Exhibit 10.4

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (this “Agreement”), dated as of March   , 2006, is made
by COVAD COMMUNICATIONS GROUP, INC., a Delaware corporation (“Group”), and COVAD
COMMUNICATIONS COMPANY, a California corporation (“Operating”; individually and
collectively with Group, the “Debtor”), for the benefit of EARTHLINK, INC., a
Delaware corporation (the “Secured Party”), acting on its own behalf and as
Collateral Agent (as defined in the Note described below) for the Holders (as
defined in the Note described below) of the Note described below.

 

RECITALS

 

WHEREAS, pursuant to the terms of a Purchase Agreement dated as of March 15,
2006 (as amended, restated or modified from time to time, the “Purchase
Agreement”), the Debtor has issued and sold to the Secured Party a 12% Senior
Secured Convertible Note in the original aggregate principal amount of
$40,000,000 (the “Note”);

 

WHEREAS, it is a condition precedent to the Secured Party’s acceptance and
purchase of the Note that each of Group and Operating execute and deliver to the
Secured Party a security agreement in substantially the form hereof; and

 

WHEREAS, each of Group and Operating wishes to grant a security interest in
favor of the Secured Party as herein provided.

 

NOW, THEREFORE, in consideration of the promises contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

 

AGREEMENTS

 

1.             DEFINITIONS.

 

All capitalized terms used herein without definitions shall have the meanings
given to them in the Purchase Agreement.  The term “State” shall mean the State
of Delaware.  All terms defined in the Uniform Commercial Code of the State and
used herein shall have the same definitions herein as specified therein. 
However, if a term is defined in Article 9 of the Uniform Commercial Code of the
State differently than in another Article of the Uniform Commercial Code of the
State, the term has the meaning specified in Article 9.  The term “Obligations”
shall mean all of the indebtedness, obligations and liabilities of the Debtor to
the Secured Party, individually or collectively, whether direct or indirect,
joint or several, absolute or contingent, due or to become due, now existing or
hereafter arising under or in respect of the Purchase Agreement and the Note
(the “Transaction Documents”).  The term “Event of Default” shall mean the
failure of either Group or Operating to pay or perform any of the Obligations as
and when due to be paid or performed under the terms of the Transaction
Documents after giving effect to any applicable grace or cure period.  The term
“Permitted Liens” shall mean (i) the lien on and security interest in
substantially all of the Debtor’s assets in favor of SBC Communications Inc.
(the “SBC Lien”), (ii) liens for taxes and special assessments not then
delinquent, (iii) liens of taxes and assessments which are delinquent but the
validity of

 

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which is being contested in good faith and with respect to which the Debtor has
set aside adequate reserves for payment, (iv) mechanics’ and materialmen’s liens
arising or incurred in the ordinary course of business and which are being
contested in good faith and have not proceeded to judgment, provided the Debtor
has set aside adequate reserves for payment, and (v) such other imperfections in
title, charges, easements, restrictions and encumbrances which could not,
individually or when taken as a whole, result in a Material Adverse Effect.

 

2.             GRANT OF SECURITY INTEREST.

 

Each of Group and Operating hereby grants to the Secured Party, to secure the
payment and performance in full of all of the Obligations, a security interest
in and so pledges and assigns to the Secured Party the following properties,
assets and rights of such Debtor, wherever located, whether now owned or
hereafter acquired or arising from (collectively, the “Collateral”): (i) all
Equipment of the Debtor acquired with the proceeds of the Note and the Primary
Shares (as defined in the Purchase Agreement) (the “Issuance
Proceeds”)(including, without limitation, the Equipment identified on Schedule 1
to this Agreement) (the “Pledged Equipment”), (ii) all additions and Accessions
to the Pledged Equipment acquired with the Issuance Proceeds, (iii) any software
and/or intellectual property (including that embedded in or integrated with the
Pledged Equipment) acquired with the Issuance Proceeds, (iv) all Documents
covering all or any part of the Pledged Equipment, and (v) all Proceeds of the
foregoing, including, without limitation, Cash Proceeds and Noncash Proceeds of
all or any part of the Pledged Equipment; provided, however, that in no event
shall the security interest granted hereunder attach to any contract or license
to which the Debtor is a party or any of its rights or interests thereunder, or
any property or assets subject to any contract or license, if and for so long as
the grant of such security interest shall constitute or result in (x) the
abandonment, invalidation or unenforceability of any right, title or interest of
the Debtor therein or (y) a breach or termination pursuant to the terms of, or a
default under, any such contract or license, except, in each case, to the extent
that any such term is rendered ineffective pursuant to Sections 9-406, 9-407,
9-408 or 9-409 of the Uniform Commercial Code (or any successor provision or
provisions) of any relevant jurisdiction or any other applicable law or
principles of equity; provided further, that notwithstanding the foregoing, such
security interest shall attach immediately at such time as the condition causing
such abandonment, invalidation or unenforceability shall be remedied and, to the
extent severable, shall attach immediately to any portion of such contract or
license, or property subject thereto, that does not result in any of the
consequences specified in clause (x) or (y) above.  Notwithstanding any thing to
the contrary herein, at all times that the SBC Lien remains in effect, the
principal amount of Obligations secured by the Collateral shall not exceed 100%
of the cost of such Collateral.

 

3.             AUTHORIZATION TO FILE FINANCING STATEMENTS.

 

Each of Group and Operating hereby irrevocably authorizes the Secured Party at
any time and from time to time to file in any filing office in any Uniform
Commercial Code jurisdiction any initial financing statements and amendments
thereto that describe the Collateral and provide any other information required
by part 5 of Article 9 of the Uniform Commercial Code of the State, or such
other jurisdiction, for the sufficiency or filing office acceptance of any
financing statement or amendment.  Each of Group and Operating agrees to furnish
any such information to the Secured Party promptly upon the Secured Party’s
request.

 

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4.             FURTHER ASSURANCES.

 

Each of Group and Operating agrees, at the request and option of the Secured
Party, to take any and all actions the Secured Party may determine to be
necessary or useful for the attachment, perfection and priority of, and the
ability of the Secured Party to enforce, the Secured Party’s security interest
in any and all of the Collateral, including, without limitation, (a) delivering
and filing financing statements and amendments relating thereto under the
Uniform Commercial Code, (b) causing the Secured Party’s name to be noted as
secured party on any certificate of title for a titled good if such notation is
a condition to attachment, perfection or priority of, or ability of the Secured
Party to enforce, the Secured Party’s security interest in such Collateral,
(c) complying with any provision of any statute, regulation or treaty of the
United States as to any Collateral if compliance with such provision is a
condition to attachment, perfection or priority of, or ability of the Secured
Party to enforce, the Secured Party’s security interest in such Collateral,
(d) using its reasonable best efforts in obtaining governmental and other third
party waivers, consents and approvals in form and substance satisfactory to
Secured Party, including, without limitation, any consent of any licensor,
lessor or other person obligated on Collateral, (e) using its reasonable best
efforts in obtaining waivers from mortgagees and landlords in form and substance
satisfactory to the Secured Party and (f) taking all actions under any earlier
versions of the Uniform Commercial Code or under any other law, as reasonably
determined by the Secured Party to be applicable in any relevant Uniform
Commercial Code or other jurisdiction, including any foreign jurisdiction;
provided that the failure of the Debtor to obtain any waivers, consents or
approvals under clauses (d) and (e) after the exercise of its reasonable best
efforts, shall not constitute an Event of Default.

 

5.             REPRESENTATIONS AND WARRANTIES CONCERNING PERFECTION CERTIFICATE.

 

Each Debtor has previously delivered to the Secured Party a certificate signed
by the Debtor and entitled “Perfection Certificate” (the “Perfection
Certificate”), a form of which is attached hereto as Exhibit A.  Each Debtor
represents and warrants to the Secured Party that all information set forth on
the Perfection Certificate is accurate and complete as of the date hereof.

 

6.             COVENANTS CONCERNING DEBTOR’S LEGAL STATUS.

 

Each of Group and Operating covenants with the Secured Party as follows:
(a) without providing at least 30 days’ prior written notice to the Secured
Party, the Debtor will not change its name, its place of business or, if more
than one, chief executive office, or its mailing address or organizational
identification number if it has one, (b) if the Debtor does not have an
organizational identification number and later obtains one, the Debtor shall
promptly notify the Secured Party of such organizational identification number,
and (c) except as permitted by any Transaction Document, the Debtor will not
change its type of organization, jurisdiction of organization or other legal
structure.

 

7.             REPRESENTATIONS AND WARRANTIES CONCERNING COLLATERAL, ETC.

 

Each of Group and Operating further represents and warrants to the Secured Party
as follows: (a) the Debtor is the owner of or has other rights in or power to
transfer the Collateral, free from any right or claim of any person or any
adverse lien, security interest or other

 

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encumbrance, except for the security interest created by this Agreement and the
Permitted Liens and (b) the Debtor has at all times operated its business in
compliance with all applicable provisions of the federal Fair Labor Standards
Act, as amended, and with all applicable provisions of federal, state and local
statutes and ordinances dealing with the control, shipment, storage or disposal
of hazardous materials or substances, except, solely in the case of (b) above,
to the extent the failure to do so could not reasonably be expected to have a
Material Adverse Effect.

 

8.             COVENANTS CONCERNING COLLATERAL, ETC.

 

Each of Group and Operating further covenants with the Secured Party as follows:
(a) the Collateral will be kept at those locations listed on the Perfection
Certificate and the Debtor will not remove the Collateral from such locations,
without providing at least 30 days’ prior written notice to the Secured Party,
(b) except for the security interest herein granted and the Permitted Liens, the
Debtor shall be the owner of or have other rights in the Collateral free from
any right or claim of any other person, lien, security interest or other
encumbrance, and the Debtor shall diligently defend the same against all claims
and demands of all persons at any time claiming the same or any interests
therein adverse to the Secured Party, (c) other than the Permitted Liens, the
Debtor shall not pledge, mortgage or create, or suffer to exist any right of any
person in or claim by any person to the Collateral, or any security interest,
lien or encumbrance in the Collateral in favor of any person, other than the
Secured Party, (d) the Debtor will keep the Collateral in good order and repair
and will not use the same in violation of law or any policy of insurance
thereon, (e) the Debtor will permit the Secured Party, or its designee, to
inspect the Collateral from time to time at any reasonable time during normal
business hours upon reasonable notice, wherever located, (f) the Debtor will pay
promptly when due all taxes, assessments, governmental charges and levies upon
the Collateral or incurred in connection with the use or operation of such
Collateral or incurred in connection with this Agreement, (g) the Debtor will
continue to operate its business in compliance with all applicable provisions of
the federal Fair Labor Standards Act, as amended, and with all applicable
provisions of federal, state and local statutes and ordinances dealing with the
control, shipment, storage or disposal of hazardous materials or substances,
(h) the Debtor will not sell or otherwise dispose, or offer to sell or otherwise
dispose, of the Collateral or any interest therein other than in the ordinary
course of business, (i) the Debtor will not permit the Collateral to be
physically located and/or put into service in any jurisdiction in which the
grant of a security interest in such Collateral would require approval from any
governmental regulatory body or agency until the delivery of reasonable evidence
of any such approval to the Collateral Agent, and (j) the Debtor may also
transfer title to all or any part of the Collateral to one or more direct or
indirect wholly-owned subsidiaries of either Debtor (a “Permitted Transferee”),
provided, however, that prior to any such transfer (i) such Permitted Transferee
shall execute a joinder agreement or guaranty in form and substance satisfactory
to the Collateral Agent (A) agreeing to be bound as a co-maker or guarantor
under the Note and as a debtor under this Agreement and (B) acknowledging and
confirming the Collateral Agent’s continuing security interest in and lien on
the Collateral, (ii) the Debtor shall provide the Collateral Agent with written
evidence that all federal and state regulatory approvals and other third party
consents, if any, required for such transfer and joinder or guaranty have been
obtained (the “Required Approvals”) and (iii) the Collateral Agent shall
indicate in writing that it is satisfied that all Required Approvals for such
transfer and joinder or guaranty have been obtained; provided, further, however,
that notwithstanding any transfer of any Collateral to the

 

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Permitted Transferee, neither Group nor Operating shall be released from its
obligations hereunder or under the Note.

 

9.             INSURANCE.

 

9.1          MAINTENANCE OF INSURANCE.  EACH OF GROUP AND OPERATING WILL
MAINTAIN WITH FINANCIALLY SOUND AND REPUTABLE INSURERS INSURANCE WITH RESPECT TO
ITS PROPERTIES AND BUSINESS AGAINST SUCH CASUALTIES AND CONTINGENCIES AS SHALL
BE CUSTOMARY FOR BUSINESSES ENGAGED IN SIMILAR ACTIVITIES IN SIMILAR INDUSTRIES
AND GEOGRAPHIC AREAS.  SUCH INSURANCE SHALL BE IN SUCH MINIMUM AMOUNTS THAT THE
DEBTOR WILL NOT BE DEEMED A CO-INSURER UNDER APPLICABLE INSURANCE LAWS,
REGULATIONS AND POLICIES AND OTHERWISE SHALL BE IN SUCH AMOUNTS, CONTAIN SUCH
TERMS, BE IN SUCH FORMS AND BE FOR SUCH PERIODS AS MAY BE REASONABLY
SATISFACTORY TO THE SECURED PARTY.  IN ADDITION, ALL SUCH INSURANCE SHALL BE
PAYABLE TO THE SECURED PARTY AS LOSS PAYEE.

 

9.2          INSURANCE PROCEEDS.  THE PROCEEDS OF ANY CASUALTY INSURANCE IN
RESPECT OF ANY CASUALTY LOSS OF ANY OF THE COLLATERAL SHALL, SUBJECT TO THE
RIGHTS, IF ANY, OF OTHER PARTIES WITH AN INTEREST HAVING PRIORITY IN THE
PROPERTY COVERED THEREBY, (I) SO LONG AS NO DEFAULT OR EVENT OF DEFAULT HAS
OCCURRED AND IS CONTINUING, BE DISBURSED TO THE DEBTOR FOR DIRECT APPLICATION BY
THE DEBTOR SOLELY TO THE REPAIR OR REPLACEMENT OF THE COLLATERAL SO DAMAGED OR
DESTROYED (WHICH REPLACEMENT COLLATERAL SHALL BE COLLATERAL HEREUNDER) AND
(II) IN ALL OTHER CIRCUMSTANCES, BE HELD BY THE SECURED PARTY AS CASH COLLATERAL
FOR THE OBLIGATIONS.  THE SECURED PARTY SHALL DISBURSE FROM TIME TO TIME ALL OR
ANY PART OF SUCH PROCEEDS SO HELD AS CASH COLLATERAL, UPON SUCH TERMS AND
CONDITIONS AS THE SECURED PARTY MAY REASONABLY PRESCRIBE, FOR DIRECT APPLICATION
BY THE DEBTOR SOLELY TO THE REPAIR OR REPLACEMENT OF THE DEBTOR’S PROPERTY SO
DAMAGED OR DESTROYED, OR THE SECURED PARTY MAY APPLY ALL OR ANY PART OF SUCH
PROCEEDS TO THE OBLIGATIONS.

 

9.3          CONTINUATION OF INSURANCE.  ALL POLICIES OF INSURANCE SHALL PROVIDE
FOR THE INSURER TO ENDEAVOR TO PROVIDE AT LEAST 30 DAYS’ PRIOR WRITTEN
CANCELLATION NOTICE TO THE SECURED PARTY.  IN THE EVENT OF FAILURE BY EITHER
GROUP OR OPERATING TO PROVIDE AND MAINTAIN INSURANCE AS HEREIN PROVIDED, THE
SECURED PARTY MAY, AT ITS OPTION, PROVIDE SUCH INSURANCE AND CHARGE THE AMOUNT
THEREOF TO THE DEBTOR.  EACH OF GROUP AND OPERATING SHALL FURNISH THE SECURED
PARTY WITH CERTIFICATES OF INSURANCE AND POLICIES EVIDENCING COMPLIANCE WITH THE
FOREGOING INSURANCE PROVISION.

 

10.          COLLATERAL PROTECTION EXPENSES; PRESERVATION OF COLLATERAL.

 

10.1        EXPENSES INCURRED BY SECURED PARTY.  IN THE SECURED PARTY’S
DISCRETION, IF THE DEBTOR FAILS TO DO SO, UPON THE OCCURRENCE AND DURING THE
CONTINUANCE OF AN EVENT OF DEFAULT, THE SECURED PARTY MAY DISCHARGE TAXES (OTHER
THAN THOSE NOT YET DUE OR BEING CONTESTED IN GOOD FAITH) AND OTHER ENCUMBRANCES
AT ANY TIME LEVIED OR PLACED ON ANY OF THE COLLATERAL (OTHER THAN THOSE BEING
CONTESTED IN GOOD FAITH), MAINTAIN ANY OF THE COLLATERAL, MAKE REPAIRS THERETO
AND PAY ANY NECESSARY FILING FEES OR INSURANCE PREMIUMS.  THE DEBTOR AGREES TO
REIMBURSE THE SECURED PARTY ON DEMAND FOR ALL EXPENDITURES SO MADE.  THE SECURED
PARTY SHALL HAVE NO OBLIGATION TO THE DEBTOR TO MAKE ANY SUCH

 

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EXPENDITURES, NOR SHALL THE MAKING THEREOF BE CONSTRUED AS THE WAIVER OR CURE OF
ANY DEFAULT OR EVENT OF DEFAULT.

 

10.2        SECURED PARTY’S OBLIGATIONS AND DUTIES.  ANYTHING HEREIN TO THE
CONTRARY NOTWITHSTANDING, EACH OF GROUP AND OPERATING SHALL REMAIN OBLIGATED AND
LIABLE UNDER EACH CONTRACT OR AGREEMENT COMPRISED IN THE COLLATERAL TO BE
OBSERVED OR PERFORMED BY THE DEBTOR THEREUNDER.  OTHER THAN AS A RESULT OF
FORECLOSURE, THE SECURED PARTY SHALL NOT HAVE ANY OBLIGATION OR LIABILITY UNDER
ANY SUCH CONTRACT OR AGREEMENT BY REASON OF OR ARISING OUT OF THIS AGREEMENT OR
THE RECEIPT BY THE SECURED PARTY OF ANY PAYMENT RELATING TO ANY OF THE
COLLATERAL, NOR SHALL THE SECURED PARTY BE OBLIGATED IN ANY MANNER TO PERFORM
ANY OF THE OBLIGATIONS OF THE DEBTOR UNDER OR PURSUANT TO ANY SUCH CONTRACT OR
AGREEMENT, TO MAKE INQUIRY AS TO THE NATURE OR SUFFICIENCY OF ANY PAYMENT
RECEIVED BY THE SECURED PARTY IN RESPECT OF THE COLLATERAL OR AS TO THE
SUFFICIENCY OF ANY PERFORMANCE BY ANY PARTY UNDER ANY SUCH CONTRACT OR
AGREEMENT, TO PRESENT OR FILE ANY CLAIM, TO TAKE ANY ACTION TO ENFORCE ANY
PERFORMANCE OR TO COLLECT THE PAYMENT OF ANY AMOUNTS WHICH MAY HAVE BEEN
ASSIGNED TO THE SECURED PARTY OR TO WHICH THE SECURED PARTY MAY BE ENTITLED AT
ANY TIME OR TIMES.  THE SECURED PARTY’S SOLE DUTY WITH RESPECT TO THE CUSTODY,
SAFE KEEPING AND PHYSICAL PRESERVATION OF THE COLLATERAL IN ITS POSSESSION,
UNDER §9-207 OF THE UNIFORM COMMERCIAL CODE OF THE STATE OR OTHERWISE, SHALL BE
TO DEAL WITH SUCH COLLATERAL IN THE SAME MANNER AS THE SECURED PARTY DEALS WITH
SIMILAR PROPERTY FOR ITS OWN ACCOUNT.

 

11.          POWER OF ATTORNEY.

 

11.1        APPOINTMENT AND POWERS OF SECURED PARTY.  EACH OF GROUP AND
OPERATING HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS THE SECURED PARTY AND ANY
OFFICER OR AGENT THEREOF, WITH FULL POWER OF SUBSTITUTION, AS ITS TRUE AND
LAWFUL ATTORNEYS-IN-FACT WITH FULL IRREVOCABLE POWER AND AUTHORITY IN THE PLACE
AND STEAD OF THE DEBTOR OR IN THE SECURED PARTY’S OWN NAME, FOR THE PURPOSE OF
CARRYING OUT THE TERMS OF THIS AGREEMENT, TO TAKE ANY AND ALL APPROPRIATE ACTION
AND TO EXECUTE ANY AND ALL DOCUMENTS AND INSTRUMENTS THAT MAY BE NECESSARY OR
USEFUL TO ACCOMPLISH THE PURPOSES OF THIS AGREEMENT AND, WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, HEREBY GIVES SAID ATTORNEYS THE POWER AND RIGHT, ON
BEHALF OF THE DEBTOR, WITHOUT NOTICE TO OR ASSENT BY THE DEBTOR, TO DO THE
FOLLOWING UPON THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT:

 

(A)           GENERALLY TO SELL, TRANSFER, PLEDGE, MAKE ANY AGREEMENT WITH
RESPECT TO OR OTHERWISE DISPOSE OF OR DEAL WITH ANY OF THE COLLATERAL IN SUCH
MANNER AS IS CONSISTENT WITH THE UNIFORM COMMERCIAL CODE OF THE STATE AND AS
FULLY AND COMPLETELY AS THOUGH THE SECURED PARTY WERE THE ABSOLUTE OWNER THEREOF
FOR ALL PURPOSES, AND TO DO, AT THE DEBTOR’S EXPENSE, AT ANY TIME, OR FROM TIME
TO TIME, ALL ACTS AND THINGS WHICH THE SECURED PARTY DEEMS NECESSARY OR USEFUL
TO PROTECT, PRESERVE OR REALIZE UPON THE COLLATERAL AND THE SECURED PARTY’S
SECURITY INTEREST THEREIN, IN ORDER TO EFFECT THE INTENT OF THIS AGREEMENT, ALL
AT LEAST AS FULLY AND EFFECTIVELY AS THE DEBTOR MIGHT DO, INCLUDING, WITHOUT
LIMITATION, (I) THE FILING AND PROSECUTING OF REGISTRATION AND TRANSFER
APPLICATIONS WITH THE APPROPRIATE FEDERAL, STATE, LOCAL OR OTHER AGENCIES OR
AUTHORITIES WITH RESPECT TO TRADEMARKS, COPYRIGHTS

 

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AND PATENTABLE INVENTIONS AND PROCESSES AND (II) THE EXECUTION, DELIVERY AND
RECORDING, IN CONNECTION WITH ANY SALE OR OTHER DISPOSITION OF ANY COLLATERAL,
OF THE ENDORSEMENTS, ASSIGNMENTS OR OTHER INSTRUMENTS OF CONVEYANCE OR TRANSFER
WITH RESPECT TO SUCH COLLATERAL; AND

 

(B)           TO THE EXTENT THAT THE DEBTOR’S AUTHORIZATION GIVEN IN SECTION 3
IS NOT SUFFICIENT TO FILE SUCH FINANCING STATEMENTS WITH RESPECT HERETO, WITH OR
WITHOUT THE DEBTOR’S SIGNATURE, OR A PHOTOCOPY OF THIS AGREEMENT IN SUBSTITUTION
FOR A FINANCING STATEMENT, AS THE SECURED PARTY MAY DEEM APPROPRIATE AND TO
EXECUTE IN THE DEBTOR’S NAME SUCH FINANCING STATEMENTS AND AMENDMENTS THERETO
AND CONTINUATION STATEMENTS WHICH MAY REQUIRE THE DEBTOR’S SIGNATURE.

 

11.2        RATIFICATION BY DEBTOR.  TO THE EXTENT PERMITTED BY LAW, EACH OF
GROUP AND OPERATING HEREBY RATIFIES ALL THAT SAID ATTORNEYS SHALL LAWFULLY DO OR
CAUSE TO BE DONE BY VIRTUE HEREOF.  THIS POWER OF ATTORNEY IS A POWER COUPLED
WITH AN INTEREST AND IS IRREVOCABLE.

 

11.3        NO DUTY ON SECURED PARTY.  THE POWERS CONFERRED ON THE SECURED PARTY
HEREUNDER ARE SOLELY TO PROTECT ITS INTERESTS IN THE COLLATERAL AND SHALL NOT
IMPOSE ANY DUTY UPON IT TO EXERCISE ANY SUCH POWERS.  THE SECURED PARTY SHALL BE
ACCOUNTABLE ONLY FOR THE AMOUNTS THAT IT ACTUALLY RECEIVES AS A RESULT OF THE
EXERCISE OF SUCH POWERS, AND NEITHER IT NOR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES OR AGENTS SHALL BE RESPONSIBLE TO EITHER GROUP OR OPERATING FOR ANY
ACT OR FAILURE TO ACT, EXCEPT FOR THE SECURED PARTY’S OWN GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT.

 

12.          RIGHTS AND REMEDIES.

 

If an Event of Default shall have occurred and be continuing, the Secured Party,
without any other notice to or demand upon either Group or Operating, has in any
jurisdiction in which enforcement hereof is sought, in addition to all other
rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code of the State and any additional rights and remedies
which may be provided to a secured party in any jurisdiction in which Collateral
is located, including, without limitation, the right to take possession of the
Collateral, and for that purpose the Secured Party may, so far as the Debtor can
give authority therefor, enter upon any premises on which the Collateral may be
situated and remove the same therefrom.  The Secured Party may in its discretion
require either Group or Operating to assemble, at the sole cost of the Debtor,
all or any part of the Collateral at such location or locations within the
jurisdiction(s) of the Debtor’s principal office(s) or at such other locations
as the Secured Party may reasonably designate.  Unless the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, the Secured Party shall give to the Debtor at least
ten Business Days’ prior written notice (or, in any case, such longer notice
period as may be required by law) of the time and place of any public sale of
Collateral or of the time after which any private sale or any other intended
disposition is to be made.  The Debtor hereby acknowledges that ten Business
Days’ prior written notice (or, in any case, such longer notice period as may be
required by law) of such sale or sales shall be reasonable notice.  In addition,
the Debtor waives any and all rights that it may have to a judicial hearing in
advance of the enforcement of any of the Secured Party’s rights and remedies
hereunder, including, without

 

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limitation, its right following an Event of Default to take immediate possession
of the Collateral and to exercise its rights and remedies with respect thereto.

 

13.          STANDARDS FOR EXERCISING RIGHTS AND REMEDIES.

 

To the extent that applicable law imposes duties on the Secured Party to
exercise remedies in a commercially reasonable manner, each of Group and
Operating acknowledges and agrees that it is not commercially unreasonable for
the Secured Party (a) to fail to incur expenses reasonably deemed significant by
the Secured Party to prepare Collateral for disposition, (b) to fail to obtain
third party consents for access to Collateral to be disposed of, or to obtain
or, if not required by other law, to fail to obtain governmental or third party
consents for the collection or disposition of Collateral to be collected or
disposed of, (c) to fail to remove liens or encumbrances on or any adverse
claims against Collateral, (d) to advertise dispositions of Collateral through
publications or media of general circulation, whether or not the Collateral is
of a specialized nature, (e) to contact other persons, whether or not in the
same business as the Debtor, for expressions of interest in acquiring all or any
portion of the Collateral, (f) to hire one or more professional auctioneers to
assist in the disposition of Collateral, whether or not the collateral is of a
specialized nature, (g) to dispose of Collateral by utilizing Internet sites
that provide for the auction of assets of the types included in the Collateral
or that have the reasonable capability of doing so, or that match buyers and
sellers of assets, (h) to dispose of assets in wholesale rather than retail
markets, (i) to disclaim disposition warranties, (j) to purchase insurance or
credit enhancements to insure the Secured Party against risks of loss,
collection or disposition of Collateral or to provide to the Secured Party a
guaranteed return from the collection or disposition of Collateral, or (k) to
the extent deemed appropriate by the Secured Party, to obtain the services of
other brokers, investment bankers, consultants and other professionals to assist
the Secured Party in the collection or disposition of any of the Collateral. 
The Debtor acknowledges that the purpose of this Section 13 is to provide
non-exhaustive indications of what actions or omissions by the Secured Party
would fulfill the Secured Party’s duties under the Uniform Commercial Code or
other law of the State or any other relevant jurisdiction in the Secured Party’s
exercise of remedies against the Collateral and that other actions or omissions
by the Secured Party shall not be deemed to fail to fulfill such duties solely
on account of not being indicated in this Section 13.  Without limitation upon
the foregoing, nothing contained in this Section 13 shall be construed to grant
any rights to the Debtor or to impose any duties on the Secured Party that would
not have been granted or imposed by this Agreement or by applicable law in the
absence of this Section 13.

 

14.          NO WAIVER BY SECURED PARTY, ETC.

 

The Secured Party shall not be deemed to have waived any of its rights or
remedies in respect of the Obligations or the Collateral unless such waiver
shall be in writing and signed by the Secured Party.  No delay or omission on
the part of the Secured Party in exercising any right or remedy shall operate as
a waiver of such right or remedy or any other right or remedy.  A waiver on any
one occasion shall not be construed as a bar to or waiver of any right or remedy
on any future occasion.  All rights and remedies of the Secured Party with
respect to the Obligations or the Collateral, whether evidenced hereby or by any
other instrument or papers, shall be cumulative and may be exercised singularly,
alternatively, successively or concurrently at such time or at such times as the
Secured Party deems expedient.

 

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15.          SURETYSHIP WAIVERS BY DEBTOR.

 

Each of Group and Operating hereby waives demand, notice, protest, notice of
acceptance of this Agreement, notice of Collateral received or delivered or
other action taken in reliance hereon and all other demands and notices of any
description.  With respect to both the Obligations and the Collateral, each of
Group and Operating assents to any extension or postponement of the time of
payment or any other indulgence, to any substitution, exchange or release of or
failure to perfect any security interest in any Collateral, to the addition or
release of any party or person primarily or secondarily liable, to the
acceptance of partial payment thereon and the settlement, compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Secured Party may deem advisable.  The Secured Party shall have no duty as to
the collection or protection of the Collateral or any income therefrom, the
preservation of rights against prior parties, or the preservation of any rights
pertaining thereto beyond the safe custody thereof as set forth in
Section 10.2.  Each of Group and Operating further waives any and all other
suretyship defenses.

 

16.          MARSHALLING.

 

The Secured Party shall not be required to marshal any present or future
collateral security (including but not limited to the Collateral) for, or other
assurances of payment of, the Obligations or any of them or to resort to such
collateral security or other assurances of payment in any particular order, and
all of its rights and remedies hereunder and in respect of such collateral
security and other assurances of payment shall be cumulative and in addition to
all other rights and remedies, however existing or arising.  To the extent that
it lawfully may, the Debtor hereby agrees that it will not invoke any law
relating to the marshalling of collateral which might cause delay in or impede
the enforcement of the Secured Party’s rights and remedies under this Agreement
or under any other instrument creating or evidencing any of the Obligations or
under which any of the Obligations is outstanding or by which any of the
Obligations is secured or payment thereof is otherwise assured, and, to the
extent that it lawfully may, the Debtor hereby irrevocably waives the benefits
of all such laws.

 

17.          PROCEEDS OF DISPOSITIONS; EXPENSES.

 

The Debtor shall pay to the Secured Party on demand any and all expenses,
including reasonable attorneys’ fees and other out-of-pocket disbursements,
incurred or paid by the Secured Party in protecting, preserving or enforcing the
Secured Party’s rights and remedies under or in respect of any of the
Obligations or any of the Collateral.  After deducting all of said expenses, the
residue of any proceeds of collection or sale or other disposition of the
Collateral shall, to the extent actually received in cash, be applied to the
payment of the Obligations in such order or preference as the Secured Party may
reasonably determine, proper allowance and provision being made for any
Obligations not then due.  Upon the final payment and satisfaction in full of
all of the Obligations and after making any payments required by
§§ 9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the State,
any excess shall be returned to the Debtor.  In the absence of final payment and
satisfaction in full of all of the Obligations, and the Debtor shall remain
liable for any deficiency.

 

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18.          OVERDUE AMOUNTS.

 

Until paid, all amounts due and payable by the Debtor hereunder shall be a debt
secured by the Collateral.

 

19.          GOVERNING LAW; CONSENT TO JURISDICTION.

 

THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE.  Each of Group and Operating agrees that any action or claim
arising out of, or any dispute in connection with, this Agreement, any rights,
remedies, obligations, or duties hereunder, or the performance or enforcement
hereof or thereof, may be brought in the courts of the State or any federal
court sitting therein and consents to the non-exclusive jurisdiction of such
court and to service of process in any such suit being made upon the Debtor by
mail at the address specified in Section 16 of the Note.  Each of Group and
Operating hereby waives any objection that it may now or hereafter have to the
venue of any such suit or any such court or that such suit is brought in an
inconvenient court.

 

20.          WAIVER OF JURY TRIAL.

 

EACH OF GROUP AND OPERATING WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY
ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT,
ANY RIGHTS, REMEDIES,  OBLIGATIONS, OR DUTIES HEREUNDER, OR THE PERFORMANCE OR
ENFORCEMENT HEREOF OR THEREOF.  Except as prohibited by law, each of Group and
Operating waives any right which it may have to claim or recover in any
litigation referred to in the preceding sentence any special, exemplary,
punitive or consequential damages or any damages other than, or in addition to,
actual damages.  Each of Group and Operating (i) certifies that neither the
Secured Party nor any representative, agent or attorney of the Secured Party has
represented, expressly or otherwise, that the Secured Party would not, in the
event of litigation, seek to enforce the foregoing waivers or other waivers
contained in this Agreement, and (ii) acknowledges that, in entering into the
Transaction Documents, the Secured Party is relying upon, among other things,
the waivers and certifications contained in this Section 20.

 

21.          MISCELLANEOUS.

 

The headings of each section of this Agreement are for convenience only and
shall not define or limit the provisions thereof.  This Agreement and all rights
and obligations hereunder shall be binding upon each of Group and Operating and
their respective successors and permitted assigns, and shall inure to the
benefit of the Secured Party, for itself and as Collateral Agent for the Holders
of the Note.  The rights under this Agreement inuring to the benefit of the
Secured Party shall be assignable only to a Holder succeeding the Secured Party
as Collateral Agent pursuant to the terms and conditions of the Note.  If any
term of this Agreement shall be held to be invalid, illegal or unenforceable,
the validity of all other terms hereof shall in no way be affected thereby, and
this Agreement shall be construed and be enforceable as if such invalid, illegal
or unenforceable term had not been included herein.  Each of Group and Operating
acknowledges receipt of a copy of this Agreement.

 

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22.          COUNTERPARTS.

 

This Agreement may be executed in one or more counterparts, each of which will
be deemed to be an original copy of this Agreement and of which, when taken
together, will be deemed to constitute one and the same agreement.

 

23.          JOINT AND SEVERAL LIABILITY.

 

Each of Group and Operating is accepting joint and several liability under this
Security Agreement and the Note in consideration of the financial accommodation
to be provided to each of them in connection with the issuance of the Note, for
the mutual benefit, directly and indirectly, of each of Group and Operating and
in consideration of the undertakings of Group and Operating to accept joint and
several liability for the obligations of each of them.

 

[Remainder of page intentionally blank]

 

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IN WITNESS WHEREOF, intending to be legally bound, the Debtor has caused this
Agreement to be duly executed as of the date first above written.

 

 

COVAD COMMUNICATIONS GROUP, INC.

 

 

 

 

 

By:

 

 

 

 

   Title:

 

 

 

 

 

COVAD COMMUNICATIONS COMPANY

 

 

 

 

 

By:

 

 

 

 

   Title:

 

ACCEPTED:

 

EARTHLINK, INC.

 

By:

 

 

 

  Title:

 

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