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Technology Stocks : Applied Magnetics Corp
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To: Brian Lempel who wrote (11696)4/3/1998 4:29:00 PM
From: Jonathan Bird  Read Replies (1) of 12298
 
1. Would hedging against LYONs offer a plausible explanation for a tripling of short interest, and continued pressure on the stock?

In my opinion it would not. What would be the point of buying a convertible if you were going to eliminate any possibility of a gain on conversion by shorting right out of the gate? Management offers a convertible deb/bond because it allows them to sell at a lower yield. The buyer is willing to accept this low yield because of the potential for an even larger gain after conversion. A buyer would have been much better off buying a T-bond then buying this LYON and shorting it.

2. Would all the LYONs likely be hedged against, and what would this bring the total short interest number to?

In my opinion NONE of the LYONs would be shorted against at this time. But if they were ALL hedged then it would correspond to anywhere from 6,401,515 to 7,261,420 shares short, depending on over-allotments.

3. What happens if someone owns the LYONs and shorts it today at $17, then the price goes up to the conversion price? Have they just lost $7, or is there something I am missing?

Yes, if they were to convert and close both positions at that price they would lose an amount corresponding to approx 7 dollars per share.

Jon Bird
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