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Subject:  What are LYONs? Date:  3/18/2001  12:26 PM
Author:  JLMoran Number:  1675 of 3994

I was reading the latest 10-Q for Kohl's, trying to start getting info about the company and decide whether I want to put money with them or Bed Bath and Beyond.

I saw that in the quarter ended October, 2000 they acquired a huge amount of short-term debt (as well as increasing their long-term debt). Reading further down in the report, I found a statement that the company "issued $554.4 million aggregate principal amount of Liquid Yield Option Subordinated Notes (LYONs) due June 12, 2020. The zero coupon LYONs were issued at a discount to yield an effective interest rate of 2.75% per year."

These can be converted to common stock by the holder at any time, and the debt is "callable by the Company beginning June 12, 2003 for cash (issue price and all original issue discount)."

So is this debt the company owes someone, or is this debt they've incurred by loaning money to other people (which I'm assuming is still a liability because the holder could default)?
Such a huge increase in debt makes me worry about the future long-term performance of the company, especially as their cash reserves shrank over the last year. This is about the only thing worrying me about investing in this company, mainly because I don't understand whether this is "good" or "bad" debt. All other indications suggest this is a good stock, but I want to understand this piece before making a decision (rather than just diving in and having it come back to bite me in the rear, as some earlier investments have done).

Any information you can give me on LYONs and what they're used for, and their likely impact on Kohl's long-term prospects, would be appreciated.
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