<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                      ------------------------------------
                                   FORM 10-K
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
                      FOR THE YEAR ENDED DECEMBER 31, 1999
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
                        Commission File Number: 0-13976
 
                                  AKORN, INC.
                  (Name of issuer as specified in its charter)
 

<TABLE>
<S>                                             <C>
                 LOUISIANA                                       72-0717400
      (State or other jurisdiction of                (IRS Employer Identification No.)
       incorporation or organization)
</TABLE>

 
              2500 MILLBROOK DRIVE, BUFFALO GROVE, ILLINOIS 60089
             (Address of principal executive offices and zip code)
 
                   ISSUER'S TELEPHONE NUMBER: (847) 279-6100
 
         SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
                                      None
 
         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
                           Common Stock, No Par Value
                                (Title of Class)
 
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.  Yes  X   No
          -----   -----
 
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]
 
The aggregate market value of the voting stock held by nonaffiliates (affiliates
being, for these purposes only, directors, executive officers and holders of
more than 5% of the Issuer's common stock) of the Issuer as of March 15, 2000
was approximately $124,200,000.
 
The number of shares of the Issuer's common stock, no par value per share,
outstanding as of March 15, 2000 was 18,968,802.
 
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<PAGE>   2
 
                           FORWARD-LOOKING STATEMENTS
 
     Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements, including statements
regarding the intent, belief or expectations of the Company or its management
are not guarantees of future performance. These statements involve risks and
uncertainties and actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to:
 
     -     the effects of federal, state and other governmental regulation of
the Company's business;
 
     -     the Company's success in developing, manufacturing and acquiring new
products;
 
     -     the Company's ability to bring new products to market and the effects
of sales of such products on the Company's financial results;
 
     -     the effects of competition from generic pharmaceuticals and from
other pharmaceutical companies; and
 
     -     other factors referred to in this Form 10-K and the Company's other
SEC filings.
 
     See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Effect Future Results". The
Company does not intend to update these forward-looking statements.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the definitive Proxy Statement (the "Proxy Statement") to be
used in connection with the Registrant's 2000 Annual Meeting of shareholders,
which Proxy Statement will be filed under the Securities Exchange Act of 1934
within 120 days of the Registrant's fiscal year ended December 31, 1999, are
incorporated by reference to Part III of this Annual Report on Form 10-K.
 
                                        1

<PAGE>   3
 
                          FORM 10-K TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                                                        PAGE
                                                                       ------
<S>       <C>                                                          <C>

                                   PART I

Item 1.   Business....................................................      3

Item 2.   Properties..................................................      6

Item 3.   Legal Proceedings...........................................      6

Item 4.   Submission of Matters to a Vote of Security Holders.........      6

                                   PART II

Item 5.   Market for Registrant's Common Equity and Related                 8
            Stockholder Matters.......................................

Item 6.   Selected Financial Data.....................................      9

Item 7.   Management's Discussion and Analysis of Financial Condition      10
            and Results of Operations.................................

Item 7A.  Quantitative and Qualitative Disclosures about Market            18
            Risk......................................................

Item 8.   Financial Statements and Supplemental Data..................     18

Item 9.   Changes in and Disagreements with Accountants on Accounting      34
            and Financial Disclosures.................................

                                  PART III

Item 10.  Directors...................................................     35

Item 11.  Executive Compensation......................................     35

Item 12.  Security Ownership of Certain Beneficial Owners and              35
            Management................................................

Item 13.  Certain Relationships and Related Transactions..............     35

                                   PART IV

Item 14.  Exhibits and Financial Statement Schedules..................     36
Signatures............................................................     37
</TABLE>

 
                                        2

<PAGE>   4
 

                                     PART I
 

ITEM 1. DESCRIPTION OF BUSINESS
 
     Akorn, Inc. ("Akorn" or the "Company") manufactures and markets diagnostic
and therapeutic pharmaceuticals in specialty areas such as ophthalmology,
rheumatology, anesthesia and antidotes, among others. The Company also markets
ophthalmic surgical instruments and related products. Customers include
physicians, optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies. The Company also provides contract manufacturing
services. Akorn is a Louisiana corporation founded in 1971 in Abita Springs,
Louisiana, a suburb of New Orleans. In 1997, the Company relocated its
headquarters and certain operations to Illinois.
 
     In May 1996, the Company acquired Pasadena Research Laboratories, Inc., a
developer and distributor of injectable pharmaceutical products. Subsequently,
the Company reorganized its operations into two segments, ophthalmic and
injectable. For information regarding sales, operating income and identifiable
assets for each of the Company's segments, see Note N to the consolidated
financial statements included in Item 8 of this report.
 
     Ophthalmic Segment.  The Company markets an extensive line of diagnostic
and therapeutic ophthalmic pharmaceutical products as well surgical instruments
and related supplies. Diagnostic products, primarily used in the office setting,
include mydriatics and cycloplegics, anesthetics, topical stains, gonioscopic
solutions, angiography dyes and others. Therapeutic products, sold primarily to
wholesalers and other national account customers, include antibiotics,
anti-infectives, steroids, steroid combinations, glaucoma medications,
decongestants/antihistamines and anti-edema medications. Surgical products
include surgical knives and other surgical instruments, balanced salt solution,
post-operative kits, surgical tapes, eye shields, anti-ultraviolet goggles,
facial drape supports and other supplies. Non-pharmaceutical products include
various artificial tear solutions, preservative-free lubricating ointments, lid
cleansers, vitamin supplements and contact lens accessories.
 
     Injectable Segment.  The Company markets a line of specialty injectable
pharmaceutical products, including anesthesia products used in the treatment of
rheumatoid arthritis and pain management. These products are marketed to
wholesalers and other national account customers as well as directly to medical
specialists. Akorn also provides contract manufacturing services to
pharmaceutical and biotech companies.
 
     Manufacturing.  The Company has two manufacturing facilities located in
Decatur, Illinois and Somerset, New Jersey. See "Item 2. Description of
Property." The Company manufactures a diverse group of sterile pharmaceutical
products, including solutions, ointments and suspensions for its ophthalmic and
injectable segments. The Company is also in the process of adding freeze dried
(lyophilized) manufacturing capabilities at its Decatur facility. See "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That May Effect Future Results -- Dependence on Development
of Pharmaceutical Products and Manufacturing Capabilities."
 
     Sales and Marketing.  While the Company is working to expand its
proprietary product base through internal development and, to a lesser extent,
acquisitions, the majority of current products are non-proprietary. The Company
relies on its efforts in marketing, distribution, development and low cost
manufacturing to maintain and increase market share.
 
     The ophthalmic segment uses a three-tiered sales effort. Outside sales
representatives, with two field managers, sell directly to physicians and group
practices. In-house sales (telemarketing) and customer service (catalog sales)
sell to optometrists and other customers. A national accounts group sells to
wholesalers, retail chains and other group purchasing organizations. This
national accounts group also markets the Company's injectable pharmaceutical
products which the Company also sells through telemarketing and direct mail
activities to individual specialty physicians and hospitals. The injectable
segment does not utilize a field sales force at this time. The segment may add
such a force in the future as it introduces proprietary products. The injectable
segment markets its contract manufacturing services through direct mail, trade
shows and direct industry contacts.
 
                                        3

<PAGE>   5
 
     Research and Development.  As of December 31, 1999, the Company had 42
Abbreviated New Drug Applications ("ANDAs") for generic pharmaceuticals in
various stages of development. The Company has filed 14 of these ANDAs and had 4
ANDAs approved in 1999. See "Government Regulation." The Company expects to
continue to file ANDAs on a regular basis as pharmaceutical products of its
competitors come off patent allowing the Company to compete by marketing generic
equivalents. The Company had one New Drug Application ("NDA"), for Paremyd, on
file at December 31, 1999. The Company is also developing four indications for
ophthalmic products for which it currently anticipates filing NDAs. See Note C
to the consolidated financial statements included in Item 8 of this report. One
is an indication for Indocyanine Green to treat age related macular
degeneration. If the Company's developmental efforts are successful, the Company
currently anticipates filing this NDA within the next four years and estimates
the market size for this product to be $350 million. A second anticipated NDA
filing is for a new delivery system for the pharmaceutical Timolol, which is
used in the treatment of glaucoma. If the Company's developmental efforts are
successful, the Company currently anticipates filing this NDA within the next
three years and estimates the market size for this product to be $270 million. A
third anticipated NDA filing is for Piroxicam ophthalmic solution which is an
anti-inflammatory to be used during cataract surgery. The Company began
conducting additional clinical studies on this product in the third quarter of
1999 and anticipates filing an NDA by the end of this year. The Company
estimates the market for this product to be $75 million. Finally, the Company
currently anticipates filing an NDA for an indication for Indocyanine Green to
treat white cataracts. The Company estimates the market for this product to be
$6 to $10 million. Pre-clinical and clinical trials required in connection with
the development of pharmaceutical products are performed by contract research
organizations under the direction of Company personnel. No assurance can be
given as to whether the Company will file these NDAs, or any ANDAs, when
anticipated, will develop marketable products based on these filings or as to
the actual size of the market for any such products. See "Government Regulation"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That May Effect Future Results--Dependence on
Development of Pharmaceutical Products and Manufacturing Capabilities".
 
     The Company also maintains a business development program which identifies
potential product acquisition or product licensing candidates. The Company has
focused its business development efforts on niche products which complement its
existing product lines and which have few or no competitors in the market.
 
     At December 31, 1999, 22 full-time employees of the Company were involved
in research and development and product licensing.
 
     Research and development costs are expensed as incurred. Such costs
amounted to $2,744,000, $4,010,000 and $1,873,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
 
     Patents and Proprietary Rights.  The Company considers the protection of
discoveries in connection with its development activities important to its
business. The Company intends to seek patent protection in the United States and
selected foreign countries where deemed appropriate. To date, the Company has
received three U.S. patents and has four additional U.S. and one international
patent applications pending. There can be no assurance that the Company will
obtain U.S. or foreign patents or, if obtained, that they will provide
substantial protection or be of commercial benefit. The Company also relies upon
trademarks, trade secrets, unpatented proprietary know-how and continuing
technological innovation to maintain and develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
However, there can be no assurance that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Effect Future
Results--Patents and Proprietary Rights".
 
                                        4

<PAGE>   6
 
     Employee Relations.  At December 31, 1999, the Company had 349 full-time
employees, of whom 309 were employed by Akorn and 40 by its wholly owned
subsidiary, Akorn (New Jersey), Inc. The Company enjoys good relations with its
employees, none of whom are represented by a collective bargaining agent.
 
     Competition.  The marketing and manufacturing of pharmaceutical products is
highly competitive, with many established manufacturers, suppliers and
distributors actively engaged in all phases of the business. Most of the
Company's competitors have substantially greater financial and other resources,
including greater sales volume, larger sales forces and greater manufacturing
capacity. See "Management's Discussion and Analysis of Operations--Factors That
May Effect Future Results--Competition; Uncertainty of Technological Change."
 
     The companies which compete with the ophthalmic segment include Alcon
Laboratories, Inc., Allergan Pharmaceuticals, Inc., Ciba Vision and Bausch &
Lomb, Inc. ("B&L"). The ophthalmic segment competes primarily on the basis of
price and service. The ophthalmic segment purchases some ophthalmic products
from Steris Pharmaceuticals, Inc. and B&L, who are in direct competition with
the Company in several markets.
 
     The companies which compete with the injectable segment include both
generic and name brand companies such as Abbott Labs, Gensia, Marsam, Steris,
Elkin Sinn and American Regent. The injectable segment competes primarily on the
basis of price. Competitors in the contract manufacturing business include Cook
Imaging, Chesapeake Biological Laboratories, Ben Venue and Oread Laboratories.
The manufacturing of sterile products must be performed under government
mandated Good Manufacturing Practices.
 
     Suppliers and Customers.  No unaffiliated supplier of products accounted
for more than 10% of the Company's sales in either segment during 1999, 1998 or
1997. The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical products for itself and for third parties
with which it has contracted. The principal components of the Company's products
are active and inactive pharmaceutical ingredients and certain packaging
materials. Many of these components are available from only a single source and,
in many of the Company's ANDAs and NDAs, only one supplier of raw materials has
been identified. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Effect Future
Results--Dependence on Supply of Raw Materials and Components".
 
     No single customer accounted for more than 10% of the Company's sales in
either segment during 1999, 1998 or 1997.
 
     Government Regulation.  Pharmaceutical manufacturers and distributors are
subject to extensive regulation by government agencies, including the Food and
Drug Administration ("FDA"), the Drug Enforcement Agency ("DEA"), the Federal
Trade Commission ("FTC") and other federal, state and local agencies. The
federal Food, Drug and Cosmetic Act (the "FDA Act"), the Controlled Substance
Act and other federal statutes and regulations govern or influence the
development, testing, manufacture, labeling, storage and promotion of products.
The FDA inspects drug manufacturers and storage facilities to determine
compliance with its Good Manufacturing Practice regulations, non-compliance with
which can result in fines, recall and seizure of products, total or partial
suspension of production, refusal to approve new drug applications and criminal
prosecution. The FDA also has the authority to revoke approval of drug products.
 
     With certain exceptions, FDA approval is required before any drug can be
manufactured and marketed. New drugs require the filing of an NDA, including
clinical studies demonstrating the safety and efficacy of the drug. Generic
drugs, which are equivalents of existing brand name drugs, require the filing of
an ANDA, which waives the requirement of conducting clinical studies of safety
and efficacy. Ordinarily, the filing of an ANDA for generic drugs which contain
the same ingredients as drugs already approved for use in the United States
requires data showing that the generic formulation is equivalent to the brand
name drug and that the product is stable in its formulation. The Company has no
control over the time required for the FDA to approve NDA or ANDA filings.
 
     The Company also manufactures and distributes several controlled-drug
substances, the distribution and handling of which are regulated by the DEA.
Failure to comply with DEA regulations can result in fines or
                                        5

<PAGE>   7
 
seizure of product. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Effect Future
Results--Government Regulation".
 
     The Company does not anticipate any material effect from compliance with
federal, state and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.
 

I
TEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth the executive officers of the Company as of
March 15, 2000. Each officer serves as such at the pleasure of the Board of
Directors.
 

<TABLE>
<CAPTION>
        NAME AND AGE                       POSITION WITH THE COMPANY                IN POSITION SINCE
        ------------                       -------------------------                -----------------
<S>                            <C>                                                  <C>
John N. Kapoor, Ph.D., 56....  Chairman of the Board of the Company since May             1991
                               1995 and from December 1991 to January 1993, and
                               acting Chairman of the Board of the Company from
                               April 1993 to May 1995; Chief Executive Officer
                               of the Company from May 1996 to November 1998;
                               Chairman of the Board of Option Care, Inc.
                               (infusion services and supplies); chief executive
                               officer of Option Care, Inc. from August 1993 to
                               April 1996; president of E.J. Financial
                               Enterprises, Inc., (venture capital company),
                               since April 1990; director of NeoPharm, Inc.
                               (specialty pharmaceutical company)
Floyd Benjamin, 57...........  President and Chief Executive Officer of the               1998
                               Company since November 1998; Executive Vice
                               President of the Company and President of Taylor
                               Pharmaceuticals, Inc. (a subsidiary of the
                               Company) from May 1996 to November 1998;
                               president of Pasadena Research Laboratories, Inc.
                               ("PRL") from October 1994 to May 1996 and
                               consultant to PRL from October 1993 to October
                               1994; president and chief executive officer of
                               Neocrin, Inc. (biomedical venture capital
                               company) from February 1992 to October 1993;
                               prior to February 1992, chief operating officer
                               of Lyphomed, Inc. (injectable pharmaceuticals)
Rita J. McConville, 41.......  Vice President, Chief Financial Officer,                   1997
                               Secretary and Treasurer of the Company since
                               February 1997; Senior Director and Controller of
                               Option Care, Inc. (infusion services and
                               supplies) from July 1993 to February 1997
</TABLE>

 

ITEM 2. DESCRIPTION OF PROPERTY
 
     Since August 1998, the Company's headquarters and certain administrative
offices, as well as a finished goods warehouse, have been located in
approximately 24,000 square feet of leased space at 2500 Millbrook Drive,
Buffalo Grove, Illinois. From May 1997 to August 1998, the Company's
headquarters and ophthalmic division offices were located in approximately
11,000 square feet of leased space in Lincolnshire, Illinois. The Company
sub-lets the Lincolnshire space to several tenants. The Company's former
headquarters, consisting of approximately 30,000 square feet located on ten
acres of land in Abita Springs, Louisiana, was sold in February 1999.
 
     The Company also owns a 76,000 square foot facility located on 15 acres of
land in Decatur, Illinois. This facility is currently used for packaging,
distribution, warehousing and office space. In addition, the Company owns a
55,000 square-foot manufacturing facility in Decatur, Illinois. The Company
leases approximately 7,000 square feet of office and warehousing space in San
Clemente, California. The Company's Akorn (New Jersey) subsidiary also leases
approximately 40,000 square feet of space in Somerset, New Jersey. This space is
used for manufacturing, research and development and administrative activities.
The combined space is considered adequate to accommodate growth for the
foreseeable future.
 
                                        6

<PAGE>   8
 

ITEM 3. LEGAL PROCEEDINGS
 
     The Company is a party in legal proceedings and potential claims arising in
the ordinary course of its business. The amount, if any, of ultimate liability
with respect to such matters cannot be determined. Despite the inherent
uncertainties of litigation, management of the Company at this time does not
believe that such proceedings will have a material adverse impact on the
financial condition or results of operations or cash flows of the Company.
 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
 
                                        7

<PAGE>   9
 

                                    PART II
 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol AKRN. On March 10, 2000, the Company estimated that the number of
holders of its Common Stock was approximately 3,200, including record holders
and individual participants in security position listings.
 
     High and low bid prices per Nasdaq for the periods indicated were:
 

<TABLE>
<CAPTION>
                                                                HIGH      LOW
                                                                -----    -----
<S>                                                             <C>      <C>
Year Ended December 31, 1999:
  1st Quarter...............................................    $5.50    $3.50
  2nd Quarter...............................................     5.00     3.69
  3rd Quarter...............................................     5.00     3.88
  4th Quarter...............................................     4.69     3.78
Year Ended December 31, 1998:
  1st Quarter...............................................    $6.88    $2.75
  2nd Quarter...............................................     9.06     6.03
  3rd Quarter...............................................     8.00     3.75
  4th Quarter...............................................     6.38     2.63
</TABLE>

 
     As of March 15, 2000, there were approximately 600 holders of record of the
Company's Common Stock. Closing price at March 15, 2000 was $9.00 per share as
reported by the Nasdaq National Market.
 
     The Company did not pay cash dividends in 1999, 1998 or 1997, and is
prohibited by its revolving credit agreement with The Northern Trust Company
from doing so.
 
                                        8

<PAGE>   10
 

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
     In October 1996, the Board of Directors of the Company voted to change the
Company's fiscal year from the year ending June 30 to a calendar year. The
following table sets forth selected consolidated financial information for the
Company for the years ended December 31, 1999, 1998 and 1997, the six month
transition period ended December 31, 1996 and the years ended June 30, 1996 and
1995:
 

<TABLE>
<CAPTION>
                                                                       SIX MONTHS
                                      YEARS ENDED DECEMBER 31,           ENDED       YEARS ENDED JUNE 30,
                                    ----------------------------      DECEMBER 31,   --------------------
                                     1999       1998      1997            1996        1996         1995
                                    -------   --------   -------      ------------   -------      -------
<S>                                 <C>       <C>        <C>          <C>            <C>          <C>
PER SHARE
Equity............................  $  1.85   $   1.40   $  1.20        $  0.98      $  0.97      $  0.93
Net income:
  Basic...........................  $  0.37   $   0.26   $  0.11        $  0.00      $  0.05      $  0.15
  Diluted.........................  $  0.36   $   0.25   $  0.11        $  0.00      $  0.05      $  0.15
Price: High.......................  $  5.56   $   9.19   $  4.50        $  3.50      $  3.50      $  4.00
       Low........................  $  3.50   $   2.54   $  1.84        $  1.63      $  2.06      $  2.25
P/E:  High........................      15x        35x       41x             NM          70x          27x
       Low........................      10x        10x       17x             NM          41x          15x
INCOME DATA (000)
Net sales.........................  $64,632   $ 56,667   $42,323        $16,519      $33,925      $37,505
Gross profit......................   33,477     29,060    18,776          5,758       11,953       15,177
Operating income..................   12,122      9,444     3,165            130        1,089        3,910
Interest expense..................   (1,921)    (1,451)     (497)          (243)        (441)         (25)
Pretax income.....................   10,639      7,686     2,844             70          977        3,738
Income taxes......................    3,969      3,039     1,052             26          189        1,232
Net income........................  $ 6,670   $  4,647   $ 1,792        $    44      $   788      $ 2,506
Weighted average shares
  outstanding:
  Basic...........................   18,269     17,891    16,614         16,580       16,383       16,236
  Diluted.........................   18,573     18,766    16,925         16,763       16,788       16,799
BALANCE SHEET (000)
Current assets....................  $35,851   $ 24,948   $19,633        $13,840      $17,001      $15,474
Net fixed assets..................   20,812     15,860    12,395         12,833       11,524       11,060
Total assets......................   76,098     61,416    38,715         28,013       29,567       27,491
Current liabilities...............    9,693     13,908     8,612          5,636        9,351        7,016
Long-term obligations.............   32,015     21,228     9,852          6,003        3,915        4,890
Shareholders' equity..............  $34,390   $ 26,280   $20,251        $16,374      $16,301      $15,585
CASH FLOW DATA (000)
From operations...................  $   131   $  1,093   $    64        $ 2,553      $    10      $   712
Dividends paid (1)................       --         --        --             --         (583)          --
From investing....................   (6,233)   (13,668)   (6,387)        (2,028)        (873)      (4,943)
From financing....................    5,391     10,898     7,356            (36)         979        3,112
Change in cash & equivalents......  $  (711)  $ (1,677)  $ 1,033        $   489      $   116      $(1,119)
</TABLE>

 
---------------
 
     (1) Dividends paid pertain to Subchapter S distributions made to former PRL
         shareholders for pre-acquisition earnings.
 
     All of the information shown in the table above for the two year period
ended June 30, 1996 has been restated to reflect the combined operations of
Akorn and Pasadena Research Laboratories, Inc. (PRL).
 
                                        9

<PAGE>   11
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements.
 
RESULTS OF OPERATIONS
 
     The Company's revenues are derived from sales of diagnostic and therapeutic
pharmaceuticals by the ophthalmic and injectable segments, from sales of
surgical instruments and related products by the ophthalmic segment and from
sales of contract manufacturing services by the injectable segment. The
following table sets forth the percentage relationships that certain items from
the Company's Consolidated Statements of Income bear to revenues for the years
ended December 31, 1999, 1998 and 1997.
 

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                               1999     1998     1997
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Revenues
     Ophthalmic.............................................    50%      52%      59%
     Injectable.............................................    50       48       41
                                                               ---      ---      ---
Total revenues..............................................   100%     100%     100%
Gross profit................................................    52       51       44
Selling, general and administrative expenses................    26       24       28
Amortization of intangibles.................................     3        4        1
Research and development expenses...........................     4        7        4
Operating income............................................    19       17        8
Net income..................................................    10%       8%       4%
</TABLE>

 
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1999 AND 1998
 
     Net sales increased 14.1% for the year ended December 31, 1999 compared to
the prior year. Ophthalmic segment sales increased 11.2%, primarily due to
previously acquired products and product licensing agreements entered into in
1999. Injectable segment sales increased 17.1%, primarily due to strong sales of
anesthesia products.
 
     Consolidated gross profit increased 15.2% for the year, with gross margins
increasing from 51.3% to 51.8%. The increase in gross margins was caused by
branded products acquired in 1998 being included in the full year results for
1999 and the resultant shift in sales mix to higher margin products. 1999 cost
of sales includes $1.4 million in unfavorable manufacturing variances resulting
from under-utilization of manufacturing capacity at the Somerset, New Jersey
facility. Management expects the unfavorable manufacturing variances to continue
until additional product approvals are obtained at the Somerset facility.
 
     Selling, general and administrative expenses (SG&A) increased 25.9% from
1998, resulting from new hires in 1999 and the associated salary and salary
related expenses being included in the full year results for 1999 (28.9%) as
well as one time consulting fees (55.5%) and warehouse related expenses (69.5%).
Management expects the growth rate for SG&A expenses to significantly decrease
in 2000.
 
     Amortization of intangibles decreased 18.9% for the year, reflecting the
expiration of a patent in May 1999.
 
     Research and development expenses ("R&D") decreased 31.6%, primarily
reflecting the conclusion of clinical studies on TP-1000, a migraine product, in
December 1998. Since obtaining favorable preliminary clinical data, the Company
has been seeking a partner to continue development of this product. The Company
did not conduct clinical studies in 1999 until late in the third quarter, when a
third Piroxicam trial began. Management expects R&D expenses to increase to
approximately $4,000,000 in 2000, as three additional NDA projects begin to move
through the pipeline. See "Item 1. Description of Business--Research and
Development".
 
     During 1998, the Company recorded $350,000 in charges related to a
cancelled public equity offering.
 
                                       10

<PAGE>   12
 
     Interest expense increased 32.4%, reflecting higher average outstanding
debt balances related to prior year product acquisitions and 1999 capital
spending.
 
     Net income for 1999 was $6,670,000 or $0.36 per diluted share compared to
$4,647,000 or $0.25 per diluted share for the prior year. The increase in
earnings resulted from the above mentioned items.
 
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997
 
     Net sales increased 33.9% for the year ended December 31, 1998 compared to
the prior year. Ophthalmic segment sales increased 17.3%, primarily due to
strong sales of acquired products. Injectable segment sales increased 57.6%,
primarily due to acquired anesthesia products. Injectable segment sales also
benefited from a continuing shortage of certain distributed products.
 
     Consolidated gross profit increased 54.8% for the year, with gross margins
increasing from 44% to 51%. The increase in gross margins was caused by branded
product acquisitions and a shift in sales mix to higher margin products.
 
     Selling, general and administrative expenses (SG&A) increased 11.2%,
reflecting increased provisions for employee performance bonuses and expenses
associated with the new corporate office facility in Buffalo Grove, Illinois.
 
     Amortization of intangibles increased 584.9% for the year, reflecting
significant product acquisitions in 1998.
 
     R&D expenses increased 114.1%, primarily reflecting accelerated development
of TP-1000, a migraine product.
 
     During 1998, the Company recorded $350,000 in charges related to a
cancelled public equity offering. During 1997, the Company recorded $1,451,000
in charges related to the relocation of the ophthalmic division and executive
offices from Abita Springs, Louisiana to the Chicago area. The charges primarily
relate to severance $494,000, and retention bonus payments, $151,000, as well as
a write-down of the Abita Springs facility and equipment to net realizable
value, $378,000 and moving relocations costs, $144,000.
 
     Interest expense increased 192.0%, reflecting higher average outstanding
debt balances related to product acquisitions. Interest income declined 97.6%
due to the liquidation of cash balances to finance acquisition activities.
 
     Net income for 1998 was $4,647,000 or $0.25 per diluted share compared to
$1,792,000 or $0.11 per diluted share for the prior year. The increase in
earnings resulted from the above mentioned items.
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedge activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement, as amended, is effective for the fiscal quarters of the Company's
fiscal year ending December 31, 2001. The Company is in the process of
evaluating the effect of this Statement on its financial statements.
 
FINANCIAL CONDITION AND LIQUIDITY
 
     As of December 31, 1999, the Company had cash and cash equivalents of
$25,000. Working capital at that date was $26,158,000 versus $11,040,000 at
December 31, 1998 resulting primarily from the refinancing of $11,000,000 of
current liabilities with long term debt under the Company's new $45 million
credit facility and an increase in receivables and inventory of $11,999,000. The
Company manages its cash balances to minimize interest expense on its line of
credit borrowing. At December 31, 1999, the Company had $16.8 million available
under its revolving credit facility.
 
     During the year ended December 31, 1999, the Company generated $131,000 in
cash from operations after financing its working capital requirements, primarily
an increase in accounts receivable and inventories
 
                                       11

<PAGE>   13
 
related to increased sales volume, including acquired products. Management
anticipates additional investment in working capital to finance continued sales
growth, but has active working capital management initiatives in place to reduce
receivables and inventory levels. Investing activities, which include the
purchase of product-related intangible assets as well as equipment required
$6,233,000 in cash. Purchases of equipment for the manufacture of lyophilized
(freeze-dried) pharmaceuticals accounted for $2,507,000 of the $6,233,000 cash
used in investing activities and the Company expects to incur an additional
$5,187,000 for such purchases during 2000. Financing activities provided
$5,391,000 in cash primarily through a net $4,216,000 increase in long-term debt
and $1,337,000 from stock option exercises. The Company's repayment of capital
lease obligations used $162,000 in cash.
 
     Capital expenditures for equipment in 1999 and 1998 principally relate to
the Company's lyophilization project as discussed in Note F to the Consolidated
Financial Statements.
 
     In 1997 the Company entered into a $15 million revolving credit
arrangement, increased to $25 million in 1998, and subsequently increased to $45
million in 1999, subject to certain financial covenants. See Note H to
Consolidated Financial Statement for a description of this indebtedness and
other indebtedness of the Company. Management believes that cash flow from
operations, in conjunction with borrowing availability under its credit
facility, will be sufficient to meet the cash needs of the business for the
foreseeable future, but additional long-term financing may be needed to finance
product development or acquisitions. There are no guarantees that such financing
will be available or available at an acceptable cost.
 
YEAR 2000 ISSUES
 
     The Company established a process to identify and resolve the business
issues associated with Year 2000 and expended resources to ensure that its
critical processes were Year 2000 compliant. The Company did not experience any
business disruptions associated with Year 2000. The Company will continue to
monitor its computer applications throughout Year 2000 to ensure that any latent
Year 2000 matters are addressed promptly.
 
SELECTED QUARTERLY DATA (UNAUDITED)
In Thousands, Except Per Share Amounts
 

<TABLE>
<CAPTION>
                                                                           NET INCOME (LOSS)
                                                                     ------------------------------
                                                   NET      GROSS             PER SHARE   PER SHARE
                                                  SALES    PROFIT    AMOUNT     BASIC      DILUTED
                                                 -------   -------   ------   ---------   ---------
<S>                                              <C>       <C>       <C>      <C>         <C>
Year Ended December 31, 1999:
  1st Quarter..................................  $14,719   $ 7,436   $1,458    $ 0.08      $ 0.08
  2nd Quarter..................................   16,089     8,323    1,675      0.09        0.09
  3rd Quarter..................................   16,795     8,932    1,702      0.09        0.09
  4th Quarter..................................   17,029     8,786    1,835      0.11        0.10
                                                 -------   -------   ------    ------      ------
                                                 $64,632   $33,477   $6,670    $ 0.37      $ 0.36
                                                 =======   =======   ======    ======      ======
Year Ended December 31, 1998:
  1st Quarter..................................  $12,051   $ 6,242   $1,048    $ 0.06      $ 0.06
  2nd Quarter..................................   13,987     7,021    1,101      0.06        0.06
  3rd Quarter..................................   15,138     7,868    1,088      0.06        0.06
  4th Quarter..................................   15,491     7,929    1,410      0.08        0.08
                                                 -------   -------   ------    ------      ------
                                                 $56,667   $29,060   $4,647    $ 0.26      $ 0.25
                                                 =======   =======   ======    ======      ======
</TABLE>

 
                                       12

<PAGE>   14
 
FACTORS THAT MAY EFFECT FUTURE RESULTS
 
  Government Regulation
 
     Virtually all aspects of the Company's business are regulated by federal
and state statutes and government agencies. The development, testing,
manufacturing, processing, quality, safety, efficacy, packaging, labeling,
record-keeping, distribution, storage and advertising of the Company's products,
and disposal of waste products arising from such activities, are subject to
regulation by one or more federal agencies, including the Food and Drug
Administration ("FDA"), the Drug Enforcement Agency ("DEA"), the Federal Trade
Commission ("FTC"), the Consumer Product Safety Commission, the Occupational
Safety and Health Administration ("OSHA") and the U.S. Environmental Protection
Agency ("EPA"). These activities are also regulated by similar state and local
agencies. Failure to comply with applicable statutes and government regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). Under the FDC Act, the federal government has
extensive administrative and judicial enforcement powers over the activities of
pharmaceutical manufacturers to ensure compliance with FDA regulations. Those
powers include, but are not limited to, the authority to initiate court action
to seize unapproved or non-complying products, to enjoin non-complying
activities, to halt manufacturing operations that are not in compliance with
current good manufacturing practices ("cGMP"), to recall products which present
a health risk, and to seek civil monetary and criminal penalties. Other
enforcement activities include refusal to approve product applications or the
withdrawal of previously approved applications. Any such enforcement activities,
including the restriction or prohibition on sales of products marketed by the
Company or the halting of manufacturing operations of the Company, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, product recalls may be issued at the
discretion of the Company, the FDA or other government agencies having
regulatory authority for pharmaceutical product sales. Recalls may occur due to
disputed labeling claims, manufacturing issues, quality defects or other
reasons. No assurance can be given that recalls of the Company's pharmaceutical
products will not occur in the future. Any product recall could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     All "new drugs" must be the subject of an FDA-approved new drug application
("NDA") before they may be marketed in the United States. Certain prescription
drugs are not currently required to be the subject of an approved NDA but,
rather, may be marketed pursuant to an FDA regulatory enforcement policy
permitting continued marketing of those drugs until the FDA determines whether
they are safe and effective. All generic equivalents to previously approved
drugs or new dosage forms of existing drugs must be the subject of an
FDA-approved abbreviated new drug application ("ANDA") before they may be
marketed in the United States. The FDA has the authority to withdraw existing
NDA and ANDA approvals and to review the regulatory status of products marketed
under the enforcement policy. The FDA may require an approved NDA or ANDA for
any drug product marketed under the enforcement policy if new information
reveals questions about the drug's safety or effectiveness. All drugs must be
manufactured in conformity with cGMP and drugs subject to an approved NDA or
ANDA must be manufactured, processed, packaged, held, and labeled in accordance
with information contained in the NDA or ANDA.
 
     The Company and its third-party manufacturers are subject to periodic
inspection by the FDA to assure such compliance. The FDA imposes additional
stringent requirements on the manufacture of sterile pharmaceutical products to
ensure the sterilization processes and related control procedures consistently
produce a sterile product. Additional sterile manufacturing requirements include
the submission for expert review of detailed documentation for sterilization
process validation in drug applications beyond those required for general
manufacturing process validation. Various sterilization process requirements are
the subject of detailed FDA guidelines, including requirements for the
maintenance of microbiological control and quality stability. Pharmaceutical
products must be distributed, sampled and promoted in accordance with FDA
requirements. The FDA also regulates drug labeling and the advertising of
prescription drugs. The Company believes its operating facilities and practices
are in compliance with applicable federal and state law. However,
 
                                       13

<PAGE>   15
 
a finding by a governmental agency or court that the Company is not in
compliance could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     While the Company believes that all of its current pharmaceuticals are
lawfully marketed in the United States under current FDA enforcement policies or
have received the requisite agency approvals for manufacture and sale, such
marketing authority is subject to withdrawal by the FDA. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may or may not be granted and which
may be subject to a lengthy application process. Any change in the FDA's
enforcement policy or any decision by the FDA to require an approved NDA or ANDA
for a Company product not currently subject to the approved NDA or ANDA
requirements or any delay in the FDA approving an NDA or ANDA for a Company
product could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     A number of products marketed by the Company are "grandfathered" drugs
which are permitted to be manufactured and marketed without FDA-issued ANDAs or
NDAs on the basis of their having been marketed prior to enactment of relevant
sections of the FDC Act. The regulatory status of these products is subject to
change and/or challenge by the FDA, which could establish new standards and
limitations for manufacturing and marketing such products, or challenge the
evidence of prior manufacturing and marketing upon which grandfathering status
is based. The Company is not aware of any current efforts by the FDA to change
the status of any of its "grandfathered" products, but there can be no assurance
that such initiatives will not occur in the future. Any such change in the
status of the Company's "grandfathered" products could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     The Company also manufactures and sells drugs which are "controlled
substances" as defined in the federal Controlled Substances Act and similar
state laws, which establishes, among other things, certain licensing, security
and record keeping requirements administered by the DEA and similar state
agencies, as well as quotas for the manufacture, purchase and sale of controlled
substances. The DEA could limit or reduce the amount of controlled substances
which the Company is permitted to manufacture and market. The Company has not
experienced sanctions or fines for non-compliance with the foregoing
regulations, but no assurance can be given that any such sanctions or fines
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     The Company cannot determine what effect changes in regulations or statutes
or legal interpretation, when and if promulgated or enacted, may have on its
business in the future. Changes could, among other things, require changes to
manufacturing methods, expanded or different labeling, the recall, replacement
or discontinuation of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes or new legislation could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
  Dependence on Development of Pharmaceutical Products and Manufacturing
  Capabilities
 
     The Company's strategy for growth is dependent upon its ability to develop
products that can be promoted through existing marketing and distribution
channels and, when appropriate, the enhancement of such marketing and
distribution channels. The Company currently has 42 ANDAs in various stages of
development and anticipates filing four NDAs. See "Item 1. Description of
Business - Research and Development." The Company may not meet its anticipated
time schedule for the filing of ANDAs and NDAs or may decide not to pursue ANDAs
or NDAs that it has submitted or anticipates submitting. The internal
development of new pharmaceutical products by the Company is dependent upon the
research and development capabilities of the Company's personnel and its
infrastructure. There can be no assurance that the Company will successfully
develop new pharmaceutical products or, if developed, successfully integrate new
products into its existing product lines. In addition, there can be no assurance
that the Company will receive all necessary approvals from the FDA or that such
approvals will not involve delays which adversely affect the marketing and sale
of the Company's products. The Company's failure to develop new products or
receive FDA approval of ANDAs or NDAs, could have a material adverse effect on
the Company's business, financial condition and results of operations. Another
part of the Company's growth strategy is to develop the
 
                                       14

<PAGE>   16
 
capability to manufacture lyophilized (freeze-dried) pharmaceutical products.
While the Company has devoted resources to developing these capabilities, it may
not be successful in developing these capabilities, or the Company may not
realize the anticipated benefits from developing these capabilities.
 
     Generic Substitution
 
     The Company's branded pharmaceutical products are subject to competition
from generic equivalents and alternative therapies. Generic pharmaceuticals are
the chemical and therapeutic equivalents of brand-name pharmaceuticals and
represent an increasing proportion of pharmaceuticals dispensed in the United
States. There is no proprietary protection for most of the branded
pharmaceutical products sold by the Company and generic and other substitutes
for most of its branded pharmaceutical products are sold by other pharmaceutical
companies. In addition, governmental and cost-containment pressures regarding
the dispensing of generic equivalents will likely result in generic substitution
and competition generally for the Company's branded pharmaceutical products.
Although the Company attempts to mitigate the effect of this substitution
through, among other things, creation of strong brand-name recognition and
product-line extensions for its branded pharmaceutical products, there can be no
assurance that the Company will be successful in these efforts. Increased
competition in the sale of generic pharmaceutical products could have a material
adverse effect on the Company's business, financial condition and results of
operations. Generic substitution is regulated by the federal and state
governments, as is reimbursement for generic drug dispensing. There can be no
assurance that substitution will be permitted for newly-approved generic drugs
or that such products will be subject to government reimbursement.
 
     Dependence on Generic and Off-Patent Pharmaceutical Products
 
     The success of the Company depends, in part, on its ability to anticipate
which branded pharmaceuticals are about to come off patent and thus permit the
Company to develop, manufacture and market equivalent generic pharmaceutical
products. Generic pharmaceuticals must meet the same quality standards as
branded pharmaceuticals, even though these equivalent pharmaceuticals are sold
at prices which are significantly lower than that of branded pharmaceuticals. In
addition, generic products that third parties develop may render the Company's
generic products noncompetitive or obsolete. Although the Company has
successfully brought generic pharmaceutical products to market in a timely
manner in the past, there can be no assurance that the Company will be able to
consistently bring these products to market quickly and efficiently in the
future. An increase in competition in the sale of generic pharmaceutical
products or the Company's failure to bring such products to market before its
competitors could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Competition; Uncertainty of Technological Change
 
     The Company competes with other pharmaceutical companies, including major
pharmaceutical companies with financial resources substantially greater than
those of the Company, in developing, acquiring, manufacturing and marketing
pharmaceutical products. The selling prices of pharmaceutical products typically
decline as competition increases. Further, other products now in use, under
development or acquired by other pharmaceutical companies, may be more effective
or offered at lower prices than the Company's current or future products. The
industry is characterized by rapid technological change which may render the
Company's products obsolete, and competitors may develop their products more
rapidly than the Company. Competitors may also be able to complete the
regulatory process sooner, and therefore, may begin to market their products in
advance of the Company's products. The Company believes that competition in
sales of its products is based primarily on price, service, availability and
product efficacy. There can be no assurance that: (i) the Company will be able
to develop or acquire commercially attractive pharmaceutical products; (ii)
additional competitors will not enter the market; or (iii) competition from
other pharmaceutical companies will not have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     Dependence on Supply of Raw Materials and Components
 
     The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical products for itself and for third parties
with which it has contracted. The principal components
                                       15

<PAGE>   17
 
of the Company's products are active and inactive pharmaceutical ingredients and
certain packaging materials. Many of these components are available from only a
single source and, in many of the Company's ANDAs and NDAs, only one supplier of
raw materials has been identified. Because FDA approval of drugs requires
manufacturers to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval of any new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The qualification of a new
supplier could delay the Company's development and marketing efforts. If for any
reason the Company is unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package its products, it may not
be able to manufacture its products as planned, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     Dependence on Third-Party Manufacturers
 
     The Company derives a significant portion of its net sales from the sale of
products manufactured by third parties, including its competitors in some
instances. There can be no assurance that the Company's dependence on third
parties for the manufacture of such products will not adversely affect the
Company's profit margins or its ability to develop and deliver its products on a
timely and competitive basis. If for any reason the Company is unable to obtain
or retain third-party manufacturers on commercially acceptable terms, it may not
be able to distribute certain of its products as planned. No assurance can be
made that the manufacturers utilized by the Company will be able to provide the
Company with sufficient quantities of its products or that the products supplied
to the Company will meet the Company's specifications. Any delays or
difficulties with third-party manufacturers could adversely affect the marketing
and distribution of certain of the Company's products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     Product Liability
 
     The Company faces exposure to product liability claims in the event that
the use of its technologies or products or those it licenses from third parties
is alleged to have resulted in adverse effects in users thereof. Receipt of
regulatory approval for commercial sale of such products does not mitigate such
product liability risks. While the Company has taken, and will continue to take,
what it believes are appropriate precautions, there can be no assurance that it
will avoid significant product liability exposure. In addition, future product
labeling may include disclosure of additional adverse effects, precautions and
contraindications, which may adversely impact sales of such products. The
Company currently has product liability insurance in the amount of $10.0 million
for aggregate annual claims with a $25,000 deductible per incident and a
$150,000 aggregate annual deductible. However, there can be no assurance that
its insurance coverage will be sufficient to cover fully potential claims.
Additionally, there can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     Dependence on Acquisition and Licensing of Pharmaceutical Products
 
     As part of its growth strategy, the Company plans to purchase or license
pharmaceutical product lines of other pharmaceutical or biotechnology companies.
Other companies, including those with substantially greater financial, marketing
and other resources, compete with the Company for the right to acquire or
license such products. The Company's success in executing this strategy depends,
in part, on its ability to identify potential products that meet the Company's
criteria, including possessing a recognizable brand name or being complementary
to the Company's existing product lines. There can be no assurance that the
Company will have success in identifying potential product acquisitions or
licensing opportunities or that, if identified, it will complete such product
acquisitions or obtain such licenses on acceptable terms or that it will
successfully integrate any acquired or licensed products into its existing
product lines. The inability to complete acquisitions of, or obtain licenses
for, pharmaceutical products could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
there can be no assurance that the Company, once it has obtained rights to a
pharmaceutical product and committed to payment terms, will be able to generate
sales sufficient to create a profit or otherwise avoid a loss. Any inability to
generate such
 
                                       16

<PAGE>   18
 
sufficient sales or any subsequent reduction of sales could have a material
adverse effect on the Company's business, financial condition and result of
operations.
 
     Patents and Proprietary Rights
 
     The patent position of competitors in the pharmaceutical industry generally
is highly uncertain, involves complex legal and factual questions, and is the
subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that the resulting patents, if any, will
provide protection against competitors who: (i) successfully challenge the
Company's patents; (ii) obtain patents that may have an adverse effect on the
Company's ability to conduct business; or (iii) are able to circumvent the
Company's patent position. It is possible that other parties have conducted or
are conducting research and could make discoveries of pharmaceutical
formulations or processes that would precede any discoveries made by the
Company, which could prevent the Company from obtaining patent protection for
these discoveries or marketing products developed therefrom. Consequently, there
can be no assurance that others will not independently develop pharmaceutical
products similar to or obsoleting those that the Company is planning to develop,
or duplicate any of the Company's products. The inability of the Company to
obtain patents for its products and processes or the ability of competitors to
circumvent or obsolete the Company's patents could have a material adverse
effect on the Company's business, financial condition and results of operations.
 
     Need to Attract and Retain Key Personnel in Highly Competitive Marketplace
 
     The Company's performance depends, to a large extent, on the continued
service of its key research and development personnel, other technical
employees, managers and sales personnel and its ability to continue to attract
and retain such personnel. Competition for such personnel is intense,
particularly for highly motivated and experienced research and development and
other technical personnel. The Company is facing increasing competition from
companies with greater financial resources for such personnel. There can be no
assurance that the Company will be able to attract and retain sufficient numbers
of highly-skilled personnel in the future, and the inability to do so could have
a material adverse effect on the Company's business, operating results and
financial condition.
 
     Dependence on Key Executive Officers
 
     The Company's success will depend, in part, on its ability to retain its
key executive officers. The loss of one or more of the Company's key executive
officers could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     Quarterly Fluctuation of Results; Possible Volatility of Stock Price
 
     The Company's results of operations may vary from quarter to quarter due to
a variety of factors including the timing of the development and marketing of
new pharmaceutical products, the failure to develop such products, delays in
obtaining government approvals, including FDA approval of NDAs or ANDAs for
Company products, expenditures incurred to acquire and promote pharmaceutical
products, changes in the Company's customer base, a customer's termination of a
substantial account, the availability and cost of raw materials, interruptions
in supply by third-party manufacturers, the introduction of new products or
technological innovations by the Company's competitors, loss of key personnel,
changes in the mix of products sold by the Company, changes in sales and
marketing expenditures and competitive pricing pressures. There can be no
assurance that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Such fluctuations may
result in volatility in the price of the Company's Common Stock.
 
     Relationships With Other Entities; Conflicts of Interest
 
     Mr. John N. Kapoor, Ph.D., the Company's Chairman of the Board is
affiliated with EJ Financial Enterprises, Inc., a health care investment firm
("EJ Financial"). EJ Financial is involved in the management of health care
companies in various fields, and Dr. Kapoor is involved in various capacities
with the management and operation of these companies. The John N. Kapoor Trust,
the beneficiary of which is Dr. Kapoor, is a principal shareholder of each of
these companies. As a result, Dr. Kapoor devotes limited time to the business of
the Company. Although such companies do not currently compete directly with the
                                       17

<PAGE>   19
 
Company, certain companies with which EJ Financial is involved are in the
pharmaceutical business. Discoveries made by one or more of these companies
could render the Company's products less competitive or obsolete. Potential
conflicts of interest could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedge activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement, as amended, is effective for the fiscal quarters of the Company's
fiscal year ending December 31, 2001. The Company is in the process of
evaluating the effect of this Statement on its financial statements.
 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company is subject to market risk associated with changes in interest
rates. The Company's interest rate exposure is limited to interest rate changes
on its revolving credit agreement. The revolving credit agreement bears interest
at rates which fluctuate at the federal funds rate or LIBOR plus an applicable
percentage, depending upon certain financial ratios. All of the Company's
remaining long-term debt is at fixed interest rates. The Company believes that
reasonable possibly near-term changes in interest rates would not have a
material effect on the Company's financial position, results of operations and
cash flows.
 
     The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable and debt. The carrying amount of these instruments,
except debt, approximate fair value due to their short-term nature. The
estimated fair value of the Company's debt instruments is based upon rates
currently available to the Company for debt with similar terms and remaining
maturities.
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The following financial statements are included in Part II, Item 8 of this
Form 10-K.
 

<TABLE>
<S>                                                          <C>
Report of Independent Auditors..............................      19
Consolidated Balance Sheets as of December 31, 1999 and
  1998......................................................      20
Consolidated Statements of Income for the years ended
  December 31, 1999, 1998 and 1997..........................      21
Consolidated Statements of Shareholders' Equity for the
  years ended December 31, 1999, 1998 and 1997..............      22
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 1998 and 1997..........................      23
Notes to Consolidated Financial Statements..................      24

</TABLE>

 
                                       18

<PAGE>   20
 

                         REPORT OF INDEPENDENT AUDITORS
 
To the Board of Directors and Shareholders of Akorn, Inc.:
 
We have audited the accompanying consolidated balance sheets of Akorn, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Akorn, Inc. and subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
 
Deloitte & Touche LLP
 
Chicago, Illinois
February 25, 2000

 
                                       19

<PAGE>   21
 
                                  AKORN, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                ------------------
                                                                 1999       1998
                                                                -------    -------
<S>                                                             <C>        <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents.................................    $    25    $   736
  Trade accounts receivable (less allowance for
     uncollectibles of $226 and $425 at December 31, 1999
     and 1998, respectively)................................     17,695     11,165
  Inventory.................................................     16,473     11,004
  Deferred income taxes.....................................        803        932
  Prepaid expenses and other assets.........................        855      1,111
                                                                -------    -------
     TOTAL CURRENT ASSETS...................................     35,851     24,948
                                                                -------    -------
OTHER ASSETS
  Intangibles, net..........................................     19,412     20,541
  Other.....................................................         23         67
                                                                -------    -------
     TOTAL OTHER ASSETS.....................................     19,435     20,608
PROPERTY, PLANT AND EQUIPMENT, NET..........................     20,812     15,860
                                                                -------    -------
     TOTAL ASSETS...........................................    $76,098    $61,416
                                                                =======    =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Current installments of long-term debt....................    $ 1,305    $ 7,284
  Current portion of capital lease obligations..............         41        161
  Trade accounts payable....................................      4,523      3,476
  Income taxes payable......................................      1,606      1,472
  Accrued compensation......................................      1,049        858
  Accrued expenses and other liabilities....................      1,169        657
                                                                -------    -------
     TOTAL CURRENT LIABILITIES..............................      9,693     13,908
                                                                -------    -------
Long-term debt..............................................     30,643     20,448
Capital lease obligations...................................         --         42
Deferred income taxes.......................................      1,372        738
SHAREHOLDERS' EQUITY
  Preferred stock, $1.00 par value -- authorized 5,000,000
     shares; none issued
  Common stock, no par value -- authorized 40,000,000
     shares; issued and outstanding 18,650,990 and
     18,121,514 shares at December 31, 1999 and 1998,
     respectively...........................................     19,392     17,952
  Retained earnings.........................................     14,998      8,328
                                                                -------    -------
     TOTAL SHAREHOLDERS' EQUITY.............................     34,390     26,280
                                                                -------    -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................    $76,098    $61,416
                                                                =======    =======
</TABLE>

 
See notes to consolidated financial statements.
 
                                       20

<PAGE>   22
 
                                  AKORN, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      1998      1997
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Net sales...................................................  $64,632   $56,667   $42,323
Cost of goods sold..........................................   31,155    27,607    23,547
                                                              -------   -------   -------
  GROSS PROFIT..............................................   33,477    29,060    18,776
Selling, general and administrative expenses................   16,733    13,291    11,949
Amortization of intangibles.................................    1,878     2,315       338
Research and development....................................    2,744     4,010     1,873
Relocation costs............................................       --        --     1,451
                                                              -------   -------   -------
                                                               21,355    19,616    15,611
                                                              -------   -------   -------
  OPERATING INCOME..........................................   12,122     9,444     3,165
Interest and other income (expense):
  Interest income...........................................       31         1        41
  Interest expense..........................................   (1,921)   (1,451)     (497)
  Offering costs............................................       --      (350)       --
  Gain on sale of fixed assets..............................      275        --        --
  Other income, net.........................................      132        42       135
                                                              -------   -------   -------
                                                               (1,483)   (1,758)     (321)
                                                              -------   -------   -------
INCOME BEFORE INCOME TAXES..................................   10,639     7,686     2,844
Income taxes................................................    3,969     3,039     1,052
                                                              -------   -------   -------
NET INCOME..................................................  $ 6,670   $ 4,647   $ 1,792
                                                              -------   -------   -------
  NET INCOME PER SHARE:
    BASIC...................................................  $  0.37   $  0.26   $  0.11
                                                              -------   -------   -------
    DILUTED.................................................  $  0.36   $  0.25   $  0.11
                                                              =======   =======   =======
Weighted average shares outstanding:
  Basic.....................................................   18,269    17,891    16,614
                                                              =======   =======   =======
  Diluted...................................................   18,573    18,766    16,925
                                                              =======   =======   =======
</TABLE>

 
                      COMPUTATION OF NET INCOME PER SHARE
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      1998      1997
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Earnings
  Income applicable to common stock.........................  $ 6,670   $ 4,647   $ 1,792
                                                              =======   =======   =======
Shares
  Weighted average number of shares outstanding.............   18,269    17,891    16,614
Net income per share -- basic...............................  $  0.37   $  0.26   $  0.11
                                                              =======   =======   =======
  Additional shares assuming conversion of options..........      304       875       311
                                                              -------   -------   -------
  Weighted average diluted shares...........................   18,573    18,766    16,925
Net income per share -- diluted.............................  $  0.36   $  0.25   $  0.11
                                                              =======   =======   =======
</TABLE>

 
See notes to consolidated financial statements.
 
                                       21

<PAGE>   23
 
                                  AKORN, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                    COMMON STOCK
                                                ---------------------
                                                  SHARES                RETAINED   TREASURY
                                                OUTSTANDING   AMOUNT    EARNINGS    STOCK      TOTAL
                                                -----------   -------   --------   --------   -------
<S>                                             <C>           <C>       <C>        <C>        <C>
Balances at December 31, 1996.................    16,592      $14,174   $ 2,231     $ (31)    $16,374
Net income....................................                            1,792                 1,792
Exercise of stock options.....................        22           46                              46
Exercise of warrant...........................     1,000        2,000                           2,000
Treasury stock reissued.......................         9                    (13)       31          18
Employee stock purchase plan..................         7           21                              21
                                                  ------      -------   -------     -----     -------
Balances at December 31, 1997.................    17,630       16,241     4,010        --      20,251
Net income....................................                            4,647                 4,647
Treasury stock received in lieu of cash.......       (56)                            (465)       (465)
Exercise of stock options.....................       484        1,649                           1,649
Treasury stock reissued.......................        56                   (329)      465         136
Employee stock purchase plan..................         8           62        --        --          62
                                                  ------      -------   -------     -----     -------
Balances at December 31, 1998.................    18,122       17,952     8,328        --      26,280
Net income....................................                            6,670                 6,670
Treasury stock received in lieu of cash.......        (9)                             (35)        (35)
Exercise of stock options.....................       478        1,228                           1,228
Management bonus paid in stock................        27          109                             109
Treasury stock reissued.......................         9           (6)                 35          29
Employee stock purchase plan..................        32          109        --        --         109
                                                  ------      -------   -------     -----     -------
Balances at December 31, 1999.................    18,659      $19,392   $14,998     $  --     $34,390
                                                  ======      =======   =======     =====     =======
</TABLE>

 
See notes to consolidated financial statements.
 
                                       22

<PAGE>   24
 
                                  AKORN, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                              -----------------------------
                                                                1999       1998      1997
                                                              --------   --------   -------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net income..................................................  $  6,670   $  4,647   $ 1,792
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................     3,161      3,615     1,515
     Gain on disposal of fixed assets.......................      (245)        --        --
     Stock bonus............................................       109         --        --
     Provision for losses on accounts receivable and
       inventory............................................        --         --     1,188
     Deferred income taxes..................................       763        307        34
     Write down of building and equipment...................        --         --       400
     Other..................................................        (6)        --        43
     Changes in operating assets and liabilities:
       Accounts receivable..................................    (6,992)    (5,736)   (4,170)
       Inventory, prepaid expenses and other assets.........    (5,213)    (1,770)   (2,235)
       Trade accounts payable and accrued expenses..........     1,750       (980)    1,721
       Income taxes payable.................................       134      1,010       461
       Pre-funded development costs.........................        --         --      (685)
                                                              --------   --------   -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.........       131      1,093        64
INVESTING ACTIVITIES
Purchases of property, plant and equipment..................    (6,157)    (4,765)   (1,154)
Proceeds from disposal of fixed assets......................       629         --        --
Product licensing costs.....................................      (705)    (1,820)      (68)
Sales of investments........................................        --         96       480
Purchase of product intangibles.............................        --     (7,179)   (5,645)
                                                              --------   --------   -------
NET CASH USED IN INVESTING ACTIVITIES.......................    (6,233)   (13,668)   (6,387)
FINANCING ACTIVITIES
Proceeds from exercise of stock options.....................     1,337      1,102     2,085
Repayments of long-term debt................................   (22,584)    (2,583)      (33)
Proceeds from issuance of long-term debt....................    26,800     14,404     3,955
Principal payments under capital lease obligations..........      (162)      (149)     (151)
Short-term borrowings, net..................................        --     (1,750)    1,500
Debt acquisition costs......................................        --       (126)       --
                                                              --------   --------   -------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................     5,391     10,898     7,356
                                                              --------   --------   -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............      (711)    (1,677)    1,033
Cash and cash equivalents at beginning of year..............       736      2,413     1,380
                                                              --------   --------   -------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $     25   $    736   $ 2,413
                                                              ========   ========   =======
</TABLE>

 
See notes to consolidated financial statements.
 
                                       23

<PAGE>   25
 
                                  AKORN, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Consolidation:  The accompanying consolidated financial statements include
the accounts of Akorn, Inc. and its wholly owned subsidiaries (the Company),
Compass Vision, Inc. (Compass), Spectrum Scientific Pharmaceuticals, Inc.
(Spectrum), Walnut Pharmaceuticals, Inc. (Walnut) and Akorn (New Jersey), Inc.
Balances and activities of Compass, Spectrum and Walnut are immaterial.
Intercompany transactions and balances have been eliminated in consolidation.
 
     Use of Estimates:  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions relate to the reserve for wholesaler
chargebacks, the reserve for slow-moving and obsolete inventory and the carrying
value of intangible assets.
 
     Revenue Recognition:  The Company recognizes sales upon the shipment of
goods.
 
     Cash Equivalents:  The Company considers all highly liquid investments with
a maturity of three months or less, when purchased, to be cash equivalents.
 
     Inventory:  Inventory is stated at the lower of cost (average cost method)
or market (see Note E). Provision is made for slow-moving, unsalable or obsolete
items.
 
     Stock Compensation Plans:  The Company has an Incentive Compensation Plan
under which any officer or key employee is eligible to receive options as
designated by the Company's Board of Directors. The Company also has a Stock
Option Plan for directors under which directors are granted nonqualified
options.
 
     Intangibles:  Intangibles consist primarily of product licensing and other
such costs which are capitalized and amortized on the straight line method over
the lives of the related license periods or the estimated life of the acquired
product, which range from 17 months to 18 years. Accumulated amortization at
December 31, 1999 and 1998 was $4,523,000 and $2,976,000, respectively.
 
     The Company annually assesses the impairment of intangibles based on
several factors, including probable fair market value and anticipated cash
flows.
 
     Property, Plant and Equipment:  Property, plant and equipment is stated at
cost, less accumulated depreciation. Depreciation is provided using the
straight-line method in amounts considered sufficient to amortize the cost of
the assets to operations over their estimated service lives. The average
estimated service lives of buildings and leasehold improvements, furniture and
equipment and automobiles are approximately 30, 8 and 5 years, respectively.
 
     Accrual for Chargebacks:  The Company accrues an estimate of the difference
between the gross sales price of certain products sold to wholesalers and
expected resale prices of such products under contractual arrangements with
third parties such as hospitals and group purchasing organizations at the time
of sale. As part of the Company's sales terms to wholesale customers, it agrees
to reimburse wholesalers for such differentials between wholesale prices and
contract prices. Because this accrual relates to amounts not yet collected from
the wholesalers, this accrual is recorded as a reduction of accounts receivable.
 
     Income Taxes:  The Company files a consolidated federal income tax return
with all of its subsidiaries. Deferred income taxes are provided in the
financial statements to account for the tax effects of temporary differences
resulting from reporting revenues and expenses for income tax purposes in
periods different from those used for financial reporting purposes.
 
     Fair Value of Financial Instruments:  The Company's financial instruments
include cash, accounts receivable, accounts payable and term debt. The fair
values of cash, accounts receivable and accounts payable approximate fair value
because of the short maturity of these instruments. The carrying amounts of the
 
                                       24

<PAGE>   26
 
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Company's bank borrowings under its credit facility approximate fair value
because the interest rates are reset periodically to reflect current market
rates.
 
     Net Income Per Common Share:  Basic net income per common share is based
upon weighted average common shares outstanding. Diluted net income per common
share is based upon the weighted average number of common shares outstanding,
including the dilutive effect of stock options and warrants using the treasury
stock method.
 
NOTE B -- NONCASH TRANSACTIONS
 
     On August 26, 1999, a former employee exercised options for 23,352 shares
of the Company's common stock. The individual tendered approximately 8,800
shares of the Company's outstanding stock as consideration for the option
exercise, which was recorded as treasury stock. The net effect of this
transaction was to increase common stock and paid in capital by $35,028 and
increase treasury stock by $35,028.
 
     In July 1998, the Company financed the acquisition of four product licenses
with long-term debt in the amount of $3.332 million.
 
     On June 5, 1998, a former employee exercised options for 105,000 shares of
the Company's common stock. The individual tendered approximately 22,000 shares
of the Company's outstanding stock as consideration for the option exercise and
approximately 33,000 shares to satisfy the personal income tax withholding
requirements of the transaction, all of which was recorded as treasury stock.
The net effect of this transaction was to increase accrued liabilities by
$280,000, increase common stock and paid in capital by $185,000, and increase
treasury stock by $465,000.
 
     On March 31, 1998, the Company financed the acquisition of two product
licenses with long-term debt in the amount of $3.905 million.
 
NOTE C -- PRODUCT AND OTHER ACQUISITIONS
 
     In March 1999, the Company purchased Paredrine from Pharmics for $62,500 in
cash. The acquisition cost has been allocated to intangibles and will be
amortized over 15 years.
 
     On February 1, 1999, the Company paid $400,000 in cash to Eastman Kodak to
license IC Green raw material manufacturing processes. The acquisition cost has
been allocated to intangibles and will be amortized over 15 years.
 
     On August 1, 1998, the Company entered into an agreement to purchase three
ophthalmic products, Fluress, Ful-Glo and Rose Bengal, from Allergan, Inc. The
total purchase price was $4,650,000 with $2,000,000 paid in cash upon closing
and two additional payments of $1,500,000 and $1,150,000 payable on the next two
anniversaries of the closing date. The Company is imputing interest on these
payments with a 7.5 percent interest rate. The acquisition cost has been
allocated to intangibles and will be amortized over 15 years.
 
     In July 1998, the Company acquired certain assets of Advanced Remedies,
Inc. (ARI) for approximately $3,750,000. The purchase price included, in
addition to capital equipment, all Abbreviated New Drug Applications (ANDAs) for
any product previously approved for ARI or under review by the FDA. The purchase
price also included regulatory files for products under development by ARI but
not yet filed with the FDA. The total purchase price was allocated to ANDAs,
$3,000,000 with amortization over 15 years, and tangible assets, $750,000 with
asset depreciation up to ten years.
 
     On January 21, 1998, the Company announced the purchase of the New Drug
Application (NDA), trademark and U.S. trade name rights to Paremyd, a topical
mydriatic combination product, from Allergan. Paremyd had been off the market
for all of 1997 due to a raw material shortage. The Company is awaiting FDA
approval to manufacture the product. The total purchase price was $700,000, with
$500,000 paid in cash upon closing and $200,000 payable upon receipt of an
approved supplement from the FDA or twelve months
 
                                       25

<PAGE>   27
 
NOTE C -- PRODUCT AND OTHER ACQUISITIONS -- (CONTINUED)
from closing, whichever is sooner. The acquisition cost has been allocated to
intangibles and will be amortized over 15 years.
 
     On January 13, 1998, the Company announced the purchase of two branded
injectable products, Sufenta and Alfenta, from Janssen Pharmaceutica, Inc. The
products are injectable opioid analgesics indicated for use in the induction and
maintenance of general anesthesia. Both were NDA products, and Alfenta remains
covered under patent. The total purchase price was $6,600,000, with $2,200,000
paid in cash upon closing and two additional payments of $2,200,000 payable on
the next anniversary of the closing date and on December 29, 1999, respectively.
The second two payments were secured by irrevocable bank letters of credit,
which were issued under the revolving credit facility (see Note H). The
acquisition cost has been allocated to intangibles and will be amortized for 17
months (patent) and 15 years.
 
NOTE D -- ALLOWANCE FOR UNCOLLECTIBLES
 
     The activity in the allowance for uncollectibles for the periods indicated
is as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                                  -------------------------
                                                                  1999      1998      1997
                                                                  ----      ----      -----
<S>                                                               <C>       <C>       <C>
Balance at beginning of year................................      $425      $522      $ 359
Provision for bad debts.....................................       161        50        285
Specific reversal of doubtful account.......................      (300)       --         --
Accounts written off........................................       (60)     (147)      (122)
                                                                  ----      ----      -----
Balance at end of year......................................      $226      $425      $ 522
                                                                  ====      ====      =====
</TABLE>

 
NOTE E -- INVENTORY
 
     The components of inventory are as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Finished goods..............................................  $10,316   $ 6,947
Work in process.............................................    2,179     2,635
Raw materials and supplies..................................    3,978     1,422
                                                              -------   -------
                                                              $16,473   $11,004
                                                              =======   =======
</TABLE>

 
     Inventory at December 31, 1999 and 1998 is reported net of reserves for
slow-moving, unsalable and obsolete items of $134,000 and $572,000,
respectively.
 
                                       26

<PAGE>   28
 
NOTE F -- PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment consists of the following (in thousands):
 

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Land........................................................  $    396   $    479
Buildings and leasehold improvements........................     7,763      7,544
Furniture and equipment.....................................    17,955     15,984
Automobiles.................................................        55         32
                                                              --------   --------
                                                                26,169     24,039
Accumulated depreciation....................................   (11,677)   (10,744)
                                                              --------   --------
                                                                14,492     13,295
Construction in progress....................................     6,320      2,565
                                                              --------   --------
                                                              $ 20,812   $ 15,860
                                                              ========   ========
</TABLE>

 
     Construction in progress represents capital expenditures principally
related to the Company's lyophilization project which will enable the Company to
perform processes in-house which are currently being performed by a
sub-contractor. The Company is committed to $1.4 million in additional
construction costs.
 
NOTE G -- PRE-FUNDED DEVELOPMENT COSTS
 
     As part of a cross-licensing agreement with Pfizer, Inc. (Pfizer), the
Company was paid an advance of $1 million to be used to fund the costs of
developing a non-steroidal anti-inflammatory drug for ophthalmic indications.
During the twelve months ended December 31, 1997, the Company incurred
development costs of $534,696 which were charged against the pre-funded balance.
 
NOTE H -- FINANCING ARRANGEMENTS
 
     The Company's long-term debt consists of (in thousands):
 

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Payable under lines of credit...............................  $28,200   $16,700
Mortgages payable secured by real property located in
  Decatur, Illinois.........................................    2,678     2,897
Notes payable secured by various assets, with maturities
  through 2000 at interest rates ranging from 7.5% to
  10.25%....................................................    1,070     8,135
                                                              -------   -------
                                                               31,948    27,732
Less current portion........................................    1,305     7,284
                                                              -------   -------
Long-term debt..............................................  $30,643   $20,448
                                                              =======   =======
</TABLE>

 
     Maturities of debt are as follows (in thousands):
 

<TABLE>
<S>                                                           <C>
Year ending December 31:
2000........................................................  $ 1,305
2001........................................................   28,453
2002........................................................      273
2003........................................................      293
2004........................................................      316
Thereafter..................................................    1,308
                                                              -------
          Total.............................................  $31,948
                                                              =======
</TABLE>

 
                                       27

<PAGE>   29
 
     In December 1997, the Company entered into a $15,000,000 revolving credit
agreement with The Northern Trust Company, which was increased to $25,000,000 on
June 30, 1998 and to $45,000,000 on December 28, 1999, of which there were
outstanding borrowings of $28,200,000 and letters of credit of $35,000 at
December 31, 1999. The total outstanding principal balance is payable in full on
December 28, 2001. Outstanding borrowings under this facility currently bear
interest at the federal funds rate or LIBOR plus an applicable percentage,
depending on certain financial ratios, which interest rate was 5.365% at
December 31, 1999.
 
     The agreement provides that an annual commitment fee be paid by the Company
based on 0.25% of the average daily unused amount of the facility. The agreement
also requires the Company to maintain certain financial covenants including, but
not limited to: minimum net income, minimum net worth, minimum cash flow
coverage and maximum funded debt to EBITDA. The agreement prohibits the Company
from declaring any cash dividends on its common stock. The revolving credit
facility is secured by substantially all of the assets of the Company and its
subsidiaries, excluding real property located in Decatur, Illinois.
 
     On June 1, 1998, the Company entered into a $3,000,000 mortgage agreement
with Standard Mortgage Investors, LLC of which there were outstanding borrowings
of $2,678,000 at December 31, 1999. The principal balance is amortized over 10
years, with the final payment due in June 2007. The mortgage note bears an
interest rate of 7.375% and is secured by the real property located in Decatur,
Illinois.
 
     On August 1, 1998, the Company entered into an agreement to purchase three
ophthalmic products from Allergan, Inc. The total purchase price was $4,650,000
with $2,000,000 paid in cash upon closing and two additional payments of
$1,500,000 and $1,150,000 payable on the next two anniversaries of the closing
date. The Company is imputing interest on these payments with a 7.5% interest
rate.
 
NOTE I -- LEASING ARRANGEMENTS
 
     The Company leases certain equipment under capital leasing arrangements
which expire through the year 2000.
 
     Property, plant and equipment includes the following amounts relating to
such capital leases (in thousands):
 

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              -------------
                                                              1999    1998
                                                              -----   -----
<S>                                                           <C>     <C>
Furniture and equipment.....................................  $ 806   $ 806
Less accumulated depreciation...............................   (697)   (540)
                                                              -----   -----
                                                              $ 109   $ 266
                                                              =====   =====
</TABLE>

 
     Depreciation expense provided on these assets was $157,034, for each of the
years ended December 31, 1999, 1998 and 1997.
 
     The following is a schedule, by year, of future minimum lease payments
under these capital leases together with the present value of the net minimum
lease payments (in thousands):
 

<TABLE>
<S>                                                           <C>
Year ending December 31, 2000...............................  $43
                                                              ---
Total Minimum Lease Payments................................   43
Less: Amount Representing Interest..........................   (2)
                                                              ---
Present Value of Net Minimum Lease Payments.................  $41
                                                              ===
</TABLE>

 
     The Company leases real and personal property in the normal course of
business under various operating leases, including non-cancelable and
month-to-month agreements. Payments under these leases were $906,167, $570,288,
and $289,276 for the years ended December 31, 1999, 1998 and 1997, respectively.
 
     The following is a schedule, by year, of future minimum rental payments
required under these non-cancelable operating leases (in thousands):
                                       28

<PAGE>   30
 
NOTE I -- LEASING ARRANGEMENTS -- (CONTINUED)
 

<TABLE>
<S>                                                           <C>
Years ended December 31,
2000........................................................  $  627
2001........................................................     900
2002........................................................     606
2003........................................................     302
2004........................................................     290
2005........................................................     286
2006........................................................     286
2007........................................................     286
2008........................................................      24
                                                              ------
Total Minimum Payments Required.............................  $3,607
                                                              ======
</TABLE>

 
     The Company currently sub-lets portions of its leased space. Rental income
under these sub-leases was $211,043 in 1999 and $41,160 in 1998.
 
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
 
     Under the 1988 Incentive Compensation Program (the "Incentive Program") any
officer or key employee of the Company is eligible to receive options as
designated by the Company's Board of Directors. As of December 31, 1999,
4,500,000 shares of the Company's Common Stock are reserved to be issued under
the Incentive Program. The exercise price of the options granted under the
Incentive Program may not be less than 50 percent of the fair market value of
the shares subject to the option on the date of grant, as determined by the
Board of Directors. All options granted under the Incentive Program during the
years ended December 31, 1999, 1998 and 1997 have exercise prices equivalent to
the market value of the Company's Common Stock on the date of grant. Options
granted under the Incentive Program generally vest over a period of three years
and expire within a period of five years.
 
     Under the 1991 Stock Option Plan for Directors (the "Directors' Plan")
persons elected as directors of the Company are granted nonqualified options at
the fair market value of the shares subject to option on the date of the grant.
As of December 31, 1999, 500,000 shares of the Company's Common Stock are
reserved to be issued under the Directors' Plan. Options granted under the
Directors' Plan vest immediately and expire five years from the date of grant.
 
     A summary of the status of the Company's stock options as of December 31,
1999, 1998 and 1997 and changes during the years ended December 31, 1999, 1998
and 1997 is presented below (shares in thousands):
 

<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------------------------
                                                                    1999                1998                1997
                                                              -----------------   -----------------   -----------------
                                                                       WEIGHTED            WEIGHTED            WEIGHTED
                                                                       AVERAGE             AVERAGE             AVERAGE
                                                                       EXERCISE            EXERCISE            EXERCISE
                                                              SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                                                              ------   --------   ------   --------   ------   --------
<S>                                                           <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of period..........................   1,952   $   3.16    1,899    $2.35     1,281     $2.35
Granted.....................................................     777   $   4.53      784    $5.18       927     $2.38
Exercised...................................................    (478)  $   2.71     (530)   $2.20       (22)    $2.13
Expired/Canceled............................................    (350)  $   4.19     (201)   $5.96      (287)    $2.46
                                                              ------              ------              -----
Outstanding at end of period................................   1,901   $   3.64    1,952    $3.16     1,899     $2.35
                                                              ======              ======              =====
Options exercisable at end of period........................   1,088   $   3.19    1,033    $2.87     1,086     $2.35
Options available for future grant..........................   1,736               2,163              1,246
Weighted average fair value of options granted during the
  period....................................................           $   2.37             $2.58               $1.04
</TABLE>

 
     The fair value of each option granted during the year ended December 31,
1999 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 51%, (iii) risk-free interest rate of 6.5% and (iv) expected life
of 5 years.
                                       29

<PAGE>   31
 
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN -- (CONTINUED)
     The fair value of each option granted during the year ended December 31,
1998 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 55%, (iii) risk-free interest rate of 5.75% and (iv) expected life
of 5 years.
 
     The fair value of each option granted during the year ended December 31,
1997 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 39%, (iii) risk-free interest rate of 5.75% and (iv) expected life
of 5 years.
 
     The following table summarizes information about stock options outstanding
at December 31, 1999 (shares in thousands):
 

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                              ----------------------------------------------------   ---------------------------------
                                  NUMBER       WEIGHTED AVERAGE                          NUMBER
                              OUTSTANDING AT      REMAINING       WEIGHTED AVERAGE   EXERCISABLE AT   WEIGHTED AVERAGE
                               DECEMBER 31,      CONTRACTUAL          EXERCISE        DECEMBER 31,        EXERCISE
RANGE OF EXERCISE PRICES           1999              LIFE              PRICE              1999             PRICE
------------------------      --------------   ----------------   ----------------   --------------   ----------------
<S>                           <C>              <C>                <C>                <C>              <C>
$1.50.......................         65           0.7 years           $   1.50                65          $   1.50
$1.75 -- $2.12..............          5           2.5 years           $   2.12                 4          $   2.12
$2.13 -- $2.20..............        412           2.3 years           $   2.15               349          $   2.14
$2.28 -- $2.54..............        144           2.3 years           $   2.36               112          $   2.36
$2.63 -- $2.81..............        134           2.0 years           $   2.73               122          $   2.73
$2.88 -- $3.94..............        100           3.9 years           $   3.92                51          $   3.92
$3.97 -- $4.60..............        610           3.9 years           $   4.18               236          $   4.16
$4.69 -- $5.56..............        411           4.0 years           $   5.13               129          $   5.22
$8.00 -- $8.38..............         20           3.4 years           $   8.38                20          $   8.38
                                  -----                                                 --------
                                  1,901                                                    1,088
                                  =====                                                 ========
</TABLE>

 
     The Company applies Accounting Principles Board (APB) Opinion No. 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation expense has been recognized for its stock option plans.
 
     Had compensation cost for the Company's stock-based compensation plans been
determined based on Statement of Financial Accounting Standards ("SFAS") No.
123, the Company's net income and net income per share for the years ended
December 31, 1999, 1998 and 1997 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
 

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                            ---------------------------------------------------------------
                                                   1999                  1998                  1997
                                            -------------------   -------------------   -------------------
                                               AS                    AS                    AS
                                            REPORTED   PROFORMA   REPORTED   PROFORMA   REPORTED   PROFORMA
                                            --------   --------   --------   --------   --------   --------
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>
Net income,(loss).........................   $6,670     $5,939     $4,647     $4,110     $1,792     $1,441
                                             ======     ======     ======     ======     ======     ======
Net income per share - diluted............   $ 0.36     $ 0.32     $ 0.25     $ 0.22     $ 0.11     $ 0.09
                                             ======     ======     ======     ======     ======     ======
</TABLE>

 
     The Akorn, Inc. Employee Stock Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through payroll deductions not
exceeding 15% of base wages, at a 15% discount from market price. A maximum of
1,000,000 shares of the Company's common stock may be acquired under the terms
of the Plan. Purchases of shares issued from treasury stock approximated 7,000,
8,000 and 9,000 shares, respectively, during the years ended December 31, 1999,
1998 and 1997. New shares issued under the plan approximated 26,000 in 1999,
8,000 in 1998 and 11,000 in 1997.
 
NOTE K -- INCOME TAXES
 
     The income tax provision (benefit) consisted of the following (in
thousands):
 
                                       30

<PAGE>   32
 
NOTE K -- INCOME TAXES -- (CONTINUED)
 

<TABLE>
<CAPTION>
                                                                CURRENT    DEFERRED    TOTAL
                                                                -------    --------    ------
<S>                                                             <C>        <C>         <C>
Year ended December 31, 1999:
  Federal...................................................    $2,561      $ 636      $3,197
  State.....................................................       645        127         772
                                                                ------      -----      ------
                                                                $3,206      $ 763      $3,969
                                                                ======      =====      ======
Year ended December 31, 1998:
  Federal...................................................    $2,124      $ 359      $2,483
  State.....................................................       608        (52)        556
                                                                ------      -----      ------
                                                                $2,732      $ 307      $3,039
                                                                ======      =====      ======
Year ended December 31, 1997:
  Federal...................................................    $1,005      $ (79)     $  926
  State.....................................................        13        113         126
                                                                ------      -----      ------
                                                                $1,018      $  34      $1,052
                                                                ======      =====      ======
</TABLE>

 
     Income tax expense differs from the "expected" tax expense computed by
applying the U.S. Federal corporate income tax rate of 34% to income before
income taxes as follows (in thousands):
 

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                                --------------------------
                                                                 1999      1998      1997
                                                                ------    ------    ------
<S>                                                             <C>       <C>       <C>
Computed "expected" tax expense.............................    $3,618    $2,613    $  947
Increase in income taxes resulting from:
  State income taxes, net of federal income tax benefits....       510       371        85
  Other, net................................................      (159)       55        20
                                                                ------    ------    ------
Income tax expense..........................................    $3,969    $3,039    $1,052
                                                                ======    ======    ======
</TABLE>

 
     Deferred tax assets (liabilities) at December 31, 1999 and 1998 include (in
thousands):
 

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1999           1998
                                                              ------------   ------------
<S>                                                           <C>            <C>
Other accrued expenses......................................    $   432        $   621
Intangible assets, net......................................        246            214
Property, plant and equipment, net..........................     (1,735)        (1,208)
Other, net..................................................        488            567
                                                                -------        -------
                                                                $  (569)       $   194
                                                                =======        =======
</TABLE>

 
     The deferred taxes are classified in the accompanying balance sheets as
follows (in thousands):
 

<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1999           1998
                                                              ------------   ------------
<S>                                                           <C>            <C>
Deferred tax asset - current................................    $   803         $ 932
Deferred tax liability - noncurrent.........................     (1,372)         (738)
                                                                -------         -----
                                                                $  (569)        $ 194
                                                                =======         =====
</TABLE>

 
NOTE L -- CHANGES IN ACCOUNTING ESTIMATES
 
     The Company accrues an estimate of the difference between the gross sales
price of certain products sold to wholesalers and expected resale prices of such
products under contractual arrangements with third parties such as hospitals and
group purchasing organizations at the time of sale. This reserve is carried as a
reduction
 
                                       31

<PAGE>   33
 
NOTE L -- CHANGES IN ACCOUNTING ESTIMATES -- (CONTINUED)
of accounts receivable. The Company evaluates the reserve balance against actual
chargebacks processed by wholesalers. Actual chargebacks processed can vary
substantially from period to period. The acquisition of two injectable
anesthesia products from Janssen Pharmaceutica in the third quarter of 1996
resulted in a substantial increase in chargeback activity. Initial receipt of
actual chargeback requests from wholesalers was sporadic during 1996. By
year-end 1997, management felt that chargeback activity for these products had
stabilized and that sufficient data had been obtained to validate adjustments to
chargeback accrual assumptions. During the fourth quarter of the year ended
December 31, 1997, the Company revised its assumptions underlying the reserve
for chargebacks, resulting in an increase in net sales of $1,300,000.
 
     The Company records a reserve for slow-moving and obsolete inventory based
upon evaluation of product dating and unit sales forecasts. In 1999, the Company
incurred $328,000 in charges for unsalable product. Throughout 1999, the Company
evaluated its estimate for unsalable product resulting in an estimate decrease
of approximately $206,000. This reduction in the reserve balance reflects more
timely destruction of obsolete product. During 1998, the Company evaluated its
estimate for unsalable product resulting in an estimate increase of
approximately $665,000.
 
     During the quarter ended December 31, 1997, the Company increased its
estimate for management bonuses by approximately $300,000.
 
NOTE M -- RETIREMENT PLAN
 
     All employees who have attained the age of 21 with six months of service
are eligible for participation in the Company's 401(k) Plan. The plan-related
expense recognized for the years ended December 31, 1999, 1998 and 1997 totaled
$220,203, $89,020 and $65,704, respectively. The employer's matching
contribution is a percentage of the amount contributed by each employee and is
funded on a current basis.
 
NOTE N -- INDUSTRY SEGMENT INFORMATION
 
     The Company classifies its operations into two business segments,
ophthalmic and injectable. The ophthalmic segment manufactures, markets and
distributes diagnostic and therapeutic pharmaceuticals and surgical instruments
and related supplies. The injectable segment manufactures, markets and
distributes
 
                                       32

<PAGE>   34
 
NOTE N -- INDUSTRY SEGMENT INFORMATION -- (CONTINUED)
injectable pharmaceuticals, primarily in niche markets. Selected financial
information by industry segment is presented below (in thousands):
 

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      1998      1997
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
NET SALES
Ophthalmic..................................................  $32,467   $29,205   $24,901
Injectable..................................................   32,165    27,462    17,422
                                                              -------   -------   -------
  Total net sales...........................................  $64,632   $56,667   $42,323
                                                              =======   =======   =======
OPERATING INCOME
Ophthalmic..................................................  $ 4,338   $ 4,219   $ 1,598
Injectable..................................................    9,208     6,364     2,428
General Corporate...........................................   (1,424)   (1,139)     (861)
                                                              -------   -------   -------
  Total operating income....................................   12,122     9,444     3,165
Interest and other (expense), net...........................   (1,483)   (1,758)     (321)
                                                              -------   -------   -------
Income before income taxes..................................  $10,639   $ 7,686   $ 2,844
                                                              =======   =======   =======
IDENTIFIABLE ASSETS
Ophthalmic..................................................  $38,206   $34,538   $20,957
Injectable..................................................   37,892    26,878    17,758
                                                              -------   -------   -------
  Total identifiable assets.................................  $76,098   $61,416   $38,715
                                                              =======   =======   =======
DEPRECIATION AND AMORTIZATION
Ophthalmic..................................................  $ 1,738   $ 1,009   $   516
Injectable..................................................    1,293     2,632       999
                                                              -------   -------   -------
  Total depreciation and amortization.......................  $ 3,031   $ 3,641   $ 1,515
                                                              =======   =======   =======
</TABLE>

 
     For the year ended December 31, 1997, operating income for the ophthalmic
segment includes non-recurring charges of $1,451,000 related to the relocation
of the division from Abita Springs, Louisiana to the Chicago area. The charges
primarily relate to severance, $494,000, and retention bonus payments, $151,000
as well as a write-down of the Abita Springs facility and equipment to net
realizable value, $378,000 and moving relocation costs, $144,000. For the same
period, operating income for the injectable segment includes non-recurring
charges of $213,000 related to a change in an estimate of the timing of
absorption of manufacturing overhead.
 
     The Company records sales between the segments at fully absorbed cost.
 
NOTE O -- COMMITMENTS AND CONTINGENCIES
 
     The Company is a party in legal proceedings and potential claims arising in
the ordinary course of its business. Despite the inherent uncertainties of
litigation, management of the Company at this time does not believe that such
proceedings will have a material adverse impact on the consolidated financial
position, results of operations, or cash flows of the Company.
 
                                       33

<PAGE>   35
 
NOTE P -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999     1998     1997
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Interest and taxes paid:
  Interest..................................................  $1,245   $1,121   $  592
  Income taxes..............................................   2,860    1,167      788
Noncash investing and financing activities:
  Treasury stock received for exercise of stock options.....      35      465       --
  Notes issued for product acquisitions.....................      --    6,741    3,250
</TABLE>

 
NOTE Q -- RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedge activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
statement, as amended, is effective for the fiscal quarters of the Company's
fiscal year ending December 31, 2001. The Company is in the process of
evaluating the effect of this Statement on its financial statements.
 

I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                       34

<PAGE>   36
 

                                    PART III
 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
     Information concerning directors and compliance with Section 16(a) of the
Exchange Act is incorporated by reference to the Company's Definitive Proxy
Statement for its 2000 Annual Meeting of Shareholders. Information concerning
the Company's executive officers is included in Item 1A of Part I hereof.
 

ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this item as to executive compensation is
hereby incorporated by reference from the information appearing under the
caption "Executive Compensation" in the Company's definitive Proxy Statement
which is to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days of the Company's fiscal year ended December 31,
1999.
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this item as to the ownership of management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Security Ownership" in the Company's
definitive Proxy Statement which is to be filed with the Commission within 120
days of the Company's fiscal year ended December 31, 1999.
 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference from the information appearing under the
caption "Transactions with Shareholders and Directors" in the Company's
definitive Proxy Statement which is to be filed with the Commission within 120
days of the Company's fiscal year ended December 31, 1999.
 
                                       35

<PAGE>   37
 

                                    PART IV
 

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) Exhibits.
 
     Those exhibits marked with an asterisk (*) refer to exhibits filed herewith
and listed in the Exhibit Index which appears immediately before the first such
exhibit; the other exhibits are incorporated herein by reference, as indicated
in the following list.
 

<TABLE>
<C>       <S>
          Agreement and Plan of Merger among Akorn, Inc., Taylor, and
          Pasadena Research Laboratories, Inc. dated May 7, 1996,
          incorporated by reference to the Company's report on Form
 (2.0)    10-K for the fiscal year ended June 30, 1996.
          Restated Articles of Incorporation of the Company dated
          September 6, 1991, incorporated by reference to Exhibit 3.1
          to the Company's report on Form 10-K for the fiscal year
 (3.1)    ended June 30, 1991.
          Articles of Amendment to Articles of Incorporation of the
          company dated February 28, 1997, incorporated by reference
          to Exhibit 3.2 to the Company's report on Form 10-K for the
 (3.2)    transition period from July 1, 1996 to December 31, 1996.
          Current Composite of By-laws of the Company, incorporated by
          reference to Exhibit 3.3 to the Company's report on Form
          10-K for the transition period from July 1, 1996 to December
 (3.3)    31, 1996.
          Specimen Common Stock Certificate, incorporated by reference
          to Exhibit 4.1 to the Company's report on Form 10-K for the
 (4.1)    fiscal year ended June 30, 1988.
          Consulting Agreement dated November 15, 1990 by and between
          E. J Financial Enterprises, Inc., a Delaware corporation,
          and the Company, incorporated by reference to Exhibit 10.24
          to the Company's report on Form 10-K for the fiscal year
(10.1)    ended June 30, 1991.
          Amendment No. 1 to the Amended and Restated Akorn, Inc. 1988
          Incentive Compensation Program, incorporated by reference to
          Exhibit 10.33 to the Company's report on Form 10-K for the
(10.2)    fiscal year ended June 30, 1992.
          1991 Akorn, Inc. Stock Option Plan for Directors,
          incorporated by reference to Exhibit 4.3 to the Company's
          registration statement on Form S-8, registration number
(10.3)    33-44785.
          Common Stock Purchase Warrant dated September 3, 1992,
          issued by the Company to the John N. Kapoor Trust dated
          September 20, 1989, incorporated by reference to Exhibit No.
          7 to Amendment No. 3 to Schedule 13D, dated September 10,
          1992, filed by John N. Kapoor and the John N. Kapoor Trust
(10.4)    dated September 20, 1989.
          *Amended and Restated Credit Agreement dated September 15,
          1999 among the Company, Akorn (New Jersey), Inc. and The
(10.5)    Northern Trust Company (the "Credit Agreement")
          *Amendment No. 1 to the Credit Agreement dated December 28,
(10.6)    1999.
(21.1)    *Subsidiaries of the Company
(23.1)    *Consent of Deloitte & Touche LLP
(27)      *Financial Data Schedule
</TABLE>

 
     (b) Reports on Form 8-K
 
     None.
 
                                       36

<PAGE>   38
 

                                   SIGNATURES
 
     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
                                          AKORN, INC.
 
                                          By:      /s/ FLOYD BENJAMIN
                                            ------------------------------------
                                                       Floyd Benjamin
                                                  Chief Executive Officer
 
Date: March 28, 2000
 
     In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant, and in
the capacities and on the dates indicated.
 

<TABLE>
<CAPTION>
                  SIGNATURE                                    TITLE                        DATE
                  ---------                                    -----                        ----
<C>                                            <S>                                     <C>
             /s/ FLOYD BENJAMIN                Chief Executive Officer and Director    March 28, 2000
---------------------------------------------  (Principal Executive Officer)
               Floyd Benjamin
 
           /s/ RITA J. MCCONVILLE              Chief Financial Officer                 March 28, 2000
---------------------------------------------  (Principal Financial Officer and
             Rita J. McConville                Principal Accounting Officer)
 
          /s/ JOHN N. KAPOOR, PH.D.            Director                                March 28, 2000
---------------------------------------------
            John N. Kapoor, Ph.D.
 
          /s/ DANIEL E. BRUHL, M.D.            Director                                March 28, 2000
---------------------------------------------
            Daniel E. Bruhl, M.D.
 
              /s/ DOYLE S. GAW                 Director                                March 28, 2000
---------------------------------------------
                Doyle S. Gaw
</TABLE>

 
                                       37





<PAGE>   1
                                                                    EXHIBIT 10.5









-------------------------------------------------------------------------------



                      AMENDED AND RESTATED CREDIT AGREEMENT

                         Dated as of September 15, 1999

                                      Among

                                   AKORN, INC.

                                       And

                             AKORN NEW JERSEY, INC.

                                  as Borrowers,

                                       and

                           THE NORTHERN TRUST COMPANY,

                                    as Lender



-------------------------------------------------------------------------------













<PAGE>   2
                                TABLE OF CONTENTS

                                                                      
                                                                        PAGE


SECTION

1.       DEFINITIONS AND OTHER TERMS.....................................1
     1.1.  Definitions...................................................1
     1.2.  Other Definitional Provisions................................16
     1.3.  Interpretation of Agreement..................................16
2.       AMOUNT AND TERMS OF CREDIT.....................................16
     2.1.  Advances.....................................................16
     2.2.  Letters of Credit............................................18
     2.3.  Prepayment, Commitment Reduction.............................21
     2.4.  Use of Proceeds..............................................21
     2.5.  Interest on Loans............................................21
     2.6.  Fees.........................................................22
     2.7.  Charging of Accounts.........................................23
     2.8.  Application and Allocation of Payments.......................23
     2.9.  Loan Account and Accounting..................................23
     2.10. Indemnity....................................................24
     2.11. Access.......................................................25
     2.12. Taxes........................................................26
     2.13. Capital Adequacy; Increased Costs; Illegality................26
     2.14. Conversion and Continuation Elections........................27
3.       CONDITIONS PRECEDENT...........................................28
     3.1.  Conditions to the Initial Advance............................28
     3.2.  Further Conditions...........................................29
4.       REPRESENTATIONS AND WARRANTIES.................................30
     4.1.  Corporate Existence; Compliance with Law.....................30
     4.2.  Executive Offices............................................30
     4.3.  Corporate Power Authorization, Enforceable Obligations.......31
     4.4.  Financial Statements.........................................31
     4.5.  Material Adverse Effect......................................31
     4.6.  Title and Liens..............................................31
     4.7.  Restrictions; No Default.....................................31
     4.8.  Labor Matters................................................32
     4.9.  Ventures, Subsidiaries and Affiliates; Outstanding Stock.....32
     4.10.
 Government Regulation........................................32
     4.11. Margin Regulations...........................................33
     4.12. Taxes........................................................33
     4.13. ERISA........................................................33
     4.14. No Litigation................................................34
     4.15. Patents, Trademarks, Copyrights and Licenses.................35
     4.16. Full Disclosure..............................................35





                                      -i-

<PAGE>   3

                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                         PAGE



     4.17. Hazardous Materials.............................................35
     4.18. Insurance Policies..............................................35
     4.19. Deposit and Disbursement Accounts...............................36
     4.20. Customer and Trade Relations....................................36
     4.21. Indebtedness....................................................36
5.       FINANCIAL STATEMENTS AND INFORMATION..............................36
     5.1.  Reports and Notices.............................................36
     5.2.  Communication with Accountants..................................37
6.       AFFIRMATIVE COVENANTS.............................................37
     6.1.  Maintenance of Existence and Conduct of Business................37
     6.2.  Payment of Obligations..........................................38
     6.3.  Books and Records...............................................38
     6.4.  Audits..........................................................38
     6.5.  Litigation......................................................38
     6.6.  Insurance.......................................................38
     6.7.  Compliance with Laws............................................39
     6.8.  Supplemental Disclosure.........................................40
     6.9.  Employee Plans..................................................40
     6.10. Environmental Matters...........................................40
     6.11. Landlords' Agreements, Bailee Letters and Mortgagee Agreements..40
     6.12. Leased Locations of Collateral..................................41
7.       NEGATIVE COVENANTS................................................41
     7.1.  Mergers, Subsidiaries, Etc......................................41
     7.2.  Investments; Loans and Advances.................................42
     7.3.  Indebtedness....................................................42
     7.4.  Employee Loans and Affiliate Transactions.......................42
     7.5.  Capital Structure and Business..................................43
     7.6.  Guaranteed Indebtedness.........................................43
     7.7.  Liens...........................................................43
     7.8.  Sale of Assets..................................................44
     7.9.  ERISA...........................................................44
     7.10. Financial Covenants.............................................44
     7.11. Hazardous Materials.............................................45
     7.12. Sale Leasebacks.................................................45
     7.13. Cancellation of Indebtedness....................................45
     7.14. Restricted Payments.............................................45
     7.15. Fiscal Year.....................................................45
     7.16. Change of Corporate Name or Location............................45
     7.17. Year 2000 Compliance............................................46
8.       EVENTS OF DEFAULT: RIGHTS AND REMEDIES............................47
     8.1.  Events of Default...............................................47







                                      -ii-

<PAGE>   4


                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                         PAGE


     8.2.   Remedies.......................................................49
     8.3.   Waivers by Borrowers...........................................50
9.       SUCCESSORS AND ASSIGNS............................................50
     9.1.   Successors and Assigns.........................................50
10.      MISCELLANEOUS.....................................................50
     10.1.  Setoff.........................................................50
     10.2.  Complete Agreement; Modification of Agreement..................50
     10.3.  Amendments and Waivers.........................................51
     10.4.  Fees and Expenses..............................................51
     10.5.  No Waiver......................................................52
     10.6.  Remedies.......................................................52
     10.7.  Survival of Obligations upon Termination of Financing 
            Agreements.....................................................52
     10.8.  Severability...................................................53
     10.9.  Conflict of Terms..............................................53
     10.10. Authorized Signature...........................................53
     10.11. GOVERNING LAW..................................................53
     10.12. Notices........................................................54
     10.13. Section Titles.................................................55
     10.14. Counterparts...................................................56
     10.15. WAIVER OF JURY TRIAL...........................................56
     10.16. Reinstatement..................................................56
11.      CROSS-GUARANTY....................................................56
     11.1.  Cross-Guaranty.................................................56
     11.2.  Obligations Absolute...........................................56
     11.3.  WAIVER.........................................................57
     11.4.  Recovery.......................................................57
     11.5.  Liability Cumulative...........................................57






                                     -iii-


<PAGE>   5
                         INDEX OF SCHEDULES AND EXHIBITS


Exhibit A - Form of Notice of Advance
Exhibit B - Form of Note
Exhibit C - Form of Security Agreement
Exhibit D - Form of Notice of Conversion/Continuation

Schedule 4.2   -  Executive Offices
Schedule 4.8   -  Labor Matters
Schedule 4.9   -  Ventures, Subsidiaries and Affiliates; Outstanding Stock
Schedule 4.13  -  ERISA Plans
Schedule 4.15  -  Intellectual Property and Trade Names
Schedule 4.17  -  Hazardous Materials
Schedule 4.18  -  Insurance Policies
Schedule 4.19  -  Deposit and Disbursement Accounts
Schedule 7.3   -  Indebtedness
Schedule 7.4(a)-  Transactions with Affiliates
Schedule 7.7   -  Liens
Schedule 10.10 -  Authorized Signatures

Schedule A     -  Letters of Credit
Schedule B     -  Schedules of Additional Closing Documents




<PAGE>   6
                             FIRST INDUSTRIAL, L.P.
             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNER'S CAPITAL
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                                         Unamortized
                                                                                          Value of 
                                                             General                      General
                                                             Partner        General        Partner         Limited
                                                            Preferred       Partner      Restricted       Partners
                                               Total          Units          Units          Units          Units
                                            -----------    -----------    -----------    -----------    -----------
<S>                                         <C>            <C>            <C>            <C>            <C>        
Balance at December 31, 1996 ............   $   535,232    $      --      $   496,169    $      --      $    39,063
    Contributions .......................       458,860        144,290        199,340           --          115,230
    Issuance of General Partner
          Restricted Units ..............          --             --           (3,655)          --            3,655
    Amortization of General Partner
          Restricted Units ..............           238           --             --             --              238
    Distributions .......................       (81,772)        (7,936)       (65,322)          --           (8,514)
    Unit Conversions ....................          --             --            3,395           --           (3,395)
    Net Income ..........................        53,619          7,936         40,371           --            5,312
                                            -----------    -----------    -----------    -----------    -----------
Balance at December 31, 1997 ............       966,177        144,290        677,608         (3,417)       147,696
    Contributions .......................       279,208        192,700         37,095           --           49,413
   Issuance of General Partner
      Restricted Units ..................          --             --            2,345         (2,345)          --
    Amortization of General Partner
           Restricted Units .............         2,450           --             --             --            2,450

    Distributions .......................      (123,555)       (26,691)       (82,316)          --          (14,548)
    Unit Conversions ....................          --             --            5,150           --            5,150
    Net Income ..........................        85,279         26,691          8,547           --           50,041
                                            -----------    -----------    -----------    -----------    -----------
Balance at December 31, 1998 ............     1,209,559        336,990        689,923         (3,312)       185,958
    Contributions .......................         5,115           --              840           --            4,275
   Issuance of General Partner
      Restricted Units ..................          --             --            2,008         (2,008)          --
    Amortization of General Partner
           Restricted Units .............         1,233           --             --            1,233           --
    Distributions .......................      (138,534)       (28,924)       (92,151)          --          (17,459)
    Unit Conversions ....................          --             --            2,618           --           (2,618)
    Net Income ..........................       137,977         28,924         91,661           --           17,392
                                            -----------    -----------    -----------    -----------    -----------
Balance at December 31, 1999 ............   $ 1,215,350    $   336,990    $   694,899    $    (4,087)   $   187,548
                                            ===========    ===========    ===========    ===========    ===========
</TABLE>




The accompanying notes are an integral part of the financial statements.


   
                                       F-5



<PAGE>   7

          "Affiliate" shall mean, with respect to any Person, (a) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, five percent (5%) or more of the Stock
having ordinary voting power in the election of directors of such Person, (b)
each Person that controls, is controlled by or is under common control with such
Person or any Affiliate of such Person or (c) each of such Person's officers,
directors, joint venturers and partners. For the purposes of this definition,
"control" of a Person shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of its management or policies, whether
through the ownership of voting securities, by contract or otherwise; provided,
however, that the term "Affiliate" shall specifically exclude Lender.

          "Applicable Percentage" shall mean at any time of determination, with
respect to LIBOR Loans or Federal Funds Rate Loans, the applicable percentage
set forth below based on the ratio of Funded Debt to EBITDA on a consolidated
basis of the Borrowers at such time:



-------------------------------------------------------------------------
                                               LIBOR Loan and Federal
     Level  Funded Debt to EBITDA Ratio           Funds Rate Loan*
-------------------------------------------------------------------------
       1    Less than or equal to 1.25x               1.125%
-------------------------------------------------------------------------
       2        > 1.25x but <= 2.00x                  1.25%
-------------------------------------------------------------------------
       3        > 2.00x but <= 2.50x                  1.50%
-------------------------------------------------------------------------
       4              > 2.50x                         1.625%
-------------------------------------------------------------------------

     For purposes of the foregoing, (a) from the Closing Date until September
     30, 1999, the Applicable Percentages shall be determined in accordance with
     Level 2, (b) from and after such date, the Applicable Percentages shall be
     determined at any time by reference to the ratio of Funded Debt to EBITDA
     on a consolidated basis of the Borrowers in effect at the time, (c) any
     change in the Applicable Percentages based on a change in such ratio shall
     be effective for all purposes five (5) Business Days from delivery to the
     Lender of an officer's certificate of Akorn with respect to the Financial
     Statements to be delivered pursuant to Section 5.1, (i) setting forth in
     reasonable detail the calculation of such ratio for such fiscal period and
     (ii) stating that such officer has reviewed the terms of this Agreement and
     has made, or caused to be made under his or her supervision, a review in
     reasonable detail of the transactions and condition of Akorn and its
     Subsidiaries during the accounting period covered by the related Financial
     Statements and that such review has not disclosed the existence during or
     at the end of such accounting period, and that such officer does not have
     knowledge of the existence as at the date of such officer's certificate, of
     any condition or event that constitutes a Default or an Event of Default
     and (d) notwithstanding the foregoing provisions of clauses (b) and (c), no
     reduction in the Applicable Percentages shall be effective if a Default or
     Event of Default shall have occurred and be continuing. It is understood
     that the foregoing officer's certificate shall be permitted to be delivered
     prior to, but in no event later than, the time of the actual 




----------------
* For Federal Funds Loans also add 1/8 % per definition of Federal Funds Rate.


                                      -2-

<PAGE>   8

     delivery of the financial statements required to be delivered pursuant to
     Section 5.1 for the applicable fiscal period. Any change in the Applicable
     Percentages due to a change in the applicable Level shall be effective on
     the effective date of such change in the applicable Level and shall apply
     to all LIBOR Loans made on or after the commencement of the period (and to
     Federal Funds Rate Loans that are outstanding at any time during the
     period) commencing on the effective date of such change in the applicable
     Level and ending on the date immediately preceding the effective date of
     the next such change in applicable Level.

          "Business Day" shall mean any day that is (a) not a Saturday, a Sunday
or a day on which banks are required or permitted to be closed in the State of
Illinois and (b) a Eurodollar Business Day.

          "Capital Lease" shall mean, with respect to any Person, any lease of
any property (whether real, personal or mixed) by such Person as lessee that, in
accordance with GAAP, either would be required to be classified and accounted
for as a capital lease on a balance sheet of such Person or otherwise be
disclosed as such in a note to such balance sheet, other than any such lease
under which such Person is the lessor.

          "Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that, in accordance
with GAAP, would appear on a balance sheet of such lessee in respect of such
Capital Lease or otherwise be disclosed in a note to such balance sheet.

          "Charges" shall mean all federal, state, county, city, municipal,
local, foreign or other governmental taxes (including, without limitation, Taxes
and taxes owed to the PBGC at the time due and payable), levies, assessments,
charges, liens, claims or encumbrances upon or relating to (a) the Collateral,
(b) the Obligations, (c) the employees, payroll, income or gross receipts of any
Borrower or any of their Subsidiaries, (d) any Borrower's or any of their
Subsidiaries' ownership or use of any properties or other assets, or (e) any
other aspect of any Borrower's or any of their Subsidiaries' businesses.

          "Closing Date" shall mean the date on which the conditions set forth
in Section 3 shall have been satisfied in a manner satisfactory to the Lender.

          "Code" shall mean the Uniform Commercial Code as the same may, from
time to time, be in effect in the State of Illinois; provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of Lender's security interest in any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of Illinois, the term "Code" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction solely for
purposes of the provisions hereof relating to such attachment, perfection or
priority and for purposes of definitions related to such provisions.

          "Collateral" shall mean the property covered by the Security
Agreements and any other personal property, tangible or intangible, now existing
or hereafter acquired, that may at






                                      -3-

<PAGE>   9

any time be or become subject to a security interest or Lien in favor of Lender
to secure the Obligations.

          "Commitment" shall mean the aggregate commitment of the Lender to make
Advances and issue Letters of Credit, which aggregate commitment shall be
Twenty-Five Million United State Dollars ($25,000,000) on the Closing Date, as
such amount may be adjusted, if at all, from time to time in accordance with
Section 2.3 of the Agreement.

          "Conversion/Continuation Date" shall mean any date on which, under
Section 2.14, any Borrower (a) converts Loans of one type to another type, or
(b) continues as Loans of the same type, but with a new LIBOR Period, Loans
having LIBOR Periods expiring on such date.

          "Currency Agreement" shall mean any foreign exchange contract,
currency swap agreement, futures contract, option contract, synthetic cap or
other similar agreement designed to protect the Person entering into same
against fluctuations in currency values.

          "DEA" shall mean the Drug Enforcement Agency, together with its 
successors, and comparable agencies in foreign countries.

          "Debt Service" shall mean, with respect to any Person for any period,
an amount equal to the sum of (a) the Interest Charges and Letter of Credit fees
for such period, measured at the end of each Fiscal Quarter for the four
immediately preceding Fiscal Quarters then ended, and (b) the scheduled
amortization of any outstanding current maturities on Indebtedness, measured at
the end of each Fiscal Quarter for the four immediately following Fiscal
Quarters.

          "Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.

          "Default Rate" shall have the meaning assigned to it in Section
2.5(d).

          "Dollars" or "$" shall mean lawful currency of the United States of
America.

          "EBITDA" means for any period of determination, Akorn's consolidated
net earnings (or loss) after provision for taxes, plus cash charges against
income for foreign, federal and state income taxes for such period, plus
depreciation and amortization expenses for such period, plus Akorn's
consolidated aggregate interest expense for such period, plus any extraordinary
losses arising outside of the ordinary course of business during such period
which have been included in the calculation of net earnings, minus extraordinary
gains arising outside the ordinary course of business during such period which
have been included in the calculation of net earnings, all determined on a
consolidated basis, in accordance with GAAP.

          "EBIT" shall mean, with respect to Borrowers for any period, the
consolidated net earnings (or loss) after provision for taxes, plus charges
against income for foreign, federal and 






                                      -4-

<PAGE>   10

state income taxes for such period, plus interest expense for such period of
Borrowers and their consolidated Subsidiaries, all determined in accordance with
GAAP.

          "Environmental Laws" shall mean all federal, state, local and foreign
laws, statutes, ordinances and regulations, now or hereafter in effect, and in
each case as amended or supplemented from time to time, and any applicable
judicial or administrative interpretation thereof, including any applicable
judicial or administrative order, consent decree or judgment, relating to the
regulation and protection of human health, safety, the environment and natural
resources (including ambient air, surface water, groundwater, wetlands, land
surface or subsurface strata, wildlife, aquatic species and vegetation).
"Environmental Laws" include, but are not limited to, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Sections 9601 et seq.); the Hazardous Material Transportation Act, as
amended (49 U.S.C. Sections 1801 et seq.); the Federal Insecticide, Fungicide,
and Rodenticide Act, as amended (7 U.S.C. Sections 136 et seq.); the Resource
Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901 et seq.); the
Toxic Substance Control Act, as amended (15 U.S.C. Sections 2601 et seq.); the
Clean Air Act, as amended (42 U.S.C. Sections 740 et seq.); the Federal Water
Pollution Control Act, as amended (33 U.S.C. Sections 1251 et seq.); the
Occupational Safety and Health Act, as amended (29 U.S.C. Sections 651 et seq.);
and the Safe Drinking Water Act, as amended (42 U.S.C.Sections 300(f) et seq.),
and any and all regulations promulgated thereunder, and all analogous state,
local and foreign counterparts or equivalents and any transfer of ownership
notification or approval statutes.

          "Environmental Liabilities and Costs" shall mean all liabilities,
obligations, responsibilities, remedial actions, removal actions, losses,
damages, punitive damages, consequential damages, treble damages, costs and
expenses (including all fees, disbursements and expenses of counsel, experts and
consultants and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim, suit,
action or demand by any Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute or common law
(including any thereof arising under any Environmental Law, permit, order or
agreement with any Governmental Authority) and which relate to any health or
safety condition regulated under any Environmental Law or in connection with any
other environmental matter or Release, threatened Release or the presence of a
Hazardous Material or threatened Release of a Hazardous Material.

          "ERISA" shall mean the Employee Retirement Income Security Act of 1974
(or any successor legislation thereto), as amended from time to time, and any
regulations promulgated thereunder.

          "ERISA Affiliate" shall mean, with respect to any Borrower or any
Subsidiary thereof, any trade or business (whether or not incorporated) under
common control with such Borrower or such Subsidiary and which, together with
such Borrower or such Subsidiary, are treated as a single employer within the
meaning of Sections 414(b), (c), (m) or (o) of the IRC.

          "ERISA Event" shall mean, with respect to any of the Borrowers
or any Subsidiary thereof or ERISA Affiliate, (a) a Reportable Event with
respect to a Title IV Plan or a 





                                      -5-

<PAGE>   11

Multiemployer Plan; (b) the withdrawal of any Borrower or any Subsidiary thereof
or ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during
a plan year in which it was a substantial employer, as defined in Section
4001(a)(2) of ERISA; (c) the complete or partial withdrawal of any Borrower or
Subsidiary thereof or ERISA Affiliate from any Multiemployer Plan; (d) the
filing of a notice of intent to terminate a Title IV Plan or the treatment of a
plan amendment as a termination under Section 4041 of ERISA; (e) the institution
of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC;
(f) the failure to make required contributions to a Qualified Plan; or (g) any
other event or condition which might reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Title IV Plan or Multiemployer Plan or the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA.

          "Eurodollar Business Day" shall mean a Business Day on which banks in
the city of London are generally open for interbank or foreign exchange
transactions.

          "Event of Default" shall have the meaning assigned to it in Section
8.1.

          "FDA" shall mean the Federal Food and Drug Administration and
comparable agencies in foreign countries.

          "Federal Funds Rate" shall mean, for any day, (a) an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions, with members of the Federal Reserve System only, arranged by
Federal funds brokers, plus (b) one-eighth of one percent (1/8%) plus (c) the
Applicable Percentage. The Federal Funds Rate shall be determined by the Lender
on the basis of reports by Federal funds brokers to, and published daily by, the
Federal Reserve Bank of New York in the Composite Closing Quotations for U.S.
Government Securities. If such publication is unavailable or the Federal Funds
Rate is not set forth therein, the Federal Funds Rate shall be determined on the
basis of any other source reasonably selected by the Lender. The Federal Funds
Rate applicable each day shall be the Federal Funds Rate reported as applicable
to Federal Funds transactions on that date. In the case of Saturday, Sunday or
legal holiday, the Federal Funds Rate shall be the rate applicable to Federal
funds transactions on the immediately preceding day for which the Federal Funds
Rate is reported.

          "Federal Funds Rate Loan" shall mean a portion of an Advance bearing
interest by reference to the Federal Funds Rate.

          "Federal Reserve Board" shall have the meaning assigned to it in
Section 4.11.

          "Fees" shall mean any and all fees payable to Lender pursuant to the
Agreement or any of the other Loan Documents.

          "Financial Statements" shall mean the financial statements referred to
in Section 4.4.






                                      -6-


<PAGE>   12

          "Fiscal Quarter" shall mean any of the quarterly accounting periods of
a Borrower of each Fiscal Year.

          "Fiscal Year" shall mean any of the annual accounting periods of a
Borrower ending on December 31, of each year.

          "Floating Rate Loans" shall mean Prime Rate Loans and Federal Funds
Rate Loans.

          "Funded Debt" shall mean, with respect to Borrowers, all Indebtedness
for borrowed money evidenced by notes, bonds, debentures, or similar evidences
of Indebtedness, including, but not limited to, the Obligations (including, but
not limited to, Letter of Credit Obligations), and unsecured financing by a
seller of product lines to Borrowers which by its terms matures less than
eighteen months from the date of determination thereof, but excluding
Indebtedness of Borrowers secured by the real estates owned by Borrowers and
their Subsidiaries.

          "Funding Arrangements" shall have the meaning assigned to it in
Section 2.10(b).

          "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect on the Closing Date, consistently applied.

          "Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.

          "Guaranteed Indebtedness" shall mean, as to any Person, any obligation
of such Person guaranteeing any Indebtedness, lease, dividend, or other
obligation ("primary obligations") of any other Person (the "primary obligor")
in any manner, including any obligation or arrangement of such Person (a) to
purchase or repurchase any such primary obligation, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet condition of the
primary obligor, (c) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation, or (d) to
indemnify the owner of such primary obligation against loss in respect thereof.
The amount of any Guaranteed Indebtedness at any time shall be deemed to be an
amount equal to the lesser at such time of (y) the stated or determinable amount
of the primary obligation in respect of which such Guaranteed Indebtedness is
made or (z) the maximum amount for which such Person may be liable pursuant to
the terms of the instrument embodying such Guaranteed Indebtedness; or, if not
stated or determinable, the maximum reasonably anticipated liability (assuming
full performance) in respect thereof.








                                      -7-

<PAGE>   13

          "Hazardous Material" shall mean any substance, material or waste, the
generation, handling, storage, treatment or disposal of which is regulated by or
forms the basis of liability now or hereafter under, to any Government Authority
in any jurisdiction in which any Borrower or any Subsidiary thereof has owned,
leased, or operated real property or disposed of hazardous materials, or to any
Federal Government Authority, including, without limitation, any material or
substance which is (a) defined as a "solid waste," "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or "restricted
hazardous waste" or other similar term or phrase under any Environmental Laws,
(b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated
biphenyls (PCBs), any radioactive substance, methane, volative hydrocarbons or
any industrial solvent, (c) designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act, 33 U.S.C.ss.ss.1251 et seq. (33 U.S.C.
Sections 1321) or listed pursuant to Section 307 of the Clean Water Act (33
U.S.C. Sections 1317), (d) defined as a "hazardous waste" pursuant to Section
1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq. (42 U.S.C. Section 6903), or (e) defined as a "hazardous substance"
pursuant to Section 1012 of the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C.
Section 9601).

          "Indebtedness" of any Person shall mean (a) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property payment
for which is deferred six (6) months or more, but excluding obligations to trade
creditors incurred in the ordinary course of business that are not overdue by
more than six (6) months unless being contested in good faith, (b) reimbursement
and all other obligations with respect to letters of credit, bankers'
acceptances and surety bonds, whether or not matured, (c) all obligations
evidenced by notes, bonds, debentures or similar Instruments, (d) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (e)
all Capital Lease Obligations, (f) all obligations of such Person under Interest
Rate Agreements, Currency Agreements, commodity purchase or option agreements or
other interest or exchange rate or commodity price hedging arrangements, (g) all
Indebtedness referred to in clause (a), (b), (c), (d), (e) or (f) above secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property or other
assets (including accounts and contract rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of such
Indebtedness, and (h) with respect to any Borrower or any Subsidiary thereto,
the Obligations.

          "Indemnified Person" shall have the meaning assigned to it in Section
2.10(a).

          "Interest Charges" shall mean, with respect to any Person for any
period, the amount which, in conformity with GAAP, would be set forth opposite
the caption "interest expense" (or any like caption) on a consolidated income
statement of such Person and all other Persons with which such Person's
financial statements are to be consolidated in accordance with GAAP for the
relevant period ended on such date.





                                      -8-

<PAGE>   14

          "Interest Payment Date" means (a) as to any Prime Rate Loan or any
Federal Funds Rate Loan, the last Business Day of each month to occur while such
Loan is outstanding, and (b) as to any LIBOR Loan, the last day of the LIBOR
Period applicable thereto; provided, however, that, in addition to the
foregoing, each of (x) the date upon which both the Commitment has been
terminated and the Loans have been paid in full and (y) the Termination Date
shall be deemed to be an "Interest Payment Date" with respect to any interest
which is then accrued hereunder.

          "Interest Rate Agreement" shall mean any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate
futures contract, interest rate option contract or other similar agreement or
arrangement to which any Borrower or any Subsidiary thereof is a party, designed
to protect such Borrower or such Subsidiary against fluctuations in interest
rates.

          "Investments" shall have the meaning assigned to it in Section 7.2.

          "IRC" shall mean the Internal Revenue Code of 1986, as amended, and
any successor thereto.

          "IRS" shall mean the Internal Revenue Service, or any successor
thereto.

          "Issuance Request" shall mean a request and certificate duly executed
by an authorized officer of any Borrower, in form and substance satisfactory to
the Lender, for the issuance by the Lender of a Letter of Credit.

          "Leases" shall mean all leasehold estates in real property now owned
or hereafter acquired by any Borrower, or any of its Subsidiaries, as lessee.

          "Letter of Credit Obligation" shall mean any outstanding obligation
incurred by Lender at the request of Akorn, for the account of any Borrower,
whether direct or indirect, contingent or otherwise, due or not due, in
connection with the issuance by Lender of the Letter of Credit. The amount of
such Letter of Credit Obligation shall equal the maximum amount which may be
payable by Lender thereupon or pursuant thereto.

          "Letter of Credit" shall mean a standby letter of credit issued from
time to time before, on or after the Closing Date at the request of Akorn and
for the account of any Borrower in the aggregate maximum face amount not
exceeding the Commitment for which Lender has incurred any Letter of Credit
Obligation pursuant thereto.

          "Level" means any of the ranges applicable to the Funded Debt to
EBITDA ratio as set forth in the table contained in the definition of
"Applicable Percentage."

          "LIBOR Loan" shall mean a portion of an Advance bearing interest by
reference to the LIBOR Rate.






                                      -9-

<PAGE>   15

          "LIBOR Period" shall mean, with respect to any LIBOR Loan, each period
commencing on the last day of the next preceding LIBOR Period applicable to such
LIBOR Loan and ending one (1), two (2) or three (3) months thereafter, as
selected by Akorn's irrevocable notice to Lender as set forth in Section 2.1(a)
hereof; provided that the foregoing provision relating to LIBOR Periods is
subject to the following:

          (a) if any LIBOR Period pertaining to a LIBOR Loan would otherwise end
     on a day that is not a Eurodollar Business Day, such LIBOR Period shall be
     extended to the next succeeding Eurodollar Business Day unless the result
     of such extension would be to carry such LIBOR Period into another calendar
     month in which event such LIBOR Period shall end on the immediately
     preceding Eurodollar Business Day;

          (b) any LIBOR Period that would otherwise extend beyond the
     Termination Date shall end two (2) Eurodollar Business Days prior to the
     Termination Date;

          (c) any LIBOR Period pertaining to a LIBOR Loan that begins on the
     last Eurodollar Business Day of a calendar month (or on a day for which
     there is no numerically corresponding day in the calendar month at the end
     of such LIBOR Period) shall end on the last Eurodollar Business Day of a
     calendar month;

          (d) Akorn shall select LIBOR Periods so as not to require a payment or
     prepayment of any LIBOR Loan during a LIBOR Period for such Loan; and

          (e) Akorn shall select LIBOR Periods so that there shall be no more
     than eight (8) separate LIBOR Loans which are Advances in existence at any
     one time.

          "LIBOR Rate" shall mean for each LIBOR Period, a rate of interest
determined by the Lender equal to (a) that fixed rate of interest per year for
deposits with maturity periods of one (1), two (2) or three (3) months (which
-maturity period Akorn shall select subject to the terms stated herein), in
United States dollars offered to the Lender in or through the London interbank
market at or about 11:00 A.M., London time, two (2) Eurodollar Business Days
before the first (1st) day of each LIBOR Period and for the London deposit
maturity requested, divided by one minus any applicable reserve requirement
(expressed as a decimal) on Eurodollar deposits of the same amount and maturity
as determined by Lender, plus (b) the Applicable Percentage.

          "Lien" shall mean any mortgage or deed of trust, pledge, 
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
under the Code or comparable law of any jurisdiction).








                                      -10-

<PAGE>   16

          "Loan" shall mean, as the context may require, the aggregate amount of
Advances outstanding at any time to any Borrower or to all Borrowers.

          "Loan Account" shall have the meaning assigned to it in Section 2.9.

          "Loan Documents" shall mean the Agreement, the Note, the Security
Agreements, the Letters of Credit, and all other agreements, instruments,
documents and certificates identified in the Schedule of Documents in favor of
Lender and including (without limitation) all other pledges, powers of attorney,
consents, assignments, contracts, notices, and all other written matter whether
heretofore, now or hereafter executed by or on behalf of any Borrower or any of
its Affiliates, or any employee of any Borrower or any of its Affiliates, and
delivered to Lender in connection with the Agreement or the transactions
contemplated hereby.

          "Margin Stock" shall have the meaning assigned to it in Section 4.11.

          "Material Adverse Effect" shall mean a material adverse effect on (a)
the business, assets, operations, prospects or financial or other condition of
Borrowers and their Subsidiaries considered as a whole, (b) Borrowers' ability
to pay the Loans or any of the other Obligations in accordance with the terms
thereof, (c) the Collateral or Lender's Liens on the Collateral or the priority
of any such Lien, or (d) Lender's rights and remedies under the Agreement or any
of the other Loan Documents.

          "Maximum Lawful Rate" shall have the meaning assigned to it in Section
2.5(e).

          "Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and to which any Borrower or any of the
Subsidiaries thereof or ERISA Affiliate is making, is obligated to make, has
made or been obligated to make, contributions on behalf of participants who are
or were employed by any of them.

          "Net Income" shall mean, with respect to any period, the aggregate of
the net income (loss) of the Person in question for such period, determined in
accordance with GAAP on a consolidated basis, provided that (a) the net income
(loss) of any Person which is not a Subsidiary shall be included only to the
extent of the amount of cash dividends or distributions paid to the Person in
question or to a consolidated Subsidiary of such Person and (b) the net income
(loss) of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded. There shall be
excluded in computing Net Income the excess (but not the deficit), if any, of
(x) any gain which must be treated as an extraordinary item under GAAP or any
gain realized upon the sale or other disposition of any real property or
equipment that is not sold in the ordinary course of business or of any capital
stock of the Person or a Subsidiary of the Person over (y) any loss which must
be treated as an extraordinary item under GAAP or any loss realized upon the
sale or other disposition of any real property or equipment that is not sold in
the ordinary course of business or of any capital stock of the Person or a
Subsidiary of the Person.









                                      -11-

<PAGE>   17

          "Net Worth" shall mean the book value of the assets of Borrowers on a
consolidated basis (inclusive of goodwill, patents, trademarks, tradenames,
copyrights, organization expenses, treasury stock, debt discount and expense,
deferred charges and other like intangibles), minus (a) reserves applicable
thereto, and (b) all of Borrowers' liabilities on a consolidated basis
(including accrued and deferred income taxes).

          "Non-Use Fee" shall have the meaning assigned to it in Section 2.6.

          "Note" shall have the meaning assigned to it in Section 2.1(b) and
shall be substantially in the form of Exhibit B.

          "Notice of Advance" shall have the meaning assigned to it in Section
2.1.

          "Notice of Conversion/Continuation" shall mean a notice in 
substantially the form of Exhibit D.

          "Obligations" shall mean all loans, advances, debts, liabilities and
obligations, including, without limitation, the Loans and Letter of Credit
Obligations, for the performance of covenants, tasks or duties or for payment of
monetary amounts (whether or not such performance is then required or
contingent, or amounts are liquidated or determinable) owing by any Borrower or
any Subsidiary thereof to Lender, and all covenants and duties regarding such
amounts, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, arising under the Agreement or any of
the other Loan Documents. This term includes all principal, interest (including,
without limitation, all interest which accrues after the commencement of any
case or proceedings in bankruptcy after the insolvency of, or for the
reorganization of, any Borrower or any Subsidiary thereof, whether or not
allowed in such proceeding), Fees, Charges, expenses, attorneys' fees and any
other sum chargeable to any Borrower or any Subsidiary thereof under the
Agreement or any of the other Loan Documents.

          "PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.

          "Pension Plan" shall mean an employee pension benefit plan, as defined
in Section 3(2) of ERISA (other than a Multiemployer Plan) , which is not an
individual account plan, as defined in Section 3(34) of ERISA, and which any
Borrower or any Subsidiary thereof or, if a Title IV Plan, any ERISA Affiliate
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any of them.

          "Permitted Encumbrances" shall mean the following encumbrances: (a)
Liens for taxes or assessments or other governmental Charges or levies, not yet
due and payable; (b) pledges or deposits securing obligations under workmen's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (c) pledges or deposits securing bids, tenders,
contracts (other than contracts for the payment of money) or leases to which any
Borrower or any Subsidiary thereof is a party as lessee made in the ordinary
course of business; (d) deposits securing statutory obligations of any Borrower
or any Subsidiary thereof; 





                                      -12-

<PAGE>   18

(e) inchoate and unperfected workers', mechanics', suppliers' or similar liens
arising in the ordinary course of business; (f) carriers', warehousemen's or
other similar possessory liens arising in the ordinary course of business and
securing liabilities in an outstanding aggregate amount not in excess of
$100,000 at any time; (g) deposits securing, or in lieu of, surety, appeal or
customs bonds in proceedings to which any Borrower or any Subsidiary thereof is
a party; (h) any attachment or judgment lien, unless the judgment it secures
shall not, within 30 days after the entry thereof, have been discharged or
execution thereof stayed pending appeal, or shall not have been discharged
within 30 days after the expiration of any such stay; (i) zoning restrictions,
easements, licenses, or other restrictions on the use of real property or other
minor irregularities in title (including leasehold title) thereto, so long as
the same do not materially impair the use, value, or marketability of such real
property, lease or leasehold estate; (j) Liens existing on the Closing Date and
listed on Schedule 7.7 hereto; and (k) other Liens securing Indebtedness
permitted pursuant to the terms of this Agreement, including but not limited to,
under Section 7.3 hereof.

          "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, other entity
or government (whether federal, state, county, city, municipal, local, foreign,
or otherwise, including any instrumentality, division, agency, body or
department thereof).

          "Plan" shall mean, with respect to any Borrower, any Subsidiary
thereof or any ERISA Affiliate, at any time, an employee benefit plan, as
defined in Section 3(3) of ERISA, which any Borrower or any Subsidiary thereof
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any of them.

          "Prime Rate" shall mean a rate per year equal to that rate of interest
per year announced from time to time by Lender called its prime rate, which rate
at any time may not be the lowest rate charged by Lender. Changes in the Prime
Rate shall take effect on the date set forth in each announcement for a change
in the Prime Rate.

          "Prime Rate Loan" shall mean a portion of an Advance bearing interest
by reference to the Prime Rate.

          "Qualified Plan" shall mean an employee pension benefit plan, as
defined in Section 3(2) of ERISA, which is intended to be tax-qualified under
Section 401(a) of the IRC, and which any Borrower, any Subsidiary thereof or any
ERISA Affiliate maintains, contributes to or has an obligation to contribute to
on behalf of participants who are or were employed by any of them.

          "Reimbursement Obligation" shall have the meaning assigned to it in
Section 2.2(e).

          "Release" shall mean, as to any Person, any material release, spill,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
dumping, leaching or 





                                      -13-

<PAGE>   19

migration of Hazardous Materials in the indoor or outdoor environment by such
Person, including the movement of Hazardous Materials through or in the air,
soil, surface water, ground water or property.

          "Reportable Event" shall mean any of the events described in Section
4043(b)(1), (2), (3), (5), (6), (8) or (9) of ERISA.

          "Restricted Payment" shall mean (a) the declaration or payment of any
dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets in respect of a Person's Stock,
(b) any payment on account of the purchase, redemption, defeasance or other
retirement of a Person's Stock or any other payment or distribution made in
respect thereof, either directly or indirectly, or (c) any payment, loan,
contribution, or other transfer of funds or other property to any stockholder of
such Person, except salary and cash bonuses paid to such Person.

          "Retiree Welfare Plan" shall refer to any Welfare Plan providing for
continuing coverage or benefits for any participant or any beneficiary of a
participant after such participant's termination of employment, other than
continuation coverage provided pursuant to Section 4980B of the IRC and at the
sole expense of the participant or the beneficiary of the participant.

          "Schedule of Documents" shall mean the schedule, including all
appendices, exhibits or schedules thereto, listing certain documents and
information to be delivered in connection with this Agreement, the other Loan
Documents and the transactions contemplated thereunder, substantially in the
form attached hereto as Schedule B.

          "Security Agreements" shall mean the Amended and Restated Security
Agreement dated as of December 29, 1997 entered into among Lender and Borrowers
substantially in the form of Exhibit C, and that certain Intellectual Property
Security Agreement dated even date herewith entered into between Lender and
Akorn, including all amendments, restatements, modifications and supplements
thereto, as the same may be in effect at the time such reference becomes
operative.

          "Solvent" shall mean, with respect to any Person, that (a) the fair
salable value of its assets exceeds the fair present value of its liabilities
(including all liabilities whether reflected on a balance sheet prepared in
accordance with GAAP or otherwise and whether direct, indirect, fixed,
contingent, disputed or undisputed); (b) such Person is able to pay its debts
when due; and (c) such Person has capital sufficient to carry on its current
business and all businesses in which it is about to engage.

          "Stated Amount" of each Letter of Credit means the "Stated Amount" as
defined therein.

          "Stated Expiry Date" shall have the meaning assigned to it in Section
2.2.






                                      -14-

<PAGE>   20

          "Stock" shall mean all shares, options, warrants, general or limited
partnership interests or other equivalents (regardless of how designated) of or
in a corporation, partnership or equivalent entity whether voting or nonvoting,
including common stock, preferred stock or any other "equity security" (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended).

          "Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than fifty percent (50%) of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors of such corporation (irrespective of whether, at the time, Stock of
any other class or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or beneficially by such Person and/or one or more
Subsidiaries of such Person, or with respect to which any such Person has the
right to vote or designate the vote of fifty percent (50%) or more of such Stock
whether by proxy agreement, operation of law or otherwise and (b) any
partnership in which such Person and/or one or more Subsidiaries of such Person
shall have an interest (whether in the form of voting or participation in
profits or capital contribution) of more than fifty percent (50%) or of which
any such Person is a general partner or may exercise the powers of a general
partner.

          "Taxes" shall mean taxes, levies, imposts, deductions, Charges or
withholdings, and all liabilities with respect thereto, excluding taxes imposed
on or measured by the net income of Lender by the jurisdictions under the laws
of which Lender is organized or any political subdivision thereof.

          "Termination Date" shall mean the earliest of (a) December 29, 2000,
(b) the date of termination of Lender's obligations to advance funds or permit
existing Advances to remain outstanding pursuant to Section 8.2, and (c) the
date of indefeasible prepayment in full by Borrowers of the Loans, and the
permanent reduction of the Commitment to zero dollars ($0) in accordance with
the provisions of Section 2.3.

          "Title IV Plan" shall mean a Pension Plan, other than a Multiemployer
Plan, which is covered by Title IV of ERISA.

          "Unfunded Pension Liability" shall mean, at any time, the aggregate
amount, if any, of the sum of (a) the amount by which the present value of all
accrued benefits under each Title IV Plan exceeds the fair market value of all
assets of such Title IV Plan allocable to such benefits in accordance with Title
IV of ERISA, all determined as of the most recent valuation date for each such
Title IV Plan using the actuarial assumptions in effect under such Title IV
Plan, and (b) for a period of five (5) years following a transaction reasonably
likely to be covered by Section 4069 of ERISA, the liabilities (whether or not
accrued) that could be avoided by any Borrower, any Subsidiary thereof or any
ERISA Affiliate as a result of such transaction.






                                      -15-

<PAGE>   21

          "Welfare Plans" shall mean any welfare plan, as defined in Section
3(1) of ERISA, which is maintained or contributed to by any Borrower, any
Subsidiary thereof or any ERISA Affiliate.

          "Withdrawal Liability" shall mean, at any time, the aggregate amount
of the liabilities, if any, pursuant to Section 4201 of ERISA, and any increase
in contributions pursuant to Section 4243 of ERISA with respect to all
Multiemployer Plans.

     1.2. Other Definitional Provisions. Unless otherwise defined or the context
otherwise requires, all financial and accounting terms used herein or in any
certificate or other document made or delivered pursuant hereto shall be defined
in accordance with GAAP. Unless otherwise defined therein, all terms defined in
this Agreement shall have the defined meanings when used in the Note or in any
certificate or other document made or delivered pursuant hereto. Terms used in
this Agreement which are defined in any Exhibit hereto shall, unless the context
otherwise indicates, have the meanings given them in such Exhibit. Other terms
used in this Agreement shall, unless the context indicates otherwise, have the
meanings provided for by the UCC to the extent the same are used or defined
therein.

     1.3. Interpretation of Agreement. A Section, an Exhibit or a Schedule is,
unless otherwise stated, a reference to a section hereof, an exhibit hereto or a
schedule hereto, as the case may be. Section captions used in this Agreement are
for convenience only, and shall not affect the construction of this Agreement.
The words "hereof," "herein," "hereto" and "hereunder" and words of similar
purport when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.

2.   AMOUNT AND TERMS OF CREDIT.

     2.1. Advances. (a) Subject to the terms and conditions of this Agreement,
the Lender agrees to make advances (the "Advance(s)") to the Borrowers, from
time to time from the date of this Agreement until the Termination Date, at such
times and in such amounts as the Borrowers may request, not to exceed in the
aggregate at any one time outstanding the difference of (i) the Commitment,
minus (ii) the Letter of Credit Obligations. Until all amounts outstanding in
respect of the Loans shall become due and payable on the Termination Date,
Borrowers may from time to time borrow, repay and reborrow under this Section
2.1(a). Each Advance to a Borrower shall be made on notice by such Borrower to
the Lender at its principal banking office at 50 South LaSalle Street, Chicago,
Illinois 60675, given no later than 11:00 a.m. (Chicago time) on (ix) the
Business Day of the proposed Advance, or (x) in the case of a request for an
Advance that is a LIBOR Loan, two (2) Business Days prior to the date of the
proposed Advance; provided, however, that any Advance requested as a LIBOR Loan
shall be in a minimum amount of $250,000 and integral multiples of $50,000 in
excess of such amount. Each such notice (a "Notice of Advance") shall be
substantially in the form of Exhibit A hereto, specifying therein the requested
date, the amount and type of such Advance, and such other information as may be
required by Lender and shall be given in writing (by telecopy or overnight
courier) or by telephone confirmed immediately in writing if requested by the
Lender. Lender







                                      -16-


<PAGE>   22

shall be entitled to rely upon, and shall be fully protected under this
Agreement in relying upon, any Notice of Advance believed by Lender to be
genuine and to assume that each Person executing and delivering the same was
duly authorized unless the responsible individual acting thereon for Lender
shall have, at the time of reliance thereon, actual knowledge to the contrary.

          (b) Prior Obligations Restructuring. On the date that all of the
     conditions precedent to the effectiveness of this Agreement have been
     satisfied (herein, the "Restructuring Date"), and at the time on such date
     that the restructuring contemplated by this Agreement occurs (herein, the
     "Restructuring Time"), (i) the outstanding principal balance of the Prior
     Loans at the Restructuring Time shall be restated and continue as Loans
     under this Agreement, (ii) the security interests and liens granted by, and
     guaranties given by, the Borrowers to the Lender under the Original Loan
     Agreement and the documents delivered in connection therewith shall
     continue in full force and effect under this Agreement and the Loan
     Documents, as applicable, and (iii) any Prior Reimbursement Obligations
     outstanding at the Restructuring Time shall be restated and continue as
     Letter of Credit Obligations under this Agreement. None of the Prior
     Obligations shall be deemed to have been repaid as a result of the
     restructuring described in this Section 2.1(b).

          (c) Note. Borrowers shall execute and deliver to the Lender a note to
     evidence the Loans, such note to be in the principal amount of the
     Commitment, dated the date hereof and substantially in the form of Exhibit
     B hereto (the "Note"). The Note shall represent the joint and several
     obligation of each Borrower to pay the amount of the Commitment or, if
     less, the aggregate unpaid principal amount of all Advances made by the
     Lender to Borrowers and all other Obligations with interest thereon as
     prescribed in Section 2.5. The date and amount of each Advance and each
     payment of principal with respect thereto shall be recorded on the books
     and records of the Lender, which books and records shall constitute prima
     facie evidence of the accuracy of the information therein recorded. The
     entire unpaid balance of the Loans shall be immediately due and payable on
     the Termination Date.

          (d) Akorn. Each Borrower hereby designates Akorn as its sole agent for
     the purposes of issuing Notices of Advances, requesting an issuance of a
     Letter of Credit, selecting interest rate options and receiving notices and
     consents hereunder.

     2.2. Letters of Credit.

          (a) Requests. By delivering to Lender an Issuance Request
     substantially in the form of Schedule A hereto, on or before 3:00 p.m.,
     Chicago time, Borrowers may request, from time to time prior to the
     Termination Date and on not less than two Business Days' notice, that the
     Lender issue a standby letter of credit, and for such purposes described in
     the Issuance Request (as used herein, the term "issue" when referring to
     Letters of Credit shall include any increase in the amount of or extension
     of the term of any Letter of Credit). The Stated Amount of any Letter of
     Credit requested to 





                                      -17-

<PAGE>   23
     be issued pursuant to such Issuance Request shall be denominated in U.S.
     dollars. Each Letter of Credit shall by its terms:

          (i) be issued in a Stated Amount which, together with all Letter of
     Credit Obligations and the Loans, in the aggregate does not exceed (or
     would not exceed) the Commitment;

          (ii) be stated to expire on a date (its "Stated Expiry Date") no later
     than the Termination Date; and

          (iii) on or prior to its Stated Expiry Date:

               (A) terminate immediately upon notice to the Lender from the
          beneficiary thereunder that all obligations covered thereby have been
          terminated, paid, or otherwise satisfied in full, or

               (B)  reduce in part immediately and to the extent the beneficiary
          thereunder has notified the Lender thereof that the obligations
          covered thereby have been paid or otherwise satisfied in part.

By delivery to the Lender of an Issuance Request at least two Business Days
prior to the Stated Expiry Date of any Letter of Credit, Borrowers may request
the Lender to extend the Stated Expiry Date of such Letter of Credit for an
additional period not to exceed the period ending on the Termination Date.

          (b) Issuances and Extensions. Subject to the terms and conditions of
     this Agreement, the Lender shall issue Letters of Credit, and extend the
     Stated Expiry Dates of outstanding Letters of Credit, in accordance with
     the Issuance Requests made therefor. If the Issuance Request consists of,
     or is supplemented by, the Lender's standard letter of credit application
     form, the terms of such application shall apply with respect to such Letter
     of Credit, but only to the extent such terms are not inconsistent with the
     provisions hereof.

          (c) Fees and Expenses. Borrowers agree to pay to the Lender (i) in
     respect of each standby Letter of Credit, a fee equal to 1.00% per annum
     (calculated from and including the date of issuance (or date of renewal or
     extension, if any) thereto to the Stated Expiry Date thereof) on the Stated
     Amount of each such Letter of Credit, payable in advance on the last
     Business Day of each Fiscal Quarter and on the Termination Date, and (ii)
     upon demand from time to time, Lender's standard issuance, administrative,
     operating and other fees and charges in effect from time to time in
     connection with the fronting, issuance, maintenance, modification (if any)
     and administration of each Letter of Credit.

          (d) Disbursements. The Lender will notify Akorn promptly of the
     presentment for payment of any Letter of Credit, together with notice of
     the date (the





                                      -18-

<PAGE>   24

     "Disbursement Date") such payment shall be made. Subject to the terms and
     provisions of such Letter of Credit, the Lender shall make such payment to
     the beneficiary (or its designee) of such Letter of Credit. Prior to 12:00
     noon, Chicago time, on the Disbursement Date, Borrower will reimburse the
     Lender for all amounts which it has disbursed under such Letter of Credit.
     To the extent the Lender is not reimbursed in full in accordance with this
     subsection, Borrower's Reimbursement Obligation shall accrue interest at a
     fluctuating rate determined by reference to the Prime Rate, plus a margin
     of two percent (2%) per annum, payable on demand. In the event the Lender
     is not reimbursed by Borrower on the Disbursement Date, or if the Lender
     must for any reason return or disgorge such reimbursement, the Lender shall
     fund the Reimbursement Obligation therefor by making Loans as provided in
     Section 2.1 (Borrowers being deemed to have given a timely request therefor
     for such amount); provided, however, for the purpose of determining the
     availability of the Advances immediately prior to giving effect to the
     application of the proceeds of such Loans, such Reimbursement Obligations
     shall be deemed not to be outstanding at such time.

          (e) Reimbursement. Borrowers' obligation (a "Reimbursement 
     Obligation") under subsection (d) of this Section 2.2 to reimburse the
     Lender with respect to each Disbursement (as defined below) (including
     interest thereon) shall be absolute and unconditional under any and all
     circumstances and irrespective of any set-off, counterclaim, or defense to
     payment which Borrowers may have or have had against the Lender or any
     beneficiary of a Letter of Credit, including any defense based upon the
     occurrence of any Event of Default or Default, any draft, demand, or
     certificate, or other document presented under a Letter of Credit proving
     to be forged, fraudulent, invalid, or insufficient, the failure of any
     Disbursement to conform to the terms of the applicable Letter of Credit
     (if, in the Lender's good faith opinion, such Disbursement is determined to
     be appropriate) or any non-application or misapplication by the beneficiary
     of the proceeds of such Disbursement, or the legality, validity, form,
     regularity, or enforceability of such Letter of Credit. "Disbursement"
     means any payment made under a Letter of Credit by the Lender to the
     beneficiary thereunder.

          (f) Deemed Disbursements. Upon the occurrence and during the
     continuation of any Event of Default, an amount equal to that portion of
     Letter of Credit Obligations attributable to outstanding and undrawn
     Letters of Credit shall, at the option of the Lender, and without demand
     upon or notice to Akorn, be deemed to have been paid or disbursed by the
     Lender under such Letters of Credit (notwithstanding that such amount may
     not in fact have been so paid or disbursed), and, upon notification by the
     Lender to Akorn of its obligations under this subsection, Borrowers shall
     be immediately obligated to reimburse the Lender the amount deemed to have
     been so paid or disbursed by the Lender. Any amounts so received by the
     Lender from Borrowers pursuant to this subsection shall be held as
     collateral security for the repayment of Borrowers' Obligations in
     connection with the Letters of Credit. At any time when such Letters of
     Credit shall terminate and all Reimbursement Obligations to the Lender are
     either terminated or paid or reimbursed to the Lender in full, the
     obligations of Borrowers under









                                      -19-

<PAGE>   25

     this subsection shall be reduced accordingly (subject, however, to
     reinstatement in the event any payment in respect of such Letters of Credit
     is recovered in any manner from any Lender), and if no Event of Default
     shall be continuing, the Lender will return to Borrowers the excess, if
     any, of

          (i) the aggregate amount deposited by Borrowers with the Lender and
     not theretofore applied by the Lender to any Reimbursement Obligation; over

          (ii) the aggregate amount of all Reimbursement Obligations to the
     Lender pursuant to this subsection, as so adjusted.

At such time when all Events of Default shall have been cured or waived, the
Lender shall return to Borrower all amounts then on deposit with the Lender
pursuant to this subsection. All amounts on deposit pursuant to this subsection
shall, until their application to any Reimbursement Obligation or their return
to Borrowers, as the case may be, bear interest at the daily average Federal
Funds Rate (without taking into account the Applicable Percentage) from time to
time in effect (net of the costs of any reserve requirements, in respect of
amounts on deposit pursuant to this Section, pursuant to Federal Reserve Board
Regulation D), which interest shall be held by the Lender as additional
collateral security for the repayment of the Letter of Credit Obligations in
connection with the Letters of Credit issued by the Lender.

          (g) Nature of Reimbursement Obligations. Borrowers shall assume all
     risks of the acts, omissions, or misuse of any Letter of Credit by the
     beneficiary thereof. The Lender (except to the extent of its own gross
     negligence or willful misconduct) shall not be responsible for:

          (i) the form, validity, sufficiency, accuracy, genuineness, or legal
     effect of any Letter of Credit or any document submitted by any party in
     connection with the application for an issuance of a Letter of Credit, even
     if it should in fact prove to be in any or all respects invalid,
     insufficient, inaccurate, fraudulent, or forged;

          (ii) the form, validity, sufficiency, accuracy, genuineness, or legal
     effect of any instrument transferring or assigning or purporting to
     transfer or assign a Letter of Credit or the rights or benefits thereunder
     or proceeds thereof in whole or in part, which may prove to be invalid or
     ineffective for any reason;

          (iii) failure of the beneficiary to comply fully with conditions
     required in order to demand payment under a Letter of Credit;

          (iv) errors, omissions, interruptions, or delays in transmission or
     delivery of any messages, by mail, cable, telegraph, telex or otherwise; or







                                      -20-

<PAGE>   26

          (v) any loss or delay in the transmission or otherwise of any document
     or draft required in order to make a Disbursement under a Letter of Credit
     or of the proceeds thereof.

None of the foregoing shall affect, impair, or prevent the vesting of any of the
rights or powers granted the Lender hereunder.

     2.3. Prepayment, Commitment Reduction. Borrowers shall have the right at
any time on three (3) days' prior written notice to the Lender to voluntarily
prepay all or part of the Loans and permanently reduce or terminate the
Commitment, and no prepayment fee, premium or penalty shall be payable in
connection with any such voluntary prepayment, except LIBOR funding breakage
costs in accordance with Section 2.10(b). Upon any such prepayment and permanent
reduction or termination of the Commitment, Borrowers' right to receive Advances
shall simultaneously terminate or be permanently reduced, as the case may be.

     2.4. Use of Proceeds. Borrowers shall utilize the proceeds of Advances for
working capital financing for the Borrowers and funding for acquisitions and
other general corporate purposes of the Borrowers.

     2.5. Interest on Loans.

          (a) Borrowers shall pay interest to Lender, in arrears on each
     applicable Interest Payment Date, based on the amounts outstanding from
     time to time under the Loan, at a rate equal to (i) the Prime Rate, (ii)
     the applicable LIBOR Rate or (iii) the Federal Funds Rate.

          (b) If any payment on the Loans becomes due and payable on a day other
     than a Business Day, the maturity thereof shall be extended to the next
     succeeding Business Day (except as set forth in the definition of LIBOR
     Period) and, with respect to payments of principal, interest thereon shall
     be payable at the then applicable rate during such extension.

          (c) All computations of interest shall be made by the Lender on the
     basis of a three hundred sixty (360) day year, in each case for the actual
     number of days occurring in the period for which such interest is payable.
     The Prime Rate and the Federal Funds Rate shall be determined each day
     based upon the Prime Rate and the Federal Funds Rate, respectively, as in
     effect each day. Each determination by the Lender of an interest rate
     hereunder shall be conclusive and binding for all purposes, absent manifest
     error or bad faith.

          (d) So long as any Event of Default shall have occurred and be
     continuing, and after written notice from the Lender to Akorn, the interest
     rates applicable to the Loans and any other Obligations shall be increased
     by two percent (2%) per annum above the rate of interest otherwise
     applicable hereunder ("Default Rate").






                                      -21-

<PAGE>   27

          (e) Notwithstanding anything to the contrary set forth in this Section
     2.5, if, at any time until payment in full of all of the Obligations, the
     rate of interest payable hereunder exceeds the highest rate of interest
     permissible under any law which a court of competent jurisdiction shall, in
     a final determination, deem applicable hereto (the "Maximum Lawful Rate"),
     then in such event and so long as the Maximum Lawful Rate would be so
     exceeded, the rate of interest payable hereunder shall be equal to the
     Maximum Lawful Rate; provided, however, that if at any time thereafter the
     rate of interest payable hereunder is less than the Maximum Lawful Rate,
     Borrowers shall continue to pay interest hereunder at the Maximum Lawful
     Rate until such time as the total interest received by Lender from the
     making of such Advances hereunder is equal to the total interest which
     would have been received had the interest rate payable hereunder been (but
     for the operation of this paragraph) the interest rate payable since the
     Closing Date as otherwise provided in this Agreement. Thereafter, the
     interest rate payable hereunder shall be the rate of interest provided in
     Sections 2.5(a) through (d) of this Agreement, unless and until the rate of
     interest again exceeds the Maximum Lawful Rate, in which event this
     paragraph shall again apply. In no event shall the total interest received
     by Lender pursuant to the terms hereof exceed the amount which Lender could
     lawfully have received had the interest due hereunder been calculated for
     the full term hereof at the Maximum Lawful Rate. In the event the Maximum
     Lawful Rate is calculated pursuant to this paragraph, such interest shall
     be calculated at a daily rate equal to the Maximum Lawful Rate divided by
     the number of days in the year in which such calculation is made. In the
     event that a court of competent jurisdiction, notwithstanding the
     provisions of this Section 2.5(e), shall make a final determination that
     Lender has received interest hereunder or under any of the other Loan
     Documents in excess of the Maximum Lawful Rate, Lender shall, to the extent
     permitted by applicable law, promptly apply such excess first to any
     interest due and not yet paid hereunder in respect of the Loans, then to
     the outstanding principal of the Loans, then to Fees and any other unpaid
     Obligations and thereafter shall refund any excess to Borrowers or as a
     court of competent jurisdiction may otherwise order.

     2.6. Fees. As compensation for Lender's costs and risks in making the Loan
available to Borrowers, Borrowers agree to pay to Lender, in arrears, on the
last Business Day of each month prior to the Termination Date and on the
Termination Date, a fee for Borrowers' non-use of available funds (the "Non-Use
Fee") in an amount equal to one quarter of one percent (0.25%) per annum
(calculated on the basis of a 360 day year for actual days elapsed) of the
difference between the respective daily averages of (a) the Commitment (as it
may be adjusted from time to time hereunder) and (b) the sum of (i) the amount
of the Loan outstanding, plus (ii) the Letter of Credit Obligations during the
period for which the Non-Use Fee is due.

     2.7. Charging of Accounts. The Borrowers hereby authorize the Lender, and
the Lender may, in its sole and absolute discretion charge to the Borrowers at
any time all or any portion of any of the Obligations then due and owing (and
interest, if any, thereon) including but not limited to any Fees and other costs
and expenses of the Lender for which the Borrowers are liable pursuant to the
terms of this Agreement or any other Loan Document, by charging Akorn's








                                      -22-

<PAGE>   28

demand deposit account or any other bank account with the Lender; provided,
however that the provisions of this Section 2.7 shall not affect the Borrowers'
obligation to pay when due all amounts payable by the Borrowers under this
Agreement, the Note or any other Loan Document, whether or not there are
sufficient funds therefor in the demand deposit account or any other bank
account of Akorn with the Lender.

     2.8. Application and Allocation of Payments. Lender is authorized to, and
at its option may, make or cause to be made Advances on behalf of Borrowers for
payment of all Fees, expenses, Charges, costs, principal, interest, or other
Obligations owing by Borrower under this Agreement or any of the other Loan
Documents if and to the extent any such Borrower fails to promptly pay any such
amounts as and when due, even if such Advance would cause total Advances to
exceed the Commitment. At Lender's option and to the extent permitted by law,
any advances so made shall be deemed Advances constituting part of the Loans
hereunder. Following the occurrence and during the continuance of an Event of
Default, Borrowers hereby irrevocably waive the right to direct the application
of any and all payments at any time or times hereafter received from or on
behalf of any such Borrower, and each Borrower hereby irrevocably agrees that
Lender shall have the continuing exclusive right to apply any and all such
payments against the then due and payable Obligations of Borrowers and in
repayment of the Loan as Lender may deem advisable notwithstanding any previous
entry by Lender upon the Loan Account or any other books and records. In the
absence of a specific determination by Lender with respect thereto, the same
shall be applied in the following order: (a) to then due and payable interest
payments on the Loans; (b) to principal payments on the Loans; (c) to then due
and payable Fees and expenses; (d) to then due and payable Obligations other
than Fees, expenses and interest and principal payments; and (e) to all other
then due and payable Obligations.

     2.9. Loan Account and Accounting. Lender shall maintain a loan account (the
"Loan Account") on its books to record: (a) all Advances, (b) all payments made
by Borrowers and (c) all other appropriate debits and credits as provided in
this Agreement with respect to the Loans or any other Obligations. All entries
in the Loan Account shall be made in accordance with Lender's customary
accounting practices as in effect from time to time. Borrowers shall pay all
Obligations as such amounts become due or are declared due pursuant to the terms
of this Agreement.

          The balance in the Loan Account shall be presumptive evidence of the
amounts due and owing to Lender by Borrower; provided, that any failure to so
record or any error in so recording shall not limit or otherwise affect
Borrowers' obligations to pay the Obligations. Any accounting provided by Lender
to Akorn regarding the Loan Account shall (absent manifest error) be deemed
final, binding and conclusive upon Borrowers in all respects as to all matters
reflected therein, unless Akorn, within thirty (30) days after the date any such
accounting is rendered, shall notify Lender in writing of any objection which
Borrowers may have to any such accounting, describing the basis for such
objection with specificity. In that event, only those items expressly objected
to in such notice shall be deemed to be disputed by Borrowers. 







                                      -23-


<PAGE>   29

Lender's determination, based upon the facts available, of any item objected to
by Akorn in such notice shall (absent manifest error) be final, binding and
conclusive on Borrowers.

     2.10. Indemnity. (a) Each Borrower shall indemnify and hold each of Lender
and its Affiliates, and each of Lender's and its Affiliates' respective
officers, directors, employees, attorneys, agents and representatives (each an
"Indemnified Person") harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses (including
attorneys' fees and disbursements and other costs of investigation or defense,
including those incurred upon any appeal) which may be instituted or asserted
against or incurred by any such Indemnified Person as the result of credit
having been extended under this Agreement and the other Loan Documents or in
connection with or arising out of the transactions contemplated hereunder and
thereunder or any actions or failures to act in connection therewith, including
any and all Environmental Liabilities and Costs; provided, that no Borrower
shall be liable for any indemnification to such Indemnified Person to the extent
that any such suit, action, proceeding, claim, damage, loss, liability or
expense results solely from such Indemnified Person's gross negligence or
willful misconduct, as finally determined by a court of competent jurisdiction
after exhaustion of all available appeals. NEITHER LENDER NOR ANY OTHER
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY HERETO, ANY
SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE,
EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT
HAVING BEEN EXTENDED OR TERMINATED UNDER THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.

          (b) Borrowers understand that in connection with Lender's arranging to
     provide the LIBOR Rate interest option, Lender may enter into funding
     arrangements with third parties ("Funding Arrangements") on terms and
     conditions which could result in losses to Lender if such LIBOR Rate funds
     do not remain outstanding at the interest rates provided herein for the
     entire LIBOR Period with respect to which the LIBOR Rate has been fixed.
     Consequently, in order to induce Lender to provide such options on the
     terms provided herein and in consideration of Lender entering into such
     Funding Arrangements from time to time, if any LIBOR Loans are repaid in
     whole or in part prior to the last day of any such LIBOR Period therefor,
     whether such repayment is made pursuant to any provision of this Agreement
     or any other Loan Document or is the result of acceleration, by operation
     of law or otherwise, Borrowers shall indemnify and hold harmless Lender
     from and against and in respect of any and all losses, costs and expenses
     resulting from, or arising out of or imposed upon or incurred by Lender by
     reason of the liquidation or reemployment of funds acquired or committed to
     be acquired by Lender to fund such LIBOR Loans, pursuant to the Funding
     Arrangements. The amount of any losses, costs or expenses resulting in an
     obligation of Borrowers to make a payment pursuant to the foregoing
     sentence shall not include any losses attributable to lost profit to Lender
     but shall represent the excess, if any, of (A) Lender's cost of borrowing
     the LIBOR Rate funds, pursuant to the Funding Arrangements over (B) the
     return to Lender






                                      -24-

<PAGE>   30

     on its reinvestment of such funds; provided, however, that if Lender
     terminates any Funding Arrangements in respect of the LIBOR Loans, the
     amount of such losses, costs and expenses shall include the cost to Lender
     of such termination. In reinvesting any funds borrowed by Lender pursuant
     to the Funding Arrangements, Lender shall take into consideration the
     remaining maturity of such borrowings. As promptly as practicable under the
     circumstances, Lender shall provide Akorn with its written calculation of
     all amounts payable pursuant to the next preceding sentence, and such
     calculation shall be binding on the parties hereto unless Akorn shall
     object thereto in writing within ten (10) Business Days of receipt thereof.

     2.11. Access. (a) Each Borrower shall provide full access during normal
business hours, from time to time upon one (1) Business Day's prior notice, to
Lender and any of its officers, employees and agents, as frequently as Lender
determines, in its reasonable discretion, to be appropriate (unless a Default or
Event of Default shall have occurred and be continuing, in which event Lender
and its officers, employees, designees, agents and representatives shall have
access at any and all times and without any advance notice), to the properties,
facilities, books, and records of Borrowers and their Subsidiaries, to the
Collateral, to the accountants of Borrowers and the Subsidiaries thereof and to
the work papers of such accountants, and in addition, (b) while any Default or
Event of Default shall have occurred and be continuing, (i) at any time for
purposes of inspection, audit or verification of accounts, or (ii) upon the
consent of Akorn, to such Borrower's suppliers, customers, advisors and
employees (including officers). Without limiting the generality of the
foregoing, each Borrower shall (x) permit Lender, and any of its officers,
employees, agents and representatives, to inspect, audit and make extracts from
all of such Borrower's and its Subsidiaries' records, files and books of account
and (y) permit Lender, and any of its officers, employees, agents and
representatives, to inspect, review and evaluate the accounts at such Borrower's
and its Subsidiaries, locations and at premises not owned by or leased to such
Borrower or any Subsidiary of such Borrower. Each Borrower shall make available
to Lender and its counsel, as quickly as is possible under the circumstances,
originals or copies of all books, records, board minutes, contracts, insurance
policies, environmental audits, business plans, files, financial statements
(actual and pro forma), filings with federal, state and local regulatory
agencies, and other instruments and documents which Lender may request. Each
Borrower shall deliver any document or instrument necessary for Lender, as it
may from time to time request, to obtain records from any service bureau or
other Person which maintains records for such Borrower, and shall maintain
duplicate records or supporting documentation on media, including computer tapes
and discs owned by such Borrower. Borrowers shall instruct their certified
public accountants to make available to Lender such information and records as
Lender may request.

          (b) A fee of $500 per day per individual or Lender's then standard
     rate, whichever is greater, (plus all reasonable out-of-pocket costs and
     expenses) in connection with Lender's field examinations permitted under
     Section 2.11(a) above and Section 5(g) of the Amended and Restated Security
     Agreement referred to in the definition of 





                                      -25-

<PAGE>   31

     "Security Agreements" shall be paid promptly by Borrowers in connection
     with each field audit conducted after the Closing Date.

     2.12. Taxes. (a) Any and all payments by any Borrower hereunder or under
the Note shall be made, in accordance with this Section 2.12, free and clear of
and without deduction for any and all present or future Taxes. If any Borrower
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder or under the Note, (a) the sum payable shall be increased as
much as shall be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.12) Lender shall receive an amount equal to the sum Lender would have received
had no such deductions been made, (b) such Borrower shall make such deductions,
and (c) such Borrower shall pay the full amount deducted to the relevant taxing
or other authority in accordance with applicable law.

          (b) Borrowers shall indemnify and pay, within ten (10) days of demand
therefor, Lender for the full amount of Taxes (including any Taxes imposed by
any jurisdiction on amounts payable under this Section 2.12) paid by Lender and
any liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes were correctly or legally
asserted.

     2.13. Capital Adequacy; Increased Costs; Illegality. (a) In the event that
Lender shall have determined that the adoption after the date hereof of any law,
treaty, governmental (or quasi-governmental) rule, regulation, guideline or
order regarding capital adequacy, reserve requirements or similar requirements
or compliance by Lender with any request or directive regarding capital
adequacy, reserve requirements or similar requirements (whether or not having
the force of law and whether or not failure to comply therewith would be
unlawful) from any central bank or governmental agency or body having
jurisdiction does or would have the effect of increasing the amount of capital,
reserves or other funds required to be maintained by Lender and thereby reducing
the rate of return on Lender's capital as a consequence of its obligations
hereunder, then Borrowers shall from time to time within fifteen (15) days after
notice and demand on Akorn by Lender (together with the certificate referred to
in the next sentence) pay to Lender additional amounts sufficient to compensate
Lender for such reduction. A certificate as to the amount of such cost and
showing the basis of the computation of such cost submitted by Lender to
Borrowers shall, absent manifest error, be final, conclusive and binding for all
purposes.

          (b) If, due to either (i) the introduction of or any change in or in
     the interpretation of any law or regulation or (ii) the compliance with any
     guideline or request from any central bank or other Governmental Authority
     (whether or not having the force of law), including, without limitation,
     any requirement that Lender hold reserves with respect to the Loan or the
     Commitment, there shall be any increase in the cost to Lender of agreeing
     to make or making, funding or maintaining of any Loan, then Borrowers shall
     from time to time, upon demand by Lender, pay to Lender for the account of
     Lender additional amounts sufficient to compensate Lender for such
     increased cost. A certificate as to the amount of such increased cost,
     submitted to Akorn by Lender, shall be 





                                      -26-

<PAGE>   32

     conclusive and binding on Borrowers for all purposes, absent manifest
     error. Lender agrees that, as promptly as practicable after it becomes
     aware of any circumstances referred to in clause (i) or (ii) above which
     would result in any such increased cost to Lender, it shall, to the extent
     not inconsistent with Lender's internal policies of general application,
     use reasonable commercial efforts to minimize costs and expenses incurred
     by it and payable to it by Borrowers pursuant to this Section 2.13(b).

          (c) Notwithstanding anything to the contrary contained herein, if the
     introduction of or any change in or in the interpretation of any law or
     regulation shall make it unlawful, or any central bank or other
     Governmental Authority shall assert that it is unlawful, for Lender to
     agree to make or to make or to continue to fund or maintain any LIBOR Loan,
     then, unless Lender is able to agree to make or to make or to continue to
     fund or to maintain such LIBOR Loan at another branch or office of Lender
     without, in Lender's opinion, adversely affecting it or its Loans or the
     income obtained therefrom, on notice thereof and demand therefor by Lender
     to Borrowers, (i) the obligation of Lender to agree to make or to make or
     to continue to fund or maintain LIBOR Loans shall terminate and (ii)
     Borrowers shall forthwith prepay in full all outstanding LIBOR Loans,
     together with interest accrued thereon, unless Borrowers, within five (5)
     Business Days after the delivery of such notice and demand, convert all
     such Loans into a Loan bearing interest based on the Prime Rate.

          (d) Upon Lender obtaining actual knowledge of the occurrence of any of
     the events set forth in this Section 2.13, Lender shall promptly notify
     Akorn of the occurrence of such event. Borrowers shall have the right
     within five (5) days of receipt of such notice to convert any outstanding
     LIBOR Loans to Prime Rate Loans.

     2.14. Conversion and Continuation Elections.

           (a) Borrowers may, upon irrevocable written notice (or telephonic
     notice promptly confirmed in writing) to Lender in accordance with Section
     2.14(b):

          (i) elect, as of any Business Day, in the case of Floating Rate Loans,
     or as of the last day of the applicable LIBOR Period, in the case of LIBOR
     Loans, to convert any such Loans (or any part thereof in an aggregate
     minimum amount of $50,000, or integral multiples of $10,000 in excess
     thereof, in the case of Floating Rate Loans, and $250,000, or integral
     multiples of $50,000 in excess thereof, in the case of LIBOR Loans) into
     Loans of any other type; or

          (ii) elect as of the last day of the applicable LIBOR Period, to
     continue any LIBOR Loans having LIBOR Periods expiring on such day (or any
     part thereof in an amount not less than $250,000, or that is in an integral
     multiple of $50,000 in excess thereof);

         provided, that if at any time the aggregate amount of LIBOR Loans in
         respect of any borrowing is reduced, by payment, prepayment, or
         conversion of part thereof to be less 





                                      -27-

<PAGE>   33

          than $250,000, such LIBOR Loans shall automatically convert into
          Floating Rate Loans, and on and after such date the right of Borrower
          to continue such LIBOR Loans as, and convert such LIBOR Loans into,
          LIBOR Loans shall terminate.

          (b) Borrower shall deliver a Notice of Conversion/Continuation to be
     received by Lender not later than 10:00 a.m. (Chicago time) at least (i)
     two Business Days in advance of the Conversion/ Continuation Date, if the
     Loans are to be converted into or continued as LIBOR Loans and (ii) on the
     date of the Conversion/Continuation Date, if the Loans are to be converted
     into Floating Rate Loans, specifying:

          (i) the proposed Conversion/Continuation Date;

          (ii) the aggregate amount of Loans to be converted or continued;

          (iii) the type of Loans resulting from the proposed conversion or
     continuation; and

          (iv) other than in the case of conversions into Floating Rate Loans,
     the duration of the requested LIBOR Period.

          (c) If upon the expiration of any LIBOR Period applicable to LIBOR
     Loans, Borrowers have failed to select a new LIBOR Period to be applicable
     to such LIBOR Loans by the time specified in Section 2.14(b), or if any
     Event of Default then exists, Borrowers shall be deemed to have elected to
     convert such LIBOR Loans into Federal Funds Rate Loans effective as of the
     expiration date of such LIBOR Period.

3.   CONDITIONS PRECEDENT.

     3.1. Conditions to the Initial Advance. Notwithstanding any other provision
of this Agreement and without affecting in any manner the rights of Lender
hereunder, Borrowers shall have no rights under this Agreement (but shall have
all applicable obligations hereunder), and Lender shall not be obligated to make
any Advance or to incur any Letter of Credit Obligation, or to take, fulfill, or
perform any other action hereunder, until the following conditions have been
satisfied, in Lender's sole discretion, or waived in writing by Lender:

          (a) Credit Agreement. This Agreement or counterparts hereof shall have
     been duly executed by, and delivered to, Borrowers and Lender.

          (b) Loan Documents. Lender shall have received such guaranties,
     documents, instruments, agreements and legal opinions as Lender shall
     request in connection with the transactions contemplated by this Agreement
     and the other Loan Documents, including all guaranties, documents,
     instruments, agreements and legal opinions listed in the Schedule of
     Documents attached hereto as Schedule B, each in form and substance
     satisfactory to Lender.





                                      -28-

<PAGE>   34

          (c) Governmental Approvals. Evidence satisfactory to Lender that
     Borrowers have obtained consents and acknowledgments of all Persons whose
     consents and acknowledgments may be required, including, but not limited
     to, all requisite Governmental Authorities, to the terms, and to the
     execution and delivery, of this Agreement, the other Loan Documents, and
     the consummation of the transactions contemplated hereby and thereby.

          (d) Insurance. Evidence satisfactory to Lender that the insurance
     policies provided for in Section 6.6 are in full force and effect, together
     with appropriate evidence showing loss payable and/or additional insured
     clauses or endorsements, as requested by Lender, in favor of Lender, and in
     form and substance satisfactory to Lender.

          (e) Officer's Certificate. Lender shall have received duly executed
     originals of a certificate of the chief executive officer or chief
     financial officer of Akorn, dated the date hereof, certifying, to the best
     of his knowledge after diligent inquiry, to the fulfillment of all
     conditions precedent to closing of this Agreement and to the truth and
     accuracy, as of such date, of the representations and warranties of
     Borrowers contained in this Agreement and each other Loan Document.

          (f) Compliance with Laws. Lender shall have received evidence
     satisfactory to Lender and its counsel that each Borrower and each of its
     Subsidiaries are in compliance in all material respects, with all
     applicable foreign, federal, state and local laws and regulations,
     including those relating to labor and environmental matters and ERISA.

          (g) Participant Consent. The Lender shall have received the written
     consent of its participant to this Agreement.

     3.2. Further Conditions. It shall be a further condition to the initial and
each subsequent Advance and to the incurrence of any Letter of Credit Obligation
that the following statements shall be true on the date of each such Advance or
funding, as the case may be:

          (i) All of each Borrower's representations and warranties contained
     herein or in any of the other Loan Documents shall be true and correct on
     and as of the Closing Date and the date on which each such Advance is made
     (or such Letter of Credit Obligation is incurred) as though made on and as
     of such date, except, to the extent that any such representation or
     warranty expressly relates to an earlier date and except for changes
     therein expressly permitted or expressly contemplated by this Agreement.

          (ii) No Material Adverse Effect shall have occurred since the date
     hereof.

          (iii) No event shall have occurred and be continuing, or would result
     from the making of any Advance (or the incurrence of any Letter of Credit
     Obligation), which constitutes or would constitute a Default or an Event of
     Default.





                                      -29-


<PAGE>   35

     The request and acceptance by any Borrower of the proceeds of any Advance
or the incurrence of any Letter of Credit Obligation shall be deemed to
constitute, as of the date of such request or acceptance, a representation and
warranty by Borrowers that the conditions in this Section 3.2 have been
satisfied.

4.   REPRESENTATIONS AND WARRANTIES.

     To induce Lender to make the Loans and to incur any Letter of Credit
Obligation, Borrowers make the following representations and warranties to
Lender, each and all of which shall survive the execution and delivery of this
Agreement:

     4.1. Corporate Existence; Compliance with Law. Each Borrower and each
Subsidiary thereof (a) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has been
duly qualified to conduct business and is in good standing in each other
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualifications; (b) has the requisite corporate power and
authority and the legal right to own, pledge, mortgage or otherwise encumber and
operate its properties, to lease the property it operates under lease and to
conduct its business as now, heretofore and proposed to be conducted; (c) has
all licenses, permits, consents or approvals from or by, and has made all
filings with, and has given all notices to, all Governmental Authorities,
including but not limited to, FDA and DEA, having jurisdiction, to the extent
required for such ownership, operation and conduct; (d) is in compliance with
its certificate or articles of incorporation and by-laws; and (e) is in
compliance with all applicable provisions of law, including but not limited to,
the Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other
United States federal statutes and regulations, issued by the FDA and DEA. On or
prior to the Closing Date, Taylor has merged into Akorn; Akorn is the surviving
corporation and has assumed all the rights and obligations of Taylor, including
any Prior Obligations. Akorn NJ is a wholly-owned Subsidiary of Akorn.

     4.2. Executive Offices. The current location of each Borrower's chief
executive office and principal place of business is set forth in Schedule 4.2
and, as of the Closing Date, none of such locations have changed within the past
three (3) months.

     4.3. Corporate Power Authorization, Enforceable Obligations. The execution,
delivery and performance by each Borrower of` the Loan Documents and all
instruments and documents to be delivered by such Person and the creation of all
Liens provided for therein: (a) are within such Person's corporate power; (b)
have been duly authorized by all necessary or proper corporate and shareholder
action; (c) are not in contravention of any provision of such Person's
certificate or articles or incorporation or bylaws; (d) will not violate any law
or regulation, or any order or decree of any court or governmental
instrumentality; (e) will not conflict with or result in the breach or
termination of, constitute a default under or accelerate any performance
required by, any indenture, mortgage, deed of trust, lease, agreement or other
instrument to which such Person is a party or by which such Person or any of its
property is bound; (f) will not result in the creation or imposition of any Lien
upon any of the property of such Person other than those in favor of Lender
pursuant to the Loan Documents; and (g) do not 





                                      -30-

<PAGE>   36
require the consent or approval of any Governmental Authority or any other
Person. On or prior to the Closing Date, each of the Loan Documents shall have
been duly executed and delivered for the benefit of or on behalf of each
Borrower and each Loan Document shall then constitute a legal, valid and binding
obligation of such Borrower, enforceable against it in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency or
other similar laws affecting the rights of creditors generally or by application
of general principles of equity.

     4.4. Financial Statements. All financial statements (the "Financial
Statements"), of the Borrowers and their respective Subsidiaries which have been
delivered to the Lender, have been prepared in accordance with GAAP consistently
applied throughout the periods involved (except as disclosed therein and except,
with respect to unaudited financial statements, for the absence of footnotes and
normal year-end audit adjustments) and do present fairly in all material
respects the financial condition of the corporations covered thereby as at the
dates thereof and the results of their operations for the periods then ended.

     4.5. Material Adverse Effect. Since September 30, 1998, none of the
Borrowers and no Subsidiary thereof has incurred any obligations, contingent
liabilities, or liabilities for Charges, long-term leases or unusual forward or
long-term commitments which are not reflected in the Financial Statements of
Borrowers and their Subsidiaries and which could, alone or in the aggregate,
have or result in a Material Adverse Effect. No Material Adverse Effect has
occurred between September 30, 1998 and the Closing Date.

     4.6. Title and Liens. All Collateral is and will continue to be owned by
the Borrowers. None of the Collateral or other property or assets of the
Borrowers or any Subsidiary is subject to any Lien (including but not limited to
Liens pursuant to Capitalized Leases under which any Borrower or any Subsidiary
is a lessee) except: (a) Liens in favor of the Lender and (b) Permitted
Encumbrances.

     4.7. Restrictions; No Default. No contract, lease, agreement or other
instrument to which any Borrower is a party or by which it or any of its
properties or assets is bound or affected, and no provision of applicable law or
governmental regulation, has or results in a Material Adverse Effect, or could
have or result in a Material Adverse Effect. None of the Borrowers and no
Subsidiary thereof is in default, and to such Borrower's or such Subsidiary's
knowledge no third party is in default, under or with respect to any material
contract, agreement, lease or other instrument to which it is a party.

     4.8. Labor Matters. No strikes or other labor disputes against any 
Borrower or any Subsidiary thereof are pending or, to any Borrower's knowledge, 
threatened. Hours worked by and payment made to employees of each Borrower and 
the Subsidiaries thereof have not been, to any Borrower's knowledge, in
violation of the Fair Labor Standards Act or any other applicable federal,
state, local or foreign law dealing with such matters. All payments due from
such Borrower or any Subsidiary thereof on account of employee health and
welfare insurance have been paid or accrued as a liability on the books of
Borrowers. Except as set forth in Schedule 4.8, there are no material
employment, consulting or management agreements covering any management employee
or Affiliate of any Borrower or any Subsidiary thereof. A true and 






                                      -31-

<PAGE>   37

complete copy of each such material agreement has been furnished to Lender.
Except as set forth in Schedule 4.8, none of the Borrowers and none of the
Subsidiaries thereof have any obligation under any collective bargaining
agreement, management agreement, consulting agreement or any employment
agreement. There is no organizing activity involving any Borrower or any
Subsidiary thereof pending or, to any Borrower's knowledge, threatened by any
labor union or group of employees. Except as set forth in Schedule 4.8, there
are no representation proceedings pending or, to any Borrower's knowledge,
threatened with the National Labor Relations Board, and no labor organization or
group of employees of any Borrower or any Subsidiary thereof has made a pending
demand for recognition. Except as set forth in Schedule 4.8, there are no
complaints or charges against any Borrower or any Subsidiary thereof pending or
threatened to be filed with any federal, state, local or foreign court,
governmental agency or arbitrator based on, arising out of, in connection with,
or otherwise relating to the employment or termination of employment by any
Borrower or any Subsidiary thereof of any individual.

     4.9. Ventures, Subsidiaries and Affiliates; Outstanding Stock. Except as
set forth in Schedule 4.9, none of the Borrowers (a) has any Subsidiaries, (b)
is engaged in any joint venture or partnership with any other Person and (c) is
an Affiliate of any other Person. Except as set forth in Schedule 4.9, there are
no outstanding rights to purchase, options, warrants or similar rights or
agreements pursuant to which any Borrower may be required to issue or sell any
Stock or other equity security of any Subsidiary.

     4.10. Government Regulation. None of the Borrowers and no Subsidiary
thereof is an "investment company" or an "affiliated person" of, or "promoter"
or "principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended. None of the Borrowers
and no Subsidiary thereof is subject to regulation under the Public Utility
Holding Company Act of 1935, the Federal Power Act, or any other federal or
state statute that restricts or limits its ability to incur Indebtedness or to
perform its obligations hereunder, and the making of the Advances by Lender, the
incurrence of any Letter of Credit Obligation, the application of the proceeds
and repayment thereof by such Borrower or such Subsidiary and the consummation
of the transactions contemplated by this Agreement and the other Loan Documents
will not violate any provision of any such statute or any rule, regulation or
order issued by the Securities and Exchange Commission.

     4.11. Margin Regulations. None of the Borrowers and no Subsidiary thereof
is engaged, nor will it engage, principally or as one of its important
activities, in the business of extending credit for the purpose of "purchasing"
or "carrying" any "Margin security" as such terms are defined in Regulation U of
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") as now and from time to time hereafter in effect (such securities being
referred to herein as "Margin Stock"). None of the Borrowers and no Subsidiary
thereof owns any Margin Stock, and the proceeds of the Advances will not be
used, directly or indirectly, for the purpose of purchasing or carrying any
Margin Stock, for the purpose of reducing or retiring any indebtedness which was
originally incurred to purchase or carry any Margin Stock or for any other
purpose which might cause any of the Loans or other extensions of credit under
this 







                                      -32-

<PAGE>   38

Agreement to be considered a "purpose credit" within the meaning of Regulation
T, U or X of the Federal Reserve Board.

     4.12. Taxes. All federal, state, local and foreign tax returns, reports and
statements, including, but not limited to, information returns required to be
filed by each Borrower or any Subsidiary thereof, have been filed with the
appropriate Governmental Authority and all Charges and other impositions shown
thereon to be due and payable have been paid prior to the date on which any
fine, penalty, interest or late charge may be added thereto for nonpayment
thereof (or any such fine, penalty, interest, late charge or loss has been
paid), and each Borrower and each Subsidiary thereof has paid when due and
payable all Charges required to be paid by it, except such Taxes, if any, as are
being contested in good faith and by appropriate proceedings and as to which
such reserves or other appropriate provisions as may be required by GAAP have
been maintained. Proper and accurate amounts have been withheld by each Borrower
or each Subsidiary thereof from its respective employees for all periods in full
and complete compliance with the tax, social security and unemployment
withholding provisions of applicable federal, state, local and foreign law and
such withholdings have been timely paid to the respective Governmental
Authorities.

     4.13. ERISA. (a) Schedule 4.13 lists all Plans maintained or contributed to
by any Borrower or any Subsidiary thereof and all Qualified Plans maintained or
contributed to by any ERISA Affiliate, and separately identifies the Title IV
Plans, Multiemployer Plans, any multiple employer plans subject to Section 4064
of ERISA, unfunded Pension Plans, Welfare Plans and Retiree Welfare Plans. Each
Qualified Plan has been determined by the IRS to qualify under Section 401 of
the IRC, and the trusts created thereunder have been determined to be exempt
from tax under the provisions of Section 501 of the IRC, and to the best
knowledge of each Borrower nothing has occurred which would cause the loss of
such qualification or tax-exempt status. To any Borrower's knowledge, each Plan
is in compliance with the applicable provisions of ERISA and the IRC, including
the filing of reports required under the IRC or ERISA, and with respect to each
Plan, other than a Qualified Plan, all required contributions and benefits have
been paid in accordance with the provisions of each such Plan. None of the
Borrowers and no Subsidiary or ERISA Affiliate thereof, with respect to any
Qualified Plan, has failed to make any contribution or pay any amount due as
required by Section 412 of the IRC or Section 302 of ERISA or the terms of any
such Plan. With respect to all Retiree Welfare Plans, the present value of
future anticipated expenses pursuant to the latest actuarial projections of
liabilities does not exceed $0; with respect to Pension Plans, other than
Qualified Plans, the present value of the liabilities for current participants
thereunder using PBGC interest assumptions does not exceed $0. None of the
Borrowers and no Subsidiary or ERISA Affiliate thereof has engaged in a
prohibited transaction, as defined in Section 4975 of the IRC or Section 406 of
ERISA, in connection with any Plan, which would subject any Borrower or any
Subsidiary thereof (after giving effect to any exemption) to a material tax on
prohibited transactions imposed by Section 4975 of the IRC or any other material
liability.

         (b) Except as set forth in Schedule 4.13: (i) no Title IV Plan has any
Unfunded Pension Liability; (ii) no ERISA Event or event described in Section
4062(e) of ERISA with 







                                      -33-

<PAGE>   39

respect to any Title IV Plan has occurred or is reasonably expected to occur;
(iii) there are no pending, or to the knowledge of any Borrower, threatened
claims, actions or lawsuits (other than claims for benefits in the normal
course) , asserted or instituted against (x) any Plan or its assets, (y) any
fiduciary with respect to any Plan or (z) any Borrower or any Subsidiary or
ERISA Affiliate thereof with respect to any Plan; (iv) none of the Borrowers and
no Subsidiary or ERISA Affiliate thereof has incurred or reasonably expects to
incur any withdrawal liability (and no event has occurred which, with the giving
of notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 of ERISA as a result of a complete or partial withdrawal from a
Multiemployer Plan; (v) within the last five years neither any Borrower nor any
Subsidiary or ERISA Affiliate thereof has engaged in a transaction which
resulted in a Title IV Plan with Unfunded Liabilities being transferred outside
of the "controlled group" (within the meaning of Section 4001(a)(14) of ERISA)
of any such entity; (vi) no Plan which is a Retiree Welfare Plan provides for
continuing benefits or coverage for any participant or any beneficiary of a
participant after such participant's termination of employment (except as may be
required by Section 4980B of the IRC and at the sole expense of the participant
or the beneficiary of the participant); (vii) each Borrower and each Subsidiary
and ERISA Affiliate thereof have complied with the notice and continuation
coverage requirements of Section 4980B of the IRC and the regulations thereunder
except where the failure to comply could not have or result in any Material
Adverse Effect; and (viii) no liability under any Plan has been funded, nor has
such obligation been satisfied, with the purchase of a contract from an
insurance company that is not rated AAA by the Standard & Poor's Corporation or
the equivalent by another nationally recognized rating agency.

     4.14. No Litigation. No action, claim or proceeding is now pending or, to
the knowledge of any Borrower, threatened against such Borrower or any
Subsidiary thereof, before any court, board, commission, agency or
instrumentality of any federal, state, local or foreign government or of any
agency or subdivision thereof, or before any arbitrator or panel of arbitrators,
(a) which challenges such Borrower's or such Subsidiary's right or power to
enter into or perform any of its Obligations under the Loan Documents, or the
validity or enforceability of any Loan Document or any action taken thereunder,
or (b) which, if determined adversely, would have or result in a Material
Adverse Effect, nor to the best knowledge of any Borrower does a state of facts
exist which is reasonably likely to give rise to such proceedings.

     4.15. Patents, Trademarks, Copyrights and Licenses. Except as otherwise set
forth in Schedule 4.15, each Borrower owns all material licenses, patents,
patent applications, copyrights, service marks, trademarks, trademark
applications, and trade names necessary to continue to conduct its business as
heretofore conducted by it or proposed to be conducted by it, each of which is
listed, together with Copyright Office or Patent and Trademark Office
application or registration numbers, where applicable, on Schedule 4.15.
Schedule 4.15 also lists all tradenames or other names under which any Borrower
conducts business. To the best of Borrower's knowledge, neither the conduct of
each Borrower's business nor the conduct of any of its Subsidiary's business
infringes upon any intellectual property right of any other Person.

     4.16. Full Disclosure. No information contained in this Agreement, any of 
the other Loan Documents, the projections, the Financial Statements, the 
collateral reports or any written 






                                      -34-


<PAGE>   40

statement furnished by or on behalf of any Borrowers or any Subsidiary thereof
pursuant to the terms of this Agreement, which has previously been delivered to
Lender, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. The Liens
granted to Lender pursuant to the Security Agreements will at the Closing Date
be fully perfected first priority Liens in and to the Collateral described
therein, subject only to Liens set forth in Schedule 7.7 and Permitted
Encumbrances.

     4.17. Hazardous Materials. Except as set forth in Schedule 4.17, (a) the
real estate (the "Real Estate") owned by the Borrowers and their Subsidiaries is
free of contamination from any Hazardous Material, or (b) to any Borrower's
knowledge, the Real Estate leased by the Borrowers or their Subsidiaries is free
of contamination from any Hazardous Material. In addition, Schedule 4.17
discloses all material environmental liabilities of any Borrower or any
Subsidiary thereof of which any Borrower has knowledge (x) related to
noncompliance with the Environmental Laws, or (y) associated with the Real
Estate. None of the Borrowers and no Subsidiary thereof has caused or suffered
to occur any Release with respect to any Hazardous Material at, under, above or
upon any real property which it owns or leases. None of the Borrowers and no
Subsidiary thereof is involved in operations which are likely to result in the
imposition of any Lien on its assets or any material liability on such Borrower
or Subsidiary thereof under any Environmental Law, and none of the Borrowers and
no Subsidiary thereof has permitted any tenant or occupant of such premises to
engage in any such activity. Borrowers have provided to Lender copies of all
existing environmental reports, reviews and audits and all written information
pertaining to actual or potential Environmental Liabilities and Costs, in each
case relating to any of the Borrowers or any of the Subsidiaries thereof.

     4.18. Insurance Policies. Schedule 4.18 lists all insurance of any nature
maintained for current occurrences by any Borrower or any Subsidiary thereof, as
well as a summary of the terms of such insurance.

     4.19. Deposit and Disbursement Accounts. Schedule 4.19 lists all banks and
other financial institutions at which any of the Borrowers or any Subsidiary
thereof maintains deposits and/or other accounts, including any disbursement
accounts, and such Schedule correctly identifies the name, address and telephone
number of each depository, the name in which the account is held, a description
of the purpose of the account, and the complete account number.

     4.20. Customer and Trade Relations. There exists no actual or threatened
termination or cancellation of, or any material adverse modification or change
in: (a) the business relationship of Borrowers with any customer or group of
customers which has resulted in or is reasonably likely to result in a Material
Adverse Effect; or (b) the business relationship of any Borrower or any
Subsidiary thereof with any supplier material to the operations of such Borrower
or such Subsidiary which has resulted in or is reasonably likely to result in a
Material Adverse Effect.

     4.21. Indebtedness. As of the Closing Date, except for the Loans and the
Letter of Credit Obligations, and as set forth in Schedule 7.3, none of the
Borrowers and no Subsidiary 




                                      -35-

<PAGE>   41

thereof has any Indebtedness or has granted any security interest to any Person
other than Lender.

5.   FINANCIAL STATEMENTS AND INFORMATION.

     5.1. Reports and Notices. Borrowers each hereby covenant and agree that
from and after the Closing Date and until the Termination Date, they shall
deliver to Lender Financial Statements and notices as follows:

          (a) Quarterly Reports of Borrowers. Within forty-five (45) days after
     the end of each Fiscal Quarter of Borrowers, a copy of an unaudited
     financial statement of Borrower prepared on a basis consistent with the
     audited financial statements of Borrowers previously furnished to Lender
     and, if requested by Lender, prepared on a consolidating and consolidated
     basis, signed by an authorized officer of Akorn and consisting of at least
     (i) a balance sheet as at the close of such quarter and (ii) a statement of
     earnings and cash flow for such quarter and for the period from the
     beginning of such fiscal year to the close of such quarter.

          (b) Audit Report of Borrowers. Within one hundred twenty (120) days
     after the end of each Fiscal Year of Borrowers, a copy of an annual audit
     report of Borrowers prepared in conformity with GAAP on a basis consistent
     with the audited financial statements of Borrowers and any Subsidiary
     referred to above and, if requested by Lender, prepared on a consolidating
     and consolidated basis, duly certified by independent certified public
     accountants of recognized standing satisfactory to Lender, accompanied by
     an opinion without significant qualification.

          (c) Certificates. Contemporaneously with the furnishing of a copy of
     each annual audit report and of each quarterly statement provided herein, a
     certificate dated the date of such annual audit report or such quarterly
     statement and signed by either the President, the Chief Financial Officer
     or the Treasurer of each Borrower, to the effect that no Default or Event
     of Default has occurred and is continuing, or, if there is any such event,
     describing it and the steps, if any, being taken to cure it, and containing
     a computation of, and showing compliance with, any financial ratio or
     restriction contained in the Agreement.

          (d) Notice of Default, Litigation and ERISA Matters. Immediately upon
     learning of the occurrence of any of the following, written notice
     describing the same and the steps being taken by Borrowers or any
     subsidiary affected in respect thereof: (i) the occurrence of a Default or
     an Event of Default; or (ii) the institution of, or any adverse
     determination in, any litigation, arbitration or governmental proceeding
     which is material to any Borrower; (iii) receipt of any notice or
     communication that the operations of the Borrowers or any Subsidiary are
     not in compliance in all material respects with







                                      -36-

<PAGE>   42

     requirements of any applicable Governmental Authority, including but not
     limited to, FDA and DEA, or (iv) the occurrence of any ERISA Event.

          (e) Other Information. Such other information, financial or otherwise,
     as Lender may from time to time request in its reasonable discretion.

          (f) Reports of Akorn (i) Within forty-five (45) days after the end of
     each fiscal quarter of Akorn, a copy of Form 10-Q as filed by or on behalf
     of Akorn with the Securities and Exchange Commission, and (ii) within one
     hundred twenty (120) days after the end of each fiscal year of Akorn, a
     copy of Form 10-K as filed by or on behalf of Akorn with the Securities and
     Exchange Commission.

     5.2. Communication with Accountants. Each Borrower authorizes Lender to
communicate directly with its independent certified public accountants and
authorizes those accountants and advisors to disclose to Lender any and all
Financial Statements and other supporting financial documents and schedules
relating to any Borrower and its Subsidiaries (including, without limitation,
copies of any issued management letters) with respect to the business, financial
condition and other affairs of any Borrower and its Subsidiaries.

6.   AFFIRMATIVE COVENANTS.

     Each Borrower jointly and severally covenants and agrees that, unless
Lender shall otherwise consent in writing, from and after the date hereof and
until the Termination Date:

     6.1. Maintenance of Existence and Conduct of Business. Each Borrower shall,
and shall cause each Subsidiary thereof to: (a) do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence and its rights and franchises; (b) continue to conduct its business
substantially as now conducted or as otherwise permitted hereunder; (c) at all
times maintain, preserve and protect all of its copyrights, patents, trademarks,
trade names and all other intellectual property and rights as licensee or
licensor thereof and preserve all the remainder of its assets and properties,
used or useful in the conduct of its business, and keep the same in good repair,
working order and condition (taking into consideration ordinary wear and tear)
and from time to time make, or cause to be made, all necessary or appropriate
repairs, replacements and improvements thereto consistent with industry
practices; and (d) transact business only in such corporate and trade names as
are set forth in Schedule 4.15.

     6.2. Payment of Obligations. (a) Each Borrower shall pay and discharge or
cause to be paid and discharged promptly all (i) Charges imposed upon it, its
income and profits, or any of its property (real, personal or mixed), and (ii)
lawful claims for labor, materials, supplies and services or otherwise, before
any thereof shall become past due.

          (b) Each Borrower may in good faith contest, by appropriate
     proceedings, the validity or amount of any Charges or claims; provided,
     that at the time of commencement of any such action or proceeding, and
     during the pendency thereof (i) no Default or Event of Default shall have
     occurred and be continuing, (ii) adequate reserves with respect






                                      -37-

<PAGE>   43

     thereto are maintained on the books of such Borrower, in accordance with
     GAAP, (iii) such contest is maintained and prosecuted continuously and with
     diligence, (iv) none of the Collateral becomes subject to forfeiture or
     loss as a result of such Charges or claims, (v) no Lien shall be imposed to
     secure payment of such Charges or claims other than inchoate tax liens, and
     (vi) such Borrower shall promptly pay or discharge such contested Charges
     and all additional charges, interest, penalties and expenses, if any, and
     shall deliver to Lender evidence acceptable to Lender of such compliance,
     payment or discharge, if such contest is terminated or discontinued
     adversely to such Borrower or the conditions set forth in this Section
     6.2(b) are no longer met.

     6.3. Books and Records. Borrowers shall keep adequate records and books of
account with respect to each Borrower's and each of its Subsidiaries' business
activities, in which proper entries, reflecting all financial transactions, are
made in accordance with GAAP and on a basis consistent with the Financial
Statements.

     6.4. Audits. Commencing with the Fiscal Year ending December 31, 1997 and
in each Fiscal Year thereafter, Borrowers will engage independent certified
public accountants of recognized standing satisfactory to Lender to perform an
audit of their respective balance sheets and related statements of operations,
shareholders' equity and cash flows and to render an opinion based upon such
audit.

     6.5. Litigation. Each Borrower shall notify Lender in writing, promptly
upon learning thereof, of any litigation commenced or threatened against such
Borrower or any Subsidiary thereof and of the institution against it of any suit
or administrative proceeding that (a) seeks damages in excess of $500,000 or (b)
seeks injunctive relief.

     6.6. Insurance. (a) Borrowers shall, at their sole cost and expense, 
maintain the policies of insurance described on Schedule 4.18 in form and with
insurers rated AA or better by Bests. Such policies shall be in such amounts as
are set forth in Schedule 4.18. Borrowers shall notify Lender promptly of any
occurrence causing a material loss or decline in value of any real or personal
property and the estimated (or actual, if available) amount of such loss or
decline. So long as any Event of Default shall have occurred and be continuing
or if the casualty loss exceeds $500,000, each Borrower hereby directs all
present and future insurers under its "All Risk" policies of insurance to pay
all proceeds payable thereunder directly to Lender and irrevocably makes,
constitutes and appoints Lender (and all officers, employees or agents
designated by Lender) as such Borrower's true and lawful agent and
attorney-in-fact for the purpose of making, settling and adjusting claims under
such "All Risk" policies of insurance and endorsing the name of such Borrower on
any check or other item of payment for the proceeds of such "All Risk" policies
of insurance. In the event any Borrower at any time or times hereafter shall
fail to obtain or maintain any of the policies of insurance required above or to
pay any premium in whole or in part relating thereto, Lender, without waiving or
releasing any obligations or Default or Event of Default hereunder, may at any
time or times thereafter (but shall not be obligated to) obtain and maintain
such policies of insurance and pay such premiums and take any other action with
respect thereto which Lender deems advisable. All sums so disbursed, including
attorneys, fees, 








                                      -38-

<PAGE>   44

court costs and other charges related thereto, shall be payable, on demand, by
Borrowers to Lender and shall be additional Obligations hereunder secured by the
Collateral, provided, that if and to the extent Borrowers fail to promptly pay
any of such sums upon demand therefor, Lender is authorized to, and at its
option may, make or cause to be made Advances on behalf of Borrowers for payment
thereof.

     (b) Lender reserves the right at any time, upon any change in any
Borrower's risk profile (including, without limitation, any change in the
product mix maintained by any Borrower or any laws affecting the potential
liability of such Borrower), to require additional forms and limits of insurance
to, in Lender's reasonable opinion, adequately protect Lender's interests in all
or any portion of the Collateral and to ensure that each Borrower and each
Subsidiary thereof is protected by insurance in amounts and with coverage
customary for its industry. If requested by Lender, each Borrower shall deliver
to Lender from time to time a report of a reputable insurance broker,
satisfactory to Lender, with respect to its insurance policies.

     (c) Borrowers shall deliver to Lender endorsements (i) to all "All Risk"
and business interruption insurance naming Lender as loss payee, and (ii) to all
general liability and other liability policies naming Lender as additional
insured.

     (d) The loss, if any, under any property insurance required to be carried
by this Section 6.6 shall be adjusted with the insurance companies or otherwise
collected, including the filing of appropriate proceedings by Borrowers or their
Subsidiaries, subject to the reasonable approval of the Lender in the case of
claims in excess of $500,000. If the proceeds payable under any policy of
property insurance are $500,000 or less, Borrowers or their Subsidiaries shall
have the right to use such proceeds to repair or replace the damaged or
destroyed property, provided, that a Default or an Event of Default shall not
have occurred and be continuing at the time the proceeds are paid.

     6.7. Compliance with Laws. Each Borrower shall, and shall cause each
Subsidiary thereof to, comply in all material respects with all federal, state
and local laws and regulations applicable to it, including but not limited to,
(i) the Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and
other United States federal statutes and regulations, issued by FDA and DEA, and
(ii) those relating to licensing, ERISA and labor matters.

     6.8. Supplemental Disclosure. On the request of Lender (in the event that
such information is not otherwise delivered by Borrowers to Lender pursuant to
this Agreement), so long as there are Obligations outstanding hereunder, but not
more frequently than quarterly absent the occurrence and continuance of a
Default or an Event of Default, Borrowers will supplement each schedule or
representation herein with respect to any matter hereafter arising which, if
existing or occurring at the date of this Agreement, would have been required to
be set forth or described in such schedule or as an exception to such
representation or which is necessary to correct any information in such schedule
or representation which has been rendered inaccurate thereby; provided, however,
that such supplement to such schedule or representation shall not be deemed an
amendment thereof unless expressly consented to in writing by Lender, and no
such amendments, except as the same may be consented to in a writing which
expressly 






                                      -39-

<PAGE>   45

includes a waiver, shall be or be deemed a waiver of any Default or Event of
Default disclosed therein.

     6.9. Employee Plans. Each Borrower shall, and shall cause each Subsidiary
thereof to, notify Lender of (a) any and all claims, actions, or lawsuits
asserted or instituted, and of any threatened litigation or claims, against such
Borrower or against any Subsidiary or ERISA Affiliate thereof in connection with
any Plan maintained, at any time, by such Borrower or such Subsidiary or ERISA
Affiliate, or to which such Borrower or such Subsidiary or ERISA Affiliate has
or had at any time any obligation to contribute, or/and against any such Plan
itself, or against any fiduciary of or service provided to any such Plan and (b)
the occurrence of any material "Reportable Event" with respect to any Pension
Plan of such Borrower or any Subsidiary or ERISA Affiliate thereof.

     6.10. Environmental Matters. Each Borrower shall, and shall cause each of
its Subsidiaries to, (a) comply in all material respects with the Environmental
Laws applicable to it, (b) notify Lender promptly after such Borrower or such
Subsidiary becomes aware of any Release upon or at any premises owned or
occupied by it, and (c) promptly forward to Lender a copy of any order, notice,
permit, application, or any communication or report received by such Borrower or
such Subsidiary in connection with any such Release or any other matter relating
to the Environmental Laws that may affect such premises or such Borrower or such
Subsidiary. The provisions of this Section 6.10 shall apply whether or not the
Environmental Protection Agency, any other federal agency or any state, local or
foreign environmental agency has taken or threatened any action in connection
with any Release or the presence of any Hazardous Materials.

     6.11. Landlords' Agreements, Bailee Letters and Mortgagee Agreements. Upon
the request of Lender, each Borrower shall use its best efforts to obtain a
landlord's agreement in form and substance acceptable to Lender from the lessor
of each leased property currently being used by such Borrower or any Subsidiary
thereof where Collateral is located. Upon the request of Lender, each Borrower
shall use its best efforts to obtain a bailee letter in form and substance
acceptable to Lender and with respect to any warehouse where Collateral is
located. Upon the request of Lender, each Borrower shall use its best efforts to
obtain a mortgagee's agreement in form and substance satisfactory to Lender from
the mortgagee (if other than Lender) of each property owned by such Borrower or
any Subsidiary thereof where Collateral is located. No real property or
warehouse space shall be leased or acquired by any Borrower or any Subsidiary
thereof after the Closing Date, unless and until a landlord or mortgagee
agreement or bailee letter, as appropriate, shall first have been obtained with
respect to such location.

     6.12. Leased Locations of Collateral. Each Borrower shall, and shall cause
each Subsidiary thereof to, timely and fully pay and perform its obligations
under all leases and other agreements with respect to each leased location or
public warehouse where any Collateral is or may be located. Borrowers shall, and
shall cause each Subsidiary thereof to, promptly deliver to Lender copies of (a)
any and all default notices received under or with respect to any such leased






                                      -40-



<PAGE>   46

location or public warehouse, and (b) such other notices or documents as Lender
may request in its reasonable discretion.

7.   NEGATIVE COVENANTS.

     Borrowers each jointly and severally covenant and agree that, without the
prior written consent of Lender, from and after the date hereof until the
Termination Date:

     7.1. Mergers, Subsidiaries, Etc. No Borrower shall, or shall permit any
Subsidiary to:

          (a) be a party to any merger or consolidation;

          (b) except in the normal course of its business, sell, transfer,
     convey, lease or otherwise dispose of all or any substantial part of the
     assets of the Borrowers and their Subsidiaries taken as a whole; or

          (c) purchase or otherwise acquire any assets or capital stock of any
     Person without the prior written consent of the Lender except where (i) the
     purchase price of each such acquisition is not greater than $2,500,000
     (including the value of any stock issued, assets exchanged or transaction
     expenses incurred to consummate such acquisition) and (ii) there is no
     Event of Default or Default after giving effect to such acquisition.

          For purposes of this Section 7.1 only, a sale, transfer, conveyance,
lease or other disposition of assets shall be deemed to be a "substantial part"
of the assets of the Borrowers and its Subsidiaries only if the value of such
assets, when added to the value of all other assets sold, transferred, conveyed,
leased or otherwise disposed of by the Borrowers and their Subsidiaries (other
than in the normal course of business) during the same Fiscal Year, exceeds ten
percent (10%) of the Borrowers' consolidated total assets determined as of the
end of the immediately preceding Fiscal Year. As used in the preceding sentence,
the term "value" shall mean, with respect to any asset disposed of, the greater
of such asset's book or fair market value as of the date of disposition, with
"book value" being the value of such asset as would appear immediately prior to
such disposition on a balance sheet of the owner of such asset prepared in
accordance with GAAP.

     7.2. Investments; Loans and Advances. Except as otherwise permitted in this
Agreement, no Borrower shall, or shall cause or permit any Subsidiary thereof
to, make any investment in, or make or accrue loans or advances of money to any
Person, through the direct or indirect lending of money, holding of securities
or otherwise; provided, that so long as no Default or Event of Default shall
have occurred or be continuing, Borrowers may make investments in (a) marketable
direct obligations issued or unconditionally guaranteed by the United States of
America or any agency thereof maturing within one year from the date of
acquisition thereof, (b) commercial paper maturing no more than one year from
the date of creation thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
(c) certificates of deposit, maturing no more 







                                      -41-

<PAGE>   47

than one year from the date of creation thereof, issued by commercial banks
incorporated under the laws of the United States of America, each having
combined capital, surplus and undivided profits of not less than $300,000,000
and having a senior secured rating of "A" or better by a nationally recognized
rating agency, provided, that the aggregate amount invested in such certificates
of deposit shall not at any time exceed $100,000 for any one such bank, and (d)
time deposits, maturing no more than thirty (30) days from the date of creation
thereof with commercial banks or savings banks or savings and loan associations
each having membership in the Federal Deposit Insurance Corporation and in
amounts not exceeding the maximum amounts of insurance thereunder, except that
in the case of time deposits and certificates of deposit maintained with The
Northern Trust Company or its successors so long as such successors meet the
criteria in this Section 7.3, such limitations of amounts shall not apply unless
notice thereof shall be provided by Lender to Akorn (collectively, the
"Investments").

     7.3. Indebtedness. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, create, incur, assume or permit to exist any
Indebtedness, except (a) Indebtedness secured by Liens permitted under Section
7.7, (b) the Loans and the other Obligations, (c) deferred taxes, (d) unfunded
pension fund and other employee benefit plan obligations and liabilities to the
extent they are permitted to remain unfunded under applicable law, (e) existing
Indebtedness set forth in Schedule 7.3 and refinancings thereof on terms and
conditions acceptable to Lender, in its reasonable discretion, which shall in
any event be on terms no less favorable to any Borrower or Lender than the terms
of the Indebtedness being refinanced, (f) any financing secured by any real
estate owned by the Borrowers and their Subsidiaries, and (g) the unsecured
financing by a seller of product lines to Borrowers.

     7.4. Employee Loans and Affiliate Transactions. (a) No Borrower shall, or
shall cause or permit any Subsidiary thereof to, enter into or be a party to any
transaction with an Affiliate except in the ordinary course of, and pursuant to
the reasonable requirements of, such Borrower's or such Subsidiary's business
and upon fair and reasonable terms that are fully disclosed to Lender in advance
and are no less favorable to such Borrower or such Subsidiary than would be
obtained in a comparable arm's length transaction with a Person not an Affiliate
of such Borrower or such Subsidiary. All such transactions existing as of the
date hereof are described on Schedule 7.4(a).

          (b) No Borrower shall, or shall cause or permit any Subsidiary thereof
to, enter into any lending or borrowing transaction with any of its employees,
except loans to its employees on an arm's-length basis in the ordinary course of
business consistent with past practice up to a maximum of $250,000 in the
aggregate at any one time outstanding.

     7.5. Capital Structure and Business. No Borrower shall, or shall cause or
permit any Subsidiary thereof to, (a) make any changes in any of its business
objectives, purposes or operations which could in any way adversely affect the
repayment of the Loans or any of the other Obligations or could have or result
in a Material Adverse Effect, (b) make any change in its capital structure as
described on Schedule 4.9, or (c) amend its certificate or articles of
incorporation or bylaws in a manner which would adversely affect Lender or its
duty or ability to repay the Obligations or change its state of incorporation.
None of the Borrowers nor any 








                                      -42-


<PAGE>   48

Subsidiary thereof shall engage in any business other than the businesses
currently engaged in by such Borrower or such Subsidiary or businesses
reasonably related thereto.

     7.6. Guaranteed Indebtedness. No Borrower shall, or shall cause or permit
any Subsidiary thereof to, incur any Guaranteed Indebtedness except (a) by
endorsement of instruments or items of payment for deposit to the general
account of any Borrower, and (b) for Guaranteed Indebtedness incurred for the
benefit of any Borrower or such Subsidiary if the primary obligation is
expressly permitted by this Agreement.

     7.7. Liens. No Borrower shall, or shall cause or permit any Subsidiary
thereof to, create, incur, assume or permit to exist any Lien on or with respect
to any of its properties or assets of any Borrower or any of their Subsidiaries,
whether now owned or hereafter acquired, except (a) Permitted Encumbrances, (b)
presently existing or hereinafter created Liens in favor of Lender, (c) Liens
created after the date hereof by conditional sale or other title retention
agreements (including, without limitation, Capital Leases) or in connection with
purchase money Indebtedness with respect to properties acquired by any Borrower
or any of its Subsidiaries in the ordinary course of business, involving the
incurrence of an aggregate amount of purchase money Indebtedness and Capital
Lease Obligations of not more than $1,000,000 outstanding at any one time for
all such Liens (provided that such Liens attach only to the assets subject to
such purchase money Indebtedness and such Indebtedness is incurred within twenty
(20) days following such purchase and does not exceed 100% of the purchase price
of the subject assets), (d) Liens in connection with any financing secured by
any real estate owned by the Borrowers and their Subsidiaries, (e) Liens not
otherwise permitted by the foregoing clauses of this Section securing
Indebtedness or other obligations not exceeding $250,000 in the aggregate at any
time outstanding, and (f) Liens existing on the date hereof and described in
Schedule 7.7.

          In addition, no Borrower shall, or shall cause or permit any
Subsidiary thereof to, become a party to any agreement, note, indenture or
instrument, or take any other action, which would prohibit the creation of a
Lien on any of its properties or other assets in favor of Lender, as additional
collateral for the Obligations, except operating leases, Capital Leases or
intellectual property licenses which prohibit liens upon the assets that are
subject thereto.

     7.8. Sale of Assets. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, sell, transfer, convey, assign or otherwise dispose of
any of its properties or other assets, except in the ordinary course of its
business.

     7.9. ERISA. No Borrower shall, or shall cause or permit any Subsidiary or
ERISA Affiliate thereof (without Lender's prior written consent) to, (a) acquire
any ERISA Affiliate that maintains or has an obligation to contribute to a
Pension Plan that has either an "accumulated funding deficiency," as defined in
Section 302 of ERISA, or any "unfunded vested benefits," as defined in Section
4006(a)(3)(e)(iii) of ERISA, in the case of any plan other than a Multiemployer
Plan, and in Section 4211 of ERISA in the case of a Multiemployer Plan, in
excess of $250,000, (b) permit or suffer any representation set forth in
Schedule 4.13 to cease to be met and satisfied at any time, (c) terminate any
Pension Plan that is subject to Title IV of ERISA where such termination could
reasonably be anticipated to result in liability in excess of 









                                      -43-


<PAGE>   49

$250,000 to such Person, (d) permit any accumulated funding deficiency, as
defined in Section 302(a)(2) of ERISA, to be incurred with respect to any
Pension Plan, in excess of $250,000, (e) fail to make any material contributions
or fail to pay any amounts due and owing as required by the terms of any Plan
before such contributions or amounts become delinquent, (f) make a complete or
partial withdrawal (within the meaning of Section 4201 of ERISA) from any
Multiemployer Plan, or (g) fail to promptly provide Lender with copies of any
Plan documents or governmental reports or filings, if requested by Lender.

     7.10. Financial Covenants. Borrowers shall not breach or fail to comply
with any of the financial covenants set forth below:

          (a) Minimum Net Income. Borrowers and their Subsidiaries on a
     consolidated basis shall maintain Net Income in each Fiscal Quarter of not
     less than $1.00.

          (b) Minimum Net Worth. Borrowers and their Subsidiaries on a
     consolidated basis shall maintain at all times Net Worth equal to or
     greater than the sum of (a) $17,000,000, plus (b) an amount equal to 50% of
     Net Income earned during each of its Fiscal Quarters beginning with its
     Fiscal Quarter commencing October 1, 1997 (without reduction for net
     losses, if any).

          (c) Cash Flow Coverage Ratio. Borrowers and their Subsidiaries on a
     consolidated basis shall maintain a ratio of (a) EBIT, measured at the end
     of each Fiscal Quarter for the four immediately preceding Fiscal Quarters
     then ended, to (b) Debt Service, measured as of the end of each Fiscal
     Quarter, of at least 1.2:1.0.

          (d) Ratio of Funded Debt of EBITDA. Borrowers and their Subsidiaries
     on a consolidated basis shall maintain a ratio of (a) Funded Debt to (b)
     EBITDA, measured at the end of each Fiscal Quarter for the four immediately
     preceding Fiscal Quarters then ended, of not more than 3.0:1.0.

     7.11. Hazardous Materials. No Borrower shall, or shall cause or permit any
Subsidiary thereof or any other Person within its control to, cause or permit a
Release or the presence, use, generation, manufacture, installation, Release,
discharge, storage or disposal of any Hazardous Materials on, under, in, above
or about any of its real estate or the transportation of any Hazardous Materials
to or from any real estate where such Release or such presence, use, generation,
manufacture, installation, Release, discharge, storage or disposal would violate
in any material respect, or form the basis for any material liability under, any
Environmental Laws. If a Default or Event of Default shall have occurred and be
continuing, each Borrower, at its own expense, shall cause the performance of
such environmental audits and preparation of such environmental reports as
Lender may from time to time request as to any location at which Collateral is
then located, by reputable environmental consulting firms acceptable to Lender,
and in form and substance acceptable to Lender.






                                      -44-

<PAGE>   50

     7.12. Sale Leasebacks. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, engage in any sale-leaseback or similar transaction
involving any of its assets.

     7.13. Cancellation of Indebtedness. No Borrower shall, or shall cause or
permit any Subsidiary thereof to, cancel any claim or debt owing to it, except
for reasonable consideration negotiated on an arm's-length basis and in the
ordinary course of its business consistent with past practices.

     7.14. Restricted Payments. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, make any Restricted Payment (including, but not limited
to, dividends), other than payments necessary to enable such Borrower (a) to
satisfy its federal, state and local income tax obligations to the extent such
obligations are the result of the net consolidated income of Borrowers and their
Subsidiaries being attributed to such Borrower for tax purposes, (b) to pay the
necessary fees and expenses to maintain its corporate existence and good
standing, (c) to pay legal and accounting fees to the extent such fees relate to
legal or accounting services provided by entities which are not Affiliates of
any Borrower and which services are directly related to any Borrowers or their
Subsidiaries, and (d) to pay any cash dividend in respect of its common stock so
long as no Event of Default or Default exists hereunder or would result after
giving effect thereto.

     7.15. Fiscal Year. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, change its Fiscal Year.

     7.16. Change of Corporate Name or Location. (a) No Borrower shall, or shall
cause or permit any Subsidiary thereof to, (i) change its corporate name or (ii)
change its chief executive office, principal place of business, corporate
offices or warehouses or Collateral locations, or the location of its records
concerning the Collateral, in any case without at least fifteen (15) Business
Days prior written notice to Lender and after Lender's written acknowledgment
that any reasonable action requested by Lender in connection therewith,
including, without limitation, to continue the perfection of any Liens in favor
of Lender in any Collateral has been completed or taken, and provided that any
such new location shall be in the continental United States; (b) in furtherance
of and without limiting the scope of clause (a) above, no Borrower shall, or
shall permit any of its Subsidiaries, to change its name, identity or corporate
structure in any manner which might make any financing or continuation statement
filed in connection herewith seriously misleading within the meaning of Section
9-402(7) of the Code or any other then applicable provision of the Code except
upon prior written notice to Lender and after Lender's written acknowledgment
that any reasonable action requested by Lender in connection therewith,
including, without limitation, to continue the perfection of any Liens in favor
of Lender in any Collateral has been completed or taken.

     7.17. Year 2000 Compliance.

           (a)  Each Borrower and each Subsidiary has:







                                      -45-
    

<PAGE>   51

               (i) conducted an analysis of all of its products, services,
     business and operations, including without limitation surveys of its
     Systems (as defined below) and surveys of and discussions with customers,
     suppliers and vendors, to determine the extent to which such Borrower or
     such Subsidiary may be adversely affected by its failure to be Year 2000
     Compliant (as defined below);

               (ii) developed a plan (the "Year 2000 Plan") to become Year 2000
     Compliant and remedy any material loss it may suffer if it fails to be Year
     2000 Compliant on a timely basis; and

               (iii) implemented and continues to proceed with the Year 2000
     Plan materially in accordance with its terms and timetables.


          (b)  Each Borrower and each Subsidiary reasonably believes that the
Year 2000 Plan, if implemented in accordance with its terms, will result in it
being Year 2000 Complaint on a timely basis.

          (c)  Each Borrower and each Subsidiary reasonably believes that each 
of its customers, suppliers and vendors whose failure to be Year 2000 Compliant
would have a material and adverse effect on such Borrower or such Subsidiary, is
Year 2000 Compliant or has developed a plan to become Year 2000 Compliant and
remedy any material loss such Person may suffer if it fails to be Year 2000
Compliant on a timely basis with respect to all of its own computer systems and
applications.

     The term "Year 2000 Compliant" means that all of such Person(s) computer
systems and applications, including without limitation software and hardware
("Systems"), will function prior to, during, and after the calendar year 2000,
and that no change in or to such calendar year will have a material adverse
effect on the performance of the Systems or on the functioning of such
Borrower's or such Subsidiary's business.

     Each Borrower acknowledges and agrees that the foregoing representations
and any other representation, warranty, schedule, certificate, statement,
report, notice or other writing now or hereafter furnished by or on behalf of
Borrowers or any Subsidiary to the Lender in connection with being Year 2000
Compliant or its Year 2000 Plan is material to the Lender and that the Lender
has relied and will continue to rely thereon. Each Borrower agrees and shall
cause each Subsidiary to provide such information, financial, technical, or
otherwise, concerning such Borrower's or such Subsidiary's Year 2000 Plan as the
Lender may reasonably request from time to time. 

8.   EVENTS OF DEFAULT: RIGHTS AND REMEDIES.

     8.1. Events of Default. The occurrence of any one or more of the following
events (regardless of the reason therefor) shall constitute an "Event of
Default" hereunder:





                                      -46-

<PAGE>   52

          (a) Any Borrower shall fail to make any payment of principal of, or
     interest on, or any other amount owing in respect of the Loans or any of
     the other Obligations (other than as set forth in clause (b) below) when
     due and payable or declared due and payable.

          (b) Any Borrower shall fail to pay any Fees, costs or expenses payable
     or reimbursable by Borrowers under this Agreement or under any other Loan
     Document, and such failure shall have remained unremedied for a period of
     ten (10) days or more.

          (c) Any Borrower shall fail or neglect to perform, keep or observe any
     of the provisions of this Agreement (and not constituting an Event of
     Default under any of the other subsections of this Section 8.1) and such
     failure shall have remained unremedied for a period of ten (10) days or
     more.

          (d) Any Borrower shall fail or neglect to perform, keep or observe any
     provision of any of the other Loan Documents (other than any provision
     embodied in or covered by any other clause of this Section 8.1) and
     continuance of such default after the grace period (if any) set forth
     therein.

          (e) A default or breach shall occur under any other agreement,
     document or instrument to which any Borrower or any Subsidiary thereof is a
     party and such default is not cured or waived within any applicable grace
     period and such default or breach (i) involves the failure to make any
     payment when due in respect of any Indebtedness (other than the
     Obligations) of any Borrower or any Subsidiary of any Borrower in excess of
     $50,000 in the aggregate, or (ii) causes such Indebtedness or a portion
     thereof in excess of $100,000 in the aggregate to become due prior to its
     stated maturity or prior to its regularly scheduled dates of payment, or
     (iii) entitles any holder of such Indebtedness or a trustee to cause such
     Indebtedness or a portion thereof in excess of $100,000 in the aggregate to
     become due prior to its stated maturity or prior to its regularly scheduled
     dates of payment, regardless of whether such right is exercised or waived
     by such holder or trustee.

          (f) Any representation or warranty herein or in any Loan Document or
     in any written statement, report, financial statement or certificate made
     or delivered to Lender by any Borrower shall be untrue or incorrect in any
     material respect, as of the date when made or deemed made.

          (g) Assets of any Borrower or any Subsidiary thereof with a fair
     market value of $500,000 or more shall be attached, seized, levied upon or
     subjected to a writ or distress warrant, or come within the possession of
     any receiver, trustee, custodian or assignee for the benefit of creditors
     of any Borrower or any Subsidiary thereof and shall such condition shall
     continue for thirty (30) days or more.

          (h) A case or proceeding shall have been commenced against any
     Borrower or any Subsidiary thereof in a court having competent jurisdiction
     seeking a decree or order







                                      -47-

<PAGE>   53

     in respect of any Borrower or any Subsidiary thereof (i) under Title 11 of
     the United States Code, as now constituted or hereafter amended or any
     other applicable federal, state or foreign bankruptcy or other similar law,
     (ii) appointing a custodian, receiver, liquidator, assignee, trustee or
     sequestrator (or similar official) for any Borrower or any Subsidiary
     thereof or of any substantial part of such Person's assets, or (iii)
     ordering the winding-up or liquidation of the affairs of any Borrower or
     any Subsidiary thereof and such case or proceeding shall remain undismissed
     or unstayed for forty-five (45) days or more or such court shall enter a
     decree or order granting the relief sought in such case or proceeding.

          (i) Any Borrower or any Subsidiary thereof shall (i) file a petition
     seeking relief under Title 11 of the United States Code, as now constituted
     or hereafter amended, or any other applicable federal, State or foreign
     bankruptcy or other similar law, (ii) consent to the institution of
     proceedings thereunder or to the filing of any such petition or to the
     appointment of or taking possession by a custodian, receiver, liquidator,
     assignee, trustee or sequestrator (or similar official) of any Borrower or
     any Subsidiary thereof or of any substantial part of such Person's assets,
     (iii) make an assignment for the benefit of creditors, or (iv) take any
     corporate action in furtherance of any such action.

          (j) A final judgment or judgments for the payment of money in excess
     of $250,000 in the aggregate shall be rendered against any Borrower or any
     Subsidiary thereof and the same shall not (i) be fully covered by
     insurance, or (ii) within thirty (30) days after the entry thereof, have
     been discharged or execution thereof stayed pending appeal, or shall not
     have been paid or otherwise discharged prior to the expiration of any such
     stay.

          (k) With respect to any Plan: (i) which is a defined contribution plan
     or Welfare Plan, any Borrower or any Subsidiary or ERISA Affiliate thereof
     or any other party-in-interest or disqualified Person shall engage in any
     transactions which in the aggregate results in a final assessment to any
     Borrower or any Subsidiary thereof in excess of $250,000 under Section 409
     or 502 of ERISA or IRC Section 4975 which assessment has not been paid
     within 30 days of final assessment and which is not being contested
     pursuant to Section 6.2 hereof; (ii) any Borrower or any Subsidiary or
     ERISA Affiliate thereof shall incur any accumulated funding deficiency, as
     defined in IRC Section 412, in the aggregate in excess of $100,000, or
     request a funding waiver from the IRS for contributions in the aggregate in
     excess of $100,000; (iii) any Borrower or any Subsidiary or ERISA Affiliate
     thereof shall not pay any withdrawal liability which involves annual
     withdrawal liability payments which exceed $100,000 as a result of a
     complete or partial withdrawal within the meaning of Section 4203 or 4205
     of ERISA, within 30 days after the date such payment becomes due; (iv) any
     Borrower or any Subsidiary or ERISA Affiliate thereof shall fail to make a
     required contribution by the due date under Section 412 of the IRC or
     Section 302 of ERISA which would result in the imposition of a Lien under
     Section 412 of the IRC or Section 302 of ERISA within thirty (30) days
     after the date such payment becomes due; or (v) an ERISA Event (other






                                      -48-

<PAGE>   54

     than an event described in 29 CFR Section 2615.23) with respect to a Plan
     has occurred, and within thirty (30) days Borrowers have not contested such
     ERISA Event by appropriate proceedings.

          (l) Any material provision of any Loan Document shall for any reason
     cease to be valid or enforceable in accordance with its terms (or any
     Borrower or any Subsidiary thereof shall challenge the enforceability of
     any Loan Document), or any security interest created under any Loan
     Document shall cease to be a valid and perfected first priority security
     interest or Lien (except as otherwise permitted herein or therein) in any
     of the Collateral purported to be covered thereby.

          (m) Lien Priority. Lender fails to have an enforceable first priority
     Lien (except for any prior Liens to which Lender has consented in writing)
     on, or security interest in, any property given as security for the
     Obligations.

     8.2. Remedies. If any Default or Event of Default shall have occurred and
be continuing, Lender may, without notice, terminate this facility with respect
to further Advances, whereupon any further Advances shall be made in Lender's
sole discretion. If any Event of Default shall have occurred and be continuing,
Lender may, without notice, (a) declare all or any portion of the Obligations to
be forthwith due and payable and require that any Letter of Credit Obligation be
cash collateralized, all without presentment, demand, protest or further notice
of any kind, all of which are expressly waived by Borrowers; (b) increase the
rate of interest applicable to the Loan to the Default Rate; and (c) exercise
any rights and remedies provided to Lender under the Loan Documents and/or at
law or equity, including all remedies provided under the Code; provided,
however, that upon the occurrence of an Event of Default specified in Sections
8.1(h) or (i) or, all of the Obligations shall become immediately due and
payable without declaration, notice or demand by Lender.

     8.3. Waivers by Borrowers. Except as otherwise provided for in this
Agreement or by applicable law, each of the Borrowers, jointly and severally,
waive: (a) presentment, demand and protest and notice of presentment, dishonor,
notice of intent to accelerate, notice of acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, contract rights, documents, instruments,
chattel paper and guaranties at any time held by Lender on which any Borrower
may in any way be liable, and hereby ratifies and confirms whatever Lender may
do in this regard, (b) all rights to notice and a hearing prior to Lender's
taking possession or control of, or to Lender's replevy, attachment or levy
upon, the Collateral or any bond or security which might be required by any
court prior to allowing Lender to exercise any of its remedies, and (c) the
benefit of all valuation, appraisal and exemption laws. Each of the Borrowers
acknowledges that it has been advised by counsel of its choice with respect to
this Agreement, the other Loan Documents and the transactions evidenced by this
Agreement and the other Loan Documents.








                                      -49


<PAGE>   55

9.   SUCCESSORS AND ASSIGNS.

     9.1. Successors and Assigns. This Agreement and the other Loan Documents
shall be binding on and shall inure to the benefit of Borrowers, Lender and
their respective successors and assigns, except as otherwise provided herein or
therein. None of the Borrowers may assign, transfer, hypothecate or otherwise
convey its rights, benefits, obligations or duties hereunder or under any of the
other Loan Documents without the prior express written consent of Lender. Any
such purported assignment, transfer, hypothecation or other conveyance by any
Borrower without the prior express written consent of Lender shall be void. The
terms and provisions of this Agreement are for the purpose of defining the
relative rights and obligations of Borrowers and Lender with respect to the
transactions contemplated hereby and there shall be no third party beneficiaries
of any of the terms and provisions of this Agreement or any of the other Loan
Documents.

10.  MISCELLANEOUS.

     10.1. Setoff. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence and during the continuance of any Event of Default, Lender and each
holder of any Note is hereby authorized at any time or from time to time,
without notice to any Borrower or to any other Person, any such notice being
hereby expressly waived, to set off and to appropriate and to apply any and all
balances held by it at any of its offices for the account of Borrowers
(regardless of whether such balances are then due to Borrowers) and any other
properties or assets any time held or owing by Lender or such holder to or for
the credit or for the account of Borrowers against and on account of any of the
Obligations which are not paid when due.

     10.2. Complete Agreement; Modification of Agreement. The Loan Documents
constitute the complete agreement between the parties with respect to the
subject matter thereof and may not be modified, altered or amended except as set
forth in Section 10.3 below. Any letter of interest or commitment letter and/or
fee letter between Borrowers and Lender or any of their respective Affiliates,
predating this Agreement and relating to a financing of substantially similar
form, purpose or effect shall be superseded by this Agreement.

     10.3. Amendments and Waivers. (a) Except as otherwise provided herein, no
amendment, modification, termination or waiver of any provision of this
Agreement or any of the other Loan Documents or consent to any departure by any
Borrower or any of its Subsidiaries therefrom shall in any event be effective
unless the same shall be in writing and signed by Lender and Borrowers.

          (b) Each amendment, modification, termination or waiver shall be
effective only in the specific instance and for the specific purpose for which
it was given. No amendment, modification, termination or waiver shall be
required for Lender to take additional Collateral pursuant to any Loan Document.
No notice to or demand on any Borrower in any case shall entitle any Borrower to
any other or further notice or demand in similar or other circumstances.







                                      -50-

<PAGE>   56
     10.4. Fees and Expenses. Borrowers shall reimburse Lender for all
reasonable out-of-pocket expenses, incurred in connection with the preparation
of the Loan Documents (including the reasonable fees and expenses of all of its
special loan counsel, advisors, consultants and auditors retained in connection
with the Loan Documents and the transactions contemplated thereby and advice in
connection therewith). In addition, Borrowers shall reimburse Lender for all
fees, costs and expenses, including the fees, costs and expenses of counsel or
other advisors (including environmental and management consultants) for advice,
assistance, or other representation in connection with:

          (a) any amendment, modification or waiver of, or consent with respect
     to, any of the Loan Documents or, advice in connection with the
     administration of the Loans made pursuant hereto or its rights hereunder or
     thereunder;

          (b) any litigation, contest, dispute, suit, proceeding or action
     (whether instituted by Lender, any Borrower or any other Person) in any way
     relating to the Collateral, any of the Loan Documents or any other
     agreement to be executed or delivered in connection therewith or herewith,
     whether as party, witness, or otherwise, including any litigation, contest,
     dispute, suit, case, proceeding or action, and any appeal or review
     thereof, in connection with a case commenced by or against any or all of
     Borrowers or any other Person that may be obligated to Lender by virtue of
     the Loan Documents;

          (c) any attempt to enforce any rights of Lender against any or all of
     Borrowers or any other Person that may be obligated to Lender by virtue of
     any of the Loan Documents; and

          (d) efforts to verify, protect, evaluate, assess, appraise, collect,
     sell, liquidate or otherwise dispose of any of the Collateral;

including, without limitation, all reasonable attorneys' and other professional
and service providers' fees arising from such services, including those in
connection with any appellate proceedings; and all reasonable expenses, costs,
charges and other fees incurred by such counsel and others in any way or respect
arising in connection with or relating to any of the events or actions described
in this Section 10.4 shall be payable, on demand, by Borrowers to Lender.
Without limiting the generality of the foregoing, such expenses, costs, charges
and fees may include: fees, costs and expenses of accountants, environmental
advisors, appraisers, investment bankers, management and other consultants and
paralegals; court costs and expenses; photocopying and duplication expenses;
court reporter fees, costs and expenses; long distance telephone charges; air
express charges; telegram charges; secretarial overtime charges; and reasonable
expenses for travel, lodging and food paid or incurred in connection with the
performance of such legal or other advisory services.

     10.5. No Waiver. Lender's failure at any time or times, to require strict
performance by Borrowers of any provision of this Agreement and any of the other
Loan Documents shall not waive, affect or diminish any right of Lender
thereafter to demand strict compliance and 





                                      -51-



<PAGE>   57

performance therewith. Any suspension or waiver of an Event of Default under
this Agreement or any of the other Loan Documents shall not suspend, waive or
affect any other Event of Default under this Agreement and any of the other Loan
Documents whether the same is prior or subsequent thereto and whether of the
same or of a different type. None of the undertakings, agreements, warranties,
covenants and representations of any Borrower contained in this Agreement or any
of the other Loan Documents and no Default or Event of Default by any Borrower
under this Agreement and no defaults by any Borrower under any of the other Loan
Documents shall be deemed to have been suspended or waived by Lender unless such
waiver or suspension is by an instrument in writing signed by an officer of or
other authorized employee of Lender and directed to Borrowers specifying such
suspension or waiver.

     10.6. Remedies. Lender's rights and remedies under this Agreement shall be
cumulative and nonexclusive of any other rights and remedies which Lender may
have under any other agreement, including the other Loan Documents, by operation
of law or otherwise. Recourse to the Collateral shall not be required.

     10.7. Survival of Obligations upon Termination of Financing Agreements.
Except as otherwise expressly provided for in the Loan Documents, no termination
or cancellation (regardless of cause or procedure) of any financing arrangement
under this Agreement shall in any way affect or impair the obligations, duties
and liabilities of Borrowers or the rights of Lender relating to any unpaid
portion of the Loan or any other Obligation, due or not due, liquidated,
contingent or unliquidated or any transaction or event occurring prior to such
termination, or any transaction or event, the performance of which is required
after the Termination Date. Except as otherwise expressly provided herein or in
any other Loan Document, all undertakings, agreements, covenants, warranties and
representations of or binding upon Borrowers, and all rights of Lender, all as
contained in the Loan Documents shall not terminate or expire, but rather shall
survive such termination or cancellation and shall continue in full force and
effect until such time as all of the obligations have been paid in full in
accordance with the terms of the agreements creating such obligations.

     10.8. Severability. Wherever possible, each provision of this Agreement and
the other Loan Documents shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.

     10.9. Conflict of Terms. Except as otherwise provided in this Agreement or
any of the other Loan Documents by specific reference to the applicable
provisions of this Agreement, if any provision contained in this Agreement is in
conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.

     10.10. Authorized Signature. Until Lender shall be notified by Akorn to the
contrary, the signature upon any document or instrument delivered pursuant
hereto of an officer of any 







                                      -52-

<PAGE>   58
Borrower listed on Schedule 10.10 shall bind such Borrower and be deemed to be
the act of such Borrower affixed pursuant to and in accordance with resolutions
duly adopted by such Borrower's Board of Directors.

     10.11. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE
LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS
(WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF ILLINOIS
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND ANY APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA. EACH BORROWER HEREBY CONSENTS AND AGREES
THAT THE STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY, CITY OF CHICAGO,
ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR
DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, PROVIDED, THAT LENDER AND
BORROWERS ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY
A COURT LOCATED OUTSIDE OF COOK COUNTY, CITY OF CHICAGO, ILLINOIS AND, PROVIDED,
THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. EACH BORROWER
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH
SUCH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE
OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH
BORROWER AT THE ADDRESS SET FORTH IN SECTION 10.12 OF THIS AGREEMENT AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH BORROWER'S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.

     10.12. Notices. Except as otherwise provided herein, whenever it is 
provided herein that any notice, demand, request, consent, approval, 
declaration or other communication shall or may be given to or served upon 
either of the 








                                      -53-


<PAGE>   59

parties by the other party, or whenever either of the parties desires to give or
serve upon the other party any communication with respect to this Agreement,
each such notice, demand, request, consent, approval, declaration or other
communication shall be in writing and shall be deemed to have been validly
served, given or delivered (a) upon the earlier of actual receipt and three (3)
Business Days after deposit in the United States mail, registered or certified
mail, return receipt requested, with proper postage prepaid, (b) upon
transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this Section
10.12), (c) one (1) Business Day after deposit with a reputable overnight
courier with all charges prepaid or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent
to the address or facsimile number indicated on this Section 10.12 or to such
other address (or facsimile number) as may be substituted by notice given as
herein provided. The giving of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Failure or delay in
delivering copies of any notice, demand, request, consent, approval, declaration
or other communication to any Person (other than Borrowers or Lender) designated
on this Section 10.12 to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.

         If to Lender, at

         The Northern Trust Company
         50 South LaSalle Street
         Chicago, Illinois 60675
         Attention:  Brian D. Beitz, Vice President
         Telecopier No.:   (312) 444-7028
         Telephone No.:    (312) 444-3987

         with copies to:

         Gardner, Carton & Douglas
         321 North Clark Street
         Suite 3400
         Chicago, Illinois  60610
         Attention:  Edward J. Tabaczyk
         Telecopier No.:       (312) 644-3381
         Telephone No:         (312) 245-8873






                                      -54-

<PAGE>   60

     If to any Borrower, at

     Akorn, Inc.
     2500 Millbrook Drive
     Buffalo Grove, Illinois  60089-4694
     Attention:  Rita J. McConville, Vice President/Chief Financial Officer
     Telecopier No.:   (847) 279-6123
     Telephone No.:    (847) 279-6151

     With copies to:

     Burke, Warren, MacKay & Serritella
     330 North Wabash Avenue
     Suite 2200
     Chicago, Illinois 60611
     Attention:        Christopher Manning, Esq.
     Telecopier No.:   (312) 840-7900
     Telephone No.:    (312) 840-7010


     10.13. Section Titles. The Section titles and Table of Contents contained
in this Agreement are and shall be without substantive meaning or content of any
kind whatsoever and are not a part of the agreement between the parties hereto.

     10.14. Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement.

     10.15. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE, AMONG LENDER AND BORROWERS ARISING OUT OF,
CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG
THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR
THE TRANSACTIONS RELATED THERETO.

     10.16. Reinstatement. This Agreement shall remain in full force and effect
and continue to be effective should any petition be filed by or against any
Borrower for liquidation or reorganization, should any Borrower become insolvent
or make an assignment for the benefit of








                                      -55-


<PAGE>   61

any creditor or creditors or should a receiver or trustee be appointed for all
or any significant part of any Borrower's assets, and shall continue to be
effective or be reinstated, as the case may be, if at any time payment and
performance of the Obligations, or any part thereof, is, pursuant to applicable
law, rescinded or reduced in amount, or must otherwise be restored or returned
by any obligee of the Obligations, whether as a "voidable preference,"
"fraudulent conveyance," or otherwise, all as though such payment or performance
had not been made. In the event that any payment, or any part thereof, is
rescinded, reduced, restored or returned, the Obligations shall be reinstated
and deemed reduced only by such amount paid and not so rescinded, reduced,
restored or returned.

11.  CROSS-GUARANTY.

     11.1. Cross-Guaranty. Each Borrower hereby acknowledges and agrees that
such Borrower is jointly and severally liable for, and hereby absolutely and
unconditionally guarantees to each other Borrower and Lender the full and prompt
payment of, all Obligations owed or hereafter owing to Lender by each other
Borrowers.

     11.2. Obligations Absolute. The liability of each Borrower to Lender
hereunder shall not be affected or impaired by any of the following acts by
Lender: (a) any acceptance of collateral security, guarantors, accommodation
parties or sureties for any or all Obligations; (b) one or more extensions or
renewals of Obligations (whether or not for longer than the original period) or
any modification of the interest rates, fees, maturities or principal amount of,
or other contractual terms applicable to any Obligations; (c) any waiver or
indulgence granted to a Borrower, any delay or lack of diligence in the
enforcement of Obligations, or any failure to institute proceedings, file a
claim, give any required notices or otherwise protect any Obligations; (d) any
full or partial release of, compromise or settlement with, or agreement not to
sue a Borrower or any guarantor or other person liable in respect of any
Obligations; (e) any release, surrender, cancellation or other discharge of any
evidence of Obligations or the acceptance of any instrument in renewal or
substitution therefore; (f) any failure to obtain collateral security (including
rights of setoff) for Obligations, or to obtain or maintain the proper or
sufficient creation and perfection thereof, or to establish the priority
thereof, or to preserve, protect, insure, care for, exercise or enforce any
collateral security; or any modification, alteration, substitution, exchange,
surrender, cancellation, termination, release or other change, impairment,
limitation, loss or discharge of any collateral security; (g) any collection,
sale, lease or disposition of, or any other foreclosure or enforcement of or
realization on, any collateral security; (h) any assignment, pledge or other
transfer of any Obligations or any evidence thereof; or (i) any manner, order or
method of application of any payments or credits upon Obligations. Each Borrower
hereby waives any and all defenses and discharges available to a surety,
guarantor, or accommodation co-obligor.

     11.3. WAIVER. EACH BORROWER HEREBY WAIVES PRESENTMENT, DEMAND FOR PAYMENT,
NOTICE OF DISHONOR OR NONPAYMENT, AND PROTEST OF ANY INSTRUMENT EVIDENCING
OBLIGATIONS.








                                      -56-


<PAGE>   62

     11.4. Recovery. If any payment is applied by Lender to the Obligations and
is thereafter set aside, recovered, rescinded or required to be returned for any
reason (including, without limitation, the bankruptcy, insolvency or
reorganization of a Borrower or any other obligor), the Obligations to which
such payment was applied shall for the purposes of this Section 11 be deemed to
have continued in existence, notwithstanding such payment and application and
this cross guaranty shall be enforceable as to such Obligations as fully as if
such payment and application had never been made.

     11.5. Liability Cumulative. The liability of Borrowers under this Section
11 is in addition to and shall be cumulative with all liabilities of each
Borrower to Lender under this Agreement and the other Loan Documents to which
such Borrower is a party or in respect of any Obligations or Obligation of the
other Borrower, without any limitation as to amount, unless the instrument or
agreement evidencing or creating such other liability specifically provides to
the contrary.

                           [signature page(s) follow]


                                      -57-

<PAGE>   63
     IN WITNESS WHEREOF, this Agreement has been duly executed as of the date
first written above.

                                       AKORN, INC.

                                       By:
                                          -----------------------------------

                                       Title:
                                             --------------------------------

                                       AKORN NEW JERSEY, INC.

                                       By:
                                          -----------------------------------

                                       Title:
                                             --------------------------------


                                       THE NORTHERN TRUST COMPANY

                                       By:
                                          -----------------------------------

                                       Title:
                                             --------------------------------






                                      -58-



<PAGE>   1
                                                                    EXHIBIT 10.6


                              FIRST AMENDMENT DATED
                             AS OF DECEMBER 28, 1999
                    TO AMENDED AND RESTATED CREDIT AGREEMENT
                         DATED AS OF SEPTEMBER 15, 1999

     THIS FIRST AMENDMENT, dated as of December 28, 1999 (this "Amendment"), is
entered into among AKORN, INC., a Louisiana corporation ("Akorn"), AKORN NEW
JERSEY, INC. ("Akorn NJ"; collectively with Akorn, the "Borrowers" and each a
"Borrower") and THE NORTHERN TRUST COMPANY, an Illinois banking corporation
having its principal office at 50 South LaSalle Street, Chicago, Illinois 60675
(the "Lender").

                                    RECITALS:

     A. The Borrowers and the Lender have entered into an Amended and Restated
Credit Agreement dated as of September 15, 1999 (said Amended and Restated
Credit Agreement, as so amended, shall hereinafter be referred to as the
"Agreement"; the terms defined in the Agreement and not otherwise defined herein
shall be used herein as defined in the Agreement).

     B. The Borrowers and the Lender wish to increase the Lender's Commitment,
extend the term of the Agreement and to otherwise amend certain provisions of
the Agreement.

     C. Therefore, the parties hereto agree as follows:

1.   AMENDMENTS TO THE AGREEMENT.

          1.1. Section 1.1 of the Agreement. The definition of "Commitment" in
Section 1.1 of the Agreement is hereby amended
 as of the date hereof by deleting
the dollar amount "Twenty-Five Million United State [sic] Dollars ($25,000,000)"
appearing therein and substituting the dollar amount "Forty-Five Million United
States Dollars ($45,000,000)" therefor.

          1.2. Section 1.1 of the Agreement. The definition of "Termination
Date" in Section 1.1 of the Agreement is hereby amended as of the date hereof by
deleting the date "December 29, 2000" appearing therein and substituting the
date "December 29, 2001" therefor.

          1.3. Section 7.10(c) of the Agreement. Section 7.10(c) of the
Agreement is hereby amended and restated in its entirety as of the date hereof
as follows:

          "Cash Flow Coverage Ratio. Borrowers and their Subsidiaries on a
     consolidated basis shall maintain a ratio of (a) EBITDA, measured at the
     end of each Fiscal Quarter for the four immediately preceding Fiscal
     Quarters then ended to (b) the sum of (i) Debt Service, measured as of the
     end of such Fiscal Quarter plus (ii) capital expenditures (determined in
     accordance with GAAP) for the four immediately preceding Fiscal Quarters
     then ended, measured at the end of such Fiscal Quarter, of at least
     1.25:1.0."

<PAGE>   2

          1.4. Exhibit B to the Agreement. Exhibit B to the Agreement is hereby
amended as of the date hereof to be in the form set forth as Exhibit B hereto.
          

2.   WARRANTIES.  To induce the Lender to enter into this Amendment, each 
Borrower warrants that:

          2.1. Authorization. Such Borrower is duly authorized to execute and
deliver this Amendment and the Replacement Note (as hereinafter defined) and is
and will continue to be duly authorized to borrow monies under the Agreement, as
amended hereby, and to perform its obligations under the Agreement, as amended
hereby, and under the Replacement Note.

          2.2. No Conflicts. The execution and delivery of this Amendment and
the Replacement Note, and the performance by such Borrower of its obligations
under the Agreement, as amended hereby, and under the Replacement Note, do not
and will not conflict with any provision of law or of the charter or by-laws of
such Borrower or of any agreement binding upon such Borrower.

          2.3. Validity and Binding Effect. The Agreement, as amended hereby,
is, and the Replacement Note when duly executed and delivered will be, a legal,
valid and binding obligation of such Borrower, enforceable against such Borrower
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency or other similar laws of general application affecting
the enforcement of creditors' rights or by general principles of equity limiting
the availability of equitable remedies.

3.       CONDITIONS PRECEDENT TO AMENDMENTS.  The  amendments contemplated by  
Section 1 hereof are subject to the satisfaction of each of the following 
conditions precedent:

          3.1. Documentation. The Borrowers shall have delivered to the Lender
all of the following, each duly executed and dated the closing date hereof, in
form and substance satisfactory to the Lender:

          (a) Replacement Note. A promissory note of the Borrowers (the
"Replacement Note"), substantially in the form set forth as Exhibit B hereto.

          Upon receipt of the Replacement Note, the Lender will: (i) record the
aggregate unpaid principal amount of the Note dated September 15, 1999 (the
"Original Note") issued under the Agreement in its records or, at its option, on
the schedule attached to the Replacement Note as the aggregate unpaid principal
amount of the Replacement Note; (ii) mark the Original Note as replaced by the
Replacement Note; and (iii) return the Original Note to Akorn upon Akorn's
request. Thereafter, all references in the Agreement and in any and all
instruments or documents provided for therein or delivered or to be delivered
thereunder or in connection therewith to the Original Note shall be deemed
references to the Replacement Note. The replacement of the Original Note with
the Replacement Note shall not be construed (i) to deem paid or forgiven the
unpaid principal amount of, or unpaid accrued interest on, the Original Note
outstanding at the time of replacement, or (ii) to release, cancel, terminate or
otherwise adversely affect all or any part of any lien, mortgage, deed of trust,
assignment, security interest or other 






                                      -2-

<PAGE>   3

encumbrance heretofore granted to or for the benefit of the payee of the 
Original Note which has not otherwise been expressly released.

          (b) Resolutions. A copy, duly certified by the secretary or an
assistant secretary of each Borrower, of (i) resolutions of such Borrower's
Board of Directors authorizing or ratifying the execution and delivery of this
Amendment and the Replacement Note and authorizing the borrowings under the
Agreement, as amended hereby, (ii) all documents evidencing other necessary
corporate action, and (iii) all approvals or consents, if any, with respect to
this Amendment and the Replacement Note.

          (c) Incumbency Certificate. A certificate of the secretary or an
assistant secretary of each Borrower certifying the names of such Borrower's
officers authorized to sign this Amendment, the Replacement Note and all other
documents or certificates to be delivered hereunder, together with the true
signatures of such officers.

          (d) Opinion. An opinion of Burke, Warren, MacKay & Serritella, counsel
to the Borrowers, addressed to the Lender, in substantially the form of Exhibit
C hereto.

          (e) Certificate. A certificate of the president or chief financial
officer of each Borrower as to the matters set out in Sections 3.2 and 3.3
hereof.

          (f) Participant Consent. The Lender shall have obtained the consents
of its existing participants to the execution, delivery and performance of this
Amendment.

          (g) Bank of America. The Lender and Bank of America, National
Association shall have entered a participation agreement in form and substance
satisfactory to the Lender.

          (h) Other. Such other documents as the Lender may reasonably request.

          3.2. No Default. As of the closing date hereof, no Event of Default or
Default under the Loan Documents shall have occurred and be continuing.

          3.3. Warranties. As of the closing date hereof, the warranties in the
Loan Documents and in Section 2 of this Amendment shall be true and correct as
though made on such date, except for such changes as are specifically permitted
under the Agreement.

4.  GENERAL.

          4.1. Expenses. Each Borrower agrees to pay the Lender upon demand for
all reasonable expenses, including reasonable attorneys' and legal assistants'
fees (which attorneys and legal assistants may be employees of the Lender),
incurred by the Lender in connection with the preparation, negotiation and
execution of this Amendment, the Replacement Note and any document required to
be furnished therewith.





                                      -3-

<PAGE>   4

          4.2. Law. THIS AMENDMENT AND THE REPLACEMENT NOTE SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS.

          4.3. Successors. This Amendment shall be binding upon each Borrower
and the Lender and their respective successors and assigns, and shall inure to
the benefit of each Borrower and the Lender and the successors and assigns of
the Lender.

          4.4. Confirmation of the Agreement. The Agreement, as amended hereby,
shall remain in full force and effect and is hereby ratified and confirmed in
all respects.

          4.5. References to the Agreement. Each reference in the Agreement to
"this Agreement," "hereunder," "hereof," or words of similar import in
instruments or documents provided for in the Agreement or delivered or to be
delivered thereunder or in connection therewith, shall, except where the context
otherwise requires, be deemed a reference to the Agreement as amended hereby.


     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Chicago, Illinois by their respective officers thereunto duly
authorized as of the date first written above.

                                       AKORN, INC.

                                       By:
                                          -------------------------------------

                                       Title
                                             ----------------------------------

                                       AKORN NEW JERSEY, INC.

                                       By:
                                          -------------------------------------

                                       Title
                                             ----------------------------------

                                       THE NORTHERN TRUST COMPANY

                                       By:
                                          -------------------------------------

                                       Title
                                             ----------------------------------






                                      -4-

<PAGE>   5


                                    EXHIBIT B

                                      NOTE


$45,000,000                                                   Chicago, Illinois
                                                              December 28, 1999


     FOR VALUE RECEIVED, the undersigned, AKORN, INC., a Louisiana corporation
("Akorn"), and AKORN NEW JERSEY, INC., an Illinois corporation ("Akorn NJ"),
jointly and severally, promise to pay to the order of THE NORTHERN TRUST COMPANY
(the "Lender") on or before the Termination Date, the principal amount of
FORTY-FIVE MILLION DOLLARS ($45,000,000), or the amount outstanding as endorsed
on the grid attached to this Note (or recorded in the Lender's books and
records, if the Lender is the holder hereof). Such endorsement or recording by
the Lender shall, absent manifest error, be rebuttably presumptive evidence of
the principal balance due on this Note.

     This Note evidences indebtedness incurred under that certain Amended and
Restated Credit Agreement, dated as of September 15, 1999 (as the same may be
subsequently amended, restated, supplemented or otherwise modified, the "Credit
Agreement"), among Akorn, Akorn NJ and the Lender, to which Credit Agreement
reference is hereby made for a statement of its terms and provisions, including
those under which this Note may be paid prior to its due date or have its due
date accelerated, and pursuant to which the applicable interest rate herein set
forth may be reduced. All capitalized terms used but not otherwise defined
herein shall have the meanings assigned to them in the Credit Agreement. This
Note constitutes a renewal and restatement of, and a replacement and substitute
for, the Note dated September 15, 1999, of Akorn and Akorn NJ payable to the
order of the Lender in the principal amount of $25,000,000 (the "Original
Note"). The indebtedness under the Original Note is continuing indebtedness
hereunder, and nothing herein shall be deemed to release or otherwise adversely
affect any lien, mortgage or security interest securing such indebtedness or any
rights of the Lender against any guarantor, surety or other party primarily or
secondarily liable for such indebtedness.

     Unless or until this Note shall sooner become due and payable, whether by
acceleration or otherwise, the principal amount outstanding hereunder shall be
paid in accordance with the terms and conditions of the Credit Agreement. The
unpaid principal amount of this Note from time to time outstanding shall bear
interest from the date of this Note at the rate per annum set forth in the
Credit Agreement. Accrued interest on this Note shall be payable in accordance
with the terms of the Credit Agreement. After maturity, whether by acceleration
or otherwise, accrued interest shall be payable on demand. Interest on this Note
shall be computed for the actual number of days elapsed on the basis of a year
consisting of 360 days. Payments of both principal and interest are to be made
in immediately available funds in lawful money of the United States of America.









<PAGE>   6

     Subject to the terms and conditions of the Credit Agreement, the
undersigned agree to pay all reasonable expenses, including reasonable
attorneys' fees and legal expenses, incurred by the holder of this Note in
attempting to collect any amounts payable hereunder. The undersigned irrevocably
waive presentment, protest, demand and notice of any kind in connection
herewith.

     This Note is made under and governed by the internal laws of the State of
Illinois (without regard to conflict of laws provisions thereof), and shall be
deemed to have been executed in the State of Illinois.

                                            AKORN, INC.,
                                            a Louisiana corporation

                                            By:
                                               --------------------------------
                                            Title:
                                                  -----------------------------

                                            AKORN NEW JERSEY, INC.,
                                            an Illinois corporation

                                            By:
                                               --------------------------------
                                            Title:
                                                  -----------------------------




                                      -2-


<PAGE>   7
Schedule attached to Note dated December 28, 1999 of AKORN, INC. and AKORN NEW
JERSEY, INC., payable to the order of THE NORTHERN TRUST COMPANY.





<TABLE>
<CAPTION>


                                               LOANS AND PRINCIPAL PAYMENTS

--------------------- ------------------- ------------------- ------------------- ------------------- -------------------
                                            Type of Loan &        Amount of        Unpaid Principal
                        Amount of Loan        Applicable       Principal Repaid        Balance         Notation Made By
        Date                 Made           Interest Rate
<S>                   <C>                 <C>                 <C>                 <C>                 <C>    
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
</TABLE>



The aggregate unpaid principal amount shown on this schedule shall be rebuttable
presumptive evidence of the principal amount owing and unpaid on this Note. The
failure to record the date and amount of any loan on this schedule shall not,
however, limit or otherwise affect the obligations of the Borrowers under the
Credit Agreement or under this Note or repay the principal amount of the loan
together with all interest accruing thereon.





<PAGE>   8
                                    EXHIBIT C

                           [FORM OF OPINION OF COUNSEL
                                 TO THE COMPANY]



The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois  60675

Attention:

Ladies and Gentlemen:

     We have acted as counsel for Akorn, Inc. and Akorn New Jersey, Inc.
(collectively, the "Borrowers" and each individually a "Borrower") in connection
with a First Amendment dated as of December 28, 1999 (the "Amendment") to the
Amended and Restated Credit Agreement dated as of September 15, 1999, as
amended, entered into among the Borrowers and Lender (the "Agreement"), and the
transactions and other documents and instruments described therein. Unless
otherwise defined herein, capitalized terms used herein shall have the
respective meanings assigned to such terms in the Amendment.

     In so acting, we, as counsel for the Borrowers, have made such factual
inquiries, and we have examined or caused to be examined such questions of law,
as we have considered necessary or appropriate for the purposes of this opinion
and, upon the basis of such inquiries and examination, advise you that, in our
opinion:

     1.   Each Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation, and is duly
qualified and in good standing as a foreign corporation in all other
jurisdictions in which its present operations or properties require such
qualification.

     2.   Each Borrower has full corporate power and authority to enter into the
Amendment and to perform its obligations under the Agreement, as amended by the
Amendment, and under the Replacement Note.

     3.   The execution and delivery of the Amendment and the Replacement Note,
the performance by each Borrower of its obligations under the Agreement, as
amended by the Amendment, and under Replacement Note, and the borrowings by each
Borrower under the Agreement, as amended by the Amendment, have been duly
authorized by all necessary corporate action, and the Amendment and the
Replacement Note have been duly executed and delivered on behalf of each
Borrower and constitute valid and binding obligations of such Borrower,
enforceable in accordance with their respective terms, except as enforceability
may be limited by bankruptcy, insolvency or other similar laws of general
application affecting the 







<PAGE>   9

enforcement of creditors' rights or by general principles of equity limiting the
availability of equitable remedies.

     4.   There is no provision in such Borrower's articles of incorporation or
by-laws, nor any provision in any indenture, mortgage, contract or agreement to
which such Borrower is a party or by which it or its properties may be bound and
of which we have knowledge, nor any law, statute, rule or regulation, nor any
writ, order or decision of any court or governmental instrumentality binding on
such Borrower which would be contravened by the execution and delivery of the
Amendment or the Replacement Note, nor do any of the foregoing prohibit such
Borrower's performance of any term, provision, condition, covenant or any other
obligation of such Borrower contained in the Agreement, as amended by the
Amendment, or in the Replacement Note.

     5. Neither the making of the Amendment or the Replacement Note nor
performance of the Agreement, as amended by the Amendment, or the Replacement
Note, nor the borrowing under the Agreement, as amended by the Amendment,
requires the consent or approval of any governmental instrumentality.


                                        Very truly yours,




<PAGE>   10
The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois  60675

     Re:  First Amendment dated as of December 28, 1999 (the "Amendment") to
          Amended and Restated Agreement dated as of September 15, 1999 (the
          "Agreement"), among Akorn, Inc. and Akorn New Jersey, Inc. (the
          "Borrowers") and The Northern Trust Company (the "Lender")

Ladies and Gentlemen:

This certificate is being delivered to the Lender pursuant to Section 3.1(e) of
the Amendment. Terms used in this certificate which are defined in the Agreement
shall have the same meaning herein as therein.

In connection with the closing today of the Amendment, the undersigned officer
of each Borrower hereby certifies as follows:

     1.   No Event of Default or Default under the Loan Documents has occurred
          and is continuing.

     2.   The warranties in the Loan Documents and in Section 2 of the Amendment
          are true and correct as of the date hereof as though made on the date
          hereof, except for such changes as are specifically permitted under
          the Agreement.

                                          Very truly yours,

Dated December 28, 1999                   AKORN, INC.


                                          By:  _______________________________
                                          Title:  Chief Financial Officer


                                          AKORN NEW JERSEY, INC.


                                          By:  _______________________________
                                          Title:  Chief Financial Officer





<PAGE>   1
Exhibit 21.1

                           SUBSIDIARIES OF THE COMPANY

               Name                                     State of Incorporation
------------------------------------------             ------------------------
Akorn (New Jersey), Inc.                                      Illinois

Spectrum Scientific Pharmaceuticals, Inc.                     Louisiana

Walnut Pharmaceuticals, Inc.                                  Louisiana

Compass Vision, Inc.                                          Louisiana



                                       39






<PAGE>   1

Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
33-44785, 33-24970 and 33-70686 of Akorn, Inc. on Form S-8 of our report dated
February 25, 2000 (which expresses an unqualified opinion), appearing in this
Annual Report on Form 10-K of Akorn, Inc. for the year ended December 31, 1999.



Deloitte & Touche LLP
Chicago, Illinois
March 28, 2000



                                       40






<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-END>                               DEC-31-1999
<CASH>                                          25,125
<SECURITIES>                                         0
<RECEIVABLES>                               17,920,384
<ALLOWANCES>                                 (225,628)
<INVENTORY>                                 16,473,020
<CURRENT-ASSETS>                            35,851,589
<PP&E>                                      32,489,448
<DEPRECIATION>                            (11,677,451)
<TOTAL-ASSETS>                              76,098,756
<CURRENT-LIABILITIES>                        9,692,912
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                    19,398,278
<OTHER-SE>                                  14,992,152
<TOTAL-LIABILITY-AND-EQUITY>                76,098,756
<SALES>                                     64,632,322
<TOTAL-REVENUES>                            64,632,322
<CGS>                                       31,155,663
<TOTAL-COSTS>                               31,155,663
<OTHER-EXPENSES>                            21,354,840
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                           1,921,309
<INCOME-PRETAX>                             10,639,102
<INCOME-TAX>                                 3,968,488
<INCOME-CONTINUING>                          6,670,614
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                 6,670,614
<EPS-BASIC>                                        .37
<EPS-DILUTED>                                      .36
        

</TABLE>