Document:

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”).

 

2

 

(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

 

6

 

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.

 

8

 

(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.

 

9

 

(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,

 

10

 

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:

 

11

 

(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.

 

12

 

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

  	
   

  
						

 

18Exhibit 10.2

 

THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”). THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT.

 

[FACE OF NOTE]

 

COVAD COMMUNICATIONS GROUP, INC.

 

12% Senior Secured Convertible Note due 2011

 

$40,000,000.00

 

No.
     

 

COVAD
COMMUNICATIONS GROUP, INC., a Delaware corporation (“Group”), and COVAD
COMMUNICATIONS COMPANY, a California corporation (“Operating”; individually and
collectively with Group, the “Company,” which term includes any successor), for
value received, jointly and severally, promise to pay to EarthLink, Inc., or
its registered assigns or successors, the principal sum of Forty Million
Dollars and No Cents ($40,000,000.00) on March 15, 2011.

 

Interest
Payment Dates:  March  15 and
September 15 of each year, commencing September 15, 2006.

 

Regular
Record Dates:  March  1 and
September  1 of each year.

 

Reference
is hereby made to the further provisions of this Note set forth on the reverse
hereof, which further provisions shall for all purposes have the same effect as
if set forth at this place.

 

 

IN
WITNESS WHEREOF, the Company has caused this Note to be signed by its duly
authorized officers.

 

	
   

  	
  COVAD
  COMMUNICATIONS GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:
  

  	
  Chief
  Executive Officer

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:
  

  	
  Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  Date:
  March      , 2006

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  COVAD
  COMMUNICATIONS COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:
  

  	
  Chief
  Executive Officer

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:
  

  	
  Chief
  Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  Date:
  March      , 2006

  	
   

  
														

 

2

 

[REVERSE SIDE OF NOTE]

 

COVAD COMMUNICATIONS GROUP, INC.

COVAD COMMUNICATIONS COMPANY

 

12% Senior Secured Convertible Note due 2011

 

Section 1.               Principal and Interest.

 

(a)               Subject to Section 1(d), the
Company will pay the principal of this Note on March  15, 2011 (the “Final
Maturity”). The Company, jointly and severally, promises to pay interest on
the principal amount of this Note on each Interest Payment Date, as set forth
below, at the rate per annum shown above.

 

(b)              Interest will be payable
semiannually (to the holders of record of the Notes at the close of business on
the March  1 or September 1 immediately preceding the Interest
Payment Date) on each Interest Payment Date, commencing September 15,
2006. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from March      ,
2006 (the “Issue Date”). Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. The Company shall pay interest
on overdue principal and premium, if any, and interest on overdue installments
of interest, to the extent lawful, at a rate per annum that is 2% in excess of
the rate otherwise payable.

 

(c)               The Company will have the option
to pay interest in cash or through the issuance of notes, other than the notes
comprising the first $40,000,000.00 principal amount of Notes issued on the
date hereof (the “Initial Notes”), which shall be issued as part of the
same series as the Initial Notes (the “Additional Notes” and, together
with the Initial Notes, the “Notes”). The Additional Notes will be
identical to the Initial Notes, except that interest will begin to accrue from
the date they are issued rather than the Issue Date. The Company shall provide
written or oral notice to the Holders five Business Days prior to an Interest
Payment Date of whether such interest payment will be made in cash, by the
issuance of Additional Notes or by a combination thereof. If the Company fails
to deliver such notice in such time period, interest for the period for which
the notice was not properly given shall be paid by the issuance of Additional
Notes. Any cash interest payment will be in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts.

 

(d)              Notwithstanding, the first
sentence of Section 1(a), in the event that: (i) (A) Operating elects under
Section 9.2.4 of that certain Agreement for XGDSL Services, dated of even date
herewith, between Operating and EarthLink, Inc. (“EarthLink”) (the “Services
Agreement”) not to proceed with the Phase II Build Out (as defined in the
Services Agreement) by written notice to EarthLink (“Phase II Notice”),
or (B) Operating receives from EarthLink notice of a Substantial Performance
Failure, as defined in and in accordance with the terms of, Section 4.5 of the
Services Agreement and Exhibit 2 of the Services Agreement (the “Substantial
Performance Notice’) and (ii) with respect to subsection (d)(i)(A), on the
date of the Phase II Notice EarthLink holds at least two-thirds of the
outstanding aggregate principal amount of the Notes and of the Primary Shares,
then EarthLink may, in either case and at its option, at any time

 

3

 

during the 30-day period following receipt of the
Phase II Notice or the Substantial Performance Notice, as applicable, by
written notice to the Company (the “Election Notice”), require the
Company to pay the remaining principal amount of the Notes held by EarthLink on
the date of the Election Notice (“Amortized Notes”) in four equal annual
installments due March 15 of each year, commencing on March 15, 2007 and ending
on March 15, 2010 (the “Principal Installments”); provided, however,
that if such Election Notice is made after any of such dates the principal on
the Amortized Notes will be paid ratably on the remaining dates. Accrued
interest, if any, on the Principal Installments shall be paid in accordance
with Section 1(b). From and after the date of the Election Notice, the
Amortized Notes shall continue to be governed by this Section 1(d), regardless
of any subsequent transfer by EarthLink of all or any portion of the Amortized
Notes.

 

Section 2.               Method of Payment. The
Company will pay interest (except defaulted interest) on the principal amount
of the Notes as provided above on each March  15 and September 15,
commencing September  15, 2006, to each person in whose names the Notes
are registered (a “Holder”) on the March 1 or September 1
immediately preceding the Interest Payment Date, in each case, even if the Note
is cancelled on registration of transfer or registration of exchange after such
record date. If a payment date is a date other than a Business Day, payment may
be made on the next succeeding day that is a Business Day and no interest shall
accrue for the intervening period. “Business Day” shall mean any day
except Saturday, Sunday or any other day on which commercial banks in the State
of California are authorized by law or other governmental action to close.

 

Section 3.               Limitations. The Notes are
general secured obligations of each of Group and Operating, will rank pari  passu
in right of payment with all existing and future secured, unsubordinated
indebtedness of each of Group and Operating and will be senior in right of
payment to all unsecured indebtedness and subordinated indebtedness of each of
Group and Operating.

 

Section 4.               Conversion of Note by Holder.

 

(a)               Subject to the further provisions
of this Section 4(a), a Holder of a Note may convert such Note (or portion
thereof) at any time beginning March 15, 2008, through the close of business on
the Final Maturity at the Conversion Price then in effect into shares of the
common stock of Group (the “Common Stock”); provided  however,
that in the event of a Change in Control, a Holder may convert such Note
immediately prior to the Change of Control irrespective of whether conversion
were to occur prior to March 15, 2008. For purposes of this Section 4, the
Company shall mail notice to the Holders not less than five Business Days prior
to the occurrence of any Change of Control, provided that the Company has
knowledge of such Change in Control. The number of shares of Group’s Common
Stock issuable upon conversion of a Note shall be determined by dividing the
outstanding principal amount (excluding accrued and unpaid interest) of the
Note (or portion thereof) surrendered for conversion by the Conversion Price in
effect on the Conversion Date (as defined in Section 4(b)). In connection with
any such conversion, such Holder also shall have the right to receive a payment
(each, a “Conversion Interest Payment”), at the time and in the manner
provided in Section 4(b), of the accrued and unpaid interest with respect to
the outstanding principal amount of the Note (or portion thereof) so converted,
which payment shall be made, at the election of the Company, in cash, Common

 

4

 

Stock, or a combination thereof. Subject to adjustment
or voluntary reduction as provided in this Section 4, the Conversion Price
initially shall be $1.86 per share of Group’s Common Stock.

 

A
Holder of Notes is not entitled to any rights of a holder of Group’s Common
Stock until such Holder has converted its Notes to Group’s Common Stock.

 

(b)              Conversion Procedure. To
convert a Note, a Holder must (i) complete and manually sign the
conversion notice on the back of the Note (or complete and manually sign a
facsimile of such notice) and deliver such notice to the Company,
(ii) surrender the Note to the Company, (iii) have satisfied any
necessary filing requirements under the Hart-Scott-Rodino Act of 1976, as
amended (the “HSR Act”), in respect of its acquisition of the shares of
Group’s Common Stock upon such conversion and the waiting period under such HSR
Act shall have expired or been terminated without objection to such
acquisition, (iv) have received any other necessary regulatory consents to
its acquisition of the shares of Group’s Common Stock upon such conversion and
(v) pay any transfer or similar tax if required pursuant to Section 4(d)
hereof. The date on which the Holder satisfies all of those requirements is the
“Conversion Date.”  The notice of
conversion shall state that the Holder has satisfied or will have satisfied
prior to the issuance of shares of the Group’s Common Stock upon conversion of
such principal amount, and prior to the payment of the Conversion Interest
Payment, any and all legal or regulatory requirements for conversion, including
compliance with the Securities Act, the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and the HSR Act. The Company shall use its
reasonable best efforts in cooperating in a timely manner with such Holder to
obtain such legal or regulatory approvals to the extent its cooperation is
necessary.

 

As
soon as practicable after the Conversion Date and in no event later than five
Business Days following the Conversion Date, Group shall deliver to the Holder
(i) a certificate for the number of whole shares of Group’s Common Stock
issuable upon the conversion of the Note or portion thereof as determined in
accordance with this Section 4, (ii) cash in lieu of any fractional
shares pursuant to Section 4(c) hereof and (iii) cash, Common Stock, or a
combination thereof, in an amount equal to the Conversion Interest Payment.

 

The
individual, corporation, partnership, limited liability company, joint venture,
association, joint-stock company, trust or other entity organization, including
a government or political subdivision or an agency or instrumentality thereof
(each a “Person” or “Persons”) in whose name the certificate is
registered shall be deemed to be a stockholder of record on and after the
Conversion Date, as the case may be; provided
that no surrender of a Note on any date when the stock transfer books of Group
shall be closed shall be effective to constitute the Person or Persons entitled
to receive the shares of Group’s Common Stock upon such conversion as the
record holder or holders of such shares of Group’s Common Stock on such date,
but such surrender shall be effective to constitute the Person or Persons
entitled to receive such shares of Group’s Common Stock as the record holder or
holders thereof for all purposes at the close of business on the next
succeeding day on which such stock transfer books are open; and provided further, that such conversion
shall be at the Conversion Price in effect on the Conversion Date as if the
stock transfer books of Group had not been closed. Upon conversion of a Note
(in whole and not in part), such Person shall no longer be a Holder of such
Note.

 

5

 

If
any Holder surrenders a Note for conversion after the close of business on the
Regular Record Date for the payment of an installment of interest and before
the close of business on the related Interest Payment Date, the Company shall
pay accrued interest, if any, through the Conversion Date to the Holder of such
Note on such Regular Record Date.

 

Upon
surrender of a Note that is converted in part, as soon as practicable after the
Conversion Date and in no event later than five Business Days following the
Conversion Date, the Company shall execute and deliver to the Holder, a new
Note equal in principal amount to the unconverted portion of the Note
surrendered.

 

If
the last day on which a Note may be converted is not a Business Day, the Note
may be surrendered to the Company on the next succeeding day that is a Business
Day.

 

(c)               Fractional Shares. Group
shall not issue fractional shares of its Common Stock upon conversion of any
Notes. In lieu thereof, the Company shall, at the Company’s option, pay an
amount in cash based upon the Current Market Price on the Business Day
immediately prior to the Conversion Date or round up the number of shares of
Group’s Common Stock issuable upon such conversion to the next highest whole
number of shares.

 

(d)              Taxes on Conversion. If a
Holder converts a Note, the Company shall pay any documentary, stamp or similar
issue or transfer tax due on the issue of shares of its Common Stock upon such
conversion. However, the Holder shall pay any such tax that is due because the
Holder requests the shares to be issued in a name other than the Holder’s name.
Group may refuse to deliver the certificate representing the shares of Group’s
Common Stock being issued in a name other than the Holder’s name until the
Company receives a sum sufficient to pay any tax which will be due because the
shares are to be issued in a name other than the Holder’s name. Nothing herein
shall preclude any tax withholding required by law or regulation.

 

(e)               Adjustment of Conversion Price.
The Conversion Price shall be adjusted from time to time by the Company as
follows:

 

(i)            In case Group shall (A) pay a
dividend in shares of its Common Stock to all holders of its Common Stock,
(B) make a distribution in shares of its Common Stock to all holders of
its Common Stock, (C) subdivide or split its outstanding Common Stock into
a larger number of shares, or (D) combine its outstanding Common Stock
into a smaller number of shares, the Conversion Price in effect immediately
prior thereto shall be adjusted so that the Holder of any Note thereafter surrendered
for conversion shall be entitled to receive that number of shares of Group’s
Common Stock that it would have owned or been entitled to receive had such Note
been converted immediately prior to the happening of such event. An adjustment
made pursuant to this Section 4(e)(i) shall become effective as of the close of
business on the record date fixed for the determination of stockholders
entitled to receive such dividend or distribution in the case of a dividend in
shares or distribution in shares and shall become effective as of the close of
business on the effective date in the case of a subdivision, split or
combination. If any dividend or distribution of the type described in this
Section 4(e)(i) is declared but not so paid or made, the Conversion Price shall
again be adjusted to the Conversion Price that would then be in effect if such
dividend or distribution had not been declared.

 

6

 

(ii)           In case (A) Group shall issue
rights, options or warrants to all or substantially all holders of its Common
Stock entitling them (for a period commencing no earlier than the record date
described below and expiring not more than 60 days after such record date) to
subscribe for or purchase shares of its Common Stock (or securities convertible
into its Common Stock) at a price per share less than the Current Market Price
at the record date fixed for the determination of stockholders entitled to
receive such rights or warrants or (B) Group shall sell or issue any shares
of its Common Stock and the consideration per share of Group’s Common Stock to
be paid upon such sale or issuance is less than the Current Market Price or
Group shall sell or issue warrants, options, rights or other convertible
securities to subscribe for or purchase shares of its Common Stock at a price
per share less than the Current Market Price on the date of such sale or
issuance, the Conversion Price in effect immediately prior to the close of
business on the record date or issue date thereto shall be reduced so that the
same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to the close of business on such record date or issue
date (as the case may be) by a fraction, the numerator of which shall be the
number of shares of Group’s Common Stock outstanding at the close of business
on such record date or issue date (as the case may be), plus the number of
shares that the aggregate offering price of the total number of shares of
Group’s Common Stock so offered (or the aggregate conversion price of the
convertible securities so offered) would purchase at such Current Market Price,
and the denominator of which shall be the number of shares of Group’s Common
Stock outstanding at the close of business on such record date or issue date
(as the case may be) plus the number of additional shares of Group’s Common
Stock offered (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever any such
rights, options, warrants or convertible securities are issued, and shall
become effective as of the close of business on such record date or issue date
(as the case may be). To the extent that shares of Group’s Common Stock are not
delivered after the expiration of such rights, options or warrants, the
Conversion Price shall be adjusted to the Conversion Price that would then be
in effect had the reduction made upon the issuance of such rights, options or
warrants been made on the basis of delivery of only the number of shares of
Group’s Common Stock actually delivered. In the event that such rights, options
or warrants are not so issued, the Conversion Price shall again be adjusted to
be the Conversion Price that would then be in effect if such record date had
not been fixed. In determining whether any rights, options or warrants entitle
the holders to subscribe for or purchase shares of Group’s Common Stock at less
than such Current Market Price, and in determining the aggregate offering price
of such shares of Group’s Common Stock, there shall be taken into account the
fair market value of any consideration received by Group for such rights,
options or warrants and any amount payable on exercise or conversion thereof.

 

(iii)          In case Group shall, by dividend or
otherwise, distribute to all holders of its Common Stock, cash, then, in such
case, the Conversion Price shall be reduced so that the same shall equal the
price determined by multiplying the Conversion Price in effect immediately
prior to the close of business on the record date fixed for the determination
of stockholders entitled to receive such distribution by a fraction, the
numerator of which shall be Current Market Price on such record date less the
amount of cash so distributed (and not excluded as provided above) applicable
to one share of Group’s Common Stock and the denominator shall be the Current
Market Price on such record date. Such reduction shall become effective as of
the close of business on such record date; provided
that, in the event the portion of the cash so distributed applicable to one
share of Group’s Common Stock is equal to

 

7

 

or greater than the Current Market Price on such
record date, in lieu of the foregoing adjustment, adequate provision shall be
made so that each Holder shall have the right to receive upon conversion, in
addition to the shares of Group’s Common Stock issuable upon such conversion,
the amount of cash such Holder would have received had such Holder converted
such Note on such record date. In the event that such dividend or distribution
is not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price that would then be in effect if such dividend or distribution
had not been declared. If any adjustment is required to be made as set forth in
this Section 4(e)(iii) as a result of a distribution that is a regular
dividend, such adjustment shall be based upon the amount by which such
distribution exceeds the amount of the regular cash dividend permitted to be
excluded pursuant hereto. If an adjustment is required to be made as set forth
in this Section 4(e)(iii) as a result of a distribution that is not a regular
dividend, such adjustment shall be based upon the full amount of the
distribution.

 

(iv)          In case Group shall distribute to all
or substantially all holders of its Common Stock any of Group’s shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity, whether outstanding on the Issue Date or issued
thereafter, including all preferred stock of Group (the “Capital Stock”)
(other than Group’s Common Stock), evidences of indebtedness or other non-cash
assets (including securities of any Person), or shall distribute to all holders
of its Common Stock rights, options or warrants to subscribe for or purchase
any of its securities (excluding those referred to in Section 4(e)(ii)) (any of
the foregoing hereinafter referred to as the “Distributed Securities”),
then in each such case the Conversion Price in effect immediately prior to the
close of business on the record date for the determination of stockholders
entitled to receive such Distributed Securities shall be reduced so that the
same shall equal the price determined by multiplying the Conversion Price in
effect as of the close of business on such record date by a fraction, the
numerator of which shall be the Current Market Price on such record date less
the fair market value on such record date of the portion of the Distributed
Securities applicable to one share of Group’s Common Stock (determined on the
basis of the number of shares of Group’s Common Stock outstanding on the record
date), and the denominator of which shall be the Current Market Price on such
record date. Such reduction shall become effective as of the close of business
on such record date; provided,
that the then fair market value of the portion of the Distributable Securities
so distributed applicable to one share of Group’s Common Stock is equal to or
greater than the Current Market Price on such record date, in lieu of making
the foregoing reduction, adequate provision shall be made so that each Holder
of a Note receives at such time, or shall have the right to receive upon such
conversion, in addition to the shares of Group’s Common Stock issuable upon
such conversion, the amount of Distributed Securities such Holder would have
received had such Holder converted such Note on such record date. In the event
that such distribution is not so made, the Conversion Price shall again be adjusted
to be the Conversion Price that would then be in effect if such dividend or
distribution had not been declared. If the Board of Directors determines the
fair market value of any distribution for purposes of this Section 4(e)(iv) by
reference to the actual or when issued trading market for any securities, it
must in doing so consider the prices in such market over the same period used
in computing the Current Market Price.

 

Rights,
options or warrants distributed by Group to all holders of Group’s Common Stock
entitling the holders thereof to subscribe for or purchase shares of Group’s
Capital Stock (either initially or under certain circumstances), which rights
or warrants, until the occurrence of a

 

8

 

specified
event or events (each a “Trigger Event”):  (A) are deemed to be transferred with
such shares of Group’s Common Stock, (B) are not immediately exercisable
and (C) are also issued in respect of future issuances of Group’s Common
Stock, shall be deemed not to have been distributed for purposes of this
Section 4(e) (and no adjustment to the Conversion Price under this Section 4(e)
shall be required) until the occurrence of the earliest Trigger Event,
whereupon such rights and warrants shall be deemed to have been distributed and
an appropriate adjustment (if any is required) to the Conversion Price shall be
made under this Section 4(e)(iv).

 

If
any such right, option or warrant, including any such existing right, option or
warrant distributed prior to the Issue Date, is subject to events, upon the
occurrence of which such right, option or warrant becomes exercisable to
purchase different securities, evidences of indebtedness or other non-cash
assets, then the date of the occurrence of any and each such event shall be
deemed to be the date of distribution and record date with respect to new
rights, options or warrants with such rights (and a termination or expiration
of the existing rights, options or warrants without exercise by any of the
holders thereof). In addition, in the event of any distribution (or deemed
distribution) of rights, options or warrants, or any Trigger Event or other
event (of the type described in the preceding sentence) with respect thereto
that was counted for purposes of calculating a distribution amount for which an
adjustment to the Conversion Price under this Section 4(e) was made,
(A) in the case of any such rights, options or warrants that shall all
have been redeemed or repurchased without exercise by any holders thereof, the
Conversion Price shall be readjusted upon such final redemption or repurchase
to give effect to such distribution or Trigger Event, as the case may be, as
though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Group’s Common Stock with
respect to such rights, options or warrants (assuming such holder had retained
such rights, options or warrants), made to all holders of Group’s Common Stock
as of the date of such redemption or repurchase and (B) in the case of
such rights, options or warrants that shall have expired or been terminated
without exercise by any holders thereof, the Conversion Price shall be
readjusted as if such rights, options and warrants had not been issued.

 

No
adjustment of the Conversion Price shall be made pursuant to this Section
4(e)(iv) in respect of rights, options or warrants distributed or deemed
distributed on any Trigger Event to the extent that such rights, options or
warrants are actually distributed, or reserved by Group for distribution, to
any Holder upon conversion by such Holder of a Note to shares of Group’s Common
Stock. For purposes of this Section 4(e)(iv) and Sections 4(e)(i) and (ii), any
dividend or distribution to which this Section 4(e)(iv) is applicable that also
includes shares of Group’s Common Stock, or rights, options or warrants to
subscribe for or purchase shares of Group’s Common Stock (or both), shall be
deemed instead to be (A) a dividend or distribution of the evidences of
indebtedness, non-cash assets or shares of Group’s Capital Stock other than
such shares of Group’s Common Stock (and any Conversion Price reduction
required by this Section 4(e)(iv) with respect to such dividend or distribution
shall then be made) immediately followed by (B) a dividend or distribution
of such shares of Group’s Common Stock or such rights, options or warrants (and
any further Conversion Price reduction required by Sections 4(e)(i) and (ii)
with respect to such dividend or distribution shall then be made), except “the
record date for the determination of stockholders entitled to receive such
Distributed Securities” shall be substituted as “the record date fixed for the
determination of stockholders entitled to receive such dividend or
distribution” and “the record date fixed for the determination of

 

9

 

stockholders
entitled to receive such rights, options or warrants” within the meaning of
Sections 4(e)(i) and (ii).

 

(v)           In case a tender or exchange offer made
by Group or any subsidiary of Group for all or any portion of Group’s Common
Stock shall expire and such tender or exchange offer (as amended upon the
expiration thereof) shall involve the payment by Group or such subsidiary to
stockholders of consideration per share of Group’s Common Stock having a fair
market value (at the last time (the “Expiration Time”) tenders or
exchanges may be made pursuant to such tender or exchange offer (as it shall
have been amended)) that exceeds the Current Market Price on the Trading Day
next succeeding the Expiration Time, the Conversion Price shall be reduced so
that the same shall equal the Conversion Price determined by multiplying the
Conversion Price in effect immediately prior to the Expiration Time by a
fraction, the numerator of which shall be the number of shares of Group’s
Common Stock outstanding (including any tendered or exchanged shares) at the
Expiration Time multiplied by the Current Market Price on the Trading Day next
succeeding the Expiration Time, and the denominator of which shall be the sum
of (A) the fair market value of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum specified in the terms
of the tender or exchange offer) of all shares validly tendered or exchanged
and not withdrawn as of the Expiration Time (the shares deemed so accepted up
to any such maximum, being referred to as the “Purchased Shares”) and
(B) the product of the number of shares of Group’s Common Stock
outstanding (less any Purchased Shares) at the Expiration Time and the Current
Market Price on the Trading Day next succeeding the Expiration Time, such
reduction to become effective immediately prior to the opening of business on
the Trading Day next succeeding the Expiration Time. In the event that Group or
such subsidiary is obligated to purchase shares of Group’s Common Stock
pursuant to any such tender or exchange offer, but Group or such subsidiary is
permanently prevented by applicable law from effecting any such purchases or
all such purchases are rescinded, the Conversion Price shall again be adjusted
to be the Conversion Price that would then be effect if such tender or exchange
offer had not been made.

 

(vi)          The following terms shall have the
meaning indicated:

 

“Closing
Price” means, with respect to any securities on any date, the closing sale
price, regular way, on such day or, in case no such sale takes place on such
day, the average of the reported closing bid and asked prices, regular way, in
each case on the New York Stock Exchange, or, if such security is not listed or
admitted to trading on such Exchange, on the principal security exchange or
automated quotation system in the United States on which such security is
quoted or listed or admitted to trading, or, the average of the closing bid and
asked prices of such security on the over the counter market on the day in
question as reported by The Nasdaq National Market or a similar generally
accepted reporting service, or if not so available, in such manner as furnished
by any New York Stock Exchange member firm selected from time to time by the
Board of Directors for that purpose.

 

“Current
Market Price” means the average of the daily Closing Prices per share of
Group’s Common Stock for the ten consecutive Trading Days immediately prior to
the date in question or, if Group’s Common Stock is not listed or quoted or
admitted to trading on any

 

10

 

national
security exchange or automated quotation system in the United States, the fair
market value of Group’s Common Stock immediately prior to the date in question.

 

“fair
market value” means the price that would be paid in an arm’s-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors; provided
that with respect to any transaction or series of related transactions having a
value in excess of $10 million, such determination is made by disinterested
members of the Board of Directors (it being acknowledged and agreed that no
such member shall be deemed interested in any such transaction by reason of the
fact that such member or any of its affiliates owns or controls securities of
Group).

 

“Trading
Day” means a day on which the principal national securities exchange or
automated quotation system in the United States on which Group’s Common Stock
is listed or quoted or admitted to trading is open for the transaction of
business or, if Group’s Common Stock is not listed or quoted or admitted to
trading on any national securities exchange or automated quotation system in
the United States, any Business Day.

 

(vii)         In any case in which this Section 4(e)
shall require that an adjustment be made on a record date established for
purposes of this Section 4(e), the Company may elect to defer (but only until
five Business Days following the mailing by the Company to the Holders of the
certificate described in Section 4(i) hereof) issuing to the Holder of any Note
converted after such record date but prior to the issue date, the shares of
Group’s Common Stock and other Capital Stock of Group issuable upon such
conversion over and above the shares of Group’s Common Stock and other Capital
Stock of Group issuable upon such conversion only on the basis of the
Conversion Price prior to adjustment and, in lieu of the shares the issuance of
which is so deferred, Group shall issue or cause its transfer agents to issue
due bills or other appropriate evidence prepared by Group of the right to
receive such shares.

 

(viii)        If any of the following shall occur,
namely:  (A) any reclassification or
change of shares of Group’s Common Stock issuable upon conversion of the Notes
(other than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or combination, or
any other change for which an adjustment is provided in this Section 4(e));
(B) any consolidation, merger or combination to which Group is a party
other than a merger in which Group is the continuing corporation and which does
not result in any reclassification of, or change (other than a change in name,
or in par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination) in, outstanding shares
of Group’s Common Stock; or (C) any sale, transfer or conveyance of all or
substantially all of the property and assets of Group to any Person, then
Group, or such successor or purchasing corporation or, if applicable, the
parent entity of such successor or purchasing corporation, as the case may be,
shall, as a condition precedent to such reclassification, change,
consolidation, merger, combination, sale, transfer or conveyance, execute and
deliver to the Holders an amendment to the Notes providing that the Holder of
each Note then outstanding shall have the right to convert such Note into the
kind and amount of shares of stock and other securities and property (including
cash) receivable upon such reclassification, change, consolidation, merger,
combination, sale, transfer or conveyance by a holder of the number of shares
of Group’s Common Stock deliverable upon conversion of

 

11

 

such Note immediately prior to such reclassification,
change, consolidation, merger, sale, transfer or conveyance.

 

(f)               No Adjustment. No
adjustment in the Conversion Price shall be required unless the adjustment
would require an increase or decrease of at least 1% in the Conversion Price as
last adjusted; provided that any
adjustments which by reason of this Section 4(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 4 shall be made to the nearest cent or
to the nearest one hundredth of a share, as the case may be. No adjustment need
be made for (i) the issuance of options or rights to purchase Common Stock
pursuant to any present or future employee, director or consultant benefit plan
or program of or assumed by Group or any subsidiary so long as the exercise
price of such options or rights is not less than the Current Market Price per
share of Common Stock on such issue date, (ii) the issuance of Common Stock
pursuant to and in accordance with the terms of Group’s Employee Stock Purchase
Plan, or (iii) the issuance of Common Stock pursuant to any option,
warrant, right or exercisable, exchangeable or convertible security outstanding
as of the Issue Date. No adjustment need be made for a change in the par value
or a change to no par value of Group’s Common Stock. To the extent that the
Notes become convertible into the right to receive cash, no adjustment need be
made thereafter as to the cash. Interest will not accrue on the cash. Notwithstanding
anything to the contrary herein or in any Additional Note, in no event shall
the conversion of this Note and any Additional Notes (as defined in this Note
and in the Registration Rights Agreement of even date herewith between Group
and EarthLink), taking into account all prior conversions, be converted in an
aggregate number of shares of Common Stock which in the aggregate exceeds 19.9%
of the then outstanding shares of Common Stock.

 

(g)              Adjustment for Tax Purposes.
Group shall be entitled to make such reductions in the Conversion Price, in
addition to those required by Section 4(e), as it in its discretion shall
determine to be advisable in order that any stock dividends, subdivisions of
shares, distributions of rights to purchase stock or Notes or distributions of
Notes convertible into or exchangeable for Capital Stock hereafter made by
Group to its stockholders shall not be taxable, provided that such reduction does not have an adverse effect
for tax purposes, or otherwise, on Holders of the Notes.

 

(h)              Notice of Adjustment.
Whenever the Conversion Price is adjusted, the Company shall promptly mail to
Holders a notice of the adjustment and an Officers’ Certificate (as defined in
Section 9(i)) briefly stating the facts requiring the adjustment, the manner of
computing it, the new Conversion Price and the date on which the adjustment
becomes effective.

 

(i)                Notice of Certain
Transactions. In the event that (i) Group takes any action that would
require an adjustment in the Conversion Price, (ii) Group consolidates,
merges or combines with, or transfers all or substantially all of its property
and assets to, another Person and stockholders of Group must approve the
transaction, or (iii) there is a dissolution, liquidation or winding up of
Group, the Company shall mail to Holders a notice stating the proposed record
or effective date, as the case may be. The Company shall mail the notice at
least 15 days before such date.

 

12

 

Section 5.               Redemption of Notes.

 

(a)               Upon the occurrence of any Change
of Control, the Holder or Holders, as the case may be, shall have the right to
require the Company to repurchase all Notes then outstanding, at a purchase
price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of
purchase (the “Change of Control Redemption Price”). A notice of a
Change of Control will be mailed within 30 days after the date any Change of
Control occurs to each Holder. If any Holder elects to exercise the right to
receive the Change of Control Redemption Price under this Section 5(a), such
Holder will mail to the Company a notice of such election. Payment of the
Change of Control Redemption Price by the Company to the Holder shall be made
in cash in immediately available funds within 30 days after the Company
receives such notice of the Holder’s election to receive the Change of Control
Redemption Price.

 

(b)              The following terms shall have the
meaning indicated:

 

“Change
of Control” means the occurrence of one or more of the following
events:  (i) the acquisition by any
person, including any syndicate or group deemed to be a “person” under Section
13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly,
through a purchase, merger or other acquisition transaction or series of
purchase, merger or other acquisition transactions, of shares of Group’s
Capital Stock entitling that person to exercise 50% or more of the total voting
power of all shares of Group’s Capital Stock entitled to vote generally in
elections of directors, other than any acquisition by Group, any of Group’s
subsidiaries or any of Group’s employee benefit plans (except that any of those
persons shall be deemed to have beneficial ownership of all securities it has
the right to acquire, whether the right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition); (ii) the first
day on which a majority of the members of the Group’s Board of Directors are
not Continuing Directors; or (iii) Group consolidates or merges with or into
any other person, any merger of another person into Group, or any conveyance,
transfer, sale, lease or other disposition, of all or substantially all of
Group’s properties and assets to another person, other than:  (A) any transaction:  (x) that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Group’s Capital Stock; and (y) pursuant to which holders of Group’s Capital
Stock immediately prior to the transaction have the entitlement to exercise,
directly or indirectly, 50% or more of the total voting power of all shares of
Capital Stock entitled to vote generally in elections of directors of the
continuing or surviving Person immediately after giving effect to such
issuance; and (B) any merger, share exchange, transfer of assets or similar
transaction solely for the purpose of changing Group’s jurisdiction of
incorporation and resulting in a reclassification, conversion or exchange of
outstanding shares of Common Stock, if at all, solely into shares of common
stock, ordinary shares or American Depositary Shares of the surviving entity or
a direct or indirect parent of the surviving corporation.

 

“Continuing
Director” means, as of any date of determination, any member of Group’s
Board of Directors who (i) was a member of such Board of Directors on the Issue
Date or (ii) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were members of
such Board of Directors at the time of such nomination or election.

 

13

 

Section 6.               Persons Deemed Owners. A
Holder shall be treated as the owner of a Note for all purposes.

 

Section 7.               Security Agreement. The
Company’s obligations to the Holders under this Note are secured by a lien on
and security interest in certain assets of Group and Operating (including,
without limitation, the equipment acquired with the proceeds of this Note), all
as more particularly described in that certain Security Agreement dated of even
date herewith made by each of Group and Operating for the benefit of the
Holders (the “Security Agreement”). Each Holder of any Notes, by its
acceptance thereof, consents and agrees to the terms of the Security Agreement
as the same may be in effect from time to time in accordance with its terms and
directs EarthLink (or its assignee), as collateral agent (the “Collateral Agent”), to enter into the
Security Agreement and to perform its obligations and exercise its rights
thereunder in accordance therewith. The Collateral Agent shall have all of the
powers and duties of the Secured Party (as defined in the Security Agreement)
under the Security Agreement and shall exercise such powers and duties on its own
behalf and on behalf of the other Holders. It is expressly understood and
agreed that no Holder other than the Collateral Agent shall have any rights or
duties under the Security Agreement except as provided in this Section 7;
provided, however that the Collateral Agent shall take any action
with respect to the Security Agreement as is directed in writing by a majority
of the Holders of outstanding aggregate principal amount of the Notes. In no
event shall the Collateral Agent be liable to any other Holder for any action
taken, or for the failure to take any action, as the Collateral Agent, except
for such actions or inactions constituting gross negligence or willful
misconduct. If at any time EarthLink ceases to hold the greatest percentage of
the outstanding aggregate principal amount of the Notes, then EarthLink (or any
assignee), with the prior written consent of the Company, not to be
unreasonably withheld, shall be entitled, but shall not be required, to assign
its rights to act as Collateral Agent to the Holder of the greatest percentage
of the outstanding aggregate principal amount of the Notes. Such assignment
shall be effective upon acceptance by such Holder and such Holder shall become
the “Collateral Agent” for all purposes under this Note and the Security
Agreement.

 

Section 8.               Amendment; Supplement; Waiver.
Subject to certain exceptions, the Notes may be amended or supplemented with
the consent of the Holders of at least a majority in principal amount of the
Notes then outstanding and any existing default or compliance with any
provision may be waived with the consent of the Holders of at least a majority
in principal amount of the Notes then outstanding.

 

Section 9.               Covenants.

 

(a)               Payment of Notes. Group
and Operating shall, jointly and severally, pay the principal of, premium, if
any, and interest on the Notes on the dates and in the manner provided in the
Notes. Group and Operating shall, jointly and severally, pay interest on
overdue principal and premium, if any, and interest on overdue installments of
interest, to the extent lawful, at the rate per annum specified in the Notes.

 

(b)              Use of Proceeds. Group and
Operating shall use the proceeds from the sale of the Notes in the manner
provided for in the Services Agreement.

 

14

 

(c)               Limitation on Indebtedness.
The Company shall not, and shall not permit any subsidiary to, contract,
create, incur, assume or permit to exist any secured Indebtedness, except
(i) Indebtedness arising or existing under the Note,
(ii) Indebtedness of the Company existing as of the Issue Date, (iii)
Indebtedness owing to EarthLink, (iv)  Indebtedness related to the Phase
II Alternative Financing (as defined in the Services Agreement) not to exceed
$45,000,000 outstanding at any time, (v) purchase money Indebtedness in an
aggregate amount not to exceed $25,000,000 outstanding at any time, and (vi)
other Indebtedness not to exceed $75,000,000 outstanding at any time (including
asset based loan financing).

 

(d)              Negative Pledge. The
Company shall not, and shall not permit any subsidiary to, enter into, assume
or become subject to any agreement prohibiting or otherwise restricting the
creation or assumption of any lien upon its assets constituting PP&E,
whether now owned or hereafter acquired, or requiring the grant of any security
for such obligation if security is given for some other obligation, except
(i) pursuant to this Agreement and the Note, (ii) pursuant to any
document or instrument governing Indebtedness incurred pursuant to
Section 9(c), provided that any such agreement, in the case of
Indebtedness permitted under clauses (c)(iii), (iv) and (v) above, relates only
to the asset or assets constructed or acquired in connection therewith, and
(iii) in connection with any Permitted Lien or any document or instrument
governing any Permitted Lien; provided that any such restriction contained
therein relates only to the asset or assets subject to such Permitted Lien.

 

(i)            The following terms shall have the
meaning indicated:

 

“Indebtedness”
shall mean, with respect to any Person, without duplication any liability of
such Person (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 such Person, whether or not the obligation giving rise to
such lien is assumed by such Person; and (vii) for indebtedness of others
guaranteed by such Person or for which such Person is legally responsible or
liable (whether by agreement to purchase indebtedness of, or to supply funds or
to invest in, others).

 

“Permitted
Lien” shall mean (i) the lien on and security interest in substantially all
of the Company’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 which is
being contested in good faith and with respect to which the Company 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
Company 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 (as defined in the Purchase Agreement).

 

15

 

“PP&E”
shall mean equipment, fixed assets, real property or improvements that have
been or should be, in accordance with GAAP, reflected as additions to property,
plant and equipment on a balance sheet of the Company or have a useful life of
more than one year.

 

(e)               Existence. The Company
shall do or cause to be done all things necessary to preserve and keep in full
force and effect its existence and the existence of each subsidiary in
accordance with the respective organizational documents of the Company and each
such subsidiary and the rights (whether pursuant to charter, partnership
certificate, agreement, statute or otherwise), licenses and franchises of the
Company and each such subsidiary; provided
that the Company shall not be required to preserve any such right, license or
franchise, or the existence of any subsidiary, if the maintenance or
preservation thereof is no longer desirable in the conduct of the business of
the Company and its subsidiaries, taken as a whole.

 

(f)               Payment of Taxes and Other
Claims. The Company shall pay or discharge and shall cause each of its
subsidiaries to pay or discharge, or cause to be paid or discharged, before the
same shall become delinquent (i) all material taxes, assessments and
governmental charges levied or imposed upon (A) the Company or any such
subsidiary, (B) the income or profits of the Company or any such
subsidiary which is a corporation or (C) the property of the Company or
any such subsidiary and (ii) all material lawful claims for labor,
materials and supplies that, if unpaid, might by law become a lien upon the
property of the Company or any such subsidiary; provided that the Company shall not be required to pay or
discharge, or cause to be paid or discharged, any such tax, assessment, charge
or claim the amount, applicability or validity of which is being contested in
good faith by appropriate proceedings and for which adequate reserves have been
established.

 

(g)              Notice of Defaults. In the
event that the Company or any subsidiary becomes aware of any default or Event
of Default, the Company shall promptly deliver to the Holders an Officers’
Certificate specifying such default or Event of Default.

 

(h)              SEC and Other Reports.
Group shall provide to each Holder, within 15 days after it files its annual
and quarterly reports, information, documents and other reports with the
Securities and Exchange Commission (the “SEC”), copies of such annual
report and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which Group is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act provided that any such reports,
information or documents filed with the SEC pursuant to its Electronic Data and
Gathering Analysis and Retrieval System shall be deemed provided to each
Holder. Delivery of such reports, information and documents to each Holder is
for informational purposes only and each Holder’s receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including Group’s compliance
with any of its covenants hereunder (as to which each Holder is entitled to
rely conclusively on Officers’ Certificates).

 

(i)                Compliance Certificate.
The Company shall deliver to each Holder within 60 days after the end of each
fiscal quarter of the Company and 120 days after the end of each fiscal year of
the Company, a certificate signed by one Officer listed in clause (i) of the
definition thereof and one Officer listed in clause (ii) of the definition
thereof; provided that any

 

16

 

such certificate may be signed by any two of the
Officers listed in clause (i) of the definition thereof in lieu of being signed
by one Officer listed in clause (i) of the definition thereof and one Officer
listed in clause (ii) of the definition thereof (an “Officers’ Certificate”),
stating whether or not to the knowledge of the signers thereof, the Company is
in default in the performance and observance of any of the terms, provisions
and conditions of this Note (without regard to any period of grace or
requirement of notice provided hereunder) and if the Company shall be in
default, specifying all such defaults and the nature and status thereof of
which they may have knowledge. “Officer” means, with respect to the
Company, (i) the Chairman of the Board of Directors, any Vice Chairman of
the Board of Directors, the Chief Executive Officer, the President or any Vice
President, and (ii) the Chief Financial Officer, the Treasurer or any
Assistant Treasurer, or the Secretary or any Assistant Secretary.

 

(j)                Transfer of Collateral.
Notwithstanding anything to the contrary herein, the Company may transfer title
to all or any part of the Collateral (as defined in the Security Agreement) to
one or more direct or indirect wholly-owned subsidiaries of the Company (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 this Note and as a debtor
under the Security Agreement and (B) acknowledging and confirming the
Collateral Agent’s continuing security interest in and lien on the Collateral,
(ii) the Company 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 Permitted
Transferee, neither Group nor Operating shall be released from its obligations
under the Security Agreement or under this Note.

 

(k)               Further Instruments and Acts.
Upon request of any Holder, the Company will execute and deliver such further
instruments and do such further acts as may be reasonably necessary or proper
to carry out more effectively the purposes of this Note.

 

Section 10.             Successor Persons. When a
successor person or other entity assumes all the obligations of its predecessor
under the Notes, the predecessor person will be released from those obligations.

 

Section 11.             When Company May Merge or
Transfer Assets. Neither Group nor Operating shall consolidate with or
merge with or into any other Person or convey, transfer, sell, lease or
otherwise dispose of all or substantially all of its properties and assets to
any Person, unless:

 

(a)             either (i) Group or Operating, as
applicable, shall be the continuing corporation or (ii) the Person (if other
than Group or Operating) formed by such consolidation or into which Group or
Operating, as applicable, is merged or the Person that acquires by conveyance,
transfer or lease all or substantially all of the properties and assets of
Group or Operating, as applicable (A) shall be a corporation organized and
validly existing under the laws of the United States or any State thereof or
the District of Columbia and (B) shall expressly

 

17

 

assume, by an amended note hereto, executed and
delivered to the Holders, in form reasonably satisfactory to the Holders, all
of the obligations of Group or Operating, as applicable, under the Notes;

 

(b)             immediately prior to and after
giving effect to such transaction, no Event of Default, and no event that,
after notice or lapse of time or both, would become an Event of Default, shall
have occurred and be continuing; and

 

(c)             Group or Operating, as applicable,
shall have delivered to the Holders an Officers’ Certificate and a written
opinion from legal counsel, and, who may be an employee of, or counsel to, the
Company or the Holders, containing (i) a statement that each person making such
opinion of counsel has read such covenant or condition, (ii) a brief statement
as to the nature and scope of the examination or investigation upon which the
statements or opinions contained in such opinion of counsel are based, (iii) a
statement that, in the opinion of each such person, he has made such
examination or investigation as is necessary to enable such person to express
an informed opinion as to whether or not such covenant or condition has been
complied with and (iv) a statement that, in the opinion of such person, such
covenant or condition has been complied with, each stating that such
consolidation, merger, conveyance, transfer or lease and, if an amendment to
the Notes is required in connection with such transaction, such amended Notes,
comply with this Section 11 and that all conditions precedent herein provided
for relating to such transaction have been satisfied.

 

For
purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of the properties and assets of one or more subsidiaries (other than
to the Company or another subsidiary), which, if such assets were owned by the
Company, would constitute substantially all of the properties and assets of the
Company, shall be deemed to be the transfer of substantially all of the
properties and assets of the Company.

 

The
successor Person formed by such consolidation or into which Group or Operating,
as applicable, is merged or the successor Person to which such conveyance, transfer
or lease is made shall succeed to, and be substituted for, and may exercise
every right and power of Group or Operating, as applicable, under the Notes
with the same effect as if such successor had been named as Group or Operating,
as applicable, herein; and thereafter, except in the case of a lease and
obligations that Group or Operating, as applicable, may have under an amended
Note, Group or Operating, as applicable, shall be discharged from all
obligations and covenants under the Notes. Group, Operating, the Holders and
the successor Person shall enter into a amendment to the Notes to evidence the
succession and substitution of such successor Person and such discharge and
release of Group or Operating, as applicable.

 

Section 12.             Defaults and Remedies. Each
of the following events constitutes an “Event of Default”:

 

(a)             default in the payment of principal
of (or premium, if any, on) any Note, including the Redemption Amount, when the
same becomes due and payable at maturity, upon acceleration, redemption or
otherwise;

 

(b)             default in the payment of interest
on any Notes when the same becomes

 

18

 

due and payable, and such default continues for a
period of 30 days;

 

(c)             default in the performance or breach
of the provisions of the Notes applicable to mergers, consolidations and
transfers of all or substantially all of the assets of Group or Operating or
the failure to make or consummate an Offer to Purchase in accordance with
Section 5 hereof;

 

(d)             Group or Operating defaults in the
performance of or breaches any other covenant or agreement of the Company under
the Notes (other than a default specified in clause (a), (b) or (c)
above), and such default or breach continues for a period of 30 consecutive days
after written notice by the Holders of 25% or more in aggregate principal
amount of the Notes;

 

(e)             the failure of Group’s Common Stock
to be quoted or listed on a national security exchange or automated quotation
system in the United States for more than three days, or if quoted on the OTC
Bulletin Board (“Bulletin Board”), failure to comply with the
requirements for continued listing on the Bulletin Board for a period of seven
consecutive Trading Days or notification from the Bulletin Board or from the
applicable national security exchange or automated quotation system that the
Company is not in compliance with the conditions for such continued quotation
on the Bulletin Board;

 

(f)              there occurs with respect to any
issue or issues of indebtedness for borrowed money of Group or any existing or
future, direct or indirect, subsidiary of Group whose assets constitute 15% or
more of the total assets of Group on a consolidated basis (a “Designated
Subsidiary”) having an outstanding principal amount of $15 million or more
in the aggregate for all such issues of all such Persons, whether such
indebtedness now exists or shall hereafter be created, (i) an event of
default that has caused the holder thereof to declare such indebtedness to be
due and payable prior to its stated maturity and such indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (ii) the failure to make a
principal payment at the final (but not any interim) fixed maturity and such
defaulted payment shall not have been made, waived or extended within 30 days
of such payment default;

 

(g)             a court having jurisdiction in the
premises enters a decree or order for (i) relief in respect of Group,
Operating or any Designated Subsidiary in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, (ii) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of Group, Operating or any Designated
Subsidiary or for all or substantially all of the property and assets of Group,
Operating or any Designated Subsidiary or (iii) the winding up or
liquidation of the affairs of Group, Operating or any Designated Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or

 

(h)             Group, Operating or any Designated
Subsidiary (i) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law,
(ii) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
Group, Operating or any Designated

 

19

 

Subsidiary or for all or substantially all of the
property and assets of Group, Operating or any Designated Subsidiary or
(iii) effects any general assignment for the benefit of creditors.

 

Section 13.             Costs of Collection. In the
event that either Group or Operating fails to pay when due (including, without
limitation upon acceleration in connection with an Event of Default) the full
amount of principal and/or interest hereunder, each of Group and Operating
shall indemnify and hold harmless the Holder of any portion of this Note from
and against all reasonable costs and expenses incurred in connection with the
enforcement of this provision or collection of such principal and interest,
including, without limitation, reasonable attorneys’ fees and expenses.

 

Section 14.             No Recourse Against Others.
No incorporator or any past, present or future partner, stockholder, other
equityholder, officer, director, employee or controlling person, as such, of
the Company or of any successor Person shall have any liability for any
obligations of the Company under the Notes for any claim based on, in respect
of or by reason of, such obligations or their creation. Each Holder by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for the issuance of the Notes.

 

Section 15.             Governing Law. This Note
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 of Group and Operating hereby irrevocably waives personal
service of process and consents to process being served in any suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to its address for notices and
communications specified in Section 16 herein 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
of Group and Operating hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any suit,
action or proceeding arising out of or relating to the Notes or the
transactions contemplated hereby.

 

Section 16.             Notices. Any and all notices
or other communications or deliveries required or permitted to be provided
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section 16 prior to 5:30 p.m. (New York City time) on a Trading Day, (ii)
the Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section 16 later than 5:30 p.m. (New York City time) on any date and
earlier than 11:59 p.m. (New York City time) on such date, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice
is required to be given. The address for such notices and communications shall
be as follows:

 

20

 

	
  If
  to the Company:

  	
   

  	
  Covad
  Communications Group, Inc.

  
	
   

  	
   

  	
  Covad
  Communications Company

  
	
   

  	
   

  	
  110
  Rio Robles

  
	
   

  	
   

  	
  San
  Jose, CA 95134

  
	
   

  	
   

  	
  Attn:
  General Counsel

  
	
   

  	
   

  	
  Fax:
  (408) 952-7539

  
	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
   

  	
  Weil,
  Gotshal and Manges LLP

  
	
   

  	
   

  	
  200
  Crescent Court, Suite 300

  
	
   

  	
   

  	
  Dallas,
  Texas 75201

  
	
   

  	
   

  	
  Attention:
  Michael A. Saslaw

  
	
   

  	
   

  	
  Fax:
  214-746-8417

  

 

The
Company by notice to the Holders may designate additional or different
addresses for subsequent notices or communications.

 

Any
notice or communication mailed to a Holder shall be mailed to it at its address
as it appears on the security register maintained by the Company by first-class
mail and shall be sufficiently given to him if so mailed within the time
prescribed.

 

Failure
to mail a notice or communication to a Holder as provided herein or any defect
in any such notice or communication shall not affect its sufficiency with
respect to other Holders. Except as otherwise provided in the Notes, if a
notice or communication is mailed in the manner provided in this
Section 16, it is duly given, whether or not the addressee receives it.

 

Where
this Note provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice.

 

In
case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Holders shall constitute
a sufficient notification for every purpose hereunder.

 

The
Holders shall be entitled to rely and act upon any notices purportedly given by
Group and/or Operating.

 

Section 17.             Miscellaneous.

 

(a)             Group shall keep a register of the
Notes and of their transfer, exchange or conversion. The transfer of this Note
is registrable on the register maintained by the Company upon surrender of this
Note for registration of transfer at the office of the Company specified in
Section 16, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company duly executed by, the Holder
hereof of such Holder’s attorney duly authorized in writing, and thereupon one
or more new Notes, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
Such Notes are issuable only in registered form without coupons in
denominations of $2,000,000

 

21

 

(or any integral multiple of $100,000 in excess
thereof). No service charge shall be made for any such registration of transfer,
exchange or conversion, but the Company may require payment of a sum sufficient
to recover any tax or other governmental charge payable in connection
therewith. Prior to due presentation of this Note for registration of transfer,
the Company and any agent of the Company may treat the Person in whose name
this Note is registered as the owner thereof for all purposes, whether or not
this Note may be overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

 

(b)             This Note and the Common Stock
issuable upon conversion of this Note have not been registered under the
Securities Act, or the securities laws of any state or other jurisdiction.
Neither this Note nor the Common Stock issuable upon conversion of this Note may
be sold, offered for sale, pledged or hypothecated except pursuant to an
effective registration statement under the Securities Act or pursuant to an
exemption from, or not subject to, registration under the Securities Act. The
Holder by its acceptance of this Note or the Common Stock issuable upon
conversion of this Note agrees that it shall not offer, sell, assign, transfer,
pledge, encumber or otherwise dispose of this Note or any portion hereof or
interest herein other that in a minimum denomination of $2,000,000 principal
amount (or any integral multiple of $100,000 in excess thereof) and then (other
than with respect to a transfer pursuant to a registration statement that is
effective at the time of such transfer) only (i) to the Company, (ii) to a person
it reasonably believes to be an institutional “accredited investor” within the
meaning of Rule 501(a) under the Securities Act or a qualified institutional
buyer (as defined in Rule 144A under the Securities Act), or (iii) in
accordance with another exemption from the registration requirements of the
Securities Act, and in the case of clauses (ii)-(iii) above in which the
transferor furnishes the Company with such certifications, legal opinions or
other information as the Company may reasonably request to confirm that such
transfer is being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act.

 

(c)             Upon presentation of this Note for
registration of transfer at the office of Group specified herein accompanied by
(i) certification by the transferor that such transfer is in compliance with
the terms hereof and (ii) by a written instrument of transfer in form approved
by the Company, in its reasonable discretion, executed by the registered Holder,
in person or by such Holder’s attorney thereunto duly authorized in writing,
and including the name, address and telephone and fax numbers of the transferee
and name of the contact person of the transferee, such Note shall be
transferred on the Note register, and a new Note of like tenor and bearing the
same legends shall be issued in the name of the transferee and sent to the
transferee at the address and c/o the contact person so indicated. Transfers
and exchanges of Notes shall be subject to such restrictions as are set forth
in the legends on the Notes and to such reasonable regulations as may be
prescribed by the Company as specified in Section 17(b) hereof. Successive
registrations of transfers as aforesaid may be made from time to time as desired,
and each such registration shall be noted on the Note register.

 

(d)             Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Note, and in the case of loss, theft or destruction, receipt
of indemnity or security reasonably satisfactory to the Company, and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of such Note, if mutilated, the Company will
deliver a new Note of like tenor and dated as of such

 

22

 

cancellation, in lieu of such Note.

 

(e)             Each of Group and Operating is
accepting joint and several liability under this Note in consideration of the
financial accommodation to be provided by the Holders under this 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.

 

23

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