Form of Notice of Exercise under the 2001 Stock Plan (Early Exercise)



 Exhibit 10.6 
 KALOBIOS PHARMACEUTICALS, INC. 2001 STOCK PLAN 

NOTICE OF STOCK OPTION EXERCISE (EARLY
EXERCISE) 
 You must sign this Notice on Page 3 before submitting it to the Company.

 OPTIONEE INFORMATION: 

 

							
	 Name:
	 	  
	    	Social Security Number:	 	  

				
	 Address:
	 	  
	    	Employee Number:	 	  

				
		 	  
	    		 	

 OPTION INFORMATION: 

 

			
	 Date of Grant:
                              , 20    
	  	Type of Stock Option:
		
	 Exercise Price per Share:
$                    
	  	  ̈       Nonstatutory
(NSO)

		
	 Total number of shares of Common Stock of KaloBios
	  	  ̈       Incentive
(ISO)

	Pharmaceuticals, Inc. (the “Company”) covered by the
option:
                        	  	

 EXERCISE INFORMATION: 

 

	
	Number of shares of Common Stock of the Company for which the option is being exercised now:
	                    . (These shares are referred to below as the
“Purchased Shares.”)
	
	Total Exercise Price for the Purchased Shares:
$                    

 Form of payment enclosed [check all that apply]: 

 

			
	  ̈
	  	Check for $                    , payable to
“KaloBios Pharmaceuticals, Inc.”
		
	  ̈
	  	Certificate(s) for                      shares of Common Stock of the
Company. These shares will be valued as of the date this notice is received by the Company. [Requires Company consent.]
		
	  ̈
	  	Attestation Form covering                      shares of Common Stock
of the Company. These shares will be valued as of the date this notice is received by the Company. [Requires Company consent.]

 Name(s) in which the Purchased Shares should be registered [please review the attached explanation of the available
forms of ownership, and then check one box]: 
  

					
	  ̈       
	 	In my name only	    	
			
	  ̈       
	 	In the names of my spouse and myself as community property	    	My spouse’s name (if applicable):
			
	  ̈       
	 	In the names of my spouse and myself as community property with the right of survivorship	    	  
  

 










							
	  ̈
	  	In the names of my spouse and myself as joint tenants with the right of survivorship	  		  	
				
	  ̈
	  	 In the name of an eligible revocable trust
 [requires Stock Transfer Agreement]
	  		  	Full legal name of revocable trust:
		  		  		  	  

		  		  		  	  

		  		  		  	  

	The certificate for the Purchased Shares should be sent to the following address:	  	  

	  	  

	  	  

	  	  


 REPRESENTATIONS AND ACKNOWLEDGMENTS OF THE
OPTIONEE: 
  

	1.	I represent and warrant to the Company that I am acquiring and will hold the Purchased Shares for investment for my account only, and not with a view to, or for resale
in connection with, any “distribution” of the Purchased Shares within the meaning of the Securities Act of 1933, as amended (the “Securities Act”). 


 

	2.	I understand that the Purchased Shares have not been registered under the Securities Act by reason of a specific exemption therefrom and that the Purchased Shares must
be held indefinitely, unless they are subsequently registered under the Securities Act or I obtain an opinion of counsel (in form and substance satisfactory to the Company and its counsel) that registration is not required. 


 

	3.	I acknowledge that the Company is under no obligation to register the Purchased Shares. 


 

	4.	I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired
in a non-public offering, subject to the satisfaction of certain conditions. These conditions include (without limitation) that certain current public information about the issuer is available, that the resale occurs only after the holding period
required by Rule 144 has been satisfied, that the sale occurs through an unsolicited “broker’s transaction” and that the amount of securities being sold during any three-month period does not exceed specified limitations. I understand
that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future. 


 

	5.	I will not sell, transfer or otherwise dispose of the Purchased Shares in violation of the Securities Act, the Securities Exchange Act of 1934, or the rules promulgated
thereunder, including Rule 144 under the Securities Act. 

  

	6.	I acknowledge that I have received and had access to such information as I consider necessary or appropriate for deciding whether to invest in the Purchased Shares and
that I had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the issuance of the Purchased Shares. 


 

	7.	I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without
impairing my financial condition, to hold the Purchased Shares for an indefinite period and to suffer a complete loss of my investment in the Purchased Shares. 


 

	8.	I acknowledge that the Purchased Shares remain subject to the Company’s right of first refusal and the market stand-off (sometimes referred to as the
“lock-up”) and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock Option Grant and Stock Option Agreement. 


  
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	9.	I acknowledge that I am acquiring the Purchased Shares subject to all other terms of the Notice of Stock Option Grant and Stock Option Agreement.


  

	10.	I acknowledge that I have received a copy of the Company’s explanation of the forms of ownership available for my Purchased Shares. I acknowledge that the Company
has encouraged me to consult my own adviser to determine the form of ownership that is appropriate for me. In the event that I choose to transfer my Purchased Shares to a trust, I agree to sign a Stock Transfer Agreement. In the event that I choose
to transfer my Purchased Shares to a trust that does not satisfy the requirements described in the attached explanation (i.e. a trust that is not an eligible revocable trust), I also acknowledge that the transfer will be treated as a
“disposition” for tax purposes. As a result, the favorable ISO tax treatment will be unavailable and other unfavorable tax consequences may occur. 


 

	11.	I acknowledge that I have received a copy of the Company’s explanation of the federal income tax consequences of an option exercise and the tax election under
section 83(b) of the Internal Revenue Code. In the event that I choose to make a section 83(b) election, I acknowledge that it is my responsibility—and not the Company’s responsibility—to file the election in a timely manner, even if
I ask the Company or its agents to make the filing on my behalf. I acknowledge that the Company has encouraged me to consult my own adviser to determine the tax consequences of acquiring the Purchased Shares at this time. 


 

	12.	I agree that the Company does not have a duty to design or administer the 2001 Stock Plan or its other compensation programs in a manner that minimizes my tax
liabilities. I will not make any claim against the Company or its Board of Directors, officers or employees related to tax liabilities arising from my options or my other compensation. In particular, I acknowledge that my options are exempt from
section 409A of the Internal Revenue Code only if the exercise price per share is at least equal to the fair market value per share of the Company’s Common Stock at the time the option was granted by the Company’s Board of Directors. Since
shares of the Company’s Common Stock are not traded on an established securities market, the determination of their fair market value was made by the Company’s Board of Directors or by an independent valuation firm retained by the Company.
I acknowledge that there is no guarantee in either case that the Internal Revenue Service will agree with the valuation, and I will not make any claim against the Company or its Board of Directors, officers or employees in the event that the
Internal Revenue Service asserts that the valuation was too low. 

  

	13.	I agree to seek the consent of my spouse to the extent required by the Company to enforce the foregoing. 


 

							
	SIGNATURE: 	 		  	DATE:	  	
				
	  
	 		  	  
	  	


  
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 EXPLANATION OF FORMS OF
STOCK OWNERSHIP 
 PURPOSE OF THIS EXPLANATION

 The purpose of this explanation is to provide you with a brief summary of the forms of legal ownership available for the shares that you
are purchasing (the “Purchased Shares”). For a number of reasons, this explanation is no substitute for personal legal advice: 
  

	 	•	 	 To make the explanation short and readable, only the highlights are covered. Some legal rules are not addressed, even though they may be important in
particular cases. 


  

	 	•	 	 While the summary attempts to deal with the most common situations, your own situation may well be different from the norm.



  

	 	•	 	 The law may change, and the Company is not responsible for updating this summary. 



 

	 	•	 	 The form in which you own your shares may have a substantial impact on the estate tax treatment that applies to those shares when you die or the
income tax treatment that applies when your survivors sell the shares after your death. 


 FOR
THESE REASONS. THE COMPANY STRONGLY ENCOURAGES YOU TO CONSULT YOUR OWN
ADVISER BEFORE EXERCISING YOUR OPTION AND BEFORE MAKING A DECISION ABOUT
THE FORM OF OWNERSHIP FOR YOUR SHARES. 
 OVERVIEW 
 The Notice of Stock Option Exercise offers five forms of taking
title to the Purchased Shares: 
  

	 	•	 	 In your name only, 


  

	 	•	 	 In your name and the name of your spouse as community property, 



 

	 	•	 	 In your name and the name of your spouse as community property with the right of survivorship, 



 

	 	•	 	 In your name and the name of your spouse as joint tenants with the right of survivorship, or 



 

	 	•	 	 In the name of an eligible revocable trust. 


 Title in the Purchased Shares depends upon (a) your marital status, (b) the marital property laws of your state of residence and (c) any agreement with your spouse altering the existing
marital property laws of your state of residence. If you are not married, you generally will take title in your name alone. If you are married, title depends upon the marital property laws of your state of residence. In general, states are
classified either as “community property” states or as “common-law property” states. (But individual state law may vary within these classifications.) 

  
 4 








 COMMUNITY PROPERTY AND JOINT
TENANCY 
 Community property states include California, Texas, Washington, Arizona, Nevada, New Mexico, Idaho, Louisiana and
Wisconsin. In a community property state, property acquired during marriage by either spouse is presumed to be one-half owned by each spouse. All other property is classified as the separate property of the spouse who acquires the property. While
either spouse has equal management and control over the community property and may sell, spend or encumber all community property, neither spouse may gift community property or partition his/her one-half interest without the consent of the other
spouse. Upon divorce, all community property is divided equally among the spouses and each spouse is entitled to retain all of his/her separate property. Upon the death of a spouse, one-half of the community property (and all of the decedent
spouse’s separate property) will pass to the decedent spouse’s heirs. The other one-half of the community property remains the property of the surviving spouse. 
 Other states are common-law property states. In a common-law property state, each spouse is generally deemed to own whatever he/she earns or acquires. 

A married couple may elect to alter the marital property rules by mutually agreeing to take title to property in other forms. For example, a couple
residing in a community property state may generally enter into an agreement and transform what otherwise would be community property into the separate property of the spouse who earns or acquires the property. 

In addition, many community property and common-law property states allow married couples to take joint title in property acquired during marriage. For
example, California allows a married couple to take title in a joint tenancy with the right of survivorship. In a joint tenancy, each spouse owns a one-half interest in the property as separate property. This means that each spouse may transfer or
sell his/her one-half interest in the property while he/she is alive. However, unlike traditional separate property, a spouse cannot transfer his/her one-half interest to heirs at death. Instead, the surviving spouse automatically receives
the decedent spouse’s one-half interest and becomes the full owner of the property. (This is called the “right of survivorship.”) Both spouses must consent to taking property in a joint tenancy in lieu of having the community property
laws apply. 
 California also allows a married couple to take title in the shares as community property with the right of survivorship. This
means that the shares are treated like community property while both spouses are alive. However, if one spouse dies, then the other spouse automatically receives the decedent spouse’s one-half interest and becomes the full owner of the shares.
In other words, the decedent spouse’s will or trust does not control the disposition of the shares. 
 If you have the Purchased
Shares issued in a form other than those described above, then the transfer will be treated as a “disposition” for tax purposes. This means that the effect, for tax purposes, will be the same as selling the Purchased Shares. Please refer
to the attached tax summary for additional information. 

  
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 TRUSTS 
 A transfer to a trust generally should not be treated as a “disposition” of the Purchased Shares for tax purposes if the trust satisfies each of the following conditions: 

 

	 	•	 	 You are the sole grantor of the trust, 


  

	 	•	 	 You are the sole trustee, or you and your spouse are the sole co-trustees, 



 

	 	•	 	 The trustee or trustees are not required to distribute the income of the trust to any person other than you and/or your spouse while you are alive, and



  

	 	•	 	 The trust permits you to revoke all or part of the trust and to have the trust’s assets returned to you, without the consent of any other person
(including your spouse). 


 If you have the Purchased Shares issued to a trust that does not meet these requirements, then the
transfer will be treated as a “disposition” for tax purposes. This means that the effect, for tax purposes, will be the same as selling the Purchased Shares. Please refer to the attached tax summary for additional information. 

If you have the Purchased Shares issued to any trust, you will be required to sign a Stock Transfer Agreement in your capacity as trustee. Under the
Stock Transfer Agreement, the Purchased Shares remain subject to the Company’s right of first refusal and may remain subject to the Company’s right of repurchase at the exercise price, all in accordance with the applicable Notice of Stock
Option Grant and Stock Option Agreement. 
 THE COMPANY WILL NOT
CHECK TO DETERMINE WHETHER THE FORM OF OWNERSHIP THAT YOU ELECT IN
YOUR NOTICE OF STOCK OPTION EXERCISE IS APPROPRIATE. YOU SHOULD CONSULT
YOUR OWN ADVISERS ON THIS SUBJECT. IF AN INAPPROPRIATE ELECTION IS
MADE, THE FORM OF OWNERSHIP MAY NOT WITHSTAND LEGAL SCRUTINY OR MAY
HAVE ADVERSE TAX CONSEQUENCES. 

  
 6 








 EXPLANATION OF FEDERAL INCOME
TAX CONSEQUENCES 
 AND SECTION 83(b) ELECTION

 (Current as of February 2009) 
 PURPOSE OF THIS EXPLANATION 

The purpose of this explanation is to provide you with a brief summary of the tax consequences of exercising your option. For a number of reasons, this
explanation is no substitute for personal tax advice: 
  

	 	•	 	 To make the explanation short and readable, only the highlights are covered. Some tax rules are not addressed, even though they may be important in
particular cases. 


  

	 	•	 	 While the summary attempts to deal with the most common situations, your own tax situation may well be different from the norm.



  

	 	•	 	 State and foreign income taxes are not addressed at all, even though they could have a significant impact on your tax planning. Likewise, federal gift
and estate taxes and state inheritance taxes are not discussed. 


  

	 	•	 	 Tax planning involving incentive stock options is exceedingly complex, in part because of the possible application of the alternative minimum tax.



  

	 	•	 	 The explanation assumes that you are paying the exercise price of your option in cash (or in the form of a full-recourse promissory note with an
interest rate that meets IRS requirements). If you are paying the exercise price in the form of stock, you become subject to special rules that are not addressed here. 



 

	 	•	 	 This explanation assumes that your option is not subject to section 409A of the Internal Revenue Code. However, the Company cannot be certain that
section 409A is inapplicable to your option. (Please refer to the last segment of this summary for more information about section 409A.) 


  

	 	•	 	 The tax rules change often, and the Company is not responsible for updating this summary. (Please refer to the date at the top of this page.)



 FOR THESE REASONS, THE COMPANY
STRONGLY ENCOURAGES YOU TO CONSULT YOUR OWN TAX ADVISER BEFORE EXERCISING
YOUR OPTION AND BEFORE MAKING A DECISION ABOUT FILING OR NOT FILING
A SECTION 83(b) ELECTION. 
 LIMIT ON ISO
TREATMENT 
 The Notice of Stock Option Grant indicates whether your option is a nonstatutory stock option (NSO) or an
incentive stock option (ISO). The favorable tax treatment for ISOs is limited, regardless of what the Notice of Stock Option Grant indicates. Of the options that become 

  
 7 








 
exercisable in any calendar year, only options covering the first $100,000 of stock are eligible for ISO treatment. The excess over $100,000 automatically receives NSO treatment. For this
purpose, stock is valued at the time of grant. This means that the value is generally equal to the exercise price. 
 For example, assume that
you hold an option to buy 50,000 shares for $4 per share. Assume further that the entire option is exercisable immediately after the date of grant. (It is irrelevant when the underlying stock vests.) Only the first 25,000 shares qualify for ISO
treatment. (25,000 times $4 equals $100,000.) The remaining 25,000 shares will be treated as if they had been acquired by exercising an NSO. This is true regardless of when the option is actually exercised; what matters is when it first
could have been exercised. 
 EXERCISE OF NSO TO PURCHASE
VESTED SHARES 
 The Notice of Stock Option Grant indicates whether your Purchased Shares are already vested.
Vested shares are no longer subject to the Company’s right to repurchase them at the exercise price, although they are still subject to the Company’s right of first refusal. If you know that your Purchased Shares are already vested, there
is no need to file a section 83(b) election. 
 If you are exercising an NSO to purchase vested shares, you will be taxed now. You will
recognize ordinary income in an amount equal to the excess of (a) the fair market value of the Purchased Shares on the date of exercise over (b) the exercise price you are paying. If you are an employee or former employee of the Company,
this amount is subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) is equal to their fair market value on the date of exercise. 

EXERCISE OF NSO TO PURCHASE NON-VESTED SHARES

 If you are exercising an NSO to purchase non-vested shares, and if you do not file a timely election under section 83(b) of the
Internal Revenue Code, then you will not be taxed now. Instead, you will be taxed whenever an increment of Purchased Shares vests—in other words, when the Company no longer has the right to repurchase those shares at the exercise price. The
Notice of Stock Option Grant indicates when this occurs, generally over a period of several years. Whenever an increment of Purchased Shares vests, you will recognize ordinary income in an amount equal to the excess of (a) the fair market value
of those Purchased Shares on the date of vesting over (b) the exercise price you are paying for those Purchased Shares. If you are an employee or former employee of the Company, this amount will be subject to withholding for income and payroll
taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) will be equal to their fair market value on the date of vesting. 
 If you are exercising an NSO to purchase non-vested shares, and if you file a timely election under section 83(b) of the Internal Revenue Code, then you will be taxed now. You will recognize ordinary
income in an amount equal to the excess of (a) the fair market value of the Purchased Shares on the date of exercise over (b) the exercise price you are paying. If you are an employee or former employee of the Company, this amount is
subject to withholding for income and payroll taxes. Your tax basis in the Purchased Shares (to calculate capital gain when you sell the shares) is equal to their fair market value on the date of exercise. Even if the fair market


  
 8 








 
value of the Purchased Shares on the date of exercise equals the exercise price (and thus no tax is payable), the section 83(b) election must be made in order to avoid having any subsequent
appreciation taxed as ordinary income at the time of vesting. 
 YOU MUST FILE
A SECTION 83(b) ELECTION WITH THE INTERNAL REVENUE SERVICE WITHIN 30 DAYS AFTER
THE NOTICE OF STOCK OPTION EXERCISE IS SIGNED. The 30-day filing period cannot be
extended. If you miss the deadline, you will be taxed as the Purchased Shares vest, based on the value of the shares at that time. (See above.) The form for making the 83(b) election is attached. Additional copies of the form must be filed with the
Company and with your tax return for the year in which you make the election. 
 DISPOSITION OF NSO
SHARES 
 When you dispose of the Purchased Shares, you will recognize a capital gain equal to the excess of (a) the sale
proceeds over (b) your tax basis in the Purchased Shares. As described above, your tax basis in the Purchased Shares is equal to their fair market value on the date of exercise (or on the date of vesting if you exercised an NSO for non-vested
shares and did not file a timely election under section 83(b) of the Internal Revenue Code). If the sale proceeds are less than your tax basis, you will recognize a capital loss. The capital gain or loss will be long-term if you held the Purchased
Shares more than 12 months. The holding period normally starts when you exercise your NSO. In general, the maximum marginal federal income tax rate on long-term capital gains is 15% under current law. 

EXERCISE OF ISO AND ISO HOLDING PERIODS 

If you are exercising an ISO, you will not be taxed under the regular tax rules until you dispose of the Purchased Shares.1 (The alternative minimum tax rules are described below.) The tax
treatment at the time of disposition depends on how long you hold the shares. You will satisfy the ISO holding periods if you hold the Purchased Shares until the later of the following dates: 

 

	 	•	 	 The date two years after the ISO was granted, and 


  

	 	•	 	 The date one year after the ISO is exercised. 


 DISPOSITION OF ISO SHARES 
 If you dispose of
the Purchased Shares after satisfying both of the ISO holding periods, then you will recognize only a long-term capital gain at the time of disposition. The amount of the capital gain is equal to the excess of (a) the sale proceeds over
(b) the exercise price. In general, the maximum marginal federal income tax rate on long-term capital gains is 15% under current law. 
  

 

	1	 Generally, a “disposition” of shares purchased under an ISO encompasses any transfer of legal title, such as a transfer by sale, exchange or gift. It generally does not include a transfer to
your spouse, a transfer into joint ownership with right of survivorship (if you remain one of the joint owners), a pledge, a transfer by bequest or inheritance, or certain tax-free exchanges permitted under the Internal Revenue Code. A transfer to a
trust is a “disposition” unless the trust is an eligible revocable trust, as described in the attached explanation. 



  
 9 








 If you dispose of the Purchased Shares before either or both of the ISO holding periods are met, then you
will recognize ordinary income at the time of disposition. The calculation of the ordinary income amount depends on whether the shares are vested at the time of exercise. 

 

	 	•	 	 Shares Vested. If the shares are vested at the time of exercise, the amount of ordinary income will be equal to the excess of (a) the fair
market value of the Purchased Shares on the date of exercise over (b) the exercise price. But if the disposition is an arm’s length sale to an unrelated party, the amount of ordinary income will not exceed the total gain from the sale.
Under current IRS rules, the ordinary income amount will not be subject to withholding for income or payroll taxes. Your tax basis in the Purchased Shares will be equal to their fair market value on the date of exercise. Any gain in excess of your
basis will be taxed as a capital gain—either long-term or short-term, depending on how long you held the Purchased Shares after the date of exercise. 



 

	 	•	 	 Shares Not Vested. If the Purchased Shares are not vested at the time of exercise, then the amount of ordinary income will be equal to the
excess of (a) the fair market value of the Purchased Shares on the date of vesting over (b) the exercise price. But if the disposition is an arm’s length sale to an unrelated party, the amount of ordinary income will not exceed
the total gain from the sale. Under current IRS rules, the ordinary income amount will not be subject to withholding for income or payroll taxes. Your tax basis in the Purchased Shares will be equal to their fair market value on the date of vesting.
Any gain in excess of your basis will be taxed as a capital gain—either long-term or short-term, depending on how long you held the Purchased Shares after the date of vesting. Please note that it makes no difference under the regular tax
rules whether or not you filed a section 83(b) election at the time you exercised your ISO. In either case, your regular taxable income is measured as of the time of vesting rather than the time of exercise. 



SUMMARY OF ALTERNATIVE MINIMUM TAX 

The alternative minimum tax (AMT) must be paid if it exceeds your regular income tax. The AMT is equal to 26% of your alternative minimum tax base up to
$175,000 and 28% of the excess over $175,000. (In the case of married individuals filing separately, the breakpoint is $87,500 rather than $175,000.) Your alternative minimum tax base is equal to your alternative minimum taxable income (AMTI) minus
your exemption amount. 
  

	 	•	 	 Alternative Minimum Taxable Income. Your AMTI is equal to your regular taxable income, subject to certain adjustments and increased by items of
tax preference. Among the many adjustments made in computing AMTI are the following: 


  

	 	•	 	 State and local income and property taxes are not allowed as a deduction. 



 

	 	•	 	 Miscellaneous itemized deductions are not allowed. 


  

	 	•	 	 Medical expenses are not allowed as a deduction until they exceed 10% of adjusted gross income (as opposed to the 7.5% floor that applies to regular
income taxes). 


  

	 	•	 	 Certain interest deductions are not allowed. 


  

	 	•	 	 The standard deduction and personal exemptions are not allowed. 



  
 10 










	 	•	 	 When an ISO is exercised, the spread is treated as if the option were an NSO. (See discussion below.) 



 

	 	•	 	 Exemption Amount. Before AMT is calculated, AMTI is reduced by the exemption amount. Under current law, the exemption amount is as follows:



  

													
	 Year:
	  	Joint Returns:	 	  	Single Returns:	 	  	Separate Returns:	 
	2009	  	 	$70,950	  	  	 	$46,700	  	  	 	$35,475	  
	After 20092	  	 	$45,000	  	  	 	$33,750	  	  	 	$22,500	  


 The exemption amount is phased out by 25 cents for each $1 by which AMTI exceeds the following
levels: 
  

					
	Joint Returns: $150,000	 	Single Returns: $112,500	 	Separate Returns: $75,000


 This means, for example, that the entire $70,950 exemption amount disappears for married individuals
filing joint returns when AMTI reaches $433,800. 
 APPLICATION OF AMT WHEN ISO
IS EXERCISED 
 As noted above, when an ISO is exercised, the spread is treated for AMT purposes as if the
option were an NSO. In other words, the spread is included in AMTI at the time of exercise, unless the Purchased Shares are not yet vested at the time of exercise. If the Purchased Shares are not yet vested, the value of the shares minus the
exercise price is included in AMTI when the shares vest. However, if you make an election under section 83(b) within 30 days after exercise, then the spread is included in AMTI at the time of exercise. YOU MUST
FILE AN 83(b) ELECTION WITH THE INTERNAL REVENUE SERVICE WITHIN 30 DAYS AFTER
THE NOTICE OF STOCK OPTION EXERCISE IS SIGNED. The 30-day filing period cannot be
extended. 
 A special rule applies if you dispose of the Purchased Shares in the same year in which you exercised the ISO. If the amount you
realize on the sale is less than the value of the stock at the time of exercise, then the amount includible in AMTI on account of the ISO exercise is limited to the gain realized on the sale.3 
 To the
extent that your AMT is attributable to the spread on exercising an ISO (and certain other items), you may be able to apply the AMT that you paid as a credit against your income tax liability in future years. But the rules on calculating the
available tax credits were amended frequently in recent years and have become extraordinarily complex. On this issue in particular, you must consult your own tax adviser. 

 

	2	This assumes that Congress does not extend AMT relief, as it has done annually in prior years. 


	3	This is similar to the rule that applies under the regular tax system in the event of a disqualifying disposition of ISO stock. The amount of ordinary income that must
be recognized in that case generally does not exceed the amount of the gain realized in the disposition. 


  
 11 









 When Purchased Shares are sold, your basis for purposes of computing the capital gain or loss under the AMT
system is increased by the option spread that exists at the time of exercise. Again, an ISO is treated under the AMT system much like an NSO is treated under the regular tax system. But your basis in the ISO shares for purposes of computing gain or
loss under the regular tax system is equal to the exercise price; it does not reflect any AMT that you pay on the spread at exercise. Therefore, if you pay AMT in the year of the ISO exercise and regular income tax in the year of selling the
Purchased Shares, you could pay tax twice on the same gain (except to the extent that you can use the AMT credit described above). 

SECTION 409A OF THE INTERNAL REVENUE CODE 

The preceding summary assumes that section 409A of the Internal Revenue Code does not apply to your option. In general, your option is exempt from section
409A if the exercise price per share is at least equal to the fair market value per share of the Company’s Common Stock at the time the option was granted by the Board of Directors. Since shares of Common Stock are not traded on an established
securities market, the determination of their fair market value generally is made by the Board of Directors or by an independent appraisal firm retained by the Company. In either case, there is no guarantee that the Internal Revenue Service will
agree with the valuation. 
 If your option were found to be subject to section 409A, then you would be required to recognize ordinary income
whenever shares subject to your option vest (until the option is exercised). The amount of ordinary income would be equal to the fair market value of the shares at the time of vesting minus the exercise price of the shares. This amount would also be
subject to a 20% federal tax in addition to the federal income tax at your usual marginal rate for ordinary income. 

  
 12 









 SECTION 83(b) ELECTION 

This statement is made under Sections 55 and 83(b) of the Internal Revenue Code of 1986, as amended, pursuant to Treasury Regulations
Section 1.83-2. 
  

	 	A.	The taxpayer who performed the services is: 

  

							
	 Name:
	 	  
	 	
			
	Address:	 	  
	 	
		 	  
	 	


							
			
	Social Security No.:	 	  
	 	

  

	 	B.	The property with respect to which the election is made is              shares of the common stock of
KaloBios Pharmaceuticals, Inc. 

  

	 	C.	The property was transferred on                     
        ,             . 

  

	 	D.	The taxable year for which the election is made is the calendar year             .


  

	 	E.	The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason
taxpayer’s service with the issuer terminates. The issuer’s repurchase right lapses in a series of installments over a             -year period ending on
                             ,
            . 

  

	 	F.	The fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never
lapse) is $             per share. 

  

	 	G.	The amount paid for such property is $             per share. 


 

	 	H.	A copy of this statement was furnished to KaloBios Pharmaceuticals, Inc., for whom taxpayer rendered the services underlying the transfer of such property.


  

	 	I.	This statement is executed on                     
        ,             . 

  

					
			
	  	 		 	  
	Signature of Spouse (if any)	 		 	Signature of Taxpayer

 Within 30 days after the date of exercise, this election must be filed with the Internal Revenue Service Center
where the Optionee files his or her federal income tax returns. The filing should be made by registered or certified mail, return receipt requested. The Optionee must (a) file a copy of the completed form with his or her federal tax return for
the current tax year and (b) deliver an additional copy to the Company. 

  
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