Exhibit
10.1


 


$50,000,000


 


COVAD
COMMUNICATIONS GROUP, INC.

COVAD COMMUNICATIONS COMPANY


 


12% SENIOR SECURED
CONVERTIBLE NOTES DUE 2011


 


6,134,969 SHARES
OF COMMON STOCK, PAR VALUE $0.001


 


PURCHASE AGREEMENT


 


 


March 15, 2006


 

















 


March 15, 2006


 


EarthLink, Inc.


1375 Peachtree Street, NW


Atlanta, Georgia 30309


 


Dear Sirs and Mesdames:


 


Covad Communications
Group, Inc., a Delaware corporation (the “Company”),
proposes to issue and sell to EarthLink, Inc., a Delaware corporation (the “Purchaser”) (i) together with Covad
Communications Company, a California corporation (“Operating”), $40,000,000 aggregate principal amount of a 12%
Senior Secured Convertible Note due 2011 (the “Note”) in the form attached hereto as Exhibit A and
(ii) 6,134,969 shares (the “Primary Shares”)
of Common Stock, par value $0.001 (the “Common
Stock”). The Note will be convertible into shares (the “Underlying Shares”) of Common Stock.


 


The Note, the Underlying
Shares and the Primary Shares will be offered without being registered under
the Securities Act of 1933, as amended (the “Securities
Act”), to the Purchaser in compliance with the exemption from
registration provided by Section 4(2) under the Securities Act.


 


This Purchase Agreement
(this “Agreement”), the Note, the
Registration Rights Agreement attached hereto as Exhibit B, the Security
Agreement attached hereto as Exhibit C, and the Agreement for XGDSL
Services attached hereto as Exhibit D (the “Services Agreement”) are collectively referred to herein as
(the “Transaction Documents”).


 


1.                                       Representations and Warranties of the Company and
Operating. The Company and Operating, jointly and severally,
represent and warrant to, and agree with the Purchaser that:


 


(a)                                  The
Company (i) is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, (ii) has the corporate
power and authority to own its property and to conduct its business as now
conducted and proposed to be conducted and (iii) is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be
in good standing would not have a material adverse effect on the properties,
assets, operations, business, results of operations or financial condition of
the Company and its subsidiaries, taken as a whole, or the ability of the
Company or Operating to perform any of their respective obligations under the
Transaction Documents to which they are a party, other than: (i) changes or
conditions in the industry or the industry sector in which the Company and its
subsidiaries operate that do not disproportionately affect the Company and its
subsidiaries or (ii) the effect of the pendency or consummation of the
transactions contemplated by this Agreement (a “Material Adverse Effect”).


 


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(b)                                 Each
subsidiary of the Company (i) is a corporation, limited liability company or
partnership duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization, (ii) has the corporate,
limited liability company or partnership power and authority to own its
property and to conduct its business as now conducted and proposed to be
conducted and (iii) is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect.


 


(c)                                  Except
as set forth on Schedule 1(c) attached hereto, all of the issued shares
of capital stock, membership interests or partnership interests, as applicable,
of each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned by the Company or one
or more of its other subsidiaries, free and clear of all liens, encumbrances, equities
or claims.


 


(d)                                 The
execution, delivery and performance by the Company and Operating of each of the
Transaction Documents to which they are a party, and the consummation of the
transactions contemplated thereby shall have been duly authorized by all
necessary corporate action.


 


(e)                                  The
authorized capital stock of the Company consists of 600,000,000 shares of
Common Stock (of which 10,000,000 are
designated as Class B common stock) and 5,000,000 shares of preferred
stock, par value $0.001 per share (“Preferred
Stock”). As of March 13, 2006, 283,381,574 shares of Common Stock
were issued and outstanding, and no shares of Preferred Stock were issued and
outstanding. As of March 13, 2006, there were outstanding the following
subscription rights, options, warrants, convertible or exchangeable securities
or other rights: (A) warrants to purchase up to 6,514,487 shares of Common
Stock, (B) options to purchase up to 26,214,538 shares of Common Stock, (C) 3%
convertible debentures due 2024 in the amount of $125,000,000 and (D) up to
16,067,077 shares of Common Stock to be issued in connection with the Company’s
acquisition of NextWeb, Inc. Except as set forth in this paragraph (e), no
shares of capital stock of the Company are authorized, issued, reserved for issuance
or outstanding. Since March 13, 2006, the Company has not issued any shares of
capital stock (except upon exercise or conversion of the securities set forth
above or otherwise pursuant to the rights and obligations set forth above), nor
any securities exchangeable for or convertible into any shares of capital stock
of the Company. All of the outstanding shares of Common Stock have been validly
issued, duly authorized, are fully paid and nonassessable and have been issued
in compliance with federal and state securities laws.


 


(f)                                    The
Primary Shares, when issued, sold and delivered in accordance with the terms
set forth in this Agreement, will be validly issued, fully paid and
non-assessable, issued in compliance with federal and state securities laws and
not subject to any preemptive or similar rights.


 


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(g)                                 The
Underlying Shares issuable upon conversion of the Note shall have been duly
authorized and reserved and, when issued upon conversion of the Note in
accordance with the terms of the Note, will be validly issued, fully paid and
non-assessable, and the issuance of the Underlying Shares will not be subject
to any preemptive or similar rights.


 


(h)                                 This
Agreement has been, and each of the other Transaction Documents when executed
and delivered will have been, duly executed and delivered by, and, assuming due
authorization, execution and delivery by the Purchaser of the Transaction
Documents to which it is a party, shall be valid and binding agreements of each
of the Company and Operating (with respect to such Transaction Documents to
which it is a party), enforceable in accordance with their respective terms,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors’ rights generally and equitable principles of general applicability.


 


(i)                                     The
execution, delivery and performance by each of the Company and Operating, as
applicable, of each of the Transaction Documents to which it is party, and the
consummation of the transactions contemplated thereby will not (i) violate any
provision of any applicable law material to the Company or Operating, (ii)
contravene the certificate of incorporation or bylaws of the Company or
Operating, (iii) conflict with or result in the breach of, or constitute a
default or require any payment to be made under, any agreement or other
instrument binding upon the Company or any of its subsidiaries that would have
a Material Adverse Effect, (iv) violate any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or any
subsidiary, or (v) result in or require the creation or imposition of any
material liens, encumbrances, equities or claims upon or with respect to any of
the properties of the Company or any of its subsidiaries, and no consent,
approval, authorization or order of, notice to or filing or qualification with,
any governmental or regulatory body or agency or any other third party is
required for the execution, delivery and performance by each of the Company and
Operating of each of the Transaction Documents to which it is a party and the
consummation of the transactions contemplated thereby, except such as may be
required by (w) the American Stock Exchange, (x) the securities or Blue Sky
laws of the various states in connection with the offer and sale of the Note
and the Primary Shares and (y) Federal and state securities laws with respect
to the Company’s obligations under registration rights granted under the
Registration Rights Agreement, and except as set forth on Schedule 1(i).


 


(j)                                     Neither
the Company nor any of its subsidiaries is (i) in violation of any provision of
applicable law, (ii) in breach of or default under any agreement or other
instrument binding upon the Company or any of its subsidiaries, or (iii) in
violation of any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, except, in each
case, to the extent that the violation or breach of, or default under, would
not have a Material Adverse Effect.


 


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(k)                                  Since
January 1, 2005, there has not occurred any event, there does not exist any
condition or set of circumstances and there has been no damage to or
destruction or loss of any property or asset of the Company and its
subsidiaries that, individually or in the aggregate, has had or would
reasonably be expected to have a Material Adverse Effect.


 


(l)                                     Except
as set forth on Schedule 1(l) attached hereto, there are no legal or
governmental proceedings pending or, to the knowledge of the Company,
threatened, to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject by or before any court, arbitrator or other governmental entity other
than proceedings that would not have a Material Adverse Effect.


 


(m)                               The
Company and its subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, except to the
extent that the failure to so possess would not result in a Material Adverse
Effect, and neither the Company nor any such subsidiary has received any notice
of proceedings relating to the revocation or modification of any such
certificate, authorization or permit, which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.


 


(n)                                 The
Company and its subsidiaries maintain a system of internal accounting controls
sufficient, in all material respects, to provide reasonable assurance that
(i) transactions are executed in accordance with management’s general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.


 


(o)                                 The
Company and its subsidiaries (i) are in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval, except, in each case, where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals would not have a Material Adverse Effect.


 


(p)                                 There
are no costs or liabilities associated with Environmental Laws (including,
without limitation, any capital or operating expenditures


 


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required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties) which would have a Material Adverse Effect.


 


(q)                                 Neither
the Company nor any of its subsidiaries is an “investment company”, or an “affiliated
person” of, or “promoter” or “principal underwriter” for, an “investment
company”, as such terms are defined in the Investment Company Act of 1940, as
amended. Neither the sale of any Note, nor the application of the proceeds or
repayment thereof by the Company, nor the consummation of the other
transactions contemplated by the Transaction Documents, will violate any
provision of such act or any rule, regulation or order of the Commission
thereunder.


 


(r)                                    Neither
the Company nor any affiliate (as defined in Rule 501(b) of
Regulation D under the Securities Act, an “Affiliate”) of the Company has directly, or through any agent,
(i) sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of, any security (as defined in the Securities Act) which
is or will be integrated with the sale of the Note or the Primary Shares in a
manner that would require the registration under the Securities Act of the Note
or the Primary Shares or (ii) offered, solicited offers to buy or sold the
Note or the Primary Shares by any form of “general solicitation” or “general
advertising” (as those terms are used in Regulation D under the Securities
Act) or in any manner involving a “public offering” within the meaning of Section 4(2)
of the Securities Act.


 


(s)                                  Assuming
the accuracy of the representations and warranties of the Purchaser set forth
in Section 7, it is not necessary in connection with the offer, sale and
delivery of the Note and the Primary Shares to the Purchaser in the manner
contemplated by this Agreement to register the Note or the Primary Shares under
the Securities Act or to qualify an indenture under the Trust Indenture Act of
1939, as amended.


 


(t)                                    The
Company’s filings with the Securities and Exchange Commission made on or after
January 1, 2004 did not, at the time of filing, contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were made,
not misleading, except to the extent information was corrected in or superseded
by subsequent filings.


 


(u)                                 The
consolidated balance sheets of the Company and its subsidiaries at December 31,
2005, and the related consolidated statements of operations, consolidated
statements of stockholders’ equity (deficit) and consolidated statements of
cash flows of the Company and its subsidiaries for the fiscal year then ended,
accompanied by an opinion of PricewaterhouseCoopers, LLP, independent public
accountants (together with any related schedules and notes, the “Financial
Statements”), fairly present in all material respects the


 


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consolidated financial condition of the Company and
its subsidiaries as at such date and the consolidated results of operations of
the Company and its subsidiaries for the period ended on such date, all in
accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis.


 


(v)                                 Each
employee benefit plan, within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), that is maintained, administered or contributed to by
the Company or any of its affiliates for employees or former employees of the
Company and its affiliates has been maintained in compliance with its terms and
the requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended (the “Code”); no prohibited
transaction, within the meaning of Section 406 of ERISA or Section 4975 of the
Code, has occurred with respect to any such plan excluding transactions
effected pursuant to a statutory or administrative exemption; and, for each
such plan that is subject to the funding rules of Section 412 of the Code or
Section 302 or ERISA, no “accumulated funding deficiency” as defined in Section
412 of the Code has been incurred, whether or not waived, and the fair market
value of the assets of such plan (excluding for these purposes accrued but
unpaid contributions) exceeds the present value of all benefits accrued under
such plan determined using reasonable actuarial assumptions.


 


(w)                               All
tax returns required to be filed by the Company or any subsidiary have been
filed in all jurisdictions where such returns are required to be filed; and all
taxes, including withholding taxes, value added and franchise taxes, penalties
and interest, assessments, fees and other charges due or claimed to be due from
such entities or that are due and payable have been paid, other than those
being contested in good faith and for which reserves have been provided in
accordance with GAAP or those currently payable without penalty or interest and
except where the failure to make such required filings or payments would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.


 


(x)                                   (i) The
fair value of the property and assets of the Company, individually and on a
consolidated basis with its subsidiaries, is greater than the total amount of
liabilities (including, without limitation, contingent liabilities) of the
Company, individually and on a consolidated basis with its subsidiaries;
(ii) the present fair saleable value of the property and assets of the Company,
individually and on a consolidated basis with its subsidiaries, is not less
than the amount that will be required to pay the probable liabilities of the
Company, individually and on a consolidated basis with its subsidiaries, on its
debts as they become absolute and matured; (iii) the Company, individually
and on a consolidated basis with its subsidiaries, does not intend to, and does
not believe that it will, incur debts or liabilities beyond its ability to pay
such debts and liabilities as they mature; and (iv) the Company,
individually and on a consolidated basis with its subsidiaries, is not engaged
in business or in a transaction for which the property and assets of the
Company, individually and on


 


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a consolidated basis with its subsidiaries, would
constitute an unreasonably small capital.


 


(y)                                 Set
forth on Schedule 1(y) hereto is a complete and accurate list of
all liabilities of the Company on a consolidated basis to be outstanding as of
February 28, 2006, showing as of February 28, 2006 the obligor and the
principal amount outstanding thereunder, (i) for borrowed money;
(ii) evidenced by bonds, debentures, notes or similar instruments;
(iii) in respect of letters of credit or bankers acceptances or similar
instruments (or reimbursement obligations with respect thereto); (iv) to
pay the deferred purchase price of property or services, except trade accounts
payable or accrued expenses arising in the ordinary course of business;
(v) as lessee, the obligations of which are capitalized in accordance with
generally accepted accounting principles; (vi) secured by a lien on any
asset of the Company or any subsidiary, whether or not the obligation giving
rise to such lien is assumed by the Company or such subsidiary; and
(vii) for indebtedness of others guaranteed by the Company or any
subsidiary or for which the Company or such subsidiary is legally responsible
or liable (whether by agreement to purchase indebtedness of, or to supply funds
or to invest in, others) (“Indebtedness”).
Since February 28, 2006, the Company on a consolidated basis has not incurred
any material Indebtedness.


 


(z)                                   (i)
The Company and each of its subsidiaries have established and maintain
disclosure controls and procedures (as such term is defined in Rule 13a-15
under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), (ii) such disclosure
controls and procedures are designed to ensure that the information required to
be disclosed by the Company and its subsidiaries in the reports they file or
submit under the Exchange Act is accumulated and communicated to management of
the Company and its subsidiaries, including their respective principal
executive officers and principal financial officers, as appropriate, to allow timely
decisions regarding required disclosure to be made and (iii) such
disclosure controls and procedures are effective in all material respects to
perform the functions for which they were established.


 


(aa)                            Except
as set forth in the Company’s most recently filed annual or quarterly Exchange
Act report or as previously disclosed to the Purchaser in writing, since the
date of the most recent balance sheet of the Company and its consolidated
subsidiaries reviewed or audited by PricewaterhouseCoopers, LLP and the audit
committee of the board of directors of the Company, (i) the Company has not
been advised of (A) any significant deficiencies in the design or operation of
internal controls that could adversely affect the ability of the Company and
each of its subsidiaries to record, process, summarize and report financial
data, or any material weaknesses in internal controls and (B) any fraud,
whether or not material, that involves management or other employees who have a
significant role in the internal controls of the Company and each of its
subsidiaries, and (ii) there have been no significant changes in internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.


 


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(bb)                          The
Company and its subsidiaries maintain insurance in such amounts and covering
such risks as the Company reasonably considers adequate for the conduct of its
business and the value of its properties and as is customary for companies
engaged in similar businesses in similar industries. As of the date hereof, the
Company has not received notice from any insurer regarding the termination of
any of such policies of insurance.


 


2.                                       Agreements to Sell and Purchase. Subject
to the terms and conditions of this Agreement: 
(i) the Company and Operating hereby agree to issue and sell to the
Purchaser, and the Purchaser upon the basis of the representations and
warranties herein contained, but subject to the conditions hereinafter stated,
agrees to purchase from the Company and Operating, the Note with an aggregate
principal amount of $40,000,000 for a purchase price equal to $40,000,000; and
(ii) the Company hereby agrees to issue and sell to the Purchaser, and the
Purchaser upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees to purchase
from the Company, the Primary Shares for an aggregate purchase price equal to
$10,000,000 (collectively, the “Purchase
Price”).


 


3.                                       Payment and Delivery. Payment of the
Purchase Price for the Note and the Primary Shares shall be made to the
Company, on behalf of itself and Operating, by wire transfer of immediately
available funds to an account designated by the Company in writing against
delivery of such Note and such Primary Shares for the account of the Purchaser
on the Closing Date. “Closing Date”
means the second business day following the satisfaction of the conditions set
forth in Section 4 or on such other date as the Company and the
Purchaser shall agree.


 


The Note and the Primary
Shares shall be delivered to the Purchaser on the Closing Date, for the account
of the Purchaser, with any transfer taxes payable in connection with the
transfer of the Note and the Primary Shares to the Purchaser duly paid, against
payment of the Purchase Price therefor.


 


4.                                       Conditions to the Purchaser’s Obligations. The
obligations of the Purchaser to purchase and pay for the Note and the Primary
Shares on the Closing Date are subject to the satisfaction or waiver of the
following conditions:


 


(a)                                  The
Purchaser shall have received the following documents on the Closing Date:


 


(i)                                     The
Registration Rights Agreement duly executed by the Company.


 


(ii)                                  The
Security Agreement duly executed by the Company and Operating.


 


(iii)                               The
Note duly executed by the Company and Operating.


 


(iv)                              The
Services Agreement duly executed by Operating.


 


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(v)                                 The
LPV Price Reduction Addendum, in the form attached hereto as Exhibit E
(the “LPV Addendum”), duly
executed by Operating.


 


(vi)                              A
stock certificate for the Primary Shares.


 


(vii)                           A
certificate, dated the Closing Date and signed by an executive officer of each
of the Company and Operating, to the effect that the representations and
warranties of the Company and Operating contained in this Agreement that are
qualified by a materiality threshold or by reference to a Material Adverse
Effect are true and correct in all respects, and that are not qualified by a
materiality threshold or by reference to a Material Adverse Effect are true and
correct in all material respects, in each case, on the Closing Date (unless any
such representations and warranties are stated to be made as of a specific
date, in which case they shall be true and correct in all respects or in all
material respects, as applicable, as of such date), after giving effect to the
issue and sale of the Note and the Primary Shares and the application of the proceeds
therefrom as contemplated hereby, and that each of the Company and Operating
have complied with all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied hereunder on or before the Closing Date.


 


(b)                                 The
Purchaser shall have received on the Closing Date an opinion of Weil Gotshal
& Manges LLP, outside counsel for the Company, dated the Closing Date, to
the effect set forth in Exhibit F and an opinion of the Senior Vice
President, General Counsel and Secretary of the Company to the effect set forth
in Exhibit G. Such opinions shall be rendered to the Purchaser at
the request of the Company and shall so state therein.


 


(c)                                  There
shall not be in effect any judgment, order or decree of a governmental body of
competent jurisdiction restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement.


 


(d)                                 All
necessary or required consents, orders, approvals or authorizations of,
notifications or submissions to, filings with, licenses or permits from, or
exemptions or waivers by, any governmental entity, stock exchange or other
person shall have been made or obtained, except where the failure by a party to
make or obtain any of the foregoing would not have a Material Adverse Effect.


 


(e)                                  The
Primary Shares and the Underlying Shares shall have been approved for listing
on the American Stock Exchange.


 


(f)                                    The
Amended and Restated Stockholder Protection Rights Agreement dated as of
November 1, 2001 (the “Rights Agreement”)
shall be amended to provide that the Purchaser is not an “Acquiring Person”
solely as a result of the transactions provided for in the Transaction
Documents; provided,


 


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however,
that the Purchaser shall be subject to the provisions of Section 18 hereof.


 


5.                                       Conditions to the Company’s Obligations. The
obligations of the Company and Operating to issue the Note and the Company to
issue the Primary Shares on the Closing Date are subject to the satisfaction or
waiver of the following conditions:


 


(a)                                  The
Company and Operating shall have received the following on the Closing Date:


 


(i)                                     The
Registration Rights Agreement duly executed by the Purchaser.


 


(ii)                                  The
Security Agreement duly executed by the Purchaser.


 


(iii)                               The
Services Agreement duly executed by the Purchaser.


 


(iv)                              The
LPV Addendum duly executed by the Purchaser.


 


(v)                                 The
Purchase Price of the Note and the Primary Shares purchased hereunder in
immediately available funds as provided in Section 3 hereof.


 


(b)                                 A
certificate dated the Closing Date and signed by an executive officer of the
Purchaser, to the effect that the representations and warranties of the
Purchaser contained in this Agreement that are qualified by a materiality
threshold or by reference to a material adverse effect shall be true and
correct in all respects, and that are not qualified by a materiality threshold
or by reference to a material adverse effect shall be true and correct in all
material respects, in each case, on the Closing Date (unless any such representations
and warranties are stated to be made as of a specific date, in which case they
shall be true and correct in all respects or all material respects, as
applicable, as of such date), and that the Purchaser has complied in all
material respects with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before the
Closing Date.


 


(c)                                  The
Purchaser shall deliver to the Company a completed IRS Form W-9 or otherwise
establish, to the Company’s reasonable satisfaction, that the Purchaser is not
subject to backup withholding under Section 3406 of the Code.


 


(d)                                 There
shall not be in effect any judgment, order or decree of a governmental body of
competent jurisdiction restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement.


 


6.                                       Covenants of the Company. In further
consideration of the agreements of the Purchaser contained in this Agreement,
the Company and Operating covenant with the Purchaser as follows:


 


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(a)                                  Whether
or not the transactions contemplated in this Agreement are consummated or this
Agreement is terminated, to pay or cause to be paid all expenses incident to
the performance of its obligations under this Agreement, including: (i) all
costs and expenses related to the transfer and delivery of the Note and the
Primary Shares to the Purchaser, including any transfer or other taxes payable
thereon, (ii) the fees and expenses, if any, incurred in connection with the
listing of the Primary Shares and the Underlying Shares on the American Stock
Exchange, (iii) the costs and charges of any transfer agent, registrar or
depositary, (iv) the cost of the preparation, issuance and delivery of the Note
and the Primary Shares and (v) the document production charges and expenses
associated with printing this Agreement. For the avoidance of doubt, each party
shall bear its own costs and expenses (including attorneys’ fees) associated
with the preparation, negotiation and execution of this Agreement and the other
Transaction Documents.


 


(b)                                 Not
to, and not permit any of its affiliates to, sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
the Securities Act) which could be integrated with the sale of the Note or the
Primary Shares in a manner which would require the registration under the
Securities Act of the Note or the Primary Shares.


 


(c)                                  Not
to solicit any offer to buy or offer or sell the Note, the Primary Shares or
the Underlying Shares by means of any form of “general solicitation” or “general
advertising” (as those terms are used in Regulation D under the Securities
Act) or in any manner involving a “public offering” within the meaning of
Section 4(2) of the Securities Act.


 


(d)                                 To
use the proceeds from the Notes and the Primary Shares as provided for in the
Services Agreement.


 


(e)                                  To
use reasonable best efforts to obtain any and all regulatory approvals
necessary in connection with the conversion of the Notes, as contemplated
therein, as soon as reasonably practicable and commencing no later than twelve
(12) months after the date of this Agreement.


 


(f)                                    Not
to physically locate and/or put into service any of the Collateral (as defined
in the Security Agreement) in any state until the Purchaser is reasonably
satisfied that all required state regulatory approvals have been obtained and
not to transfer any of the Collateral to any other subsidiary of the Company
until the Purchaser is reasonably satisfied that all required regulatory
approvals have been obtained.


 


(g)                                 To
promptly make all filings and file all applications to obtain any state
regulatory approvals, including but not limited to, filings and applications in
New York, required for the transactions contemplated by the Transaction
Documents and to use reasonable best efforts to obtain such approvals as
promptly as practicable.


 


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7.                                       Representations and Warranties of the Purchaser.
The Purchaser represents and warrants to the Company that:


 


(a)                                  The
Purchaser is an “accredited investor” within the meaning of Rule 501(a) of
Regulation D promulgated under the Securities Act.


 


(b)                                 The
Purchaser will acquire the Note, the Primary Shares and the Underlying Shares
solely for its own account and for investment and not with a view to, or for
sale in connection with, the distribution of the Note, the Primary Shares and
the Underlying Shares in any transaction that would be in violation of the
Securities Act or any applicable state securities laws.


 


(c)                                  The
Purchaser understands that the Note, the Primary Shares and the Underlying
Shares have not been registered under the Securities Act or any applicable
state securities laws and that the Note, the Primary Shares and the Underlying
Shares may be resold, pledged, hypothecated, transferred or otherwise disposed
of only if registered under the Securities Act and applicable state securities
laws or if an exemption from such registration requirements is available, and
subject, nevertheless, to the disposition of its property being at all times
within its control, and subject to Section 9 hereof.


 


(d)                                 The
Purchaser understands that no governmental entity has passed upon or made any
recommendation or endorsement of the Note, the Primary Shares and the
Underlying Shares.


 


(e)                                  The
Purchaser has the requisite corporate power and authority to enter into this
Agreement and each of the other Transaction Documents to which it is a party
and to consummate the transactions contemplated hereby and thereby to be
consummated by the Purchaser.


 


(f)                                    The
execution and delivery by the Purchaser of this Agreement and each of the other
Transaction Documents to which it is a party and the consummation by the
Purchaser of the transactions contemplated hereby to be consummated by the
Purchaser have been duly authorized by all necessary corporate action of the
Purchaser.


 


(g)                                 This
Agreement has been, and each of the other Transaction Documents to which the
Purchaser is a party when delivered will have been, duly and validly executed
and delivered by the Purchaser.


 


(h)                                 This
Agreement constitutes, and each of the other Transaction Documents to which the
Purchaser is a party when executed and delivered will constitute, valid and
binding agreements of the Purchaser enforceable against the Purchaser in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors’ rights generally and equitable principles of
general applicability.


 


13

















 


(i)                                     The
execution and delivery by the Purchaser of this Agreement do not, and of each
of the other Transaction Documents to which the Purchaser is a party when
delivered will not, and, the consummation by the Purchaser of the transactions
contemplated hereby and thereby will not (i) violate any provision of law, rule
or regulation applicable to it or any of its subsidiaries, except for any such
violation that would not have a material adverse effect on the Purchaser’s
ability to perform its obligations hereunder and thereunder, (ii) violate its
certificate of incorporation, bylaws, or other organizational documents or
those of any of its subsidiaries, or (iii) conflict with, result in a breach of
or constitute a default under any contractual obligation to which it is a
party, except for any such conflict, breach or default that would not have a
material adverse effect on the Purchaser’s ability to perform its obligations
hereunder and thereunder.


 


(j)                                     There
is no legal or governmental proceeding pending or, to the knowledge of the
Purchaser, threatened, to which the Purchaser is a party or to which any of the
properties or assets of the Purchaser is subject by or before any court,
arbitrator or other governmental entity which in any manner challenges or seeks
to prevent, enjoin, alter or materially delay the transactions contemplated by
this Agreement.


 


8.                                       Board of Directors Observer Rights. So
long as the Purchaser holds at least 33% of the total number of Primary Shares
and Underlying Shares (directly or through assumed conversion of the Note), (i)
the Purchaser shall be given reasonable advance written notice of each such
meeting of the Board of Directors of the Company, and (ii) the Purchaser shall
be entitled to have one person, who initially shall be Michael C. Lunsford or
Linda W. Beck or such other person reasonably acceptable to the Company, attend
such meetings as an invitee, who shall have all of the privileges and benefits
of a director of the Company (including receiving all materials provided to the
Board of Directors), except voting rights; provided,
however, (i) that such person shall maintain the confidentiality of
all financial and other proprietary information discussed at such meetings or
made known to such person in connection with such meetings; and (ii) that
the Company reserves the right to withhold any information and to exclude such
person from any meeting or portion thereof if the Board of Directors believes,
in good faith, that providing such information or attending such meeting or
portion thereof (a)  could adversely affect a material business
relationship between the Company and any third party, (b) would pose a conflict
of interest for the Purchaser, or (c) could adversely affect the
attorney-client privilege between the Company and its counsel, provided that if
only a portion of the information or meeting would be subject to this clause
(ii), the observer shall receive all such other information and be entitled to
attend all remaining portions of such meeting. Neither the Purchaser or any
such designee, however, shall have any duties, responsibilities or liabilities
as a director of the Company by virtue of attendance at such meetings or the
failure to attend the same other than the duty to maintain the confidentiality
of any material non-public information it receives at or in connection with
such meeting.


 


9.                                       Lock Up Period. During the period
beginning from the date hereof and continuing to and including the date that is
180 days after the Closing Date (the “Lock-


 


14

















 


Up Period”), the
Purchaser agrees to not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose of the Notes, the Primary Shares or the Underlying Shares without the
prior written consent of the Company; provided,
however, that the Lock-Up Period shall expire upon the Company’s
entry into an agreement that would result in a Change in Control (as defined in
the Note) or the termination of the Services Agreement.


 


10.                                 Indemnity.


 


(a)                                  The
Company and Operating, jointly and severally, agree to indemnify, defend and
save and hold harmless the Purchaser and each of its affiliates and their
respective officers, directors, employees, agents and advisors (each, “Purchaser Indemnified Party”) from and
against, and shall pay on demand, any and all claims, damages, losses,
liabilities and expenses (including, without limitation, reasonable fees and
expenses of counsel) that may be incurred by or asserted or awarded against any
Purchaser Indemnified Party by a third party, in each case arising out of or in
connection with or by reason of (including, without limitation, in connection
with any investigation, litigation or proceeding or preparation of a defense in
connection therewith) any breach of any representation, warranty, covenant or
agreement of the Company or Operating under this Agreement.


 


(b)                                 The
Purchaser agrees to indemnify, defend and save and hold harmless the Company and
Operating and each of their affiliates and their respective officers,
directors, employees, agents and advisors (each, a “Company Indemnified Party”) from and against, and shall pay on
demand, any and all claims, damages, losses, liabilities and expenses
(including, without limitation, reasonable fees and expenses of counsel) that
may be incurred by or asserted or awarded against any Company Indemnified Party
by a third party, in each case arising out of or in connection with or by
reason of (including, without limitation, in connection with any investigation,
litigation or proceeding or preparation of a defense in connection therewith)
any breach of any representation, warranty, covenant or agreement of the
Purchaser under this Agreement with respect to the Services Agreement.


 


(c)                                  The
indemnifying party will not, without the prior written consent of the
applicable indemnified party, as applicable, settle, compromise, consent to the
entry of any judgment in or otherwise seek to terminate any action, claim, suit
or proceeding in respect of which indemnification of such indemnified party may
be sought under subsection (a) of this Section 9 unless such
settlement, compromise, consent or termination includes a full and
unconditional release of such indemnified party from any and all claims against
such indemnified party and any and all liabilities thereof arising out of or
relating to such action, claim, suit or proceeding.


 


11.                                 Amendments; Waivers. The provisions of
this Agreement, including the provisions of this Section, may not be amended,
modified or supplemented, and waivers


 


15

















 


or consents to departures from the provisions hereof may not be given,
without the prior written consent thereto of the Company, Operating and the
Purchaser.


 


12.                                 Governing Law. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by and construed and enforced in accordance with the internal
laws of the State of Delaware, without regard to the principles of conflicts of
law thereof. Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any action, suit or proceeding
by mailing a copy thereof via registered or certified mail or overnight
delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.


 


13.                                 Interpretation. The descriptive headings
in this Agreement are for convenience of reference only and shall not be deemed
to alter or affect the meaning or interpretation of any provision of this
Agreement. The parties to this Agreement have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties hereto, and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement.


 


14.                                 Pronouns, Etc. Whenever required by the
context, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular forms of nouns, pronouns
and verbs shall include the plural, and vice versa.


 


15.                                 Entire Agreement. This Agreement, together
with the other Transaction Documents, contains the entire agreement of the
parties with respect to any subject matter of this Agreement, and no party
shall be liable or bound to the other party in any manner by any
representations, warranties, covenants and agreements except as specifically
set forth herein and in the Confidentiality Agreement between the Company and
the Purchaser dated February 21, 2006.


 


16.                                 Severability. Whenever possible, each
provision of this Agreement shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement is held
to be invalid or unenforceable in any respect, such invalidity or
unenforceability shall not render invalid or unenforceable any other provision
of this Agreement.


 


17.                                 Facsimile Copies. This Agreement, the
agreements referred to herein, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and


 


16

















 


respects as an original agreement or instrument and shall be considered
to have the same binding legal effect as if it were the original signed version
thereof delivered in person. At the request of any party hereto or to any such
agreement or instrument, the other parties hereto or thereto shall re-execute
original forms thereof and deliver them to the other party. No party hereto or
to any such agreement or instrument shall raise the use of a facsimile machine
to deliver a signature or the fact that any signature or agreement or
instrument was transmitted or communicated through the use of a facsimile
machine as a defense to the formation or enforceability of a contract, and each
party forever waives any such defense.


 


18.                                 Standstill.


 


(a)                                  The
Purchaser agrees that after Closing and until such time as the Purchaser would
no longer be required to file a report on Schedule 13D or 13G (assuming for
purposes of this Section 18 that the Notes have been converted in full and the
Purchaser owns an amount of Common Stock such that the Purchaser would not be
deemed an “Acquiring Person” under the Rights Agreement), unless the Purchaser
shall have been specifically authorized in writing by the Company or a
committee of the Board of Directors of the Company, neither the Purchaser nor
any of its Affiliates will, and Purchaser and Affiliates will direct their
representatives, agents, directors, officers and employees not to, directly or
indirectly, (a) effect or seek, offer, or propose (whether publicly or
otherwise) to effect, or cause or participate in, (i) any acquisition of
any securities (or of beneficial ownership thereof) of the Company or any of
its subsidiaries (except as contemplated by the Transaction Documents);
(ii) any tender or exchange offer, merger, or other business combination
involving the Company or any of its subsidiaries; (iii) any
recapitalization, restructuring, liquidation or dissolution of the Company or
any of its subsidiaries; or (iv) any solicitation of proxies or consents
to vote any voting securities of the Company; (b) form, join or in any way
participate in a “group” (as defined in the Exchange Act); (c) take any
action which might force the Company to make a public announcement regarding
any of the types of matters set forth in (a) above; or (d) enter into any
discussions or arrangements with any third party with respect to any of the
foregoing.


 


(b)                                 The
parties acknowledge and agree that the Company’s remedies at law for a breach
of this Section 18 would be inadequate and that irreparable damage will result
to the Company from any violation of this Section 18 by the Purchaser. The
parties expressly agree that the Company shall have the remedy of a restraining
order and injunction and any such equitable relief as may be declared or issued
to enforce the provisions of this Section 18.


 


19.                                 Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
and all of which taken together shall constitute one and the same instrument


 


17

















 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  COVAD COMMUNICATIONS GROUP, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Charles Hoffman

  	
   

  
	
   

  	
   

  	
    Name: Charles
  Hoffman

  	
   

  
	
   

  	
   

  	
    Title:   President
  and CEO

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  COVAD COMMUNICATIONS COMPANY

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Charles Hoffman

  	
   

  
	
   

  	
   

  	
    Name: Charles
  Hoffman

  	
   

  
	
   

  	
   

  	
    Title:    President and CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Accepted as of the date hereof

  
	
   

  
	
  EARTHLINK, INC.

  
	
   

  
	
   

  
	
  By:

  	
  /s/ Kevin M. Dotts

  	
   

  
	
   

  	
    Name: Kevin
  M. Dotts

  	
   

  
	
   

  	
    Title: CFO

  	
   

  
						



 


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