As usual, the devil is in the details, which, not surprisingly, are not in the press release. The details are buried in a dense and legalistic 8-K filing that few will read. If you care about Excite@Home, you should take the time to read through the contract between the buyers of the new convertible secured notes, led by Promethean Capital Group and Angelo Gordon. I don't believe you'll like what you see.

The structure of these securities is a new twist on the convertible securities issued by, among others, Winstar and MicroStrategy. If all goes well for the issuer, it simply redeems the securities at maturity for cash. The issuer suffers no adverse consequences, and the holder realizes a healthy return on its investment. If the company thrives over the terms of the securities, the holder further benefits by the appreciation of the underlying common shares through the convertible feature of the security.

However, companies that issue these securities are usually in dire straits, unable to access more conventional forms of financing. Typically, all of their assets have been previously hocked to the banks (or they have no hard assets to pledge), their credit ratings are insufficient to borrow in the junk-bond market, and they have tried and failed to raise money by selling common stock in a conventional manner.

The specific terms of the Excite@Home deal are certainly innovative. By no means does this deal represent the most punitive terms I have seen, but they still present grave risk to common shareholders. Here's why.

Where the Risk Is

The initial conversion price is set at $4.38. If Excite@Home uses the $100 million wisely and succeeds, presumably the common will be much higher at the 2006 maturity of the notes. If so, the holders will present their securities for conversion at the now-below-market price, realizing as a gain the difference between the market price and $4.38. But what if things don't work out so well, and the common price declines?

In that case, special provisions come into play. Most notably, the holders have the right on each anniversary of the financing to demand repayment of the notes. Excite@Home would not likely have the cash to buy back the paper. In that case, the conversion price gets reset lower, to 95% of a 10-day average trading price. If the market senses the holders will likely exercise this option, the resulting liquidity concerns are likely to send the common lower. The lower the common goes, the more shares the issue becomes convertible into. The greater the number of shares issued, the greater the dilution, pressuring the common still lower, which results in even more share issuance -- hence, the colorful term "death spiral converts."

Other holder protections are built into the contract as well. If Excite@Home files for bankruptcy, these securities become the most senior claims, putting those holders first in line to receive any residual value. The conversion price is protected from dilution by any subsequent share or option issuance.

Excite@Home does receive some limited protection against the holders selling short the common during the annual pricing periods. However, the issuance of the security will, by itself, manufacture a large short interest in the stock as the holders seek to hedge their position through short sales against the conversion feature. Again, the lower the common goes, the more shares will be sold short to hedge the notes.

Perhaps most fundamentally, an Excite@Home holder needs to ask why new money could not have been raised in a simpler way. Why wasn't AT&T interested in advancing more capital, particularly in light of the billions it has expended through direct investment and in settling put options it wrote to other cable firms against Excite@Home shares? Sure, AT&T has its own problems, but $100 million is a drop in the bucket at this point.