Why Owning GMXR Shares is a Risky Proposition

Preferred Stock Offering
The latest GMXR 10Q stated on page 10, "On August 8, 2006, we sold 1,800,000 shares of our 9.25% Series B Cumulative Preferred Stock at $25.00 per share. Additionally, the underwriters exercised their option to purchase up to an additional 200,000 shares of Series B Cumulative Preferred Stock, resulting in a total offering size of $50 million. The closing of the sale of the 2,000,000 shares occurred on August 11, 2006."

The 10Q went on to state, "The initial annual dividend on each share of Series B Cumulative Preferred Stock is $2.3125 (an aggregate of $4,625,000) and is payable quarterly..."

Lets do the math:

$25(preferred share price) X 0.0925 (interest) = $2.3125

$2.3125 / 4 (quarterly dividend payments) = $0.5781 per quarter.

2,000,000 (preferred shares) x $0.578125 (dividend/share) = $1,156,250 dividend payment per quarter.

In other words the GMXR preferred stock (2,000,000 shares outstanding) will effectively REDUCE GMXR net income by an amount of $1,156,250 each quarter. Since share price is based on EPS longterm, we can expect GMXR share price to be impacted negatively. This fact should be underscored given the fact that the dividend payment each quarter is a significant percentage of quarterly net income.

How would the full dividend payment of $1,156,250 have affected Q3'06 net income and eps?

GMXR net income (before dividend payment) for Q3'06 was reported as $2,860,905. If we factor in the full dividend payment that will be due each quarter the net income available for common shares would have been reduced to:

$2,860,905 - $1,156,250 = $1,704,655

With 11,380,283 fully diluted common shares outstanding the EPS would have been:

$1,704,655 (net income) / 11,380,283 (common shares) = $0.14

In other words EPS for the GMXR common shares (fully diluted)would have been $0.14 after a dividend payment to the preferred stock holders.

What would the EPS have been for common shares if there was no preferred stock?

$2,860,905 (net income before preferred payment)/ 11,380,283 (common shares) = $0.25.


In other words, GMXR common shares would have had EPS of $0.25 in the absence of any preferred stock dividend payments.

In conclusion, we are looking at a situation where GMXR common stock shareholders would have been penalized $0.11 per share in earnings if the full dividend payment were paid out in Q3'06. This effectively would have reduced earnings per share by 44% from $0.25 to $0.11 per share. This reduction in EPS increases the risk of holding the GMXR shares. (Margin of safety has already been eroded as previously discussed in an earlier post.) Any softness in the price of natural gas will magnify the negative impact of the preferred stock dividend on GMXR earnings per share.