Last May the price of shares in Prison Realty Trust Inc., the parent company of Corrections Corporation of America, fell almost 35% within a week after Prison Realty announced it would pay increased costs for building and marketing private prisons. Several investment firms downgraded Prison Realty's stock, which dropped to a 52 week low from a high of about $22 per share.

On May 14, 1999, company officials said Prison Realty will pay $4,000 per bed in incentive fees to CCA, its main tenant for new facilities -- up from a previous fee of $840 per bed. The increase, which was made retroactive to January 1, will cost Prison Realty shareholders an estimated $80 million in 1999 alone.

According to Prison Realty chairman and CEO Doctor R. Crants, the company also will pay 4.5% of the cost of each facility to CCA in business development expenses. Further, a 5% fee paid to CCA for capital expenditures has been doubled. Prison Realty officials did not mention the elevated costs in a May 5 first quarter earnings statement even though the company's board had approved the increases the day before.

Prison Realty, a real estate investment trust (REIT), distributes almost all of its profits to shareholders through dividend payments; thus, the cost increases will have a direct impact on investors' returns. Rank-and-file CCA employees receive company stock in lieu of a pension plan and the declining stock value reduces their retirement savings.

"It caught everyone a little off guard," said Gary Boston, an analyst with Paine Webber who downgraded Prison Realty's stock from attractive to neutral. Jerry Doctrow, an analyst with Legg Mason Securities, was more blunt stating the increased costs raise "serious questions about the credibility of the management team" at Prison Realty. "People are debating whether these guys are incompetent or thieves," he said.

On May 21, in an attempt to reassure investors and stem the stock price slide, Prison Realty released favorable occupancy rate information for CCA facilities. Also, on May 25, Crants bought 50,000 shares in Prison Realty to promote confidence in the stock; he now owns over two million shares in the company.

But Prison Realty's stock fell an additional 14% on June 4, to less than $11 per share, amid concerns that the company was paying higher interest rates to acquire capital. Prison Realty announced plans for a $100 million bond sale at 12% interest - well above the 9.25-9.5% interest rate that had been anticipated. The higher rate will result in a smaller amount of revenue for the company over the long term.

At least eleven Prison Realty investors have filed lawsuits against the company in Nashville courts, seeking to represent shareholders in class-actions. According to a federal suit, shareholders claim the company "waited until after release of its first quarter results to retroactively alter" the fees it pays to CCA. They are seeking damages for losses caused by the decline in Prison Realty's stock price; Prison Realty chairman Crants and his son, Prison Realty president D. Robert Crants III are named as defendants.

Commercial Appeal (TN), The Tennessean