DEF 14A 1 d80254ddef14a.txt DEFINITIVE PROXY STATEMENT 1 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14A-12 Internet America, Inc. ------------------------------------------------------------------- (Name of Registrant as Specified in its Charter) ------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement if other than Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total Fee Paid: [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 2 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: 3 [Internet America Logo] INTERNET AMERICA, INC. 350 NORTH ST. PAUL, SUITE 3000 DALLAS, TEXAS 75201 (214) 861-2500 September 29, 2000 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders of Internet America, Inc., a Texas corporation, to be held at 10:00 a.m., local time, on November 1, 2000, at the Adam's Mark Hotel, 400 North Olive Street, Dallas, Texas 75201. All shareholders of record as of September 20, 2000, are entitled to vote at the Meeting. I urge you to be present in person or represented by proxy at the Meeting. The attached Notice of Annual Meeting and Proxy Statement fully describe the formal business to be transacted at the Meeting, which includes the election of two directors and approval of amendments to the Internet America 1998 Nonqualified Stock Option Plan. We have also enclosed a copy of our Annual Report for the fiscal year ended June 30, 2000. Internet America's Board of Directors believes that a favorable vote on each of the matters to be considered at the Meeting is in the best interest of Internet America and its shareholders and unanimously recommends a vote "FOR" each such matter. Accordingly, we urge you to review the attached material carefully and to return the enclosed Proxy promptly. Directors and officers of Internet America will be present to help host the Meeting and to respond to any questions that our shareholders may have. I hope that you will be able to attend. Even if you expect to attend the Meeting, please complete, sign, date and return your proxy in the enclosed envelope without delay. If you attend the Meeting, you may vote in person even if you have previously mailed your proxy. On behalf of your Board of Directors, thank you for your support. Sincerely, /s/ JACK T. SMITH Jack T. Smith President, Chief Executive Officer and Director 4 INTERNET AMERICA, INC. 350 NORTH ST. PAUL, SUITE 3000 DALLAS, TEXAS 75201 (214) 861-2500 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD NOVEMBER 1, 2000 NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Meeting") of Internet America, Inc. ("Internet America") will be held at 10:00 a.m., local time, on November 1, 2000, at the Adam's Mark Hotel, 400 North Olive Street, Dallas, Texas 75201, for the purpose of considering and acting upon: (1) The election of two members of the Board of Directors; (2) A proposal to amend the Internet America, Inc. 1998 Nonqualified Stock Option Plan to increase by 400,000 the number of shares of Common Stock available for issuance pursuant to such Plan and to clarify the mechanism for granting options to Independent Directors under such Plan; and (3) Such other matters as may properly come before the Meeting or any adjournments thereof. The close of business on September 20, 2000, has been fixed as the record date for determining shareholders entitled to notice of and to vote at the Meeting or any adjournments thereof. For a period of at least 10 days prior to the Meeting, a complete list of shareholders entitled to vote at the Meeting will be open for examination by any shareholder during ordinary business hours at the offices of Internet America at One Dallas Centre, 350 North St. Paul, Suite 3000, Dallas, Texas 75201. Information concerning the matters to be acted upon at the Meeting is set forth in the accompanying Proxy Statement. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES). EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. HOWEVER, IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME. By Order Of The Board Of Directors /s/ ELIZABETH PALMER DAANE Elizabeth Palmer Daane Secretary Dallas, Texas September 29, 2000 5 INTERNET AMERICA, INC. 350 NORTH ST. PAUL, SUITE 3000 DALLAS, TEXAS 75201 (214) 861-2500 PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD NOVEMBER 1, 2000 This Proxy Statement is being first mailed on or about September 29, 2000, to shareholders of Internet America, Inc., a Texas corporation, by the Board of Directors to solicit proxies (the "Proxies") for use at the Annual Meeting of Shareholders (the "Meeting") to be held at 10:00 a.m., local time, on November 1, 2000 the Adam's Mark Hotel, 400 North Olive Street, Dallas, Texas 75201, or at such other time and place to which the Meeting may be adjourned (the "Meeting Date"). The purpose of the Meeting is to consider and act upon: (1) the election of two directors; (2) the approval of amendments to the Internet America, Inc. 1998 Nonqualified Stock Option Plan (the "1998 Option Plan") to increase by 400,000 the number of shares of Common Stock available for issuance pursuant to the 1998 Option Plan and to clarify the mechanism for granting options to Independent Directors under the 1998 Option Plan; and (3) such other matters as may properly come before the Meeting or any adjournments thereof. All shares represented by valid Proxies, unless the shareholder otherwise specifies, will be voted: (1) FOR the election of the persons named herein under "Election of Directors" as nominees for election as directors; (2) FOR the amendments to the 1998 Option Plan; and (3) at the discretion of the Proxy holders with regard to any other matter that may properly come before the Meeting or any adjournments thereof. Where a shareholder has appropriately specified how a Proxy is to be voted, it will be voted accordingly. The Proxy may be revoked by providing written notice of such revocation to our stock transfer agent, ChaseMellon Shareholder Services, L.L.C., 2323 Bryan Street, Suite 2300, Dallas, Texas 75201, Attention: Patti Knight, which notice must be received prior to the Meeting. If notice of revocation is not received by such date, a shareholder may nevertheless revoke a Proxy by attending the Meeting and voting in person; however, if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain from the record holder a proxy issued in your name. RECORD DATE AND VOTING SECURITIES The record date for determining the shareholders entitled to vote at the Meeting is the close of business on September 20, 2000 (the "Record Date"), at which time we had issued and outstanding 9,719,790 shares of Common Stock, par value $.01 per share (the "Common Stock"). Common Stock is our only class of outstanding voting securities. Each share of Common Stock is entitled to one vote on each matter to be voted at the Meeting. QUORUM AND VOTING The presence in person or by proxy, of the holders of a majority of the issued and outstanding shares of Common Stock is necessary to constitute a quorum to transact business at the meeting. Abstentions and broker non-votes will be counted as present and entitled to vote for purposes of determining a quorum. In deciding all questions and other matters, a holder of Common Stock on the Record Date shall be entitled to cast one vote for each share of Common Stock registered in such holder's name. In order to be elected a director, a nominee must receive the affirmative vote of a plurality of the shares of Common Stock voted in person or by proxy at the Meeting. Votes may be cast in favor of or withheld with respect to a director nominee. Votes that are withheld will be counted toward a quorum but will not be counted for purposes of the election of directors. 1 6 In order to comply with certain rules promulgated under the Internal Revenue Code and of the Nasdaq National Market, approval of the amendments to the 1998 Option Plan requires the affirmative vote of a majority of the shares of Common Stock present or represented at the Meeting and entitled to vote thereon. Abstentions on this proposal may be specified and will have the same effect as a vote against it. A "broker non-vote" occurs when a broker or nominee holding shares for a beneficial owner does not vote on a particular proposal because the broker or nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner. Broker non-votes will be treated as shares that are present and entitled to vote for purposes of determining the presence of a quorum. However, for purposes of determining the outcome of any matter in which brokers or nominees have no discretionary power to vote, broker non-votes will be treated as not present and not entitled to vote with respect to that matter (even though those shares are considered entitled to vote for quorum purposes and may be entitled to vote on other matters). Brokers or nominees have discretionary power to vote on proposal no. 1, but do not have discretionary power to vote on proposal no. 2. Accordingly, broker non-votes will not be counted in favor of or against proposal no. 2, but will be counted toward a quorum. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS The following table sets forth information as of September 1, 2000 regarding the beneficial ownership of Common Stock of (1) each person or group known by us to beneficially own 5% or more of the outstanding shares of Common Stock, (2) each director, nominee for director and our Chief Executive Officer and four other most highly compensated executive officers (the "Named Executive Officers") and (3) all executive officers and directors as a group. Unless otherwise noted, the persons named below have sole voting and investment power with respect to the shares shown as beneficially owned by them.
NAME AND ADDRESS OF AMOUNT AND NATURE BENEFICIAL OWNER OR GROUP(1) OF BENEFICIAL OWNERSHIP PERCENT OF CLASS ---------------------------- ----------------------- ---------------- Jack T. Smith(2)........................................... 441,811(3) 4.5% President, Chief Executive Officer and Director William O. Hunt............................................ 777,063(3)(4) 8.0% Chairman of the Board William E. Ladin, Jr....................................... 810,805(3) 8.3% Vice Chairman of the Board Gary L. Corona............................................. 73,624(3) * Director John Palmer................................................ 682,598 7.0% Director James T. Chaney............................................ 39,503(3) * Vice President and Chief Financial Officer Michael T. Maples(2)....................................... 267,213(3) 2.7% Former President, Chief Executive Officer and Director All directors and executive officers as a group (twelve persons)................................................. 3,296,678(3) 32.3%
--------------- * Less than one percent. (1) The address of each officer and director is in care of Internet America at One Dallas Centre, 350 North St. Paul, Suite 3000, Dallas, Texas 75201. Mr. W. Ladin was formerly the President and a Director of our wholly owned subsidiary, PDQ.Net, Inc. Mr. Palmer was formerly Chairman of the Board of PDQ. (2) Mr. Maples resigned as President and Chief Executive Officer and as a director, and Mr. Smith was elected President and Chief Executive Officer, on September 5, 2000. 2 7 (3) Includes options to purchase 45,000, 45,000, 68,051, 45,000, 185,625 and 39,375 shares of Common Stock granted to Messrs. Smith, Hunt, W. Ladin, Corona, Maples and Chaney, respectively, that are exercisable within 60 days of September 1, 2000. (4) Includes 268,678 shares of Common Stock owned by B&G Partnership, Ltd., a limited partnership in which Mr. Hunt and his wife serve as general partners, and 463,385 shares of Common Stock owned by the William O. Hunt, Jr. Rollover IRA, of which Mr. Hunt is the beneficiary. PROPOSAL NO. 1 ELECTION OF DIRECTORS The Board of Directors is divided into three classes of two directors each serving staggered three-year terms. All directors of one class hold their positions until the annual meeting of shareholders at which the terms of such directors expire and their respective successors are elected and qualified. Our Bylaws provide that the Board of Directors shall consist of at least one director. The term of office of directors in Class I will expire at the this Meeting, the term of office of directors in Class II will expire at the annual meeting for 2001 and the term of office of directors in Class III will expire at the annual meeting for 2002. Effective September 5, 2000, Michael T. Maples resigned as a member of the Board of Directors. John Palmer, a director whose term expires at this Meeting, has chosen not to be nominated for reelection to another term. Thus two vacancies will exist on the Board until replacements are elected in accordance with our Bylaws. The Board of Directors has approved the submission to the shareholders of William E. Ladin, Jr. and Gary L. Corona as nominees, each to serve a three-year term as director expiring at the annual meeting for 2003 and until his successor is elected and has qualified. Mr. W. Ladin was elected as a director by the Board of Directors in January 2000. Mr. Corona has served as a member of the Board of Directors since before the last annual meeting of shareholders. It is intended that Messrs. W. Ladin and Corona will be placed in nomination and that the shares represented by Proxies will be voted for their election. Each nominee has indicated his willingness to serve as a member of the Board of Directors, if elected; however, if at the time of the Meeting any of the nominees should be unwilling or unable to serve, the discretionary authority provided in the Proxy will be exercised to vote for a substitute, as the Board of Directors recommends. The Board has no reason to believe that any nominee will be unwilling or unable to serve as a director. The Board unanimously recommends that shareholders vote "FOR" the election of the nominees. The following sets forth information as to the nominees for election at the Meeting and each of the directors whose term of office will continue after the Meeting:
NAME AGE POSITION TERM EXPIRING ---- --- -------- ------------- Nominees for three-year terms ending in 2003: William E. Ladin, Jr. ................... 59 Vice Chairman of the Board 2000(Class I) Gary L. Corona(1)(2)..................... 49 Director 2000(Class I) Continuing directors: William O. Hunt(1)(2).................... 66 Chairman of the Board 2002(Class III) Jack T. Smith............................ 47 Director 2001(Class II)
--------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. William O. Hunt has served as our Chairman of the Board and as one of our directors since May 1995. Mr. Hunt is currently Chairman of the Board and director of Intellicall, Inc., a diversified telecommunications company providing products and services to pay telephone networks on a worldwide basis. From December 1992 to May 1998, Mr. Hunt served as Chief Executive Officer of Intellicall, Inc. From August 1990 to March 1996, Mr. Hunt served as Chairman or Vice Chairman of the Board and director of Hogan Systems, Inc., a designer of integrated online application software products for financial institutions. He is also a director of American Homestar Corporation, Andrew Corporation and Mobility Electronics, Inc. 3 8 William E. Ladin, Jr. has served as Vice Chairman of our Board of Directors since January 2000. Prior to joining us, Mr. Ladin founded PDQ in 1997 and was its Chief Executive Officer from its inception to its acquisition by us. From 1991 until present, Mr. Ladin served as Chief Executive Officer of Desktop Solutions, Inc. Mr. Ladin is the father of Marc Ladin, our Vice President -- Marketing. Jack T. Smith has served as our President and Chief Executive Officer since September 2000 and as one of our directors since November 1995. Mr. Smith is also employed by Carl Westcott LLC, a private capital firm. From March 1997 to February 1999, Mr. Smith was President and Chief Operating Officer of Jayhawk Acceptance Corporation, a specialized financial services company. From June 1996 to September 1997, Mr. Smith was employed as an independent business consultant. From 1989 until its acquisition by Primedia, Inc., in June 1996, Mr. Smith was President and Chief Operating Officer of Westcott Communications, Inc. He is also a director of First Extended Service Corporation and FFG Insurance Company. Gary L. Corona has served as one of our directors since May 1998. Mr. Corona is currently employed by Carl Westcott LLC, a private capital firm. From March 1997 to February 1999, Mr. Corona was General Manager of the Automotive Division of Jayhawk Acceptance Corporation. From July 1996 to August 1997, Mr. Corona served as a business consultant for Carl Westcott LLC. From July 1990 until its acquisition by Primedia, Inc., in June 1996, Mr. Corona was Vice President, New Business Development of Westcott Communications, Inc. Mr. Corona is also a director of First Extended Service Corporation and FFG Insurance Company. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS Our business is managed under the direction of the Board of Directors. The Board of Directors meets on a regularly scheduled basis to review significant developments affecting us and to act on matters requiring approval of the Board of Directors. It also holds special meetings when an important matter requires action by the Board of Directors between scheduled meetings. During fiscal 2000, the Board of Directors met four times and acted by unanimous written consent six times. During fiscal 2000, each member of the Board of Directors participated in all Board of Directors and applicable meetings held during the period for which he was a director. The Board of Directors has two standing committees: the Audit Committee and the Compensation Committee. The functions of these committees, their current members and the number of meetings held during fiscal 2000 are described below. Audit Committee. The Audit Committee reviews the professional services and independence of our independent auditors, as well as the adequacy of our accounting procedures and internal controls. The Audit Committee recommends to the Board of Directors the appointment of the firm selected to be our independent public accountants and monitors the performance of such firm; reviews and approves the results and scope of the annual audit; reviews with management the status of internal accounting controls; evaluates any problem areas having a potential financial impact on us that may be brought to its attention by management, the independent public accountants or the Board of Directors; and evaluates all of our public financial reporting documents. The Audit Committee is comprised of Messrs. Hunt and Corona. The Audit Committee met three times in fiscal 2000. Compensation Committee. The Compensation Committee recommends compensation for all executive officers and administers incentive compensation and benefit plans. The Compensation Committee is comprised of Messrs. Hunt and Corona. The Compensation Committee acted by unanimous written consent three times in fiscal 2000. COMPENSATION OF DIRECTORS Upon consummation of our initial public offering in December 1998, directors who were not also our employees ("Independent Directors") received an annual retainer upon election to the Board of $6,000 (pro rata for existing Independent Directors for the first partial year) and an additional $750 for each Board meeting attended. All of our directors are reimbursed for travel, lodging and other out-of-pocket expenses in 4 9 connection with their attendance at Board and committee meetings. Each Independent Director, upon election to the Board of Directors will receive a nonqualified option to purchase 22,500 shares of Common Stock (which will be immediately exercisable), and following the third anniversary of his election to the Board of Directors, and each third anniversary thereafter, and only if such Independent Director continues to be a member of the Board, such director will receive a nonqualified option to purchase 20,000 shares of Common Stock (with such options vesting 25% annually, commencing on the date of issuance and continuing on the first, second and third anniversaries of the date of issuance, subject to such director's continued status as a member of to the Board of Directors, and further subject to the terms and provisions of the 1998 Nonqualified Stock Option Plan). Each Independent Director holding office at the time of consummation of our initial public offering received such options as if he had been initially elected as of such date. On April 20, 1999, we entered into a Consulting Agreement with Mr. Corona as an independent contractor for his services in identifying and contacting potential acquisition candidates for us, as well as such other advisory and management services as our Chief Executive Officer may request from time-to-time. The Consulting Agreement is for a term of four years, but may be terminated by either party upon thirty days prior written notice. As compensation under the Consulting Agreement, in November 1999 we granted Mr. Corona an option to purchase 75,000 shares of our Common Stock at an exercise price of $10.00 per share. In addition, we agreed to reimburse Mr. Corona for all reasonable and necessary travel and other expenses incurred by him in performing his duties under the Consulting Agreement. Also on April 20, 1999, we entered into a letter agreement with Carl Westcott LLC by which we retained Carl Westcott LLC as our non-exclusive financial advisor. Messrs. Smith and Corona are employed by Carl Westcott LLC. Under the letter agreement, Carl Westcott LLC will assist us in identifying and contacting potential acquisition or business combination candidates, evaluate and value such candidate businesses, assist in structuring transaction proposals, develop strategies for successful consummation of transactions, analyze the economic effects to us of a transaction, assist in the negotiation of transaction proposals and preparation of documents, assist in the due diligence process and complete other matters related to closing such transactions. As compensation for rendering such services, we will pay Carl Westcott LLC a fee equal to two percent of the estimated annual revenue, for the twelve months after a closing, of a company acquired by us due to Carl Westcott LLC's performance of services under the letter agreement; provided, however, that in no event shall such fee for any acquisition be less than $25,000 nor more than $75,000. We also agreed to reimburse Carl Westcott LLC for all reasonable expenses, and agreed to indemnify Carl Westcott LLC for damages relating to any transaction contemplated by the engagement of Carl Westcott LLC under the letter agreement. The letter agreement is effective until terminated by either party upon thirty days written notice. In fiscal 2000, we paid Westcott LLC aggregate fees in the amount of $225,000 related to the acquisitions of NeoSoft, Inc., PDQ.Net, Inc. and subscribers of Pointe Communications Corporations, Inc., INTX Networking, L.L.C. and Kdi Internet Solutions. Mr. W. Ladin, the Vice Chairman of our Board of Directors, is an employee providing services to us in the areas of developing strategic relationship, assistance with acquisitions and consultation on consumer marketing. Mr. W. Ladin is paid $16,666 per month and receives the same benefits offered to our other employees. In the event Mr. W. Ladin is terminated or resigns, we have agreed to pay his then current salary for a period of one year and provide him with an office, telephone and secretary for a period of two years. 5 10 EXECUTIVE COMPENSATION The following table sets forth information regarding compensation paid to the Named Executive Officers for the fiscal periods indicated. No other executive officers were compensated over $100,000 in fiscal 2000. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION ------------ ----------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTION --------------------------- ---- -------- ------------ ------------ Michael T. Maples 2000 $125,000 -- -- Former President and 1999 125,000 -- -- Chief Executive Officer(1)...................... 1998 108,333 -- 157,500(2) James T. Chaney 2000 $114,000 -- 10,000(3) Vice President and 1999 96,884 -- -- Chief Financial Officer......................... 1998 44,134 -- 78,750(3)
--------------- (1) Mr. Maples resigned on September 5, 2000. (2) Mr. Maples was granted an option to purchase 157,500 shares of Common Stock at an exercise price of $1.67 per share on March 24, 1998. Options to purchase 118,125 of those shares are vested. The remaining portion vests on March 24, 2001 or if Mr. Maples' employment is terminated without cause, whichever is sooner. (3) Mr. Chaney was granted an option to purchase 10,000 shares of Common Stock at an exercise price of $9.25 per share on December 15, 1999 and was granted an option to purchase 78,750 shares of Common Stock at an exercise price of $1.67 per share on March 24, 1998. All of these options vest one quarter on each anniversary of the date of grant until fully vested on the fourth anniversary of the date of grant. The following table set forth information regarding the grant of stock options in fiscal 2000 to each of the Named Executive Officers. OPTION GRANTS IN FISCAL 2000
NUMBER OF % OF TOTAL SECURITIES OPTIONS GRANTED EXERCISE OR UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE NAME GRANTED(#) FISCAL YEAR ($/SH) EXPIRATION DATE ---- ------------------ --------------- ----------- --------------- Michael T. Maples(1)............ -- -- -- -- James T. Chaney................. 10,000 1.8% $9.25 December 15, 2009
--------------- (1) Mr. Maples resigned on September 5, 2000. The following table sets forth the information regarding the value of stock options outstanding at June 30, 2000 held by each of the Named Executive Officers. No stock options were exercised by the Named Executive Officers in fiscal 2000. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FY END(#) AT FY END($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Michael T. Maples(2).......................... 146,250 78,750 $490,888 $264,324 James T. Chaney............................... 39,374 39,376 $132,159 $132,166
--------------- (1) The value of the options is based on the difference between the option exercise price of $1.67 per share for all options and $5.0265 (which was the closing sales price per share of the Common Stock on June 30, 6 11 2000 as reported on Nasdaq) multiplied by the number of shares of Common Stock underlying the option. (2) Mr. Maples resigned on September 5, 2000. EMPLOYMENT CONTRACTS We entered into an agreement with Jack T. Smith dated September 5, 2000 pursuant to which we agreed to (i) employ Mr. Smith as our Chief Executive Officer on an at will basis at an annual salary of $200,000, (ii) offer Mr. Smith the same benefits as provided to other senior executive officers and (iii) pay the costs of Mr. Smith's administrative assistant. As part of this arrangement, we entered into a Stock Purchase Agreement dated September 5, 2000 with Mr. Smith, pursuant to which Mr. Smith purchased 200,000 shares of Common Stock from us at the price of $3.4375 per share, which was the closing market price of the stock on the date of the agreement. Of the total purchase price of $687,500, Mr. Smith paid $2,000 in cash and entered into a Promissory Note to the Company for the remaining amount. The Promissory Note is for the principal amount of $685,500, with interest accruing at the rate of 6.33% annually. Interest is payable each calendar quarter beginning on October 1, 2000 and continuing until July 1, 2007. All unpaid principal and interest is due and payable on August 29, 2007. The Promissory Note is secured by the 200,000 shares of Common Stock under a Pledge and Security Agreement also dated September 5, 2000. Under the Stock Purchase Agreement, we agreed to pay to Mr. Smith as additional compensation on or before the due date of any interest payment under the Promissory Note, an amount which after all withholding required by applicable law equals the next interest installment due on the Promissory Note. This amount may be paid by a credit to the accrued unpaid interest on the Promissory Note. No later than January 15 of each calendar year during the term of Mr. Smith's employment, we will pay to Mr. Smith a cash bonus in an amount which after all withholding required by applicable law equals the federal income tax liability of Mr. Smith not previously withheld or paid by us for any such additional compensation. For a period of seven years after the date of the Stock Purchase Agreement, Mr. Smith has the right and option to sell all or any portion of the 200,000 shares to us for the price of $3.4375 per share. In the event that Mr. Smith's employment with us is terminated for cause prior to the third anniversary of the Stock Purchase Agreement, for a period of 60 days after the date of such termination, we have the right and option to purchase from Mr. Smith, at a purchase price equal to $3.4375 per share, the following number of shares: (i) on or prior to the first anniversary: 200,000 shares; (ii) after the first anniversary but on or prior to the second anniversary: 133,333 shares; and (iii) prior to the third anniversary: 66,666 shares; provided, however, that this repurchase right will terminate immediately prior to any change in control of the Company. The purchase price upon exercise of this option shall be applied to the outstanding balance of unpaid accrued interest and principal upon the Promissory Note and the balance, if any, shall be paid in cash to Mr. Smith. Under the Stock Purchase Agreement, Mr. Smith has demand registration rights for all or any portion of the 200,000 shares of Common Stock. In connection with Mr. Maples' resignation as President, Chief Executive Officer and as a director, we entered into an agreement with him dated September 5, 2000, pursuant to which we agreed to employ Mr. Maples as an employee at will. In addition, we agreed that the vesting of all options held by Mr. Maples would be accelerated by one year, and if he was terminated without cause all options would immediately vest. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors has a Compensation Committee, which currently is comprised of Messrs. Hunt, Smith and Corona. None of our executive officers currently serves on the compensation committee of another entity or any other committee of the board of directors of another entity performing similar functions. 7 12 RELATED PARTY TRANSACTIONS Our Chairman of the Board of Directors, William O. Hunt, personally guaranteed payment under a promissory note made by us in the original principal amount of $350,000 payable to NationsBank, N.A. (the "NationsBank Note"). A total of $225,000 was borrowed under the NationsBank Note, which bore interest at the bank's prime rate. The NationsBank Note originally matured on July 15, 1997 and was renewed through December 15, 1998. A guarantee fee would accrue to Mr. Hunt at 18% minus the bank's prime rate if the NationsBank Note became in default. The guarantee fee and all principal were payable upon demand of the guarantor. All advances under the NationsBank Note required the consent of the guarantor. In June 1998, we entered into a letter agreement with Mr. Hunt, Jack T. Smith, a director and our Chief Executive Officer, and Carl Westcott, a principal shareholder at the time (the "Letter Agreement"). Pursuant to the Letter Agreement, we made the following promissory notes to refinance notes made in 1997 to First Extended, Inc. and First Computer Services Corporation, companies owned by Mr. Westcott: (i) Amended and Restated Promissory Note payable to Mr. Smith in the principal amount of $229,450, (ii) Amended and Restated Promissory Note payable to Mr. Smith in the principal amount of $77,694, (iii) Amended and Restated Promissory Note payable to Mr. Westcott in the principal amount of $1,538,263 and (iv) Amended and Restated Promissory Note payable to Mr. Westcott in the principal amount of $172,306 (collectively, the "Amended Notes"). All of the Amended Notes bore interest per annum at the NationsBank of Texas, N.A. prime rate. Pursuant to the Letter Agreement, we were to make a monthly payment of $140,000, which would be applied pro rata to the repayment of the Amended Notes and the NationsBank Note. In the event of default under any of the Amended Notes, the outstanding indebtedness of such note was convertible into shares of Common Stock at the price of $0.44 per share at the option of the noteholders. Michael T. Maples, our former Chief Executive Officer and a director at the time, had an interest in the Amended Notes, which he sold to Mr. Westcott. Under the Amended Notes and the Letter Agreement, in the event of any offering of our securities pursuant to a registration statement declared effective by the Securities and Exchange Commission or the sale or issuance of our securities through which we raise a minimum of $1.0 million, we had to use all of the proceeds of such offering, sale or issuance to pay off the Amended Notes and the NationsBank Note until all such debt was extinguished. We used approximately $2.0 million of the net proceeds of our initial public offering in December 1998 to prepay the Amended Notes and the NationsBank Note. In 1997, Chase Bank made available a stand-by letter of credit in the original principal amount of $150,000, payment of which was personally guaranteed by Mr. Hunt. Approximately $66,000 of this letter of credit was pledged as collateral under a three year capital lease. All amounts outstanding under the letter of credit were paid with a portion of the proceeds of our initial public offering in December 1998, and the letter of credit was terminated. On April 20, 1999, we entered into a Consulting Agreement with Gary L. Corona, one of our directors, as an independent contractor for his services in identifying and contacting potential acquisition candidates for us, as well as such other advisory and management services as our Chief Executive Officer may request from time-to-time. The Consulting Agreement is for a term of four years, but may be terminated by either party upon thirty days prior written notice. As compensation under the Consulting Agreement, in November 1999 we granted Mr. Corona an option to purchase 75,000 shares of our Common Stock at an exercise price of $10.00 per share. We also agreed to reimburse Mr. Corona for all reasonable and necessary travel and other expenses incurred by him in performing his duties under the Consulting Agreement. Also on April 20, 1999, we entered into a letter agreement with Carl Westcott LLC by which we retained Carl Westcott LLC as our non-exclusive financial advisor. Messrs. Smith and Corona are employed by Carl Westcott LLC. Under the letter agreement, Carl Westcott LLC will assist us in identifying and contacting potential acquisition or business combination candidates, evaluate and value such candidate businesses, assist in structuring transaction proposals, develop strategies for successful consummation of transactions, analyze the economic effects to us of a transaction, assist in the negotiation of transaction proposals and preparation of documents, assist in the due diligence process and complete other matters related to closing such transactions. As compensation for rendering such services, we will pay Carl Westcott LLC a fee equal to two percent of the 8 13 estimated annual revenue, for the twelve months after a closing, of a company acquired by us due to Carl Westcott LLC's performance of services under the letter agreement; provided, however, that in no event shall such fee for any acquisition be less than $25,000 nor more than $75,000. We also agreed to reimburse Carl Westcott LLC for all reasonable expenses, and agreed to indemnify Carl Westcott LLC for damages relating to any transaction contemplated by the engagement of Carl Westcott LLC under the letter agreement. The letter agreement is effective until terminated by either party upon thirty days written notice. In fiscal 2000, we paid Westcott LLC aggregate fees in the amount of $225,000 related to the acquisitions of NeoSoft, Inc., PDQ.Net, Inc. and subscribers of Pointe Communications Corporations, Inc., INTX Networking,L.L.C. and Kdi Internet Solutions. William E. Ladin, Jr., the Vice Chairman of our Board of Directors, is an employee providing services to us in the areas of developing strategic relationships, assistance with acquisitions and consultation on consumer marketing. Mr. W. Ladin is paid $16,666 per month and receives the same benefits offered to our other employees. In the event Mr. W. Ladin is terminated or resigns, we have agreed to pay his then current salary for a period of one year and provide him with an office, telephone and secretary for a period of two years. We entered into a Stock Purchase Agreement dated September 5, 2000, in which Mr. Smith purchased 200,000 shares of Common Stock from us at the price of $3.4375 per share, which was the closing market price of the stock on the date of the agreement. Of the total purchase price of $687,500, Mr. Smith paid $2,000 in cash and entered into a Promissory Note to the Company for the remaining amount. The Promissory Note is for the principal amount of $685,500, with interest accruing at the rate of 6.33% annually. Interest is payable each calendar quarter beginning on October 1, 2000 and continuing until July 1, 2007. All unpaid principal and interest is due and payable on August 29, 2007. The Promissory Note is secured by the 200,000 shares of Common Stock under a Pledge and Security Agreement also dated September 5, 2000. Under the Stock Purchase Agreement, we agreed to pay to Mr. Smith as additional compensation on or before the due date of any interest payment under the Promissory Note, an amount which after all withholding required by applicable law equals the next interest installment due on the Promissory Note. This amount may be paid by a credit to the accrued unpaid interest on the Promissory Note. No later than January 15 of each calendar year during the term of Mr. Smith's employment, we will pay to Mr. Smith a cash bonus in an amount which after all withholding required by applicable law equals the federal income tax liability of Mr. Smith not previously withheld or paid by us for any such additional compensation. For a period of seven years after the date of the Stock Purchase Agreement, Mr. Smith has the right and option to sell all or any portion of the 200,000 shares to us for the price of $3.4375 per share. In the event that Mr. Smith's employment with us is terminated for cause prior to the third anniversary of the Stock Purchase Agreement, for a period of 60 days after the date of such termination, we have the right and option to purchase from Mr. Smith, at a purchase price equal to $3.4375 per share, the following number of shares: (i) on or prior to the first anniversary: 200,000 shares; (ii) after the first anniversary but on or prior to the second anniversary: 133,333 shares; and (iii) prior to the third anniversary: 66,666 shares; provided, however, that this repurchase right will terminate immediately prior to any change in control of the Company. The purchase price upon exercise of this option shall be applied to the outstanding balance of unpaid accrued interest and principal upon the Promissory Note and the balance, if any, shall be paid in cash to Mr. Smith. Under the Stock Purchase Agreement, Mr. Smith has demand registration rights for all or any portion of the 200,000 shares of Common Stock. We have adopted a policy providing that all transactions between us and related parties are subject to approval by a majority of all disinterested directors and must be on terms no less favorable than those that could otherwise be obtained from unrelated third parties. 9 14 PROPOSAL NO. 2 APPROVAL OF AMENDMENTS TO THE 1998 NONQUALIFIED STOCK OPTION PLAN INTRODUCTION Our 1998 Nonqualified Stock Option Plan, as amended by the First Amended 1998 Nonqualified Stock Option Plan (the "1998 Option Plan"), was adopted by the Board of Directors and our shareholders on July 13, 1998. The purpose of the 1998 Option Plan is to promote our growth and general prosperity by permitting us to grant to our employees, directors and advisors options to purchase Common Stock. The Board believes that the amendment to increase the number of shares reserved for issuance under the 1998 Option Plan is necessary to allow flexibility for additional grants of options. The amendment to revise the mechanism for granting options to Independent Directors under the 1998 Option Plan is required to clarify language taking into account the September 13, 1999 amendment to the Bylaws that created a staggered Board. Thus, the Board believes that approval of the amendments to the 1998 Option Plan is in Internet America's and our shareholders' best interests and unanimously recommends a vote "FOR" approval of the amendments. SUMMARY OF TERMS AND PROVISIONS OF THE 1998 OPTION PLAN The following summary of the 1998 Option Plan is qualified in its entirety by the terms of the 1998 Option Plan, as amended, a copy of which is attached as Appendix A to this Proxy Statement. Capitalized terms used and not otherwise defined in this portion of this Proxy Statement have the respective meanings ascribed to such terms in the 1998 Option Plan. Pursuant to the 1998 Option Plan, we may grant nonstatutory (nonqualified) stock options to our employees, directors and advisors. A total of 800,000 shares of Common Stock are currently reserved for issuance under the 1998 Option Plan. One of the amendments would increase this number by 400,000 shares to 1,200,000 shares. The Compensation Committee has the authority to select the employees, directors and advisors to whom stock options are granted. Subject to the limitations set forth in the 1998 Option Plan, the Compensation Committee has the sole discretion and authority to determine the persons to whom options shall be granted and the number of shares covered by each option, to interpret the 1998 Option Plan, to establish vesting schedules, to specify the type of consideration to be paid upon exercise and, subject to certain restrictions, to specify other terms of the options. The maximum term of options granted under the 1998 Option Plan is ten years. Options granted under the 1998 Option Plan are in most cases nontransferable and generally expire within 30 days after the termination of the optionee's services, except in cases when the optionee is terminated "for cause" (as such term is defined therein). In such cases, the option typically expires automatically on the date of termination. In general, if an optionee is disabled or dies, such option may be exercised up to 12 months following such disability or death, unless the Compensation Committee determines to allow a longer period for exercise. In general, if an optionee retires from his or her service to us, such option may be exercised up to three months following such retirement, unless the Compensation Committee determines to allow a longer period for exercise. GRANTS UNDER THE 1998 OPTION PLAN There are currently outstanding options to purchase 343,088 shares of Common Stock under the 1998 Option Plan, consisting of: (i) an option issued to Mr. Corona in July 1998 to purchase 22,500 shares of Common Stock at an exercise price of $8.00 per share; (ii) options issued to each of Messrs. Corona, Hunt and Smith in December 1998 to purchase 22,500 shares of Common Stock at an exercise price of $13.00 per share; (iii) options issued to certain of our employees in December 1998 to purchase an aggregate of 2,000 shares of Common Stock at an exercise price of $13.00 per share; (iv) options issued to certain of our employees in August 1999 to purchase an aggregate of 39,000 shares of Common Stock at an exercise price of $13.75 per share; (v) replacement options issued to consultants of a subsidiary acquired in November 1999 to 10 15 purchase 60,588 shares of Common Stock at an exercise price of $1.12 per share; (vi) options issued to certain of our employees in December 1999 to purchase an aggregate of 129,000 shares of Common Stock at an exercise price of $9.25 per share; and (vii) options issued to Mr. W. Ladin in January 2000 to purchase 22,500 shares of Common Stock at an exercise price of $13.19 per share. AMENDMENTS Our Board of Directors has unanimously approved the adoption of two amendments to the 1998 Option Plan. The first amendment is to increase the number of shares of Common Stock reserved for issuance under the 1998 Option Plan by 400,000 shares to a total of 1,200,000 shares. The Board of Directors believes that this amendment is important to allow flexibility to issue additional options to our officers, directors and employees and to facilitate acquisitions of targets which may have granted options. The second amendment is to revise the mechanism for granting options to Independent Directors under the 1998 Option Plan. The Board of Directors believes that this amendment is required solely to clarify certain language in the First Amended 1998 Nonqualified Stock Option Plan taking into account the September 13, 1999 amendment to the Bylaws that divides the Board into three classes, as nearly equal in size as possible, with staggered terms. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE 1998 OPTION PLAN The following summary is intended only as a general guide as to the United States federal income tax consequences under current law of the grant of an option under the 1998 Option Plan (an "Option") and does not attempt to describe all possible federal tax consequences or any foreign, state, local or other tax consequences or tax consequences based on particular circumstances. The holder of an Option (an "Optionee") will not recognize taxable income upon the grant of the Option, and no tax deduction will be available to us unless the Option has a readily ascertainable value on the date of grant. An Option that is not publicly traded ordinarily is not considered to have a readily ascertainable value on the date of grant. Upon exercise of an Option, the Optionee will recognize ordinary taxable income equal to the difference between (a) the fair market value, on the date of exercise, of the Common Stock subject to the Option and (b) the exercise price. We will be entitled to a corresponding tax deduction. The Optionee's tax basis in the Common Stock purchased upon exercise of the Option will be the sum of the exercise price and the amount of ordinary taxable income the Optionee recognized on the exercise. When the Optionee sells the Common Stock, the Optionee will recognize capital gain or loss equal to the difference between the amount realized on the sale and the tax basis of the Common Stock. The capital gain or loss will be long-term capital gain or loss if the Optionee held the Common Stock for more than one year. Otherwise the capital gain or loss will be short-term capital gain or loss. Other rules apply if an Option is exercised by tendering Common Stock. Upon an Optionee's exercise of an Option, the excess of the fair market value of the Common Stock subject to the Option over the exercise price will constitute "wages" for employment tax and income tax withholding purposes. Therefore, we will be required to withhold the appropriate amounts from such wages. INDEPENDENT AUDITORS The Board of Directors has selected Deloitte & Touche LLP as our independent auditors for the year ended June 30, 2000. Representatives of Deloitte & Touche LLP, who also served as our independent auditors for the year ended June 30, 1999, will be present at the Annual Meeting of Shareholders and will have an opportunity to make a statement if they so desire and to answer any appropriate questions. 11 16 SECTION 16 REQUIREMENTS Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission (the "SEC"). Such persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. During the fiscal year ended June 30, 2000, we believe that our officers, directors and persons who own more than 10% of a registered class of our equity securities have timely filed all reports required by Section 16(a) of the Exchange Act. In making this disclosure, we have relied solely on our review of the copies of such forms received by us with respect to fiscal 2000, or written representations from certain reporting persons. SHAREHOLDER PROPOSALS Shareholders may submit proposals on matters appropriate for shareholder action at our subsequent annual meetings consistent with Rule 14a-8 promulgated under the Exchange Act. Any proposal which a shareholder intends to present at next year's Annual Meeting of Shareholders must be received by us at our principal executive office not later than May 3, 2001 in order to be included in the proxy material for such meeting. Such proposals should be sent to Internet America, Inc., Attention: Secretary, 350 North St. Paul, Suite 3000, Dallas, Texas 75201. OTHER MATTERS As of the date of this Proxy Statement, we know of no other business to be presented for action at the meeting. As to any business which would properly come before the meeting, the Proxies confer discretionary authority in the persons named therein and those persons will vote or act in accordance with their best judgment with respect thereto. MISCELLANEOUS All costs of solicitation of Proxies will be borne by us. In addition to solicitation by mail, our officers and employees may solicit Proxies by telephone or personally, without additional compensation. We may also make arrangements with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of shares of Common Stock held of record by such persons, and we may reimburse them for their out-of-pocket expenses incurred in connection therewith. Our Annual Report to Shareholders, including financial statements for the fiscal year ended June 30, 2000, accompanies this Proxy Statement. The Annual Report is not to be deemed part of this Proxy Statement. By Order of the Board of Directors /s/ Elizabeth Palmer Daane Elizabeth Palmer Daane Secretary September 29, 2000 Dallas, Texas 12 17 APPENDIX A INTERNET AMERICA, INC. SECOND AMENDED 1998 NONQUALIFIED STOCK OPTION PLAN ARTICLE I THE PLAN 1.1 Name. This Plan shall be known as the "Internet America, Inc. 1998 Nonqualified Stock Option Plan." Capitalized terms used herein are defined in Article V hereof. 1.2 Purpose. The purpose of the Plan is to promote the growth and general prosperity of the Company by permitting the Company to grant to its Employees, Directors, and Advisors Options to purchase Common Stock of the Company. The Plan is designed to help the Company and its Subsidiaries attract and retain superior personnel for positions of substantial responsibility and to provide Employees, Directors, and Advisors with an additional incentive to contribute to the success of the Company. Options granted under the Plan are not intended to qualify as "incentive stock options" within the meaning of Section 422 of the Code. 1.3 Effective Date. The Plan shall become effective upon the Effective Date. 1.4 Eligibility to Participate. Any Employee, Director, or Advisor shall be eligible to participate in the Plan. Subject to the following provisions, the Committee may grant Options in accordance with such determinations as the Committee from time to time in its sole discretion shall make. Any Options granted shall be in the form approved at such time by the Committee. 1.5 Shares Subject to the Plan. The shares of Common Stock to be issued pursuant to the Plan shall be either authorized and unissued shares of Common Stock or shares of Common Stock issued and thereafter acquired by the Company. 1.6 Maximum Number of Plan Shares. Subject to adjustment pursuant to the provisions of Section 3.2, and subject to any additional restrictions elsewhere in the Plan, the maximum aggregate number of shares of Common Stock that may be issued and sold hereunder shall not exceed 1,200,000 shares (which number has been adjusted to give effect to the Company's 2.25 for 1.00 stock split in July 1998). The maximum aggregate number of shares of Common Stock with respect to which Options may be granted to any person during the term of the Plan shall not exceed 150,000 shares. 1.7 Options and Stock Granted Under Plan. Plan Shares with respect to which an Option has been exercised shall not again be available for grant hereunder. If Options terminate for any reason without being wholly exercised, new Options may be granted hereunder covering the number of Plan Shares to which such termination relates. 1.8 Conditions Precedent. The Company shall not issue any certificate for Plan Shares pursuant to the Plan prior to fulfillment of all of the following conditions: (a) The admission of the Plan Shares to listing on all stock exchanges on which the Common Stock is then listed, unless the Committee determines in its sole discretion that such listing is neither necessary nor advisable; (b) The completion of any registration or other qualification of the offer or sale of the Plan Shares under any federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body that the Committee shall in its sole discretion deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any federal or state governmental agency that the Committee shall in its sole discretion determine to be necessary or advisable. A-1 18 1.9 Reservation of Shares of Common Stock. During the term of the Plan, the Company shall at all times reserve and keep available such number of shares of Common Stock as shall be necessary to satisfy the requirements of the Plan as to the number of Plan Shares. In addition, the Company shall from time to time, as is necessary to accomplish the purposes of the Plan, seek or obtain from any regulatory agency having jurisdiction any requisite authority that is necessary to issue Plan Shares hereunder. The inability of the Company to obtain from any regulatory agency having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance of any Plan Shares shall relieve the Company of any liability in respect of the nonissuance of Plan Shares as to which the requisite authority shall not have been obtained. 1.10 Tax Withholding and Reporting. (a) Condition Precedent. The issuance of Plan Shares pursuant to the exercise of any Option is subject to the condition that if at any time the Committee shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any federal, state, or local law is necessary or desirable as a condition of, or in connection with such issuance, then the issuance shall not be effective unless the withholding shall have been effected or obtained in a manner acceptable to the Committee. (b) Manner of Satisfying Withholding Obligation. When the Committee requires an Optionee to pay to the Company an amount required to be withheld under applicable income tax laws in connection with paragraph (a) above, such payment may be made (i) in cash, (ii) by check, (iii) if permitted by the Committee, by delivery to the Company of shares of Common Stock already owned by the Optionee having a Fair Market Value on the Tax Date equal to the amount required to be withheld, (iv) through the withholding by the Company of a portion of the Plan Shares acquired upon the exercise of an Option having a Fair Market Value on the Tax Date equal to the amount required to be withheld, or (v) in any other form of valid consideration permitted by the Committee in its discretion. (c) Tax Reporting. The Company shall file, and shall furnish the Optionee, a copy of all federal, state, and local tax information returns that it deems to be required in connection with the grant, exercise, or vesting of any Option. 1.11 Exercise of Options (a) Method of Exercise. Each Option shall be exercisable in accordance with the terms of the Option Agreement pursuant to which the Option was granted. No Option may be exercised for a fraction of a Plan Share. (b) Payment of Purchase Price. The purchase price of any Plan Shares purchased shall be paid at the time of exercise of the Option either (i) in cash, (ii) by certified or cashier's check, (iii) if permitted by the Committee, in shares of Common Stock, (iv) by delivery of a copy of irrevocable instructions from the Optionee to a broker or dealer, reasonably acceptable to the Company, to sell certain of the Plan Shares purchased upon exercise of the Option or to pledge them as collateral for a loan and promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay such purchase price or (v) in any other form of valid consideration permitted by the Committee in its discretion. If any portion of the purchase price or a note given at the time of exercise is paid in shares of Common Stock, those shares shall be valued at their then Fair Market Value. 1.12 Acceleration in Certain Events. The Committee may accelerate the exercisability or other vesting of any Option in whole or in part at any time. Notwithstanding the provisions of any Option Agreement, the following provisions shall apply: (a) Mergers, Consolidation, Etc. In the event that the Company, pursuant to action by the Board, at any time enters an agreement whereby the Company will merge into, consolidate with, or sell or otherwise transfer all or substantially all of its assets to another corporation and provision is not made pursuant to the terms of such transaction for the assumption by the surviving, resulting, or acquiring corporation of outstanding Options, or for the substitution of new Options with substantially equivalent A-2 19 benefit therefor, each outstanding Option shall become fully (100 percent) vested. The Committee shall advise each Optionee in writing of the manner and terms under which such fully vested Options shall be exercised, if applicable. (b) Change in Control. Anything contained herein to the contrary notwithstanding, at the sole discretion of the Committee (1) an Optionee shall become fully (100 percent) vested in each of his Options upon the occurrence of a change in control (as defined below) or a threatened change in control (as determined by the Committee in its sole discretion); and (2) no Option held by an Optionee at the time a change in control or threatened change in control occurs or at any time thereafter shall terminate for any reason before the end of the Option's express term (if applicable). For purposes of this section, "change in control" means one or more of the following events: (i) Any person within the meaning of Section 13(d) and 14(d) of the Exchange Act, other than the Company (including its Subsidiaries, directors or executive officers) has become the beneficial owner, within the meaning of Rule 13d-3 under the Exchange Act, of 50 percent or more of the combined voting power of the Company's then outstanding Common Stock or equivalent in voting power of any class or classes of the Company's outstanding securities ordinarily entitled to vote in elections of directors ("voting securities"); or (ii) Shares representing 50 percent or more of the combined voting power of the Company's voting securities are purchased pursuant to a tender offer or exchange offer (other than an offer by the Company or its subsidiaries or affiliates); or (iii) As a result of, or in connection with, any tender offer or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who were Directors of the Company before the Transaction shall cease to constitute a majority of the Board of the Company or of any successor to the Company; or (iv) Following the effective date of the Plan, the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50 percent of the outstanding voting securities of the surviving or resulting corporation shall then be owned in the aggregate by the former shareholders of the Company, other than (A) any party to such merger or consolidation, or (B) any affiliates of any such party; or (v) The Company transfers more than 50 percent of its assets, or the last of a series of transfers results in the transfer of more than 50 percent of the assets of the Company, to another entity that is not wholly-owned by the Company. For purposes of this subsection (v), the determination of what constitutes 50 percent of the assets of the Company shall be made by the Committee, as constituted immediately prior to the events that would constitute a change of control if 50 percent of the Company's assets were transferred in connection with such events, in its sole discretion. 1.13 Written Notice Required. Any Option shall be deemed to be exercised for purposes of the Plan when written notice of exercise has been received by the Company at its principal office from the person entitled to exercise the Option and payment for the Plan Shares with respect to which the Option is exercised has been received by the Company in accordance with Section 1.11. 1.14 Compliance with Securities Laws. Plan Shares shall not be issued with respect to any Option unless the issuance and delivery of the Plan Shares (and the exercise of an Option, if applicable) shall comply with all relevant provisions of state and federal law (including without limitation (i) the Securities Act and the rules and regulations promulgated thereunder and (ii) the requirements of any stock exchange upon which the Plan Shares may then be listed) and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Committee may also require an Optionee to furnish evidence satisfactory to the Company, including without limitation a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the Plan Shares are being acquired only for investment and without any present intention to sell or distribute the shares A-3 20 in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the certificate representing the Plan Shares issued pursuant to an Option, restricting their transfer as required by law or this section. 1.15 Employment or Service of Optionee. Nothing in the Plan or in any Option shall confer upon any Employee any right to continued employment by the Company or any of its Subsidiaries or limit in any way the right of the Company or any Subsidiary at any time to terminate or alter the terms of that employment. Nothing in the Plan or in any Option shall confer upon any Director or Advisor any right to continued service as a Director or Advisor of the Company or any of its Subsidiaries or limit in any way the right of the Company or any Subsidiary at any time to terminate or alter the terms of that service. 1.16 Rights of Optionees Upon Termination of Employment or Service. In the event an Optionee ceases to be an Employee, Director, or Advisor for any reason other than death, Retirement, Permanent Disability, or Cause or pursuant to a right of termination under an Employee's employment agreement with the Company, (i) the Committee shall have the ability to accelerate the vesting of the Optionee's Options, in its sole discretion, and (ii) any Option held by such Optionee shall be exercisable (to the extent exercisable on the date of termination of employment or rendition of services, or, if the vesting of such Option has been accelerated, to the extent exercisable following such acceleration) at any time within 30 days after the date of termination of employment or rendition of services and thereafter shall expire, unless by its terms the Option expires earlier or unless the Committee agrees, in its sole discretion, to extend its term further; provided that the term of any such Option shall not be extended beyond its initial term. In the event an Optionee ceases to serve as an Employee, Director, or Advisor due to death, Permanent Disability, Retirement, or Cause or pursuant to a right of termination under an Employee's employment agreement with the Company, (i) the Committee shall have the ability to accelerate the vesting of the Optionee's Options, in its sole discretion, and (ii) the Optionee's Options may be exercised as follows: (a) Death. Except as otherwise limited by the Committee at the time of the grant of an Option if an Optionee dies while serving as an Employee, Director, or Advisor or within three months after ceasing to be an Employee, Director, or Advisor, his Options shall become fully (100 percent) vested on the date of his death and shall expire twelve months thereafter, unless by their terms they expire sooner or unless the Committee agrees, in its sole discretion, to extend its term further; provided that the term of any such Option shall not be extended beyond its initial term. During such period, the Option may be fully exercised, to the extent that it remains unexercised on the date of death, by the Optionee's personal representative or by the distributees to whom the Optionee's rights under the Option pass by will or by the laws of descent and distribution. (b) Retirement. If an Optionee ceases to serve as an Employee, Director, or Advisor as a result of Retirement, (i) the Committee shall have the ability to accelerate the vesting of the Optionee's Options, in its sole discretion, and (ii) the Optionee's Options shall be exercisable (to the extent exercisable on the effective date of such Retirement or, if the vesting of such Options has been accelerated, to the extent exercisable following such acceleration) at any time within three months after the effective date of such Retirement and thereafter shall expire, unless by their terms the Options expire earlier or unless the Committee agrees, in its sole discretion, to extend its term further; provided that the term of any such Option shall not be extended beyond its initial term. (c) Disability. If an Optionee ceases to serve as an Employee, Director, or Advisor as a result of Permanent Disability, the Optionee's Options shall become fully (100 percent) vested and shall expire twelve months thereafter, unless by their terms they expire sooner or unless the Committee agrees, in its sole discretion, to extend its term; provided that the term of any such Option shall not be extended beyond its initial term. (d) Cause. If an Optionee ceases to be employed by the Company or a Subsidiary or ceases to serve as a Director or Advisor because the Optionee's employment or service relationship with the Company or a Subsidiary is terminated for Cause, the Optionee's Options (whether vested or unvested) shall automatically expire on the date of such termination. If any facts that would constitute Cause for termination or removal of an Optionee are discovered after the Optionee's employment or service A-4 21 relationship with the Company has ended, any Options then held by the Optionee may be immediately terminated by the Committee. Notwithstanding the foregoing, if an Optionee is an Employee employed pursuant to a written employment agreement with the Company or a Subsidiary, the Optionee's relationship with the Company or a Subsidiary shall be deemed terminated for Cause for purposes of the Plan only if the Optionee is considered under the circumstances to have been terminated "for cause" for purposes of such written agreement or the Optionee voluntarily ceases to be an Employee in breach of his employment agreement with the Company or a Subsidiary. (e) Notice. If an Optionee's employment agreement with the Company or a Subsidiary is terminated by either the Company, a Subsidiary, or the Optionee by providing a required or permitted notice of termination thereunder, the Options that are exercisable as of the date of termination shall remain exercisable for a period of twelve months after the date of termination and shall expire at the end of such twelve-month period. 1.17 Transferability of Options. Except as may be agreed upon by the Committee in accordance with this section, Options shall not be transferable other than by will or the laws of descent and distribution. The designation by an Optionee of a beneficiary shall not constitute a transfer of the Option. The Committee may, in its discretion, provide in an Option Agreement that Options may be transferred to members of the Optionee's immediate family, trusts for the benefit of such immediate family members, and partnerships in which such immediate family members are the only partners, provided that there is no consideration for the transfer. 1.18 Return of Value of Option. The Committee, in its sole discretion, may include in any Option Agreement a provision requiring the Optionee to pay to the Company an amount of money equal to the excess of the value of Common Stock received upon the exercise of an Option over the exercise price paid for such Common Stock, if the Optionee terminates his employment with the Company without the Company's consent, terminates his employment with the Company and thereafter engages in competition with the Company (as defined in the applicable Option Agreement), or is discharged by the Company for Cause. 1.19 Other Terms and Conditions of Options. Except as otherwise provided in the Plan, the terms and conditions of Options may differ from one another as the Committee shall, in its discretion. 1.20 Duration of Options. Each Option and all rights thereunder shall expire on the date determined by the Committee, but in no event shall any Option expire later than ten years after the date on which the Option is granted. In addition, each Option shall be subject to early termination as provided elsewhere in the Plan. 1.21 Purchase Price. The purchase price for the Plan Shares acquired pursuant to the exercise, in whole or in part, of an Option shall not be less than the Fair Market Value of the Plan Shares at the time of the grant of the Option. 1.22 Individual Option Agreements. Each Optionee shall be required to enter a written Option Agreement with the Company. In such Option Agreement, the Optionee shall agree to be bound by the terms and conditions of the Plan, the Options granted pursuant hereto, and such other matters as the Committee deems appropriate. 1.23 Option Grants to Nonemployee Directors. Upon initial election or appointment to the Board, each Director who is not an officer or Employee (a "Nonemployee Director") will receive an Option to purchase 22,500 shares of Common Stock (which number has been adjusted to give effect to the Company's 2.25 for 1.00 stock split in July 1998), which will be fully exercisable on the date of grant of such Option. In addition, each Nonemployee Director will receive an Option to purchase 20,000 shares of Common Stock (which number has been adjusted to give effect to the Company's 2.25 for 1.00 stock split in July 1998) following the third anniversary of his initial election or appointment to the Board of Directors (and each third anniversary thereafter), and only if such Nonemployee Director continues to be a Director. Each of such Options will vest 25% annually, with the initial 25% becoming exercisable on the date of grant of the Option and an additional 25% becoming exercisable on each of the first three anniversaries of the grant date. The purchase price of Plan A-5 22 Shares acquired pursuant to the exercise, in whole or in part, of any Option received by Nonemployee Directors will be the Fair Market Value of the Plan Shares on the date of grant. Each such Option will expire on the day prior to the tenth anniversary of the date of grant of such Option. At the time the Company becomes a Reporting Company, the above provisions in this Section 1.23 shall become applicable to existing Nonemployee Directors as if such Nonemployee Director had been initially elected or appointed to the Board as of the date the Company became a Reporting Company. ARTICLE II ADMINISTRATION 2.1 Committee. The Plan shall be administered by a Committee of not fewer than two members of the Board. The Committee shall be appointed by the Board. Each member of the Committee shall be both a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code and the regulations issued pursuant thereto. Subject to the provisions of the Plan, the Committee shall have the sole discretion and authority to determine from time to time the persons to whom Options shall be granted and the number of Plan Shares subject to each Option, to interpret the Plan, to prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, to determine and interpret the details and provisions of each Option Agreement, to modify or amend any Option Agreement or waive any conditions or restrictions applicable to any Option (or the exercise thereof), and to make all other determinations necessary or advisable for the administration of the Plan. 2.2 Majority Rule; Unanimous Written Consent. A majority of the members of the Committee shall constitute a quorum, and any action taken by a majority present at a meeting at which a quorum is present or any action taken without a meeting evidenced by a writing executed by all members of the Committee shall constitute the action of the Committee. Meetings of the Committee may take place by telephone conference call. 2.3 Company Assistance. The Company shall supply full and timely information to the Committee on all matters relating to Employees, Directors, and Advisors, their employment, death, Retirement, Permanent Disability, or other termination of employment or service, and such other pertinent facts as the Committee may require. The Company shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties. 2.4 Exculpation of Committee. No member of the Committee shall be personally liable for, and the Company shall indemnify all members of the Committee and hold them harmless against, any claims resulting directly or indirectly from any action or inaction by the Committee pursuant to the Plan, including without limitation any determination by the Committee regarding whether a "change in control" (within the meaning of Section 1.12) is threatened and any failure by the Committee to consider such a determination. ARTICLE III TERMINATION, AMENDMENT, AND ADJUSTMENT 3.1 Termination and Amendment. The Plan shall terminate on July 7, 2008. No Option shall be granted under the Plan after that date of termination. Subject to the limitations contained in this section, the Committee may at any time amend or revise the terms of the Plan, including the form and substance of the Option Agreements to be used in connection herewith; provided that no amendment or revision may be made without the approval of the shareholders of the Company if such approval is required under the Code, Rule 16b-3, or any other applicable law or rule. No amendment, suspension, or termination of the Plan shall, without the consent of the individual who has received an Option hereunder, alter or impair any of that individual's rights or obligations under any Option granted prior to that amendment, suspension, or termination. A-6 23 3.2 Adjustments. If the outstanding Common Stock is increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split, or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of Plan Shares as to which Options may be granted under the Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised Options or portions thereof granted prior to any such change also shall be made. Any such adjustment in outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Options but with a corresponding adjustment in the price for each share covered by the Options. The foregoing adjustments and the manner of application of the foregoing provisions shall be determined solely by the Committee, and any such adjustment may provide for the elimination of fractional share interests. ARTICLE IV MISCELLANEOUS 4.1 Other Compensation Plans. The adoption of the Plan shall not affect any other stock option or incentive or other compensation plans in effect for the Company or any Subsidiary or affiliate of the Company, nor shall the Plan preclude the Company or any Subsidiary or affiliate thereof from establishing any other forms of incentive or other compensation plans. 4.2 Plan Binding on Successors. The Plan shall be binding upon the successors and assigns of the Company and any Subsidiary or affiliate of the Company that adopts the Plan. 4.3 Number and Gender. Whenever used herein, nouns in the singular shall include the plural where appropriate, and the masculine pronoun shall include the feminine gender. 4.4 Headings. Headings of articles and sections hereof are inserted for convenience of reference and constitute no part of the Plan. ARTICLE V DEFINITIONS As used herein, the following terms have the meanings hereinafter set forth unless the context clearly indicates to the contrary: 5.1 "Advisor" means any person not employed by the Company and not a Director, rendering consulting or advisory services to the Company, who is expected or determined by the Committee to contribute significantly to the management, growth, or direction of some part or all of the business of the Company. The power to determine who is and who is not an Advisor for purposes of the Plan is reserved solely to the Committee. 5.2 The term "affiliate" means, with respect to any Person, any other Person directly or indirectly controlling or controlled by, or under direct or indirect common control with such Person. 5.3 "Board" means the Board of Directors of the Company. 5.4 "Cause" means conviction of a crime involving moral turpitude or a crime providing for a term of imprisonment in a federal or state penitentiary; failure or refusal to follow reasonable instructions of the Board; failure or refusal to comply with the reasonable policies, standards and regulations of the Company, which from time to time may be established; failure or refusal to faithfully and diligently perform the usual customary duties of his employment or service; acting in an unprofessional, unethical, immoral or fraudulent manner; acting in a manner which discredits or is detrimental to the reputation, character and standing of Company or a Subsidiary; or the commission of any other act that causes or reasonably may be expected to cause substantial injury to the Company. 5.5 The term "change of control" has the meaning set forth in Section 1.12(b). A-7 24 5.6 "Code" means the Internal Revenue Code of 1986, as amended. 5.7 "Committee" means the Committee appointed in accordance with Section 2.1. 5.8 "Common Stock" means the Common Stock, par value $0.01 per share, of the Company or, in the event that the outstanding shares of such Common Stock are hereafter changed into or exchanged for shares of a different stock or security of the Company or some other corporation, such other stock or security. 5.9 "Company" means Internet America, Inc., a Texas corporation, or one or more of its Subsidiaries. 5.10 "Director" means a member of the Board. 5.11 "Effective Date" means July 10, 1998. 5.12 "Employee" means an employee (within the meaning of Section 3401(c) of the Code and the regulations thereunder) of the Company or of any Subsidiary of the Company that adopts the Plan, including Officers. 5.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 5.14 "Fair Market Value" means such value as determined by the Committee on the basis of such factors as it deems appropriate; provided that if the Common Stock is traded on a national securities exchange or transactions in the Common Stock are quoted on the Nasdaq National Market System, such value as shall be determined by the Committee on the basis of the reported sales prices for the Common Stock on the date for which such determination is relevant, as reported on the national securities exchange or the Nasdaq National Market System, as the case may be. If the Common Stock is not listed and traded upon a recognized securities exchange or on the Nasdaq National Market System, the Committee shall make a determination of Fair Market Value on a reasonable basis which may include the mean between the closing bid and asked quotations for such stock on the date for which such determination is relevant (as reported by a recognized stock quotation service) or, in the event that there shall be no bid or asked quotations on the date for which such determination is relevant, then on the basis of the mean between the closing bid and asked quotations on the date nearest preceding the date for which such determination is relevant for which such bid and asked quotations were available. 5.15 "Officer" means an officer of the Company or any Subsidiary of the Company. 5.16 "Option" means an option to purchase Common Stock pursuant to this Plan. 5.17 "Optionee" means a person to whom an Option has been granted hereunder. 5.18 "Option Agreement" means an agreement between the Company and an Optionee with respect to one or more Options. 5.19 "Permanent Disability" has the meaning provided for that term in Section 22(e)(3) of the Code. 5.20 "Person" means any individual, corporation, partnership, joint venture, trust, or unincorporated organization. 5.21 "Plan" means the Internet America, Inc. 1998 Nonqualified Stock Option Plan, as set forth herein and as amended from time to time. 5.22 "Plan Shares" means shares of Common Stock issuable pursuant to the Plan. 5.23 "Retirement" occurs when an Optionee terminates his employment or service relationship with the Company or a Subsidiary on or after the date he (a) turns 65 years old or (b) turns 55 years old and has completed ten years of service with the Company or a Subsidiary as otherwise determined by the Board. 5.24 "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor rule. 5.25 "Securities Act" means the Securities Act of 1933, as amended. 5.26 "Subsidiary" means a subsidiary corporation of the Company, as defined in Section 424(f) of the Code. A-8 25 5.27 "Tax Date" means the date on which the amount of tax to be withheld is determined. 5.28 "Transaction" has the meaning set forth in Section 1.12(b)(iii). 5.29 The term "voting securities" has the meaning set forth in Section 1.12(b)(i). A-9 26 INTERNET AMERICA, INC. REVOCABLE PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS 2000 ANNUAL MEETING OF SHAREHOLDERS - NOVEMBER 1, 2000 The undersigned hereby appoints Jack T. Smith and Elizabeth Palmer Daane, each with power to act without the other and full power of substitution, as proxies of the undersigned and authorizes them to represent and vote, as designated on the reverse side hereof, all of the shares of common stock of Internet America, Inc. that the undersigned is entitled to vote at the 2000 Annual Meeting of Shareholders to be held at the Adam's Mark Hotel, 400 North Olive Street, Dallas, Texas 75201, on November 1, 2000, at 10:00 a.m. central time, and any adjournment thereof. THIS PROXY, WHEN PROPERLY EXECUTED AND DATED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES FOR DIRECTORS UNDER PROPOSAL NO. 1 AND "FOR" PROPOSAL NO. 2 AND WILL GRANT DISCRETIONARY AUTHORITY PURSUANT TO ITEM 3. (to be dated and signed on reverse side) ------------------------------------------------------------------------------ 27 FOR WITHHOLD FOR AGAINST ABSTAIN all nominees listed AUTHORITY (except as marked to vote for all 2. Approve amendments to the [ ] [ ] [ ] to the contrary) nominees 1998 Non-Qualified Stock Option Plan as Amended (increasing the 1. Election of Directors [ ] [ ] number of authorized shares from 800,000 to 1,200,000, and modifying language granting options to Independent Directors). William E. Ladin, Jr., Gary L. Corona 3. In their discretion, the proxies [ ] [ ] [ ] are authorized to vote upon such (Instruction: To withhold authority to vote for any individual nominee, other business as may properly write that nominee's name on the space provided below) come before the meeting or any adjournment thereof. -------------------------------------------------------------- Dated , 2000 ---------------------------------- Please sign this proxy as your name appears hereon. When shares are held by joint tenants, both should sign. When -------------------------------------------------------------- signing as attorney, executor, administrator, trustee or Signature guardian, please give full title as such. If a corporation, please sign in full corporate name by the -------------------------------------------------------------- president or other authorized officer. If a partnership, Signature, if held jointly please sign in partnership name by an authorized person.
Please mark, sign, date and return this proxy promptly using the enclosed envelope.