWA to collect waste from four more counties. But the company's troubles continued.
Continued cash shortages forced the company to lay off about 30 workers.
Just last fall, Mr. Sherman and Mr. Kaufman asked the Maryland Environmental Service, which operates more than a hundred waste plants around the state, if the state would buy MWA.
According to MES Director George Perdikakis, Mr. Sherman said he needed $37 million from the sale just to break even. Mr. Perdikakis said that was too high, and the negotiations broke down.
Garbage not picked up
The final blow came this winter when MWA's trucks couldn't negotiate the icy streets to pick up garbage.
Two hospitals, including MWA's biggest customer -- Johns Hopkins -- pulled out. That cut the MWA's daily incineration by nearly 20 tons to about 50 tons -- far below the 84 tons city auditors estimated MWA needed simply to keep operating.
As a result, MWA, which was already facing about $5 million in unpaid bills to suppliers ranging from electrical contractors to labor lawyers, defaulted on its most important debt -- it failed to make its March payment to bondholders.
Now, as venture capitalists associated with Timonium-based Grotech Partners Inc. negotiate to purchase the plant, creditors are holding off on foreclosure in hopes of collecting at least part of their money. And the bondholders, led by Dreyfus Corp., are in talks about restructuring the debt.
Mr. McKewen has been taking calls from hospitals in other cities "checking where we are, to see if we have any pulse left."
He concedes the founders ought to have provided more cash to take care of emergencies like Consumat's pullout.
But that, he said, could not have been foreseen. Independent engineers and financial analysts endorsed MWA's blueprints and projections. And the founders, a group of successful businessmen and politicians, couldn't have expected so many things to go wrong.
"I've never been associated before with a failure like this," Mr. McKewen said.
MWA chronology
* Aug. 25, 1988: Medical Waste Associates Inc. is incorporated. The partners are William Boucher III, Andrew H. Kaufman, Neil J. Ruther, Harry J. McGuirk and Thomas D. McKewen.
* May 23, 1989: Mayor Kurt L. Schmoke, who had lobbied hard for MWA, suddenly withdraws his support, claiming he'd been misled. He says the founders told him that all city hospitals would shut down their incinerators when MWA built its planned 150-ton-a-day unit. But several hospitals refuse to sign up with MWA, and report they will continue operating their burners.
* June 23, 1989: Advanced Technology Investments Inc., owned by Otis Warren Jr., Theo Rodgers and Raymond V. Haysbert Sr., is incorporated. The three black partners invest $300,000 in MWA in return for a 6 percent stake.
* June 26, 1989: After winning back Mayor Schmoke's support, MWA wins city approval for incinerator; it is limited to accepting medical waste from the city and Baltimore, Anne Arundel and Harford counties.
* Sept. 5, 1989: Board of Estimates agrees to sell 5 acres at 3200 Hawkins Point Road to a company owned by Mr. Boucher and Mr. Ruther, with the condition that the land not be resold for a quick profit.
* Sept. 7, 1989: State Department of the Environment issues permit.
* Nov. 15, 1989: Maryland Industrial Financing Authority backs $24 million of tax-free bonds to finance construction of the MWA plant. The prospectus reveals that Mr. Boucher and Mr. Ruther sold the Hawkins Point property to MWA for $2 million.
* May 1990: As Consumat Systems Inc. builds the plant, the founders attempt to sell 75 percent of the company to outside investors for $45 million.
* Nov. 10, 1990: Test burning starts.
* March 7, 1991: City attempts to close incinerator after discovering it has been burning out-of-state waste.
* June 1991: MWA files a federal suit challenging city's limitation on its acceptance area.
* July 1991: Founders again try to find new investors. Prospectus values company at $35 million.
* August 1991: Poole & Kent Co., a plumbing contractor, files a mechanic's lien seeking payment of more than $110,000. Whiting Turner Contracting Co. files a lien for more than $162,000.
* Aug. 29, 1991: U.S. District Judge Frederic N. Smalkin rules in favor of the city on MWA's acceptance area. MWA appeals.
* Oct. 20, 1991: Consumat announces it is pulling out. It pays MWA 1.2 million shares of Consumat stock to be released from about $4 million worth of construction debts.
* Oct. 24: MWA hires National Medical Waste Inc. and Tate Engineering Services of Baltimore to operate the incinerator.
* Dec. 13, 1991: MWA asks the city to expand the region it can serve.
* April, 1992: MWA hires one of the operators' executives, Karen Goodhart, to run the Hawkins Point plant. National Medical and Tate leave, still owed more than $487,000 for its services.
* May 28, 1992: A federal appeals court dismisses MWA's appeal over its acceptance area.
* Nov. 23, 1992: City auditors investigating MWA report the company is in financial chaos.
* June 20, 1993: In a compromise, the city expands the incinerator's acceptance area; MWA agrees not to violate this limitation and to drop its lawsuits against the city.
* Sept. 1993: After news of the Baltimore difficulties reach California, a native-American tribe rejects a bid by three MWA founders to build an incinerator on their land near Palm Springs.
* January 1994: Icy roads prevent MWA from picking up trash at local hospitals. As a result, Johns Hopkins Hospital pulls out of its contract.
* March 1994. Because of the loss of Johns Hopkins, MWA defaults on its bond payments. Mr. Boucher, facing personal foreclosure because of a troubled real estate investment, seeks bankruptcy court protection.
* April 1994: MWA begins negotiations for its sale to Grotech Partners Inc. of Timonium.