Exhibit 10.40.1

 

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED IN A TRANSACTION NOT
INVOLVING ANY PUBLIC OFFERING AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT.

 

VISUAL NETWORKS, INC.

 

NONSTATUTORY STOCK OPTION GRANT AGREEMENT

 

This Grant Agreement (the “Agreement”) is entered into this 12th day of July,
2004 (the “Grant Date”), by and between VISUAL NETWORKS, INC., a Delaware
corporation (the “Company”), and DONALD E. CLARKE (the “Optionee”).

 

In consideration of the premises, mutual covenants and agreements herein, the
Company and the Optionee agree as follows:

 

1. Grant of Option. The Company hereby grants to the Optionee a nonstatutory
stock option to purchase from the Company, at a price of $2.54 per share (the
“Exercise Price”), 300,000 shares of Common Stock of the Company, $0.01 par
value per share (“Common Stock”), subject to the provisions of this Agreement
(the “Option”). The Option will expire at 5:00 p.m. Eastern Time on the last
business day preceding the tenth anniversary of the Grant Date (the “Expiration
Date”), unless fully exercised or terminated earlier.

 

2. Terminology.

 

(a) Except where the context otherwise requires, the term “Company” as used
herein includes Visual Networks, Inc. and its affiliates.

 

(b) This Agreement will be administered by Compensation Committee of the Board
of Directors of the Company or by the full Board of Directors in its discretion
(each hereinafter referred to as the “Administrator”).

 

(c) The term “Fair Market Value” as used herein means, with respect to a share
of Common Stock for any purpose on a particular date, the value determined by
the Administrator in good faith. However, if the Common Stock is registered
under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the
“Exchange Act”), “Fair Market Value” means, as applicable, (i) either the
closing price or the average of the high and low sale price on the relevant
date, as determined in the Administrator’s discretion, quoted on the New York
Stock Exchange, the American Stock Exchange, or the Nasdaq National Market; (ii)
the last sale price on the relevant date quoted on the Nasdaq SmallCap Market;
(iii) the average of the high bid and low asked prices on the relevant date
quoted on the Nasdaq OTC Bulletin Board Service or by the National Quotation
Bureau, Inc. or a comparable service as determined in the Administrator’s
discretion; or (iv) if the Common Stock is not quoted by any of the above, the
average of the closing bid and asked prices on the relevant date furnished by a
professional market maker for the Common Stock, or by such other source,
selected by the Administrator. If no public trading of the Common Stock occurs
on the relevant date, then Fair Market Value shall be determined as of the next
preceding date on which trading of the Common Stock does occur. For all purposes
under this Agreement, the term “relevant date” as used in this Section 2(c)
means either the date as of which Fair Market Value is to be determined or the
next preceding date on which public trading of the Common Stock occurs, as
determined in the Administrator’s discretion.

 

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3. Exercise of Option.

 

(a) Right to Exercise. Except as otherwise provided in this Agreement, this
Option may be exercised as to its vested portion at any time and from time to
time, in whole or in part, on or before the Expiration Date or earlier
termination of the Option. In the event of the Optionee’s death, disability, or
other termination of employment or service relationship, the exercisability is
governed by Section 4 below.

 

(b) Vesting. The Option will become vested over forty-eight (48) months, as
follows; provided, however, that the Optionee is in the continuous employ of or
in a service relationship with the Company from the date the Optionee’s
employment with the Company commences (“Commencement Date”) through the
applicable date upon which vesting is scheduled to occur:

 

  (i) 25% of the Option shall be vested on the first anniversary of the Grant
Date, and

 

  (ii) 2.083% of the Option shall become vested, on the 12th day of each month,
over a thirty-six (36) month period that commences July 12, 2005 (rounded down
to the nearest whole share each month, except for the final month, in which case
vesting is rounded up).

 

Unless the Option has earlier terminated, vesting of the Option will be
accelerated so that the outstanding unvested portion of the Option will become
vested as to 100% of such unvested portion immediately before the occurrence of
a Change in Control in the Company. For purposes of this Agreement, a “Change in
Control of the Company” shall occur or be deemed to have occurred only if:

 

(1) any “person,” as such term is used in Sections 13(d) and 14(d) of the
Exchange Act (other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportion as their ownership of stock of the Company), is or becomes
the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company’s then outstanding securities;

 

(2) during any period of two consecutive years ending during the term of the
Plan, individuals who at the beginning of such period constitute the Board of
Directors of the Company, and any new director (other than a director designated
by a person who has entered into an agreement with the Company to effect any
transaction described in clause (1), (3) or (4) of this Section 3(b)) whose
election by the Board of Directors or nomination for election by the Company’s
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who were either directors at the beginning of the period or
whose election or whose nomination for election was previously so approved
(collectively, the “Disinterested Directors”), cease for any reason to
constitute a majority of the Board of Directors;

 

(3) the stockholders of the Company approve a merger or consolidation of the
Company with any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no “person”
(as herein above defined) acquires more than 50% of the combined voting power of
the Company’s then outstanding securities; or

 

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(4) the stockholders of the Company approve a plan of complete liquidation of
the Company or the sale of all or substantially all of the Company’s assets
which, in either case, has not previously been approved by a majority of the
Disinterested Directors.

 

(c) Exercise Procedure. Subject to the conditions set forth in this Agreement,
this Option shall be exercised by delivery of written notice of exercise on any
business day to the Corporate Secretary of the Company in such form as the
Company may require from time to time. Such notice shall specify the number of
shares in respect of which the Option is being exercised and shall be
accompanied by full payment of the Exercise Price for such shares in accordance
with Section 3(d) of this Agreement. The exercise will be effective upon receipt
by the Corporate Secretary of the Company of such written notice accompanied by
the required payment or properly executed, irrevocable instructions to
effectuate a broker-assisted cashless exercise. The Option may be exercised only
in multiples of whole shares and may not be exercised at any one time as to
fewer than ten (10) shares (or such lesser number of shares as to which the
Option is then exercisable). No fractional shares will be issued pursuant to
this Option.

 

(d) Method of Payment. Payment of the Exercise Price may be made by delivery of
cash, certified or cashier’s check, money order or other cash equivalent
acceptable to the Administrator in its discretion, a broker-assisted cashless
exercise in accordance with Regulation T of the Board of Governors of the
Federal Reserve System through a brokerage firm approved by the Administrator,
or a combination of the foregoing. In addition, payment of the Exercise Price
may be made by any of the following methods, or a combination thereof, as
determined by the Administrator in its discretion at the time of exercise: (i)
by tender (via actual delivery or attestation) to the Company of other shares of
Common Stock of the Company which have a Fair Market Value on the date of tender
equal to the Exercise Price, provided that such shares have been owned by the
Optionee for a period of at least six months free of any substantial risk of
forfeiture or were purchased on the open market without assistance, direct or
indirect, from the Company; or (ii) by any other method approved by the
Administrator.

 

(e) Issuance of Shares upon Exercise. Upon due exercise of the Option, in whole
or in part, in accordance with the terms of this Agreement, the Company will
issue to the Optionee, the brokerage firm specified in the Optionee’s delivery
instructions pursuant to a broker-assisted cashless exercise, or such other
person exercising the Option, as the case may be, the number of shares of Common
Stock so paid for, in the form of fully paid and nonassessable stock and will
deliver certificates therefor as soon as practicable thereafter. The stock
certificates for any shares of Common Stock issued hereunder will, unless such
shares are registered or an exemption from registration is available under
applicable federal and state law, bear a legend restricting transferability of
such shares.

 

4. Termination of Employment or Service.

 

(a) Exercise Period Following Cessation of Employment or Service Relationship,
In General. If the Optionee ceases to be employed by, or in a service
relationship with, the Company for any reason other than death, total and
permanent disability (as defined in Section 4(b) below) or discharge for Cause
(as defined in Section 4(d) below), (i) this Option will terminate immediately
upon such cessation to the extent it is unvested, and (ii) this Option will be
exercisable during the three (3) month period following such cessation with
respect its vested portion, but in no event after the Expiration Date. Unless
sooner terminated, this Option will terminate in its entirety upon the
expiration of such three (3) month period.

 

(b) Disability of Optionee. Notwithstanding the provisions of Section 4(a)
above, if the Optionee ceases his employment or service relationship with the
Company as a result of his or her total and permanent disability, (i) this
Option will terminate immediately upon such cessation to the extent it is
unvested, and (ii) this Option will be exercisable during the one (1) year
period following such cessation with respect to its vested portion, but in no
event after the Expiration Date. Unless sooner

 

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terminated, this Option will terminate in its entirety upon the expiration of
such (1) year period. For purposes of this Agreement, “total and permanent
disability” means the inability to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve months. The Administrator may require
such proof of total and permanent disability as the Administrator in its sole
discretion deems appropriate and the Administrator’s good faith determination as
to whether the Optionee is totally and permanently disabled will be final and
binding on all parties concerned.

 

(c) Death of Optionee. If the Optionee dies prior to the Expiration Date or
other termination of the Option, including if the Optionee dies during the three
(3) month period following termination of service for reasons other than Cause,
(i) this Option will terminate immediately upon the Optionee’s death to the
extent it is unvested, and (ii) this Option will be exercisable during the one
(1) year period following the date of death of the Optionee with respect to its
vested portion, but in no event after the Expiration Date, by the Optionee’s
executor, personal representative, or the person(s) to whom this Option is
transferred by will or the laws of descent and distribution. Unless sooner
terminated, this Option will terminate in its entirety upon the expiration of
such one (1) year period.

 

(d) Cause. Notwithstanding anything to the contrary herein, this Option will
terminate in its entirety, regardless of whether the Option is vested in whole
or in part, immediately upon the Optionee’s discharge of employment or service
relationship for Cause or upon the Optionee’s commission of conduct constituting
Cause during any period following the cessation of employment or service
relationship during which the Option otherwise would be exercisable. For
purposes of this Agreement, “Cause” shall have the meaning set forth in the
employment agreement entered into between the Optionee and the Company, as the
same may be amended from time to time, and shall be determined in a manner
consistent with the procedure set forth therein.

 

5. Adjustments and Business Combinations.

 

(a) Adjustments for Events Affecting Common Stock. In the event of changes
affecting the Company, the capitalization of the Company or the Common Stock of
the Company by reason of any stock dividend, spin-off, split-up,
recapitalization, merger, consolidation, business combination or exchange of
shares and the like, the Administrator will, in its discretion, make appropriate
adjustments to the number, kind and price of shares covered by this Option, and
will, in its discretion and without the consent of the Optionee, make any other
adjustments in this Option, including but not limited to reducing the number of
shares subject to the Option or providing or mandating alternative settlement
methods such as settlement of the Option in cash or in shares of Common Stock or
other securities of the Company or of any other entity, or in any other matters
which relate to the Option as the Administrator, in its sole discretion,
determines to be necessary or appropriate.

 

(b) Adjustments for Unusual Events. The Administrator is authorized to make, in
its discretion and without the consent of the Optionee, adjustments in the terms
and conditions of, and the criteria included in, the Option in recognition of
unusual or nonrecurring events affecting the Company, or the financial
statements of the Company or any affiliate, or of changes in applicable laws,
regulations, or accounting principles, whenever the Administrator determines
that such adjustments are appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Option.

 

(c) Binding Nature of Adjustments. Adjustments under this Section 5 will be made
by the Administrator, whose determination as to what adjustments, if any, will
be made and the extent thereof will be final, binding and conclusive. No
fractional shares will be issued pursuant to this Option on account of any such
adjustments.

 

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6. Compliance with Securities Laws; Listing and Registration. If at any time the
Administrator determines that the delivery of Common Stock under this Agreement
is or may be unlawful under the laws of any applicable jurisdiction, or federal
or state securities laws, the right to exercise the Option or receive shares of
Common Stock pursuant to the Option shall be suspended until the Administrator
determines that such delivery is lawful. The Company shall have no obligation to
effect any registration or qualification of the Common Stock under federal or
state laws.

 

The Company may require that the Optionee, as a condition to exercise of the
Option, and as a condition to the delivery of any share certificate, make such
written representations (including representations to the effect that such
person will not dispose of the Common Stock so acquired in violation of federal
or state securities laws) and furnish such information as may, in the opinion of
counsel for the Company, be appropriate to permit the Company to issue the
Common Stock in compliance with applicable federal and state securities laws.

 

7. Investment Representations. The Optionee represents, warrants and covenants
that:

 

(a) Any shares purchased upon exercise of this Option shall be acquired for the
Optionee’s account for investment only and not with a view to, or for sale in
connection with, any distribution of the shares in violation of the Securities
Act of 1933 (the “Securities Act”) or any rule or regulation under the
Securities Act, and that he will not distribute the same in violation of any
state or federal law or regulation.

 

(b) The Optionee has had such opportunity as he has deemed adequate to obtain
from representatives of the Company such information as is necessary to permit
the Optionee to evaluate the merits and risks of his investment in the Company.

 

(c) The Optionee is able to bear the economic risk of holding shares acquired
pursuant to the exercise of this Option for an indefinite period.

 

(d) The Optionee understands that (i) the shares acquired pursuant to the
exercise of this Option will not be registered under the Securities Act or under
the securities laws of any state and are “restricted securities” within the
meaning of Rule 144 under the Securities Act; (ii) such shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act, and such registration or qualification as may be
necessary under the securities laws of any state, or an exemption from
registration is then available; (iii) in any event, the exemption from
registration under Rule 144 will not be available for at least one year from
date of exercise and even then will not be available unless a public market then
exists for the Common Stock, adequate information concerning the Company is then
available to the public and other terms and conditions of Rule 144 are complied
with; and (iv) there is as of the date of this Agreement no registration
statement on file with the Securities and Exchange Commission with respect to
any stock of the Company covered by this Option and the Company has no
obligation or current intention to register any shares acquired pursuant to the
exercise of this Option under the Securities Act.

 

By making payment upon exercise of this Option, the Optionee shall be deemed to
have reaffirmed, as of the date of such payment, the representations made in
this Section 7.

 

8. Reservation of Shares. The Company will reserve and set apart and have at all
times, free from preemptive rights, a number of shares of authorized but
unissued Common Stock deliverable upon the exercise of this Option sufficient to
enable it at any time to fulfill all its obligations hereunder.

 

9. Non-Guarantee of Employment or Consulting Relationship. Nothing in this
Agreement alters the at-will or other employment or consulting status of the
Optionee, nor is to be construed as a contract of employment or consulting
relationship between the Company and the Optionee, or as a

 

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contractual right of Optionee to continue in the employ of, or in a consulting
relationship with, the Company, or as a limitation of the right of the Company
to discharge the Optionee at any time with or without cause or notice and
whether or not such discharge results in the failure of any portion of the
Option to vest or any other adverse effect on the Optionee’s interests under
this Agreement.

 

10. No Rights as a Stockholder. The Optionee will not have any of the rights of
a stockholder with respect to the shares of Common Stock that may be issued upon
the exercise of the Option until such shares of Common Stock have been issued to
him or her upon the due exercise of the Option. No adjustment will be made for
dividends or distributions or other rights for which the record date is prior to
the date such certificate or certificates are issued.

 

11. Nonstatutory Nature of the Option. This Option is not intended to qualify as
an “incentive stock option” within the meaning of Code section 422, and this
Agreement will be so construed. The Optionee acknowledges that, upon exercise of
this Option, the Optionee will recognize taxable income in an amount equal to
the excess of the then Fair Market Value of the shares over the Exercise Price
and must comply with the provisions of Section 12 of this Agreement with respect
to any tax withholding obligations that arise as a result of such exercise.

 

12. Withholding of Taxes. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Company, the Optionee hereby
authorizes withholding from payroll or any other payment of any kind due the
Optionee and otherwise agrees to make adequate provision for foreign, federal,
state and local taxes required by law to be withheld, if any, which arise in
connection with the Option. The Company may require the Optionee to make a cash
payment to cover any withholding tax obligation as a condition of exercise of
the Option. If the Optionee does not make such payment when requested, the
Company may refuse to issue any stock certificate until arrangements
satisfactory to the Administrator for such payment have been made.

 

The Company may, in its sole discretion, permit the Optionee to satisfy, in
whole or in part, any withholding tax obligation which may arise in connection
with the Option either by electing to have the Company withhold from the shares
to be issued upon exercise that number of shares, or by electing to deliver to
the Company already-owned shares, in either case having a Fair Market Value
equal to the amount necessary to satisfy the statutory minimum withholding
amount due.

 

13. The Company’s Rights. The existence of this Option will not affect in any
way the right or power of the Company or its stockholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company’s capital structure or its business, or any merger or consolidation
of the Company, or any issue of bonds, debentures, preferred or other stocks
with preference ahead of or convertible into, or otherwise affecting the Common
Stock or the rights thereof, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of the Company’s assets or business,
or any other corporate act or proceeding, whether of a similar character or
otherwise.

 

14. Optionee. Whenever the word “Optionee” is used in any provision of this
Agreement under circumstances where the provision should logically be construed,
as determined by the Administrator, to apply to the estate, personal
representative or beneficiary to whom this Option may be transferred by will or
by the laws of descent and distribution, the word “Optionee” will be deemed to
include such person.

 

15. Nontransferability of Option. This Option is nontransferable otherwise than
by will or the laws of descent and distribution and during the lifetime of the
Optionee, the Option may be exercised only by the Optionee or, during the period
the Optionee is under a legal disability, by the Optionee’s guardian or legal
representative. Except as provided above, the Option may not be assigned,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) and will not

 

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be subject to execution, attachment or similar process.

 

16. Notices. All notices and other communications made or given pursuant to this
Agreement will be in writing and will be sufficiently made or given if hand
delivered or mailed by certified mail, addressed to the Optionee at the address
contained in the records of the Company, or addressed to the Company for the
attention of its Corporate Secretary at its principal office or, if the
receiving party consents in advance, transmitted and received via telecopy or
via such other electronic transmission mechanism as may be available to the
parties.

 

17. Effect of Administrator’s Decision. All actions taken and decisions and
determinations made by the Administrator on all matters relating to this
Agreement pursuant to the powers vested in it hereunder shall be in the
Administrator’s sole and absolute discretion and shall be conclusive and binding
on all parties concerned, including the Optionee, the Company, its stockholders,
director and officers, and their respective successors in interest.

 

18. Entire Agreement. This Agreement contains the entire agreement between the
parties with respect to the stock option granted hereunder. Any oral or written
agreements, representations, warranties, written inducements, or other
communications made prior to the execution of this Agreement with respect to the
stock option granted hereunder will be void and ineffective for all purposes.

 

19. Amendment. This Agreement may be amended from time to time by the
Administrator in its discretion; provided, however, that this Agreement may not
be modified in a manner that would have a materially adverse effect on the
Option as determined in the discretion of the Board of Directors, except as
provided in a written document signed by each of the parties hereto.

 

20. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Maryland, other than the conflict of
laws principles thereof.

 

21. Headings. The headings in this Agreement are for reference purposes only and
will not affect the meaning or interpretation of this Agreement.

 

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer as of the date first above written.

 

VISUAL NETWORKS, INC.

By:

 

/s/ Lawrence S. Barker

   

Lawrence S. Barker

   

President and Chief Executive Officer

 

The undersigned hereby acknowledges that he has carefully read this Agreement
and agrees to be bound by all of the provisions set forth herein.

 

OPTIONEE

/s/ Donald E. Clarke

Donald E. Clarke

Date: July 12, 2004

 

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