SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-K/A
                                 AMENDMENT NO. 2

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                      FOR THE YEAR ENDED DECEMBER 31, 2001

[ ]     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 registrant as specified in its charter)

               LOUISIANA                               72-0717400
    (State or other jurisdiction of         (IRS Employer Identification No.)
    incorporation or organization)

               2500 MILLBROOK DRIVE, BUFFALO GROVE, ILLINOIS 60089
              (Address of principal executive offices and zip code)

                  REGISTRANT'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 [ ] No [X]

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 non-affiliates
(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
7, 2002 was approximately $47,229,000.

The number of shares of the Issuer's common stock, no par value per share,
outstanding as of March 7, 2002 was 19,555,514.

                           FORWARD-LOOKING STATEMENTS

    Certain statements in this Form 10-K/A 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 Company's working capital requirements;

    -   the Company's ability to comply with debt covenants;

    -   the effects of competition from generic pharmaceuticals and from other
        pharmaceutical companies; and

    -   other factors referred to in this Form 10-K/A 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 Affect Future Results". The Company
does not intend to update these forward-looking statements.


                                       1

                                EXPLANATORY NOTE

    We are filing this Annual Report on Form 10-K/A as Amendment No. 2 to our
Form 10-K, originally filed on April 16, 2002, for the purpose of giving effect
to the restatement of the Company's consolidated financial statements for the
years ended December 31, 2000 and 2001 and for the purpose of filing the report
of our independent auditors. The details of this restatement are discussed in
Note S "Restatement" in the consolidated financial statements included in Item
8. For the convenience of the reader, we have restated the Form 10-K in its
entirety. Except as otherwise specifically noted, the disclosure contained
herein speaks as of April 16, 2002, the date of filing of the original Form
10-K. For information subsequent to the original date of filing, reference is
made to the Company's subsequent filings with the Securities and Exchange
Commission in accordance with Sections 13 or 15(d) of the Securities Exchange
Act of 1934 and to Note T "Subsequent Events" in the consolidated financial
statements included in Item 8.



                    FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Description of Business........................................................... 3 Item 2. Description of Properties......................................................... 6 Item 3. Legal Proceedings................................................................. 6 Item 4. Submission of Matters to a Vote of Security Holders............................... 8 PART II Item 5. Market for Common Equity and Related Stockholder Matters.......................... 9 Item 6. Selected Consolidated Financial Data.............................................. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 10 Item 7A Quantitative and Qualitative Disclosures about Market Risk........................ 24 Item 8. Financial Statements and Supplementary Data....................................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................... 46 PART III Item 10. Directors and Executive Officers of the Registrant................................ 47 Item 11. Executive Compensation............................................................ 48 Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 52 Item 13. Certain Relationships and Related Transactions.................................... 53 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................. 55 Schedule II....................................................................... 58 Signatures........................................................................ 59 Certifications.................................................................... 60
2 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. Akorn is a Louisiana corporation founded in 1971 in Abita Springs, Louisiana. In 1997, the Company relocated its headquarters and certain operations to Illinois. Previous to 2001, the Company evaluated its business as two segments, ophthalmic and injectable. The Company now classifies its operations into three identifiable business segments, ophthalmic, injectable and contract services. These three segments are discussed in greater detail below. For information regarding revenues and gross profit for each of the Company's segments, see Note L "Industry Segment Information" in 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 and 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. Contract Services Segment. The Company provides contract-manufacturing services as well as product research and development services to pharmaceutical and biotechnology 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 Decatur facilities manufacture product for all three of the Company's segments. The Somerset facility manufactures product for the ophthalmic segment. 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 Affect 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 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 contract services segment markets its contract manufacturing services through direct mail, trade shows and direct industry contacts. Research and Development. As of December 31, 2001, the Company had 17 Abbreviated New Drug Applications ("ANDAs") for generic pharmaceuticals in various stages of development. The Company filed 7 of these ANDAs and received approval for 1 ANDA in 2001. See "Government Regulation." The Company expects to continue to file ANDAs on a regular basis as pharmaceutical products come off patent allowing the Company to compete by marketing generic equivalents. The Food and Drug Administration ("FDA") approved the New Drug Application ("NDA") for Paremyd, on December 5, 2001. This product was launched during the first quarter of 2002. 3 The Company is developing two new indications for ophthalmic products for which it currently anticipates filing NDAs in the future. One is an indication for Indocyanine Green ("ICG") to treat age related macular degeneration ("AMD"). Although the Company has relinquished its rights to the Johns Hopkins University, Applied Physics Laboratory Patents (See "Patents and Proprietary Rights" below), the Company is actively pursuing alternative treatment methods for AMD using ICG. If the Company's developmental efforts are successful, the Company currently anticipates filing a NDA within the next four years and estimates the market size for this product to be substantial. The Company also anticipates filing an NDA supplement within the next three years for an indication for ICG for intra-ocular staining. The Company estimates the market for this product to be $10 million annually. 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, whether the Company 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 Affect Future Results -- Dependence on Development of Pharmaceutical Products and Manufacturing Capabilities." The Company also maintains a business development program that identifies potential product acquisition or product licensing candidates. The Company has focused its business development efforts on niche products that complement its existing product lines and that have few or no competitors in the market. In 2000, the Company entered into an exclusive cross marketing agreement with Novadaq Technologies, Inc., for cardiac angiography procedures employing ICG. Under the terms of the agreement, as amended on January 25, 2002, Novadaq will assume all further costs associated with development of the technology. The Company, in consideration of foregoing any share of future net profits, will obtain an equity ownership interest in Novadaq and the right to be the exclusive supplier of ICG for use in Novadaq's diagnostic procedures. At December 31, 2001, 14 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 $2,598,000, $4,132,000 and $2,744,000 for the years ended December 31, 2001, 2000 and 1999, 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. As of December 31, 2001, the Company had received four U.S. patents and had four additional U.S. patent applications and one international patent application pending. In February of 2002, the U.S. Patent and trademark Office notified the Company that U.S. patent number 6,351,663 titled "Methods for diagnosing and treating abnormal vasculature using fluorescent dye angiography and dye enhanced photocoagulation" had been issued to the Company. This was one of the four U.S. patent applications pending as of December 31, 2001. The Company had also licensed two U.S. patents from the Johns Hopkins University, Applied Physics Laboratory ("JHU/APL") for the development and commercialization of AMD diagnosis and treatment using ICG. However, a dispute arose between the Company and JHU/APL regarding the two patents licensed for AMD and the Company's performance required by December 31, 2001 under the terms of the applicable License Agreement. In July 2002, The Company and JHU/APL agreed to terminate their license agreement and as a result, the Company no longer has any rights to the JHU/APL patents. See "Item 3. Legal Proceedings." The patents held by the Company cover ophthalmic products and processes except for four patents which are methods patents relating to a currently marketed injectable product. 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 Affect Future Results -- Patents and Proprietary Rights". Employee Relations. At December 31, 2001, the Company had 310 full-time employees, 292 of whom were employed by Akorn and 18 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 4 substantially greater financial and other resources, including greater sales volume, larger sales forces and greater manufacturing capacity. See "Item 7. Management's Discussion and Analysis of Operations -- Factors That May Affect Future Results -- Competition; Uncertainty of Technological Change." The companies that 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 B&L, who is in direct competition with the Company in several markets. The companies that compete with the injectable segment include both generic and name brand companies such as Abbott Labs, Gensia, American Pharmaceutical Products, Elkin Sinn and American Regent. The injectable segment competes primarily on the basis of price. Competitors in the contract services segment 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 supplier of products accounted for more than 10% of the Company's purchases in 2001, 2000 or 1999. The Company requires a supply of quality raw materials and components to manufacture and package pharmaceutical products for it 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 the case of 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 Affect Future Results -- Dependence on Supply of Raw Materials and Components". No single customer accounted for more than 10% of the Company's revenues during 2001 or 1999. During 2000, the Company realized approximately 12% of its net revenues from Cardinal Health, Inc. ("Cardinal"). Cardinal is a distributor of the Company's products as well as a distributor of a broad range of health care products for many companies in the health care sector. Cardinal is not the end user of the Company's products. If sales to Cardinal were to diminish or cease, the Company believes that the end users of its products would find no difficulty obtaining the Company's products either directly from the Company or from another distributor. The accounts receivable balance for Cardinal was approximately 22% of gross trade receivables at December 31, 2000. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results -- Financial Risk Factors." A small number of wholesale drug distributors accounts for a large portion of the Company's revenues. In 2001, sales to five wholesale drug distributors accounted for 42% of total gross sales and approximately 47% of gross trade receivables as of December 31, 2001. The loss of one or more of these customers, a change in purchasing patterns, an increase in returns of the Company's products, delays in purchasing products and delays in payment for products by one or more distributors could have a material negative impact on the Company's revenue and results of operations and may lead to a violation of debt covenants. Government Regulation. Pharmaceutical manufacturers and distributors are subject to extensive regulation by government agencies, including the 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 that 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. In October 2000, the Company received a warning letter from the FDA as a result of a routine inspection of its Decatur manufacturing facilities. This letter focused on general documentation and cleaning validation issues. The Company was re-inspected 5 in late 2001 and the FDA issued a Form 483 documenting its findings. The Company responded to these findings on January 4, 2002 and the FDA has accepted the Company's response. The Company anticipates a re-inspection of its Decatur facility by the FDA in the fourth quarter of 2002. The warning letter prevents the FDA from issuing any approval for new products manufactured at the Decatur facility. The warning letter does not inhibit the Company's ability to continue manufacturing products that are currently approved. The warning letter does not impact the operations at the Somerset facility. 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 seizure of product. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors That May Affect Future Results -- Government Regulation". On March 6, 2002, the Company received a letter from the United States Attorney's Office, Central District of Illinois, Springfield, Illinois, advising the Company that the United States Drug Enforcement Administration had referred a matter to that office for a possible civil legal action for alleged violations of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. Section 801, et. seq. and regulations promulgated under the Act. The Company continues to have discussions with the United States Attorneys Office and anticipates that any action under this matter will not have a material impact on its financial statements. See "Item 3. Legal Proceedings". The Company does not anticipate any material adverse effect from compliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. ITEM 2. DESCRIPTION OF PROPERTIES Since August 1998, the Company's headquarters and certain administrative offices, as well as a finished goods warehouse, have been located in leased space at 2500 Millbrook Drive, Buffalo Grove, Illinois. The Company leased approximately 24,000 square feet until June 2000 at which time it expanded to the current occupied space of approximately 48,000 square feet. 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 sublets portions of the space leased in Lincolnshire. 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 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 Decatur facilities support all three of the Company's segments. The Company leases approximately 7,000 square feet of office and warehousing space in San Clemente, California, formerly used as a sales office to support the Injectable segment. The Company successfully sublet this space through the term of the lease when the San Clemente operations were closed and relocated to Buffalo Grove in July of 2001. 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 related to the ophthalmic segment. The combined space is considered adequate to accommodate growth for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS On March 27, 2002, the Company received a letter informing it that the staff of the Securities and Exchange Commission's regional office in Denver, Colorado, would recommend to the Commission that it bring an enforcement action for injunctive relief against the Company. The recommended action concerns the Company's alleged misstatements, in quarterly and annual Securities and Exchange Commission ("SEC") filings and earnings press releases, of its income for fiscal years 2000 and 2001 by allegedly failing to reserve for doubtful accounts receivable and overstating its accounts receivable balance as of December 31, 2000. The Company also learned that certain of its former officers, as well as a current employee had received similar notifications. The Company disagrees with the staff's proposed recommendation and allegations and has submitted its views as to why an enforcement action should not be brought. Notwithstanding the fact that subsequent to the issuance of the Company's consolidated financial statements for the year ended December 31, 2001, management of the Company determined it needed to restate the Company's financial statements for 2000 and 2001 (See Note S), the Company and the staff of the SEC's enforcement division continue to have discussions regarding the potential enforcement recommendation. It is not anticipated that these proceedings will have any material impact on the Company's Consolidated Balance Sheet as of December 31, 2001 or on the Company's 2002 or future operating results. 6 The Company was party to a License Agreement with The Johns Hopkins University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and amended effective July 15, 2001 (See Note C). Pursuant to the License Agreement, the Company licensed two patents from JHU/APL for the development and commercialization of a diagnosis and treatment for age-related macular degeneration ("AMD") using Indocyanine Green ("ICG"). A dispute arose between the Company and JHU/APL concerning the License Agreement. Specifically, JHU/APL challenged the Company's performance required by December 31, 2001 under the License Agreement and alleged that the Company was in breach of the License Agreement. The Company denied JHU/APL's allegations and contended that it had performed in accordance with the terms of the License Agreement. As a result of the dispute, on March 29, 2002, the Company commenced a lawsuit in the U.S. District Court for the Northern District of Illinois, seeking declaratory and other relief against JHU/APL. On July 3, 2002, the Company reached an agreement with JHU/APL with regard to the dispute that had risen between the two parties. The Company and JHU/APL mutually agreed to terminate their license agreement. As a result, the Company no longer has any rights to the JHU/APL patent rights as defined in the license agreement. In exchange for relinquishing its rights to the JHU/APL patent rights, the Company received an abatement of the $300,000 due to JHU/APL at March 31, 2002 and a payment of $125,000 to be received by August 3, 2002. The Company also has the right to receive 15% of all cash payments and 20% of all equity received by JHU/APL from any license of the JHU/APL patent rights less any cash or equity returned by JHU/APL to such licensee. The combined total of all such cash and equity payments are not to exceed $1,025,000. The $125,000 payment is considered an advance towards cash payments due from JHU/APL and will be credited against any future cash payments due the Company as a result of JHU/APL's licensing efforts. As a result of the resolved dispute discussed above, the Company will record an asset impairment charge of $1,559,500 in 2002. The impairment amount represents the net value of the asset recorded on the balance sheet of the Company less the $300,000 payment abated by JHU/APL and the $125,000 payment from JHU/APL. The $125,000 payment was received on August 3, 2002. In October 2000, the Company received a warning letter from the FDA as a result of a routine inspection of its Decatur manufacturing facilities. This letter focused on general documentation and cleaning validation issues. The Company was re-inspected in late 2001 and the FDA issued a Form 483 documenting its findings. The Company responded to these findings on January 4, 2002 and the FDA has accepted the Company's response. The Company anticipates a re-inspection of its Decatur facility by the FDA in the fourth quarter of 2002. The warning letter prevents the FDA from issuing any approval for new products manufactured at the Decatur facility. The warning letter does not inhibit the Company's ability to continue manufacturing products that are currently approved. The warning letter does not impact the operations at the Somerset facility. On March 6, 2002, the Company received a letter from the United States Attorney's Office, Central District of Illinois, Springfield, Illinois, advising the Company that the United States Drug Enforcement Administration had referred a matter to that office for a possible civil legal action for alleged violations of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. Section 801, et. seq. and regulations promulgated under the Act. The Company continues to have discussions with the United States Attorneys Office and anticipates that any action under this matter will not have a material impact on its financial position, results of operations or cash flows. On August 9, 2001, the Company was served with a Complaint, which had been filed on August 8, 2001 in the United States District Court for The Northern District of Illinois, Eastern Division. The suit named the Company as well as Mr. Floyd Benjamin, the former president and chief executive officer of the Company, and Dr. John N. Kapoor, the Company's current chairman of the board and then interim chief executive officer as defendants. The suit, which was filed by Michelle Golumbski, individually, and on behalf of all others similarly situated, alleged various violations of the federal securities laws in connection with the Company's public statements and filings with the Securities and Exchange Commission during the period from February 20, 2001 through May 22, 2001. The plaintiff subsequently voluntarily dismissed her claims against Akorn, Inc., Mr. Floyd Benjamin and Dr. John N. Kapoor, and, in exchange for the Company's consent to this voluntary dismissal, also provided, through counsel, a written statement that the plaintiff would not reassert her claims against any of the defendants in any subsequent actions. The Company did not provide the plaintiff with any compensation in consideration for this voluntary dismissal. On April 4, 2001, the International Court of Arbitration (the "ICA") of the International Chamber of Commerce notified the Company that Novadaq Technologies, Inc. ("Novadaq") had filed a Request for Arbitration with the ICA on April 2, 2001. Akorn and Novadaq had previously entered into an Exclusive Cross-Marketing Agreement dated July 12, 2000 (the "Agreement"), providing for their joint development and marketing of certain devices and procedures for use in fluorescein angiography (the "Products"). Akorn's drug indocyanine green ("ICG") would be used as part of the angiographic procedure. The United States Food and Drug Administration ("FDA") had requested that the parties undertake clinical studies prior to obtaining FDA approval. In its Request for Arbitration, Novadaq asserted that under the terms of the Agreement, Akorn should be responsible for the costs of performing the requested clinical trials, which were estimated to cost approximately $4,400,000. Alternatively, Novadaq sought a declaration that the Agreement should be terminated as a result of Akorn's alleged breach. Finally, in either event, Novadaq sought unspecified damages 7 as a result of the alleged failure or delay on Akorn's part in performing its obligations under the Agreement. In its response, Akorn denied Novadaq's allegations and alleged that Novadaq had breached the agreement. On January 25, 2002, the Company and Novadaq reached a settlement of the dispute. Under terms of a revised agreement entered into as part of the settlement, Novadaq will assume all further costs associated with development of the technology. The Company, in consideration of foregoing any share of future net profits, obtained an equity ownership interest in Novadaq and the right to be the exclusive supplier of ICG for use in Novadaq's diagnostic procedures. In addition, Antonio R. Pera, Akorn's then President and Chief Operating Officer, was named to Novadaq's Board of Directors. In conjunction with the revised agreement, Novadaq and the Company each withdrew their respective arbitration proceedings. Subsequent to the resignation of Mr. Pera on June 7, 2002, the Company named Ben J. Pothast, its Chief Financial Officer, to fill the vacancy on the Novadaq Board of Directors created by his departure. 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, 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, 2001. 8 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock was traded on the NASDAQ National Market under the symbol AKRN until June 24, 2002. The Company was notified on that day that due to non-compliance with the NASDAQ report filing requirements, the Company's stock would cease being listed effective the opening of business on June 25, 2002. The non-compliance related to the Company's Form 10-K filing with the Securities and Exchange Commission for the year ended December 31, 2001 that contained unaudited financial statements. Subsequently, the Company's stock has traded in the Over-the-Counter market and is listed on the Pink Sheets under the symbol AKRN. The Company plans to apply for listing on a National Stock Market Exchange upon the filing of this Form 10-K/A, which contains audited financial statements. On March 7, 2002, there were approximately 615 holders of record of the Company's Common Stock. This number does not include shareholders for which shares are held in a 'nominee' or 'street' name. The closing price of the Company's Common Stock on March 7, 2002 was $3.94 per share. High and low bid prices per NASDAQ for the periods indicated were:
HIGH LOW ---- --- Year Ended December 31, 2001: 1st Quarter....................... $ 6.25 $ 1.97 2nd Quarter....................... 3.25 1.03 3rd Quarter....................... 4.23 2.79 4th Quarter....................... 4.74 2.76 Year Ended December 31, 2000: 1st Quarter....................... $ 13.56 $ 4.00 2nd Quarter....................... 9.88 5.50 3rd Quarter....................... 12.63 5.00 4th Quarter....................... 11.00 2.16
The Company did not pay cash dividends in 2001, 2000 or 1999 and does not expect to pay dividends on our common stock in the foreseeable future. Moreover, the Company is currently prohibited by its credit agreement from making any dividend payment. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial information for the Company for the years ended December 31, 2001, 2000, 1999, 1998 and 1997. Financial information for the years ended December 31, 2001 and 2000 has been restated. See Note S "Restatement" in the consolidated financial statements included in Item 8.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- --------- ------- RESTATED RESTATED PER SHARE Equity........................... $ 1.23 $ 1.85 $ 1.85 $ 1.40 $ 1.20 Net income: Basic.......................... $ (0.78) $ (0.13) $ 0.37 $ 0.26 $ 0.11 Diluted........................ $ (0.78) $ (0.13) $ 0.36 $ 0.25 $ 0.11 Price: High...................... $ 6.44 $ 13.63 $ 5.56 $ 9.19 $ 4.50 Low....................... $ 1.03 $ 3.50 $ 3.50 $ 2.54 $ 1.84 P/E: High...................... NM NM 15x 35x 41x Low....................... NM MN 10x 10x 17x INCOME DATA (000's) Revenues......................... $ 42,248 $ 66,927 $ 64,632 $ 56,667 $ 42,323 Gross profit..................... 7,101 28,837 33,477 29,060 18,776 Operating income (loss).......... (20,996) (1,731) 12,122 9,444 3,165 Interest expense................. (3,768) (2,400) (1,921) (1,451) (497) Pretax income (loss)............. (24,926) (4,014) 10,639 7,686 2,844 Income tax provision (benefit)... (9,780) (1,600) 3,969 3,039 1,052 Net income (loss)................ (15,146) (2,414) 6,670 4,647 1,792 Weighted average shares outstanding: Basic.......................... 19,337 19,030 18,269 17,891 16,614 Diluted........................ 19,337 19,030 18,573 18,766 16,925 BALANCE SHEET (000's) Current assets................... $ 28,580 $ 37,522 $ 35,851 $ 24,948 $ 19,633 Net fixed assets................. 33,518 34,031 20,812 15,860 12,395 Total assets..................... 84,546 91,917 76,098 61,416 38,715 Current liabilities.............. 52,937 15,768 9,693 13,908 8,612 Long-term obligations............ 7,779 40,918 32,015 21,228 9,852 Shareholders' equity............. 23,830 35,231 34,390 26,280 20,251 CASH FLOW DATA (000's) From operations.................. $ (444) $ 362 $ 131 $ 1,093 $ 64 Dividends paid................... -- -- -- -- -- From investing................... (4,126) (17,688) (6,233) (13,668) (6,387) From financing................... 9,118 18,108 5,391 10,898 7,356 Change in cash and cash 4,548 782 (711) (1,677) 1,033 equivalents......................
- ---------- NM -- Not meaningful 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. Subsequent to the issuance of the Company's consolidated financial statements for the year ended December 31, 2001, management of the Company determined that the balance of the Company's allowance for doubtful accounts as of December 31, 2000 was understated by $7,520,000 and that bad debt expense for the years ended December 31, 2000 and 2001 was understated and overstated, respectively, by a corresponding amount. In addition, management determined that the Company had not recognized the $1,508,000 beneficial conversion feature embedded in the convertible notes issued to Dr. Kapoor. The Company's consolidated financial statements for the years ended December 31, 2000 and 2001 have been restated to appropriately account for these items. See Note S "Restatement" in the consolidated financial statements included in Item 8 for a summary of the significant effects of the restatement. The following discussion and analysis give effect to the restatement. 10 RESULTS OF OPERATIONS The Company's revenues are derived from sales of diagnostic and therapeutic pharmaceuticals and surgical instruments by the ophthalmic segment, from sales of diagnostic and therapeutic pharmaceuticals by the injectable segment and from contract services revenue. 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, 2001, 2000 and 1999.
YEARS ENDED DECEMBER 31, ---------------------------- 2001 2000 1999 --------- --------- ------- Revenues Ophthalmic.................................... 41% 42% 50% Injectable.................................... 23 38 35 Contract Services............................. 36 20 15 ---- --- --- Total revenues.................................. 100 100 100 Gross profit.................................... 17 43 52 Selling, general and administrative expenses.... 57 37 26 Amortization of intangibles..................... 4 2 3 Research and development expenses............... 6 6 4 ---- --- --- Operating income (loss)......................... (50) (3) 19 Net income (loss)............................... (36) (4) 10
CRITICAL ACCOUNTING POLICIES The Company recognizes sales upon the shipment of goods, provided that all obligations of the Company have been fulfilled and collection of the related receivable is probable. Provision is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date for estimated chargebacks, rebates and product returns. Royalty revenue is recognized when earned and is based on net sales, as defined. The Company enters contractual agreements with certain third parties such as hospitals and group-purchasing organizations to sell certain products at predetermined prices. The parties have elected to have these contracts administered through wholesalers. When a wholesaler sells products to one of the third parties that is subject to a contractual price agreement, the difference between the price to the wholesaler and the price under the contract is charged back to the Company by the wholesaler. The Company reduces gross sales and accounts receivable by the estimated chargeback amount when it sells products to a wholesaler. The Company evaluates the chargeback allowance against actual chargebacks processed by wholesalers. Actual chargebacks processed can vary materially from period to period. Similarly, the Company maintains an allowance for rebates related to contract and other programs with wholesalers. These allowances also reduce gross sales and accounts receivable by the amount of the estimated rebate amount when the Company sells its products to the wholesalers. The Company evaluates the allowance against actual rebates processed and such amount can vary materially from period to period. The recorded allowances reflect the Company's current estimate of the future chargeback and rebate liability to be paid or credited to the wholesalers under these various contracts and programs. For the years ended December 31, 1999, 2000 and 2001, the Company recorded chargeback and rebate expense of $23,793,000, $29,558,000 and $28,655,000, respectively. The allowance for chargebacks and rebates was $3,296,000 and $4,190,000 as of December 31, 2000 and 2001. In May 2001, the Company completed an analysis of its March 31, 2001 allowance for chargebacks and rebates. In performing such analysis, the Company utilized recently obtained reports of wholesalers' inventory information, which had not been previously obtained or utilized. Based on the wholesalers' March 31, 2001 inventories and historical chargeback and rebate activity, the Company recorded an allowance of $6,961,000, which resulted in an expense of $12,000,000 for the three months ended March 31, 2001, as compared to an allowance of $3,296,000 at December 31, 2000. During the quarter ended June 30, 2001, the Company further refined its estimates of the chargeback and rebate liability determining that an additional $2,250,000 provision needed to be recorded. This additional increase to the allowance was necessary to reflect the continuing shift of sales to customers who purchase their products through group purchasing organizations and buying groups. The Company had previously seen a greater level of list price business than is occurring in the current business environment. 11 The Company maintains an allowance for estimated product returns. This allowance is reflected as a reduction of account receivable balances. The Company evaluates the allowance balance against actual returns processed. Actual returns processed can vary materially from period to period. For the years ended December 31, 1999, 2000 and 2001, the Company recorded a provision for product returns of $205,000, $1,159,000 and $4,103,000, respectively. The allowance for potential product returns was $232,000 and $548,000 at December 31, 2000 and 2001, respectively. Based on the wholesalers' inventory information, the Company increased its allowance for potential product returns to $2,232,000 at March 31, 2001 from $232,000 at December 31, 2000. The provision for the three months ended March 31, 2001 was $2,559,000. The Company maintains an allowance for doubtful accounts, which reflects trade receivable balances owed to the Company that are believed to be uncollectible. This allowance is reflected as a reduction of accounts receivable balances. The expense related to doubtful accounts is reflected in selling, general and administrative ("SG&A") expenses. In estimating the allowance for doubtful accounts, the Company has: - Identified the relevant factors that might affect the accounting estimate for allowance for doubtful accounts, including: (a) historical experience with collections and write-offs; (b) credit quality of customers; (c) the interaction of credits being taken for discounts, rebates, allowances and other adjustments; (d) balances of outstanding receivables, and partially paid receivables; and (e) economic environmental and other exogenous factors that might affect collectibility (e.g., bankruptcies of customers, "channel" factors, etc.). - Accumulated data on which to base the estimate for allowance for doubtful accounts, including: (a) collections and write-offs data; (b) information regarding current credit quality of customers; and (c) information regarding exogenous factors, particularly in respect of major customers. - Developed assumptions reflecting management's judgments as to the most likely circumstances and outcomes, regarding, among other matters: (a) collectibility of outstanding balances relating to "partial payments;" (b) the ability to collect items in dispute (or subject to reconciliation) with customers; and (c) economic and other exogenous factors that might affect collectibility of outstanding balances - based upon information available at the time. For the years ended December 31, 1999, 2000 and 2001, the Company recorded a provision for doubtful accounts of $161,000, $8,127,000 and $4,480,000, respectively. The allowance for doubtful accounts was $8,321,000 and $3,706,000 as of December 31, 2000 and 2001, respectively. The Company maintains an allowance for discounts, which reflects discounts available to certain customers based on agreed upon terms of sale. This allowance is reflected as a reduction of accounts receivable. The Company evaluates the allowance balance against actual discounts taken. For the year ended December 31, 2001, the Company recorded a provision for discounts of $886,000. Previous to 2001, the Company did not grant discounts. The allowance for discounts was $143,000 as of December 31, 2001. The Company maintains an allowance for slow-moving and obsolete inventory based upon recent historical sales by unit and, more recently, wholesaler inventory information. The Company evaluates the potential sales of its products over their remaining lives and estimates the amount that may expire before being sold. For the years ended December 31, 1999, 2000 and 2001, the Company recorded a provision for inventory obsolescence of $611,000, $3,983,000 and $1,830,000, respectively. The allowance for inventory obsolescence was $3,171,000 and $1,845,000 as of December 31, 2000 and 2001, respectively. The Company files a consolidated federal income tax return with its subsidiary. 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. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. Intangibles consist primarily of product licensing and other such costs that 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, 2001 and 2000 was $7,132,000 and $5,954,000, respectively. The Company annually assesses the impairment of intangibles based on several factors, including estimated fair market value and anticipated cash flows. 12 COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2001 AND 2000 Revenues decreased 36.9% for the year ended December 31, 2001 compared to the prior year. Ophthalmic segment revenues decreased 38.2%, primarily reflecting the decline in sales in the antibiotic, glaucoma and artificial tear product lines. The remaining decline in ophthalmic revenues reflects the effect of increases to the allowance for chargebacks and rebates and returns discussed above. Ophthalmic net sales were also negatively impacted by price competition for some of the Company's higher volume product lines. The reduction in sales was due to both declines in unit price as well as volume. Injectable segment revenues decreased 60.9%, primarily due to the increases in the allowances for chargebacks and rebates and returns and a sharp reduction in anesthesia and antidote product sales. The sharp reduction is attributable to excessive wholesaler inventories that were reduced during the year without compensating purchases made by the wholesalers. Contract services revenues increased 10.6% compared to the same period in 2000, primarily due to price increases necessary to cover increasing production costs. Consolidated gross profit decreased 75.4% for the year, with gross margins decreasing from 43.1% to 16.8%. This reflects the effects of the aforementioned decline in net sales, as well as an increase in the reserve for slow-moving, unsaleable and obsolete inventory items. In addition, the Company incurred unfavorable manufacturing variances at the Somerset, NJ facility and its Decatur, IL facility, which eroded the gross margin percentage. These variances were the result of reduced activity in the plant, primarily caused by the previously discussed reduction in sales that resulted from the wholesaler inventories being reduced without compensating purchases. Management anticipates that unfavorable manufacturing variances will decrease in the future as a result of the restructuring program (See Note R "Restructuring Charges" in the consolidated financial statements included in Item 8) implemented during 2001. The Company is actively looking into increasing its manufacturing activity at its Somerset facility either through additional product approvals or increasing its third-party manufacturing business. SG&A expenses decreased 3.7% for the year as compared to 2000. The decrease is primarily due to a year over year decrease in the provision for bad debts of $3,647,000 partially offset by asset impairment charges related to discontinued products of $2,132,000 and restructuring-related charges of $1,117,000 (primarily severance and lease costs). Amortization of intangibles decreased 1.6% for the year, reflecting the exhaustion of certain product intangibles. Research and Development expenses ("R&D") decreased 37.1%, primarily reflecting a scaling back of research and development activities. The Company is focusing on strategic product niches in which it believes it will be able to add value, primarily in the areas of controlled substances and ophthalmic products. Interest expense increased 57.0% compared to 2000, reflecting higher interest rates on higher average outstanding debt balances and amortization related to the convertible debt issued during the year (See Note G) partially offset by capitalized interest related to the lyophilized pharmaceuticals manufacturing line expansion. Income tax benefit of $9,780,000 was recorded for the year compared to a income tax benefit of $1,600,000 recorded in 2000 reflecting a greater level of operating losses. The effective tax rate for the year was 39.2% compared to an effective tax rate in 2000 of 39.9%. Net loss for 2001 was $15,146,000, or $0.78 per share, compared to net loss of $2,414,000, or $0.13 per share, for the prior year. The decrease in earnings resulted from the aforementioned items. COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2000 AND 1999 Revenues increased 3.6% for the year ended December 31, 2000 compared to the prior year. Ophthalmic segment revenues decreased 13.1%, primarily due to sharply reduced sales in generic therapeutic pharmaceuticals for glaucoma and allergies. The reduction in sales was due to both declines in unit price as well as volume. Injectable segment revenues increased 10.8%, primarily due to sales of acquired anesthesia products. Injectable segment sales also benefited from favorable unit prices due to a continuing shortage of certain distributed products. In both segments, wholesaler-discounting programs unfavorably impacted unit prices. These discounts take the form of chargebacks and rebates. Contract services revenue increased 43.3% as a result of management's efforts to increase the volume of business related to commercial contract manufacturing and product development activities. Consolidated gross profit decreased 13.9% for the year, with gross margins decreasing from 51.8% to 43.1%. Pricing pressure on ophthalmic generic pharmaceuticals as well as the disproportionate increase in contract manufacturing revenues caused the decrease in gross margins. Contract manufacturing activity commands significantly lower margins than sales of the Company's other product 13 lines. Margins in 2000 were also reduced by a $4.0 million ($2.7 million in the fourth quarter) increase in the reserve for slow-moving and obsolete inventory. This increase was primarily related to products purchased from third parties in 1998 and 1999 for which the original sales forecast overestimated demand. SG&A expenses increased 48.9% for the year as compared to 1999. The primary source of the increase was the provision for bad debts recorded during the year of $8,127,000. In late 2000, the Company increased collection attempts of certain outstanding and past-due receivables, primarily involving certain of its major customers (including wholesalers). The Company was confronted with customers unwilling to pay invoiced amounts without the Company meeting certain high levels of evidentiary support. The Company concluded it would be unable to collect these amounts from certain customers. As a result, the Company recorded bad debt expense of $7,520,000 during the fourth quarter of 2000. Amortization of intangibles decreased 19.1% for the year, reflecting a patent expiration in the 2nd quarter of 1999. R&D expenses increased 50.6%, primarily reflecting costs associated with Piroxicam clinical trials and beginning stage development of the Company's age-related macular degeneration product. Interest expense increased 24.9%, reflecting higher interest rates on higher average outstanding debt balances partially offset by capitalized interest related to major capital projects in 2000. Income tax benefit of $1,600,000 was recorded for the year compared to an income tax provision of $3,969,000 recorded in 2000 reflecting the impact of operating losses during fiscal 2000. The effective tax rate for the year was 39.9% compared to an effective tax rate in 1999 of 37.3%. Net loss for 2000 was $2,414,000, or $0.13 per share, compared to net income of $6,670,000, or $0.36 per diluted share, for the prior year. The decrease in earnings resulted from the above-mentioned items. FINANCIAL CONDITION AND LIQUIDITY As of December 31, 2001, the Company had cash and cash equivalents of $5,355,000. The net working capital balance at December 31, 2001 was $(24,357,000) versus $21,754,000 at December 31, 2000 resulting primarily from decreases in receivables and inventory and classification of the Company's senior debt obligation as a current liability. During the year ended December 31, 2001, the Company used $444,000 in cash for operations. Investing activities, which include the purchase of product-related intangible assets as well as equipment required $4,126,000 in cash. Fixed asset purchases related to the lyophilized (freeze-dried) pharmaceuticals manufacturing line expansion accounted for $2,566,000 of the $4,126,000 cash used in investing activities and the Company expects to spend an additional $2,500,000 for such expansion during 2002. Financing activities provided $9,118,000 in cash primarily through the issuance of $5,000,000 subordinated convertible debentures and a $3,250,000 promissory note. 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 and secured by substantially all of the assets of the Company. The credit agreement, as amended effective January 1, 2002, requires the Company to maintain certain financial covenants. These covenants include minimum levels of cash receipts, limitations on capital expenditures, a $750,000 per quarter limitation on product returns and required amortization of the loan principal. The agreement also prohibits the Company from declaring any cash dividends on its common stock and identifies certain conditions in which the principal and interest on the credit agreement would become immediately due and payable. These conditions include: (a) an action by the FDA which results in a partial or total suspension of production or shipment of products, (b) failure to invite the FDA in for re-inspection of the Decatur manufacturing facilities by June 1, 2002, (c) failure to make a written response, within 10 days, to the FDA, with a copy to the lender, to any written communication received from the FDA after January 1, 2002 that raises any deficiencies, (d) imposition of fines against the Company in an aggregate amount greater than $250,000, (e) a cessation in public trading of Akorn stock other than a cessation of trading generally in the United States securities market, (f) restatement of or adjustment to the operating results of the Company in an amount greater than $27,000,000, (g) failure to enter into an engagement letter with an investment banker for the underwriting of an offering of equity securities by June 15, 2002, (h) failure to not be party to an engagement letter at any time after June 15, 2002 or (i) experience any material adverse action taken by the FDA, the SEC, the DEA or any other Governmental Authority based on an alleged failure to comply with laws or regulations. The amended credit agreement requires a minimum payment of $5.6 million, which relates to an estimated federal tax refund, with the balance of $39.2 million due June 30, 2002. The Company remitted the $5.6 million payment on 14 May 8, 2002. The Company is also obligated to remit any additional federal tax refunds received above the estimated $5.6 million. The Company's senior lenders agreed to extend the credit agreement to July 31, 2002 and then again to August 31, 2002. These two extensions contain the same covenants and reporting requirements except that the Company is not required to comply with conditions (g) and (h) which relate to the offering of equity securities. In both instances, the balance of $39.2 million was due at the end of the extension term. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced losses from operations in 2001 and 2000 of $21.0 million and $1.7 million, respectively and has a working capital deficiency of $24.4 million as of December 31, 2001. As discussed in Note G, the Company has significant borrowings which require, among other things, compliance with various covenants. On September 16, 2002, the Company was notified by it senior lenders that it was in default due to failure to pay the principal and interest owed as of August 31, 2002 under the most recent extension of the credit agreement. The senior lenders also notified the Company that they would forbear from exercising their remedies under the credit agreement until January 3, 2003 if a forbearance agreement could be reached. On September 20, 2002, the Company and its senior lenders entered into an agreement under which the senior lenders would agree to forbear from exercising their remedies (the "Forbearance Agreement) and the Company acknowledged its current default. The Forbearance Agreement provides a second line of credit allowing the Company to borrow the lesser of (i) the difference between the Company's outstanding indebtedness to the senior lenders and $39,200,000, (ii) the Company's borrowing base and (iii) $1,750,000, to fund the Company's day-to-day operations. The Forbearance Agreement provides for certain additional restrictions on operations and additional reporting requirements. The Forbearance Agreement also requires automatic application of cash from the Company's operations to repay borrowings under the new revolving loan, and to reduce the Company's other obligations to the senior lenders. The Company, as required in the Forbearance Agreement, has agreed to provide the senior lenders with a plan for restructuring its financial obligations on or before December 1, 2002, and has agreed to retain a consulting firm by September 27, 2002 to assist in the development and execution of this restructuring plan. In addition, as discussed in Note M to the consolidated financial statements in Item 8, the Company is a party in governmental proceedings and potential claims by the Food and Drug Administration, the Securities and Exchange Commission and the Drug Enforcement Agency. While the Company is cooperating with each governmental agency, an unfavorable outcome in one or more proceeding may have a material impact on the Company's operations and its financial condition, results of operations and/or cash flows and, accordingly, may constitute a material adverse action that would result in a covenant violation. In the event that the Company is not in compliance with the covenants during 2002 and does not negotiate amended covenants and/or obtain a waiver thereto, then the debt holder, at its option, may demand immediate payment of all outstanding amounts due it and exercise any and all remedies available to it, including, but not limited to, foreclosure on the Company's assets. These matters, among others raise substantial doubt about whether the Company will be able to continue as a going concern. The Company's ability to operate as a going concern is dependent on its ability to successfully negotiate with its senior lenders to extend its borrowing on a long term basis, to obtain such additional financing or re-financing as may be required, and ultimately to achieve profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As discussed above, the current credit facility matured on August 31, 2002 and is subject to the Forbearance Agreement discussed above which matures on January 3, 2003, at which point the Company will need to re-negotiate or obtain new financing. While there can be no guarantee that the Company will be successful in re-negotiating or obtaining new financing, the Company believes it has a good relationship with its lenders, is returning to generating income from operations and, as required, will retain a consulting firm to assist in the development of a restructuring plan. As a result, management of the Company believes that the Company will be able to sustain its operations and continue as a going concern. However, the ultimate outcome of this uncertainty cannot presently be determined. On July 12, 2001 the Company entered into a $5,000,000 subordinated debt transaction with the John N. Kapoor Trust dtd. 9/20/89 (the "Trust"), the sole trustee and sole beneficiary of which is Dr. John N. Kapoor, the Company's current CEO and Chairman of the Board of Directors. The transaction is evidenced by a Convertible Bridge Loan and Warrant Agreement (the "Trust Agreement") in which the Trust agreed to provide two separate tranches of funding in the amounts of $3,000,000 ("Tranche A" which was received on July 13, 2001) and $2,000,000 ("Tranche B" which was received on August 16, 2001). As part of the consideration provided to the Trust for the subordinated debt, the Company issued the Trust two warrants which allow the Trust to purchase 1,000,000 shares of common stock at a price of $2.85 per share and another 667,000 shares of common stock at a price of $2.25 per share. The exercise 15 price for each warrant represented a 25% premium over the share price at the time of the Trust's commitment to provide the subordinated debt. Under the terms of the Trust Agreement, the subordinated debt bears interest at prime plus 3%, which is the same rate the Company pays on its senior debt. Interest cannot be paid to the Trust until the repayment of the senior debt pursuant to the terms of a subordination agreement, which was entered into between the Trust and the Company's senior lenders. Should the subordination agreement be terminated, interest may be paid sooner. The convertible feature of the Trust Agreement, as amended, allows for conversion of the subordinated debt plus interest into common stock of the Company, at a price of $2.28 per share of common stock for Tranche A and $1.80 per share of common stock for Tranche B. The Company, in accordance with Accounting Principles Board ("APB") Opinion No. 14, recorded the subordinated debt transaction such that the convertible debt and warrants have been assigned independent values. The fair value of the warrants was 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 79%, (iii) risk free rate of 4.75%, and (iv) expected life of 5 years. As a result, the Company assigned a value of $1,516,000 to the warrants and recorded this amount as additional paid in capital. In accordance with Emerging Issues Task Force Abstract 00-27, the Company has also computed and recorded a value related to the "intrinsic" value of the convertible debt. This calculation determines the value of the embedded conversion option within the debt that has become beneficial to the owner as a result of the application of APB Opinion No. 14. This value was determined to be $1,508,000 and was recorded as additional paid in capital. The remaining $1,976,000 was recorded as long-term debt. The resultant debt discount of $3,024,000, equivalent to the value assigned to the warrants and the "intrinsic" value of the convertible debt, is being amortized and charged to interest expense over the life of the subordinated debt. In December 2001, the Company entered into a $3,250,000 five-year loan with NeoPharm, Inc. ("NeoPharm") to fund Akorn's efforts to complete its lyophilization facility located in Decatur, Illinois. Under the terms of the Promissory Note, dated December 20, 2001, interest accrues at the initial rate of 3.6% and will be reset quarterly based upon NeoPharm's average return on its cash and readily tradable long and short-term securities during the previous calendar quarter. The principal and accrued interest is due and payable on or before maturity on December 20, 2006. The note provides that Akorn will use the proceeds of the loan solely to validate and complete the lyophilization facility located in Decatur, Illinois and to address the issues set forth in the Form 483 and warning letter received from the FDA. The Promissory Note is subordinated to Akorn's senior debt owed to The Northern Trust Company but is senior to Akorn's subordinated debt owed to the Trust. The note was executed in conjunction with a Processing Agreement that provides NeoPharm, Inc. with the option of securing at least 15% of the capacity of Akorn's lyophilization facility each year. Dr. John N. Kapoor, the Company's chairman and chief executive officer is also chairman of NeoPharm and holds a substantial stock position in NeoPharm as well as in the Company. Contemporaneous with the completion of the Promissory Note between the Company and NeoPharm, the Company entered into an agreement with the Trust, which amended the Trust Agreement. The amendment extended the Trust Agreement to terminate concurrently with the Promissory Note on December 20, 2006. The amendment also made it possible for the Trust to convert the interest accrued on the $3,000,000 tranche into common stock of the Company. Previously, the Trust could only convert the interest accrued on the $2,000,000 tranche. The change related to the convertibility of the interest accrued on the $3,000,000 tranche requires that shareholder approval be received by August 31, 2002, which was subsequently extended to December 31, 2002. In June 1998, the Company entered into a $3,000,000 mortgage agreement with Standard Mortgage Investors, LLC of which there were outstanding borrowings of $2,189,000 and $2,442,000 at December 31, 2001 and 2000, respectively. The principal balance is payable 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. The fair value of the debt obligations approximated the recorded value as of December 31, 2001. The promissory note between the Company and NeoPharm, Inc. bears interest at a rate that is lower than the Company's current borrowing rate with its senior lenders. Accordingly, the computed fair value of the debt, which the Company estimates to be approximately $2,650,000, would be lower than the current carrying value of $3,250,000. 16 SELECTED QUARTERLY DATA In Thousands, Except Per Share Amounts As previously reported:
NET INCOME (LOSS) -------------------------------- GROSS PER SHARE PER SHARE REVENUES PROFIT (LOSS) AMOUNT BASIC DILUTED -------- ------------- --------- --------- --------- Year Ended December 31, 2001: 1st Quarter................ $ 6,076 $ (5,783) $ (12,977) $(0.67) $(0.67) 2nd Quarter................ 10,637 2,509 (6,275) (0.33) (0.33) 3rd Quarter................ 12,842 5,013 (479) (0.02) (0.02) 4th Quarter................ 12,693 5,362 120 0.01 0.01 ------- -------- --------- ------ ------ Total $42,248 $ 7,101 $ (19,611) $(1.01) $(1.01) ======= ======== ========= ====== ====== Year Ended December 31, 2000: 1st Quarter................ $16,644 $ 8,413 $ 1,794 $ 0.10 $ 0.09 2nd Quarter................ 18,320 9,786 2,184 0.11 0.11 3rd Quarter................ 16,878 7,096 415 0.02 0.02 4th Quarter................ 15,085 3,542 (2,206) (0.11) (0.11) ------- -------- --------- ------ ------ Total $66,927 $ 28,837 $ 2,187 $ 0.11 $ 0.11 ======= ======== ========= ====== ======
As restated, see Note S "Restatement" in the consolidated financial statements included in Item 8:
NET INCOME (LOSS) -------------------------------- GROSS PER SHARE PER SHARE REVENUES PROFIT (LOSS) AMOUNT BASIC DILUTED -------- ------------- -------- --------- --------- Year Ended December 31, 2001: 1st Quarter - RESTATED..... $ 6,076 $ (5,783) $ (8,376) $(0.43) $(0.43) 2nd Quarter................ 10,637 2,509 (6,275) (0.33) (0.33) 3rd Quarter - RESTATED..... 12,842 5,013 (536) (0.03) (0.03) 4th Quarter - RESTATED..... 12,693 5,362 41 0.00 0.00 ------- -------- --------- ------ ------ Total - RESTATED $42,248 $ 7,101 $ (15,146) $(0.78) $(0.78) ======= ======== ========= ====== ====== Year Ended December 31, 2000: 1st Quarter................ $16,644 $ 8,413 $ 1,794 $ 0.10 $ 0.09 2nd Quarter................ 18,320 9,786 2,184 0.11 0.11 3rd Quarter................ 16,878 7,096 415 0.02 0.02 4th Quarter - RESTATED..... 15,085 3,542 (6,807) (0.35) (0.35) ------- -------- --------- ------ ------ Total - RESTATED $66,927 $ 28,837 $ (2,414) $(0.13) $(0.13) ======= ======== ========== ======= =======
FACTORS THAT MAY AFFECT FUTURE RESULTS Financial Risk Factors A small number of wholesale drug distributors accounts for a large portion of the Company's revenues. In 2001, sales to five wholesale drug distributors accounted for 42% of total gross sales and approximately 47% of gross trade receivables as of December 31, 2001. The loss of one or more of these customers, a change in purchasing patterns, an increase in returns of the Company's products, delays in purchasing products and delays in payment for products by one or more distributors could have a material negative impact on the Company's revenue and results of operations and may lead to a violation of debt covenants. At December 31, 2001, the Company had total outstanding indebtedness of $52,646,000, or 69% of total capitalization. This significant debt load could limit the Company's operating flexibility as a result of restrictive covenants placed on the Company by its lenders. Further, the current debt levels could require usage of a large portion of the cash flow from operations for debt payments that would reduce the availability of cash flow to fund operations, product acquisitions, expansion of the Company's sales force, facilities improvements and research and development activities. On a number of occasions, the Company has been out of compliance with many of the financial and other covenants contained in the documents that govern its debt. To date, the Company has been able to either renegotiate the terms of such covenants or obtain waivers or forbearance of such non-compliance. On September 16, 2002, the Company was notified by it senior lenders that it was in default due to failure to pay the principal and interest owed as of August 31, 2002 under the most recent extension of the credit agreement. The senior lenders also notified the Company that they would forbear from exercising their remedies under the credit agreement until January 3, 2003 if a forbearance agreement could be reached. On September 20, 2002, the Company and its senior lenders entered into an agreement under which the senior lenders would agree to forbear from exercising their remedies (the "Forbearance Agreement) and the Company acknowledged its current default. The Company is a party in governmental proceedings and potential claims by the FDA, the SEC and the DEA. 17 See "Item 3. Legal Proceedings." An unfavorable outcome in one or more proceeding may constitute a material adverse action that would constitute a covenant violation. While there can be no guarantee that the Company will be successful in re-negotiating or obtaining new financing, the Company believes it has a good relationship with its lenders, is returning to generating income from operations and, as required, will retain a consulting firm to assist in the development of the restructuring plan. See Note A "Basis of Presentation" in the consolidated financial statements included in Item 8 for a discussion on the Company's ability to continue as a going concern. The Company may need additional funds to operate and grow its business. The Company may seek additional funds through public and private financing, including equity and debt offerings. Adequate funds through the financial markets or from other sources, may not be available when needed or on terms favorable to the Company or its stockholders. Insufficient funds could cause the Company to delay, scale back, or abandon some or all of its product acquisition, licensing opportunities, marketing, product development, research and development and manufacturing opportunities. Government Regulation Federal and state statutes and government agencies regulate virtually all aspects of the Company's business. 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. These agencies include 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"). Similar state and local agencies also regulate these activities. 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 restriction or prohibition on sales, halting of manufacturing operations or recalls of the Company's pharmaceutical products will not occur in the future. Any such actions could have a material adverse effect on the Company's business, financial condition and results of operations. Further, such actions, in certain circumstances, could constitute an event of default under the provision of the Company's senior debt. 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 efficacy. 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, 18 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. 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. During 2000, the Company received a warning letter as a result of a routine inspection of its Decatur manufacturing facilities. This letter focused on general documentation and cleaning validation issues. The Company was re-inspected in late 2001 and the FDA issued a Form 483 documenting its findings. The Company responded to these findings on January 4, 2002 and the FDA has accepted the Company's response. The Company anticipates a re-inspection of its Decatur facility by the FDA in the fourth quarter of 2002. The warning letter prevents the FDA from issuing any approval for new products manufactured at the Decatur facility. The warning letter does not inhibit the Company's ability to continue manufacturing products that are currently approved. The warning letter does not impact the operations at the Somerset facility. See Item 3 "Legal Proceedings." 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 that 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. On March 6, 2002, the Company received a letter from the United States Attorney's Office, Central District of Illinois, Springfield, Illinois, advising the Company that the United States Drug Enforcement Administration had referred a matter to that office for a possible civil legal action for alleged violations of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. Section 801, et. seq. and regulations promulgated under the Act. The Company continues to have discussions with the United States Attorneys Office and anticipates that any action under this matter will not have a material impact on its financial statements. See Item 3 "Legal Proceedings." 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 current marketing and distributions channels and, when appropriate, the enhancement of such marketing and distribution channels. As of December 31, 2002, the Company had 17 ANDAs in various stages of development and anticipates filing two NDAs relating to the 19 usage of Indocyanine Green for age-related macular degeneration and intra-ocular staining at some point in the future. 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. Until such time as the Company receives clearance from the Form 483 and warning letter received from the FDA, the Company will not receive approval from the FDA to manufacture any new NDA products at its Decatur facility. The Company's failure to develop new products or receive FDA approval of ANDAs or NDAs, or address the issues raised in the Form 483 and warning letter received from the FDA, 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 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 other pharmaceutical companies sell generic and other substitutes for most of its branded pharmaceutical products. 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 that 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. Risks and Expense of Legal Proceedings The Company is currently involved in several pending or threatened legal actions with both private parties and certain government agencies. See "Legal Proceedings". While the Company believes that its positions in these various matters are meritorious, to the extent that the Company's personnel must spend time and the Company must expend resources to pursue or contest these various matters, or any additional matters that may be asserted from the time to time in the future, this represents time and money that is not available for other actions that the Company might otherwise pursue which could be beneficial to the Company's future. In addition, to the extent that the Company is unsuccessful in any legal proceedings, the consequences could have a negative impact on the Company or its operations. These consequences could include, but not be limited to, fines, penalties, injunctions, the loss of patent or other rights, the need to write down or off the value of assets (which could negatively impact the Company's earnings and/or cause the violation of debt covenants) and a wide variety of other potential remedies or actions that could be taken against the Company. While the Company will continue to vigorously pursue its rights in all such matters, no assurance can be given that the Company will be successful in any of these proceedings or, even if successful, that the Company would be able to recoup any of the moneys expended 20 in pursuing such matters. 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 that 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 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 the case of 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 revenues 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 $50,000 deductible per incident and a $250,000 aggregate annual deductible. However, there can be no assurance that such insurance coverage will be sufficient to fully cover 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. 21 Acquisition and Licensing of Pharmaceutical Products The Company may 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. Were the Company to elect to pursue this strategy, its success would depend, 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 would have success in identifying potential product acquisitions or licensing opportunities or that, if identified, it would complete such product acquisitions or obtain such licenses on acceptable terms or that it would obtain the necessary financing, or that it could 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 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. Exercise of Warrants, Conversion of Subordinated Debt, May have Dilutive Effect Under the terms of a $5,000,000 subordinated debt transaction, which the Company entered into on July 12, 2001 with the John N. Kapoor trust dtd. 9/20/89 (the "Trust"), the sole trustee and sole beneficiary of which is Dr. John N. Kapoor, the Company's current CEO and Chairman of the Board of Directors, the Trust agreed to provide the Company with $5,000,000 of subordinated debt in two separate tranches of $3,000,000 ("Tranche A") and $2,000,000 ("Tranche B"). In return for providing the subordinated debt, the Trust was granted Warrants to purchase 1,000,000 shares of common stock, at a purchase price of $2.85 per share for Tranche A and 667,000 shares of common stock, at a purchase price of $2.25 per share, for Tranche B. In addition, Tranche A, plus the interest on Tranche A, is convertible into common stock of the Company at a price of $2.28 per share, and Tranche B, plus the interest on Tranche B, is convertible into common stock of the Company at a price of $1.80 per share. If the price per share of the Company's common stock at the time of exercise of the Warrants or conversion of the subordinated debt is in excess of the various Warrant exercise or conversion prices, exercise of the Warrants and conversion of the subordinated debt would have a dilutive effect on the Company's common stock. The amount of such dilution, however, cannot currently be determined as it would depend on the difference between the stock price and the price at which the warrants were exercised or the subordinated debt was converted at the time of exercise or conversion. 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 and results of operations. 22 Dependence on Key Executive Officers The Company's success will depend, in part, on its ability to attract and retain key executive officers. The inability to find or 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, but not limited to, 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 to comply with governmental requirements for manufacturing facilities, 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, competitive pricing pressures, expenditures incurred to pursue or contest pending or threatened legal action and the Company's ability to meet its financial covenants. 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, Chief Executive Officer and a principal shareholder, is affiliated with EJ Financial Enterprises, Inc., a health care consulting investment company ("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 and sole trustee of which is Dr. Kapoor, is a principal shareholder of each of these companies. As a result, Dr. Kapoor does not devote his full time to the business of the Company. Although such companies do not currently compete directly with the 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. In addition, one of these companies, NeoPharm, Inc. of which Dr. Kapoor is Chairman and a major stockholder, recently entered into a loan agreement with the Company. Further, Dr. Kapoor has loaned the Company $5,000,000 with the result that he has become a major creditor of the Company as well as a major shareholder. See "Financial Condition and Liquidity." 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 Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137 and No. 138, was effective for the Company's fiscal 2001 financial statements and was adopted by the Company on January 1, 2001. Adoption of these standards did not have an effect on the Company's financial position or results of operations. In June 2001, the FASB issued three statements, SFAS No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 supercedes APB Opinion No. 16, "Business Combinations," and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring all business combinations be accounted for using the purchase method. In addition, in applying the purchase method, SFAS No. 141 changes the criteria for recognizing intangible assets apart from goodwill. The following criteria is to be considered in determining the recognition of the intangible assets: (1) the intangible asset arises from contractual or other legal rights, or (2) the intangible asset is separable or dividable from the acquired entity and capable of being sold, transferred, licensed, rented, or exchanged. The requirements of SFAS No. 141 are effective for all business combinations completed after June 30, 2001. The adoption of this new standard did not have an effect on the Company's financial statements. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets," and requires goodwill and other intangible assets that have an 23 indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. The Company has adopted SFAS No. 142 as of January 1, 2002. The adoption of this new standard did not have an effect on the Company's financial statements as no impairments were recognized. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company has adopted SFAS No. 143 as of January 1, 2002. The adoption of this new standard did not have an effect on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement also supercedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 is effective January 1, 2002. The adoption of this new standard did not have an effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company will adopt SFAS No. 146 for exit or disposal activities initiated after December 31, 2002. The Company does not anticipate that adoption of this standard will have a material effect 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 involves three debt instruments. The credit agreement with The Northern Trust Company and the subordinated convertible debentures issued to the John N. Kapoor Trust bear the same interest rate, which fluctuates at Prime plus 300 basis points. The promissory note issued to NeoPharm, Inc. ("NeoPharm") bears interest at an initial rate of 3.6% and will be reset quarterly based upon NeoPharm's average return on its cash and readily tradable long and short-term securities during the previous calendar quarter. All of the Company's remaining long-term debt is at fixed interest rates. Management estimates that a change of 100 basis points in its variable rate debt from the interest rates in effect at December 31, 2001 would result in a $394,000 change in annual interest expense. The Company's financial instruments consist mainly of cash, accounts receivable, accounts payable and debt. The carrying amounts of these instruments, except debt, approximate fair value due to their short-term nature. The carrying amounts of the Company's bank borrowings under its credit facility approximate fair value because the interest rates are reset periodically to reflect current market rates. The fair value of the debt obligations approximated the recorded value as of December 31, 2001. The promissory note between the Company and NeoPharm, Inc. bears interest at a rate that is lower than the Company's current borrowing rate with its senior lenders. Accordingly, the computed fair value of the debt, which the Company estimates to be approximately $2,650,000, would be lower than the current carrying value of $3,250,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are included in Part II, Item 8 of this Form 10-K/A. Independent Auditors' Report.................................................................................... 25 Consolidated Balance Sheets as of December 31, 2001 (Restated) and 2000 (Restated).............................. 26 Consolidated Statements of Operations for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999 27 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999.................................................................................... 28 Consolidated Statements of Cash Flows for the years ended December 31, 2001 (Restated), 2000 (Restated) and 1999 29 Notes to Consolidated Financial Statements...................................................................... 30
24 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Shareholders of Akorn, Inc.: We have audited the accompanying consolidated financial statements of Akorn, Inc. and subsidiary (the "Company") as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, as listed in the Index at Item 8. Our audits also included the financial statement schedule listed in the Index at Item 14(a).2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 subsidiary at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements for the year ended December 31, 2001 have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company's losses from operations in recent years, working capital deficiency as of December 31, 2001 and the need to refinance or extend its debt on a long-term basis raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note S, the accompanying 2001 and 2000 financial statements have been restated. Deloitte & Touche LLP Chicago, Illinois September 24, 2002, except for paragraph 5 of Note T, as to which the date is October 1, 2002 25 AKORN, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
DECEMBER 31, 2001 2000 ---------- ------- AS RESTATED AS RESTATED ASSETS SEE NOTE S SEE NOTE S CURRENT ASSETS Cash and cash equivalents.......................................... $ 5,355 $ 807 Trade accounts receivable (less allowance for doubtful accounts of $3,706 and $8,321 at December 31, 2001 and 2000, respectively)......................................... 5,902 16,624 Inventory.......................................................... 8,135 14,058 Deferred income taxes.............................................. 2,069 4,935 Income taxes recoverable........................................... 6,540 -- Prepaid expenses and other current assets.......................... 579 1,098 --------- --------- TOTAL CURRENT ASSETS............................................ 28,580 37,522 OTHER ASSETS Intangibles, net................................................... 18,485 20,342 Deferred income taxes.............................................. 3,850 -- Other.............................................................. 113 22 --------- --------- TOTAL OTHER ASSETS.............................................. 22,448 20,364 PROPERTY, PLANT AND EQUIPMENT, NET................................... 33,518 34,031 --------- --------- TOTAL ASSETS.................................................... $ 84,546 $ 91,917 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current installments of long-term debt............................. $ 45,072 $ 7,753 Trade accounts payable............................................. 3,035 5,900 Income taxes payable............................................... -- 556 Accrued compensation............................................... 760 854 Accrued expenses and other liabilities............................. 4,070 705 --------- --------- TOTAL CURRENT LIABILITIES....................................... 52,937 15,768 Long-term debt....................................................... 7,574 39,089 Other long-term liabilities.......................................... 205 -- Deferred income taxes................................................ -- 1,829 --------- --------- TOTAL LIABILITIES............................................... 60,716 56,686 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes C, H and M) 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 19,465,815 and 19,247,299 shares at December 31, 2001 and 2000, respectively.............. 26,392 22,647 Retained earnings (accumulated deficit)............................ (2,562) 12,584 --------- --------- TOTAL SHAREHOLDERS' EQUITY...................................... 23,830 35,231 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 84,546 $ 91,917 ========= =========
See notes to consolidated financial statements. 26 AKORN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------- ---------- ------- AS RESTATED AS RESTATED SEE NOTE S SEE NOTE S Revenues.................................................... $ 42,248 $ 66,927 $ 64,632 Cost of sales............................................... 35,147 38,090 31,155 ---------- --------- --------- GROSS PROFIT.............................................. 7,101 28,837 33,477 Selling, general and administrative expenses................ 24,005 24,917 16,733 Amortization of intangibles................................. 1,494 1,519 1,878 Research and development expenses........................... 2,598 4,132 2,744 ---------- --------- --------- 28,097 30,568 21,355 ---------- --------- --------- OPERATING INCOME (LOSS)................................... (20,996) (1,731) 12,122 Interest and other income (expense): Interest income........................................... -- -- 31 Interest expense.......................................... (3,768) (2,400) (1,921) (Loss) gain on sale of fixed assets....................... (78) -- 275 Other (expense) income, net............................... (84) 117 132 ---------- --------- --------- (3,930) (2,283) (1,483) ---------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES........................... (24,926) (4,014) 10,639 Income tax (benefit) provision.............................. (9,780) (1,600) 3,969 ---------- ---------- --------- NET INCOME (LOSS)......................................... $ (15,146) $ (2,414) $ 6,670 ========== ========== ========= NET INCOME (LOSS) PER SHARE: BASIC.................................................. $ (0.78) $ (0.13) $ 0.37 ========== ========== ========= DILUTED................................................ $ (0.78) $ (0.13) $ 0.36 ========== ========== ========= SHARES USED IN COMPUTING NET INCOME (LOSS) PER SHARE: BASIC.................................................. 19,337 19,030 18,269 ========== ========= ========= DILUTED................................................ 19,337 19,030 18,573 ========== ========= =========
See notes to consolidated financial statements. 27 AKORN, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
COMMON STOCK ------------------- RETAINED EARNINGS (ACCUMULATED TREASURY SHARES AMOUNT DEFICIT) STOCK TOTAL ------ ------ -------- ----- ----- Balances at January 1, 1999............ 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.............. 476 1,228 -- -- 1,228 Management bonus paid in common stock.. 27 109 -- -- 109 Treasury stock reissued................ 9 (6) -- 35 29 Shares issued in connection with the employee stock purchase plan..... 26 109 -- -- 109 ------ -------- --------- ----- --------- Balances at December 31, 1999.......... 18,651 19,392 14,998 -- 34,390 Net loss (AS RESTATED, SEE NOTE S)..... -- -- (2,414) -- (2,414) Exercise of stock options.............. 576 3,105 -- -- 3,105 Shares issued in connection with the employee stock purchase plan..... 20 150 -- -- 150 ------ -------- --------- ----- --------- Balances at December 31, 2000 (AS RESTATED, SEE NOTE S)............ 19,247 22,647 12,584 -- 35,231 Net loss (AS RESTATED, SEE NOTE S).... -- -- (15,146) -- (15,146) Warrants issued in connection with convertible debentures............... -- 1,516 -- -- 1,516 Intrinsic value of conversion feature in connection with the issuance of convertible debentures (AS RESTATED, SEE NOTE S).......................... -- 1,508 -- -- 1,508 Exercise of stock options.............. 175 583 -- -- 583 Shares issued in connection with the employee stock purchase plan..... 44 138 -- -- 138 ------ -------- --------- ----- --------- Balances at December 31, 2001 (AS RESTATED, SEE NOTE S)............ 19,466 $ 26,392 $ (2,562) $ -- $ 23,830 ========= ======== ========= ===== =========
See notes to consolidated financial statements. 28 AKORN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 2001 2000 1999 ----------- ----------- -------- AS RESTATED AS RESTATED SEE NOTE S SEE NOTE S OPERATING ACTIVITIES Net income (loss).......................................................... $ (15,146) $ (2,414) $ 6,670 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization......................................... 4,286 3,539 3,161 Impairment of long-lived assets....................................... 2,132 -- -- Loss (gain) on disposal of fixed assets............................... 78 -- (245) Stock bonus........................................................... -- -- 109 Deferred income taxes................................................. (2,813) (3,675) 763 Amortization of debt discount......................................... 431 -- -- Other................................................................. -- -- (6) Changes in operating assets and liabilities: Accounts receivable................................................. 10,722 1,071 (6,992) Income taxes recoverable............................................ (6,540) -- -- Inventory, prepaid expenses and other assets........................ 6,351 2,173 (5,213) Trade accounts payable, accrued expenses and other liabilities...... 611 718 1,750 Income taxes payable................................................ (556) (1,050) 134 ---------- ---------- ---------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES........................ (444) 362 131 INVESTING ACTIVITIES Purchases of property, plant and equipment................................. (3,626) (15,239) (6,157) Proceeds from disposal of fixed assets..................................... -- -- 629 Purchase of product intangibles and product licensing Fees..................................................................... (500) (2,449) (705) ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES...................................... (4,126) (17,688) (6,233) FINANCING ACTIVITIES Proceeds from exercise of stock options.................................... 721 3,255 1,337 Repayments of long-term debt............................................... (1,153) (22,206) (22,584) Proceeds from issuance of long-term debt................................... 8,034 37,100 26,800 Proceeds from issuance of stock warrants................................... 1,516 -- -- Principal payments under capital lease obligations......................... -- (41) (162) ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 9,118 18,108 5,391 ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 4,548 782 (711) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................. 807 25 736 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 5,355 $ 807 $ 25 ========== ========== ==========
See notes to consolidated financial statements. 29 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 subsidiary, Akorn (New Jersey), Inc. (collectively, the "Company"). Intercompany transactions and balances have been eliminated in consolidation. During 2000, the Company dissolved the inactive subsidiaries Compass Vision, Inc., Spectrum Scientific Pharmaceuticals, Inc. and Walnut Pharmaceuticals, Inc. The dissolution of these subsidiaries did not have a material impact on the balances and activities of the Company. BASIS OF PRESENTATION: The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced losses from operations in 2001 and 2000 of $21.0 million and $1.7 million, respectively and has a working capital deficiency of $24.4 million as of December 31, 2001. As discussed in Note G, the Company has significant borrowings which require, among other things, compliance with various covenants. On September 16, 2002, the Company was notified by it senior lenders that it was in default due to failure to pay the principal and interest owed as of August 31, 2002 under the most recent extension of the credit agreement. The senior lenders also notified the Company that they would forbear from exercising their remedies under the credit agreement until January 3, 2003 if a forbearance agreement could be reached. On September 20, 2002, the Company and its senior lenders entered into an agreement under which the senior lenders would agree to forbear from exercising their remedies (the "Forbearance Agreement) and the Company acknowledged its current default. The Forbearance Agreement provides a second line of credit allowing the Company to borrow the lesser of (i) the difference between the Company's outstanding indebtedness to the senior lenders and $39,200,000, (ii) the Company's borrowing base and (iii) $1,750,000, to fund the Company's day-to-day operations. The Forbearance Agreement provides for certain additional restrictions on operations and additional reporting requirements. The Forbearance Agreement also requires automatic application of cash from the Company's operations to repay borrowings under the new revolving loan, and to reduce the Company's other obligations to the senior lenders. The Company, as required in the Forbearance Agreement, has agreed to provide the senior lenders with a plan for restructuring its financial obligations on or before December 1, 2002, and has agreed to retain a consulting firm by September 27, 2002 to assist in the development and execution of this restructuring plan. In addition, as discussed in Note M, the Company is a party in governmental proceedings and potential claims by the Food and Drug Administration, the Securities and Exchange Commission and the Drug Enforcement Agency. While the Company is cooperating with each governmental agency, an unfavorable outcome in one or more proceeding may have a material impact on the Company's operations and its financial condition, results of operations and/or cash flows and, accordingly, may constitute a material adverse action that would result in a covenant violation. In the event that the Company is not in compliance with the covenants during 2002 and does not negotiate amended covenants and/or obtain a waiver thereto, then the debt holder, at its option, may demand immediate payment of all outstanding amounts due it and exercise any and all remedies available to it, including, but not limited to, foreclosure on the Company's assets. These matters, among others raise substantial doubt about whether the Company will be able to continue as a going concern. The Company's ability to operate as a going concern is dependent on its ability to successfully negotiate with its senior lenders to extend its borrowing on a long term basis, to obtain such additional financing or re-financing as may be required, and ultimately to achieve profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. As discussed above, the current credit facility matured on August 31, 2002 and is subject to the Forbearance Agreement discussed above which matures on January 3, 2003, at which point the Company will need to re-negotiate or obtain new financing. While there can be no guarantee that the Company will be successful in re-negotiating or obtaining new financing, the Company believes it has a good relationship with its lenders, is returning to generating income from operations and, as required, will retain a consulting firm to assist in the development of a restructuring plan. As a result, management of the Company believes that the Company will be able to sustain its operations and continue as a going concern. However, the ultimate outcome of this uncertainty cannot presently be determined. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and 30 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 materially from those estimates. Significant estimates and assumptions relate to the allowance for doubtful accounts, the allowance for chargebacks, the allowance for rebates, the reserve for slow-moving and obsolete inventory, the allowance for product returns, the carrying value of intangible assets and the carrying value of deferred tax assets. Revenue Recognition: The Company recognizes sales upon the shipment of goods, provided that all obligations of the Company have been fulfilled and collection of the related receivable is probable. Provision is made at the time of sale and is analyzed and adjusted, if necessary, at each balance sheet date for estimated chargebacks, rebates and product returns. Royalty revenue is recognized when earned and is based on net sales, as defined. Cash Equivalents: The Company considers all highly liquid investments with maturity of three months or less, when purchased, to be cash equivalents. Accounts Receivable: The nature of the Company's business inherently involves, in the ordinary course, significant amounts and substantial volumes of accounting activity (i.e., transactions and estimates) relating to allowances for product returns, chargebacks, rebates and discounts given to customers. This is a natural circumstance of the pharmaceutical industry and not specific to the Company and inherently lengthens the collection process. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company's wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company's accounts receivable. The process of claiming these deductions depends on wholesalers reporting to Akorn the amount of deductions that were earned under the respective terms with end-user customers (which in turn depends on which end-user customer, under which pricing arrangement, might be entitled to a particular deduction). This process can lead to "partial payments" against outstanding invoices as the wholesalers take the claimed deductions at the time of payment. Allowance for Chargebacks and Rebates: The Company enters contractual agreements with certain third parties such as hospitals and group-purchasing organizations to sell certain products at predetermined prices. The parties have elected to have these contracts administered through wholesalers. When a wholesaler sells products to one of the third parties that is subject to a contractual price agreement, the difference between the price to the wholesaler and the price under the contract is charged back to the Company by the wholesaler. The Company reduces gross sales and accounts receivable by the estimated chargeback amount when it sells product to a wholesaler. The Company evaluates the chargeback allowance against actual chargebacks processed by wholesalers. Actual chargebacks processed can vary materially from period to period. Similarly, the Company maintains an allowance for rebates related to contract and other programs with wholesalers. These allowances also reduce gross sales and accounts receivable by the amount of the estimated rebate amount when the Company sells its products to the wholesalers. The Company evaluates the allowance against actual rebates processed and such amount can vary materially from period to period. The recorded allowances reflect the Company's current estimate of the future chargeback and rebate liability to be paid or credited to the wholesalers under these various contracts and programs. For the years ended December 31, 1999, 2000 and 2001, the Company recorded chargeback and rebate expense of $23,793,000, $29,558,000 and $28,655,000, respectively. The balance for these allowances was $4,190,000 and $3,296,000 as of December 31, 2001 and 2000, respectively. In May 2001, the Company completed an analysis of its March 31, 2001 allowance for chargebacks and rebates. In performing such analysis, the Company utilized recently obtained reports of wholesalers' inventory information, which had not been previously obtained or utilized. Based on the wholesalers' March 31, 2001 inventories and historical chargeback and rebate activity, the Company recorded an allowance of $6,961,000, which resulted in an expense of $12,000,000 for the three months ended March 31, 2001, as compared to an allowance of $3,296,000 at December 31, 2000. During the quarter ended June 30, 2001, the Company further refined its estimates of the chargeback and rebate liability determining that an additional $2,250,000 provision needed to be recorded. This additional increase to the allowance was necessary to reflect the continuing shift of sales to customers who purchase their products through group purchasing organizations and buying groups. Allowance for Product Returns: The Company maintains an allowance for estimated product returns. This allowance is reflected as a reduction of account receivable balances. The Company evaluates the allowance balance against actual returns processed. Actual returns processed can vary materially from period to period. For the years ended December 31, 1999, 2000 and 2001, the 31 Company recorded a provision for product returns of $205,000, $1,159,000 and $4,103,000, respectively. The allowance for potential product returns was $232,000 and $548,000 at December 31, 2000 and 2001, respectively. Based on the wholesalers' inventory information, the Company increased its allowance for potential product returns to $2,232,000 at March 31, 2001 from $232,000 at December 31, 2000. The provision for the three months ended March 31, 2001 was $2,559,000. Allowance for Doubtful Accounts: The Company maintains an allowance for doubtful accounts, which reflects trade receivable balances owed to the Company that are believed to be uncollectible. This allowance is reflected as a reduction of accounts receivable. The expense related to doubtful accounts is reflected in SG&A expenses. For the years ended December 31, 1999, 2000 and 2001, the Company recorded a provision for doubtful accounts of $161,000, $8,127,000 and $4,480,000, respectively. The allowance for doubtful accounts was $8,321,000 and $3,706,000 as of December 31, 2000 and 2001, respectively. In late 2000, the Company began reconciling and making collection attempts of certain outstanding and past-due receivables, primarily involving certain of its major customers (including wholesalers). The Company was confronted with customers unwilling to pay invoiced amounts without the Company meeting certain high levels of evidentiary support. The Company concluded it would be unable to collect these amounts from certain customers. As a result, the Company recorded bad debt expense of $7,520,000 during the fourth quarter of 2000. During the second quarter of 2001, the Company used then available information and recent experience to update its analysis and estimated that it needed to increase its allowance for doubtful accounts to $12,928,000 at June 30, 2001 from $8,321,000 at December 31, 2000. The expense for the three months ended June 30, 2001 was $4,610,000. Allowance for Discounts: The Company maintains an allowance for discounts, which reflects discounts available to certain customers based on agreed upon terms of sale. This allowance is reflected as a reduction of accounts receivable. The Company evaluates the allowance balance against actual discounts taken. For the year ended December 31, 2001 the Company recorded a provision for discounts of $886,000. Previous to 2001, the Company did not offer discounts. The allowance for discounts was $143,000 as of December 31, 2001. 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 based upon recent historical sales by unit. The Company evaluates the potential sales of its products over their remaining lives and estimates the amount that may expire before being sold. For the years ended December 31, 1999, 2000 and 2001, the Company recorded a provision for inventory obsolescence of $611,000, $3,983,000 and $1,830,000, respectively. The allowance for inventory obsolescence was $3,171,000 and $1,845,000 as of December 31, 2000 and 2001, respectively. In the fourth quarter of 2000, the Company increased its inventory obsolescence reserve by $2,700,000 to account for slow moving and obsolete inventory primarily related to products purchased from third parties in 1998 and 1999 for which the original sales forecast overestimated actual demand. In the first quarter of 2001, based on sales trends and forecasted sales activity by product, the Company increased its allowance for inventory obsolescence to $4,583,000. The provision for the three months ended March 31, 2001 was $1,500,000. The allowance for inventory obsolescence was $1,845,000 at December 31, 2001. Intangibles: Intangibles consist primarily of product licensing and other such costs that 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, 2001 and 2000 was $7,132,000 and $5,954,000, respectively. The Company annually assesses the impairment of intangibles based on several factors, including estimated fair market value and anticipated cash flows (See Note T). 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, leasehold improvements, furniture and equipment, and automobiles are approximately 30, 10, 8, and 5 years, respectively. Net Income (Loss) Per Common Share: Basic net income (loss) per common share is based upon weighted average common shares outstanding. Diluted net income (loss) per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect of stock options, warrants and convertible debt using the treasury stock method. 32 The following table shows basic and diluted earnings per share computations for the years ended December 31, 2001, 2000 and 1999 (in thousands, except per share information):
YEAR ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 ----------- --------- ------- Net income (loss) per share -- basic: Net income (loss)............................................. $ (15,146) $ (2,414) $ 6,670 Weighted average number of shares outstanding................. 19,337 19,030 18,269 Net income (loss) per share -- basic............................ $ (0.78) $ (0.13) $ 0.37 ========== ========== ========= Net income (loss) per share -- diluted: Net income (loss)............................................. $ (15,146) $ (2,414) $ 6,670 Net income (loss) adjustment for interest on convertible debt....................................................... -- -- -- ---------- --------- -------- Net income (loss), as adjusted................................ $ (15,146) $ (2,414) $ 6,670 ========== ========== ========= Weighted average number of shares outstanding................. 19,337 19,030 18,269 Additional shares assuming conversion of convertible debt and convertible interest on debt(1)........................ -- -- -- Additional shares assuming conversion of warrants(2).......... -- -- -- Additional shares assuming conversion of options(3)........... -- -- 304 ---------- --------- --------- Weighted average number of shares outstanding, as adjusted................................................... 19,337 19,030 18,573 ========== ========= ========= Net income (loss) per share -- diluted.......................... $ (0.78) $ (0.13) $ 0.36 ========== ========== =========
- ---------- (1) For 2001, debt and interest convertible into 2,519 shares of common stock was excluded from the computation of diluted earnings per share, as the inclusion of such shares would be antidilutive. (2) For 2001, warrants to purchase 1,667 shares of common stock were excluded from the computation of diluted earnings per share, as the inclusion of such shares would be antidilutive. (3) For 2001 and 2000, options to purchase 3,226 and 1,827 shares of common stock, respectively, were excluded from the computation of diluted earnings per share as the inclusion of such shares would be antidilutive. Income Taxes: The Company files a consolidated federal income tax return with its subsidiary. 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. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. 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 Company's bank borrowings under its credit facility approximate fair value because the interest rates are reset periodically to reflect current market rates. The promissory note between the Company and NeoPharm, Inc. bears interest at a rate that is lower than the Company's current borrowing rate with its senior lenders. Accordingly, the computed fair value of the debt, which the Company estimates to be approximately $2,650,000, would be lower than the current carrying value of $3,250,000. NOTE B -- NONCASH TRANSACTIONS In July 2001, the Company amended a license agreement with The Johns Hopkins University Applied Physics Laboratory (See Note C). As part of that amendment, the Company delivered research and development equipment in lieu of a $100,000 payment. The Company recorded a gain of $51,000 upon transfer of the equipment. In August 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. 33 NOTE C -- PRODUCT AND OTHER ACQUISITIONS In April 2000, the Company entered into a worldwide license agreement with The Johns Hopkins University, Applied Physics Laboratory ("JHU/APL"). This license provided the Company exclusive rights to two patents covering the methodology and instrumentation for a method of treating age-related macular degeneration. Upon signing the agreement, the Company made an initial payment under the agreement of $1,484,500. In July 2001, this license agreement was amended such that the Company relinquished the international rights to the two patents in exchange for a reduced financial obligation. The Company retained the exclusive rights in the United States of America. Future payments of $600,000 were required under terms of the amendment. The Company subsequently relinquished its rights to these patents and recorded an impairment charge as discussed in Note T. In March 1999, the Company purchased the Paredrine NDA and trade name from Pharmics for $62,500 in cash. The acquisition cost has been allocated to intangibles and will be amortized over 15 years. In February 1999, the Company paid $400,000 to Eastman Kodak to license IC Green raw material manufacturing processes. The acquisition cost has been allocated to intangibles and is being amortized over 15 years. NOTE D -- ALLOWANCE FOR DOUBTFUL ACCOUNTS The activity in the allowance for doubtful accounts for the periods indicated is as follows (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 ---------- --------- ------- Balance at beginning of year............ $ 8,321 $ 226 $ 425 Provision for bad debts................. 4,480 8,127 161 Specific reversal of doubtful account... -- -- (300) Accounts written off.................... (9,095) (32) (60) --------- ----- ------- Balance at end of year.................. $ 3,706 $8,321 $ 226 ========= ====== =======
NOTE E -- INVENTORY The components of inventory are as follows (in thousands):
DECEMBER 31, ------------------- 2001 2000 -------- --------- Finished goods.......................... $ 2,906 $ 5,014 Work in process......................... 1,082 3,644 Raw materials and supplies.............. 4,147 5,400 -------- --------- $ 8,135 $ 14,058
Inventory at December 31, 2001 and 2000 is reported net of reserves for slow-moving, unsalable and obsolete items of $1,845,000 and $3,171,000, respectively. NOTE F -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands):
DECEMBER 31, ----------------------- 2001 2000 ---------- ---------- Land...................................... $ 396 $ 396 Buildings and leasehold improvements...... 8,208 8,204 Furniture and equipment................... 25,724 21,508 Automobiles............................... 55 55 ---------- ---------- 34,383 30,163 Accumulated depreciation.................. (16,440) (13,697) ---------- ---------- 17,943 16,466 Construction in progress.................. 15,575 17,565 ---------- ---------- $ 33,518 $ 34,031 ========== ==========
34 Construction in progress represents capital expenditures principally related to the Company's lyophilization project that will enable the Company to perform processes in-house, which are currently being performed by a sub-contractor. The Company capitalized interest expense related to the lyophilization project of $1,111,000 and $795,000 in 2001 and 2000, respectively. NOTE G -- FINANCING ARRANGEMENTS The Company's long-term debt consists of (in thousands):
DECEMBER 31, -------------------- 2001 2000 --------- -------- Credit Agreement with The Northern Trust Company........... $ 44,800 $ 44,400 Subordinated convertible debentures........................ 5,000 -- Mortgages payable secured by real property located in Decatur, Illinois........................................ 2,189 2,442 Promissory note to NeoPharm, Inc........................... 3,250 -- --------- -------- 55,239 46,842 Less unamortized discount on subordinated convertible debentures............................................... 2,593 -- Less current portion....................................... 45,072 7,753 --------- --------- Long-term debt............................................. $ 7,574 $ 39,089 ========= =========
Maturities of debt are as follows (in thousands): Year ending December 31: 2002.............................................................. 45,072 2003.............................................................. 293 2004.............................................................. 316 2005.............................................................. 340 2006.............................................................. 8,616 Thereafter........................................................ 602 --------- Total................................................... $ 55,239 =========
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. This Amended and Restated Credit Agreement (the "Credit Agreement") is secured by substantially all of the assets of the Company and its subsidiaries and contains a number of restrictive covenants. There were outstanding borrowings of $44,800,000 and $44,400,000 at December 31, 2001 and 2000, respectively. The interest rate as of December 31, 2001 was 7.75%. On April 16, 2001 the revolving credit agreement was amended (the "2001 Amendment") and included, among other things, extension of the term of the agreement, establishment of a payment schedule, revision of the method by which the interest rate was to be determined, and the amendment and addition of certain covenants. The 2001 Amendment also required the Company to obtain subordinated debt of $3 million by May 15, 2001 and waived certain covenant violations through March 31, 2001. The 2001 Amendment required payments throughout 2001 totaling $7.5 million, with the balance of $37.5 million due January 1, 2002. The method used to calculate interest was changed to the prime rate plus 300 basis points. Previously, the interest rate was computed at the federal funds rate or LIBOR plus an applicable percentage, depending on certain financial ratios. On July 12, 2001 the Company entered into a forbearance agreement (the "Prior Agreement") with its senior lenders under which the lenders agreed to forbear from taking action against the Company to enforce their rights under the currently existing Amended and Restated Credit Agreement until January 2, 2002. As part of the Prior Agreement, the Company acknowledged the existence of certain events of default. These events included a default on a $1.3 million principal payment, failure to timely make monthly interest payments due on May 31, 2001 and June 30, 2001 (these interest payments were subsequently made on July 27, 2001) and failure to receive $3.0 million of cash proceeds of subordinated debt by May 15, 2001 (these proceeds were subsequently received on July 13, 2001). The Company received two extensions, which extended the Prior Agreement to February 1, 2002 and March 15, 2002, respectively. Both of these extensions carried the same reporting requirements and covenants while establishing new cash receipts covenants for the months of January and February in 2002. 35 On April 12, 2002, in lieu of further extending the Prior Agreement, the Company entered into an amendment to the Credit Agreement (the "2002 Amendment"), effective January 1, 2002. The 2002 Amendment included, among other things, extension of the term of the agreement, establishment of a payment schedule and the amendment and addition of certain covenants. The new covenants include minimum levels of cash receipts, limitations on capital expenditures, a $750,000 per quarter limitation on product returns and required amortization of the loan principal. The agreement also prohibits the Company from declaring any cash dividends on its common stock and identifies certain conditions in which the principal and interest on the credit agreement would become immediately due and payable. These conditions include: (a) an action by the FDA which results in a partial or total suspension of production or shipment of products, (b) failure to invite the FDA in for re-inspection of the Decatur manufacturing facilities by June 1, 2002, (c) failure to make a written response, within 10 days, to the FDA, with a copy to the lender, to any written communication received from the FDA after January 1, 2002 that raises any deficiencies, (d) imposition of fines against the Company in an aggregate amount greater than $250,000, (e) a cessation in public trading of Akorn stock other than a cessation of trading generally in the United States securities market, (f) restatement of or adjustment to the operating results of the Company in an amount greater than $27,000,000, (g) failure to enter into an engagement letter with an investment banker for the underwriting of an offering of equity securities by June 15, 2002, (h) failure to not be party to an engagement letter at any time after June 15, 2002 or (i) experience any material adverse action taken by the FDA, the SEC, the DEA or any other Governmental Authority based on an alleged failure to comply with laws or regulations. The amended credit agreement requires a minimum payment of $5.6 million, which relates to an estimated federal tax refund, with the balance of $39.2 million due June 30, 2002. The Company remitted the $5.6 million payment on May 8, 2002. The Company is also obligated to remit any additional federal tax refunds received above the estimated $5.6 million. The Company's senior lenders agreed to extend the credit agreement to July 31, 2002 and then again to August 31, 2002. These two extensions contain the same covenants and reporting requirements except that the Company is not required to comply with conditions (g) and (h) which relate to the offering of equity securities. In both instances, the balance of $39.2 million was due at the end of the extension term. On September 16, 2002, the Company was notified by it senior lenders that it was in default due to failure to pay the principal and interest owed as of August 31, 2002 under the most recent extension of the credit agreement. The senior lenders also notified the Company that they would forbear from exercising their remedies under the credit agreement until January 3, 2003 if a forbearance agreement could be reached. On September 20, 2002, the Company and its senior lenders entered into an agreement under which the senior lenders would agree to forbear from exercising their remedies (the "Forbearance Agreement) and the Company acknowledged its current default. The Forbearance Agreement provides a second line of credit allowing the Company to borrow the lesser of (i) the difference between the Company's outstanding indebtedness to the senior lenders and $39,200,000, (ii) the Company's borrowing base and (iii) $1,750,000, to fund the Company's day-to-day operations. The Forbearance Agreement provides for certain additional restrictions on operations and additional reporting requirements. The Forbearance Agreement also requires automatic application of cash from the Company's operations to repay borrowings under the new revolving loan, and to reduce the Company's other obligations to the senior lenders. The Company, as required in the Forbearance Agreement, has agreed to provide the senior lenders with a plan for restructuring its financial obligations on or before December 1, 2002, and has agreed to retain a consulting firm by September 27, 2002 to assist in the development and execution of this restructuring plan. The Company is a party in governmental proceedings and potential claims by the FDA, the SEC and the DEA. See Note M "Commitments and Contingencies". While the Company is cooperating with each governmental agency, an unfavorable outcome in one or more proceeding may have a material impact on the Company's operations and its financial condition, results of operations and/or cash flows and, accordingly, may constitute a material adverse action that would constitute a covenant violation. In the event that the Company is not in compliance with the covenants during 2002 and does not negotiate amended covenants and/or obtain a waiver thereto, then the debt holder, at its option, may demand immediate payment of all outstanding amounts due it and exercise any and all remedies available to it, including, but not limited to, foreclosure on the Company's assets. The current credit facility matured on August 31, 2002 and is subject to the Forbearance Agreement discussed above which matures on January 3, 2003, at which point the Company will need to re-negotiate or obtain new financing. On July 12, 2001 as required under the terms of the Prior Agreement, the Company entered into a $5,000,000 subordinated debt transaction with the John N. Kapoor Trust dtd. 9/20/89 (the "Trust"), the sole trustee and sole beneficiary of which is Dr. John N. Kapoor, the Company's current CEO and Chairman of the Board of Directors. The transaction is evidenced by a Convertible Bridge Loan and Warrant Agreement (the "Trust Agreement") in which the Trust agreed to provide two separate tranches of funding in the amounts of $3,000,000 ("Tranche A" which was received on July 13) and $2,000,000 ("Tranche B" which was received on August 16). As part of the consideration provided to the Trust for the subordinated debt, the Company issued the Trust two warrants which allow the Trust to purchase 1,000,000 shares of common stock at a price of $2.85 per share and another 667,000 shares of common 36 stock at a price of $2.25 per share. The exercise price for each warrant represented a 25% premium over the share price at the time of the Trust's commitment to provide the subordinated debt. Under the terms of the Trust Agreement, the subordinated debt bears interest at prime plus 3%, which is the same rate the Company pays on its senior debt. Interest cannot be paid to the Trust until the repayment of the senior debt pursuant to the terms of a subordination agreement, which was entered into between the Trust and the Company's senior lenders. Should the subordination agreement be terminated, interest may be paid sooner. The convertible feature of the Trust Agreement, as amended, allows for conversion of the subordinated debt plus interest into common stock of the Company, at a price of $2.28 per share of common stock for Tranche A and $1.80 per share of common stock for Tranche B. The Company, in accordance with Accounting Principles Board ("APB") Opinion No. 14, recorded the subordinated debt transaction such that the convertible debt and warrants have been assigned independent values. The fair value of the warrants was 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 79%, (iii) risk free rate of 4.75%, and (iv) expected life of 5 years. As a result, the Company assigned a value of $1,516,000 to the warrants and recorded this amount as additional paid in capital. In accordance with Emerging Issues Task Force Abstract 00-27, the Company has also computed and recorded a value related to the "intrinsic" value of the convertible debt. This calculation determines the value of the embedded conversion option within the debt that has become beneficial to the owner as a result of the application of APB Opinion No. 14. This value was determined to be $1,508,000 and was recorded as additional paid in capital. The remaining $1,976,000 was recorded as long-term debt. The resultant debt discount of $3,024,000, equivalent to the value assigned to the warrants and the "intrinsic" value of the convertible debt, is being amortized and charged to interest expense over the life of the subordinated debt. As of December 31, 2001, there was no available credit under the Amended and Restated Credit Agreement. Future working capital needs will be highly dependent upon the Company's ability to improve gross margins, control expenses and collect its past due receivables. Management believes that existing cash, cash flow from operations and the subordinated debt proceeds will be sufficient to meet the cash needs of the business for the next twelve months, but that additional funding will be needed to refund the current bank debt. If available funds, cash generated from operations and subordinated debt proceeds are insufficient to meet immediate liquidity requirements, further financing and/or reductions of existing operations will be required. There are no guarantees that such financing will be available or available on acceptable terms. Further, such additional financing may require the granting of rights, preferences or privileges senior to those rights of the common stock and existing stockholders may experience substantial dilution of their ownership interests. The Company will need to refinance or extend the maturity of the bank credit agreement, as it does not anticipate sufficient cash to make the January 3, 2003 scheduled payment. See Note T "Subsequent Events." In December 2001, the Company entered into a $3,250,000 five-year loan with NeoPharm, Inc. ("NeoPharm") to fund Akorn's efforts to complete its lyophilization facility located in Decatur, Illinois. Under the terms of the Promissory Note, dated December 20, 2001, interest accrues at the initial rate of 3.6% and will be reset quarterly based upon NeoPharm's average return on its cash and readily tradable long and short-term securities during the previous calendar quarter. The principal and accrued interest is due and payable on or before maturity on December 20, 2006. The note provides that Akorn will use the proceeds of the loan solely to validate and complete the lyophilization facility located in Decatur, Illinois. The Promissory Note is subordinated to Akorn's senior debt owed to The Northern Trust Company but is senior to Akorn's subordinated debt owed to the Trust. The note was executed in conjunction with a Processing Agreement that provides NeoPharm, Inc. with the option of securing at least 15% of the capacity of Akorn's lyophilization facility each year. Dr. John N. Kapoor, the Company's chairman and chief executive officer is also chairman of NeoPharm and holds a substantial stock position in NeoPharm as well as in the Company. Contemporaneous with the completion of the Promissory Note between the Company and NeoPharm, the Company entered into an agreement with the Trust, which amended the Trust Agreement. The amendment extended the Trust Agreement to terminate concurrently with the Promissory Note on December 20, 2006. The amendment also made it possible for the Trust to convert the interest accrued on the $3,000,000 tranche into common stock of the Company. Previously, the Trust could only convert the interest accrued on the $2,000,000 tranche. The change related to the convertibility of the interest accrued on the $3,000,000 tranche requires that shareholder approval be received by August 31, 2002, which date has been extended to December 31, 2002. In June 1998, the Company entered into a $3,000,000 mortgage agreement with Standard Mortgage Investors, LLC of which there were outstanding borrowings of $2,189,000 and $2,442,000 at December 31, 2001 and 2000, respectively. The principal balance is payable 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. 37 NOTE H -- LEASING ARRANGEMENTS The Company leased certain equipment under capital lease arrangements that expired in 2000. Property, plant and equipment includes the following amounts relating to such capital leases (in thousands):
DECEMBER 31, -------------- 2001 2000 ----- ------ Furniture and equipment................................................. $ -- $ 806 Less accumulated depreciation........................................... -- (806) ----- ------ $ -- $ -- ===== ======
Depreciation expense provided on these assets was $109,000 and $157,000 for the years ended December 31, 2000 and 1999, respectively. 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 $1,841,000, $1,159,000 and $906,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The following is a schedule, by year, of future minimum rental payments required under non-cancelable operating leases (in thousands): Year ending December 31, 2002.................................................................... $ 1,749 2003.................................................................... 1,219 2004.................................................................... 1,149 2005.................................................................... 1,145 2006.................................................................... 1,129 2007 and thereafter..................................................... 1,458 -------- Total................................................................... $ 7,849 ========
The Company currently sublets portions of its leased space. Rental income under these subleases was $56,000, $227,000 and $211,000 in 2001, 2000 and 1999, respectively. NOTE I -- 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, 2001, 6,500,000 shares of the Company's Common Stock are reserved for issuance 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, 2001, 2000 and 1999 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"), which expired in December 2001, persons elected as directors of the Company were granted nonqualified options at the fair market value of the shares subject to option on the date of the grant. As of December 31, 2001, 500,000 shares of the Company's Common Stock are reserved for issuance under the Directors' Plan. Options granted under the Directors' Plan vest immediately and expire five years from the date of grant. 38 A summary of the status of the Company's stock options as of December 31, 2001, 2000 and 1999 and changes during the years ended December 31, 2001, 2000 and 1999 is presented below (shares in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 2001 2000 1999 ------------------ ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ------- ------ ----- ------ ----- Outstanding at beginning of period 1,827 $4.78 1,901 $3.64 1,952 $3.16 Granted........................... 2,039 $3.05 644 $6.80 777 $4.53 Exercised......................... (175) $2.48 (576) $3.14 (478) $2.71 Expired/Canceled.................. (465) $5.40 (142) $5.30 (350) $4.19 ---- ---- ---- Outstanding at end of period...... 3,226 $3.72 1,827 $4.78 1,901 $3.64 ===== ===== ===== Options exercisable at end of period 1,735 $3.92 1,054 $4.08 1,088 $3.19 Options available for future grant 1,660 1,234 1,736 Weighted average fair value of options granted during the period.. $2.02 $5.17 $2.37
The fair value of each option granted during the year ended December 31, 2001 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 79%, (iii) risk-free interest rate of 4.4% and (iv) expected life of 5 years. The fair value of each option granted during the year ended December 31, 2000 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 98%, (iii) risk-free interest rate of 5.0% and (iv) expected life of 5 years. 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. The following table summarizes information about stock options outstanding at December 31, 2001 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- -------------------------------- NUMBER NUMBER OUTSTANDING WEIGHTED AVERAGE EXERCISABLE AT DECEMBER 31, REMAINING WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE RANGE OF EXERCISE PRICES 2001 CONTRACTUAL LIFE EXERCISE PRICE 2001 EXERCISE PRICE --------------------------- ------------- ------------------ ----------------- ------------- ---------------- $1.74 -- $2.05.......... 216 3.9 years $ 2.01 200 $ 2.03 $2.13 -- $2.19.......... 173 0.5 years $ 2.14 173 $ 2.14 $2.25 -- $2.60.......... 1,085 4.2 years $ 2.30 309 $ 2.30 $2.81 -- $2.99.......... 64 2.7 years $ 2.91 38 $ 2.85 $3.00 -- $4.00.......... 337 4.3 years $ 3.42 132 $ 3.56 $4.06 -- $4.82.......... 367 1.9 years $ 4.19 299 $ 4.17 $5.00 -- $5.57.......... 568 2.9 years $ 5.16 334 $ 5.13 $6.06 -- $6.25.......... 301 3.1 years $ 6.24 173 $ 6.25 $7.71 -- $8.38.......... 55 2.7 years $ 7.99 37 $ 8.10 $9.31 -- $9.50.......... 50 3.3 years $ 9.46 35 $ 9.45 $10.06 -- $11.88........ 10 3.7 years $ 10.97 5 $ 10.97 ----- ---- 3,226 1,735 ===== =====
The Company applies 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 (loss) and net income (loss) per share for the years ended December 31, 2001, 2000 and 1999 would have been the pro forma amounts indicated below (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2001 2000 1999 -------------------- -------------------- -------------------- AS AS AS REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA -------- --------- -------- --------- -------- --------- Net income (loss)....................... $ (15,146) $(16,900) $ (2,414) $ (4,180) $ 6,670 $ 5,939 ========= ======== ======== ======== ======= ======= Net income (loss) per share - diluted... $ (0.78) $ (0.87) $ (0.13) $ (0.22) $ 0.36 $ 0.32 ========= ======== ======== ======= ======= =======
39 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 shares during the year ended December 31, 1999. New shares issued under the plan approximated 44,000 in 2001, 20,000 in 2000, and 26,000 in 1999. NOTE J -- INCOME TAXES The income tax provision (benefit) consisted of the following (in thousands):
CURRENT DEFERRED TOTAL --------- --------- ---------- Year ended December 31, 2001 Federal.......................... $ (6,714) $ (746) $ (7,460) State............................ (253) (2,067) (2,320) --------- --------- ---------- $ (6,967) $ (2,813) $ (9,780) ========= ========= ========== Year ended December 31, 2000 Federal.......................... $ 1,680 $ (3,186) $ (1,506) State............................ 395 (489) (94) --------- --------- ----------- $ 2,075 $ (3,675) $ (1,600) ========= ========= =========== Year ended December 31, 1999: Federal.......................... $ 2,561 $ 636 $ 3,197 State............................ 645 127 772 --------- --------- ---------- $ 3,206 $ 763 $ 3,969 ========= ========= ==========
Income tax expense (benefit) differs from the "expected" tax expense (benefit) computed by applying the U.S. Federal corporate income tax rate of 34% to income before income taxes as follows (in thousands):
YEARS ENDED DECEMBER 31, ---------------------------------- 2001 2000 1999 ----------- --------- ------- Computed "expected" tax expense (benefit)................... $ (8,475) $ (1,365) $ 3,618 Change in income taxes resulting from: State income taxes, net of federal income tax benefits.... (1,245) (185) 510 Other, net................................................ (60) (50) (159) ---------- -------- -------- Income tax expense (benefit)................................ $ (9,780) $ (1,600) $ 3,969 ========== ========= ========
Deferred tax assets at December 31, 2001 and 2000 include (in thousands):
DECEMBER 31, DECEMBER 31, Deferred tax assets: 2001 2000 ------------- --------- Other accrued expenses................ $ 2,537 $ 1,688 Intangible assets..................... 525 556 Net operating loss carry forwards..... 5,052 -- Other................................. 571 3,441 --------- --------- $ 8,685 $ 5,685 --------- --------- Deferred tax liabilities: Property, plant and equipment, net.... (2,593) (2,332) Intangible assets..................... (15) (11) Other................................. (158) (236) ---------- ---------- $ (2,766) $ (2,579) ---------- ---------- Net $ 5,919 $ 3,106 ========= =========
The deferred taxes are classified in the accompanying balance sheets as follows (in thousands):
DECEMBER 31, DECEMBER 31, 2001 2000 ----------- ------------ Deferred tax asset -- current................. $ 2,069 $ 4,935 Deferred tax asset (liability) -- noncurrent.. 3,850 (1,829) --------- ---------- $ 5,919 $ 3,106 ========= =========
40 Management concluded that it was more likely than not that all of the net deferred tax assets will be realized through future taxable earnings. Accordingly, no valuation allowance is recorded. The Company's net operating loss carry forwards expire in 2021. NOTE K -- RETIREMENT PLAN All employees who have attained the age of 21 are eligible for participation in the Company's 401(k) Plan. The plan-related expense recognized for the years ended December 31, 2001, 2000 and 1999 totaled $234,000, $285,000 and $220,000, respectively. The employer's matching contribution is a percentage of the amount contributed by each employee and is funded on a current basis. NOTE L -- SEGMENT INFORMATION The Company classifies its operations into three business segments, ophthalmic, injectable and contract services. The ophthalmic segment manufactures, markets and distributes diagnostic and therapeutic pharmaceuticals and surgical instruments and related supplies. The injectable segment manufactures, markets and distributes injectable pharmaceuticals, primarily in niche markets. The contract services segment provides contract-manufacturing services as well as product research and development services to pharmaceutical and biotechnology companies. The Company's basis of accounting in preparing its segment information is consistent with that used in preparing its consolidated financial statements. Selected financial information by industry segment is presented below (in thousands):
YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 ----------- ---------- ------- Revenues Ophthalmic............................. $ 17,443 $ 28,221 $ 32,467 Injectable............................. 9,859 25,196 22,736 Contract services...................... 14,946 13,510 9,429 ---------- --------- --------- Total revenues.................. $ 42,248 $ 66,927 $ 64,632 ========== ========= ========= Gross profit Ophthalmic............................. $ (245) $ 9,251 $ 16,873 Injectable............................. 2,936 16,287 13,346 Contract services...................... 4,410 3,299 3,258 ---------- --------- --------- Total gross profit.............. 7,101 28,837 33,477 Operating expenses..................... 28,097 30,568 21,355 ---------- --------- --------- Total operating income (loss)... (20,996) (1,731) 12,122 Interest and other (expense), net...... (3,930) (2,283) (1,483) ---------- --------- --------- Income (loss) before income taxes...... $ (24,926) $ (4,014) $ 10,639 ========== ========== =========
The Company manages its business segments to the gross profit level and manages its operating costs on a company-wide basis. The Company does not identify assets by segment for internal purposes. NOTE M -- COMMITMENTS AND CONTINGENCIES On March 27, 2002, the Company received a letter informing it that the staff of the Securities and Exchange Commission's regional office in Denver, Colorado, would recommend to the Commission that it bring an enforcement action for injunctive relief against the Company. The recommended action concerns the Company's alleged misstatements, in quarterly and annual Securities and Exchange Commission ("SEC") filings and earnings press releases, of its income for fiscal years 2000 and 2001 by allegedly failing to reserve for doubtful accounts receivable and overstating its accounts receivable balance as of December 31, 2000. The Company also learned that certain of its former officers, as well as a current employee had received similar notifications. The Company disagrees with the staff's proposed recommendation and allegations and has submitted its views as to why an enforcement action should not be brought. Notwithstanding the fact that subsequent to the issuance of the Company's consolidated financial statements for the year ended December 31, 2001, management of the Company determined it needed to restate the Company's financial statements for 2000 and 2001 (See Note S), the Company and the staff of the SEC's enforcement division continue to have discussions regarding the potential enforcement recommendation. The Company was party to a License Agreement with The Johns Hopkins University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and amended effective July 15, 2001 (See Note C). Pursuant to the License Agreement, the Company licensed two patents from JHU/APL for the development and commercialization of a diagnosis and treatment for age-related macular degeneration ("AMD") using Indocyanine Green ("ICG"). A dispute arose between the Company and JHU/APL concerning the License Agreement. Specifically, JHU/APL challenged the Company's performance required by December 31, 2001 under the License 41 Agreement and alleged that the Company was in breach of the License Agreement. The Company denied JHU/APL's allegations and contended that it had performed in accordance with the terms of the License Agreement. As a result of the dispute, on March 29, 2002, the Company commenced a lawsuit in the U.S. District Court for the Northern District of Illinois, seeking declaratory and other relief against JHU/APL. On July 3, 2002, the Company reached an agreement with JHU/APL with regard to the dispute that had risen between the two parties. The Company and JHU/APL mutually agreed to terminate their license agreement. As a result, the Company no longer has any rights to the JHU/APL patent rights as defined in the license agreement. In exchange for relinquishing its rights to the JHU/APL patent rights, the Company received an abatement of the $300,000 due to JHU/APL at March 31, 2002 and a payment of $125,000 to be received by August 3, 2002. The Company also has the right to receive 15% of all cash payments and 20% of all equity received by JHU/APL from any license of the JHU/APL patent rights less any cash or equity returned by JHU/APL to such licensee. The combined total of all such cash and equity payments are not to exceed $1,025,000. The $125,000 payment is considered an advance towards cash payments due from JHU/APL and will be credited against any future cash payments due the Company as a result of JHU/APL's licensing efforts. As a result of the resolved dispute discussed above, the Company will record an asset impairment charge of $1,559,500 in the third quarter of 2002. The impairment amount represents the net value of the asset recorded on the balance sheet of the Company less the $300,000 payment abated by JHU/APL and the $125,000 payment from JHU/APL. The $125,000 payment was received on August 3, 2002. In October 2000, the Company received a warning letter from the FDA as a result of a routine inspection of its Decatur manufacturing facilities. This letter focused on general documentation and cleaning validation issues. The Company was re-inspected in late 2001 and the FDA issued a Form 483 documenting its findings. The Company responded to these findings on January 4, 2002 and the FDA has accepted the Company's response. The Company anticipates a re-inspection of its Decatur facility by the FDA in the fourth quarter of 2002. The warning letter prevents the FDA from issuing any approval for new products manufactured at the Decatur facility. The warning letter does not inhibit the Company's ability to continue manufacturing products that are currently approved. The warning letter does not impact the operations at the Somerset facility. On March 6, 2002, the Company received a letter from the United States Attorney's Office, Central District of Illinois, Springfield, Illinois, advising the Company that the United States Drug Enforcement Administration had referred a matter to that office for a possible civil legal action for alleged violations of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. Section 801, et. seq. and regulations promulgated under the Act. The Company continues to have discussions with the United States Attorneys Office and anticipates that any action under this matter will not have a material impact on its financial position, results of operations or cash flows. On August 9, 2001, the Company was served with a Complaint, which had been filed on August 8, 2001 in the United States District Court for The Northern District of Illinois, Eastern Division. The suit named the Company as well as Mr. Floyd Benjamin, the former president and chief executive officer of the Company, and Dr. John N. Kapoor, the Company's current chairman of the board and then interim chief executive officer as defendants. The suit, which was filed by Michelle Golumbski, individually, and on behalf of all others similarly situated, alleged various violations of the federal securities laws in connection with the Company's public statements and filings with the Securities and Exchange Commission during the period from February 20, 2001 through May 22, 2001. The plaintiff subsequently voluntarily dismissed her claims against Akorn, Inc., Mr. Floyd Benjamin and Dr. John N. Kapoor, and, in exchange for the Company's consent to this voluntary dismissal, also provided, through counsel, a written statement that the plaintiff would not reassert her claims against any of the defendants in any subsequent actions. The Company did not provide the plaintiff with any compensation in consideration for this voluntary dismissal. On April 4, 2001, the International Court of Arbitration (the "ICA") of the International Chamber of Commerce notified the Company that Novadaq Technologies, Inc. ("Novadaq") had filed a Request for Arbitration with the ICA on April 2, 2001. Akorn and Novadaq had previously entered into an Exclusive Cross-Marketing Agreement dated July 12, 2000 (the "Agreement"), providing for their joint development and marketing of certain devices and procedures for use in fluorescein angiography (the "Products"). Akorn's drug indocyanine green ("ICG") would be used as part of the angiographic procedure. The United States Food and Drug Administration ("FDA") had requested that the parties undertake clinical studies prior to obtaining FDA approval. In its Request for Arbitration, Novadaq asserted that under the terms of the Agreement, Akorn should be responsible for the costs of performing the requested clinical trials, which were estimated to cost approximately $4,400,000. Alternatively, Novadaq sought a declaration that the Agreement should be terminated as a result of Akorn's alleged breach. Finally, in either event, Novadaq sought unspecified damages as a result of the alleged failure or delay on Akorn's part in performing its obligations under the Agreement. In its response, Akorn denied Novadaq's allegations and alleged that Novadaq had breached the agreement. On January 25, 2002, the Company and Novadaq reached a settlement of the dispute. Under terms of a revised agreement entered into as part of the settlement, Novadaq will assume all further costs associated with development of the technology. The Company, in consideration of foregoing any share of future net profits, obtained an equity ownership interest in Novadaq and the right to be the exclusive supplier of ICG for use in Novadaq's 42 diagnostic procedures. In addition, Antonio R. Pera, Akorn's then President and Chief Operating Officer, was named to Novadaq's Board of Directors. In conjunction with the revised agreement, Novadaq and the Company each withdrew their respective arbitration proceedings. Subsequent to the resignation of Mr. Pera on June 7, 2002, the Company named Ben J. Pothast, its Chief Financial Officer, to fill the vacancy on the Novadaq Board of Directors created by his departure. 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, results of operations, or cash flows of the Company. NOTE N -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001 2000 1999 --------- --------- ------- Interest and taxes paid: Interest (net of amounts capitalized)................... $ 3,308 $ 2,596 $ 1,245 Income taxes............................................ 38 1,625 2,860 Noncash investing and financing activities: Treasury stock received for exercise of stock options... -- -- 35 Intangible asset received in exchange for research equipment............................................ 100 -- --
NOTE O -- RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137 and No. 138, was effective for the Company's fiscal 2001 financial statements and was adopted by the Company on January 1, 2001. Adoption of these standards did not have any effect on the Company's financial position or results of operations. In June 2001, the FASB issued three statements, SFAS No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 141 supercedes APB Opinion No. 16, "Business Combinations," and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring all business combinations be accounted for using the purchase method. In addition, in applying the purchase method, SFAS No. 141 changes the criteria for recognizing intangible assets apart from goodwill. The following criteria is to be considered in determining the recognition of the intangible assets: (1) the intangible asset arises from contractual or other legal rights, or (2) the intangible asset is separable or dividable from the acquired entity and capable of being sold, transferred, licensed, rented, or exchanged. The requirements of SFAS No. 141 are effective for all business combinations initiated after June 30, 2001. The adoption of this new standard did not have any effect on the Company's financial statements. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets," and requires goodwill and other intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. The Company has adopted SFAS No. 142 as of January 1, 2002. The adoption of this new standard did not have a significant effect on the Company's financial statements as no impairments were recognized. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company has adopted SFAS No. 143 as of January 1, 2002. The adoption of this new standard did not have any effect on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement also supercedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting 43 the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 is effective January 1, 2002. The adoption of this new standard did not have any effect on the Company's financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company will adopt SFAS No. 146 for exit or disposal activities initiated after December 31, 2002. The Company does not anticipate that adoption of this standard will have a material effect on its financial statements. NOTE P -- CUSTOMER AND SUPPLIER CONCENTRATION A small number of wholesale drug distributors account for a large portion of the Company's revenues. In 2001, sales to five wholesale drug distributors accounted for 42% of total gross sales and approximately 47% of gross trade receivables as of December 31, 2001. However, no single customer accounted for more than 10% of the Company's revenues during 2001 or 1999. During 2000, the Company realized approximately 12% of its revenues from Cardinal Health, Inc. ("Cardinal"). Cardinal is a distributor of the Company's products as well as a distributor of a broad range of health care products for many companies in the health care sector. Cardinal is not the end user of the Company's products. If sales to Cardinal were to diminish or cease, the Company believes that the end users of its products would find no difficulty obtaining the Company's products either directly from the Company or from another distributor. The account receivable balance for Cardinal was approximately 22% of gross trade receivables at December 31, 2000. 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 the case of 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. NOTE Q -- DISCONTINUED PRODUCTS In May 2001, the Company discontinued one of its products due to uncertainty of product availability from a third-party manufacturer, rising manufacturing costs and delays in obtaining FDA approval to manufacture the product in-house. The Company recorded an asset impairment charge of $1,170,000 related to manufacturing equipment specific to the product and an asset impairment charge of $140,000 related to the remaining balance of the product acquisition intangible asset during the first quarter of 2001. In November 2001, the Company decided to no longer sell one of its products due to unavailability of raw material at a competitive price and declining market share. The Company recorded an asset impairment charge of $725,000 related to the remaining balance of the product acquisition intangible asset during the fourth quarter of 2001. NOTE R -- RESTRUCTURING CHARGES During 2001, the Company adopted a restructuring program to properly size its operations to then current business conditions. These actions were designed to reduce costs and improve operating efficiencies. The program included, among other items, severance of employees, plant-closing costs related to the Company's San Clemente, CA sales office and rent for unused facilities under lease in San Clemente and Lincolnshire, IL. The restructuring, affecting all three business segments, reduced the Company's workforce by 50 employees, primarily sales and manufacturing related, representing 12.5% of the total workforce. Activities previously executed in San Clemente have been relocated to the Company's headquarters. The restructuring program costs are included in selling, general and administrative expenses in the accompanying consolidated statement of income and resulted in a charge to operations of approximately $1,117,000 consisting of severance costs of $398,000, lease costs of $625,000 and other costs of $94,000. At December 31, 2001, the amount remaining in the accruals for the restructuring 44 program was approximately $528,000. Approximately $589,000 of the restructuring accrual was paid by December 31, 2001 ($181,000 severance, $314,000 lease costs, $94,000 other) and the remainder was paid by June 30, 2002, except for $176,000 in lease costs that continue through February of 2003. NOTE S -- RESTATEMENT Subsequent to the issuance of the Company's consolidated financial statements for the year ended December 31, 2001, management of the Company determined that the Company had not adequately considered all of the information available with respect to certain disputed receivables in establishing its allowance for uncollectible accounts as of December 31, 2000 and that the $7,520,000 increase in its allowance for doubtful accounts that was recognized during the three months ended March 31, 2001 should have been recognized at December 31, 2000 and that bad debt expense for the years ended December 31, 2000 and 2001 was understated and overstated, respectively, by a corresponding amount. In addition, management determined that the Company had not recognized the $1,508,000 beneficial conversion feature embedded in the convertible notes issued to Dr. Kapoor (See Note G). The Company's consolidated financial statements for the years ended December 31, 2000 and 2001 have been restated to appropriately account for these items. The following tables summarize the significant effects of the restatements:
AS PREVIOUSLY AS OF DECEMBER 31, 2000: REPORTED AS RESTATED ------------------------ -------- ----------- Trade accounts receivable..................... $ 24,144 $ 16,624 Deferred income taxes - current............... 2,016 4,935 Total assets.................................. 96,518 91,917 Retained earnings............................. 17,185 12,584 Shareholders' equity.......................... 39,832 35,231
AS PREVIOUSLY AS OF DECEMBER 31, 2001: REPORTED AS RESTATED ------------------------ -------- ----------- Deferred income taxes - non current........... 3,765 3,850 Total assets.................................. 84,461 84,546 Long-term debt................................ 8,861 7,574 Common stock.................................. 24,884 26,392 Accumulated deficit........................... (2,426) (2,562) Shareholders' equity.......................... 22,458 23,830
YEAR ENDED YEAR ENDED DECEMBER 31, 2000 DECEMBER 31, 2001 ----------------- ----------------- AS AS PREVIOUSLY AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ----------- --------- ---------- ---------- Selling, general and administrative expense............ 17,397 24,917 31,525 24,005 Interest expense................... 2,400 2,400 (3,547) (3,768) Income (loss) before income taxes.. 3,506 (4,014) (32,225) (24,926) Income tax provision (benefit)..... 1,319 (1,600) (12,614) (9,780) Net income (loss).................. 2,187 (2,414) (19,611) (15,146) Net income (loss) per share:....... Basic............................ $ 0.11 $ (0.13) $ (1.01) $ (0.78) Diluted.......................... $ 0.11 $ (0.13) $ (1.01) $ (0.78)
NOTE T -- SUBSEQUENT EVENTS On January 25, 2002, the Company and Novadaq Technologies, Inc. ("Novadaq") reached a settlement of a dispute involving the two companies. Under terms of a revised agreement, Novadaq will assume all costs associated with development of certain devices and procedures for use in fluorescein angiography. The Company, in consideration of foregoing any share of future net profits, will obtain an equity ownership interest in Novadaq and the right to be the exclusive supplier of ICG for use in Novadaq's diagnostic procedures. In addition, Antonio R. Pera, Akorn's then President and Chief Operating Officer, was named to Novadaq's Board of Directors. In conjunction with the revised agreement, Novadaq and the Company have agreed to withdraw from arbitration 45 proceedings that were currently in process at the time. Subsequent to the resignation of Mr. Pera on June 7, 2002, the Company named Ben J. Pothast, its Chief Financial Officer, to fill the vacancy on the Novadaq Board of Directors created by his departure. On March 21, 2002, the Company announced that it had been notified by the U.S. Patent and trademark Office that U.S. patent number 6,352,663 titled "Methods for diagnosing and treating abnormal vasculature using fluorescent dye angiography and dye enhanced photocoagulation" had been issued to the Company. This was one of the three U.S. patents on file as of December 31, 2001. The Company was party to a License Agreement with The Johns Hopkins University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and amended effective July 15, 2001 (See Note C). Pursuant to the License Agreement, the Company licensed two patents from JHU/APL for the development and commercialization of a diagnosis and treatment for age-related macular degeneration ("AMD") using Indocyanine Green ("ICG"). A dispute arose between the Company and JHU/APL concerning the License Agreement. Specifically, JHU/APL challenged the Company's performance required as of December 31, 2001 under the License Agreement and alleged that the Company was in breach of the License Agreement. The Company denied JHU/APL's allegations and contended that it had performed in accordance with the terms of the License Agreement. As a result of the dispute, on March 29, 2002, the Company commenced a lawsuit in the U.S. District Court for the Northern District of Illinois, seeking declaratory and other relief against JHU/APL. On July 3, 2002, the Company reached an agreement with JHU/APL with regard to the dispute that had risen between the two parties. The Company and JHU/APL mutually agreed to terminate their license agreement. As a result, the Company no longer has any rights to the JHU/APL patent rights as defined in the license agreement. In exchange for relinquishing its rights to the JHU/APL patent rights, the Company received an abatement of the $300,000 due to JHU/APL at March 31, 2002 and a payment of $125,000 to be received by August 3, 2002. The Company also has the right to receive 15% of all cash payments and 20% of all equity received by JHU/APL from any license of the JHU/APL patent rights less any cash or equity returned by JHU/APL to such licensee. The combined total of all such cash and equity payments are not to exceed $1,025,000. The $125,000 payment is considered an advance towards cash payments due from JHU/APL and will be credited against any future cash payments due the Company as a result of JHU/APL's licensing efforts. As a result of the resolved dispute discussed above, the Company will record an asset impairment charge of $1,559,500 in 2002. The impairment amount represents the net value of the asset on the balance sheet of the Company less the $300,000 payment abated by JHU/APL and the $125,000 payment from JHU/APL. The $125,000 payment was received on August 3, 2002. On September 16, 2002, the Company was notified by it senior lenders that it was in default due to failure to pay the principal and interest owed as of August 31, 2002 under the most recent extension of the credit agreement. The senior lenders also notified the Company that they would forbear from exercising their remedies under the credit agreement until January 3, 2003 if a forbearance agreement could be reached. On September 20, 2002, the Company and its senior lenders entered into an agreement under which the senior lenders would agree to forbear from exercising their remedies (the "Forbearance Agreement) and the Company acknowledged its current default. The Forbearance Agreement provides a second line of credit allowing the Company to borrow the lesser of (i) the difference between the Company's outstanding indebtedness to the senior lenders and $39,200,000, (ii) the Company's borrowing base and (iii) $1,750,000, to fund the Company's day-to-day operations. The Forbearance Agreement provides for certain additional restrictions on operations and additional reporting requirements. The Forbearance Agreement also requires automatic application of cash from the Company's operations to repay borrowings under the new revolving loan, and to reduce the Company's other obligations to the senior lenders. The Company, as required in the Forbearance Agreement, has agreed to provide the senior lenders with a plan for restructuring its financial obligations on or before December 1, 2002, and has agreed to retain a consulting firm by September 27, 2002 to assist in the development and execution of this restructuring plan. On October 1, 2002, a Nasdaq Listing Qualification Panel notified the Company that the appeal of its June 24, 2002 delisting from the Nasdaq National Market had been denied. Previously, on April 19, 2002, the Company received a Nasdaq Staff Determination advising the Company that, as a result of the Company's inability to include audited financial statements in its 2001 Annual Report on Form 10-K as filed with the Commission on April 16, 2002, the Company was in violation of Nasdaq's report filing requirements for continued listing on the Nasdaq National Market. On May 16, 2002, the Company participated in a hearing before a Nasdaq Listing Qualification Panel to review the Staff Determination that the Company should be delisted. The Nasdaq Listing Qualification Panel requested additional information before making a decision on the Company's continued listing, which the Company provided. Upon the filing of this Form 10-K/A, the Company intends to reapply for listing on the Nasdaq National Market exchange or a similar exchange. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the directors and executive officers of the Company as of March 15, 2002. Each officer serves as such at the pleasure of the Board of Directors.
NAME AGE POSITION WITH THE COMPANY ---- --------- ------------------------- John N. Kapoor, Ph.D..... 58 Chief Executive Officer, Director, Chairman of the Board Antonio R. Pera.......... 44 President, Chief Operating Officer and Director Ben J. Pothast........... 40 Sr. Vice President, Chief Financial Officer, Secretary and Treasurer Daniel E. Bruhl, M.D..... 59 Director Doyle S. Gaw............. 70 Director Jerry N. Ellis........... 64 Director
Dr. Bruhl, Mr. Gaw and Mr. Ellis comprise Akorn's audit committee. Dr. Bruhl and Mr. Gaw comprise Akorn's compensation committee. John N. Kapoor, Ph.D. Dr. Kapoor has served as Chief Executive Officer of the Company since March 2001. Dr. Kapoor has served as Chairman of the Board of the Company since May 1995 and from December 1991 to January 1993. Dr. Kapoor also served as acting Chairman of the Board of the Company from April 1993 to May 1995 and Chief Executive Officer of the Company from May 1996 to November 1998. Dr. Kapoor serves as Chairman of the Board of Option Care, Inc. (an infusion services and supplies company) and was Chief Executive Officer of Option Care, Inc. from August 1993 to April 1996. Dr. Kapoor is the president of E.J. Financial Enterprises, Inc., (a health care consulting and investment company) and has served as Chairman of the Board of NeoPharm, Inc. (a specialty pharmaceutical company) since July 1990. Dr. Kapoor is a director of First Horizon Pharmaceutical Corporation (a distributor of pharmaceuticals) and of Introgen Therapeutics, Inc. (a gene therapy company). Antonia R. Pera. Mr. Pera served as President and Chief Operating Officer of the Company from June 2001 to June 2002. Mr. Pera was also a director of the Company. From September 1992 to June 2001, he was Vice President and General Manager of the Bedford Laboratories Division of Ben Venue Laboratories, Inc. (a manufacturer of injectable drugs), and a subsidiary of Boehringer-Ingelheim Corporation. Mr. Pera held various positions from March 1989 through September 1992 with Anaquest (Ohmeda, Inc.) (a manufacturer of inhalation anesthetics). From July 1985 to March 1989, Mr. Pera held several positions with Lyphomed, Inc. (a parenteral products and injectable drug manufacturer) including two years as General Manager of the AccuPharma Division of that Company. Mr. Pera was also a director of Novadaq Technologies, Inc., a privately held research company. Ben J. Pothast. Mr. Pothast has served as Senior Vice President of the Company since June 2002 and Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since September 2001. From 1998 to 2001, he was Director of Financial Planning and Analysis of Moore North America (a business form printing company). From 1995 to 1998, Mr. Pothast was Director of Business Planning and Corporate Finance of GATX Corporation (a transportation and logistics company). From 1990 to 1995, he was Manager of Financial Reporting and Analysis for The Perseco Company (a packaging and logistics company). Mr. Pothast began his career at the public accounting firm of Ernst & Young. Mr. Pothast is also a director of Novadaq Technologies, Inc., a privately held research company. Daniel E. Bruhl, M.D. Dr. Bruhl has served as a Director of the Company since 1983. Dr. Bruhl is an ophthalmologist, President of the Surgery Center of Fort Worth and a director of Medsynergies, Inc., (private ophthalmology practice management company). Dr. Bruhl was a director of Surgical Care Affiliates (outpatient surgery center company) from 1983 to 1996, when it merged with Healthsouth Corporation. Doyle S. Gaw. Mr. Gaw has served as a Director of the Company since 1975. Mr. Gaw is a private investor. Jerry N. Ellis. Mr. Ellis has served as a Director of the Company since 2001. Mr. Ellis is an Adjunct Professor in the Department of Accounting at The University of Iowa. Mr. Ellis was a consultant to Arthur Andersen, LLP from 1994 to 2000 and a Partner at Arthur Andersen in the Dallas, Madrid and Chicago offices from 1973 to 1994. Mr. Ellis is a director of First Horizon Pharmaceutical Corporation (a distributor of pharmaceuticals). 47 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE During 2001, Mr. Pothast, an officer of the Company, failed to file timely with the Securities and Exchange Commission one Form 3 to report initial holdings. During 2001, Mr. Gaw, Dr. Bruhl, Dr. Kapoor and Mr. Ellis, all directors of the Company, failed to file timely with the Securities and Exchange Commission one Form 4 to report current transactions, as required by Section 16(a) of the Securities Exchange Act of 1934. All such transactions have been reported on amended statements or annual statements on Form 5. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation paid by the Company for services rendered during the years ended December 31, 2001, 2000 and 1999 to each person who, during 2001, served as the chief executive officer of the Company and to each other executive officer of the Company whose total annual salary and bonus for 2001 exceeded $100,000 (each a "Named Executive Officer"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------- ANNUAL COMPENSATION SECURITIES ----------------------------------------------------------- UNDERLYING ALL OTHER(1) NAME AND PRINCIPAL TIME PERIOD SALARY BONUS(2) OPTIONS/SARS COMPENSATION ------------------ ----------------------- ---------- ----------- ------------ ------------ John N. Kapoor(3)... Year ended December 31, 2001 $ 2,083 $ -- 500,000 $ -- Chief Executive Year ended December 31, 2000 50,000 -- 5,000 -- Officer Year ended December 31, 1999 47,917 -- 5,000 -- Antonio R. Pera(4).. Year ended December 31, 2001 145,176 -- 500,000 11,486 President and Chief Year ended December 31, 2000 -- -- -- -- Operating Officer Year ended December 31, 1999 -- -- -- -- Floyd Benjamin(5)... Year ended December 31, 2001 123,477 -- 70,000 12,591 Year ended December 31, 2000 274,205 -- 105,000 38,826 Year ended December 31, 1999 246,184 137,116 305,000 11,700 Harold Koch Jr.(6).. Year ended December 31, 2001 56,874 -- 25,000 113,203 Year ended December 31, 2000 158,617 -- 40,000 11,600 Year ended December 31, 1999 147,928 36,540 10,000 11,600 Rita J. McConville(7) Year ended December 31, 2001 89,162 -- 30,000 56,763 Year ended December 31, 2000 151,716 -- 55,000 3,500 Year ended December 31, 1999 138,600 33,301 30,000 3,333
- ---------- (1) Represents contributions to the Company's Savings and Retirement Plan, except as indicated in notes (4), (5), (6) and (7). (2) Represents bonuses awarded for 1998 and 1999 performance paid in 1999 and 2000, except for Mr. Benjamin, whose 1998 bonus was paid partially in 1998 and partially in 1999 ($55,916). There were no executive officer bonuses awarded for 2000 or 2001. (3) Dr. Kapoor receives $50,000 annually for his services as Chairman. Amounts due Dr. Kapoor for 2001 were not paid as agreed upon between the Company, Dr. Kapoor and the Company's senior lenders. (4) Mr. Pera became President and COO of the Company on June 4, 2001. His "Other Compensation" for 2001 includes $7,000 for auto allowance and $4,486 for Company sponsored life insurance. Mr. Pera's employment with the Company terminated June 7, 2002. (5) Mr. Benjamin served as Chief Executive Officer from May 3, 1996 to March 21, 2001. His "Other Compensation" for 2001 includes $4,000 for auto allowance, $5,539 for country club membership and $763 for spousal travel. His "Other Compensation" for 2000 and 1999 includes $9,600 auto allowance. His "Other Compensation" for 2000 includes $23,372 for country club membership and $4,104 for spousal travel. Mr. Benjamin's employment with the Company terminated May 30, 2001. (6) Mr. Koch served as an officer of the Company from May 12, 2000 to April 13, 2001. His "Other Compensation" includes $111,177 severance in 2001, $923 auto allowance in 2001 and $7,200 auto allowance for 2000 and 1999. Mr. Koch's employment with the Company terminated April 13, 2001. 48 (7) Ms. McConville served as Chief Financial Officer from February 28, 1997 to March 21, 2001. Her "Other Compensation" includes $54,686 severance in 2001. Ms. McConville's employment with the Company terminated July 13, 2001. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers in the fiscal year ended December 31, 2001, including the potential realizable value over the five-year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the Securities and Exchange Commission and do not represents Akorn's estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of Akorn's common stock.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ------------------------------ VALUE AT ASSUMED NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS/SARS EXERCISE PRICE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM ------------------ OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($) ----------------- ----------------------------- ----------- ----------- ----------- --------- John N. Kapoor... 500,000(1) 25% $2.25 3/29/06 $ 310,817 $ 686,824 Antonio R. Pera.. 500,000(1) 25% 2.33 6/4/06 321,868 711,244 Floyd Benjamin... 60,000(1) 3% 5.31 2/1/06 88,023 194,508 10,000(2) NM 1.74 5/16/06 4,807 10,623 Harold Koch Jr... 25,000(1) 1% 5.31 2/1/06 36,676 81,045 Rita J. McConville 25,000(1) 1% 5.31 2/1/06 36,676 81,045 5,000(2) NM 1.74 5/16/06 2,404 5,311
- ---------- NM -- Not Meaningful (1) Issued pursuant to the Amended and Restated 1988 Incentive Compensation Program. (2) Issued pursuant to the Amended and Restated 1988 Incentive Compensation Program as part of the Company salary reduction program. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT AT FY-END(#) FY-END($)(1) SHARES ------------------- ---------------- ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- ----------- ----------- ------------------- ---------------- John N. Kapoor........... -- -- 263,438/375,000 475,698/843,750 Antonio R. Pera.......... -- -- 125,000/375,000 291,250/873,750 Floyd Benjamin........... -- -- 430,000/175,000 126,600/8,700 Harold Koch Jr........... -- -- 37,500/40,000 21,875/ -- Rita J. McConville (2)... 45,000 49,790 86,250/ -- -- / --
- ---------- (1) Value of Unexercised in-the-Money options calculated using the 12/31/01 closing price of $4.00. (2) Ms. McConville's exercises were executed after termination of her employment with the Company. EMPLOYMENT AGREEMENTS In May 1996 the Company entered into an employment agreement with Mr. Benjamin pursuant to which Mr. Benjamin agreed to 49 serve as Executive Vice President of the Company and President of Taylor Pharmaceuticals Inc. (a subsidiary of the Company) for an annual salary of $200,000, increased annually at the discretion of the Board of Directors, plus bonuses determined by a formula stated in the agreement. The agreement terminated January 1, 1999 upon Mr. Benjamin's appointment as President and CEO of Akorn, Inc. In May 2001 the Company entered into an employment agreement with Mr. Pera pursuant to which Mr. Pera served as President and Chief Operating Officer of the Company. The employment agreement provides for an annual salary of $260,000, increased annually at the discretion of the Board of Directors, plus bonuses determined by a formula stated in the agreement. In addition, the employment agreement contains restrictive covenants concerning the use of confidential information, non-competition and non-solicitation of the Company's employees, both during the term of and after termination of Mr. Pera's employment with the Company. Mr. Pera's employment with the Company terminated on June 7, 2002. In accordance with the employment agreement and the severance agreement executed at the time of his termination, the Company is committed to pay Mr. Pera salary continuance for one year, provide continuation of health benefits and fully vest all stock option grants. The Company currently has no other employment agreements in place. COMPENSATION COMMITTEE INTERLOCKS Dr. Bruhl and Mr. Gaw, who currently comprise the Compensation Committee, are each independent, non-employee directors of the Company. No executive officer of the Company served as a director or member of the compensation committee of (i) another entity in which one of the executive officers of such entity served on the Company's Compensation Committee, (ii) the board of directors of another entity in which one of the executive officers of such entity served on the Company's Compensation Committee, or (iii) the compensation committee of any other entity in which one of the executive officers of such entity served as a member of the Company's Board of Directors, during the year ended December 31, 2001. COMPENSATION OF DIRECTORS For services as Chairman of the Board and as a consultant to the Company, Dr. Kapoor receives a fee of $50,000 per year. Each other director who is not a salaried officer or consultant of the Company receives a fee for his services as a director of $1,000 per regular meeting of the Board of Directors, $500 per telephone meeting and $500 per committee meeting, plus reimbursement of his expenses related to those services. All directors of the Company participate in the Company's Stock Option Plan for Directors, pursuant to which each director of the Company is granted an option to acquire 5,000 shares of Company common stock on the day after each annual meeting of shareholders at which he is elected to serve as a director. Any director appointed between annual meetings is entitled to receive a pro rata portion of an option to acquire 5,000 shares. The Compensation Committee may, in its sole discretion, grant an option to purchase up to 100,000 shares to a person who is not already a director and who becomes a director at any time; no member of the Compensation Committee is eligible to be granted such an option and any director who has been granted such an option is not permitted to serve on the Compensation Committee for one year after such grant. Options granted under the plan vest immediately and expire five years from the date of grant. Upon joining the Board in 2001, Mr. Ellis was granted an option under the plan for 20,000 shares. The option exercise price for all options granted under the plan is the fair market value of the shares covered by the option at the time of the grant. COMPENSATION COMMITTEE REPORT The Compensation Committee of the Board of Directors reviews, analyzes and makes recommendations related to compensation packages for the Company's executive officers, evaluates the performance of the Chief Executive Officer and the Chief Operating Officer and administers the grant of stock options under the Company's Incentive Compensation Program. The Company's executive compensation policies are designed to (a) provide competitive levels of compensation to attract and retain qualified executives, (b) reward achievements in corporate performance, (c) integrate pay with annual and long-term performance goals and (d) align the interests of executives with the goals of shareholders. Compensation paid to Company executives consists of salaries, annual cash incentive bonuses and long-term incentive opportunities in the form of stock options. 50 Salary Mr. Pera's salary for 2001 was fixed in his employment agreement. Mr. Benjamin's salary for the years ended December 31, 2000 and 1999 and the salary of Ms. McConville for the year ended December 31, 1999 were determined after considering the executive compensation policies noted above, the impact the executive has on the Company, the skills and experience the executive brings to the job, competition in the marketplace for those skills and the potential of the executive in the job. Ms. McConville's salary for 2000 and 2001 and Mr. Koch's salary for 1999, 2000 and 2001 was determined by the Chief Executive Officer. Mr. Benjamin's salary through 1998 was fixed in his employment agreement. Incentive Bonus Annual incentive compensation for executive officers during 2001, 2000 and 1999 was based on corporate earnings objectives as well as position-specific performance objectives. Mr. Pera's employment agreement specified the formula under which he was to be awarded incentive bonuses. Mr. Benjamin's employment agreement also specified the formula under which he was to be awarded incentive bonuses. Under those criteria, Mr. Benjamin did earn a bonus for 1998. Mr. Benjamin's 1998 bonus was paid partially in 1998 and partially in 1999. The bonuses awarded to Ms. McConville and Mr. Koch, as noted in the compensation table for 1998 and 1999, and to Mr. Benjamin for 1999, were paid in 1999 and 2000, respectively. There were no performance bonuses granted to executive officers for 2000 or 2001. Stock Options The Committee's practice with respect to stock options has been to grant options based upon the attainment of Company performance goals and to vest options based on the passage of time. The option grants noted in the compensation tables include grants upon initial employment and annual grants as well as grants issued under the Stock Option Plan for Directors to those named executive officers that are also directors. It is the responsibility of the Committee to address the issues raised by tax laws under which certain non-performance based compensation in excess of $1 million per year paid to executives of public companies is non-deductible to the Company and to determine whether any actions with respect to this limit need to be taken by the Company. It is not anticipated that any executive officer of the Company will receive any compensation in excess of this limit. SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS Daniel E. Bruhl, M.D. Doyle S. Gaw 51 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of March 15, 2002, the following persons were directors, nominees, Named Executive Officers (as defined in "Executive Compensation" above), or others with beneficial ownership of five percent or more of the Company's common stock.. The information set forth below has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 based upon information furnished to the Company or to the Securities and Exchange Commission by the persons listed. Unless otherwise noted the address of each of the following persons is 2500 Millbrook Drive, Buffalo Grove, Illinois 60089.
SHARES PERCENT BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS ---------------- ------------------ --------- DIRECTORS AND NOMINEES John N. Kapoor, Ph.D............................ 8,809,227(1) 36.64% Daniel E. Bruhl, M.D............................ 316,767(2) 1.62% Doyle S. Gaw.................................... 107,860(2) 0.55% Jerry N. Ellis.................................. 20,000(2) 0.10% Antonio R. Pera................................. 137,500(3) 0.70% NAMED EXECUTIVE OFFICERS(4) Floyd Benjamin(5)............................... 956,667(6) 4.77% Rita J. McConville(5)........................... 95,178(7) 0.48% Harold Koch Jr.(5).............................. 46,341 0.24% Directors and officers as a group (9 persons)... 10,514,540(8) 42.33% OTHER BENEFICIAL OWNERS Wellington Management Company (9)............... 986,200 5.04% Arjun C. Waney(10).............................. 1,868,900 9.56%
- ---------- (1) Of such 8,809,227 shares, (i) 841,000 are owned directly by the John N. Kapoor Trust dated September 20, 1989 (the "Trust") of which Dr. Kapoor is the sole trustee and beneficiary, (ii) 3,395,000 are owned by EJ financial/Akorn Management, L.P. of which Dr. Kapoor is managing general partner, (iii) 25,000 are owned directly by Dr. Kapoor, (iv) 63,600 are owned by a trust, the trustee of which is Dr. Kapoor's wife and the beneficiaries of which are their children, (v) 258,438 are issuable pursuant to options granted by the Company directly to Dr. Kapoor, (vii) 1,667,000 are issuable upon conversion of warrants issued to the John N. Kapoor Trust dated September 20, 1989, (viii) 2,426,900 are issuable upon the conversion of a convertible note held by the John N. Kapoor Trust dated September 20, 1989 and (ix) 132,289 are issuable upon the conversion of interest related to the convertible note held by the John N. Kapoor Trust dated September 20, 1989. (2) The reported shares include options to purchase shares. The shares reported for Directors Bruhl, Gaw and Ellis include options to purchase 20,000, 20,000 and 20,000 shares, respectively. In addition, Dr. Bruhl's retirement plan holds 64,266 of the listed shares. (3) The shares reported include options to purchase 137,500 shares. Under the terms of the Employment Agreement executed by and between Mr. Pera and the Company, Mr. Pera received non-qualified stock options under the Company's Amended and Restated Akorn, Inc. 1988 Incentive Compensation Program to purchase 500,000 shares of the Company's common stock. These stock options vest in four equal increments of 125,000 shares beginning at June 4, 2001. (4) Dr. Kapoor and Mr. Pera are also Named Executive Officers of the Company, and information regarding their beneficial ownership is included in this table under the section, "Directors and Nominees." (5) Information reported for Mr. Benjamin, Ms. McConville and Mr. Koch is based on most recently reported information prior to their respective departures from the Company. (6) Mr. Benjamin's shares are held by a trust of which Mr. Benjamin and his wife are trustees and their child is the beneficiary. Includes 490,000 shares issuable pursuant to options granted by the Company directly to Mr. Benjamin. (7) The shares reported for Ms. McConville include options to purchase 86,250 shares. 52 (8) Of such 10,514,540 shares, 5,283,377 are not presently outstanding, but are issuable pursuant to option rights described in the preceding footnotes. (9) The address of Wellington Management Company is 75 State Street, Boston, MA 02109. (10) Of such 1,868,900 shares, (i) 439,900 are owned by Argent Fund Management Ltd., a United Kingdom corporation having a mailing address of 67 Cheval Place, London SW7 1HP, U.K. (Argent") for which Mr. Waney serves as Chairman and Managing Director and of which 51% is owned by Mr. Waney, (ii) 608,400 are owned by First Winchester Investments Ltd., a British Virgin Islands corporation having a mailing address of 8 Church Street, St. Helier, Jersey JE4 0SG, Channel Islands, which operates as an equity fund for investors unrelated to Mr. Waney and whose investments are directed by Argent, (iii) 495,000 are owned by Mr. Waney through certain Individual Retirement Accounts maintained in the United States, and (iv) 325,600 are owned directly by Mr. Waney and his spouse. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. John N. Kapoor, Ph.D., the Company's Chairman of the Board, Chief Executive Officer and a principal shareholder, is affiliated with EJ Financial Enterprises, Inc., a health care consulting investment company ("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 and sole trustee of which is Dr. Kapoor, is a principal shareholder of each of these companies. As a result, Dr. Kapoor does not devote his full time to the business of the Company. Although such companies do not currently compete directly with the 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. In addition, one of these companies, NeoPharm, Inc. of which Dr. Kapoor is Chairman and a major stockholder, recently entered into a loan agreement with the Company. Further, Dr. Kapoor has loaned the Company $5,000,000 with the result that he has become a major creditor of the Company as well as a major shareholder. On March 21, 2001, in consideration of Dr. Kapoor assuming the positions of President and interim CEO of the Company, the Compensation Committee of the Board of Directors agreed to issue Dr. Kapoor 500,000 options under the Amended and Restated Akorn, Inc. 1988 Incentive Compensation Program in lieu of cash compensation. On July 12, 2001, the Company entered into a $5,000,000 subordinated debt transaction with the John N. Kapoor Trust dtd. 9/20/89 (the "Trust"), the sole trustee and sole beneficiary of which is Dr. John N. Kapoor, the Company's current CEO and Chairman of the Board of Directors. The transaction is evidenced by a Convertible Bridge Loan and Warrant Agreement (the "Trust Agreement") in which the Trust agreed to provide two separate tranches of funding in the amounts of $3,000,000 ("Tranche A" which was received on July 13) and $2,000,000 ("Tranche B" which was received on August 16). As part of the consideration provided to the Trust for the subordinated debt, the Company issued the Trust two warrants which allow the Trust to purchase 1,000,000 shares of common stock at a price of $2.85 per share and another 667,000 shares of common stock at a price of $2.25 per share. The exercise price for each warrant represented a 25% premium over the share price at the time of the Trust's commitment to provide the subordinated debt. Under the terms of the Trust Agreement, the subordinated debt bears interest at prime plus 3%, which is the same rate the Company pays on its senior debt. Interest cannot be paid to the Trust until the repayment of the senior debt pursuant to the terms of a subordination agreement, which was entered into between the Trust and the Company's senior lenders. Should the subordination agreement be terminated, interest may be paid sooner. The convertible feature of the Trust Agreement, as amended, allows for conversion of the subordinated debt plus interest into common stock of the Company, at a price of $2.28 per share of common stock for Tranche A and $1.80 per share of common stock for Tranche B. In December 2001, the Company entered into a $3,250,000 five-year loan with NeoPharm, Inc. ("NeoPharm") to fund Akorn's efforts to complete its lyophilization facility located in Decatur, Illinois. Under the terms of the promissory note, dated December 20, 2001, evidencing the loan (the Promissory Note") interest will accrue at the initial rate of 3.6% and will be reset quarterly based upon NeoPharm's average return on its cash and readily tradable long and short-term securities during the previous calendar quarter. The principal and accrued interest is due and payable on or before maturity on December 20, 2006. The note provides that Akorn will use the proceeds of the loan solely to validate and complete the lyophilization facility located in Decatur, Illinois. In consideration for the loan, under a separate manufacturing agreement between the Company and NeoPharm, the Company, upon completion of the lyophilization facility, agrees to provide NeoPharm with access to at least 15% of the capacity of Akorn's lyophilization facility each 53 year. The Promissory Note is subordinated to Akorn's senior debt owed to The Northern Trust Company but is senior to Akorn's subordinated debt owed to the Trust. Dr. John N. Kapoor, the Company's chairman and chief executive officer is also chairman of NeoPharm and holds a substantial stock position in that company as well as in the Company. Commensurate with the completion of the Promissory Note between the Company and NeoPharm, the Company entered into an agreement with the Trust, which amended the Trust Agreement. The amendment extended the Trust Agreement to terminate concurrently with the Promissory Note on December 20, 2006. The amendment also made it possible for the Trust to convert the interest accrued on the $3,000,000 tranche into common stock of the Company. Previously, the Trust could only convert the interest accrued on the $2,000,000 tranche. The change related to the convertibility of the interest accrued on the $3,000,000 tranche requires that shareholder approval be received by August 31, 2002, which date has been extended to December 31, 2002. The Company has an equity ownership interest in Novadaq Technologies, Inc. ("Novadaq") of 4,000,000 common shares, representing approximately 16.4% of the outstanding stock of Novadaq. Previously, the Company had entered into a marketing agreement with Novadaq, which was terminated in early 2002. The Company, as part of the termination settlement, received the aforementioned shares and entered into an agreement with Novadaq to be the exclusive future supplier of Indocyanine Green for use in Novadaq's diagnostic procedures. The Company also has the right to appoint one individual to the Board of Directors of Novadaq. Ben J. Pothast, the Company's Chief Financial Officer, currently serves in this capacity. 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a).2. Financial Statement Schedule. The following Financial Statement Schedule is filed with this Annual Report on Form 10-K on the page indicated:
Description Page ----------- ---- II. Valuation and Qualifying Accounts 58
(a).3. Exhibits Those exhibits marked with an asterisk (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list. (2.0) 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 10-K for the fiscal year ended June 30, 1996. (3.1) 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 ended June 30, 1991. (3.2) 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 transition period from July 1, 1996 to December 31, 1996. (3.3) 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 31, 1996. (4.1) Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 to the Company's report on Form 10-K for the fiscal year ended June 30, 1988. (10.1) 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 ended June 30, 1991. (10.2) 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 fiscal year ended June 30, 1992. (10.3) 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 33-44785. 55 (10.4) 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 dated September 20, 1989. (10.5) Amended and Restated Credit Agreement dated September 15, 1999 among the Company, Akorn (New Jersey), Inc. and The Northern Trust Company (the "Credit Agreement"), incorporated by reference to Exhibit 10.5 to the Company's report on Form 10-K for the fiscal year ended December 31, 1999. (10.6) Amendment No. 1 to the Credit Agreement dated December 28, 1999, incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-K for the fiscal year ended December 31, 1999. (10.7) Amendment No. 2 to the Credit Agreement dated February 15, 2001, incorporated by reference to Exhibit 10.1 to the Company's report on Form 8-K filed on April 17, 2001. (10.8) Amendment No. 3 to the Credit Agreement dated April 16, 2001, incorporated by reference to Exhibit 10.2 to the Company's report on Form 8-K filed on April 17, 2001. (10.9) Promissory Note among the Company, Akorn (New Jersey), Inc. and The Northern Trust Company dated April 16, 2001, incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K filed on April 17, 2001. (10.10) Letter of Commitment to the Company from John. N. Kapoor, incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K filed on April 17, 2001. (10.11) Promissory Note among the Company, Akorn (New Jersey), Inc. and The Northern Trust Company dated April 16, 2001, incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K filed on April 17, 2001. (10.12) Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001, by and between Akorn, Inc. and the John N. Kapoor Trust dtd. 9/20/89, incorporated by reference to Exhibit 10.1 to the Company's report on Form 8-K filed on July 26, 2001. (10.13) The Tranche A Common Stock Purchase Warrant, dated July 12, 2001, incorporated by reference to Exhibit 10.2 to the Company's report on Form 8-K filed on July 26, 2001. (10.14) The Tranche B Common Stock Purchase Warrant, dated July 12, 2001, incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K filed on July 26, 2001. (10.15) Registration Rights Agreement dated July 12, 2001, by and between Akorn, Inc. and the John N. Kapoor Trust dtd. 9/20/89, incorporated by reference to Exhibit 10.4 to the Company's report on Form 8-K filed on July 26, 2001. 56 (10.16) Forbearance Agreement by and among Akorn, Inc., Akorn (New Jersey), Inc. and The Northern Trust Company, dated as of July 12, 2001, incorporated by reference to Exhibit 10.5 to the Company's report on Form 8-K filed on July 26, 2001. (10.17) *Promissory Note among the Company, Akorn (New Jersey), Inc. and NeoPharm, Inc. dated December 20, 2001. (10.18) *Processing Agreement dated December 20, 2001, by and between Akorn, Inc. and NeoPharm, Inc. (10.19) *Subordination, Standby and Intercreditor Agreement dated December 20, 2001, by and between NeoPharm, Inc. and The Northern Trust Company. (10.20) *Subordination and Intercreditor Agreement dated December 20, 2001, by and between NeoPharm, Inc. and the John N. Kapoor trust dtd. 9/20/89. (10.21) *Waiver Letter dated December 20, 2001 by and between the Company, Akorn (New Jersey), Inc. and The Northern Trust Company. (10.22) *Supply Agreement dated January 4, 2002, by and between Akorn, Inc. and Novadaq Technologies, Inc. (10.23) *Mutual Termination and Settlement Agreements by and between Akorn, Inc. and Johns Hopkins University/Applied Physics Laboratory dtd. July 3, 2002. (10.24) *Amendment No. 4 to the Credit Agreement dated January 1, 2002, by and among the Company, Akorn (NJ) Inc. and The Northern Trust Company. (10.25) *Amendment No. 5 to the Credit Agreement dated June 30, 2002, by and among the Company, Akorn (NJ) Inc. and The Northern Trust Company. (10.26) *Amendment No. 6 to the Credit Agreement dated July 31, 2002, by and among the Company, Akorn (NJ) Inc. and The Northern Trust Company. (10.27) *Pre-Negotiation Agreement by and among Akorn, Inc., Akorn (NJ) Inc. and The Northern Trust Company, dated as of September 20, 2002. (21.1) *Subsidiaries of the Company. (23.1) *Consent of Deloitte & Touche LLP. (99.1) *Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. There was no Form 8-K filed during the fourth quarter of 2001. 57 AKORN, INC. VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 2001, 2000 AND 1999
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ----------- ------------- -------------- ---------------- ------------ Allowance for doubtful accounts 1999..................................... $ 425,000 $ 161,000 $ (360,000) $ 226,000 2000 (AS RESTATED)....................... 226,000 8,127,000 (32,000) 8,321,000 2001 (AS RESTATED)....................... 8,321,000 4,480,000 (9,095,000) 3,706,000 Allowance for returns 1999..................................... $ -- $ 205,000 $ (205,000) $ -- 2000..................................... -- 1,159,000 (927,000) 232,000 2001..................................... 232,000 4,103,000 (3,787,000) 548,000 Allowance for discounts 2001..................................... $ -- $ 886,000 $ (743,000) $ 143,000 Allowance for chargebacks and rebates 1999..................................... $ 1,549,000 $ 23,793,000 $ (22,168,000) $ 3,174,000 2000..................................... 3,174,000 29,558,000 (29,436,000) 3,296,000 2001..................................... 3,296,000 28,655,000 (27,761,000) 4,190,000 Allowance for inventory obsolescence 1999..................................... $ 572,000 $ 611,000 $ (1,049,000) $ 134,000 2000..................................... 134,000 3,983,000 (946,000) 3,171,000 2001..................................... 3,171,000 1,830,000 (3,156,000) 1,845,000
58 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/ JOHN N. KAPOOR ------------------------------- John N. Kapoor Chief Executive Officer Date: October 4, 2002 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ John N. Kapoor, Ph.D. Chief Executive Officer and Director October 4, 2002 -------------------------- (Principal Executive Officer) John N. Kapoor, Ph.D. /s/ Ben J. Pothast Chief Financial Officer October 4, 2002 -------------------------- (Principal Financial Officer and Ben J. Pothast Principal Accounting Officer) /s/ Jerry N. Ellis Director October 4, 2002 -------------------------- Jerry N. Ellis /s/ Daniel E. Bruhl, M.D. Director October 4, 2002 -------------------------- Daniel E. Bruhl, M.D. /s/ Doyle S. Gaw Director October 4, 2002 -------------------------- Doyle S. Gaw
59 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, John N. Kapoor, certify that: 1. I have reviewed this annual report on Form 10-K/A of Akorn, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 4, 2002 /s/ JOHN N. KAPOOR ---------------------------------------- Name: John N. Kapoor Title: Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Ben J. Pothast, certify that: 1. I have reviewed this annual report on Form 10-K/A of Akorn, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 4, 2002 /s/ BEN J. POTHAST -------------------------------------- Name: Ben J. Pothast Title: Chief Financial Officer 60

                                                                   Exhibit 10.17


THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED,
PLEDGED OR OTHERWISE DISTRIBUTED UNLESS REGISTERED UNDER THE SECURITIES ACT OF
1933 AND APPLICABLE STATE SECURITIES LAWS OR SUCH SALE, TRANSFER, ASSIGNMENT,
OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT AND SUCH LAWS.


                                 PROMISSORY NOTE


$3,250,000.00                                                  December 20, 2001
                                                         Buffalo Grove, Illinois



         FOR VALUE RECEIVED, AKORN, INC., a Louisiana corporation ("Borrower"),
promises to pay to the order of NEOPHARM, INC., a Delaware corporation
("NeoPharm," together with any person or entity to whom all or any portion of
this Note may be transferred being hereinafter referred to as "Lender"), at its
principal offices located at 150 Field Drive, Suite 195, Lake Forest, Illinois
60045, or at such other place as Lender may direct, the principal sum of THREE
MILLION TWO HUNDRED FIFTY THOUSAND AND 00/100 DOLLARS ($3,250,000.00), and to
pay interest thereon in accordance with the terms hereof, on December 20, 2006
(the "Maturity Date").

         This Promissory Note (this "Note") has been executed in connection with
(a) that certain Processing Agreement, of even date herewith (the "Processing
Agreement"), between Lender and Borrower; and (b) that certain Subordination and
Intercreditor Agreement, of even date herewith (the "Subordination Agreement"),
between Borrower and John N. Kapoor, as Trustee under The John N. Kapoor Trust,
dated September 20, 1989, (the trustee and the trust, together, "Kapoor"), to
which reference is hereby made.


                                   ARTICLE 1
                                    INTEREST

         1.1 Calculation of Interest Rate. Interest shall begin to accrue on the
date hereof in accordance with the terms of this Section 1.1 and shall be
compounded as of the first business day of each calendar quarter until all
principal and accrued interest is paid. Commencing on the date hereof, interest
shall accrue at a rate of 3.6% per annum. As of the first business day of each
calendar quarter (each, a "Change Date"), commencing on January 1, 2002, Lender
shall adjust the interest rate charged on all amounts of outstanding principal
and interest accrued during the previous calendar quarter to a rate which is
equal to the average return on all of





Lender's cash and readily tradable long- and short-term securities during such
previous calendar quarter; thereafter, interest shall accrue on the unpaid
outstanding principal and accrued interest at the most recently adjusted
interest rate until the next Change Date. Lender shall furnish to Borrower a
statement showing all such cash and securities and the return thereon for the
prior calendar quarter in support of each adjustment to the interest rate.
Interest shall be computed for the actual number of days elapsed on the basis of
a year consisting of 365 days, including the date the loan is made and excluding
the date the loan or any portion thereof is paid or prepaid.

         1.2 Default Rate. After an Event of Default, interest shall accrue and
be payable at a rate equal to (a) the interest rate calculated in accordance
with Section 1.1, plus (b) three percent (3%) (the "Default Rate").

                                   ARTICLE 2
                                    PAYMENTS

         2.1 Required Repayment. Borrower shall pay all amounts of outstanding
principal and accrued but unpaid interest hereunder on the Maturity Date.
Borrower may prepay all outstanding principal and accrued but unpaid interest at
any time without penalty or premium.


         2.2 Manner of Payments. All payments made by Borrower hereunder shall
be made to Lender at its principal offices located at 150 Field Drive, Suite
195, Lake Forest, Illinois 60045, Attn: Chief Financial Officer or at such other
places as Lender may designate. All payments hereunder shall be made in
immediately available funds, and shall be applied first to accrued interest and
then to principal; however, if an Event of Default occurs, Lender may, in its
sole discretion, and in such order as it may choose, apply any payment to
interest, principal and/or lawful charges and expenses then accrued. All
payments shall be made without deduction for or on account of any present or
future taxes, duties or other charges levied or imposed on this Note or the
proceeds thereof by any government or political subdivision thereof, except as
required by law.


                                    ARTICLE 3
                        OPERATIONS/LYOPHILIZATION RAMP-UP

         3.1 Use of Proceeds. Borrower agrees that the proceeds from the loan
evidenced by this Note shall be used solely (a) to achieve removal of all
warning letter sanctions pursuant to Form 483 or current Good Manufacturing
Practice regulations issued or imposed by the Food and Drug Administration
("FDA") with regard to Borrower's ability to handle and manufacture sterile
pharmaceuticals and provide lyophilization services; (b) to obtain FDA
validation for Borrower's operation of its facility located at 1222 West Grand
Avenue, Decatur, Illinois (the "Facility") to offer and provide lyophilization
services for the handling and manufacturing of sterile pharmaceuticals; (c) to
obtain any other required license, consent, permit or approval from the FDA or
any other governmental authority in the United States or its political
subdivisions as shall be required to establish operations at the Facility to
handle and manufacture sterile pharmaceuticals and provide lyophilization
services; (d) to establish operations at the Facility to provide lyophilization
services and to handle and manufacture sterile pharmaceuticals; and (e) to


                                       2


make any capital expenditure necessary to provide lyophilization services (the
items set forth in subsections (a), (b), (c), (d), and (e) collectively, the
"Lyophilization Ramp-Up").

         3.2 Additional Costs. Borrower shall be responsible for all costs
whatsoever related to the Lyophilization Ramp-Up in excess of the proceeds
hereunder and shall not require, request or demand additional amounts from
Lender to fund the Lyophilization Ramp-Up other than the amounts loaned by
Lender to Borrower or evidenced by this Note.

         3.3 June 30, 2003. By June 30, 2003, Borrower shall (a) complete the
Lyophilization Ramp-Up; (b) maintain the continued removal of all warning letter
sanctions pursuant to Form 483 related to the Facility; and (c) be prepared to
immediately begin development of the procedures for manufacture of Lender's
products.

         3.4 Change in Control. If Borrower experiences (a) a change in control
of greater than fifty percent (50%) of Borrower's voting securities or (b) a
change in control through a merger or the sale of all or substantially all of
Borrower's assets, then Lender may declare all amounts of principal and interest
under this Note immediately due and payable and/or terminate the Processing
Agreement.

                                    ARTICLE 4
                                 REPRESENTATIONS

         4.1 Organization and Qualification. Borrower is duly organized, validly
existing and in good standing under the laws of the State of Louisiana, its
state of incorporation. Borrower is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the failure to
receive or retain such qualification would have a material adverse effect on the
business, operations or financial condition of Borrower.

         4.2 Corporate Authority and Authorization. Borrower has all requisite
corporate, power, authority and legal right to execute and deliver and perform
its obligations under this Note and all of Borrower's obligations described
herein have been duly and validly authorized by all necessary corporate
proceedings on the part of Borrower.

         4.3 Execution and Binding Effect. This Note has been or shall be duly
and validly executed and delivered by Borrower and this Note when executed and
delivered shall constitute the legal, valid and binding obligations of Borrower
enforceable in accordance with the terms hereof and thereof, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
receivership, moratorium or other laws affecting creditors' rights generally.

         4.4 Absence of Conflicts. The execution and delivery of this Note,
consummation of the transactions herein or Borrower's performance of or
compliance with the terms and conditions hereof or in the Processing Agreement
shall not (a) materially violate any applicable law or regulation; (b) conflict
with or result in a material breach of or a default under the certificate of
incorporation or bylaws of Borrower, or any agreement or instrument to which
Borrower is a party or by which Borrower or its properties is bound; or (c)
result in the creation or imposition of any lien upon any property (now owned or
hereafter acquired) of Borrower except as otherwise contemplated by this Note.


                                       3


         4.5 No Event of Default; Compliance with Instruments Corporate
Documents and Material Agreements. As of the date hereof Borrower is not in
violation of any term of its certificate of incorporation and/or bylaws and
Borrower is not in violation of any term of its material agreements or
instruments including, without limitation, (a) that certain Amended and Restated
Credit Agreement, dated September 15, 1999, as most recently amended by that
certain Forbearance Agreement (the "Forbearance Agreement"), dated July 12, 2001
(the Amended and Restated Credit Agreement and the Forbearance Agreement,
together, the "Northern Trust Credit Facility"), among Borrower, Borrower's
wholly owned subsidiary, Akorn (New Jersey), Inc., an Illinois corporation and
the Northern Trust Company ("Northern Trust"); (b) that certain Junior Mortgage,
dated March 21, 2001 between Borrower and Northern Trust (the "Northern
Mortgage"); (c) two Mortgage Notes (together, the "Primary Mortgage"), each
dated April 27, 1997, by and between Borrower and Standard Mortgage Investors
("Standard Investors"); (d) that certain Master Equipment Lease Agreement No.
08197, dated December 9, 1999, as amended December 26, 2000 (the "Asset Lease"),
by and between Borrower and National City Leasing Corporation ("National City");
(e) that certain Convertible Bridge Loan and Warrant Agreement, dated July 12,
2001, by and between Borrower and the John N. Kapoor Trust, dated September 20,
1989 (the "Kapoor Loans"), or (f) any other material agreement or instrument to
which Borrower is a party or by which it or its properties is bound.

         4.6 Litigation. There is no pending action, suit or threatened
proceeding by or before any governmental authority against or affecting Borrower
which if adversely decided would have a material adverse effect on its financial
condition or on its ability to comply with its obligations herein, except those
disclosed on Exhibit A attached hereto.

         4.7 Rights to Property. Except for the security interests (a) granted
by Borrower to Northern Trust under the terms of the Northern Credit Facility
and the Northern Mortgage; (b) granted to Standard Investors under the terms of
the Primary Mortgage; and (c) retained by National City under the terms of the
Asset Lease, Borrower has good and marketable title to all personal and real
property purported to be owned by it.

         4.8 Taxes. All tax returns required to be filed by Borrower have been
properly prepared, executed and filed, and all taxes, assessments, fees and
other governmental charges levied upon Borrower or upon any of its properties,
incomes, sales or franchises which are shown to be due and payable thereon have
been paid, other than taxes or assessments the validity or amount of which
Borrower is contesting in good faith. The reserves and provisions for taxes on
the books of Borrower are adequate for all open years and for its current fiscal
period.

         4.9 Financial Accounting Practices. Borrower and each of its
subsidiaries have made and kept books, records and accounts which, in reasonable
detail, accurately and fairly reflect their respective dealings or transactions
of or in relation to the plants, properties, business and affairs of the
Borrower and of each subsidiary, and Borrower shall keep, and cause each of its
subsidiaries to keep, proper books of account, in which full and correct entries
shall be made of all dealings or transactions of or in relation to the plants,
properties, business and affairs of the Borrower and of each subsidiary in
accordance with generally accepted accounting principles applied on a consistent
basis. The Borrower will at any and all times, upon the written request of the
Lender and at the Lender's expense, permit the Lender by its representatives to
inspect the plants and properties, books of account, records, reports and other
papers of the Borrower and of


                                       4


each subsidiary, and to take copies and extracts therefrom, and will afford and
procure a reasonable opportunity to make any such inspection.

         4.10 Accurate and Complete Disclosure. To the best of Borrower's
knowledge, no representation made by Borrower under this Note and no statement
made by Borrower in any financial statement, report filed with the Securities
and Exchange Commission, certificate, exhibit or document furnished by Borrower
to Lender pursuant to or in connection with this Note is false or misleading as
of the date made in any material respect (including by omission of material
information necessary to make such representation, warranty or statement not
misleading). Lender has had adequate access to Borrower's management and
opportunity to conduct it own due diligence examination of the plants and
properties, books of account, records, reports and other papers of the Borrower
and each of its subsidiaries.

         4.11 Other Indebtedness. With the exception of (a) the Northern Credit
Facility together with the Northern Mortgage; (b) the Primary Mortgage; (c) the
Asset Lease; and (d) the Kapoor Loans, Borrower has no Indebtedness in excess of
$100,000.

         4.12 Capital Stock. All of the outstanding capital stock of Borrower
has been duly authorized and validly issued, and is non-assessable.

         4.13 Environmental Warranties. To the best of Borrower's knowledge,
Borrower and each of its subsidiaries is in substantial compliance with all
environmental laws, regulations, rules, ordinances, permits, orders, and other
requirements applicable to it, the operations of each or the real or personal
property owned, leased or operated by each, including without limitation, all
such laws governing employment, the generation, use, storage, disposal or
transportation of toxic or hazardous substances or wastes. Borrower has not
received notice of, and is not aware of, any violations or alleged violations,
or any liability or asserted liability, under any such environmental laws, with
respect to Borrower, its subsidiaries, or their respective businesses or
properties.

                                    ARTICLE 5
                                    COVENANTS

         Except as otherwise permitted under the Northern Trust Credit Facility
or consented to in writing by Northern Trust, Borrower covenants and agrees
that, without the prior written consent of Lender, from and after the date
hereof until all amounts of principal and interest hereunder are repaid and
discharged:

         5.1 Indebtedness. Borrower shall not create, incur, assume or permit to
exist any Indebtedness, after the date hereof except (a) deferred taxes; (b)
unfunded pension fund and other employee benefit plan obligations and
liabilities to the extent they are permitted to remain unfunded under applicable
law; (c) existing Indebtedness, which includes (i) amounts outstanding under the
Northern Credit Facility and any additional advances or borrowings under the
Northern Credit Facility in accordance with the terms thereof, (ii) the Primary
Mortgage, (iii) the Northern Mortgage and any additional advances or borrowings
under the Northern Mortgage, in accordance with the terms thereof, (iv) the
Asset Lease, (v) the Kapoor Loans, and (vi) the loans made by Lender evidenced
by this Note, or the refinancing of any of the documents or


                                       5


facilities set forth in subparagraphs (i) through (vi), the refinanced terms of
which shall in any event be on terms no less favorable to Borrower or Lender
than the terms of the Indebtedness being refinanced; (d) any financing secured
by any real estate owned by Borrower; and (e) the unsecured financing by a
seller of product lines to Borrower.

         "Indebtedness" shall mean (a) any obligation for the repayment of
borrowed money or, with respect to the purchase price of property, any payment
which is deferred six (6) months or more after the date of acquisition, 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) any obligation for the payment of money created or arising
under any conditional sale or other title retention agreement; (e) all capital
leases; and (f) any agreement to guarantee the indebtedness of a subsidiary of
Borrower or any other person or business entity.

         5.2 Business. Borrower shall not make any changes in its business
objectives, purposes or operations which could in any way adversely affect the
repayment of this Note or Borrower's ability to comply with its obligations
contained in the Processing Agreement.

         5.3 Liens. Borrower shall not create, incur, assume or permit to exist
any Lien on or with respect to any of its properties or assets whether now owned
or hereafter acquired, except (a) presently existing or hereafter created Liens
in favor of Lender; (b) 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 Borrower 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); (c) Liens in connection with any financing secured by
any real estate owned by Borrower; and (d) Liens existing on the date hereof and
described in Exhibit A hereto.

         In addition, Borrower shall not 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 collateral for payment and satisfaction of the outstanding principal and
accrued interest under this Note, except operating leases, capital leases or
intellectual property licenses which prohibit liens upon the assets that are
subject thereto.

         "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 Uniform
Commercial Code or comparable law of any jurisdiction).


                                       6


         5.4 Cancellation of Indebtedness. Borrower shall not 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.

                                    ARTICLE 6
                     EVENTS OF DEFAULT: RIGHTS AND REMEDIES

         6.1 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: (a) Borrower shall fail to make any payment of principal
of, or interest on, or any other amount owing in respect of this Note when due
and payable; (b) Borrower shall fail to pay any costs or expenses payable or
reimbursable by Borrower under this Note, and such failure shall have remained
unremedied for a period of thirty (30) days or more; (c) Borrower shall fail or
neglect to perform, keep or observe any of the provisions of this Note (and not
constituting an Event of Default under any of the other subsections of this
Section 6.1) and such failure shall have remained unremedied for a period of
thirty (30) days or more; (d) Borrower shall fail to perform, keep or observe
any provision of the Processing Agreement after the grace period (if any) set
forth therein or the Processing Agreement shall not be effective on or before
June 30, 2003; (e) a default or breach that is not waived in writing shall occur
under the Northern Credit Facility, The Northern Mortgage, the Primary Mortgage,
the Asset Lease or the Kapoor Loans; (f) a default under any agreement, document
or instrument, excluding those specified in subsection 6.1(e), to which Borrower
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 of Borrower or any subsidiary of
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 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; (g) The Forbearance Agreement expires, unless the same expires without
Borrower being in breach or default thereof; (h) Kapoor breaches or repudiates
or attempts to breach or repudiate, the Subordination Agreement or the
Subordination Agreement is terminated by operation of its terms or operation of
law; (i) any representation or warranty herein or in any written statement,
report filed with the Securities and Exchange Commission, financial statement or
certificate made or delivered to Lender by Borrower shall be untrue or incorrect
in any material respect, as of the date when made or deemed made; (j) assets of
Borrower or any subsidiary thereof with a fair market value of $100,000 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 Borrower or any subsidiary thereof and
such condition shall continue for thirty (30) days or more; (k) a case or
proceeding shall have been commenced against Borrower or any subsidiary thereof
in a court having competent jurisdiction seeking a decree or order in respect of
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 Borrower or any subsidiary thereof or of any substantial part of the assets
thereof, or (iii) ordering the winding-up or liquidation of the affairs of
Borrower or any subsidiary thereof and


                                       7


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; (l) 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 Borrower or any
subsidiary thereof or of any substantial part of its respective assets, (iii)
make an assignment for the benefit of creditors, or (iv) take any corporate
action in furtherance of any such action; or (m) a final judgment or judgments
for the payment of money in excess of $250,000 in the aggregate shall be
rendered against 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.

         6.2 Remedies. If any Event of Default shall have occurred and be
continuing (a) all of the outstanding principal and accrued and unpaid interest
under this Note shall be immediately due and payable without presentment,
demand, protest or further notice of any kind, all of which are expressly waived
by Borrower; (b) the rate of interest applicable to this Note shall be increased
to the Default Rate; and (c) Borrower may exercise any rights and remedies
provided to Lender under this Note and/or at law or equity.

         6.3 Waivers by Borrower. Except as otherwise provided for in this Note
or by applicable law, Borrower waives 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 Borrower may in any way be liable, and hereby
ratifies and confirms whatever Lender may do in this regard. Borrower
acknowledges that it has been advised by counsel of its choice with respect to
this Note and the transactions evidenced by this Note.

                                    ARTICLE 7
                             SUCCESSORS AND ASSIGNS

         This Note shall be binding on and shall inure to the benefit of
Borrower and Lender and their respective successors and assigns, except as
otherwise provided herein. Borrower may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties hereunder without
the prior express written consent of Lender. Any such purported assignment,
transfer, hypothecation or other conveyance by Borrower without the prior
express written consent of Lender shall be void. The terms and provisions of
this Note are for the purpose of defining the relative rights and obligations of
Borrower 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 Note.


                                       8


                                    ARTICLE 8
                                  SUBORDINATION

         Anything in this Note to the contrary notwithstanding, the Indebtedness
evidenced by this Note, both principal and interest, and the right to seek
enforcement of any of the rights granted to Lender herein, shall be subordinate
and junior to all obligations of Borrower incurred under the Northern Credit
Facility, between Borrower and Northern Trust.

                                    ARTICLE 9
                                     NOTICES

         All notices, requests, demands and payments of principal and interest
given to or made under this Note shall, except as otherwise specified in this
Note, be in writing and shall be effective upon the earlier of (a) receipt or
(b) the fifth (5th) day following the date such notice was mailed properly
addressed, first class, registered or certified mail, return receipt requested,
postage prepaid, to the other party at the following addresses (which may be
changed at any time by notice under this Article 9):

        If to NeoPharm, Inc.
                                   150 Field Drive, Suite 195
                                   Lake Forest, Illinois 60045
                                   Facsimile No.:  (847) 295-8854
                                   Attn:  James Hussey

        With a copy to:
                                   Ross & Hardies
                                   150 North Michigan Avenue
                                   Chicago, Illinois  60601-7567
                                   Facsimile No.:  (312) 750-8600
                                   Attn:  Scott Becker

        If to Akorn, Inc.
                                   Akorn, Inc.
                                   2500 Millbrook Drive
                                   Buffalo Grove, IL 60089-4694
                                   Facsimile No.    (847) 279-6123
                                   Attn: Antonio Pera

        With a copy to:
                                   Tressler, Soderstrom, Maloney & Priess
                                   2100 Manchester Road, Suite 950
                                   Wheaton, Illinois
                                   Facsimile No.:  (630) 668-3003
                                   Attn:  William A. Kindorf, III


                                       9


                                   ARTICLE 10
                      GOVERNING LAW & WAIVER OF JURY TRIAL


         This Note and any document or instrument executed in connection
herewith shall be governed by and construed in accordance with the internal law
of the State of Illinois, and shall be deemed to have been executed in the State
of Illinois. Unless the context requires otherwise, wherever used herein the
singular shall include the plural and vice versa, and the use of one gender
shall also denote the other. Captions herein are for convenience of reference
only and shall not define or limit any of the terms or provisions hereof;
references herein to Articles or provisions without reference to the document in
which they are contained are references to this Note. This Note shall bind
Borrower, its trustees (including without limitation successor and replacement
trustees), successors and assigns, and shall inure to the benefit of Lender, its
successors and assigns, except that Borrower may not transfer or assign any of
its rights or interest hereunder without the prior written consent of Lender.

         BORROWER HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S SOLE AND
ABSOLUTE ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS WITH RESPECT TO,
ARISING OUT OF OR IN CONNECTION WITH THIS NOTE OR ANY DOCUMENT OR INSTRUMENT
EXECUTED IN CONNECTION HEREWITH SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING
SITUS WITHIN OR JURISDICTION OVER COOK COUNTY, ILLINOIS. BORROWER HEREBY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT
LOCATED IN OR HAVING JURISDICTION OVER SUCH COUNTY, AND HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE TO REQUEST OR DEMAND TRIAL BY JURY, TO TRANSFER OR
CHANGE THE VENUE OF ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT BY LENDER IN
ACCORDANCE WITH THIS PARAGRAPH, OR TO CLAIM THAT ANY SUCH PROCEEDING HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.


                                   ARTICLE 11
                                  MISCELLANEOUS

         11.1 Construction. Wherever possible, each provision of this Note shall
be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Note is prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity without invalidating the remainder of such provision
or the remaining provisions of this Note.

         11.2 Amendments. This Note may not be and shall not be deemed or
construed to have been modified, amended, rescinded, canceled, or waived in
whole or in part, except by written instruments signed by Borrower and Lender.

         11.3 No Waiver. Lender's failure at any time or times, to require
strict performance by Borrower of any provision of this Note or Promissory
Agreement shall not waive, affect or diminish any right of Lender thereafter to
demand strict compliance and performance therewith. Any suspension or waiver of
an Event of Default under this Note or Promissory Agreement shall


                                       10


not suspend, waive or affect any other Event of Default under this Note or
Promissory Agreement 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 Borrower contained in this Note or
Promissory Agreement and no Event of Default by Borrower under this Note or
Promissory Agreement 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 Borrower
specifying such suspension or waiver.


                                       11


         IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
as of the day and year first above written.

                                            AKORN, INC.
                                            By:
                                                --------------------------------
                                            Its:
                                                --------------------------------
Accepted:

NEOPHARM, INC.
By:
   --------------------------------
Its: President and Chief Executive Officer


Acknowledged:

THE NORTHERN TRUST COMPANY
By:
   --------------------------------
Its:
   --------------------------------


                                       12


                                    EXHIBIT A


1.       LITIGATION.

         1.       Shareholder Class Action Lawsuit - Filed August 9, 2001

                  Class action lawsuit filed against the Company, Mr. Floyd
                  Benjamin, former CEO, and Mr. John Kapoor, current chairman
                  and interim CEO. Potential damages unknown at this time.

         2.       NovaDaq Technologies - Filed April 4, 2001

                  The Company was notified by the International Court of
                  Arbitration that NovaDaq filed a request for Arbitration in
                  relation to an Existing agreement between NovaDaq and the
                  company. Potential damages estimated at $4.4 million by
                  NovaDaq.

2.       LIENS.

TRANSACTION SECURED PARTY DEBTOR JURISDICTION FILE NO. ACTION DATE EQUIPMENT LEASE NO. THE CIT GROUP/ AKORN LA and 52-E7167 Filed 11/29/94 OL-8248 WITH EQUIPMENT St. Tammany 52-E7167 Correction 3/16/95 AMPLICON, INC.; FINANCING, INC. Parrish 52-E8067 Amendment 5/30/95 SECURED BY UCC 1620 W. Fountainhead 52-19775 Continuation 10/22/99 FINANCING STATEMENT Pkwy. COVERING EQUIPMENT Tempe, AZ 85282 MORTGAGE LOAN NOS. STANDARD MORTGAGE AKORN Macon Co., IL 98021903 AND 98021904 INVESTORS DATED 4/27/97; SECURED BY MORTGAGES ON DECATUR REAL PROPERTIES; PRINCIPAL BALANCE AT 6/30/01 $2,318,214.90, FINAL PAYMENT DUE JUNE 2008
13
TRANSACTION SECURED PARTY DEBTOR JURISDICTION FILE NO. ACTION DATE Amended and Restated The Northern Trust Akorn CA 9800560381 Filed 12/31/97 Credit Agreement Company Amendment 9/21/99 dated 9/15/99 as 50 South LaSalle 9800560407 Filed 12/31/97 amended by Street Amendment 9/21/99 Forbearance Agreement Chicago, IL 60675 IL 3780342 Filed 12/30/97 dated 7/12/01 for 4097177 Amendment 9/21/99 $45,000,000 line of 4203325 Partial 4/24/00 credit; secured by Release UCC financing Taylor IL 3780343 Filed 12/30/97 statements covering Pharmaceuticals 4097192 Amendment 9/21/99 accounts, inventory (merged with and equipment Akorn) Akorn (New IL 4096623 Filed 9/21/99 Jersey) NJ 01930630 Filed 9/20/99 Equipment Lease Nos. Associates Leasing, Akorn NJ 01885213 Filed 1/21/99 VJ3317 and W10811 Inc. with Lincoln Service 8001 Ridgepoint Drive & Equipment Co.; Irving, TX 75063 secured by UCC financing statement covering equipment Equipment Lease No. Deerbart Financial Akorn IL 4022989 Filed 4/20/99 5387; secured by UCC Services Co. financing statement 2250 E. Devon Ave., covering equipment Ste. 251 Des Plaines, IL 60018 Master Equipment National City Akorn IL 4314294 Filed 1/03/01 Lease Agreement No. Leasing Corp. 08197-0012, dated P.O. Box 36040 December 9, 1999, Louisville, KY 40233 as amended December 26, 2000; acquisition cost $3,811,028.93 with monthly payments of $52,577.71 through 12/26/07; secured by UCC financing statement covering equipment Junior Mortgage dated The Northern Trust Akorn 3/21/01 Company 50 South LaSalle Street Chicago, IL 60675
14

                                                                   Exhibit 10.18


                              PROCESSING AGREEMENT

      THIS PROCESSING AGREEMENT (the "Agreement") is made and entered into this
20th day of December, 2001, between Akorn, Inc., a Louisiana Corporation
("Akorn") and NeoPharm, Inc., a Delaware Corporation ("NeoPharm").

      WHEREAS, NeoPharm is a pharmaceutical company which has developed certain
chemotherapeutic agents (the "Products");

      WHEREAS, Akorn owns and operates a lyophilization facility located at 1222
West Grand Avenue, Decatur, Illinois (the "Facility") and has the ability and
capacity to process and finish pharmaceutical products; and

      WHEREAS, NeoPharm desires to contract with Akorn to process and finish the
Products at the Facility, and Akorn desires to provide such services, on the
terms and conditions set forth herein

      NOW, THEREFORE, in consideration of the mutual covenants and promises set
forth herein, the parties agree as follows:

                                    ARTICLE I
                    PROCESSING ESTIMATE/DELIVERY OF PRODUCTS

      Section 1.1. Processing Estimate. At least thirty (30) days prior to the
Effective Date (as defined herein), and at least thirty (30) days prior to the
commencement of each twelve (12) month period thereafter, NeoPharm shall deliver
to Akorn its good faith estimate (the "Estimate") of the quantity of Products to
be Processed (as defined herein) by Akorn hereunder for the upcoming twelve (12)
month period. Such estimate shall be non-binding, and NeoPharm shall update the
Estimate quarterly based upon its expected Processing needs. Akorn agrees to
allocate to the Processing of NeoPharm's Products no less than fifteen percent
(15%) of the Facility's Processing capacity during every twelve (12) month
period during the Term of this Agreement; the actual allocation of the
Facility's capacity to NeoPharm for such period shall be agreed upon by the
parties and is referred to herein as the "Processing Maximum". Processing
Capacity shall be measured in terms of hours usage of the Facility. NeoPharm
shall have the right to audit Akorn's books and records to ascertain compliance
with this Section 1.1.

      Section 1.2. Purchase Orders. From time to time, NeoPharm shall provide
Akorn with a purchase order (the "Purchase Order") which shall set forth the
Product to be Processed and the quantity of Bulk Product to be Processed by
Akorn (the "Batch"). Akorn shall provide NeoPharm with written acceptance of the
Purchase Order, which acceptance shall set forth the date the Processing Run (as
defined herein) for the Batch covered by such Purchase Order shall commence (the
"Processing Run Commencement Date"). Akorn agrees that the Processing Run
Commencement Date shall be no later than fourteen (14) days after Akorn's
receipt of the

Purchase Order. Akorn shall use its best efforts to accommodate NeoPharm's
request to amend a Purchase order to modify the size of a Batch to be Processed.

      Section 1.3. Estimated Yield. Upon Akorn's acceptance of a Purchase Order,
Akorn shall calculate the estimated Final Product to be manufactured (the
"Estimated Yield") from the Batch that is the subject of the Purchase Order. The
Estimated Yield factor to be applied to each Purchase Order shall be based upon
the optimum yield determined from the first (3) Processing Runs of a particular
Product. Such determination and each such Processing Run shall be performed and
conducted in the presence of a NeoPharm representative. In the event NeoPharm
disagrees with Akorn's Estimated Yield, the Parties shall in good faith agree
upon a third party to review the data Akorn utilized to calculate the Estimated
Yield. The findings of such third party shall be binding on both parties. In the
event that the actual yield of any Batch is less than ninety-five percent (95%)
of the Estimated Yield, NeoPharm shall be entitled to an investigation of the
reason(s) for the reduced yield of the Batch, and NeoPharm shall be entitled to
an equitable reduction (the "Yield Credit") in the Processing Fee (as defined
herein).

      Section 1.4. Delivery of Bulk Products. At least fifteen (15) business
days prior to each Processing Run Commencement Date, NeoPharm shall deliver to
Akorn sufficient amounts of Bulk Product for such Processing Run along with any
applicable vial labeling materials. For purposes of this Agreement, Bulk Product
shall mean formulated solutions of the Products. NeoPharm warrants that all Bulk
Product provided hereunder shall meet all applicable specifications and shall
have been produced in compliance with applicable federal, state and local laws
and regulations, including, without limitation, the Good Manufacturing Practices
Regulations ("GMPs") of the United States Food and Drug Administration ("FDA"),
21 C.F.R. part 211, in effect at the time of Processing. In connection with the
delivery of Bulk Product, NeoPharm shall provide Akorn with written
certification of the sterility of Bulk Product.

      Section 1.5. Ownership/Risk of Loss. NeoPharm shall own all Bulk Product
delivered by NeoPharm and all Finished Product (as defined herein) Processed by
Akorn and, except in a case giving rise to Akorn's indemnification
responsibilities hereunder, NeoPharm shall bear the risk of loss with respect to
such materials.

                                   ARTICLE II
                           PROCESSING OF BULK PRODUCTS

      Section 2.1. Processing Obligations. Commencing with each Processing Run
Commencement Date, Akorn shall Process the Bulk Product corresponding to the
applicable Purchase Order in accordance with the terms of this Article II (each
a "Processing Run"). For purposes of this Agreement, "Processing" shall mean
filling into vials, lyophilizing, inspecting and packaging the Bulk Product in
order to produce finished pharmaceutical dosage forms of the Products (the
"Finished Product"). The parameters (the "Processing Parameters") under which
Akorn shall Process the Bulk Product shall be mutually agreed upon by the
Parties at least thirty (30) days prior to the Effective Date and shall be
attached hereto as Schedule 2.1. Any amendments and/or additions to the
Processing Parameters or the equipment, test methods,


                                       2

specifications or any other requirement of this Agreement or with respect to the
operation of the Facility, must be mutually agreed to by the parties in writing
and shall be attached to Schedule 2.1. Notwithstanding the foregoing and in
addition to any supplemental parameters agreed to by the parties with respect to
a particular Processing Run, Akorn's Processing at a minimum shall consist of
the following components:

            (a)   Preparation and retention of the master production and control
                  records required by the FDA for each Product pursuant to 21
                  CFR 600.12 (the "Batch Records") as approved by Akorn and
                  NeoPharm.

            (b)   Compliance with the applicable standards from the USP-NF
                  guidelines.

            (c)   Furnishing vials, stoppers and seals for the Products and
                  conducting the appropriate inspection, testing and release
                  thereof.

            (d)   Preparation and sterilization of vials and stoppers in
                  accordance with Akorn's Standard Procedures;

            (e)   Aseptically filling vials within tolerance limits set by
                  NeoPharm and holding filled vials under specified conditions
                  which shall be provided by NeoPharm until loaded in
                  lyophilizer;

            (f)   Aseptically stopping and sealing lyophilized product vials.

            (g)   Performance of Quality Control Testing of finished dosage
                  forms in accordance with NeoPharm's specifications.

            (h)   Inspection of the finished dosage form.

            (i)   Storage of quarantined vials at mutually agreed upon
                  temperatures until instructed by NeoPharm to ship the Finished
                  Product.

            (j)   Shipping of the Finished Product in accordance with NeoPharm's
                  specifications.

      Section 2.2. Addition of Other Products to the Agreement. NeoPharm may add
additional pharmaceutical products to be Processed by Akorn. The parties shall
mutually agree upon any Processing Parameters and the Processing Fee for such
additional products.

      Section 2.3. Representations and Warranties of Akorn. Akorn agrees that in
performing the Processing services hereunder, it shall comply with applicable
GMPs and that it shall use its best efforts to maintain the Facility in such a
fashion as to be in compliance with all applicable federal, state and local
rules and regulations. Akorn agrees that it shall maintain all licenses and
permits required by any applicable federal, state or local agency, including but
not limited to the FDA, in order to operate the Facility and provide the
Processing services required hereunder. Without limiting the generality of the
foregoing, Akorn agrees that it will cause its


                                       3

employees and agents to follow all procedures developed and implemented in
connection with the removal of the warning letter sanctions pursuant to Form 483
or current GMP regulations issued or imposed by the FDA with regard to the
Facility. Akorn also agrees to store all manufacturing and laboratory records on
the site where the Processing is performed and to keep such records readily
available. Further, Akorn represents and warrants that it shall use its best
efforts to insure that all filtration, filling and lyophilization of the Product
by Akorn shall be done in an aseptic processing environment and in accordance
with the Processing Parameters.

      Section 2.4. Facilities Inspection. During the Term of this Agreement,
NeoPharm shall have the right, at its expense, to audit the Facility for Akorn's
compliance with GMPs and any other applicable laws. NeoPharm agrees to provide
Akorn with reasonable prior notice of the date of such audit. In addition to the
foregoing, NeoPharm shall have the right to designate an individual to be at the
Facility to monitor each Processing Run. NeoPharm agrees that its employees or
agents who inspect the Facility or who are on site at the Facility during a
Processing Run will comply with Akorn's rules, regulations and GMPs.

      Section 2.5. Akorn Obligation to Meet Requirements. Akorn agrees to
fulfill, in each twelve (12) month period during the Term of this Agreement (as
defined herein), all Purchase Orders placed by NeoPharm up to one hundred
percent (100%) of NeoPharm's most recently updated Estimate. Akorn shall use
reasonable efforts to supply any quantity ordered by NeoPharm of Product in
excess of the Estimate subject to Akorn's production scheduling capabilities and
commitments to other customers.

      Section 2.6. Subcontracting. Akorn shall not pass to a third party any
work entrusted to it under this Agreement without first obtaining NeoPharm's
written approval of such arrangements, which approval shall not be unreasonably
withheld.

      Section 2.7. Quality Assurance Department. Akorn agrees that at all times
during the term of this Agreement, it shall maintain a quality assurance
department (the "Quality Assurance Department") for purposes of monitoring the
quality of Akorn's Processing hereunder and for purposes of approving each Batch
Processed hereunder. Akorn agrees that upon NeoPharm's request, it shall provide
NeoPharm with copies of the policies, procedures and findings of the Quality
Assurance Department.

                                  ARTICLE III
                              SHIPMENT AND STORAGE

      Section 3.1. Storage. Akorn shall store and handle the Bulk Product and
Finished Product as required by the Processing Parameters. Akorn shall take such
actions as are reasonably necessary to protect the Bulk Product and Finished
Product from damage and deterioration. Vials of Finished Product will be stored
at the recommended controlled temperature until shipped as instructed by
NeoPharm.


                                       4

      Section 3.2. Release of Finished Product. Upon Akorn's Quality Assurance
Department's written release of a Batch of Finished Product, Akorn shall
promptly ship the Finished Product to NeoPharm or, at NeoPharm's discretion,
warehouse Finished Product, in accordance with FDA and GMP warehousing
procedures, for a maximum of thirty (30) days at no cost, and thereafter at
charges to be mutually agreed upon, to the extent warehousing space is
available. Akorn shall provide NeoPharm with properly completed Batch Records,
prepared in conformance with the Processing Parameters, within five (5) days
following Akorn's written release of such Batch but, in no event more than four
(4) weeks from the date the Processing Run is completed (i.e., the date the
filling or lyophilization is completed).

      Section 3.3. Transfer of Finished Product to NeoPharm. Finished Product
shall be shipped to NeoPharm in accordance with NeoPharm's written instructions.
Unless otherwise agreed to in writing by the Parties, there shall be only one
shipment per Batch of Finished Product. NeoPharm shall be responsible for all
costs associated with the shipment of Finished Product

      Section 3.4. Rejection. NeoPharm may reject any Batch of Finished Product
failing to meet any of the Processing Parameters by providing Akorn with written
notice of such rejection (the "Rejection") within sixty (60) days following
NeoPharm's receipt of the applicable Batch Records and written notice from Akorn
stating that Akorn's Quality Assurance Department has approved the Batch. Any
rejection by NeoPharm pursuant to this Section 3.4 shall be accompanied by a
report of analysis, including a product sample from the Batch analyzed.
NeoPharm's failure to reject a Batch of Finished Product in the manner set forth
above shall constitute acceptance thereof except to the extent that any defect
in the Batch was not discovered by NeoPharm after exercising due diligence and
using customary testing procedures accepted in the industry and provided that
NeoPharm notifies Akorn of any such defect within a reasonable time after
NeoPharm discovers or should have discovered the defect and before any
substantial change in the condition of the Batch which is not caused by such
defect. In the event Akorn accepts NeoPharm's Rejection, NeoPharm shall be
entitled to a credit against the Processing Fee (the "Rejection Credit") equal
to the Processing Fee for such Batch and the cost, not to exceed $25,000, of
NeoPharm's Bulk Product. In the event the Parties can not agree upon whether the
Rejection was justified, the Parties shall mutually agree upon a third party to
test samples of such Batch and to review records and test data and other
relevant information developed by both parties relating thereto to ascertain
whether the Batch was manufactured in accordance with the Processing Parameters.
The findings of such third party shall be binding on both parties. If the third
party determines that the Batch was manufactured in accordance with the
Processing Parameters, NeoPharm shall be deemed to have accepted the affected
Batch. If the third party determines that the Batch was not manufactured in
accordance with the Processing Parameters, NeoPharm shall be entitled to the
Rejection Credit. The Parties shall share the costs of any such third party
testing. In the event a Batch was properly Rejected, Akorn agrees that NeoPharm
shall be entitled to a replacement Processing Run, regardless of whether such
replacement Processing Run will cause NeoPharm to exceed the Processing Maximum.


                                       5

                                   ARTICLE IV
                              PRICE OF MANUFACTURE

      Section 4.1. Price. In consideration of the Processing provided by Akorn
hereunder, NeoPharm agrees to pay Akorn a processing fee (the "Processing Fee"),
as modified by the Yield Credit or the Rejection Credit, if applicable. The
Processing Fee shall be mutually agreed upon by the Parties at least thirty (30)
days prior to the Effective Date based upon the Processing Parameters for each
Product, after a trial run if necessary, and shall be attached hereto as
Schedule 4.1.

      Section 4.2. Most Favored Pricing. Akorn agrees that the Processing Fee
charged to NeoPharm hereunder shall be no higher than the lowest fee charged by
Akorn to any customers with similar processing requirements for Processing at
the Facility, regardless of any discounts afforded to such other customers.
NeoPharm shall have the right to audit Akorn's books and records to ascertain
compliance with this Section 4.2.

                                    ARTICLE V
                              TERM AND TERMINATION

      Section 5.1. Term. This Agreement shall have an initial term (the "Initial
Term") commencing on the date the warning letter sanctions imposed by the FDA
pursuant to Form 483 or current GMP regulations on Akorn and/or the Facility
have been removed (the "Effective Date") and ending on the later of (i) the
fifth (5th) anniversary of the Effective Date, or (ii) two (2) years after the
date on which Akorn pays all amounts of principal and accrued interest under
that certain Promissory Note (the "Note"), dated December 20, 2001, issued by
Akorn to NeoPharm in exchange for a loan in principal amount of Three Million
Two Hundred Fifty Thousand Dollars ($3,250,000) plus interest. This Agreement
will automatically extend for two additional, five-year terms (each, an
"Additional Term") beyond the Initial Term, provided, however, that either
NeoPharm or Akorn may terminate this Agreement at the end of the Initial Term or
an Additional Term, as the case may be, by sending a termination notice ninety
(90) days prior to the end of such Initial Term or Additional Term.
Notwithstanding the foregoing, in the event the warning letter sanctions
pursuant to Form 483 or current GMP regulations have not been removed by June
30, 2003 or in the event the Akorn has not received validation from the FDA with
respect to Processing NeoPharm's Products by such date, NeoPharm may terminate
this Agreement upon written notice to Akorn.

      Section 5.2. Voluntary Termination. NeoPharm or Akorn may terminate this
Agreement for any reason, provided that the terminating party first serves
written notice of such termination on the other party no later than one hundred
eighty (180) days prior to the date of such termination. Notwithstanding the
foregoing, Akorn shall not have the right to voluntarily terminate this
Agreement until the Note has been paid in full and for two (2) years thereafter.

      Section 5.3. Termination for Material Breach. Either party may terminate
this Agreement in the event of a material breach by the other, provided that the
party asserting such


                                       6

breach first serves written notice of the alleged breach on the offending party
and such alleged breach is not cured within thirty (30) days of the offending
party's receipt of such notice.

      Section 5.4. Termination for Rejected Finished Products. NeoPharm may
terminate this Agreement upon written notice to Akorn in the event NeoPharm
property rejects three (3) consecutive Batches of Finished Product or six (6)
Batches of Finished Product within a two (2) month period.

      Section 5.5. Termination for Insolvency. In the event that either party
shall admit in writing that it can not pay its debts, or shall suspend its
business, or shall file a voluntary petition or any answer admitting the
jurisdiction of the court and the material allegations of, or shall consent to,
an involuntary petition pursuant to or purporting to be pursuant to any
reorganization or insolvency law of any jurisdiction, or shall make an
assignment for the benefit of creditors, or shall apply for or consent to the
appointment of a receiver or trustee of all or a substantial part of its
property (such party, upon the occurrence of any such event, a "Bankrupt
Party"), then, to the extent permitted by the law, the other party hereto may
thereafter immediately terminate this Agreement by giving notice of termination
to the Bankrupt Party.

      Section 5.6. Effect of Expiration or Termination. Upon termination or
expiration of this Agreement, neither party shall have any further obligations
to the other party except for those obligations which accrued prior to the date
of termination or those obligations which are intended to survive the
termination or expiration of this Agreement.

      Section 5.7. Akorn Obligations Upon Expiration or Termination. Upon the
expiration of this Agreement or its earlier termination, Akorn shall, at the
request of NeoPharm and at NeoPharm's expense, return or dispose of all Bulk
Product or Finished Product to NeoPharm or to a third party pursuant to the
instructions of NeoPharm.

                                   ARTICLE VI
                                 INDEMNIFICATION

      Section 6.1. Akorn Indemnity. Akorn agrees to indemnify, protect and
defend NeoPharm and hold NeoPharm harmless from and against any claims, damages,
liability, harm, loss, costs, penalties, lawsuits, threats of lawsuit, recalls
or other governmental action, including reasonable attorneys' fees, brought or
claimed by any third party which (i) arise as the result of Akorn's breach of
this Agreement or of any warranty or representation made to NeoPharm under this
Agreement; or (ii) which result from any claim made against NeoPharm in
connection with Akorn's manufacture of defective Finished Product for NeoPharm.
Upon the filing of any such legal claim or lawsuit against NeoPharm, NeoPharm
shall promptly notify Akorn, in writing, of any such claim and Akorn shall, at
its expense, with attorneys reasonably acceptable to NeoPharm, handle, defend
and control such claim or lawsuit. Failure to notify Akorn promptly of the
commencement of any such action, if prejudicial to the ability to defend such
action, shall


                                       7

relieve Akorn of any liability to NeoPharm under this Section 6.1. NeoPharm
shall have the right to participate in the defense of such action at its expense
with counsel of its choosing.

      Section 6.2. NeoPharm Indemnity. NeoPharm agrees to indemnify, protect and
defend Akorn and hold Akorn harmless from and against any claims, damages,
liabilities, harm, loss, costs, penalties, lawsuits, threats of lawsuit, recalls
or other governmental action, including reasonable attorneys' fees, brought or
claimed by any third party, which (i) arise out of NeoPharm's breach of this
Agreement or of any warranty or representation to Akorn under this Agreement; or
(ii) result from the negligent acts or willful malfeasance on the part of
NeoPharm or employees or agents, in connection with NeoPharm's sale, marketing
or distribution of Product manufactured by Akorn or other activities or actions
in connection with the Finished Product. Upon the filing of any such legal claim
or lawsuit against Akorn, Akorn shall promptly notify NeoPharm, in writing, of
any such claim and NeoPharm shall, at its expense, with attorneys reasonably
acceptable to Akorn, handle, defend and control such claim or lawsuit. Failure
to notify NeoPharm promptly of the commencement of any such action, if
prejudicial to the ability to defend such action, shall relieve NeoPharm of any
liability to Akorn under this Section 6.2. Akorn shall have the right to
participate in the defense of such action at its expense with counsel of its
choosing.

                                  ARTICLE VII
                             RIGHT OF FIRST REFUSAL

      Section 7.1. Grant of Rights. Akorn agrees that in the event it receives a
bona fide third party offer (an "Offer") to acquire the Facility from an
unrelated third party (exclusive of an offer to acquire a controlling interest
in the outstanding shares of stock or substantially all of the assets of Akorn),
it shall provide NeoPharm with written notice of the terms and conditions of
such Offer.

      Section 7.2. Right of First Refusal. Upon its receipt of the notice
contemplated by Section 7.1, NeoPharm shall have the right to acquire the
Facility on the same terms and conditions as are set forth in the Offer (or
their cash equivalent in the event the Offer contains consideration other than
cash). In order to exercise the foregoing right, NeoPharm must provide Akorn
written notice of its exercise within thirty (30) days of its receipt of the
written notice from Akorn.

                                  ARTICLE VIII
                                 CONFIDENTIALITY

      Section 8.1. Confidential Information. Each party (the "Receiving Party")
shall maintain in confidence all information heretofore or hereafter disclosed
by the other party (the "Disclosing Party") which such party knows or has reason
to know is a trade secret, and other proprietary information owned by or
licensed to the other party, including, but not limited to,


                                       8

information relating to the Product (including without limitation, information
developed in preclinical and clinical studies) and licenses, patents, patent
applications, technology or processes and business plans of the other party,
including, without limitation, information designated as confidential in writing
from one party to the other (all of the foregoing hereinafter referred to as
"Confidential Information") and shall not use such Confidential Information
except as permitted by this Agreement or disclose the same to anyone other than
those of its officers, directors or employees as are necessary in connection
with such party's activities as contemplated by this Agreement. Each party shall
use the same efforts as such party would use to protect its own information and
to ensure that its officers, directors and employees do not disclose or make any
unauthorized use of such Confidential Information. Each party shall notify the
other promptly upon discovery of any unauthorized use or disclosure of the other
party's Confidential Information.

      Section 8.2. Limitations on Confidentiality. The obligation of
confidentiality contained in this Article VIII shall not apply to the extent
that: i) the Receiving Party is required to disclose Confidential Information by
applicable law, regulation or order of a governmental agency or a court of
competent jurisdiction; ii) the Receiving Party can demonstrate that the
disclosed Confidential Information was, at the time of disclosure, already in
the public domain other than as a result of actions or failure to act of the
Receiving Party, its officers, directors or employees, in violation hereof; iii)
the disclosed Confidential Information was rightfully known by the Receiving
Party (as shown by its written records) prior to the date of disclosure to the
Receiving Party in connection with this Agreement; or iv) the disclosed
Confidential Information was received by the Receiving Party on an unrestricted
basis from a source which is not under a duty of confidentiality to the other
Party.

      Section 8.3. Disclosure Required by Law. In the event that the Receiving
Party shall be required to make disclosure pursuant to the provisions of Section
8.2 (i) as a result of the issuance of a court order or other government
process, the Receiving Party shall promptly, but in no event more than
forty-eight (48) hours after learning of such court order or other government
process, notify, by personal delivery or facsimile, all pursuant to Section 9.4
hereof, the Disclosing Party and, at the Disclosing Party's expense, the
Receiving Party shall: a) take all reasonably necessary steps requested by the
Disclosing Party to defend against the enforcement of such court order or other
government process, and b) permit the Disclosing Party to intervene and
participate with counsel of its choice in any proceeding relating to the
enforcement thereof.

      Section 8.4. Equitable Remedies for Breach of Confidentiality. The parties
acknowledge that their failure to comply with the provisions of Section 8.1 may
cause irreparable harm and damage to the name and reputation of the other party
for which no adequate remedy may be available at law. Accordingly, the parties
agree that upon a breach by a party of such provisions, the non-breaching party
may, at its option, enforce the obligations of the breaching party under those
provisions by seeking equitable remedies in a court of competent jurisdiction.


                                       9

                                   ARTICLE IX

                                  MISCELLANEOUS

      Section 9.1. Force Majeure. Neither of the parties to this Agreement shall
be liable to the other party for any loss, injury, delay, damage or other
casualty suffered or incurred by such other party due to strikes, lockouts,
accidents, fire, delays in manufacture, transportation or delivery of material,
embargoes, inability to ship, explosions, floods, war, governmental action or
any other cause similar thereto which is beyond the reasonable control of such
other party and any failure or delay by a party in the performance of any of its
obligations under this Agreement shall not be considered a breach of this
Agreement due to, but only so long as there exists, one or more of the foregoing
causes; provided, however, that if Akorn cannot complete a Processing Run within
ninety (90) days of the stated completion date due to any such cause, NeoPharm
may cancel the order without liability to Akorn.

      Section 9.2. Status of the Parties. This Agreement shall not be construed
to create between the parties hereto or their respective successors or permitted
assignees the relationship of principal and agent, joint venturers, copartners
or any other similar relationship, the existence of which is hereby expressly
denied by each party. Neither party shall be liable to any third party in any
way for engagement, obligation, contract, representation or transaction or for
any negligent act or omission to act of the other except as expressly provided.

      Section 9.3. Governing Law. The provisions of this Agreement shall be
governed in all respects by the laws of the State of Illinois.

      Section 9.4. Notice. All notices, proposals, submissions, offers,
approvals, agreements, elections, consents, acceptances, waivers, reports,
plans, requests, instructions and other communications required or permitted to
be made or given hereunder (all of the foregoing hereinafter collectively
referred to as "Communications") shall be in writing and shall be deemed to have
been duly made or given when: a) delivered personally with receipt acknowledged;
b) sent by registered or certified mail or equivalent, return receipt requested;
c) sent by facsimile, cable or telex (which shall promptly be confirmed by a
writing sent by registered or certified mail or equivalent, return receipt
requested); or d) sent by recognized overnight courier for delivery within
twenty-four (24) hours, in each case addressed or sent to the parties at the
following addresses and facsimile numbers or to such other or additional address
or facsimile as any party shall hereafter specify by Communication to the other
parties:

            To Akorn:         Akorn, Inc.
                              2500 Millbrook Drive
                              Buffalo Grove, Illinois 60089-4694
                              Facsimile No. (847) 279-6123
                              Attn:  Antonio Pera

            With a Copy to:   Tressler, Soderstrom, Maloney & Priess
                              2100 Manchester Road, Suite 950


                                       10

                              Wheaton, Illinois 60187
                              Facsimile No.: (630) 668-3003
                              Attn:  William A. Kindorf, III

            To NeoPharm:      Neopharm, Inc.
                              150 Field Drive, Illinois 60045
                              Facsimile No.: (847) 295-8854
                              Attn:  James Hussey

            With a Copy to:   Ross & Hardies
                              150 North Michigan Avenue
                              Chicago, Illinois 60601-7567
                              Facsimile No.: (312) 750-8600
                              Attn:  Scott Becker

Notice of change of address shall be deemed given when actually received, all
other Communications shall be deemed to have been given, received and dated on
the earlier of: (i) when actually received or on the date when delivered
personally; (ii) one (1) day after being sent by facsimile, cable, telex (each
promptly confirmed by a writing as aforesaid) or overnight courier; or (iii)
four (4) business days after mailing (except that in the case of any
communication given to a person with an address outside the United States, then
ten (10) business days after mailing).

      Section 9.5. Legal Construction. In case any one or more of the provisions
contained in this Agreement shall be invalid or unenforceable in any respect,
the validity and enforceability of the remaining provisions contained herein
shall not in any way be affected or impaired thereby, and the parties will
attempt to agree upon a valid and enforceable provision which shall be a
reasonable substitute for such invalid and unenforceable provision in light of
the tenor of this Agreement, and, upon so agreeing, shall incorporate such
substitute provision in this Agreement.

      Section 9.6. Entire Agreement, Modifications, Consents, Waivers. This
Agreement, together with the Schedules hereto, contains the entire agreement of
the parties with respect to the subject matter hereof. This Agreement may not be
modified or amended except by an instrument or instruments in writing signed by
the party against whom enforcement of any such modification or amendment is
sought. Each party hereto may, by an instrument in writing, waive compliance by
the other party hereto with any term or provision of this Agreement to be
performed or complied with by such other party. The waiver by either party
hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach. Neither anything in this
Agreement nor the execution or performance hereof shall be deemed to prejudice
in any way, and each party hereto expressly reserves, any and all rights,
remedies and claims which each party may now or hereafter have against or with
respect to the other party or any of such other party's Affiliates, relating to
any matter which is not expressly covered by this Agreement.


                                       11

      Section 9.7. Section Headings; Construction. The section headings and
titles contained herein are each for reference only and shall not be deemed to
affect the meaning or interpretation of this agreement. The words "hereby",
"herein", "herein above", "hereinafter", "hereof" and "hereunder", when used
anywhere in this Agreement, refer to this Agreement as a whole and not merely to
a subdivision in which such words appear, unless the context otherwise requires.
The singular shall include the plural, the conjunctive shall include the
disjunctive and the masculine gender shall include the feminine and neuter, and
vice versa, unless the context otherwise requires.

      Section 9.8. Execution Counterparts. This Agreement may be executed in any
number of counterparts and each such duplicate counterpart shall constitute an
original, any one of which may be introduced in evidence or used for any other
purpose without the production of its duplicate counterpart. Moreover,
notwithstanding that any of the parties did not execute the same counterpart,
each counterpart shall be deemed for all purposes to be an original, and all
such counterparts shall constitute one and the same instrument, binding on all
of the parties hereto.

      Section 9.9. Binding Effect, Assignment. Neither party may directly or
indirectly assign, delegate, encumber or in any other manner transfer any of its
rights, remedies, obligations, liabilities or interests in or arising under this
Agreement, without the prior consent of the other party, which consent shall not
be unreasonably withheld or delayed. Any attempted assignment, delegation,
encumbrance or other transfer in violation of this Agreement shall be void and
of no effect and shall be a material breach hereof. In the event Akorn sells the
Facility to a third party, Akorn agrees that it shall cause such third party to
agree in writing to assume Akorn's responsibilities hereunder.

                                 * * * * * * * *


      IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first written above.

AKORN, INC.                                 NEOPHARM, INC.

By:_________________________                By:______________________________

Its:________________________                Its:_____________________________


                                       12

                                  Schedule 2.1
                              Processing Parameters

                                  Schedule 4.1
                                 Processing Fee


                                                                   Exhibit 10.19


20095718.3
12-07-01

               SUBORDINATION, STANDBY AND INTERCREDITOR AGREEMENT

      WHEREAS, AKORN, INC., a Louisiana corporation (hereinafter, together with
its successors and assigns, called "Akorn"), and AKORN (NEW JERSEY), INC., an
Illinois corporation ("Akorn NJ"; together with Akorn, the "Borrowers" and each
individually a "Borrower") may from time to time hereafter become indebted to
the undersigned NEOPHARM, INC., a Delaware corporation (the "Junior Lender"),
including, without limitation, indebtedness under the Promissory Note referred
to below, and the Borrowers have requested, and may from time to time hereafter
request, THE NORTHERN TRUST COMPANY, an Illinois banking corporation
(hereinafter, together with its successors and assigns, called the "Bank"), 50
South LaSalle Street, Chicago, Illinois 60675, to make or agree to make loans,
advances or other financial accommodations to the Borrowers pursuant to the
terms of the Credit Agreement (as hereinafter defined); and

      WHEREAS, the Borrowers and the Bank are party to that certain Amended and
Restated Credit Agreement dated as of September 15, 1999 (as amended, restated
or supplemented from time to time, the "Credit Agreement"; capitalized terms not
otherwise defined herein shall have the same meanings herein as in the Credit
Agreement); and

      WHEREAS, Akorn intends to incur an indebtedness to the Junior Lender in
the principal amount of $3,250,000 pursuant to a Promissory Note (the
"Subordinated Note"), in the form attached hereto as Schedule A; and

      WHEREAS, the Junior Lender is a customer of Akorn and as such will benefit
from the continued making of loans, advances and other financial accommodations
from the Bank to the Borrowers;

      NOW, THEREFORE, to induce the Bank, from time to time, at its option, to
make or agree to make loans, advances or other financial accommodations
(including, without limitation, renewals or extensions of, or forbearances with
respect to, any loans or advances heretofore or hereafter made) to Borrowers,
and for other valuable consideration, receipt whereof is hereby acknowledged,
the Junior Lender agrees as follows:

      1. All obligations of each of the Borrowers, howsoever created, arising or
evidenced, whether direct or indirect, absolute or contingent or now or
hereafter existing, or due or to become due, are hereinafter called
"Liabilities". All Liabilities to the Bank (other than any arising solely by
reason of any pledge or assignment made to the Bank pursuant to paragraph 2(c)
hereof) are hereinafter called "Senior Liabilities"; and all Liabilities to the
Junior Lender, including under the Subordinated Note (including any that may be
pledged or assigned to the Bank pursuant to paragraph 2(c) hereof), other than
trade payables arising in the usual and ordinary course of business between the
Borrowers and the Junior Lender, are hereinafter called "Junior Liabilities"; it
being expressly understood and agreed that

the term "Senior Liabilities", as used herein, shall include, without
limitation, any and all interest accruing on any of the Senior Liabilities after
the commencement of any proceedings referred to in paragraph 4 hereof,
notwithstanding any provision or rule of law which might restrict the rights of
the Bank, as against the Borrowers or anyone else, to collect such interest.

      2. The Junior Lender will, from time to time, (a) promptly notify the Bank
of the creation of any Junior Liabilities, and of the issuance of any promissory
note or other instrument to evidence any Junior Liabilities, (b) upon request by
the Bank, cause any Junior Liabilities which are not evidenced by a promissory
note or other instrument of either of the Borrowers to be so evidenced, and (c)
if an event of default on any of the Senior Liabilities has occurred and is
continuing beyond any applicable grace period, and if there is no written
forbearance agreement in effect between Akorn and the Bank relating to such
event of default, upon request by the Bank, and as collateral security for all
Senior Liabilities, indorse without recourse, deliver and pledge to the Bank any
or all promissory notes or other instruments evidencing Junior Liabilities, and
otherwise assign to the Bank any or all Junior Liabilities and any or all
security therefor and guaranties thereof, all in a manner satisfactory to the
Bank.

      3. Except as the Bank may hereafter otherwise expressly consent in
writing, which consent may be given or withheld by the Bank in its sole and
absolute discretion, the payment of all Junior Liabilities shall be postponed
and subordinated to the payment in full of all Senior Liabilities, and no
payments or other distributions whatsoever in respect of any Junior Liabilities
shall be made by either of the Borrowers, or accepted by the Junior Lender, nor
shall any property or assets of either of the Borrowers be applied by them, or
accepted by the Junior Lender, to or for the purchase or other acquisition or
retirement of any Junior Liabilities.

      4. In the event of any dissolution, winding up, liquidation, readjustment,
reorganization or other similar proceedings relating to any Borrower or its
creditors, as such, or to their property (whether voluntary or involuntary,
partial or complete, and whether in bankruptcy, insolvency or receivership, or
upon an assignment for the benefit of creditors, or any other marshalling of the
assets and liabilities of any Borrower, or any sale of all or substantially all
of the assets of any Borrower, or otherwise), the Senior Liabilities shall first
be paid in full before the Junior Lender shall be entitled to receive and to
retain any payment or distribution in respect of the Junior Liabilities, and, in
order to implement the foregoing, (a) all payments and distributions of any kind
or character in respect of the Junior Liabilities to which the Junior Lender
would be entitled if the Junior Liabilities were not subordinated, or
subordinated and pledged or assigned, pursuant to this Agreement shall be made
directly to the Bank, (b) the Junior Lender shall promptly file a claim or
claims, in the form required in such proceedings, for the full outstanding
amount of the Junior Liabilities, and shall cause said claim or claims to be
approved and all payments and other distributions in respect thereof to be made
directly to the Bank, and (c) the Junior Lender hereby irrevocably agrees that
the Bank may, at its sole discretion, in the name of the Junior Lender or
otherwise, demand, sue for, collect, receive and receipt for any and all such
payments

                                      - 2 -

or distributions, and file, prove, and vote or consent in any such proceedings
with respect to, any and all claims of the Junior Lender relating to the Junior
Liabilities.

      5. In the event that the Junior Lender receives any payment or other
distribution of any kind or character from any Borrower or from any other source
whatsoever in respect of any of the Junior Liabilities, other than as expressly
permitted by the terms of this Agreement, such payment or other distribution
shall be received in trust for the Bank and promptly turned over by the Junior
Lender to the Bank. The Junior Lender will mark its books and records, and cause
the applicable Borrower to mark its books and records, so as to clearly indicate
that the Junior Liabilities are subordinated in accordance with the terms of
this Agreement, and will cause to be clearly inserted in any promissory note or
other instrument which at any time evidences any of the Junior Liabilities a
statement to the effect that the payment thereof is subordinated in accordance
with the terms of this Agreement. The Junior Lender will execute such further
documents or instruments and take such further action as the Bank may reasonably
from time to time request to carry out the intent of this Agreement.

      6. All payments and distributions received by the Bank in respect of the
Junior Liabilities, to the extent received in or converted into cash, may be
applied by the Bank first to the payment of any and all expenses (including
attorneys fees and legal expenses) paid or incurred by the Bank in enforcing
this Agreement or in endeavoring to collect or realize upon any of the Junior
Liabilities or any security therefor, and any balance thereof shall, solely as
between the Junior Lender and the Bank, be applied by the Bank, in such order of
application as the Bank may from time to time select, toward the payment of the
Senior Liabilities remaining unpaid; but, as between any Borrower and its
respective creditors, no such payments or distributions of any kind or character
shall be deemed to be payments or distributions in respect of the Senior
Liabilities; and, notwithstanding any such payments or distributions received by
the Bank in respect of the Junior Liabilities and so applied by the Bank toward
the payment of the Senior Liabilities, the Junior Lender shall be subrogated to
the then existing rights of the Bank, if any, in respect of the Senior
Liabilities only at such time as this Agreement shall have been discontinued and
the Bank shall have received payment of the full amount of the Senior
Liabilities, as provided for in paragraph 11 hereof.

      7. Notwithstanding anything to the contrary contained in the Subordinated
Note, until such time as this Agreement shall have been discontinued and the
Bank shall have received payment of the full amount of the Senior Liabilities,
as provided for in paragraph 11 hereof, no action or inaction by either of the
Borrowers shall be deemed to be in violation of the provisions contained in
Article 5 of the Subordinate Note if such action or inaction either (i) is not
in violation of any of the provisions of the Credit Agreement, or (ii) has been
consented to in writing by the Bank.

      8. The Junior Lender hereby waives: (a) notice of acceptance by the Bank
of this Agreement; (b) notice of the existence or creation or non-payment of all
or any of the Senior Liabilities; and (c) all


                                      - 3 -

diligence in collection or protection of or realization upon the Senior
Liabilities or any thereof or any security therefor.

      9. The Junior Lender will not without the prior written consent of the
Bank: (a) cancel, waive, forgive, transfer or assign, or attempt to enforce or
collect, or subordinate to any Liabilities other than the Senior Liabilities,
any Junior Liabilities or any rights in respect thereof; (b) take any collateral
security for any Junior Liabilities; or (c) commence, or join with any other
creditor in commencing, any bankruptcy, reorganization or insolvency proceedings
with respect to any Borrower.

      10. This Agreement shall in all respects be a continuing agreement and
shall remain in full force and effect (notwithstanding, without limitation, the
dissolution of the Junior Lender or that at any time or from time to time all
Senior Liabilities may have been paid in full), subject to discontinuance only
upon receipt by the Bank of payment in full of all Senior Liabilities and
termination of any and all commitments by the Bank to extend credit to either of
the Borrowers.

      11. The Bank may, from time to time, whether before or after any
discontinuance of this Agreement, at its sole discretion and without notice to
the Junior Lender, take any or all of the following actions: (a) retain or
obtain a security interest in any property to secure any of the Senior
Liabilities, (b) retain or obtain the primary or secondary obligation of any
other obligor or obligors with respect to any of the Senior Liabilities, (c)
extend or renew or forbear for one or more periods (whether or not longer than
the original period), alter or exchange any of the Senior Liabilities, or
release or compromise any obligation of any nature of any obligor with respect
to any of the Senior Liabilities, and (d) release its security interest in, or
surrender, release or permit any substitution or exchange for, all or any part
of any property securing any of the Senior Liabilities, or extend or renew or
forbear for one or more periods (whether or not longer than the original period)
or release, compromise, alter or exchange any obligations of any nature of any
obligor with respect to any such property.

      12. The Bank may, from time to time, whether before or after any
discontinuance of this Agreement, without notice to the Junior Lender, assign or
transfer any or all of the Senior Liabilities or any interest therein; and,
notwithstanding any such assignment or transfer or any subsequent assignment or
transfer thereof, such Senior Liabilities shall be and remain Senior Liabilities
for the purposes of this Agreement, and every immediate and successive assignee
or transferee of any of the Senior Liabilities or of any interest therein shall,
to the extent of the interest of such assignee or transferee in the Senior
Liabilities, be entitled to the benefits of this Agreement to the same extent as
if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Agreement, for the benefit of the Bank, as to those of the Senior
Liabilities which the Bank has not assigned or transferred.


                                      - 4 -

      13. The Bank shall not be prejudiced in its rights under this Agreement by
any act or failure to act of any Borrower or the Junior Lender, or any
noncompliance of any Borrower or the Junior Lender with any agreement or
obligation, regardless of any knowledge thereof which the Bank may have or with
which the Bank may be charged; and no action of the Bank permitted hereunder
shall in any way affect or impair the rights of the Bank and the obligations of
the Junior Lender under this Agreement.

      14. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Agreement be binding upon the Bank
except as expressly set forth in a writing duly signed and delivered on behalf
of the Bank. For the purposes of this Agreement, Senior Liabilities shall
include all obligations of each of the Borrowers to the Bank, notwithstanding
any right or power of either Borrower or anyone else to assert any claim or
defense as to the invalidity or unenforceability of any such obligation, and no
such claim or defense shall affect or impair the agreements and obligations of
the Junior Lender hereunder.

      15. This Agreement shall be binding upon the Junior Lender and upon the
heirs, legal representatives, successors and assigns of the Junior Lender; and,
to the extent that either Borrower or the Junior Lender is either a partnership
or a corporation, all references herein to such Borrower and to the Junior
Lender, respectively, shall be deemed to include any successor or successors,
whether immediate or remote, to such partnership or corporation. If more than
one party shall execute this Agreement, the term "undersigned" as used herein
shall mean all parties executing this Agreement and each of them, and all such
parties shall be jointly and severally obligated hereunder.

      16. This Agreement shall be construed in accordance with and governed by
the laws of the State of Illinois. Wherever possible each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under such 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.

      17. THE JUNIOR LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY. THE JUNIOR LENDER HEREBY ABSOLUTELY AND IRREVOCABLY CONSENTS AND SUBMITS
TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS HAVING SITUS IN COOK
COUNTY, ILLINOIS OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF
ILLINOIS IN CONNECTION WITH ANY SUITS, ACTIONS OR PROCEEDINGS BROUGHT AGAINST
THE JUNIOR LENDER BY THE BANK ARISING OUT OF OR RELATING TO


                                      - 5 -

THIS AGREEMENT, AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH
SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE
JUNIOR LENDER HEREBY WAIVES AND AGREES NOT TO ASSERT IN SUCH SUIT, ACTION OR
PROCEEDING, IN EACH CASE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
CLAIM THAT (A) THE JUNIOR LENDER IS NOT PERSONALLY SUBJECT TO THE JURISDICTION
OF ANY SUCH COURT; (B) THE JUNIOR LENDER IS IMMUNE FROM SUIT OR ANY LEGAL
PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION, EXECUTION OR OTHERWISE) WITH RESPECT TO IT OR
ITS PROPERTY; (C) ANY SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM; (D) THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING IS
IMPROPER; OR (E) THIS AGREEMENT MAY NOT BE ENFORCED IN OR BY ANY SUCH COURT.
NOTHING CONTAINED HEREIN SHALL AFFECT ANY RIGHT THAT THE BANK MAY HAVE TO BRING
ANY SUIT, ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AGAINST THE JUNIOR
LENDER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.

                       [SIGNATURE PAGE(S) AND EXHIBIT(S),
                            IF ANY, FOLLOW THIS PAGE]


                                      - 6 -

      IN WITNESS WHEREOF, this Agreement has been made and delivered at Chicago,
Illinois as of the_________day of December, 2001.

                                       NEOPHARM, INC.


                                       By_______________________________________
                                         Name:
                                         Title:


ACCEPTED December_____, 2001

THE NORTHERN TRUST COMPANY



By_________________________________
  Title:


                                      - 7 -

                         ACKNOWLEDGMENT OF SUBORDINATION

      The Borrowers each hereby acknowledge receipt of a copy of the foregoing
Subordination, Standby and Intercreditor Agreement, waive notice of acceptance
thereof by the Bank, and agree to be bound by the terms and provisions thereof,
to make no payments or distributions contrary to the terms and provisions
thereof, and to do every other act and thing necessary or appropriate to carry
out such terms and provisions. In the event of any violation of any of the terms
and provisions of the foregoing Subordination and Standby Agreement, then, at
the election of the Bank, any and all obligations of each of the Borrowers to
the Bank shall forthwith become due and payable and any and all agreements of
the Bank to make loans, advances or other financial accommodations to the
Borrowers, or to forbear from exercising remedies, shall forthwith terminate,
notwithstanding any provisions thereof to the contrary.

Dated as of December______, 2001       AKORN, INC.

                                       By_______________________________________
                                         Name:
                                         Title:



Dated as of December______, 2001       AKORN (NEW JERSEY), INC.

                                       By_______________________________________
                                         Name:
                                         Title:


                                      - 8 -

                                   SCHEDULE A

                                 PROMISSORY NOTE



                                                                   Exhibit 10.20


                   SUBORDINATION AND INTERCREDITOR AGREEMENT

            THIS SUBORDINATION AND INTERCREDITOR AGREEMENT (this "Agreement") is
made and entered into as of this 20th day of December, 2001, by John N. Kapoor,
as Trustee under THE JOHN N. KAPOOR TRUST, dated September 20, 1989 (the "Junior
Party") and NEOPHARM, INC., a Delaware corporation (the "Lender").

                                R E C I T A L S:

            A.    The Lender and Akorn, Inc., a Louisiana corporation (the
"Borrower"), have entered into that certain Processing Agreement, of even date
herewith (the "Processing Agreement"), and, in connection therewith, Borrower
executed and delivered that certain Promissory Note, of even date herewith (the
"Promissory Note"), evidencing a loan made by Lender to Borrower, as of the date
hereof, in aggregate principal amount of THREE MILLION TWO HUNDRED FIFTY
THOUSAND DOLLARS (US$3,250,000.00), plus accrued but unpaid interest (the
"Lender Debt").

            B.    On July 13, 2001, the Borrower and the Junior Party entered
into that certain Convertible Bridge Loan and Warrant Agreement (the "Junior
Agreement"), pursuant to which the Junior Party made certain loans to Borrower
in aggregate principal amount of FIVE MILLION AND 00/100 DOLLARS
($5,000,000.00), plus accrued interest thereon (the aforementioned loans,
accrued interest thereon and any other loans made by the Junior Party to the
Borrower (excluding any consulting fee, chairman's fee and expense
reimbursement, whether or not deferred, owed by Borrower to the Junior Party or
any entity controlled by the Junior Party), presently outstanding or made in the
future, to be collectively referred to as the "Junior Debt"). In connection with
the consummation of the Junior Agreement, the Junior Party entered into a
Subordination Agreement, of even date therewith, whereby the Junior Party agreed
to subordinate the Junior Debt to all outstanding debt owed by Borrower to The
Northern Trust Company ("Northern Trust"), Borrower's senior lender, under the
terms of an Amended and Restated Credit Agreement, as most recently amended by
that certain Forbearance Agreement, dated July 13, 2001, by and among Northern
Trust, the Borrower and the Borrower's wholly-owned subsidiary, Akorn (New
Jersey), Inc, an Illinois corporation.

            C.    Lender was unwilling to enter into the Processing Agreement or
provide Borrower with the Lender Debt unless the Junior Party entered into this
Subordination and Intercreditor Agreement.

            NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is hereby agreed as follows:

            1.    Recitals. The Recitals of this Agreement are incorporated
herein and made a part hereof by this reference thereto.

            2.    Junior Debt Subordinate to Lender Debt. The Junior Debt is
hereby, and shall continue to be, subject and subordinate in lien and in payment
to the lien and payment of the Lender Debt and any other document evidencing,
securing or guaranteeing the Lender Debt without regard to the application of
such proceeds together with all interest, late fees, default interest, future
principal advances and all other sums due under the Promissory Note. The

foregoing shall apply notwithstanding the actual date and time of execution,
delivery, recordation, filing or perfection of the Lender Debt or the Junior
Debt, or the lien or priority of payment thereof.

            Until all Lender Debt shall have been paid in full, the Junior Party
shall not, directly or indirectly, demand or accept from the Borrower nor cancel
or otherwise discharge all or any part of the Junior Debt, and the Junior Party
shall not otherwise take or permit any action prejudicial to or inconsistent
with the Lender's priority position over the Junior Party created by this
Agreement. Excluded from the provisions of this paragraph 2 are the conversion
rights under the Junior Debt of principal and interest to an equity interest in
Borrower.

            3.    Allocation of Collateral During Bankruptcy, Etc. In the event
of (a) any proceeding under the Bankruptcy Code or other applicable federal or
state insolvency law relative to the Borrower, or (b) any liquidation,
dissolution or other winding up of the Borrower, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy, or (c) any
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Borrower, then and in any such event, the Lender shall be
entitled to receive payment in full in cash of all amounts due or to become due
on or in respect of the Lender Debt, and to that end the Lender shall be
entitled to receive as collateral therefor, any payment or distribution of any
kind or character, whether in cash, property or securities which may be payable
or deliverable to the Junior Party in such proceeding, dissolution, liquidation
or other winding up or event until the Lender Debt is fully repaid and
discharged.

            In the event that, notwithstanding the foregoing provisions of this
Section 3, the Junior Party shall have received any cash or assets of any kind
from Borrower as payment for the Junior Debt or to secure, guarantee or
discharge all or any part of the Junior Debt before all Lender Debt is paid in
full, then and in such event such cash or assets shall be delivered forthwith to
the Lender or, if required by law, the trustee in bankruptcy, receiver,
custodian, assignee, agent or other person making payment or distribution of
assets of the Borrower as collateral for the Lender Debt remaining unpaid, to
the extent necessary to pay all the Lender Debt in full, after giving effect to
any concurrent payment or distribution to or for the Lender.

            4.    Certain Matters Relating to Bankruptcy. The Junior Party
hereby waives any objection it may have to the use of cash collateral or the
financing of the Borrower pursuant to either Section 363 or Section 364,
including, without limitation, Section 364(d), of the Bankruptcy Code. Notice of
a proposed financing or use of cash collateral shall be deemed given upon the
sending of such notice by telegraph, telecopy or hand delivery to the Junior
Party at address indicated on the signature page attached hereto. All
allocations of payments between the Lender and the Junior Party, subject to any
court order, continue to be made after the filing of a petition under the
Bankruptcy Code on the same basis that the payments were to be allocated prior
to the date of such filing. To the extent that the Lender receives payments on
the Lender Debt which are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy law, state or federal law, common law, or
equitable cause, then, to the extent of such payment or proceeds received, the
Lender Debt, or part thereof, intended to be satisfied shall be reinstated and
continue in full force and effect as if such payments or proceeds had not been
received by the Lender.


                                       2

            5.    Continuing Nature of Subordination. This Agreement shall be
effective and may not be terminated or otherwise revoked by the Junior Party
until the Lender Debt shall have been fully repaid and discharged and all
financing arrangements between the Borrower and the Lender under the Promissory
Note as amended from time to time, have been terminated. If the Junior Party
shall have any right under applicable law to terminate or revoke this Agreement
which right cannot be waived, such termination or revocation shall not be
effective until written notice of such termination or revocation, signed by the
Junior Party, is delivered to the Lender pursuant to the provisions of Section
10, provided, however, that no such notice of termination or revocation shall
affect or impair any of the agreements and obligations of the Junior Party
hereunder with respect to any and all Lender Debt existing prior to the time of
receipt of such notice by the Lender, any and all Lender Debt created or
acquired thereafter pursuant to any previous commitments made by the Lender
under the Promissory Note, any and all extensions or renewals of any of the
foregoing, any and all interest accruing on any of the foregoing, and any and
all expenses paid or incurred by the Lender in endeavoring to collect or realize
upon any of the foregoing; and all of the agreements and obligations of the
Junior Party under this Agreement shall, notwithstanding any such notice of
termination or revocation, remain fully in effect until such Lender Debt
(including any extensions or renewals thereof and all such interest and
expenses) shall have been paid in full.

            The Junior Party agrees that the Lender shall be entitled to manage
and supervise the Lender's loans to the Borrower in accordance with applicable
law, the terms of the Promissory Note and the Lender's usual practices, modified
from time to time as the Lender deems appropriate under the circumstances,
without regard to the existence of any rights that the Junior Party may now or
hereafter have and that the Lender shall have no liability to the Junior Party
for, and Junior Party hereby waives any claim which the Junior Party may now or
hereafter have against, the Lender arising out of any and all actions which the
Lender, in good faith, takes or omits to take with respect to the Promissory
Note or any other agreement related thereto or to the collection of the Lender
Debt.

            6.    Information Concerning Financial Condition of the Borrower.
The Junior Party hereby assumes responsibility for keeping itself informed of
the financial condition of Borrower and of all other circumstances bearing upon
the risk of nonpayment of the Lender Debt that diligent inquiry would reveal,
and the Junior Party hereby agrees that the Lender shall have no duty to advise
the Junior Party of information known to the Lender regarding such condition or
any such circumstances except as set forth below.

            7.    Assignment; Refinancing. The Junior Agreement and the rights
and obligations therein may be sold, assigned or transferred by the Junior Party
to an entity controlled by the Junior Party, to members of the immediate family
of the Junior Party, or to trusts, partnerships, S-corporations or other
beneficiaries of the Junior Party. In the event of such transfer, the assignee
shall become subject to the terms of this Agreement. Except for such transfers
described above, the Junior Party shall not sell, assign or otherwise transfer
any interest in the Junior Agreement without the prior written consent of the
Lender, which consent shall not be unreasonably withheld.

            8.    Covenants and Assurances. The Junior Party shall (a) provide
the Lender with a copy of any and all notices of default, event of default or
acceleration which the Junior Party gives Borrower under or in connection with
the Junior Agreement or Junior Debt, which notices to the Lender shall be given
at the same time as the Junior Party gives such notices to the


                                       3

Borrower, and (b) upon the request of Lender, execute and deliver to the Lender
such other documents and assurances and do or cause to be done all such other
acts and things as may be reasonably required by the Lender in order to give
effect to this Agreement.

            The Lender shall provide the Junior Party with a copy of any and all
notices of default, events of default or acceleration which the Lender gives
Borrower under or in connection with the Lender Debt, which notices to the
Junior Party shall be given at the same time Lender gives such notices to the
Borrower.

            9.    Waivers, Etc. No delay on the part of the Lender in its
respective exercise of any right or remedy shall operate as a waiver thereof,
and no single or partial exercise by the Lender of any right or remedy shall
preclude other or further exercise thereof or the exercise of any other right or
remedy; nor shall any modification or waiver of any of the provisions of this
Agreement be binding upon the Lender or Junior Party except as expressly set
forth in a writing duly signed and delivered on behalf of the Lender.

            10.   Notices. Any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, facsimile transmission, overnight courier or United States mail
certified mail, return receipt requested (postage prepaid) addressed to such
party at the address specified on the signature page hereof, or at such other
address as such party shall have specified to the other party hereto in writing.
All periods of notice shall be measured from the date of delivery thereof if
manually delivered, from the date of sending thereof if sent by facsimile
transmission, from the first business day after the date of sending if sent by
overnight courier, or from four days after the date of mailing if mailed;
provided, however, that any notice to the Lender shall be deemed to have been
given only when received by the Lender.

            11.   Governing Law and Construction. The validity, construction and
enforceability of this Agreement shall be governed by the internal laws of the
State of Illinois, without giving effect to conflict of laws principles thereof.

            12.   Consent to Jurisdiction. AT THE OPTION OF THE LENDER, THIS
AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR ILLINOIS STATE COURT SITTING
IN COOK COUNTY, ILLINOIS; AND THE BORROWER AND JUNIOR PARTY EACH CONSENT TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVE ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER OR JUNIOR PARTY
COMMENCE ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT
THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS
AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE
TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH
TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.

            13.   Waiver of Jury Trial. BORROWER AND JUNIOR PARTY IRREVOCABLY
WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT AND ANY


                                       4

OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

            14.   Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the successors and assigns of Borrower, the Junior
Party and the Lender.

            15.   Multiple Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original and all of
which shall constitute one and the same instrument.


                                       5

            IN WITNESS WHEREOF, the parties hereto have executed, or caused this
agreement to be executed by the respective officers thereunto duly authorized,
as of the day and year first above written.

                                John N. Kapoor, as Trustee under
                                THE JOHN N. KAPOOR TRUST,
                                Dated September 20, 1989

                                By:         _______________________________
                                Its:        _______________________________

                                Address:    _______________________________
                                            _______________________________
                                Fax No.:    _______________________________
                                Attn:       John Kapoor

                                NEOPHARM, INC., a Delaware corporation

                                By:   _____________________________________
                                Its:  President and Chief Executive Officer

                                Address:    150 Field Drive, Suite 195
                                            Lake Forest, Illinois  60045
                                            Attn:  President and Chief Executive
                                                   Officer
                                Fax No.:    (847) 295-8854

Acknowledged and Agreed by:

AKORN, INC., a Louisiana corporation

By:   _______________________________
Its:  _______________________________

Address:    Akorn, Inc.
            2500 Millbrook Drive
            Buffalo Grove, IL 60089-4694
            Facsimile No. (847) 279-6123
            Attn:  Ben Pothast


                                       6


                                                                   Exhibit 10.21

                               December 10, 2001

To:  Akorn, Inc.
     Akorn (New Jersey), Inc.

                     Re: Proposed Loan from NeoPharm, Inc.

Gentlemen:

     Reference is made to (i) the Forbearance Agreement dated as of July 12,
2001 (the "Forbearance Agreement"), by and among Akorn, Inc., a Louisiana
corporation, Akorn (New Jersey), Inc., an Illinois corporation, and The Northern
Trust Company, an Illinois banking corporation, and (ii) the "Credit Agreement"
(as defined in the Forbearance Agreement). All capitalized terms used and not
otherwise defined herein shall have the same meanings as in the Credit
Agreement.

     You have advised us that the Borrowers propose to (i) obtain a loan from
NeoPharm, Inc., a Delaware corporation ("NeoPharm"), in the principal amount of
$3,250,000 (the "NeoPharm Loan"), pursuant to a Promissory Note in the form
attached hereto as Exhibit A (the "NeoPharm Note"), and (ii) expend the proceeds
of the NeoPharm Loan for the purpose of undertaking and completing the
"Lyophilization Ramp-Up" (as defined in the NeoPharm Note). The NeoPharm Loan
would be obtained, and the NeoPharm Note would be executed and delivered, in
connection with a Processing Agreement between Akorn and NeoPharm in the form
attached hereto as Exhibit B.

     The act of Akorn in obtaining and becoming obligated for the NeoPharm Loan,
Akorn's execution and delivery of the NeoPharm Note, and Akorn's expenditures
for the Lyophilization Ramp-Up will or may constitute a violation of one or more
provisions of the Credit Agreement, and will or may cause one or more of the
Forbearance Conditions (as defined in the Forbearance Agreement) to fail to be
satisfied. You have requested that the Lender waive any such violation of the
provisions of the Credit Agreement and any such failure of one or more of such
Forbearance Conditions to be satisfied (the "Waiver").

     The Lender hereby grants the Waiver, but only on and subject to the
following conditions:

          (i)  The NeoPharm Loan will be on the terms and conditions set forth
               in the NeoPharm Note.

          (ii) Contemporaneously with the execution and delivery of this letter
               NeoPharm and the Borrowers enter into a Subordination, Standby
               and Intercreditor Agreement with the Lender in the form attached
               hereto as Exhibit C (the "NeoPharm Subordination Agreement").



     (iii) The Waiver shall be in effect only so long as the NeoPharm
Subordination Agreement is in effect and there is no failure on the part of
NeoPharm or either of the Borrowers to be in compliance with all of the terms
and conditions of the NeoPharm Subordination Agreement.

     (iv)  The Waiver shall apply only to the specific matters referred to in
this letter and shall not extend or relate to any other related or unrelated
matters, and neither the granting of the Waiver nor anything contained in this
letter shall be construed to obligate the Lender to grant any other waivers to
the Borrowers.

     (iv)  The Borrowers hereby (A) confirm and reaffirm all of their
obligations under the "Documents" (as defined in the Forbearance Agreement) and
under the Forbearance Agreement; (B) acknowledge and agree that the Lender, by
granting the Waiver, does not waive any existing or future default or event of
default under any of the Documents or the Forbearance Agreement, or any rights
or remedies under any of the Documents or the Forbearance Agreement, except as
expressly provided herein; (C) acknowledge and agree that the Lender has not
heretofore waived any default or event of default under any of the Documents, or
any rights or remedies under any of the Documents, except as provided in the
Forbearance Agreement; and (D) acknowledge that they do not have any defense,
set-off or counterclaim to the payment or performance of any of their
obligations under the Documents or other Forbearance Agreement.

     (v)  The Borrowers shall expend the proceeds of the NeoPharm Loan solely to
pay or reimburse costs incurred in connection with the Lyophilization Ramp-Up,
and the Borrowers shall not expend any funds in excess of the proceeds of the
NeoPharm Loan on the Lyophilization Ramp-Up.

     (vi) The Borrowers shall provide the Bank with reports no less often than
once during each of the periods ending on the 15th day and the last day of each
calendar month, commencing with the month of December, 2001, as to the progress
of Lyophilization Ramp-Up, including, without limitation, information concerning
the budget and time schedule and changes to the budget and time schedule for the
Lyophilization Ramp-Up, contracts and commitments entered into, and payments
made and scheduled to be made. To the extent that the Lyophilization Ramp-Up
involves payment for labor, materials or property the furnishing of which could
give rise to mechanics lien claims against the premises commonly known as 1222
West Grand, Decatur, Illinois, the Borrower shall make such payment only in
exchange for waivers and releases of such mechanics lien claims, and at the time
of making each such payment, the Borrowers shall furnish to the Bank a date down
endorsement to Chicago Title Insurance Company Policy No. 120090185 insuring the
Bank's mortgage on such property, covering the date of such payment and raising
no exception for mechanics lien claims.

                                      -2-

If the foregoing terms are acceptable to you, please so indicate by signing
below.

                                   Very truly yours,

                                   THE NORTHERN TRUST COMPANY

                                   /s/ Olga Georgiov

                                   Olga Georgiov
                                   Vice President


                                      -3-



                                                                   Exhibit 10.22


                                SUPPLY AGREEMENT

      THIS SUPPLY AGREEMENT (the "Agreement") is entered into as of January 4,
2002, by and between AKORN, INC. a Louisiana corporation with its principal
offices at 2500 Millbrook Drive, Buffalo Grove, Illinois 60089 ("AKORN") and
NOVADAQ TECHNOLOGIES, INC., a Canadian corporation with its principal place of
business at 924 The East Mall, Suite 100, Toronto, Canada M9B 6K1 ("NOVADAQ").
AKORN and NOVADAQ may each be referred to herein individually as a "Party" and
collectively as the "Parties."

In consideration of the mutual premises, covenants and conditions contained in
this Agreement, the Parties agree as follows:

1. DEFINITIONS

      As used in this Agreement, the following terms shall have the following
      respective meanings:

      "ACCEPTABLE PRODUCT" shall have the meaning set forth in Section 5.1
      hereof.

      "AFFILIATE" shall mean, in the case of either Party, any corporation,
      joint venture, or other business entity, which directly or indirectly
      controls, is controlled by, or is under common control with that Party.
      "Control", as used in this definition, shall mean having the power to
      direct, or cause the direction of, the management and policies of an
      entity, whether through ownership of voting securities, by contract or
      otherwise. Notwithstanding the foregoing, for purposes of this Agreement,
      the term "Affiliate" shall not include subsidiaries in which a Party or
      its Affiliates owns a majority of the ordinary voting power to elect a
      majority of the board of directors but is restricted from electing such
      majority by contract or otherwise, until such time as such restrictions
      are no longer in effect.

      "AKORN KNOW-HOW" shall mean all proprietary technical and clinical
      information, data and know-how relating to the manufacture of the Product,
      whether or not patentable, owned or controlled, as of the Effective Date
      or acquired during the term of this Agreement, by AKORN or its Affiliates.
      AKORN Know-How shall include, without limitation, all processes, formulas,
      discoveries and inventions whether relating to biological, chemical,
      pharmacological, toxicological, pharmaceutical, physical and analytical
      safety or quality control data. The term "AKORN Know-How", however, shall
      not include (i) any know-how, processes, information and data which is, as
      of the Effective Date or later becomes, generally available to the public
      or (ii) any general manufacturing know-how not specific to the Product.

      "CALENDAR QUARTER" shall mean the respective periods of three (3)
      consecutive calendar months ending on March 31, June 30, September 30 or
      December 31, for so long as this Agreement is in effect.

      "CERTIFICATE OF ANALYSIS" shall mean the certificate for each batch of
      Product delivered hereunder in the form contemplated by Section 3.1 of
      this Agreement.

      "cGMP" shall mean current good manufacturing practices of the FDA,
      including compliance with the FD&C Act, 21 C.F.R. parts 210 and 211 and
      all applicable FDA rules, regulations, policies and guidelines in effect
      at a given time.

      "COMMERCIALLY REASONABLE EFFORTS" shall mean efforts and resources
      normally used by a Party for a compound or product owned by it or to which
      it has rights, which is of similar market potential at a similar stage in
      its product life, taking into account the competitiveness of the
      marketplace, the proprietary position of the compound or product, the
      regulatory structure involved, the profitability of the applicable
      products, and other relevant factors.

      "DOLLARS" AND "$" shall mean lawful money of the United States unless
      otherwise indicated.

      "EFFECTIVE DATE" shall mean January 4, 2002.

      "FDA" shall mean the United States Food and Drug Administration, and any
      successor thereto.

      "FD&C ACT" shall mean the United States Federal Food, Drug and Cosmetic
      Act, as amended.

      "HPB" shall mean the Health Protection Branch of Health Canada or any
      successor or replacement entities thereof.

      "GOVERNMENTAL BODY" shall mean (i) any domestic or foreign national,
      federal, provincial, state, municipal or other government or body, (ii)
      any international or multilateral body, (iii) any subdivision, ministry,
      department, secretariat, bureau, agency, commission, board,
      instrumentality or authority of any of the foregoing governments or
      bodies, (iv) any quasi-governmental or private body exercising any
      regulatory, expropriation or taxing authority under or for the account of
      any of the foregoing governments or bodies, or (v) any domestic, foreign,
      international, multilateral, or multinational judicial, quasi-judicial,
      arbitration or administrative court, grand jury, tribunal, commission,
      board or panel or other regulatory or governmental authority.

      "ICG" shall mean indocyanine green complying with the specifications of
      U.S. Pharmacopoeia 24 and FDA approved NDA.

      "INDICATIONS" means NOVADAQ's use of ICG-C for angiography of arteries,
      carotid arteries, intracranial vasculature, AV fistulas and the peripheral
      vasculature, for the diagnosis and treatment of age-related macular
      degeneration utilizing U.S. Patents #5,279,298 and #5,394,199 and all
      corresponding foreign patents that are licensed by NOVADAQ from Johns
      Hopkins University, or any other patents and technologies derived from the
      foregoing patents, outside of the United States ("AMD"), and for such
      other applications as may be mutually agreed to by the Parties.

      "MATERIAL BREACH" means, in the case of AKORN, a breach of subsections
      3(i), 3(ii), 3(iii) or 3(iv) of the Settlement and Mutual Release or any
      failure by AKORN to supply, either directly or through Third Parties,
      ICG-C in accordance with the terms and conditions of this Agreement,
      including the specifications, where such failure shall continue for three
      months and shall not be the result of a Material Breach of this Agreement
      by NOVADAQ, or an event of force majeure as described in Section 12.1. In


                                       2

      the case of NOVADAQ, "Material Breach" means the failure to make payment
      or a series of payments of a minimum value of $50,000 or more, subject to
      the terms of paragraph 12.9 hereof;

      "PERMITTED MANUFACTURERS" shall have the meaning set forth in Section 2.2
      hereof.

      "PRODUCT" or "ICG-C" shall mean a human pharmaceutical product, of which
      ICG is the sole active ingredient, and which conforms to the
      Specifications and which is used in accordance with, or for the purposes
      of, the Regulatory Approvals.

      "REGULATORY APPROVALS" shall mean all (i) authorizations by the
      appropriate Regulatory Authorities which are required for the marketing,
      promotion, pricing and sale of the Product in the Territory, and (ii) new
      drug applications ("NDAs") for the use of the Product in the Territory, as
      applicable, for the Indications.

      "REGULATORY AUTHORITY" shall mean any national, supra-national, regional,
      state or local regulatory agency, department, bureau, commission, council
      or other governmental entity in the Territory involved in the granting of
      Regulatory Approval for the Product, including, without limitation, the
      FDA and the HPB.

      "SETTLEMENT AND MUTUAL RELEASE" shall mean the Settlement and Mutual
      Release between AKORN and NOVADAQ dated January 4, 2002.

      "SPECIFICATIONS" shall mean the specifications for or concerning the
      manufacturing, testing, packaging and shipping of the Product as set forth
      in the Schedule A hereto, or as may be agreed upon by the Parties in
      writing from time to time.

      "STORAGE PROTOCOL" shall mean that procedure and protocol prepared by
      AKORN for the storage of Product, as such procedures and protocols shall
      be amended from time to time.

      "TERM" shall have the meaning set forth in Section 10.1 hereof.

      "TERRITORY" shall mean the world, except in the case of NOVADAQ's Use for
      the treatment of AMD, "Territory" shall mean the world excluding the
      United States of America.

      "THIRD PARTY(IES)" shall mean any person(s) or party(ies) other than
      AKORN, NOVADAQ or their respective Affiliates.

2. SUPPLY OF PRODUCT

      2.1   OBLIGATION TO SUPPLY. Subject to the provisions of this Agreement,
            after the Effective Date and during the Term of this Agreement,
            AKORN shall manufacture, or contract with Third Parties to have
            manufactured, exclusively for and supply to NOVADAQ, Product for use
            by NOVADAQ, its Affiliates or its permitted sub-licensees in the
            Territory, and NOVADAQ shall exclusively purchase from AKORN its
            entire requirements of Product for use in the Territory, in each
            case for the Indications now or hereafter subject to this Agreement.
            Prior to the Effective Date, AKORN shall supply NOVADAQ's
            requirements for ICG-C for all clinical and pre-clinical trials on
            the same terms as provided herein. All Product supplied under this
            Agreement is to be supplied in finished form, as specified in
            NOVADAQ's purchase orders placed with AKORN pursuant to


                                       3

            Section 2.4 below. AKORN acknowledges NOVADAQ's ownership of all
            rights in and to the Product and agrees not to sell or supply
            Product to any Third Party without the express written consent of
            NOVADAQ.

      2.2   SUBCONTRACTING. For Product intended by NOVADAQ for sale in the
            U.S., AKORN may subcontract or assign any part of its manufacturing
            and supply obligations hereunder to any facility approved by FDA for
            the manufacture of the Product, provided, however, that AKORN shall
            notify NOVADAQ prior to transferring any manufacturing and supply
            obligations to a subcontractor or assignee other than SP
            Pharmaceutical, Inc. 4272 Ballon Park Road, Albuquerque, NM 87107 or
            Sigma-Aldrich Fine Chemicals 3050 Spruce St., St. Louis, MO 63103.
            For Product intended by NOVADAQ for sale outside the U.S., AKORN may
            subcontract or assign any part of its manufacturing and supply
            obligations hereunder to any facility approved by the relevant
            Regulatory Authority for the manufacture of the Product. AKORN shall
            provide NOVADAQ documentation demonstrating that any subcontractor's
            or assignee's facility has been approved by the FDA (for Product
            intended for sale in the U.S.) or the relevant Regulatory Authority
            (for Product intended for sale outside the U.S.) for the manufacture
            of the Product.

      2.3   FORECASTS.

            2.3.1 ROLLING FORECASTS. Throughout the term of this Agreement,
                  NOVADAQ shall provide AKORN with a rolling one (1) year
                  forecast (the "Forecast") of its expected purchases of the
                  Product, the mechanism for which shall be as follows:

                  (a)   On or before the Effective Date, NOVADAQ shall have
                        provided AKORN with a written forecast of its expected
                        purchases of the Product for the period extending three
                        (3) Calendar Quarters beyond the Calendar Quarter
                        containing the Effective Date.

                  (b)   Beginning on the date of the first Calendar Quarter
                        following the Effective Date and then on or prior to the
                        first day of each subsequent Calendar Quarter, NOVADAQ
                        shall provide AKORN with an update to its previously
                        submitted Forecast of its expected purchases of the
                        Product. Such update shall consist of a repetition of
                        the previously forecasted three (3) Calendar Quarters
                        along with a newly introduced forecast for the Calendar
                        Quarter subsequent to the last Calendar Quarter
                        previously forecasted.

            2.3.2 AKORN shall provide sixty (60) days written notice to NOVADAQ
                  in the event AKORN determines that it cannot fill an order or
                  meet a forecast. In the event that AKORN is unable to provide
                  NOVADAQ with its requirement for ICG-C, NOVADAQ may obtain the
                  required quantity from an alternative source, but subject to
                  the Termination provisions


                                       4

                  hereof, only until such time as AKORN is able to again provide
                  the required quantity. The inability of AKORN to supply
                  amounts or fill orders exceeding the forecast in any quarter
                  by more than 100% shall not be considered a default or breach
                  of this Agreement.

      2.4   SUBMISSION OF PURCHASE ORDERS. From time to time, NOVADAQ shall
            place orders with AKORN, in a format agreed upon by the Parties, for
            the purchase of Product, specifying the quantities of the Product
            desired and the place(s) to which and the manner and dates by which
            delivery is to be made; said delivery dates to be no earlier than
            one hundred twenty (120) calendar days after the purchase order
            date. All purchase orders shall be sent on forms previously reviewed
            by and jointly approved by the Parties and shall be delivered by
            NOVADAQ to the following address or as otherwise instructed by
            AKORN.

                  Akorn, Inc.
                  2500 Millbrook Rd.
                  Buffalo Grove, Illinois
                  Attn: Director of Materials Management
                  Fax: (847) 279-6123

            Purchase orders made in accordance with the provisions of this
            Article 2 shall be deemed to be accepted by AKORN if AKORN has not
            rejected said purchase orders within ten (10) business days of
            receipt of the same. To the extent the terms of any purchase order
            or acknowledgment thereof are inconsistent with the terms of this
            Agreement, the terms of this Agreement shall prevail.

      2.5   DELIVERY. AKORN shall execute all accepted purchase orders
            consistent with this Agreement by delivery F.O.B. to NOVADAQ's
            designated carrier at AKORN's distribution facility of all ordered
            quantities of the Product no later than the delivery dates provided
            in NOVADAQ's purchase orders. Title and risk of loss will pass to
            NOVADAQ when each order of Product is delivered to NOVADAQ's
            designated carrier at AKORN's distribution facility.

      2.6   LABELING. Within thirty (30) days after the Effective Date, NOVADAQ,
            at its own expense, will provide AKORN with NOVADAQ's labeling for
            the Product bearing NOVADAQ's corporate name and trade dress. AKORN,
            at NOVADAQ's expense, will print, either directly or through a Third
            Party, labels and other printed material to be included as part of
            the finished Product. Product manufactured by or for AKORN after
            AKORN's receipt of any new or altered labeling for the Product,
            shall bear such new labeling, provided, however, that AKORN shall
            have no responsibility with respect to the content of such labeling,
            provided the content of the labeling printed by AKORN is the same as
            the content or specification of the labeling provided by NOVADAQ.
            NOVADAQ shall reimburse AKORN for all reasonable costs incurred by
            AKORN in making any modifications to the labeling, branding or
            imprinting, packaging and/or manufacturing processes to accommodate
            NOVADAQ's labeling or to


                                       5

            accommodate any other changes requested by NOVADAQ. Such
            reimbursement shall be made pursuant to invoices submitted by AKORN
            to NOVADAQ, which invoices shall be payable within thirty (30) days
            after NOVADAQ's receipt thereof.

3. MANUFACTURE OF PRODUCTS

      3.1   MANUFACTURE OF PRODUCT; CERTIFICATE OF ANALYSIS. AKORN shall, or
            shall cause any Third Party manufacturer contracted by AKORN to
            manufacture the Product to, manufacture the Product in compliance
            with applicable current good manufacturing practices as described in
            21 C.F.R. parts 210 and 211 for ICG-C used in the United States and
            any equivalent provisions enforced by applicable Regulatory
            Authorities for ICG-C used in countries outside the United States.
            All Product supplied by AKORN to NOVADAQ shall materially conform to
            the Specifications. AKORN shall perform, or cause to be performed,
            release testing of each batch of Product, in a manner consistent
            with testing methods agreed upon by the Parties, and AKORN shall
            provide to NOVADAQ a Certificate of Analysis with each shipment of
            the Product to NOVADAQ or its designated recipient stating that the
            Product materially conforms to the Specifications. The Certificate
            of Analysis shall be in a format agreed upon by the Parties.

      3.2   COMPLIANCE WITH LAWS AND REGULATIONS. While the Product is in its
            possession or under its, or its sub-contractor's control, AKORN
            shall comply, or ensure that its subcontractors comply, with all
            applicable federal, state and local statutory and regulatory
            requirements regarding the manufacture, if applicable, packaging,
            handling transportation and storage of the Product.

      3.3   MANUFACTURING DIFFICULTIES. AKORN shall notify NOVADAQ (within 10
            working days) upon any occasion in which AKORN, or any Third Party
            with whom AKORN has contracted for the manufacture of the Product,
            experiences any manufacturing problems in producing the Product
            which AKORN reasonably believes may delay shipment of the Product to
            NOVADAQ. Subject to the provisions of Section 12.1, AKORN shall use
            Commercially Reasonable Efforts to resolve those problems and shall
            keep NOVADAQ fully informed of the status of those efforts. If
            delays are reasonably expected to (or do) cause AKORN to be unable
            to supply Product in accordance with NOVADAQ'S purchase order, then
            NOVADAQ may obtain ICG-C from an alternative source until the supply
            problems are resolved by AKORN.

4. PURCHASE PRICE; TERMS OF PAYMENT.

      4.1   PRICE. NOVADAQ shall purchase from AKORN and AKORN shall sell to
            NOVADAQ Product at a purchase price which shall, at all times,
            equals AKORN's best wholesale price for ICG for the calendar month
            immediately preceding the date of shipment of a Purchase Order,
            adjusted, however, to reflect any volume discounts resulting from
            increases in the amount of Product ordered


                                       6

            by NOVADAQ for the Calendar Year in which such Purchase Order is
            received and which are then being offered by AKORN to other Third
            Party purchasers of ICG products.

      4.2   FREIGHT, INSURANCE AND TAXES. NOVADAQ shall pay all actual freight,
            insurance and government sales tax imposed on purchasers for resale,
            and duties and other fees (except tax on income to AKORN) incurred
            in connection with the sale and shipment of the Product to NOVADAQ.

      4.3   PAYMENT. Payments to AKORN for the purchase price of delivered
            Product (as well as any other payment due from NOVADAQ to AKORN
            under this Agreement) shall be made by NOVADAQ within thirty (30)
            days after the date of shipment, except as to Product orders which
            are rejected by NOVADAQ in accordance with the procedures contained
            in Section 5, or which the Parties dispute constitute Acceptable
            Product. In the event Product is rejected by NOVADAQ, but is
            determined to be Acceptable Product pursuant to Section 5.2 hereof,
            the payment for such Product shall be due and payable within ten
            (10) days after the determination with respect to such Product is
            made in accordance with Section 5.2 hereof.

      4.4   MAINTENANCE OF RECORDS; AUDITS. AKORN shall keep complete records of
            its average wholesale cost for ICG product sales and, upon request
            of NOVADAQ, shall permit an independent certified public accountant
            selected by NOVADAQ, that has first executed an appropriate
            confidentiality agreement with AKORN and is reasonably acceptable to
            AKORN, to inspect and review AKORN's records during normal business
            hours and upon reasonable prior notice, but, in any event, no more
            than once per year, in order to verify or determine AKORN's average
            wholesale cost of ICG products. The independent certified public
            accountant selected by NOVADAQ may not disclose to NOVADAQ specific
            sales prices charged to any individual Third Party, but only whether
            or not the average wholesale price for ICG products as reported by
            AKORN is correct. NOVADAQ shall bear the costs and fees associated
            with such inspections and reviews unless it is determined by the
            independent certified public accountant that the average wholesale
            price was incorrect (in excess of five percent (5%)) in which case
            AKORN shall bear the costs and fees of such audit. AKORN shall
            promptly refund to NOVADAQ any overpayments made by NOVADAQ because
            of such unsupported pricing.

5. INSPECTION OF PRODUCT.

      5.1   INSPECTION; REJECTION OF PRODUCT. NOVADAQ shall analyze
            representative samples of each lot of Product delivered to NOVADAQ
            for purposes of determining whether the same meets the
            Specifications ("Acceptable Product") and, if performed, will do so
            within sixty (60) days from the date of delivery of the Product to
            NOVADAQ's carrier. NOVADAQ shall notify AKORN in writing within said
            sixty (60) days of any Product lot, or portion thereof, which


                                       7

            NOVADAQ is rejecting because NOVADAQ believes such Product is not
            Acceptable Product. If NOVADAQ fails to so notify AKORN that it is
            rejecting a lot of Product, or portion thereof, within such sixty
            (60) day period, such lot of Product, or portion thereof, shall be
            deemed to be Acceptable Product. Payment terms will still remain net
            thirty days (30). Any Product which is properly rejected in
            accordance with the procedures set forth in this Section 5 for which
            NOVADAQ has already paid shall be replaced in accordance with
            Section 5.3

      5.2   THIRD PARTY ANALYSIS. If AKORN, after good faith consultation with
            NOVADAQ, disputes any finding by NOVADAQ that Product is not
            Acceptable Product, representative samples of the Product shall be
            forwarded for analysis to a suitably qualified independent Third
            Party jointly selected by AKORN and NOVADAQ, in their reasonable
            discretion, which analysis shall be performed in compliance with
            applicable FDA regulations for retesting of pharmaceutical products.
            The findings of such Third Party regarding whether the Product was
            Acceptable Product shall be binding upon the Parties. The cost of
            such analysis by such Third Party shall be borne by the Party whose
            findings differed from those generated by such Third Party
            laboratory.

      5.3   REPLACEMENT OF PRODUCT. AKORN shall replace any Product order, or
            portion thereof, which is not Acceptable Product (unless such
            non-conformance is due to any negligent or wrongful act or omission
            by NOVADAQ or its agents or sub contractors), at AKORN's cost and
            expense, including shipping costs.

      5.4   DISPOSITION OF REJECTED PRODUCT. AKORN shall instruct NOVADAQ as to
            the disposition of any Product order or portion thereof determined
            not to be Acceptable Product. At the sole option of AKORN, said
            Product may be returned to AKORN, at AKORN's expense including
            shipping costs, or destroyed in an environmentally acceptable
            manner, again at AKORN's expense.

6. INSPECTION AND ACCESS TO FACILITY AND RECORDS.

      6.1   INSPECTION BY REGULATORY AUTHORITIES. Upon the request of the FDA or
            other Regulatory Authority, such authority shall have access to
            observe and inspect AKORN's or its Third Party manufacturers'
            facilities and procedures used for the manufacture, testing or
            warehousing of the Product and to audit such facilities for
            compliance with cGMP and/or other applicable regulatory standards.

      6.2   NOTIFICATION OF INQUIRIES. AKORN shall notify NOVADAQ as soon as
            possible, and in any event, within ten (10) days, of any written or
            oral inquiries, notifications or inspection activity by the FDA or
            other Regulatory Authority in regard to or affecting the Product.
            AKORN shall furnish to NOVADAQ (i) within ten (10) business days
            after receipt, any report or correspondence issued by the FDA or
            other Governmental Authority in connection with such visit or
            inquiry, including, but not limited to, any FDA Form 483 (List of
            Inspectional Observations), Establishment Inspection Report or
            applicable portions of any


                                       8

            FDA Warning Letters which pertain to the Product in the Territory
            and (ii) not later than ten (10) business days after to the time it
            provides to the FDA or other Regulatory Authority, copies of
            proposed responses or explanations relating to items set forth above
            (each, a "Proposed Response"), in each case redacted of trade
            secrets or other confidential or proprietary information that is
            unrelated to the obligations under this Agreement or are unrelated
            to the Product. After the filing of a response with the FDA or other
            Regulatory Authority, AKORN will notify NOVADAQ of any further
            contacts with such agency relating to the subject matter of the
            response.

7. WARRANTIES AND INDEMNITIES.

      7.1   REPRESENTATIONS AND WARRANTIES OF EACH PARTY. As of the Effective
            Date, each of NOVADAQ and AKORN hereby represents, warrants and
            covenants to the other Party hereto as follows:

                  (a)   It is a corporation duly organized and validly existing
                        under the laws of the state, province or other
                        jurisdiction of its incorporation or formation;

                  (b)   The execution, delivery and performance of this
                        Agreement by such Party has been duly authorized by all
                        requisite corporate action and does not require any
                        shareholder action or approval;

                  (c)   It has the power and authority to execute and deliver
                        this Agreement and to perform its obligations hereunder;

                  (d)   The execution, delivery and performance by such Party of
                        this Agreement and its compliance with the terms and
                        provisions hereof does not and will not conflict with or
                        result in a breach of any of the terms and provisions of
                        or constitute a default under (i) a loan agreement,
                        guaranty, financing agreement, agreement affecting a
                        product or other agreement or instrument binding or
                        affecting it or its property; (ii) the provisions of its
                        charter or operative documents or bylaws; or (iii) any
                        order, writ, injunction or decree of any court or
                        governmental authority entered against it or by which
                        any of its property is bound; and

                  (e)   It shall at all times comply with all applicable
                        material laws and regulations relating to its activities
                        under this Agreement.

      7.2   SETTLEMENT AND MUTUAL RELEASE. The Parties acknowledge the
            Settlement and Mutual Release and confirm and agree that all of the
            terms and conditions thereof shall be incorporated in this Agreement
            to the extent applicable.


                                       9

      7.3   PRODUCT WARRANTY. In addition to the representations and warranties
            made by AKORN in Section 7.1 hereof, AKORN represents and warrants
            to NOVADAQ that all Product supplied hereunder will conform to the
            Specifications.

      7.4   DISCLAIMER OF ALL OTHER WARRANTIES. EXCEPT FOR THE WARRANTIES
            EXPRESSLY MADE BY AKORN IN SECTIONS 7.1 AND 7.3 HEREOF, AKORN MAKES
            NO OTHER REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED
            (WHETHER WRITTEN OR ORAL), INCLUDING, WITHOUT LIMITATION ANY IMPLIED
            WARRANTY OF MERCHANTABILITY OR ANY WARRANTY OF FITNESS FOR A
            PARTICULAR PURPOSE WITH RESPECT TO THE PRODUCTS OR AKORN'S
            OBLIGATIONS HEREUNDER. IN ADDITION, BECAUSE AKORN WILL HAVE NO
            CONTROL OVER (A) ANY OTHER PRODUCT OR PROCEDURE OF WHICH THE PRODUCT
            IS A COMPONENT OR IN WHICH THE PRODUCT IS USED, (B) THE CONDITIONS
            UNDER WHICH THE PRODUCT OR ANY OTHER PRODUCT OR PROCEDURE OF WHICH
            THE PRODUCT IS A COMPONENT OR IS USED, (C) THE DIAGNOSIS OF THE
            PATIENTS, OR (D) THE METHODS OF ADMINISTERING OR HANDLING THE
            PRODUCT OR ANY OTHER PRODUCT OR PROCEDURE OF WHICH THE PRODUCT IS A
            COMPONENT OR IS USED AFTER THE PRODUCT LEAVES AKORN'S POSSESSION,
            AKORN DOES NOT WARRANT EITHER A GOOD EFFECT OR AGAINST AN ILL EFFECT
            FOLLOWING THE USE OF THE PRODUCT OR ANY OTHER PRODUCT OR PROCEDURE
            OF WHICH THE PRODUCT IS A COMPONENT OR IS USED. AKORN EXPRESSLY
            DISCLAIMS ANY WARRANTY UNDER SECTION 2-312(3) OF THE UNIFORM
            COMMERCIAL CODE.

      7.5   INDEMNIFICATION BY AKORN. AKORN shall indemnify, defend and hold
            harmless NOVADAQ, its Affiliates and each of its and their
            respective officers, directors, shareholders, employees, agents and
            representatives (each a "NOVADAQ Indemnified Party") from any
            claims, losses, liabilities, costs, expenses (including reasonable
            attorney's fees) and damages to Third Parties, including any related
            to property or personal injury (each a "Liability"), which any
            NOVADAQ Indemnified Party may incur, suffer or be required to pay
            resulting from or arising in connection with (a) the breach by AKORN
            of any representation or warranty contained in this Agreement; (b)
            any violation by AKORN or any Third Party manufacturer of any
            applicable federal, state or local regulation, statute or order in
            the manufacture, packaging, storage or shipping of Products arising
            out of AKORN's duties under this Agreement which is not attributable
            to printed materials provided by NOVADAQ; or (c) any negligent act
            or omission by AKORN or its Affiliates in carrying out its
            obligations under this Agreement. Notwithstanding the foregoing,
            AKORN shall have no obligation to defend, indemnify or hold harmless
            any NOVADAQ Indemnified Party for any Liability that results from
            the negligence or intentional misconduct of NOVADAQ, its Affiliates,
            or any of its permitted sub-licensees or any of their respective
            officers, directors, employees, agents, consultants or
            representatives.


                                       10

      7.6   INDEMNIFICATION BY NOVADAQ. NOVADAQ shall indemnify, defend and hold
            harmless AKORN and its Affiliates and subcontractors, and each of
            its and their respective employees, officers, directors and agents
            (each an "AKORN Indemnified Party") from and against any Liability
            which any AKORN Indemnified Party may incur, suffer or be required
            to pay resulting from or arising in connection with (a) the breach
            by NOVADAQ of any representation or warranty contained in this
            Agreement; (b) materials, including, but not limited to labeling, or
            promotional claims supplied or made by NOVADAQ, or (c) the use,
            packaging, promotion, distribution, testing, use, marketing, sale or
            other disposition of Product by NOVADAQ, its Affiliates, its
            permitted sub-licensees or their respective subcontractors.
            Notwithstanding the foregoing, NOVADAQ shall have no obligation to
            indemnify, defend, or hold harmless any AKORN Indemnified Party for
            any Liability that results from the intentional misconduct or
            negligence of AKORN, its Affiliates, its permitted subcontractors or
            any of their respective employees, officers, directors or agents,
            consultants or representatives.

      7.7   CONDITIONS TO INDEMNIFICATION. The obligations of the indemnifying
            Party under Sections 7.4 and 7.5 are conditioned upon the delivery
            of written notice to the indemnifying Party of any potential
            Liability promptly after the indemnified Party becomes aware of such
            potential Liability. The indemnifying Party shall have the right to
            assume the defense of any suit or claim related to the Liability if
            it has assumed responsibility for the suit or claim in writing;
            provided, however, if in the reasonable judgment of the indemnified
            Party, such suit or claim involves an issue or matter which could
            have a materially adverse effect on the business operations or
            assets of the indemnified Party, the indemnified Party may waive its
            rights to indemnity under this Agreement and control the defense or
            settlement thereof, but in no event shall any such waiver be
            construed as a waiver of any indemnification rights such Party may
            have at law or in equity. If the indemnifying Party defends the suit
            or claim, the indemnified Party may participate in (but not control)
            the defense thereof at its sole cost and expense. Any
            indemnification payable to an indemnified Party shall be net of
            taxes, insurance or payment received by the indemnified Party from
            any Third Party.

      7.8   LIMITATION OF LIABILITY. WITH RESPECT TO ANY CLAIM BY ONE PARTY
            AGAINST THE OTHER ARISING OUT OF THE PERFORMANCE OR FAILURE OF
            PERFORMANCE OF THE OTHER PARTY UNDER THIS AGREEMENT WHERE THE
            INABILITY OR FAILURE TO PERFORM IS FOR REASONS BEYOND THE REASONABLE
            CONTROL OF SUCH PARTY, THE PARTIES EXPRESSLY AGREE THAT THE
            LIABILITY OF SUCH PARTY TO THE OTHER PARTY FOR SUCH BREACH SHALL BE
            LIMITED UNDER THIS AGREEMENT OR OTHERWISE AT LAW OR EQUITY TO DIRECT
            DAMAGES ONLY AND IN NO EVENT SHALL A PARTY BE LIABLE FOR INCIDENTAL,
            PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES OR LOST PROFITS.


                                       11

      7.9   SETTLEMENTS. Neither Party may settle a claim nor action related to
            a Liability without the consent of the other Party, if such
            settlement would impose any monetary obligation on the other Party,
            constitute or admission by the other Party, expose the other Party
            to any additional liability or prosecution, require the other Party
            to submit to an injunction or otherwise limit the other Party's
            rights under this Agreement. Except as otherwise expressly set forth
            in this Article 7, any payment made by a Party to settle any such
            claim or action shall be at its own cost and expense.

      7.10  INSURANCE. AKORN and NOVADAQ shall obtain and maintain at all times
            during the term of this Agreement commercial general liability
            insurance, including products liability, with limits which are
            commercially reasonable for similarly situated companies and each
            agrees to provide the other with a Certificate of Insurance
            evidencing this coverage within thirty (30) days of the Effective
            Date.

8. RECALLS

      8.1   PRODUCT RECALLS. In the event of an actual or threatened recall of
            the Product required or recommended by a Governmental Authority of
            competent jurisdiction within the Territory or if recall of any
            Product is (i) reasonably deemed advisable by AKORN or by NOVADAQ,
            or (ii) jointly deemed advisable by AKORN and NOVADAQ, such recall
            shall be promptly implemented and administered by NOVADAQ in a
            manner which is appropriate and reasonable under the circumstances
            and in conformity with accepted trade practices. In the event that a
            recall is caused due to the negligent acts or omissions of AKORN,
            its Affiliates or subcontractors, or by the fact that the Product
            supplied by AKORN to NOVADAQ does not conform to the Specifications,
            the cost, including NOVADAQ's reasonable out-of-pocket expenses, of
            any such recall shall be borne by AKORN. NOVADAQ shall pay all
            costs, including AKORN's reasonable out-of-pocket expenses,
            associated with a recall for any other reason, including, without
            limitation, recalls (i) caused by actions of Third Parties occurring
            after such Product is sold to NOVADAQ, or (ii) due to packaging or
            label defects for which NOVADAQ has responsibility, or (iii) due to
            any other breach by NOVADAQ of this Agreement.

      8.2   NOTICE OF EVENTS THAT MAY LEAD TO PRODUCT RECALL. Each Party shall
            keep the other fully and promptly informed of any notification,
            event or other information, whether received directly or indirectly,
            which might affect the marketability, safety or effectiveness of the
            Product or might result in a recall of Product by the HPB, FDA or
            other Governmental Body.

      8.3   RECALL DUE TO BREACH BY AKORN. In the event of any recall for which
            AKORN would be responsible for the costs in accordance with Section
            8.1 hereof, AKORN shall, at the election of NOVADAQ either:


                                       12

                  (a)   Supply Product, without charge to NOVADAQ, in an amount
                        sufficient to replace the amounts of Product recalled,
                        or

                  (b)   Refund to NOVADAQ the amount paid or give credit to
                        NOVADAQ against outstanding receivables due from NOVADAQ
                        for the price of Product to be delivered to NOVADAQ in
                        the future, in amounts equal to the price paid by
                        NOVADAQ to AKORN for Product so recalled plus the
                        reasonable transportation costs incurred by NOVADAQ and
                        not recovered by NOVADAQ in respect of such recalled
                        Product.

      8.4   DEFINITION OF RECALL. For Purposes of the Article 8, "recall" shall
            mean any action by NOVADAQ and its Affiliates, or AKORN and its
            Affiliates, to recover title or possession or halt distribution,
            prescription or consumption of Product sold or shipped to Third
            Parties.

      8.5   SURVIVAL OF OBLIGATIONS. The provisions and obligations of this
            Article 8 shall survive any termination of this Agreement.

9. NON-COMPETITION AND PERMITTED USE

      9.1   CONTINUING MANUFACTURE AND SALE OF OTHER ICG PRODUCTS. NOVADAQ
            acknowledges that AKORN and its Affiliates have sold and will
            continue to sell other products containing ICG prior to and
            subsequent to the execution of this Agreement. The Parties agree
            that this Agreement shall not be construed to limit the right of
            AKORN and its Affiliates to manufacture, have manufactured and sell
            other products containing ICG to Third Parties subject to AKORN's
            obligations of confidentiality and non-use under this Agreement.

      9.2   RESTRICTIVE COVENANTS. Each Party hereby covenants and agrees with
            the other that for so long as this Agreement is in effect and for a
            period (the "Restricted Period") of five (5) years thereafter,
            neither Party shall, without the prior written consent of the other
            Party, which consent shall be within the sole and exclusive
            discretion of the other Party, either directly or indirectly, on its
            own account or as a consultant, agent, partner, joint venturer,
            owner, or shareholder of any other person (other than AKORN's status
            as a shareholder of NOVADAQ), entity, or in any other capacity, in
            any way:

            9.2.1 Carry on, be engaged in or have any financial interest in any
                  business which is in competition with the business of the
                  other Party. For purposes of this Section 9.2, a business
                  shall be deemed to be in competition with AKORN if it involves
                  products which were at the relevant time or at the time of
                  termination, being marketed in the Territory or which at such
                  time were under study by AKORN and expected to be marketed in
                  the Territory within six (6) months of such date for
                  ophthalmic uses. For purposes of this Section 9.2, a business
                  shall be deemed to be in competition with


                                       13

                  NOVADAQ if it involves products which were, at the relevant
                  time or at the time of termination, being marketed in the
                  Territory by NOVADAQ or which at such time were under study by
                  NOVADAQ and expected to be marketed in the Territory within
                  six (6) months of such date of termination, in either case for
                  any of the Indications only.

            9.2.2 Solicit for the business of the other Party (as defined in
                  paragraph 9.2.1) any then current customer or client of the
                  other Party or any affiliate of the other Party or, after
                  termination, anyone who was a customer or client at any time
                  during the twelve (12) month period immediately preceding
                  termination.

            9.2.3 Solicit, employ or engage any person who is then an employee
                  of the other Party or any affiliate of the other Party or was
                  an employee of the other Party or, after termination, any
                  affiliate of the other Party at any time during the twelve
                  (12) month period immediately preceding termination.

10. TERM AND TERMINATION.

      10.1  TERM. This Agreement shall become effective upon the Effective Date
            and, unless earlier terminated as provided below, shall remain in
            full force and effect for a period ending on the seventh (7th)
            anniversary of the Effective Date (the "Initial Term"). Thereafter,
            this Agreement shall automatically renew for successive five (5)
            year terms (each a "Renewal Term" and together with the Initial
            Term, the "Term") unless, at least 180 days prior to any such
            Renewal Term, either Party shall have notified the other of its
            intention not to renew this Agreement. Upon expiration or
            termination of this Agreement for any reason, all unpaid amounts due
            pursuant to this Agreement, including, but not limited to, Section
            4.3, shall become immediately due and payable.

      10.2  TERMINATION

                  (a)   This Agreement shall terminate upon the mutual written
                        agreement of the Parties.

                  (b)   If either Party breaches or defaults in the performance
                        or observance of any of the material provisions of this
                        Agreement, and such breach or default is not cured
                        within 60 days after the giving of notice by the
                        non-defaulting Party specifying such breach or default,
                        the non-defaulting Party shall have the right to
                        terminate this Agreement, effective immediately upon
                        notice to the defaulting Party.

                  (c)   Either Party shall have the right to terminate this
                        Agreement upon 30 days' notice to the other Party, if
                        that other Party becomes involved in financial
                        difficulties as evidenced:


                                       14

                        (i)   by that other Party's commencement of a voluntary
                              case under any applicable bankruptcy code or
                              statue, or by its authorizing, by appropriate
                              proceedings, the commencement of such voluntary
                              case; or

                        (ii)  by its failing to receive dismissal of any
                              involuntary case under any applicable bankruptcy
                              code or statute within 90 days after initiation of
                              such action or petition; or

                        (iii) by its seeking relief as a debtor under any
                              applicable law of any jurisdiction relating to the
                              liquidation or reorganization of debtors or to the
                              modification or alteration of the rights of
                              creditors, or by consenting to or acquiescing in
                              such relief; or

                        (iv)  by the entry of an order by a court of competent
                              jurisdiction finding it to be bankrupt or
                              insolvent, or ordering or approving its
                              liquidation, reorganization or any modification or
                              alteration of the rights of its creditors or
                              assuming custody of, or appointing a receiver or
                              other custodian for, all or a substantial part of
                              its property or assets; or

                        (v)   by its making an assignment for the benefit of, or
                              entering into an agreement with, its creditors, or
                              appointing or consenting to the appointment of a
                              receiver or other custodian for all or a
                              substantial part of its property or by the
                              appointment of such a receiver by a Third Party,
                              which appointment is not revoked by a Court of
                              competent jurisdiction within sixty (60) days of
                              its occurrence.

                  (d)   The failure by a Party to exercise its right to
                        terminate this Agreement pursuant to Section 9.2. in the
                        event of any occurrence giving rise thereto shall not
                        constitute waiver of the right in the event of any
                        subsequent occurrence.

      10.3  EFFECT OF TERMINATION.

                  (a)   Unless otherwise agreed to between the Parties, all
                        Product on hand as of the effective date of expiration
                        or termination of this Agreement will be treated as
                        follows as soon as practicable:

                        (i)   Product manufactured and packaged pursuant to
                              purchase orders previously received from NOVADAQ,
                              will be delivered by AKORN to NOVADAQ, whereupon


                                       15

                              NOVADAQ will pay AKORN therefore in accordance
                              with the terms hereof; and

                        (ii)  Work in progress commenced by AKORN in accordance
                              with a Binding Quarterly Forecast will, at the
                              option of NOVADAQ (but at the option of AKORN in
                              the case of termination hereof by AKORN under
                              Section 10.2(b)), (A) cease, and such work in
                              progress will remain with AKORN (in which case
                              NOVADAQ will pay AKORN an amount equal to AKORN's
                              actual costs incurred in connection with the
                              performance and cessation of such work less the
                              cost to AKORN of materials that can be returned by
                              AKORN or used by AKORN in later batches of other
                              products manufactured by AKORN as reasonably
                              determined by AKORN) or (B) be completed by AKORN
                              and delivered to NOVADAQ whereupon NOVADAQ will
                              pay AKORN therefore in accordance with the terms
                              hereof.

                  (b)   In the event that NOVADAQ terminates this Agreement
                        either pursuant to Section 10.2.(b) because of a
                        Material Breach, or pursuant to 10.2.(c), then, in
                        either event, NOVADAQ shall thereafter be permitted to
                        order all further supply of Product directly from any
                        Third Party which is at the time of termination a
                        Permitted Manufacturer or other qualified supplier.
                        AKORN will license to NOVADAQ, within 60 (sixty) days of
                        the date of this Agreement, for the Indications, all
                        required Know-How necessary to manufacture the Product
                        which license shall become effective only in the event
                        that NOVADAQ terminates this Agreement either pursuant
                        to Section 10.2(b) because of a Material Breach or
                        pursuant to 10.2(c).

      10.4  ACCRUED OBLIGATIONS. Termination of this Agreement for any cause
            shall not release either Party from any obligation or liability
            incurred prior to or upon termination hereof or which subsequently
            arises under Section 10.6.

      10.5  NO WAIVER. The failure on the part of either Party to exercise or
            enforce any right conferred upon it hereunder shall not be deemed to
            be a waiver of any such right nor operate to bar the exercise or
            enforcement thereof at any time thereafter.

      10.6  SURVIVAL. Subject to Section 10.3 hereof, the following provisions
            shall survive expiration or termination of this Agreement: Sections
            4.4, 5.3, 5.4, 9.2, 12.3, 12.4, 12.5, 12.6, 12.7, 12.8, and 12.9 and
            Articles 7, 8 and 11.


                                       16

11. CONFIDENTIALITY.

      11.1  NONDISCLOSURE OBLIGATION. Each of NOVADAQ and AKORN agree to use any
            information received by it from the other Party (the "Information")
            only in accordance with this Agreement and not to disclose
            Information to any Third Party, without the prior written consent of
            the other Party, for a period of five (5) years from the termination
            or expiration of this Agreement. These obligations shall not apply
            to Information that:

                  (a)   Is known by the receiving Party at the time of its
                        receipt, and not through a prior disclosure by the
                        disclosing Party, as documented by the receiving Party's
                        business records;

                  (b)   Is at the time of disclosure or thereafter becomes
                        published or otherwise part of the public domain without
                        breach of this Agreement by the receiving Party;

                  (c)   Is subsequently disclosed to the receiving Party by a
                        Third Party who has the right to make such disclosure;

                  (d)   Is developed by the receiving Party independently of the
                        Information received from the disclosing Party and such
                        independent development can be documented by the
                        receiving Party; or

                  (e)   Is required by law, regulation, rule, act or order of
                        any governmental authority or agency to be disclosed by
                        a Party, provided that notice is promptly delivered to
                        the other Party in order to provide an opportunity to
                        seek a protective order or other similar order with
                        respect to such Information and thereafter the
                        disclosing Party discloses to the requesting entity only
                        the minimum Information required to be disclosed in
                        order to comply with the request, whether or not a
                        protective order or other similar order is obtained by
                        the other Party.

      11.2  PERMITTED DISCLOSURES. Information may be disclosed to employees,
            agents, consultants, sub-licensees or suppliers or Third Party
            manufacturers of the recipient Party or its Affiliates, but only to
            the extent required to accomplish the purposes of this Agreement and
            only if the recipient Party obtains prior agreement from its
            employees, agents, consultants, sub-licensees, suppliers or Third
            Party manufacturers to whom disclosure is to be made to hold in
            confidence and not make use of such Information for any purpose
            other than those permitted by this Agreement. Each Party will use at
            least the same standard of care as it uses to protect proprietary or
            confidential information of its own to ensure that such employees,
            agents, consultants, sub-licensees, suppliers or Third Party
            manufacturers do not disclose or make any unauthorized use of the
            Information.


                                       17

      11.3  DISCLOSURE OF AGREEMENT. Neither NOVADAQ nor AKORN shall release to
            any Third Party or publish in any way any non-public information
            with respect to the terms of this Agreement or concerning their
            cooperation without the prior written consent of the other, which
            consent will not be unreasonably withheld or delayed, provided,
            however, that either Party may disclose the terms of this Agreement
            to the extent required to comply with applicable laws, including,
            without limitation the rules and regulations promulgated by the
            United States Securities and Exchange Commission, provided, however,
            that prior to making any such disclosure, the Party intending to so
            disclose the terms of this Agreement shall (i) provide the
            non-disclosing Party with written notice of the proposed disclosure
            and a opportunity to review and comment on the intended disclosure
            which is reasonable under the circumstances and (ii) shall seek
            confidential treatment for as much of the disclosure as is
            reasonable under the circumstances, including, without limitation,
            seeking confidential treatment of any information as may be
            requested by the other Party. Notwithstanding any other provision of
            this Agreement, each Party may disclose the terms of this Agreement
            to lenders, investment bankers and other financial institutions of
            its choice solely for purposes of financing the business operations
            of such Party, if the disclosing Party uses reasonable efforts to
            obtain a signed confidentiality agreement with such financial
            institution with respect to such information on terms substantially
            similar to those contained in this Article 11.

      11.4  PUBLICITY. Subject to Section 11.3, all publicity, press releases
            and other announcements relating to this Agreement or the
            transactions contemplated hereby shall be reviewed in advance by,
            and shall be subject to the approval of, both Parties. The Party
            responding to a request for such approval shall respond to the other
            Party in writing within five (5) days of such request.

12. MISCELLANEOUS.

      12.1  FORCE MAJEURE. Except for the obligation to make payment when due,
            each Party shall be excused from liability for the failure or delay
            in performance of any obligation under this Agreement by reason of
            any event beyond such Party's reasonable control including but not
            limited to Acts of God, fire, flood, explosion, earthquake, or other
            natural forces, war, civil unrest, accident, destruction or other
            casualty, any act, inaction or delay of any government or government
            agency, or any other event similar to those enumerated above. Such
            excuse from liability shall be effective only to the extent and
            duration of the event(s) causing the failure or delay in performance
            and provided that the Party has not caused such event(s) to occur.
            Notice of a Party's failure or delay in performance due to force
            majeure must be given to the other party within Ten (10) days after
            its occurrence. All delivery dates in this Agreement that have been
            affected by force majeure shall be suspended for the duration of
            such force majeure.


                                       18

      12.2  ASSIGNMENT

                  (a)   ASSIGNMENT BY NOVADAQ. NOVADAQ may assign any or all of
                        its rights or obligations under this Agreement in the
                        Territory to any of its Affiliates, for so long as they
                        remain Affiliates. In addition, NOVADAQ may assign any
                        or all of its rights or obligations under this Agreement
                        in the Territory in conjunction with a merger or
                        acquisition of NOVADAQ. NOVADAQ may not otherwise assign
                        any of its rights or obligations under this Agreement
                        without AKORN's prior written consent, which consent
                        shall not be unreasonably withheld. AKORN shall respond
                        to such requests by NOVADAQ for assignment within thirty
                        (30) days from such request. Any permitted assignment
                        shall not relieve NOVADAQ of its responsibilities for
                        performance of its obligations under this Agreement.

                  (b)   ASSIGNMENT BY AKORN. AKORN may assign any or all of its
                        rights or obligations under this Agreement to any of its
                        Affiliates. AKORN may also assign any or all of its
                        rights or obligations under this Agreement in
                        conjunction with a merger or acquisition of AKORN. In
                        addition, AKORN may assign all or part of its
                        obligations to a Third Party manufacturer after
                        receiving NOVADAQ's prior written consent, (other than
                        to a Permitted Manufacturer for which consent shall not
                        be required) which consent shall not be unreasonably
                        withheld or delayed. Any permitted assignment shall not
                        relieve AKORN of its responsibilities for performance of
                        its obligations under this Agreement.

                  (c)   BINDING NATURE OF ASSIGNMENT. This Agreement shall be
                        binding upon and inure to the benefit of the successors
                        and permitted assigns of the Parties. Any assignment not
                        in accordance with this Section 12.2 shall be void.

      12.3  NO WAIVER. The failure of either Party to require performance by the
            other Party of any of that other Party's obligations hereunder shall
            in no manner affect the right of such Party to enforce the same at a
            later time. No waiver by any Party hereto of any condition, or of
            the breach of any provision, term, representation or warranty
            contained in this Agreement, whether by conduct or otherwise, in any
            one or more instances, shall be deemed to be or construed as a
            further or continuing waiver of any such condition or breach, or of
            any other condition or of the breach of any other provision, term,
            representation or warranty hereof.

      12.4  SEVERABILITY. If a court or other tribunal of competent jurisdiction
            should hold any term or provision of this Agreement to be excessive,
            or invalid, void or unenforceable, the offending term or provision
            shall be deleted or revised to the


                                       19

            extent necessary to be enforceable, and, if possible, replaced by a
            term or provision which, so far as practicable achieves the
            legitimate aims of the Parties.

      12.5  RELATIONSHIP BETWEEN THE PARTIES. Both Parties are independent
            contractors under this Agreement. Nothing herein contained shall be
            deemed to create an employment, agency, joint venture or partnership
            relationship between the Parties hereto or any of their agents or
            employees, or any other legal arrangement that would impose
            liability upon one Party for the act or failure to act of the other
            Party. Neither Party shall have any express or implied power to
            enter into any contracts or commitments or to incur any liabilities
            in the name of, or on behalf of, the other Party, or to bind the
            other Party in any respect whatsoever.

      12.6  CORRESPONDENCE AND NOTICES.

                  (a)   Ordinary Notices. Correspondence, reports,
                        documentation, and any other communication in writing
                        between the Parties in the course of ordinary
                        implementation of this Agreement shall be delivered by
                        hand, sent by facsimile, overnight courier or by airmail
                        to the employee or representative of the other Party who
                        is designated by such other Party to receive such
                        written communication.

                  (b)   Extraordinary Notices. Extraordinary notices and
                        communications (including, without limitation, notices
                        of termination, force majeure, material breach, change
                        of address) shall be in writing and sent by prepaid
                        registered or certified mail, overnight courier or by
                        facsimile confirmed by prepaid registered or certified
                        mail letter, and shall be deemed to have been properly
                        served to the addressee three days after mailing by
                        registered or certified mail, the next day if sent by
                        overnight courier and upon receipt if sent by facsimile.

                  (c)   Addresses. In the case of NOVADAQ, the proper address
                        for communications and for all payments shall be:

                  Novadaq Technologies, Inc.
                  924 The East Mall, Suite 100
                  Toronto, Ontario M9B 6K1
                  Attn: Chief Financial Officer
                  Fax: (416) 695-3993

            and in the case of AKORN, the proper address for communications and
            for all payments shall be:

                  Akorn, Inc.
                  2500 Millbrook Drive
                  Buffalo Grove, Illinois 60089
                  Attn: Chief Financial Officer
                  Fax: (847) 279-6123


                                       20

      12.7  CHOICE OF LAW. This Agreement is subject to and governed by the laws
            of the State of Illinois, excluding its conflict of laws provisions.

      12.8  ENTIRE AGREEMENT; AMENDMENT. This Agreement sets forth the complete,
            final and exclusive agreement between the Parties with respect to
            the subject matter hereto and supersedes and terminates all prior
            and contemporaneous agreements and understandings between the
            Parties, whether oral or in writing. No subsequent alteration,
            amendment, change, waiver or addition to this Agreement shall be
            binding upon the Parties unless reduced to writing and signed by an
            authorized officer of each Party. No understanding, agreement,
            representation or promise, not explicitly set forth herein, other
            than the Settlement and Mutual Release executed by the Parties on
            the date hereof, has been relied on by either Party in deciding to
            execute this Agreement as set forth herein.

      12.9  ARBITRATION. The Parties shall attempt in good faith to promptly
            resolve any controversy, claim or dispute arising between them. In
            the event that the Parties are unable to resolve any such
            controversy, claim or dispute within 30 days, then any such
            controversy, claim or dispute between the Parties, directly or
            indirectly, concerning this Agreement or the breach hereof, or the
            subject matter hereof, shall be finally settled by binding
            arbitration in accordance with the Rules of Conciliation and
            Arbitration of the International Chamber of Commerce. Prior to
            initiating such arbitration proceedings the Parties shall attempt to
            resolve the dispute by good faith negotiations between themselves.
            The situs of the arbitration proceedings shall be the City of
            Toronto, Ontario, Canada, if the arbitration was requested or
            initiated by NOVADAQ, and in the City of Chicago, Illinois, U.S.A.,
            if the arbitration was requested or initiated by Akorn, and judgment
            upon the award rendered may be entered in any court having a
            jurisdiction hereof. In deciding the dispute the arbitrator(s) shall
            apply first the plain meaning of this Agreement, but in matters not
            fairly provided for in this Agreement, shall apply the substantive
            law of the State of Illinois. All pleadings, evidence, testimony, or
            other submissions to the arbitrator(s) shall be in the English
            language as shall be the judgment of the arbitrator(s). Pending
            resolution of any such arbitration, any Party may deposit with its
            solicitors or another mutually agreeable party an amount equal to
            50% of any monetary amount in dispute or such other amount as may be
            directed by the arbitrator(s) upon preliminary application.

      12.10 HEADINGS. The headings and captions used in this Agreement are
            solely for the convenience of reference and shall not affect its
            interpretation.

      12.11 COUNTERPARTS. This Agreement may be executed in one or more
            counterparts each of which shall be an original and all of which
            shall constitute together the same document.

      12.12 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and
            deliver such further instruments, and to do all other acts, as may
            be necessary or appropriate in


                                       21

            order to carry out the purposes and intent of this Agreement
            including, without limitation, any filings with any antitrust agency
            which may be required.

      IN WITNESS WHEREOF, this Agreement has been executed by the duly
authorized representatives of the Parties as of the date set forth below.

AKORN, INC.                                    NOVADAQ TECHNOLOGIES, INC.


By:______________________________              By:______________________________

Name:____________________________              Name:____________________________

Title:___________________________              Title:___________________________


                                       22

                                   SCHEDULE A
                                 SPECIFICATIONS


                                       23


                                                                   Exhibit 10.23


                   MUTUAL TERMINATION AND SETTLEMENT AGREEMENT


      WHEREAS, The Johns Hopkins University, a Maryland corporation, acting
through its Applied Physics Laboratory having a place of business at 11100 Johns
Hopkins Road, Laurel, MD 20723-6099 (hereinafter "JHU/APL"), and Akorn, Inc.
(hereinafter "Akorn"), a Louisiana corporation, having a place of business at
2500 Millbrook Drive, Buffalo Grove, IL 60089, entered into a license agreement
effective April 26, 2000, as amended by Amendment No. 1, effective July 15,
2001, (hereinafter collectively "License") as relates to the JHU/APL PATENT
RIGHTS, as defined therein; and

      WHEREAS, JHU/APL is the sole owner of the entire right, title, and
interest in and to the JHU/APL PATENT RIGHTS, as defined in the License; and

      WHEREAS, by letter dated January 16, 2002, JHU/APL provided notice of
breach/default of the License to Akorn; and

      WHEREAS, Akorn filed suit on March 29, 2002 against The Johns Hopkins
University in the United States District Court for the Northern District of
Illinois ("the Court"), Civil Action No. 02C 2299 ("the Action"), seeking among
other relief a declaration from the Court that Akorn had not breached the
License; and

      WHEREAS, JHU/APL and Akorn now mutually desire to terminate the License
and settle the Action;

      Now, therefore, in consideration of the premise and the mutual covenants
and agreements herein contained, and for good and valuable consideration, the
sufficiency and receipt of which is hereby mutually acknowledged, and intending
to be legally bound hereby, the parties hereto do covenant and agree as follows:

      (1)   The License is by mutual agreement hereby terminated and of no
further effect, with each party having no recourse against the other as to the
License. Hereafter, Akorn shall have no right or license in the JHU/APL PATENT
RIGHTS, as defined in the License. Both JHU/APL and Akorn shall be free to
pursue business arrangements relating to technologies for the treatment of
age-related macular degeneration subject only to the terms of this Agreement and
applicable laws and regulations.

      (2) Akorn shall be entitled to retain the $300,000 comprising the final
$300,000 installment of the license execution fee payment due under Section
4.2b) of the License.

      (3)   JHU/APL shall pay to Akorn fifteen percent (15%) of all cash
payments and twenty percent (20%) of all equity received by JHU/APL from any
licensee of the U.S. JHU/APL PATENT RIGHTS less any cash or equity returned

by JHU/APL to such licensee, the combined total of all such cash and equity
payments made by JHU/APL to Akorn not to exceed One Million Twenty-Five Thousand
Dollars ($1,025,000). JHU/APL agrees that it will accept only cash or equity as
consideration from any licensee for a license under the U.S. JHU/APL PATENT
RIGHTS. JHU/APL further agrees that it will instruct any licensee to issue any
equity due under this Agreement to Akorn directly to Akorn in Akorn's name, and
JHU/APL will include as a provision in any license agreement with such licensee
the requirement that the licensee issue such equity in that fashion to Akorn.
Akorn agrees to accept such equity from such licensee, and is not aware of any
facts, circumstances, or reasons why such licensee would not or could not issue
any such equity in that fashion to Akorn, PROVIDED, HOWEVER, that in the event
that such licensee does not issue any such equity to Akorn, JHU/APL will
promptly transfer the corresponding cash equivalent in lieu of equity to Akorn.
The first of such payments totaling One Hundred Twenty-Five Thousand Dollars
($125,000) in cash shall be made by JHU/APL to Akorn within thirty (30) days of
the effective date of this Agreement and JHU/APL shall make such first payment
regardless of whether any payments have been or will be received by JHU/APL from
any licensee of the U.S. JHU/APL PATENT RIGHTS. All remaining of such payments
shall be made by JHU/APL to Akorn only after receipt of cash payments or equity
from a licensee and then within thirty (30) days of the end of each calendar
quarter for cash payments and equity received from a licensee during that
quarter. Such payments made to Akorn shall be in kind, that is, 15% of any cash
received from a licensee shall be made in cash to Akorn and 20% of any equity
received from a licensee shall be made in equity to Akorn. Furthermore, the
first payment of $125,000 in cash made by JHU/APL to Akorn, as required above,
shall be considered an advance towards cash payments but not equity due Akorn
and, therefore, JHU/APL shall be entitled to a dollar for dollar credit against
such future cash payments due Akorn up to $125,000.

      (4)   JHU/APL shall make and retain, for a period of three (3) years
following each payment required by paragraph (3), true and accurate records,
files and books of account containing all the data reasonably required for the
full computation and verification of the payments required in paragraph (3).
Such books and records shall be in accordance with generally accepted accounting
principles consistently applied. JHU/APL shall forward to Akorn a copy of any
license agreement entered into by JHU/APL relating to the U.S. JHU/APL PATENT
RIGHTS within ten (10) days of entry into such an agreement. JHU/APL shall also
permit the inspection and copying of such records, files and books of account by
Akorn or its agents during regular business hours upon ten (10) business days'
written notice to JHU/APL. Such inspection shall not be made more than once each
calendar year. All costs of such inspection and copying shall be paid by Akorn,
provided that if any such inspection shall reveal that an error has been made in
the amount equal to five percent (5%) or more of such payment, such costs shall
be borne by JHU/APL.



                                       2

      (5)   Except for the rights, duties, and obligations arising under this
Agreement and the JHU/APL PATENT RIGHTS, each party hereto hereby completely
releases, acquits, and forever discharges and covenants not to sue the other
party hereto, including the other party's parents, subsidiaries, divisions, and
affiliates, and the other party's current and former directors, officers, and
employees, as well as the other party's representatives, distributors,
customers, dealers, attorneys, and agents, from all asserted and unasserted
claims (including claims for damages, costs, expenses, and/or attorneys fees)
arising from the actions of the parties occurring prior to the effective date of
this Agreement which each party hereto has now or may have in the future against
the other party hereto, including the other party's parents, subsidiaries,
divisions, and affiliates, and the other party's current and former directors,
officers, and employees, as well as the other party's representatives,
distributors, customers, dealers, attorneys, and agents including but not
limited to any and all claims relating to the License or otherwise relating to
or arising out of the facts and circumstances giving rise to the Action.

      (6)   Within seven (7) days of the execution of this Agreement, the
parties will dismiss the Action with prejudice by filing with the Court a fully
executed Stipulation and Order of Dismissal with Prejudice.

      (7)   As of the effective date of this Agreement and, thereafter, the
parties hereto, and their employees, agents, and attorneys, shall keep
confidential the terms of this Agreement, except that the parties and their
attorneys may make such disclosures as may be required by law, financial
reporting and disclosure requirements and generally accepted accounting
principles (including but not limited to reporting requirements for publicly
traded corporations and lender disclosure requirements), or by court order. Upon
inquiry, the parties and their attorneys may respond that the License and the
Action have been amicably terminated and settled, respectively. Additionally,
the parties agree that neither party shall provide negative commentary to any
third parties on the other party's technology related to the License including
the JHU/APL PATENT RIGHTS except that factual results of any research may be
released to third parties if not otherwise subject to an obligation of
confidentiality.

      (8)   This Agreement constitutes the complete, final, and entire
understanding of the parties with respect to the subject matter hereof, and the
parties shall not be bound by any terms, covenants, conditions, or
representations not expressly contained herein with respect to the subject
matter hereof. This Agreement may not be modified except by an agreement in
writing signed by all parties.

      (9)   A waiver of any term or condition contained in this Agreement shall
not be effective unless made and/or confirmed in the writing by all of the
parties; unless such writing expressly states otherwise, no such waiver shall be
construed as a waiver of a subsequent breach or failure of the term or condition
or a waiver of any other term or condition contained in this Agreement.


                                       3

      (10)  The parties agree that this Agreement shall be construed, applied,
and interpreted in accordance with the laws of the State of Maryland, including
in relation to all matters of formation, interpretation, construction, validity,
performance, and enforcement, and without regard to conflict of law provisions.
In the event any dispute whatsoever arises which related to or concerns in any
way the terms and conditions of this Agreement and/or the performance by the
parties of their respective obligations hereunder, such dispute will be subject
to the jurisdiction and venue of the U.S. District Court for the District of
Maryland, Northern Division.

      (11)  No determination by any court, governmental or administrative body,
or otherwise that any provisions of this Agreement or any amendment hereof is
illegal, invalid, or unenforceable in any instance shall affect the validity or
enforceability of (i) such provision in any circumstance not controlled by such
determination or (ii) any other provision of the Agreement. Each provision shall
be valid and enforceable to the fullest extent allowed by, and shall be
construed whenever possible as being consistent with, applicable law. In the
event any provision of this Agreement is declared illegal, invalid, or
unenforceable, the remainder of the Agreement shall continue in full force and
effect.

      (12)  Each of the parties shall be responsible for its respective fees and
expenses, including court costs, legal fees, and expert fees that are related to
or arise out of the Action.

      (13)  There shall be no right to set-off any payment due under this
Agreement against any payment arising out of any other contract, agreement, or
controversy between JHU/APL, on the one hand, and Akorn, on the other hand.

      (14)  The terms of this Agreement are contractual, and the parties hereto
represent and warrant that they possess the full and complete authority to
covenant and agree as provided herein, and further represent and warrant that
they have full and complete authority to execute this Agreement. In addition,
the individuals executing this Agreement on behalf of the respective parties
warrant and represent that they have been duly authorized and empowered to
execute this Agreement on behalf of their respective parties.

      (15)  This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective subsidiaries, affiliates,
divisions, parents, successors, permitted assigns, trustees, officers,
directors, employees, attorneys, and agents. Except as set forth in the
preceding sentence, nothing in this Agreement is intended to confer, expressly
or by implication, upon any person or entity other than the parties to this
Agreement, any right or remedies under or by reason of this Agreement. Neither
party hereto shall assign its rights and/or obligations under this Agreement
without the prior written consent of the other party hereto.


                                       4

      (16)  This Agreement is intended to be and is a settlement and compromise
of disputed claims. The execution of this Agreement, and the exchange of
consideration, releases, and other actions provided herein, are not to be
construed as any admission or concession on the part of any party with respect
to any liability, claim, counterclaim, or defense.

      (17)  Each party and counsel for each party have reviewed and approved
this Agreement, and accordingly any presumption or other rule of construction
that any ambiguities be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.

      (18)  The parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be
reasonably necessary or appropriate to give full force and effect to the terms
of this Agreement.

      IN WITNESS WHEREOF the respective parties hereto have executed this
Agreement in duplicate originals by their duly authorized officers to be
effective as of the date of the last party to execute this Agreement.



AKORN, INC.                         THE JOHNS HOPKINS UNIVERSITY
                                    Applied Physics Laboratory

By                                  By
   ---------------------------         ---------------------------------
      Ben Pothast                         Ruth E. Nimmo
      Chief Financial Officer             Assistant Director, Operations

Date                                Date
     -------------------------           -------------------------------


                                       5


                                                                   Exhibit 10.24

                                FOURTH AMENDMENT

            THIS FOURTH AMENDMENT dated as of January 1, 2002, by and among
AKORN, INC., a Louisiana corporation ("Akorn"), AKORN (NEW JERSEY), INC., an
Illinois corporation "Akorn NJ") (Akorn and Akorn NJ being sometimes referred to
herein individually as a "Borrower" and collectively as the "Borrowers"), and
THE NORTHERN TRUST COMPANY, an Illinois banking corporation (the "Lender");

                                   WITNESSETH:

            WHEREAS, the following documents (collectively, the "Documents")
were heretofore entered into by the parties indicated:

            (i) Amended and Restated Credit Agreement dated as of September 15,
      1999, among the Borrowers and the Lender (which, as amended by the
      documents referred to below, is referred to herein as the "Credit
      Agreement");

            (ii) Amended and Restated Security Agreement dated as of December
      29, 1997, from the Borrowers to the Lender;

            (iii) Intellectual Property Security Agreement dated as of September
      15, 1999, from Akorn to the Lender;

            (iv) Junior Mortgage dated as of March 21, 2001, from Akorn to the
      Lender recorded in the Office of the Recorder of Deeds of Macon County,
      Illinois, on May 7, 2001, in Book 3056, Page 544;

            (v) First Amendment dated as of December 28, 1999, among the
      Borrowers and the Lender;

            (vi) Second Amendment and Waiver dated as of February 15, 2001,
      among the Borrowers and the Lender;

            (vii) Third Amendment and Waiver dated as of April 16, 2001 (the
      "Third Amendment"), among the Borrowers and the Lender;

            (viii) Note dated April 16, 2001, from the Borrowers to the Lender
      in the principal amount of $45,000,000;

            (ix) Forbearance Agreement dated as of July 12, 2001 (the
      "Forbearance Agreement"), by and among the Borrowers and the Lender;

            (x) Subordination and Standby Agreement dated as of July 12, 2001,
      by The John N. Kapoor Trust dated September 20, 1989, in favor of the
      Lender and containing the Acknowledgment of the Borrowers;

            (xi) Waiver letter from the Lender to the Borrowers dated December
      10, 2001, and accepted and agreed to by the Borrowers, relating to a loan
      to Akorn by NeoPharm, Inc., a Delaware corporation ("NeoPharm");

            (xii) Subordination, Standby and Intercreditor Agreement dated as of
      December 20, 2001, between NeoPharm and the Lender and containing the
      Acknowledgment of Subordination by the Borrowers;

            (xiii) Amendment to Forbearance Agreement dated as of December 20,
      2001, by and among the Borrowers and the Lender;

            (xiv) Notice dated January 30, 2002, from the Lender to the
      Borrowers, given pursuant to the Amendment to Forbearance Agreement
      referred to in (xiii) above; and

            (xv) Second Amendment to Forbearance Agreement dated as of February
      21, 2002, by and among the Borrowers and the Lender; and

            WHEREAS, the parties desire to make certain modifications and
amendments to the Documents, as previously modified and amended, as provided for
herein;

            NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

            Section 1. Recitals Part of Agreement; References to Documents
Defined Terms. (a) The foregoing recitals are hereby incorporated into and made
a part of this Agreement.

            (b) Except as otherwise stated herein, all references in this
Agreement to any one or more of the Documents shall be deemed to include the
previous modifications and amendments to the Documents provided for in the
Documents described above, whether or not express reference is made to such
previous modifications and amendments.

            (c) The following new defined terms are hereby added in alphabetical
order in Section 1.1 of the Credit Agreement:

                  "DEA" means the Drug Enforcement Administration of the United
            States Department of Justice.

                  "SEC" means the United States Securities and Exchange
            Commission.

            (d) All capitalized terms used and not otherwise defined in this
Agreement shall have the same meanings as the defined terms contained in the
Credit Agreement, including the defined terms being added to the Credit
Agreement by this Agreement. Unless otherwise defined or the context otherwise,
all financial and accounting terms used in this Agreement shall be defined in
accordance with GAAP.

            Section 2. Extension of Termination Date. The parties acknowledge
that the date appearing in the definition of the term "Termination Date" in
Section 1.1 of the Credit Agreement, as previously modified and amended, is
"January 2, 2002". The definition of the term "Termination Date" in Section 1.1
of the Credit Agreement, as previously modified and


                                      - 2 -

amended, is hereby further modified and amended by changing the date appearing
therein from "January 1, 2002" to "June 30, 2002". The Lender agrees that such
extension of the Termination Date supersedes the requirement in Section 5(c) of
the Forbearance Agreement that the Borrowers pay all principal, interest and
other amounts due under the Documents on the last day of the Forbearance Period
under the Forbearance Agreement.

            Section 3. Commitment Terminated. The parties acknowledge that
pursuant to the terms of Section 4 of the Forbearance Agreement, the Commitment
of the Lender to make Advances and to issue Letters of Credit under the Credit
Agreement is not in effect and shall not be in effect from and after the date of
this Agreement, and that the Lender is not and shall not be obligated to make,
and that the Borrowers do not and shall not have the right to receive, any
additional Advances or Letters of Credit under the Credit Agreement from and
after the date of this Agreement.

            Section 4. Interest Rate. The parties acknowledge that pursuant to
the terms of the Credit Agreement as modified and amended by the Third
Amendment, absent the occurrence and continuance of an Event of Default under
the Documents and notice, the interest rate on the Loan is the Prime Rate, which
is defined as that rate per year announced from time to time by the Lender
called its prime rate, which rate at any time may not be the lowest rate charged
by the Lender, plus 3% per annum.

            Section 5. Mandatory Principal Payments. (a) The parties acknowledge
that the principal amount of the Loans outstanding on the date of this Agreement
is $44,800,000.

            (b) Section 2.3 of the Credit Agreement, as previously modified and
amended, is hereby amended and restated in its entirety to read as follows:

                  2.3 Voluntary and Mandatory Prepayments.

                  (a) Voluntary Prepayments. 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 no prepayment fee,
            premium or penalty shall be payable in connection with any such
            voluntary prepayment.

                  (b) Mandatory Prepayments.

                        (i) In addition to the other payments required by this
                  clause (b), within three Business Days after the date on which
                  Borrowers receive a refund of federal income taxes in respect
                  of the tax year ended December 31, 2001, Borrowers shall make
                  a payment on the principal of the Loans in the amount of
                  $5,580,000; provided, however, that if Borrowers fail to file
                  their federal income tax return for such tax year on or before
                  April 15, 2002, such principal payment shall be due and
                  payable on or before the earlier of June 15, 2002, and the
                  date on which Borrowers receive a refund of federal income
                  taxes in respect of such tax year.

                        (ii) In addition to the other payments required by this
                  clause (b), within three Business Days after the date on the
                  date on which Borrowers receive a refund of federal income
                  taxes in respect of the tax year ended December 31 2001,
                  Borrowers shall make a payment on the principal of the Loans
                  in an amount equal to the positive difference, if any, between



                                      - 3 -

                  the amount of such tax refund and the amount of any payment on
                  the principal of the Loans made pursuant to the provisions of
                  subparagraph (i) of this clause (b).

                        (iii) Borrowers shall immediately pay all of the
                  principal of and interest on the Loans if any of the following
                  shall occur:

                              (A) At any time after January 1, 2002, the FDA
                        shall file any judicial or administrative proceeding or
                        take any administrative action that results in a partial
                        or total suspension of production or shipment of
                        products for the account of either of Borrowers or under
                        any contract under which either of Borrowers
                        manufactures product for any third party.

                              (B) As of June 1, 2002, Borrowers have not issued
                        a written request to the FDA, with a copy to the Lender,
                        to make a re-inspection relating to the 483 M Warning
                        Letter issued by the FDA.

                              (C) At any time after January 1, 2002, Borrowers
                        fail to make a written response, within 10 Business
                        Days, to the FDA, with a copy to the Lender, to any
                        written communication received from the FDA after
                        January 1, 2002, that raises any deficiencies.

                              (D) At any time after January 1, 2002, one or more
                        fines, penalties or other monetary obligation due and
                        payable to any Governmental Authority is assessed
                        against Borrowers, or either of them, and the aggregate
                        amount thereof is more than $250,000.

                              (E) At any time after January 1, 2002, there is a
                        cessation in the public trading of the stock of Akorn,
                        other than as a result of a cessation of trading
                        generally in the United States securities markets.

                              (F) At any time after January 1, 2002, there is
                        any restatement of or adjustment to the operating
                        results of Borrowers for any one or more Fiscal Years
                        ended on or prior to December 31, 2001, and the
                        aggregate amount of all such restatements and
                        adjustments is more than $27,000,000.

                              (G) As of June 15, 2002, Borrowers have not
                        entered into an engagement letter in a form acceptable
                        to the Lender in its reasonable judgment, with an
                        investment banker acceptable to the Lender in its
                        reasonable judgment, for the underwriting of an offering
                        of equity securities (a "Qualifying Underwriting
                        Engagement") (it being understood that if the Lender
                        does not object to a proposed engagement letter with a
                        proposed underwriter within 10 Business Days after
                        receipt of such proposed engagement letter, including
                        the name of the proposed



                                      - 4 -

                        underwriter, the Lender shall be deemed to have approved
                        such proposed engagement letter and underwriter).

                              (H) At any time after June 15, 2002, Borrowers do
                        not have a Qualifying Underwriting Engagement in effect.

                              (I) At any time after April 12, 2002, any
                        materially adverse action is taken by the FDA, the SEC,
                        the DEA, or any other Governmental Authority, or any
                        state or federal court, with respect to either of
                        Borrowers, based on an alleged failure to comply with
                        laws or regulations, including, without limitation, any
                        ban on sale, recall or seizure of products, any total or
                        partial suspension of production, or the entry of any
                        restraining order or injunction against violations of
                        the law, or the filing of any judicial or administrative
                        proceeding seeking any of the foregoing; provided,
                        however, that the foregoing provisions of this
                        subparagraph (I) shall not apply to a consent decree
                        relating to SEC or DEA matters, or the judicial
                        proceeding in which it is entered, if such consent
                        decree does not result in the occurrence of any of the
                        events described in subparagraphs (A) through (H) above.

            Section 6. Collection and Deposit of Cash Receipts. (a)
Notwithstanding the provisions of Section 6(a) of the Forbearance Agreement, the
authority granted to the Borrowers by the Lender in Section 6(a) of the
Forbearance Agreement to collect their accounts receivable shall not terminate
at the end of the Forbearance Period, and such authority shall continue until
the Termination Date or the earlier occurrence of any Event of Default.

            (b) The provisions of Sections 6(b), (c), (d) and (e) of the
Forbearance Agreement (which relate to, among other things, the requirement that
the Borrowers deposit cash receipts in an account at the Lender and have their
cash and investments on deposit in accounts maintained with the Lender) shall
continue to apply from and after the date of this Agreement, and without
limitation on the generality of such provisions, those provision shall apply
with respect to the proceeds of any offering of securities by either of the
Borrowers; provided, however, that unless and until an Event of Default has
occurred and is continuing, the Lender shall not exercise the rights referred to
in Section 6(c) of the Credit Agreement or the right to apply payments or
proceeds on deposit in the lockbox account referred to in Section 6(d) of the
Credit Agreement to the Obligations of the Borrowers under the Documents. The
Credit Agreement is hereby modified and amended to incorporate the provisions of
this paragraph.

            Section 7. Fees and Expenses. The provisions of Section 8 of the
Forbearance Agreement shall continue to apply from and after the date of this
Agreement and the Credit Agreement is hereby modified and amended to incorporate
the provisions of this Section.

            Section 8. Lender's Consultant and Personnel. The Borrowers
understand that the Lender may from time to time engage consultants to review
the accounting and business practices of the Borrowers and that the Lender's
collateral evaluation personnel will from time to time, and not less often than
monthly, make visits to the Borrowers' places of business to inspect the
tangible collateral for the Loan, review the books and records of the Borrowers
and confer with the Borrowers' personnel. The Borrowers shall cooperate with
such consultants and collateral evaluation personnel and allow them to have
access to the Borrowers' books and


                                      - 5 -

records and personnel and to the collateral for the Loan. The Borrowers
acknowledge that the fees of such consultant shall be reimbursable to the Lender
by the Borrowers in accordance with Section 10.4 of the Credit Agreement. The
provisions of this Section are without limitation on the provisions of Section
2.11 of the Credit Agreement. The Credit Agreement is hereby modified and
amended to incorporate the provisions of this Section.

            Section 9. Indebtedness. (a) The provisions of Sections 7(b), (c)
and (d) of the Forbearance Agreement (which relate to matters concerning
subordinated loan transactions) shall continue to apply from and after the date
of this Agreement.

            (b) Section 7.3 of the Credit Agreement is hereby modified and
amended by adding the following sentence at the end thereof:

            In addition to the foregoing restrictions contained in this Section,
            from and after January 1, 2002, Borrowers shall not incur any
            additional Indebtedness other than (i) obligations to trade
            creditors incurred in the ordinary course of business, and (ii)
            obligations to vendors in connection with capital expenditures that
            do not violate the conditions provided for in Section 7.18 of this
            Agreement.

            Section 10. Amendments to Section 7.10 of Credit Agreement. Section
7.10 of the Credit Agreement, as previously modified and amended, is hereby
modified and amended by deleting clauses (a) through (f) thereof. New clauses
(g) and (h) are added to Section 7.10 of the Credit Agreement by Sections 11 and
12 of this Agreement, respectively.

            Section 11. Inventory Matters. (a) The provisions of Section 10 of
the Forbearance Agreement shall no longer apply from and after the date of this
Agreement.

            (b) The following new clause (g) is hereby added to Section 7.10 of
the Credit Agreement:

                  (g) Commencing with the three-month period ended January 31,
            2002, for each period of three calendar months, Borrowers' returns
            of inventory for credit shall not exceed $750,000.

            Section 12. Receipts. (a) The following new defined terms are hereby
added in alphabetical order in Section 1.1 of the Credit Agreement:

                  "Gross Receipts" shall mean, for any period, the amount of the
            gross proceeds received by Borrowers during such period from sales
            of merchandise, including collections of accounts receivable, all
            determined on a cash basis.

                  "Net Receipts" shall mean, for any period, an amount equal to
            (i) the amount of Gross Receipts for such period, minus (ii) the
            amount of all of the cash expenditures of Borrowers during such
            period, excluding only capital expenditures that are permitted under
            the provisions of Section 7.18 of this Agreement; all determined on
            a cash basis.

            (b) The following new clause (h) is hereby added to Section 7.10 of
the Credit Agreement:



                                      - 6 -

                  (h) For the periods commencing on January 1, 2002, and ending
            on the last day of each of the months set forth in Column A below,
            the cumulative Gross Receipts and cumulative Net Receipts of
            Borrowers shall be not less than the amount set forth beside such
            month in Column B and Column C below, respectively:

Column A Column B Column C - -------- -------- -------- Cumulative Gross Cumulative Net Receipts For Receipts For Period Period January 1, 2002, January 1, 2002, through Last through Last Day Day of Month Not of Month Not Month, 2002 Less Than Less Than March $11,500,000 $0 April $15,500,000 $430,000 May $19,400,000 $525,000
Borrowers acknowledge and agree that the amounts provided for in this clause have been established at levels that are substantially lower than Borrowers' actual expectations, and that any failure to satisfy the foregoing condition of this clause shall be deemed to be material, regardless of the amount of such failure. Section 13. Dividends. From and after the date of this Agreement, the Borrowers shall not pay any cash dividend on any of their capital stock, and Section 7.14 of the Credit Agreement is hereby modified and amended accordingly. Section 14. Capital Expenditures. The Borrowers together in the aggregate shall not make capital expenditures of more than $4,735,000 during the first six months of the calendar year 2002, which capital expenditures shall consist only of the following: (i) Capital expenditures in an aggregate amount not exceeding $1,129,000 made at Akorn's Decatur, Illinois, place of business for the purpose of complying with requirements of the FDA. (ii) Other capital expenditures in an aggregate amount not exceeding $182,000 made at Akorn's Decatur, Illinois, place of business (iii) Capital expenditures in connection with Akorn's lyophilization project, in an aggregate amount not exceeding $2,600,000, paid from the proceeds of the loan to Akorn from NeoPharm. (iv) Up to $600,000 for interest required to be capitalized under GAAP on borrowings to finance Akorn's lyophilization project. (v) Other capital expenditures in an aggregate amount not exceeding $149,000 made in accordance with the capital expenditures budget previously furnished to the Lender by the Borrowers. (vi) Other capital expenditures in an aggregate amount not exceeding $75,000. Section 7.18 of the Credit Agreement is hereby modified and amended to include the foregoing provisions of this Section. Section 15. Regulatory Matters. Section 6.14 of the Credit Agreement is hereby modified and amended by adding the following provision at the end thereof: - 7 - Borrowers shall provide the Lender with copies of any communications to or from the FDA (whether relating to the 483 M Warning Letter received by Akorn from the FDA, or relating to any other matters), the SEC, the DEA or any other Governmental Authority, or any United States attorney, concerning any investigation or inquiry, and shall inform the Lender of the substance of any oral communication with the FDA, the SEC, the DEA or any other Governmental Authority, or any United States attorney, concerning any of such matters, in each case not later than the first Business Day after the date of any such communication. Section 16. Reports and Notices. From and after the date of this Agreement, the Borrowers shall provide the Lender with the Financial Statements, reports and notices provided for in the following paragraphs of this Section, and Section 5.1 of the Credit Agreement, as previously modified and amended, is hereby modified and amended accordingly: (a) Quarterly Reports of Borrowers. Within forty-five (45) days after the end of each Fiscal Quarter of Borrowers, Borrowers shall deliver to Lender a copy of an unaudited financial statement of Borrowers 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, Borrowers shall deliver to Lender 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 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; provided, however, that in the case of Fiscal Year 2001, if the annual audit report has not been issued within such time period, Borrowers shall deliver unaudited financial statements within such time period and shall deliver the annual audit report within five days after it is issued. (c) Certificates. Contemporaneously with the furnishing of a copy of each annual audit report and of each quarterly statement provided herein, Borrowers shall deliver to Lender 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 Credit Agreement. (d) Notice of Default, Litigation and ERISA Matters. Immediately upon learning of the occurrence of any of the following, Borrowers shall deliver to Lender 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 - 8 - material respects with 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. Borrowers shall deliver to Lender such other information and documents, financial or otherwise, in the addition to the information and documents specifically referred to herein as Lender may from time to time request. (f) Reports of Akorn. (i) Within forty-five (45) days after the end of each fiscal quarter of Akorn, Borrowers shall deliver to Lender 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. (g) Monthly Reports. Within fifteen (15) Business Days after the end of each month, beginning with the month ending December 31, 2001, Borrowers shall deliver to Lender a copy of an unaudited financial statement of the Borrowers for such month, in form and substance satisfactory to the Lender, prepared on a basis consistent with the audited financial statements of the Borrowers previously furnished to the Lender and, if required by the Lender, prepared on a consolidating and consolidated basis, signed by an authorized officer of Akorn and consisting of at least a balance sheet as at the end of such month and a statement of earnings and cash flow for such month. (h) Reports Relating to Receipts. The Borrowers shall deliver the following reports to the Lender relating to Gross Receipts and Net Receipts: (i) On or before Wednesday of each week, the Borrowers shall deliver to the Lender a report of actual Gross Receipts and Net Receipts for the one-week period ending on the immediately preceding Friday, and forecast Gross Receipts and Net Receipts for the next 12 weeks, prepared in the format of Exhibit A attached to this Agreement and signed by officers of the Borrowers. (ii) Within two Business Day after the end of each calendar month commencing with the month of March, 2002, the Borrowers shall deliver to the Lender a report of Gross Receipts and Net Receipts for such month and for the period commencing January 1, 2002, and ending on the last day of such month, which reports shall be prepared in reasonable detail and in a format acceptable to the Lender and shall be signed by officers of the Borrowers. (i) Monitoring Reports. The Borrowers shall deliver to the Lender each of the monitoring reports specified in Exhibit B attached to this Agreement, with the frequency and by the dates specified in Exhibit B, each of which reports shall be prepared in reasonable detail and in a format acceptable to the Lender and shall be signed by officers of the Borrowers. (j) Status Reports. On or before the 15th and the last day of each month commencing April 30, 2002, the Borrowers shall deliver to the Lenders a status report concerning any investigation or inquiry then in progress by the FDA, the SEC, the DEA or any other Governmental Authority, describing the current status of such investigation or inquiry, the schedule for future action and any significant events that have occurred since the date of the last such report, which reports shall be prepared in such detail and form, and shall contain such information, as the Lender shall from time to time require. - 9 - Section 17. Security Interests. The Credit Agreement is hereby modified and amended by adding the following new Section 6.17 thereto: 6.17. Security Interests. Without limitation on any other provisions of the Loan Documents, Borrowers shall cooperate with Lender by executing and delivering from time to time such documents as Lender shall deem necessary or advisable in order to conform to the provisions of Revised Article 9 of the Uniform Commercial Code and to perfect Lender's security interest in any intellectual property of Borrowers in addition to that described in the Security Agreement. Section 18. Financing Fees. On or before the date of the execution and delivery of this Agreement, and as a condition to the agreements of the Lender contained herein, the Borrowers shall pay to the Lender (i) the financing fee in the amount of $168,750 payable under Section 17 of the Forbearance Agreement, and (ii) an additional non-refundable financing fee in the amount of $84,375. Section 19. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows: (a) Akorn is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana and duly qualified to do business and in good standing in the States of Illinois and California, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (b) Akorn NJ is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois and duly qualified to do business and in good standing in the State of New Jersey, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (c) This Agreement and the Documents have been duly authorized, executed and delivered by the Borrowers and constitute valid and legally binding obligations enforceable against the Borrowers in accordance with their terms, subject to bankruptcy, insolvency and other laws of general application relating to the enforcement of creditors rights. The execution and delivery of this Agreement and the Documents and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the articles of incorporation or bylaws of either of the Borrowers, or any agreement or other instrument to which either of the Borrowers are party, or by which either of them are bound, or to which their properties are subject, or any existing law, administrative regulation, court order or consent decree to which either of them are subject. (d) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement or the Documents, or questioning the validity thereof, or in any way contesting the existence or powers of either of the Borrowers, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement or the Documents. - 10 - (e) Except as disclosed in Exhibit C attached to this Agreement, there is no litigation or administrative proceeding pending or threatened against either of the Borrowers. (f) Schedules 4.2, 4.8, 4.9, 4.13, 4.15, 4.17, 4.18, 4.19, 7.3, 7.4(a), 7.7 and 10.10 attached to this Agreement contain accurate and complete current updates of the information contained in the corresponding Schedules attached to the Credit Agreement. Section 20. Time of Essence. Time is of the essence of this Agreement and each of the provisions hereof. Section 21. Joint and Several Obligation. The obligations of the Borrowers under this Agreement shall be joint and several. Section 22. Release of Lender. To the extent permitted by applicable law, each of the Borrowers hereby releases and forever discharges the Lender and its past, present and future parent corporations, subsidiaries, affiliates and divisions, and their respective past, present and future shareholders, directors, officers, employees, attorneys, agents, investigators and insurers, and the heirs, administrators, executors, legal representatives, trustees, successors and assigns of each of the foregoing, of and from any and all claims of any kind or character whatsoever, whether now known or hereafter discovered, absolute or contingent, direct or indirect, arising out of any act, event or occurrence of any sort whatsoever occurring on or prior to the date of this Agreement; provided, however, that the Borrowers do not hereby release the right to performance by the Lender of its obligations under the Documents and this Agreement arising on and after the date of this Agreement. The Borrowers shall forever refrain and forbear from commencing or prosecuting any lawsuit or other proceeding against the Lender based upon, arising out of or connected with any of the claims released in this Agreement. Section 23. Documents to Remain In Effect; Confirmation of Obligations; References. Each of the Documents shall remain in full force and effect as originally executed and delivered by the parties, as previously modified and amended by one or more of the other Documents and as modified and amended by this Agreement. In order to induce the Lender to enter into this Agreement, the Borrowers hereby (i) confirm and reaffirm all of their obligations under each of the Documents, as previously modified and amended by one or more of the other Documents and modified and amended by this Agreement; (ii) acknowledge and agree that the Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree that the Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents, other than as expressly provided in the Documents; and (iv) acknowledge that they do not have any defense, set-off or counterclaim to the payment or performance of any of their obligations under the Documents, as previously modified and amended by one or more of the other Documents and modified and amended by this Agreement. Section 24. Confirmation of Certifications, Representations and Warranties. In order to induce the Lender to enter into this Agreement, the Borrowers hereby certify, represent and warrant to the Lender that, except as otherwise disclosed to the Lender in writing on or prior to the date hereof, including in this Agreement and in the Exhibits and Schedules attached hereto and/or in documents submitted to the Lender prior to the date hereof (including, but not - 11 - limited to, any and all financial statements and reports, budgets, statements of cash flow and governmental reports and filings) (collectively referred to herein as "Disclosures"), all certifications, representations and warranties contained in the Documents and in all certificates heretofore delivered to the Lender are true and correct as of the date hereof in all material respects, and, subject to such Disclosures, all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement. Section 25. Entire Agreement. This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. Section 26. Successors. This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives. Section 27. Severability. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 28. Amendments, Changes and Modifications. This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto. Section 29. Construction. (a) The words "hereof," "herein," and "hereunder," and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used. (b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed. (c) The headings of this Agreement are for convenience only and shall not define or limit the provisions hereof. (d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders. (e) Each party to this Agreement and legal counsel for each party have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement. Section 30. Execution of Counterparts. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. - 12 - Section 31. Governing Law. This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement. [SIGNATURE PAGE(S) AND EXHIBIT(S), IF ANY, FOLLOW THIS PAGE] - 13 - IN WITNESS WHEREOF, the parties have executed this instrument as of the date first above written. AKORN, INC. By____________________________________________ Title: AKORN (NEW JERSEY), INC. By___________________________________________ Title: THE NORTHERN TRUST COMPANY By____________________________________________ Vice President - 14 - EXHIBIT A FORMAT OF GROSS RECEIPTS AND NET RECEIPTS REPORT EXHIBIT B MONITORING REPORTS
Report Frequency Due By ------ --------- ------ 1. Accounts Receivable Roll Forward Weekly Following Wednesday 2. Accounts Payable Roll Forward Weekly Following Wednesday 3. Income Statement, Balance Sheet, Cash Flow Monthly 15th following month 4. Summary Accounts Receivable Aging Monthly 15th following month 5. Summary Accounts Payable Aging Monthly 15th 6. Wholesaler Inventory Days on Hand, to include description of sale above 90 days stock level Monthly 15th following month 7. FDA Warning Letter update detailing key issues, action plan update, key tasks accomplished, tasks past due and copies of all FDA communications Monthly 15th following month 8. Lyophilization project update detailing progress on completion of project, comparison of expenditures and sales to budget Monthly 15th following month 9. Sales analysis by wholesaler, monthly, quarterly and annual Monthly 15th following month 10. Inventory item turn and margin analysis Quarterly 15th following month 11. New product development report detailing Monthly 15th progress in NDA and ANDA pipelines, to include minutes from the New Product Committee
EXHIBIT C LITIGATION AND ADMINISTRATIVE PROCEEDINGS 1. Apex Communications, Inc. v. Akorn Ophthalmics, Inc., Docket No. BER-L-506-00, Superior Court of New Jersey 2. Matters relating to 483 M Warning Letter issued to Akorn, Inc., by the Food and Drug Administration 3. Additional matters disclosed in Schedule 4.8 4. SEC investigation described in SEC letter dated March 27, 2002 5. DEA investigation described in United States Attorney, Central District of Illinois, letter dated March 6, 2002 SCHEDULE 4.2 EXECUTIVE OFFICES Same as Schedule 4.2 attached to the Credit Agreement SCHEDULE 4.8 LABOR MATTERS EMPLOYMENT AGREEMENTS Akorn Inc Tony Pera, President, COO Executed May 11, 2001 Terms of Employment Akorn (New Jersey), Inc. None CONSULTING AGREEMENTS Akorn Inc EJ Financial Enterprises, Inc. (affiliate) Akorn (New Jersey), Inc. None MANAGEMENT AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None COLLECTIVE BARGAINING AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None ORGANIZING ACTIVITY PENDING OR THREATENED Akorn Inc None Akorn (New Jersey), Inc. None NLRB REPRESENTATION PROCEEDINGS PENDING OR THREATENED Akorn Inc None Akorn (New Jersey), Inc. None EMPLOYMENT RELATED COMPLAINTS OR CHARGES PENDING OR THREATENED Akorn, Inc. E. Green Human Rights Age Discrimination Case #1998SA0338. This matter has no material dollar exposure. Sandra Mickle City of Decatur Human Relations Commission, Race Discrimination Charge # 01-0118. This matter has no material dollar exposure. Akorn (New Jersey), Inc. None SCHEDULE 4.9 VENTURES, SUBSIDIARIES AND AFFILIATES OUTSTANDING STOCK Same as Schedule 4.9 attached to the Credit Agreement with the following changes in the number of shares of outstanding stock: 1. Change 18,241,246 to 19,470,815 2. Change 687,032 to 618,159 3. Change 3,703,581 to 1,660,251 SCHEDULE 4.13 ERISA PLANS Same as Schedule 4.13 attached to the Credit Agreement SCHEDULE 4.15 INTELLECTUAL PROPERTY AND TRADE NAMES Akorn, Inc., and Akorn (New Jersey), Inc., conduct business under the names Akorn Ophthalmics and Akorn, Inc. Akorn, Inc. See Exhibit A attached hereto Exclusive, royalty-free license to make and have made Piroxicam (patents held by Pfizer) anywhere in the world for use and sale in prescription ophthalmic applications to be sold by prescription License Agreement from Johns Hopkins for methods and instrumentation related to two patents for treating macular degeneration. Akron (New Jersey), Inc. See Exhibit A attached hereto SCHEDULE 4.17 HAZARDOUS MATERIALS Same as Schedule 4.17 attached to the Credit Agreement SCHEDULE 4.18 INSURANCE POLICIES Akorn, Inc. and Subsidiaries Policy periods run to March 22, 2002 for Directors and Officers and to January 29, 2003 for all other policies. Premiums for the current policy periods have been paid in full. Commercial General Liability Hartford Fire Insurance Company Policy #42UUVUA559 General aggregate $2,000,000 Each occurrence $1,000,000 Excess Liability Hartford Fire Insurance Company Policy #42RHVUA8534 General aggregate $10,000,000 Each occurrence $10,000,000 Commercial Package Hartford Fire Insurance Company Policy #42UUVUA559 Property limits $61,767,471 Business interruption limits $10,000,000 Retention $5,000 per occurrence Commercial Automobile Hartford Fire Insurance Company Policy #42UUVUA559 Combined single limit $1,000,000 Deductible $250 comprehensive $500 collision Workers Compensation Hartford Casualty Insurance Company Policy #42WEVGU2114 Limits each accident $500,000 Directors and Officers Federal Insurance Company Liability Policy #8153-14-68 General aggregate $5,000,000 Retention $150,000 Product/Clinical Trial North American Capacity Insurance Company Liability Policy #BLG-0000-113-00 General aggregate $10,000,000 Each occurrence $10,000,000 Retention $50,000/claim; $250,000 aggregate Executive Protection Federal Insurance Company Policy #8153-14-29 Limit $1,000,000 Retention $2,500 SCHEDULE 4.19 DEPOSIT AND DISBURSEMENT ACCOUNTS Akorn, Inc. - ----------- The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 (312) 630-6000 Akorn operating account #86746 Controlled disbursements (A/P) 30286746 Payroll disbursements 30386746 Akorn lockbox 30186746 and 30486746 Health Insurance 30786746 Flexible Spending 31286746 401(k) 31386746 Blocked Account 1525034 Akorn, Inc. - ----------- American National Bank 120 South LaSalle Street Chicago, Illinois 60603-3400 (312) 661-5000 Akorn Merchant Account #5300107421 (Credit Card Account) Akorn (New Jersey), Inc. The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 (312) 630-6000 Controlled disbursements 30986746 Payroll 31186746 SCHEDULE 7.3 INDEBTEDNESS The Borrowers have the following outstanding Indebtedness: Akron, Inc. Mortgage loans #98021904 and 98021903 to Standard Mortgage Investors, secured by Decatur real properties; principal balance at December 31, 2001, $1,916,601.55, final payment due June 2008 Indebtedness of $5,000,000 to The John N. Kapoor Trust dated September 20, 1989 under Convertible Bridge Loan and Warrant Agreement dated July 12, 2001 Indebtedness of $3,250,000 to NeoPharm, Inc., under Promissory Note dated December 20, 2001 Akorn (New Jersey), Inc. None SCHEDULE 7.4(a) TRANSACTIONS WITH AFFILIATES Same as Schedule 7.4(a) attached to the Credit Agreement SCHEDULE 7.7 LIENS Akorn, Inc. 1. Operating lease #8197-001 with National City Leasing Corporation financing production equipment. Total acquisition cost of $3,811,028.93. Monthly rent of $52,577.71 through December 26, 2007. 2. See Schedule 7.3. Akron (New Jersey), Inc. None SCHEDULE 10.10 AUTHORIZED SIGNATURES Akorn, Inc. Antonio Pera, President and Chief Operating Officer John M. Kapoor, Chief Executive Officer Bernard J. Pothast, Vice President, Chief Financial Officer, Secretary and Treasurer Akron (New Jersey), Inc. Antonio Pera, President Bernard J. Pothast, Vice President, Secretary and Treasurer

                                                                   Exhibit 10.25

20115386.3
07-08-02

                                 FIFTH AMENDMENT

         THIS FIFTH AMENDMENT dated as of June 30, 2002, by and among AKORN,
INC., a Louisiana corporation ("Akorn"), AKORN (NEW JERSEY), INC., an Illinois
corporation "Akorn NJ") (Akorn and Akorn NJ being sometimes referred to herein
individually as a "Borrower" and collectively as the "Borrowers"), and THE
NORTHERN TRUST COMPANY, an Illinois banking corporation (the "Lender");

                                   WITNESSETH:

                  WHEREAS, the following documents (collectively, the
"Documents") were heretofore entered into by the parties indicated:

                  (i) Amended and Restated Credit Agreement dated as of
         September 15, 1999, among the Borrowers and the Lender (which, as
         amended by the documents referred to below, is referred to herein as
         the "Credit Agreement");

                  (ii) Amended and Restated Security Agreement dated as of
         December 29, 1997, from the Borrowers to the Lender;

                  (iii) Intellectual Property Security Agreement dated as of
         September 15, 1999, from Akorn to the Lender;

                  (iv) Junior Mortgage dated as of March 21, 2001, from Akorn to
         the Lender recorded in the Office of the Recorder of Deeds of Macon
         County, Illinois, on May 7, 2001, in Book 3056, Page 544;

                  (v) First Amendment dated as of December 28, 1999, among the
         Borrowers and the Lender;

                  (vi) Second Amendment and Waiver dated as of February 15,
         2001, among the Borrowers and the Lender;

                  (vii) Third Amendment and Waiver dated as of April 16, 2001
         (the "Third Amendment"), among the Borrowers and the Lender;

                  (viii) Note dated April 16, 2001, from the Borrowers to the
         Lender in the principal amount of $45,000,000;

                  (ix) Forbearance Agreement dated as of July 12, 2001 (the
         "Forbearance Agreement"), by and among the Borrowers and the Lender;

                  (x) Subordination and Standby Agreement dated as of July 12,
         2001, by The John N. Kapoor Trust dated September 20, 1989, in favor of
         the Lender and containing the Acknowledgment of the Borrowers;


                  (xi) Waiver letter from the Lender to the Borrowers dated
         December 10, 2001, and accepted and agreed to by the Borrowers,
         relating to a loan to Akorn by NeoPharm, Inc., a Delaware corporation
         ("NeoPharm");


                  (xii) Subordination, Standby and Intercreditor Agreement dated
         as of December 20, 2001, between NeoPharm and the Lender and containing
         the Acknowledgment of Subordination by the Borrowers;

                  (xiii) Amendment to Forbearance Agreement dated as of December
         20, 2001, by and among the Borrowers and the Lender;

                  (xiv) Notice dated January 30, 2002, from the Lender to the
         Borrowers, given pursuant to the Amendment to Forbearance Agreement
         referred to in (xiii) above;

                  (xv) Second Amendment to Forbearance Agreement dated as of
         February 21, 2002, by and among the Borrowers and the Lender; and

                  (xvi) Fourth Amendment dated as of January 1, 2002 (the
         "Fourth Amendment"), by and among the Borrowers and the Lender; and

                  WHEREAS, the parties desire to make certain modifications and
amendments to the Documents, as previously modified and amended, as provided for
herein;

                  NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

                  Section 1. Recitals Part of Agreement; References to Documents
Defined Terms. (a) The foregoing recitals are hereby incorporated into and made
a part of this Agreement.

                  (b) Except as otherwise stated herein, all references in this
Agreement to any one or more of the Documents shall be deemed to include the
previous modifications and amendments to the Documents provided for in the
Documents described above, whether or not express reference is made to such
previous modifications and amendments.

                  (c) The parties acknowledge that, by Section 1(c) of the
Fourth Amendment, the following new defined terms were added in alphabetical
order in Section 1.1 of the Credit Agreement:

                           "DEA" means the Drug Enforcement Administration of
                  the United States Department of Justice.

                           "SEC" means the United States Securities and Exchange
                  Commission.

                  (d) All capitalized terms used and not otherwise defined in
this Agreement shall have the same meanings as the defined terms contained in
the Credit Agreement, including the defined terms that were added to the Credit
Agreement by the Fourth Amendment. Unless otherwise defined or the context
otherwise, all financial and accounting terms used in this Agreement shall be
defined in accordance with GAAP.


                                      -2-

                  Section 2. Extension of Termination Date. The parties
acknowledge that the date appearing in the definition of the term "Termination
Date" in Section 1.1 of the Credit Agreement, as previously modified and
amended, is "June 30, 2002". The definition of the term "Termination Date" in
Section 1.1 of the Credit Agreement, as previously modified and amended, is
hereby further modified and amended by changing the date appearing therein from
"June 30, 2002" to "July 31, 2002". The Lender agrees that such extension of the
Termination Date supersedes the requirement in Section 5(c) of the Forbearance
Agreement that the Borrowers pay all principal, interest and other amounts due
under the Documents on the last day of the Forbearance Period under the
Forbearance Agreement.

                  Section 3. Commitment Terminated. The parties acknowledge that
pursuant to the terms of Section 4 of the Forbearance Agreement, the Commitment
of the Lender to make Advances and to issue Letters of Credit under the Credit
Agreement is not in effect and shall not be in effect from and after the date of
this Agreement, and that the Lender is not and shall not be obligated to make,
and that the Borrowers do not and shall not have the right to receive, any
additional Advances or Letters of Credit under the Credit Agreement from and
after the date of this Agreement.

                  Section 4. Interest Rate. The parties acknowledge that
pursuant to the terms of the Credit Agreement as modified and amended by the
Third Amendment, absent the occurrence and continuance of an Event of Default
under the Documents and notice, the interest rate on the Loans is the Prime
Rate, which is defined as that rate per year announced from time to time by the
Lender called its prime rate, which rate at any time may not be the lowest rate
charged by the Lender, plus 3% per annum.

                  Section 5. Mandatory Principal Payments. (a) The parties
acknowledge that the principal amount of the Loans outstanding on the date of
this Agreement is $39,200,000.

                  (b) Section 2.3 of the Credit Agreement, as previously
modified and amended, is hereby amended and restated in its entirety to read as
follows:

                           2.3 Voluntary and Mandatory Prepayments.

                           (a) Voluntary Prepayments. 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
                  no prepayment fee, premium or penalty shall be payable in
                  connection with any such voluntary prepayment.

                           (b) Mandatory Prepayments.

                                    (i) [Intentionally Omitted]

                                    (ii) [Intentionally Omitted]

                                    (iii) Borrowers shall immediately pay all of
                           the principal of and interest on the Loans if any of
                           the following shall occur:

                                             (A) At any time after January 1,
                                    2002, the FDA shall file any judicial or
                                    administrative proceeding or take any
                                    administrative action that results in a
                                    partial or total suspension of production or
                                    shipment of products for the account of
                                    either of


                                      -3-

                                    Borrowers or under any contract under which
                                    either of Borrowers manufactures product for
                                    any third party.

                                             (B) Borrowers at any time rescind
                                    any written request to the FDA to make a
                                    re-inspection relating to the 483 M Warning
                                    Letter issued by the FDA.

                                             (C) At any time after January 1,
                                    2002, Borrowers fail to make a written
                                    response, within 10 Business Days, to the
                                    FDA, with a copy to the Lender, to any
                                    written communication received from the FDA
                                    after January 1, 2002, that raises any
                                    deficiencies.

                                             (D) At any time after January 1,
                                    2002, one or more fines, penalties or other
                                    monetary obligation due and payable to any
                                    Governmental Authority is assessed against
                                    Borrowers, or either of them, and the
                                    aggregate amount thereof is more than
                                    $250,000.

                                             (E) At any time after January 1,
                                    2002, the stock of Akorn is neither listed
                                    on any securities exchange or the Nasdaq
                                    National Market nor traded on the Pink
                                    Sheets.

                                             (F) At any time after January 1,
                                    2002, there is any restatement of or
                                    adjustment to the operating results of
                                    Borrowers for any one or more Fiscal Years
                                    ended on or prior to December 31, 2001, and
                                    the aggregate amount of all such
                                    restatements and adjustments is more than
                                    $27,000,000.

                                             (G) [Intentionally Omitted]

                                             (H) [Intentionally Omitted]

                                             (I) At any time after April 12,
                                    2002, any materially adverse action is taken
                                    by the FDA, the SEC, the DEA, or any other
                                    Governmental Authority, or any state or
                                    federal court, with respect to either of
                                    Borrowers, based on an alleged failure to
                                    comply with laws or regulations, including,
                                    without limitation, any ban on sale, recall
                                    or seizure of products, any total or partial
                                    suspension of production, or the entry of
                                    any restraining order or injunction against
                                    violations of the law, or the filing of any
                                    judicial or administrative proceeding
                                    seeking any of the foregoing; provided,
                                    however, that the foregoing provisions of
                                    this subparagraph (I) shall not apply to a
                                    consent decree relating to SEC or DEA
                                    matters, or the judicial proceeding in which
                                    it is entered, if such consent decree does
                                    not result in the occurrence of any of the
                                    events described in subparagraphs (A)
                                    through (H) above.

                  Section 6. Collection and Deposit of Cash Receipts. (a)
Notwithstanding the provisions of Section 6(a) of the Forbearance Agreement, the
authority granted to the Borrowers by the Lender in Section 6(a) of the
Forbearance Agreement to collect their accounts receivable shall not terminate
at the end of the Forbearance Period, and such authority shall continue until


                                      -4-

the Termination Date or the earlier occurrence of any Event of Default. This
paragraph (a) restates the provisions of Section 6(a) of the Fourth Amendment.

                  (b) The provisions of Sections 6(b), (c), (d) and (e) of the
Forbearance Agreement (which relate to, among other things, the requirement that
the Borrowers deposit cash receipts in an account at the Lender and have their
cash and investments on deposit in accounts maintained with the Lender) shall
continue to apply from and after the date of this Agreement, and without
limitation on the generality of such provisions, those provision shall apply
with respect to the proceeds of any offering of securities by either of the
Borrowers; provided, however, that unless and until an Event of Default has
occurred and is continuing, the Lender shall not exercise the rights referred to
in Section 6(c) of the Credit Agreement or the right to apply payments or
proceeds on deposit in the lockbox account referred to in Section 6(d) of the
Credit Agreement to the Obligations of the Borrowers under the Documents. The
Credit Agreement is hereby modified and amended to incorporate the provisions of
this paragraph. This paragraph (b) restates the provisions of Section 6(b) of
the Fourth Amendment.

                  Section 7. Fees and Expenses. The provisions of Section 8 of
the Forbearance Agreement shall continue to apply from and after the date of
this Agreement and the Credit Agreement is hereby modified and amended to
incorporate the provisions of this Section. This Section restates the provisions
of Section 7 of the Fourth Amendment.

                  Section 8. Lender's Consultant and Personnel. The Borrowers
understand that the Lender or its counsel may from time to time engage
consultants in connection with the Loans and that the Lender's collateral
evaluation personnel will from time to time, and with such frequency as the
Lender deems appropriate, make visits to the Borrowers' places of business to
inspect the tangible collateral for the Loan, review the books and records of
the Borrowers and confer with the Borrowers' personnel. The Borrowers shall
cooperate with such consultants and collateral evaluation personnel and allow
them to have access to the Borrowers' books and records and personnel and to the
collateral for the Loan. The Borrowers acknowledge that the fees of such
consultant shall be reimbursable to the Lender by the Borrowers in accordance
with Section 10.4 of the Credit Agreement. The provisions of this Section are
without limitation on the provisions of Section 2.11 of the Credit Agreement.
The foregoing provisions of this Section supersede and replace the provisions of
Section 8 of the Fourth Amendment and the Credit Agreement is hereby modified
and amended to incorporate the foregoing provisions of this Section.

                  Section 9. Indebtedness. (a) The provisions of Sections 7(b),
(c) and (d) of the Forbearance Agreement (which relate to matters concerning
subordinated loan transactions) shall continue to apply from and after the date
of this Agreement. This paragraph (a) restates the provisions of Section 9(a) of
the Fourth Amendment.

                  (b) The parties acknowledge that, by Section 9(b) of the
Fourth Amendment, Section 7.3 of the Credit Agreement was modified and amended
by adding the following sentence at the end thereof:

                  In addition to the foregoing restrictions contained in this
                  Section, from and after January 1, 2002, Borrowers shall not
                  incur any additional Indebtedness other than (i) obligations
                  to trade creditors incurred in the ordinary course of
                  business, and (ii) obligations to vendors in connection with
                  capital expenditures that do not violate the conditions
                  provided for in Section 7.18 of this Agreement.


                                      -5-

                  Section 10. Amendments to Section 7.10 of Credit Agreement.
The parties acknowledge that, by Section 10 of the Fourth Amendment, Section
7.10 of the Credit Agreement, as previously modified and amended, was modified
and amended by deleting clauses (a) through (f) thereof. The parties acknowledge
that, by Sections 11 and 12 of the Fourth Amendment, new clauses (g) and (h)
were added to Section 7.10 of the Credit Agreement, which new clauses (g) is
restated in Sections 11 of this Agreement, and which new clause (h) is modified
and amended in Section 12 of this Agreement.

                  Section 11. Inventory Matters. (a) The provisions of Section
10 of the Forbearance Agreement shall no longer apply from and after the date of
this Agreement. This paragraph (a) restates the provisions of Section 11(a) of
the Fourth Amendment.

                  (b) The parties acknowledge that, by Section 11(b) of the
Fourth Amendment, the following new clause (g) was added to Section 7.10 of the
Credit Agreement:

                           (g) Commencing with the three-month period ended
                  January 31, 2002, for each period of three calendar months,
                  Borrowers' returns of inventory for credit shall not exceed
                  $750,000.

                  Section 12. Receipts. (a) The parties acknowledge that, by
Section 12(a) of the Fourth Amendment, the following new defined terms were
added in alphabetical order in Section 1.1 of the Credit Agreement:

                           "Gross Receipts" shall mean, for any period, the
                  amount of the gross proceeds received by Borrowers during such
                  period from sales of merchandise, including collections of
                  accounts receivable, all determined on a cash basis.

                           "Net Receipts" shall mean, for any period, an amount
                  equal to (i) the amount of Gross Receipts for such period,
                  minus (ii) the amount of all of the cash expenditures of
                  Borrowers during such period, excluding only capital
                  expenditures that are permitted under the provisions of
                  Section 7.18 of this Agreement; all determined on a cash
                  basis.

                  (b) The parties acknowledge that, by Section 12(b) of the
Fourth Amendment, a new clause (h) was added to Section 7.10 of the Credit
Agreement:, which new clause (h) is hereby modified and amended in its entirety
to read as follows:

                           (h) For the periods commencing on January 1, 2002,
                  and ending on the last day of each of the months set forth in
                  Column A below, the cumulative Gross Receipts and cumulative
                  Net Receipts of Borrowers shall be not less than the amount
                  set forth beside such month in Column B and Column C below,
                  respectively:

Column A Column B Column C -------- -------- -------- Cumulative Gross Cumulative Net Receipts For Period Receipts For Period January 1, 2002, January 1, 2002, through Last Day of through Last Day of Month, 2002 Month Not Less Than Month Not Less Than ----------- ------------------- ------------------- March $11,500,000 $0 April $15,500,000 $430,000 May $19,400,000 $525,000 June $23,300,000 $1,115,000
-6- Borrowers acknowledge and agree that the amounts provided for in this clause have been established at levels that are substantially lower than Borrowers' actual expectations, and that any failure to satisfy the foregoing condition of this clause shall be deemed to be material, regardless of the amount of such failure. Section 13. Dividends. From and after the date of this Agreement, the Borrowers shall not pay any cash dividend on any of their capital stock, and Section 7.14 of the Credit Agreement is hereby modified and amended accordingly. This Section restates the provisions of Section 13 of the Fourth Amendment. Section 14. Capital Expenditures. The Borrowers together in the aggregate shall not make capital expenditures of more than $4,976,000 during the first seven months of the calendar year 2002, which capital expenditures shall consist only of the following: (i) Capital expenditures in an aggregate amount not exceeding $1,160,000 made at Akorn's Decatur, Illinois, place of business for the purpose of complying with requirements of the FDA. (ii) Other capital expenditures in an aggregate amount not exceeding $215,000 made at Akorn's Decatur, Illinois, place of business (iii) Capital expenditures in connection with Akorn's lyophilization project, in an aggregate amount not exceeding $2,773,000, paid from the proceeds of the loan to Akorn from NeoPharm. (iv) Up to $600,000 for interest required to be capitalized under GAAP on borrowings to finance Akorn's lyophilization project. (v) Other capital expenditures in an aggregate amount not exceeding $180,000 made in accordance with the capital expenditures budget previously furnished to the Lender by the Borrowers. (vi) Other capital expenditures in an aggregate amount not exceeding $87,000. The foregoing provisions of this Section supersede and replace the provisions of Section 14 of the Fourth Amendment and Section 7.18 of the Credit Agreement is hereby modified and amended to include the foregoing provisions of this Section. Section 15. Regulatory and Stock Listing Matters. The provision that was added at the end of Section 6.14 of the Credit Agreement by the Fourth Amendment is hereby modified and amended in its entirety to read as follows: Borrowers shall provide the Lender with copies of (i) any communications to or from the FDA (whether relating to the 483 M Warning Letter received by Akorn from the FDA, or relating to any other matters), the SEC, the DEA or any other Governmental Authority, or any United States attorney, concerning any investigation or inquiry, and shall inform the Lender of the substance of any oral communication with the FDA, the SEC, the DEA or any other Governmental Authority, or any United States attorney, concerning any of such matters, and (ii) any communications to or from the The Nasdaq Stock Market, Inc., or any other securities exchange concerning the de-listing or listing of Akorn's stock; in each -7- case not later than the first Business Day after the date of any such communication. Section 16. Reports and Notices. From and after the date of this Agreement, the Borrowers shall provide the Lender with the Financial Statements, reports and notices provided for in the following paragraphs of this Section, and Section 5.1 of the Credit Agreement, as previously modified and amended, is hereby modified and amended accordingly: (a) Quarterly Reports of Borrowers. Within forty-five (45) days after the end of each Fiscal Quarter of Borrowers, Borrowers shall deliver to Lender a copy of an unaudited financial statement of Borrowers 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, Borrowers shall deliver to Lender 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 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; provided, however, that in the case of Fiscal Year 2001, if the annual audit report has not been issued within such time period, Borrowers shall deliver unaudited financial statements within such time period and shall deliver the annual audit report within five days after it is issued. (c) Certificates. Contemporaneously with the furnishing of a copy of each annual audit report and of each quarterly statement provided herein, Borrowers shall deliver to Lender 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 Credit Agreement. (d) Notice of Default, Litigation and ERISA Matters. Immediately upon learning of the occurrence of any of the following, Borrowers shall deliver to Lender 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 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. Borrowers shall deliver to Lender such other information and documents, financial or otherwise, in the addition to the information and documents specifically referred to herein as Lender may from time to time request. -8- (f) Reports of Akorn. (i) Within forty-five (45) days after the end of each fiscal quarter of Akorn, Borrowers shall deliver to Lender 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. (g) Monthly Reports. Within fifteen (15) Business Days after the end of each month, beginning with the month ending December 31, 2001, Borrowers shall deliver to Lender a copy of an unaudited financial statement of the Borrowers for such month, in form and substance satisfactory to the Lender, prepared on a basis consistent with the audited financial statements of the Borrowers previously furnished to the Lender and, if required by the Lender, prepared on a consolidating and consolidated basis, signed by an authorized officer of Akorn and consisting of at least a balance sheet as at the end of such month and a statement of earnings and cash flow for such month. (h) Reports Relating to Receipts. The Borrowers shall deliver the following reports to the Lender relating to Gross Receipts and Net Receipts: (i) On or before Wednesday of each week, the Borrowers shall deliver to the Lender a report of actual Gross Receipts and Net Receipts for the one-week period ending on the immediately preceding Friday, and forecast Gross Receipts and Net Receipts for the next 12 weeks, prepared in the format of Exhibit A attached to this Agreement and signed by officers of the Borrowers. (ii) Within two Business Days after the end of each calendar month commencing with the month of March, 2002, the Borrowers shall deliver to the Lender a report of Gross Receipts and Net Receipts for such month and for the period commencing January 1, 2002, and ending on the last day of such month, which reports shall be prepared in reasonable detail and in a format acceptable to the Lender and shall be signed by officers of the Borrowers. (i) Monitoring Reports. The Borrowers shall deliver to the Lender each of the monitoring reports specified in Exhibit B attached to this Agreement, with the frequency and by the dates specified in Exhibit B, each of which reports shall be prepared in reasonable detail and in a format acceptable to the Lender and shall be signed by officers of the Borrowers. (j) Status Reports. On or before the 15th and the last day of each month commencing April 30,2002, the Borrowers shall deliver to the Lenders (i) a status report concerning any investigation or inquiry then in progress by the FDA, the SEC, the DEA or any other Governmental Authority, describing the current status of such investigation or inquiry, the schedule for future action and any significant events that have occurred since the date of the last such report and (ii) a status report concerning the listing of Akorn's stock on the Nasdaq National Market or any other securities exchange. All such reports shall be prepared in such detail and form, and shall contain such information, as the Lender shall from time to time require. The foregoing provisions of this Section supersede and replace the provisions of Section 16 of the Fourth Amendment. -9- Section 17. Security Interests. The parties acknowledge that, by Section 17 of the Fourth Amendment, the Credit Agreement was modified and amended by adding the following new Section 6.17 thereto: 6.17. Security Interests. Without limitation on any other provisions of the Loan Documents, Borrowers shall cooperate with Lender by executing and delivering from time to time such documents as Lender shall deem necessary or advisable in order to conform to the provisions of Revised Article 9 of the Uniform Commercial Code and to perfect Lender's security interest in any intellectual property of Borrowers in addition to that described in the Security Agreement. Section 18. [Intentionally Omitted] Section 19. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows: (a) Akorn is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana and duly qualified to do business and in good standing in the States of Illinois and California, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (b) Akorn NJ is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois and duly qualified to do business and in good standing in the State of New Jersey, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (c) This Agreement and the Documents have been duly authorized, executed and delivered by the Borrowers and constitute valid and legally binding obligations enforceable against the Borrowers in accordance with their terms, subject to bankruptcy, insolvency and other laws of general application relating to the enforcement of creditors rights. The execution and delivery of this Agreement and the Documents and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the articles of incorporation or bylaws of either of the Borrowers, or any agreement or other instrument to which either of the Borrowers are party, or by which either of them are bound, or to which their properties are subject, or any existing law, administrative regulation, court order or consent decree to which either of them are subject. (d) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement or the Documents, or questioning the validity thereof, or in any way contesting the existence or powers of either of the Borrowers, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement or the Documents. (e) Except as disclosed in Exhibit C attached to this Agreement, there is no litigation or administrative proceeding pending or threatened against either of the Borrowers. -10- (f) Schedules 4.2, 4.8, 4.9, 4.13, 4.15, 4.17, 4.18, 4.19, 7.3, 7.4(a), 7.7 and 10.10 attached to this Agreement contain accurate and complete current updates of the information contained in the corresponding Schedules attached to the Credit Agreement. Section 20. Time of Essence. Time is of the essence of this Agreement and each of the provisions hereof. Section 21. Joint and Several Obligation. The obligations of the Borrowers under this Agreement shall be joint and several. Section 22. Release of Lender. To the extent permitted by applicable law, each of the Borrowers hereby releases and forever discharges the Lender and its past, present and future parent corporations, subsidiaries, affiliates and divisions, and their respective past, present and future shareholders, directors, officers, employees, attorneys, agents, investigators and insurers, and the heirs, administrators, executors, legal representatives, trustees, successors and assigns of each of the foregoing, of and from any and all claims of any kind or character whatsoever, whether now known or hereafter discovered, absolute or contingent, direct or indirect, arising out of any act, event or occurrence of any sort whatsoever occurring on or prior to the date of this Agreement; provided, however, that the Borrowers do not hereby release the right to performance by the Lender of its obligations under the Documents and this Agreement arising on and after the date of this Agreement. The Borrowers shall forever refrain and forbear from commencing or prosecuting any lawsuit or other proceeding against the Lender based upon, arising out of or connected with any of the claims released in this Agreement. Section 23. Documents to Remain In Effect; Confirmation of Obligations; References. Each of the Documents shall remain in full force and effect as originally executed and delivered by the parties, as previously modified and amended by one or more of the other Documents and as modified and amended by this Agreement. In order to induce the Lender to enter into this Agreement, the Borrowers hereby (i) confirm and reaffirm all of their obligations under each of the Documents, as previously modified and amended by one or more of the other Documents and modified and amended by this Agreement; (ii) acknowledge and agree that the Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree that the Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents, other than as expressly provided in the Documents; and (iv) acknowledge that they do not have any defense, set-off or counterclaim to the payment or performance of any of their obligations under the Documents, as previously modified and amended by one or more of the other Documents and modified and amended by this Agreement. Section 24. Confirmation of Certifications, Representations and Warranties. In order to induce the Lender to enter into this Agreement, the Borrowers hereby certify, represent and warrant to the Lender that, except as otherwise disclosed to the Lender in writing on or prior to the date hereof, including in this Agreement and in the Exhibits and Schedules attached hereto and/or in documents submitted to the Lender prior to the date hereof (including, but not limited to, any and all financial statements and reports, budgets, statements of cash flow and governmental reports and filings) (collectively referred to herein as "Disclosures"), all certifications, representations and warranties contained in the Documents and in all certificates heretofore delivered to the Lender are true and correct as of the date hereof in all material -11- respects, and, subject to such Disclosures, all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement. Section 25. Entire Agreement. This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. Section 26. Successors. This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives. Section 27. Severability. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 28. Amendments, Changes and Modifications. This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto. Section 29. Construction. (a) The words "hereof," "herein," and "hereunder," and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used. (b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed. (c) The headings of this Agreement are for convenience only and shall not define or limit the provisions hereof. (d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders. (e) Each party to this Agreement and legal counsel for each party have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement. Section 30. Execution of Counterparts. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 31. Governing Law. This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement. [SIGNATURE PAGE(S) AND EXHIBIT(S), IF ANY, FOLLOW THIS PAGE] -12- IN WITNESS WHEREOF, the parties have executed this instrument as of the date first above written. AKORN, INC. By____________________________________________ Title: AKORN (NEW JERSEY), INC. By____________________________________________ Title: THE NORTHERN TRUST COMPANY By____________________________________________ Vice President -13- EXHIBIT A FORMAT OF GROSS RECEIPTS AND NET RECEIPTS REPORT EXHIBIT B MONITORING REPORTS
Report Frequency Due By 1. Accounts Receivable Roll Forward Weekly Following Wednesday 2. Accounts Payable Roll Forward Weekly Following Wednesday 3. Income Statement, Balance Sheet, Cash Flow Monthly 15th following month 4. Summary Accounts Receivable Aging Monthly 15th following month 5. Summary Accounts Payable Aging Monthly 15th 6. Wholesaler Inventory Days on Hand, to include description of sale above 90 days stock level Monthly 15th following month 7. FDA Warning Letter update detailing key issues, action plan update, key tasks accomplished, tasks past due and copies of all FDA communications Monthly 15th following month 8. Lyophilization project update detailing progress on completion of project, comparison of expenditures and sales to budget Monthly 15th following month 9. Sales analysis by wholesaler, monthly, quarterly and annual Monthly 15th following month 10. Inventory item turn and margin analysis Quarterly 15th following month 11. New product development report detailing progress in NDA and ANDA pipelines, to include minutes from the New Product Committee Monthly 15th
EXHIBIT C LITIGATION AND ADMINISTRATIVE PROCEEDINGS 1. [Intentionally Omitted] 2. Matters relating to 483 M Warning Letter issued to Akorn, Inc., by the Food and Drug Administration 3. Additional matters disclosed in Schedule 4.8 4. SEC investigation described in SEC letter dated March 27, 2002 5. DEA investigation described in United States Attorney, Central District of Illinois, letter dated March 6, 2002 SCHEDULE 4.2 EXECUTIVE OFFICES Same as Schedule 4.2 attached to the Credit Agreement SCHEDULE 4.8 LABOR MATTERS EMPLOYMENT AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None CONSULTING AGREEMENTS Akorn Inc EJ Financial Enterprises, Inc. (affiliate) Akorn (New Jersey), Inc. None MANAGEMENT AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None COLLECTIVE BARGAINING AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None ORGANIZING ACTIVITY PENDING OR THREATENED Akorn Inc None Akorn (New Jersey), Inc. None NLRB REPRESENTATION PROCEEDINGS PENDING OR THREATENED Akorn Inc None Akorn (New Jersey), Inc. None
EMPLOYMENT RELATED COMPLAINTS OR CHARGES PENDING OR THREATENED Akorn, Inc. None Akorn (New Jersey), Inc. None
SCHEDULE 4.9 VENTURES, SUBSIDIARIES AND AFFILIATES OUTSTANDING STOCK Same as Schedule 4.9 attached to the Credit Agreement with the following changes in the number of shares of outstanding stock: 1. Change 18,241,246 to 19,578,573 2. Change 687,032 to 606,901 3. Change 3,703,581 to 1,093,477 SCHEDULE 4.13 ERISA PLANS Same as Schedule 4.13 attached to the Credit Agreement SCHEDULE 4.15 INTELLECTUAL PROPERTY AND TRADE NAMES Akorn, Inc., and Akorn (New Jersey), Inc., conduct business under the names Akorn Ophthalmics and Akorn, Inc. Akorn, Inc. See Exhibit A attached hereto Exclusive, royalty-free license to make and have made Piroxicam (patents held by Pfizer) anywhere in the world for use and sale in prescription ophthalmic applications to be sold by prescription License Agreement from Johns Hopkins for methods and instrumentation related to two patents for treating macular degeneration. Akron (New Jersey), Inc. See Exhibit A attached hereto
SCHEDULE 4.17 HAZARDOUS MATERIALS Same as Schedule 4.17 attached to the Credit Agreement SCHEDULE 4.18 INSURANCE POLICIES Akorn, Inc. and Subsidiaries Policy periods run to April 24, 2003 for Directors and Officers and to January 29, 2003 for all other policies. Premiums for the current policy periods have been paid in full. Commercial General Liability Hartford Fire Insurance Company Policy #42UUVUA559 General aggregate $2,000,000 Each occurrence $1,000,000 Excess Liability Hartford Fire Insurance Company Policy #42RHVUA8534 General aggregate $10,000,000 Each occurrence $10,000,000 Commercial Package Hartford Fire Insurance Company Policy #42UUVUA559 Property limits $61,767,471 Business interruption limits $10,000,000 Retention $5,000 per occurrence Commercial Automobile Hartford Fire Insurance Company Policy #42UUVUA559 Combined single limit $1,000,000 Deductible $250 comprehensive $500 collision Workers Compensation Hartford Casualty Insurance Company Policy #42WEVGU2114 Limits each accident $500,000 Directors and Officers Greenwich Insurance Company Liability Policy #ELU-83244-02 General aggregate $5,000,000 Retention $350,000 Product/Clinical Trial North American Capacity Insurance Company Liability Policy #BLG-0000-113-00 General aggregate $10,000,000 Each occurrence $10,000,000 Retention $50,000/claim; $250,000 aggregate
Executive Protection Federal Insurance Company Policy #8153-14-29 Limit $1,000,000 Retention $2,500
SCHEDULE 4.19 DEPOSIT AND DISBURSEMENT ACCOUNTS Akorn, Inc. The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 (312) 630-6000 Akorn operating account #86746 Controlled disbursements (A/P) 30286746 Payroll disbursements 30386746 Akorn lockbox 30186746 and 30486746 Health Insurance 30786746 Flexible Spending 31286746 401(k) 31386746 Blocked Account 1525034 Akorn, Inc. American National Bank 120 South LaSalle Street Chicago, Illinois 60603-3400 (312) 661-5000 Akorn Merchant Account #5300107421 (Credit Card Account) Akorn (New Jersey), Inc. The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 (312) 630-6000 Controlled disbursements 30986746 Payroll 31186746 SCHEDULE 7.3 INDEBTEDNESS The Borrowers have the following outstanding Indebtedness: Akron, Inc. Mortgage loans #98021904 and 98021903 to Standard Mortgage Investors, secured by Decatur real properties; principal balance at June 1, 2002, $1,796,960.64, final payment due June 2008 Indebtedness of $5,000,000 to The John N. Kapoor Trust dated September 20, 1989 under Convertible Bridge Loan and Warrant Agreement dated July 12, 2001 Indebtedness of $3,250,000 to NeoPharm, Inc., under Promissory Note dated December 20, 2001 Akorn (New Jersey), Inc. None SCHEDULE 7.4(a) TRANSACTIONS WITH AFFILIATES Same as Schedule 7.4(a) attached to the Credit Agreement SCHEDULE 7.7 LIENS Akorn, Inc. 1. Operating lease #8197-001 with National City Leasing Corporation financing production equipment. Total acquisition cost of $3,811,028.93. Monthly rent of $52,577.71 through December 26, 2007. 2. See Schedule 7.3. Akron (New Jersey), Inc. None SCHEDULE 10.10 AUTHORIZED SIGNATURES Akorn, Inc. John M. Kapoor, Chief Executive Officer Bernard J. Pothast, Vice President, Chief Financial Officer, Secretary and Treasurer Akron (New Jersey), Inc. John M. Kapoor, Chief Executive Officer Bernard J. Pothast, Vice President, Secretary and Treasurer

                                                                   Exhibit 10.26


                                 SIXTH AMENDMENT

                  THIS SIXTH AMENDMENT dated as of July 31, 2002, by and among
AKORN, INC., a Louisiana corporation ("Akorn"), AKORN (NEW JERSEY), INC., an
Illinois corporation ("Akorn NJ") (Akorn and Akorn NJ being sometimes referred
to herein individually as a "Borrower" and collectively as the "Borrowers"), and
THE NORTHERN TRUST COMPANY, an Illinois banking corporation (the "Lender");

                                   WITNESSETH:

                  WHEREAS, the following documents (collectively, the
"Documents") were heretofore entered into by the parties indicated:

                  (i)      Amended and Restated Credit Agreement dated as of
         September 15, 1999, among the Borrowers and the Lender (which, as
         amended by the documents referred to below, is referred to herein as
         the "Credit Agreement");

                  (ii)     Amended and Restated Security Agreement dated as of
         December 29, 1997, from the Borrowers to the Lender;

                  (iii)    Intellectual Property Security Agreement dated as of
         September 15, 1999, from Akorn to the Lender;

                  (iv)     Junior Mortgage dated as of March 21, 2001, from
         Akorn to the Lender recorded in the Office of the Recorder of Deeds of
         Macon County, Illinois, on May 7, 2001, in Book 3056, Page 544;

                  (v)      First Amendment dated as of December 28, 1999, among
         the Borrowers and the Lender;

                  (vi)     Second Amendment and Waiver dated as of February 15,
         2001, among the Borrowers and the Lender;

                  (vii)    Third Amendment and Waiver dated as of April 16, 2001
         (the "Third Amendment"), among the Borrowers and the Lender;

                  (viii)   Note dated April 16, 2001, from the Borrowers to the
         Lender in the principal amount of $45,000,000;

                  (ix)     Forbearance Agreement dated as of July 12, 2001 (the
         "Forbearance Agreement"), by and among the Borrowers and the Lender;

                  (x)      Subordination and Standby Agreement dated as of July
         12, 2001, by The John N. Kapoor Trust dated September 20, 1989, in
         favor of the Lender and containing the Acknowledgment of the Borrowers;

                  (xi)     Waiver letter from the Lender to the Borrowers dated
         December 10, 2001, and accepted and agreed to by the Borrowers,
         relating to a loan to Akorn by NeoPharm, Inc., a Delaware corporation
         ("NeoPharm");

                  (xii)    Subordination, Standby and Intercreditor Agreement
         dated as of December 20, 2001, between NeoPharm and the Lender and
         containing the Acknowledgment of Subordination by the Borrowers;

                  (xiii)   Amendment to Forbearance Agreement dated as of
         December 20, 2001, by and among the Borrowers and the Lender;

                  (xiv)    Notice dated January 30, 2002, from the Lender to the
         Borrowers, given pursuant to the Amendment to Forbearance Agreement
         referred to in (xiii) above;

                  (xv)     Second Amendment to Forbearance Agreement dated as of
         February 21, 2002, by and among the Borrowers and the Lender;

                  (xvi)    Fourth Amendment dated as of January 1, 2002 (the
         "Fourth Amendment"), by and among the Borrowers and the Lender; and

                  (xvii)   Fifth Amendment dated as of June 30, 2002 (the "Fifth
         Amendment"), by and among the Borrowers and the Lender; and

                  WHEREAS, the parties desire to make certain modifications and
amendments to the Documents, as previously modified and amended, as provided for
herein;

                  NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

                  Section 1. Recitals Part of Agreement; References to Documents
Defined Terms. (a) The foregoing recitals are hereby incorporated into and made
a part of this Agreement.

                  (b) Except as otherwise stated herein, all references in this
Agreement to any one or more of the Documents shall be deemed to include the
previous modifications and amendments to the Documents provided for in the
Documents described above, whether or not express reference is made to such
previous modifications and amendments.

                  (c) The parties acknowledge that, by Section 1(c) of the
Fourth Amendment, the following new defined terms were added in alphabetical
order in Section 1.1 of the Credit Agreement:

                  "DEA" means the Drug Enforcement Administration of the United
         States Department of Justice.

                  "SEC" means the United States Securities and Exchange
         Commission.

                  (d) All capitalized terms used and not otherwise defined in
this Agreement shall have the same meanings as the defined terms contained in
the Credit Agreement, including the defined terms that were added to the Credit
Agreement by the Fourth Amendment. Unless


                                      -2-

otherwise defined or the context otherwise, all financial and accounting terms
used in this Agreement shall be defined in accordance with GAAP.

                  Section 2. Extension of Termination Date. The parties
acknowledge that the date appearing in the definition of the term "Termination
Date" in Section 1.1 of the Credit Agreement, as previously modified and
amended, is "July 31, 2002". The definition of the term "Termination Date" in
Section 1.1 of the Credit Agreement, as previously modified and amended, is
hereby further modified and amended by changing the date appearing therein from
"July 31, 2002" to "August 31, 2002". The Lender agrees that such extension of
the Termination Date supersedes the requirement in Section 5(c) of the
Forbearance Agreement that the Borrowers pay all principal, interest and other
amounts due under the Documents on the last day of the Forbearance Period under
the Forbearance Agreement.

                  Section 3. Commitment Terminated. The parties acknowledge that
pursuant to the terms of Section 4 of the Forbearance Agreement, the Commitment
of the Lender to make Advances and to issue Letters of Credit under the Credit
Agreement is not in effect and shall not be in effect from and after the date of
this Agreement, and that the Lender is not and shall not be obligated to make,
and that the Borrowers do not and shall not have the right to receive, any
additional Advances or Letters of Credit under the Credit Agreement from and
after the date of this Agreement.

                  Section 4. Interest Rate. The parties acknowledge that
pursuant to the terms of the Credit Agreement as modified and amended by the
Third Amendment, absent the occurrence and continuance of an Event of Default
under the Documents and notice, the interest rate on the Loans is the Prime
Rate, which is defined as that rate per year announced from time to time by the
Lender called its prime rate, which rate at any time may not be the lowest rate
charged by the Lender, plus 3% per annum.

                  Section 5. Mandatory Principal Payments. (a) The parties
acknowledge that the principal amount of the Loans outstanding on the date of
this Agreement is $39,200,000.

                  (b) The parties acknowledge that, by Section 5(b) of the Fifth
Amendment, Section 2.3 of the Credit Agreement, as previously modified and
amended, was amended and restated in its entirety to read as follows:

                  2.3 Voluntary and Mandatory Prepayments.

                  (a) Voluntary Prepayments. 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 no prepayment fee,
         premium or penalty shall be payable in connection with any such
         voluntary prepayment.

                  (b) Mandatory Prepayments.

                           (i)      [Intentionally Omitted]

                           (ii)     [Intentionally Omitted]

                           (iii)    Borrowers shall immediately pay all of the
                  principal of and interest on the Loans if any of the following
                  shall occur:


                                      -3-

                           (A) At any time after January 1, 2002, the FDA shall
                  file any judicial or administrative proceeding or take any
                  administrative action that results in a partial or total
                  suspension of production or shipment of products for the
                  account of either of Borrowers or under any contract under
                  which either of Borrowers manufactures product for any third
                  party.

                           (B) Borrowers at any time rescind any written request
                  to the FDA to make a re-inspection relating to the 483 M
                  Warning Letter issued by the FDA.

                           (C) At any time after January 1, 2002, Borrowers fail
                  to make a written response, within 10 Business Days, to the
                  FDA, with a copy to the Lender, to any written communication
                  received from the FDA after January 1, 2002, that raises any
                  deficiencies.

                           (D) At any time after January 1, 2002, one or more
                  fines, penalties or other monetary obligation due and payable
                  to any Governmental Authority is assessed against Borrowers,
                  or either of them, and the aggregate amount thereof is more
                  than $250,000.

                           (E) At any time after January 1, 2002, the stock of
                  Akorn is neither listed on any securities exchange or the
                  Nasdaq National Market nor traded on the Pink Sheets.

                           (F) At any time after January 1, 2002, there is any
                  restatement of or adjustment to the operating results of
                  Borrowers for any one or more Fiscal Years ended on or prior
                  to December 31, 2001, and the aggregate amount of all such
                  restatements and adjustments is more than $27,000,000.

                           (G) [Intentionally Omitted]

                           (H) [Intentionally Omitted]

                           (I) At any time after April 12, 2002, any materially
                  adverse action is taken by the FDA, the SEC, the DEA, or any
                  other Governmental Authority, or any state or federal court,
                  with respect to either of Borrowers, based on an alleged
                  failure to comply with laws or regulations, including, without
                  limitation, any ban on sale, recall or seizure of products,
                  any total or partial suspension of production, or the entry of
                  any restraining order or injunction against violations of the
                  law, or the filing of any judicial or administrative
                  proceeding seeking any of the foregoing; provided, however,
                  that the foregoing provisions of this subparagraph (I) shall
                  not apply to a consent decree relating to SEC or DEA matters,
                  or the judicial proceeding in which it is entered, if such
                  consent decree does not result in the occurrence of any of the
                  events described in subparagraphs (A) through (H) above.


                                      -4-

                  Section 6. Collection and Deposit of Cash Receipts. (a)
Notwithstanding the provisions of Section 6(a) of the Forbearance Agreement, the
authority granted to the Borrowers by the Lender in Section 6(a) of the
Forbearance Agreement to collect their accounts receivable shall not terminate
at the end of the Forbearance Period, and such authority shall continue until
the Termination Date or the earlier occurrence of any Event of Default. This
paragraph (a) restates the provisions of Section 6(a) of the Fourth Amendment
and Section 6(a) of the Fifth Amendment.

                  (b) The provisions of Sections 6(b), (c), (d) and (e) of the
Forbearance Agreement (which relate to, among other things, the requirement that
the Borrowers deposit cash receipts in an account at the Lender and have their
cash and investments on deposit in accounts maintained with the Lender) shall
continue to apply from and after the date of this Agreement, and without
limitation on the generality of such provisions, those provision shall apply
with respect to the proceeds of any offering of securities by either of the
Borrowers; provided, however, that unless and until an Event of Default has
occurred and is continuing, the Lender shall not exercise the rights referred to
in Section 6(c) of the Credit Agreement or the right to apply payments or
proceeds on deposit in the lockbox account referred to in Section 6(d) of the
Credit Agreement to the Obligations of the Borrowers under the Documents. The
Credit Agreement is hereby modified and amended to incorporate the provisions of
this paragraph. This paragraph (b) restates the provisions of Section 6(b) of
the Fourth Amendment and Section 6(b) of the Fifth Amendment.

                  Section 7. Fees and Expenses. The provisions of Section 8 of
the Forbearance Agreement shall continue to apply from and after the date of
this Agreement and the Credit Agreement is hereby modified and amended to
incorporate the provisions of this Section. This Section restates the provisions
of Section 7 of the Fourth Amendment and Section 7 of the Fifth Amendment.

                  Section 8. Lender's Consultant and Personnel. The Borrowers
understand that the Lender or its counsel may from time to time engage
consultants (collectively, "Lender Consultants") in connection with the Loans
and that the Lender's collateral evaluation personnel will from time to time,
and with such frequency as the Lender deems appropriate, make visits to the
Borrowers' places of business to inspect the tangible collateral for the Loan,
review the books and records of the Borrowers and confer with the Borrowers'
personnel and any consultants engaged by either of the Borrowers. The Borrowers
shall cooperate with the Lender Consultants and collateral evaluation personnel
and allow them to have access to the Borrowers' books and records, and personnel
and consultants and to the collateral for the Loan. The Borrowers acknowledge
that the fees of the Lender Consultants shall be reimbursable to the Lender by
the Borrowers in accordance with Section 10.4 of the Credit Agreement. The
Borrowers shall also cause their officers and consultants to participate from
time to time, and with such frequency as the Lender deems appropriate, in
personal and telephone conferences with the Lender and the Lender Consultants
concerning the business and affairs of the Borrowers. The Borrowers hereby
consent to direct communication between the Lender and the Lender Consultants
and any consultants engaged by either of the Borrowers. The provisions of this
Section are without limitation on the provisions of Section 2.11 of the Credit
Agreement. The foregoing provisions of this Section supersede and replace the
provisions of Section 8 of the Fourth Amendment and Section 8 of the Fifth
Amendment, and the Credit Agreement is hereby modified and amended to
incorporate the foregoing provisions of this Section.


                                      -5-

                  Section 9. Indebtedness. (a) The provisions of Sections 7(b),
(c) and (d) of the Forbearance Agreement (which relate to matters concerning
subordinated loan transactions) shall continue to apply from and after the date
of this Agreement. This paragraph (a) restates the provisions of Section 9(a) of
the Fourth Amendment and Section 9(a) of the Fifth Amendment.

                  (b) The parties acknowledge that, by Section 9(b) of the
Fourth Amendment, Section 7.3 of the Credit Agreement was modified and amended
by adding the following sentence at the end thereof:

                  In addition to the foregoing restrictions contained in this
                  Section, from and after January 1, 2002, Borrowers shall not
                  incur any additional Indebtedness other than (i) obligations
                  to trade creditors incurred in the ordinary course of
                  business, and (ii) obligations to vendors in connection with
                  capital expenditures that do not violate the conditions
                  provided for in Section 7.18 of this Agreement.

                  Section 10. Amendments to Section 7.10 of Credit Agreement.
The parties acknowledge that, by Section 10 of the Fourth Amendment, Section
7.10 of the Credit Agreement, as previously modified and amended, was modified
and amended by deleting clauses (a) through (f) thereof. The parties acknowledge
that, by Sections 11 and 12 of the Fourth Amendment, new clauses (g) and (h)
were added to Section 7.10 of the Credit Agreement, which new clause (g) is
restated in Section 11 of this Agreement, and which new clause (h), as modified
and amended by Section 12 of the Fifth Amendment, is modified and amended in
Section 12 of this Agreement.

                  Section 11. Inventory Matters. (a) The provisions of Section
10 of the Forbearance Agreement shall no longer apply from and after the date of
this Agreement. This paragraph (a) restates the provisions of Section 11(a) of
the Fourth Amendment and Section 11(a) of the Fifth Amendment.

                  (b) The parties acknowledge that, by Section 11(b) of the
Fourth Amendment, the following new clause (g) was added to Section 7.10 of the
Credit Agreement:

                           (g) Commencing with the three-month period ended
                  January 31, 2002, for each period of three calendar months,
                  Borrowers' returns of inventory for credit shall not exceed
                  $750,000.

                  Section 12. Receipts. (a) The parties acknowledge that, by
Section 12(a) of the Fourth Amendment, the following new defined terms were
added in alphabetical order in Section 1.1 of the Credit Agreement:

                           "Gross Receipts" shall mean, for any period, the
                  amount of the gross proceeds received by Borrowers during such
                  period from sales of merchandise, including collections of
                  accounts receivable, all determined on a cash basis.

                           "Net Receipts" shall mean, for any period, an amount
                  equal to (i) the amount of Gross Receipts for such period,
                  minus (ii) the amount of all of the cash expenditures of
                  Borrowers during such period, excluding only capital
                  expenditures that are permitted under the provisions of
                  Section 7.18 of this Agreement; all determined on a cash
                  basis.


                                       -6-

                  (b) The parties acknowledge that, by Section 12(b) of the
Fourth Amendment, a new clause (h) was added to Section 7.10 of the Credit
Agreement:, which new clause (h), as modified and amended by Section 12(b) of
the Fifth Amendment, is hereby modified and amended in its entirety to read as
follows:

                           (h) For the periods commencing on January 1, 2002,
                  and ending on the last day of each of the months set forth in
                  Column A below, the cumulative Gross Receipts and cumulative
                  Net Receipts of Borrowers shall be not less than the amount
                  set forth beside such month in Column B and Column C below,
                  respectively:

-------------------------------------------------------------- Column A Column B Column C -------------------------------------------------------------- Cumulative Gross Cumulative Net Receipts For Period Receipts For Period January 1, 2002, January 1, 2002, through Last Day of through Last Day of Month, 2002 Month Not Less Than Month Not Less Than -------------------------------------------------------------- March $11,500,000 $0 April $15,500,000 $430,000 May $19,400,000 $525,000 June $23,300,000 $1,115,000 July $27,500,000 $1,450,000
Borrowers acknowledge and agree that the amounts provided for in this clause have been established at levels that are substantially lower than Borrowers' actual expectations, and that any failure to satisfy the foregoing condition of this clause shall be deemed to be material, regardless of the amount of such failure. Section 13. Dividends. From and after the date of this Agreement, the Borrowers shall not pay any cash dividend on any of their capital stock, and Section 7.14 of the Credit Agreement is hereby modified and amended accordingly. This Section restates the provisions of Section 13 of the Fourth Amendment and Section 13 of the Fifth Amendment. Section 14. Capital Expenditures. The Borrowers together in the aggregate shall not make capital expenditures of more than $4,976,000 during the first eight months of the calendar year 2002, which capital expenditures shall consist only of the following: (i) Capital expenditures in an aggregate amount not exceeding $1,160,000 made at Akorn's Decatur, Illinois, place of business for the purpose of complying with requirements of the FDA. (ii) Other capital expenditures in an aggregate amount not exceeding $215,000 made at Akorn's Decatur, Illinois, place of business. (iii) Capital expenditures in connection with Akorn's lyophilization project, in an aggregate amount not exceeding $2,773,000, paid from the proceeds of the loan to Akorn from NeoPharm. (iv) Up to $600,000 for interest required to be capitalized under GAAP on borrowings to finance Akorn's lyophilization project. (v) Other capital expenditures in an aggregate amount not exceeding $180,000 made in accordance with the capital expenditures budget previously furnished to the Lender by the Borrowers. -7- (vi) Other capital expenditures in an aggregate amount not exceeding $87,000. The foregoing provisions of this Section supersede and replace the provisions of Section 14 of the Fourth Amendment and Section 14 of the Fifth Amendment, and Section 7.18 of the Credit Agreement is hereby modified and amended to include the foregoing provisions of this Section. Section 15. Regulatory and Stock Listing Matters. The parties acknowledge that, by Section 15 of the Fifth Amendment, the provision that was added at the end of Section 6.14 of the Credit Agreement by the Fourth Amendment was modified and amended in its entirety to read as follows: Borrowers shall provide the Lender with copies of (i) any communications to or from the FDA (whether relating to the 483 M Warning Letter received by Akorn from the FDA, or relating to any other matters), the SEC, the DEA or any other Governmental Authority, or any United States attorney, concerning any investigation or inquiry, and shall inform the Lender of the substance of any oral communication with the FDA, the SEC, the DEA or any other Governmental Authority, or any United States attorney, concerning any of such matters, and (ii) any communications to or from the The Nasdaq Stock Market, Inc., or any other securities exchange concerning the de-listing or listing of Akorn's stock; in each case not later than the first Business Day after the date of any such communication. Section 16. Reports and Notices. From and after the date of this Agreement, the Borrowers shall provide the Lender with the Financial Statements, reports and notices provided for in the following paragraphs of this Section, and Section 5.1 of the Credit Agreement, as previously modified and amended, is hereby modified and amended accordingly: (a) Quarterly Reports of Borrowers. Within forty-five (45) days after the end of each Fiscal Quarter of Borrowers, Borrowers shall deliver to Lender a copy of an unaudited financial statement of Borrowers 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, Borrowers shall deliver to Lender 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 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; provided, however, that in the case of Fiscal Year 2001, if the annual audit report has not been issued within such time period, Borrowers shall deliver unaudited financial statements within such time period and shall deliver the annual audit report within five days after it is issued. (c) Certificates. Contemporaneously with the furnishing of a copy of each annual audit report and of each quarterly statement provided herein, Borrowers shall deliver to Lender a certificate dated the date of such annual audit report or such -8- 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 Credit Agreement. (d) Notice of Default, Litigation and ERISA Matters. Immediately upon learning of the occurrence of any of the following, Borrowers shall deliver to Lender 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 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. Borrowers shall deliver to Lender such other information and documents, financial or otherwise, in the addition to the information and documents specifically referred to herein as Lender may from time to time request. (f) Reports of Akorn. (i) Within forty-five (45) days after the end of each fiscal quarter of Akorn, Borrowers shall deliver to Lender 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. (g) Monthly Reports. Within fifteen (15) Business Days after the end of each month, beginning with the month ending December 31, 2001, Borrowers shall deliver to Lender a copy of an unaudited financial statement of the Borrowers for such month, in form and substance satisfactory to the Lender, prepared on a basis consistent with the audited financial statements of the Borrowers previously furnished to the Lender and, if required by the Lender, prepared on a consolidating and consolidated basis, signed by an authorized officer of Akorn and consisting of at least a balance sheet as at the end of such month and a statement of earnings and cash flow for such month. (h) Reports Relating to Receipts. The Borrowers shall deliver the following reports to the Lender relating to Gross Receipts and Net Receipts: (i) On or before Wednesday of each week, the Borrowers shall deliver to the Lender a report of actual Gross Receipts and Net Receipts for the one-week period ending on the immediately preceding Friday, and forecast Gross Receipts and Net Receipts for the next 12 weeks, prepared in the format of Exhibit A attached to this Agreement and signed by officers of the Borrowers. (ii) Within two Business Days after the end of each calendar month commencing with the month of March, 2002, the Borrowers shall deliver to the Lender a report of Gross Receipts and Net Receipts for such month and for the period commencing January 1, 2002, and ending on the last day of such month, which reports shall be prepared in reasonable detail and in a format acceptable to the Lender and shall be signed by officers of the Borrowers. -9- (i) Monitoring Reports. The Borrowers shall deliver to the Lender each of the monitoring reports specified in Exhibit B attached to this Agreement, with the frequency and by the dates specified in Exhibit B, each of which reports shall be prepared in reasonable detail and in a format acceptable to the Lender and shall be signed by officers of the Borrowers. (j) Status Reports. On or before the 15th and the last day of each month commencing April 30,2002, the Borrowers shall deliver to the Lenders (i) a status report concerning any investigation or inquiry then in progress by the FDA, the SEC, the DEA or any other Governmental Authority, describing the current status of such investigation or inquiry, the schedule for future action and any significant events that have occurred since the date of the last such report and (ii) a status report concerning the listing of Akorn's stock on the Nasdaq National Market or any other securities exchange. All such reports shall be prepared in such detail and form, and shall contain such information, as the Lender shall from time to time require. (j) Management Reports. On or before the 15th day of each month commencing August 15, 2002, the Borrowers shall deliver to the Lenders a narrative report of management summarizing financial performance of the Borrowers for the previous month and for the year to date, including, without limitation, discussion of sales, expenses, inventory levels and returns, cash flow and cash on hand. All such reports shall be prepared in such detail and form, and shall contain such information, as the Lender shall from time to time require. (k) Projection. On or before August 16, 2002, the Borrowers shall deliver to the Lender a financial projection for the remainder of the calendar year 2002, prepared in the same form as the existing financial projection for the calendar year 2002 that the Borrowers previously delivered to the Lender. (l) Consultant Matters. If either of the Borrowers at any time engages any consultant, including, without limitation, any consultant with respect to FDA matters, the Borrowers shall deliver to the Lender a copy of the engagement letter for such consultant and a copies of any reports, recommendations or other communications received from time to time from such consultant, not later than the first Business Day after the date such engagement letter is entered into or the date of any such communication, recommendation or other communication, respectively. The foregoing provisions of this Section supersede and replace the provisions of Section 16 of the Fourth Amendment and Section 16 of the Fifth Amendment. Section 17. Security Interests. The parties acknowledge that, by Section 17 of the Fourth Amendment, the Credit Agreement was modified and amended by adding the following new Section 6.17 thereto: 6.17. Security Interests. Without limitation on any other provisions of the Loan Documents, Borrowers shall cooperate with Lender by executing and delivering from time to time such documents as Lender shall deem necessary or advisable in order to conform to the provisions of Revised Article 9 of the Uniform Commercial Code and to perfect Lender's security interest in any intellectual property of Borrowers in addition to that described in the Security Agreement. -10- Section 18. [Intentionally Omitted] Section 19. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows: (a) Akorn is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana and duly qualified to do business and in good standing in the States of Illinois and California, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (b) Akorn NJ is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois and duly qualified to do business and in good standing in the State of New Jersey, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (c) This Agreement and the Documents have been duly authorized, executed and delivered by the Borrowers and constitute valid and legally binding obligations enforceable against the Borrowers in accordance with their terms, subject to bankruptcy, insolvency and other laws of general application relating to the enforcement of creditors rights. The execution and delivery of this Agreement and the Documents and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the articles of incorporation or bylaws of either of the Borrowers, or any agreement or other instrument to which either of the Borrowers are party, or by which either of them are bound, or to which their properties are subject, or any existing law, administrative regulation, court order or consent decree to which either of them are subject. (d) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement or the Documents, or questioning the validity thereof, or in any way contesting the existence or powers of either of the Borrowers, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement or the Documents. (e) Except as disclosed in Exhibit C attached to this Agreement, there is no litigation or administrative proceeding pending or threatened against either of the Borrowers. (f) Schedules 4.2, 4.8, 4.9, 4.13, 4.15, 4.17, 4.18, 4.19, 7.3, 7.4(a), 7.7 and 10.10 attached to this Agreement contain accurate and complete current updates of the information contained in the corresponding Schedules attached to the Credit Agreement. Section 20. Time of Essence. Time is of the essence of this Agreement and each of the provisions hereof. Section 21. Joint and Several Obligation. The obligations of the Borrowers under this Agreement shall be joint and several. -11- Section 22. Release of Lender. To the extent permitted by applicable law, each of the Borrowers hereby releases and forever discharges the Lender and its past, present and future parent corporations, subsidiaries, affiliates and divisions, and their respective past, present and future shareholders, directors, officers, employees, attorneys, agents, investigators and insurers, and the heirs, administrators, executors, legal representatives, trustees, successors and assigns of each of the foregoing, of and from any and all claims of any kind or character whatsoever, whether now known or hereafter discovered, absolute or contingent, direct or indirect, arising out of any act, event or occurrence of any sort whatsoever occurring on or prior to the date of this Agreement; provided, however, that the Borrowers do not hereby release the right to performance by the Lender of its obligations under the Documents and this Agreement arising on and after the date of this Agreement. The Borrowers shall forever refrain and forbear from commencing or prosecuting any lawsuit or other proceeding against the Lender based upon, arising out of or connected with any of the claims released in this Agreement. Section 23. Documents to Remain In Effect; Confirmation of Obligations; References. Each of the Documents shall remain in full force and effect as originally executed and delivered by the parties, as previously modified and amended by one or more of the other Documents and as modified and amended by this Agreement. In order to induce the Lender to enter into this Agreement, the Borrowers hereby (i) confirm and reaffirm all of their obligations under each of the Documents, as previously modified and amended by one or more of the other Documents and modified and amended by this Agreement; (ii) acknowledge and agree that the Lender, by entering into this Agreement, does not waive any existing or future default or event of default under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree that the Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents, other than as expressly provided in the Documents; and (iv) acknowledge that they do not have any defense, set-off or counterclaim to the payment or performance of any of their obligations under the Documents, as previously modified and amended by one or more of the other Documents and modified and amended by this Agreement. Section 24. Confirmation of Certifications, Representations and Warranties. In order to induce the Lender to enter into this Agreement, the Borrowers hereby certify, represent and warrant to the Lender that, except as otherwise disclosed to the Lender in writing on or prior to the date hereof, including in this Agreement and in the Exhibits and Schedules attached hereto and/or in documents submitted to the Lender prior to the date hereof (including, but not limited to, any and all financial statements and reports, budgets, statements of cash flow and governmental reports and filings) (collectively referred to herein as "Disclosures"), all certifications, representations and warranties contained in the Documents and in all certificates heretofore delivered to the Lender are true and correct as of the date hereof in all material respects, and, subject to such Disclosures, all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement. Section 25. Entire Agreement. This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. -12- Section 26. Successors. This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and legal representatives. Section 27. Severability. In the event any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. Section 28. Amendments, Changes and Modifications. This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto. Section 29. Construction. (a) The words "hereof," "herein," and "hereunder," and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used. (b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed. (c) The headings of this Agreement are for convenience only and shall not define or limit the provisions hereof. (d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders. (e) Each party to this Agreement and legal counsel for each party have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement. Section 30. Execution of Counterparts. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 31. Governing Law. This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement. [SIGNATURE PAGE(S) AND EXHIBIT(S), IF ANY, FOLLOW THIS PAGE] -13- IN WITNESS WHEREOF, the parties have executed this instrument as of the date first above written. AKORN, INC. By_________________________________________ Title: AKORN (NEW JERSEY), INC. By_________________________________________ Title: THE NORTHERN TRUST COMPANY By_________________________________________ Vice President -14- EXHIBIT A FORMAT OF GROSS RECEIPTS AND NET RECEIPTS REPORT EXHIBIT B MONITORING REPORTS
- ------------------------------------------------------------------------------------------ Report Frequency Due By - ------------------------------------------------------------------------------------------ 1. Accounts Receivable Roll Forward Weekly Following Wednesday 2. Accounts Payable Roll Forward Weekly Following Wednesday 3. Income Statement, Balance Sheet, Cash Flow Monthly 15th following month 4. Summary Accounts Receivable Aging Monthly 15th following month 5. Summary Accounts Payable Aging Monthly 15th 6. Wholesaler Inventory Days on Hand, to include description of sale above 90 days stock level Monthly 15th following month 7. FDA Warning Letter update detailing key issues, action plan update, key tasks accomplished, tasks past due and copies of all FDA communications Monthly 15th following month 8. Lyophilization project update detailing progress on completion of project, comparison of expenditures and sales to budget Monthly 15th following month 9. Sales analysis by wholesaler, monthly, quarterly and annual Monthly 15th following month 10. Inventory item turn and margin analysis Quarterly 15th following month 11. New product development report detailing Monthly 15th progress in NDA and ANDA pipelines, to include minutes from the New Product Committee
EXHIBIT C LITIGATION AND ADMINISTRATIVE PROCEEDINGS 1. [Intentionally Omitted] 2. Matters relating to 483 M Warning Letter issued to Akorn, Inc., by the Food and Drug Administration 3. Additional matters disclosed in Schedule 4.8 4. SEC investigation described in SEC letter dated March 27, 2002 5. DEA investigation described in United States Attorney, Central District of Illinois, letter dated March 6, 2002 SCHEDULE 4.2 EXECUTIVE OFFICES Same as Schedule 4.2 attached to the Credit Agreement SCHEDULE 4.8 LABOR MATTERS EMPLOYMENT AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None CONSULTING AGREEMENTS Akorn Inc EJ Financial Enterprises, Inc. (affiliate) Akorn (New Jersey), Inc. None MANAGEMENT AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None COLLECTIVE BARGAINING AGREEMENTS Akorn Inc None Akorn (New Jersey), Inc. None ORGANIZING ACTIVITY PENDING OR THREATENED Akorn Inc None Akorn (New Jersey), Inc. None
EMPLOYMENT RELATED COMPLAINTS OR CHARGES PENDING OR THREATENED Akorn Inc. None Akorn (New Jersey), Inc. None
SCHEDULE 4.9 VENTURES, SUBSIDIARIES AND AFFILIATES OUTSTANDING STOCK Same as Schedule 4.9 attached to the Credit Agreement with the following changes in the number of shares of outstanding stock: 1. Change 18,241,246 to 19,578,573 2. Change 687,032 to 606,901 3. Change 3,703,581 to 1,093,477 SCHEDULE 4.13 ERISA PLANS Same as Schedule 4.13 attached to the Credit Agreement SCHEDULE 4.15 INTELLECTUAL PROPERTY AND TRADE NAMES Akorn, Inc., and Akorn (New Jersey), Inc., conduct business under the names Akorn Ophthalmics and Akorn, Inc. Akorn, Inc. See Exhibit A attached hereto Exclusive, royalty-free license to make and have made Piroxicam (patents held by Pfizer) anywhere in the world for use and sale in prescription ophthalmic applications to be sold by prescription License Agreement from Johns Hopkins for methods and instrumentation related to two patents for treating macular degeneration. Akron (New Jersey), Inc. See Exhibit A attached hereto SCHEDULE 4.17 HAZARDOUS MATERIALS Same as Schedule 4.17 attached to the Credit Agreement SCHEDULE 4.18 INSURANCE POLICIES Akorn, Inc. and Subsidiaries Policy periods run to April 24, 2003 for Directors and Officers and to January 29, 2003 for all other policies. Premiums for the current policy periods have been paid in full. Commercial General Liability Hartford Fire Insurance Company Policy #42UUVUA559 General aggregate $2,000,000 Each occurrence $1,000,000 Excess Liability Hartford Fire Insurance Company Policy #42RHVUA8534 General aggregate $10,000,000 Each occurrence $10,000,000 Commercial Package Hartford Fire Insurance Company Policy #42UUVUA559 Property limits $61,767,471 Business interruption limits $10,000,000 Retention $5,000 per occurrence Commercial Automobile Hartford Fire Insurance Company Policy #42UUVUA559 Combined single limit $1,000,000 Deductible $250 comprehensive $500 collision Workers Compensation Hartford Casualty Insurance Company Policy #42WEVGU2114 Limits each accident $500,000 Directors and Officers Greenwich Insurance Company Liability Policy #ELU-83244-02 General aggregate $5,000,000 Retention $350,000 Product/Clinical Trial North American Capacity Insurance Company Liability Policy #BLG-0000-113-00 General aggregate $10,000,000 Each occurrence $10,000,000 Retention $50,000/claim; $250,000 aggregate Executive Protection Federal Insurance Company Policy #8153-14-29 Limit $1,000,000 Retention $2,500 SCHEDULE 4.19 DEPOSIT AND DISBURSEMENT ACCOUNTS Akorn, Inc. The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 (312) 630-6000 Akorn operating account #86746 Controlled disbursements (A/P) 30286746 Payroll disbursements 30386746 Akorn lockbox 30186746 and 30486746 Health Insurance 30786746 Flexible Spending 31286746 401(k) 31386746 Blocked Account 1525034 Akorn, Inc. American National Bank 120 South LaSalle Street Chicago, Illinois 60603-3400 (312) 661-5000 Akorn Merchant Account #5300107421 (Credit Card Account) Akorn (New Jersey), Inc. The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 (312) 630-6000 Controlled disbursements 30986746 Payroll 31186746 SCHEDULE 7.3 INDEBTEDNESS The Borrowers have the following outstanding Indebtedness: Akron, Inc. Mortgage loans #98021904 and 98021903 to Standard Mortgage Investors, secured by Decatur real properties; principal balance at June 1, 2002, $1,796,960.64, final payment due June 2008 Indebtedness of $5,000,000 to The John N. Kapoor Trust dated September 20, 1989 under Convertible Bridge Loan and Warrant Agreement dated July 12, 2001 Indebtedness of $3,250,000 to NeoPharm, Inc., under Promissory Note dated December 20, 2001 Akorn (New Jersey), Inc. None SCHEDULE 7.4(a) TRANSACTIONS WITH AFFILIATES Same as Schedule 7.4(a) attached to the Credit Agreement SCHEDULE 7.7 LIENS Akorn, Inc. 1. Operating lease #8197-001 with National City Leasing Corporation financing production equipment. Total acquisition cost of $3,811,028.93. Monthly rent of $52,577.71 through December 26, 2007. 2. See Schedule 7.3. Akron (New Jersey), Inc. None SCHEDULE 10.10 AUTHORIZED SIGNATURES Akorn, Inc. John M. Kapoor, Chief Executive Officer Bernard J. Pothast, Vice President, Chief Financial Officer, Secretary and Treasurer Akron (New Jersey), Inc. John M. Kapoor, Chief Executive Officer Bernard J. Pothast, Vice President, Secretary and Treasurer

                                                                   Exhibit 10.27


                                                                  EXECUTION COPY


                            PRE-NEGOTIATION AGREEMENT

         THIS PRE-NEGOTIATION AGREEMENT, dated as of September 20, 2002 (as
modified, supplemented or amended from time to time, the "Agreement"), among
AKORN, INC., a corporation organized and existing under the laws of Louisiana
("Akorn"), and AKORN (NEW JERSEY), INC., a corporation organized and existing
under the laws of Illinois ("Akorn NJ" and, together with Akorn, each, a
"Borrower" and collectively, the "Borrowers"), and THE NORTHERN TRUST COMPANY, a
corporation organized and existing under the laws of Illinois (the "Lender");

                              W I T N E S S E T H:

         WHEREAS, the obligations of the Borrowers, including, without
limitation, the obligation to pay principal, interest and other fees, costs and
expenses, are set forth in the Credit Agreement (as defined below) and the
agreements, documents and instruments executed in connection therewith
(collectively, together with this Agreement, the "Loan Documents"), including,
without limitation,

         (i)      Amended and Restated Credit Agreement, dated as of September
                  15, 1999, among the Borrowers and the Lender, as amended by
                  the First Amendment, dated as of December 28, 1999, among the
                  Borrowers and the Lender, the Second Amendment and Waiver,
                  dated as of February 15, 2001, among the Borrowers and the
                  Lender, the Third Amendment and Waiver, dated as of April 16,
                  2001, among the Borrowers and the Lender, the Fourth
                  Amendment, dated as of January 1, 2002, among the Borrowers
                  and the Lender, the Fifth Amendment, dated as of June 30,
                  2002, among the Borrowers and the Lender, and the Sixth
                  Amendment, dated as of July 31, 2002, among the Borrowers and
                  the Lender (collectively, the "Credit Agreement");

         (ii)     Security Agreement, dated as of December 29, 1997, among the
                  Borrowers and the Lender, as amended by the First Amendment to
                  Security Agreement, dated as of March 27, 1998, among the
                  Borrowers and the Lender (the "Security Agreement");

         (iii)    Intellectual Property Security Agreement, dated as of
                  September 15, 1999, by and between Akorn and the Lender (the
                  "Intellectual Property Security Agreement"); and

         (iv)     Junior Mortgage, dated as of March 21, 2001, by and between
                  Akorn and the Lender, recorded in the Office of the Recorder
                  of Deeds of Macon County, Illinois, on May 7, 2001, in Book
                  3056, Page 544 (the "Junior Mortgage").

         WHEREAS, the Termination Date under and as defined in the Credit
Agreement having occurred and the Borrowers having failed to repay in full all
Obligations (as defined below) (the "Payment Default"), the Lender may exercise
unconditionally any or all of its rights and remedies under the Loan Documents
and applicable law to collect the Obligations, including, without limitation,
exercising its rights in and to the assets and property rights that secure
payment of the Obligations (collectively, as defined in the Loan Documents, the
"Collateral");

         WHEREAS, the Borrowers have determined to consider, develop,
investigate, evaluate, analyze, negotiate and/or pursue one or more
restructuring proposals to address the Borrowers' current financial difficulties
(collectively, the "Proposed Restructuring") and, in connection therewith, (i)
the Borrowers desire to enter into discussions with the Lender regarding such
Proposed Restructuring and to make available to the Lender and its advisors
certain information concerning the Borrowers pursuant to this Agreement and (ii)
in order to provide the Borrowers with a reasonable period of time within which
to develop a plan to restructure the Obligations, the Borrowers have requested
that the Lender forbear for a time from exercising its rights and remedies under
the Loan Documents and applicable law;

         WHEREAS, the Lender has agreed to the Borrowers' request, but only on
the terms set forth herein;

         NOW THEREFORE, in consideration of the covenants, agreements and
acknowledgments contained herein, and for other good and valuable consideration,
the receipt and legal sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, each of the Borrowers and the Lender agree
as of the date the conditions specified in Section 5.1 are first satisfied (the
"Agreement Closing Date") as follows:

                                    ARTICLE I
                                   DEFINITIONS

         1.1      Defined Terms. All capitalized terms used but not specifically
defined herein shall have the meaning ascribed thereto in the Credit Agreement.
As used in this Agreement, the following terms shall have the following meanings
(such meanings to be equally applicable to the singular and plural forms of the
terms defined):

                  "Advisors" shall have the meaning provided in Section 3.1(a).

                  "Agreement" shall have the meaning provided in the first
paragraph of this Agreement.

                  "Agreement Closing Date" shall have the meaning provided in
the recitals to this Agreement.

                  "Akorn" shall have the meaning provided in the first paragraph
of this Agreement.

                  "Akorn NJ" shall have the meaning provided in the first
paragraph of this Agreement.

                  "Balance Sheet" shall mean, for purposes of Section 6.7 and
for Borrowing Base calculations, the Borrowers' consolidated balance sheet as of
the end of the calendar month referred to therein.

                  "Bank Accounts" shall have the meaning provided in Section
10.3(b).

                  "Borrower" shall have the meaning provided in the first
paragraph of this Agreement.


                                      -2-

                  "Borrowing Base" shall mean, for any date, the product of (a)
0.50 and (b) Net Trade Accounts Receivable on such date.

                  "Borrowing Condition Failure" shall occur when the Lender
gives the Borrowers written notice on any day on or after the Agreement Closing
Date (whether or not the Borrowers seek to incur a Tranche B Loan on such date)
that any condition specified in Sections 8.7(a), (b) or (c) cannot be or is not
satisfied on such date (provided that a Borrowing Condition Failure shall exist
on any date on which any bankruptcy proceeding in respect of either Borrower is
commenced).

                  "Borrowers" shall have the meaning provided in the first
paragraph of this Agreement.

                  "Borrower Parties" shall have the meaning provided in Section
3.2.

                  "Budget" shall have the meaning provided in Section 6.6.

                  "Collateral" shall have the meaning provided in the second
recital to this Agreement.

                  "Communications" shall have the meaning provided in Section
3.2.

                  "Concentration Account" shall mean the Borrowers' bank
account, Account No. 86746, maintained at the offices of the Lender.

                  "Constituent Documents" shall mean, with respect to a
Borrower, such Borrower's articles of incorporation and bylaws, in each case as
in effect on the Agreement Closing Date and attached to the officer's
certificate of such Borrower delivered pursuant to Section 5.1(a)(ii).

                  "Consultant" shall have the meaning provided in Section 6.4.

                  "Consultant Agreement" shall have the meaning provided in
Section 6.4.

                  "Credit Agreement" shall have the meaning provided in the
first recital to this Agreement.

                  "Cumulative Gross Receipts" shall mean, as of the last day of
any month, the cumulative amount of Gross Receipts from September 1, 2002
through and including the last day of such month.

                  "Cumulative Net Receipts" shall mean, as of the last day of
any month, an amount equal to the cumulative amount of Net Receipts from
September 1, 2002 through and including the last day of such month.

                  "Current Outstanding Obligations" shall have the meaning
provided in Section 2.3.

                  "Existing Events" shall mean the Payment Default and all other
Events of Default that are listed on Schedule 1.1.


                                      -3-

                  "Forbearance Period" shall mean the period commencing on the
Agreement Closing Date and ending on the Forbearance Termination Date.

                  "Forbearance Termination Date" shall have the meaning provided
in Section 4.1.

                  "Gross Trade Accounts Receivable" shall mean, for any date,
the total amount of trade accounts receivable generated in the ordinary course
of business, net of payments in transit, as shown in the accounts receivable
aging report for such date generated by the Borrowers' JD Edwards accounting
system.

                  "Intellectual Property Security Agreement" shall have the
meaning provided in the first recital to this Agreement.

                  "Junior Mortgage" shall have the meaning provided in the first
recital to this Agreement.

                  "Lender" shall have the meaning provided in the first
paragraph of this Agreement.

                  "Lender Parties" shall have the meaning provided in Section
3.2.

                  "Loan Documents" shall have the meaning provided in the first
recital to this Agreement.

                  "Lock-Box Account" shall have the meaning provided in Section
10.3(d).

                  "Loans" shall mean the Tranche A Loans and the Tranche B
Loans. This definition amends and restates the definition contained in the
Credit Agreement for all purposes.

                  "Maximum Lawful Rate" shall have the meaning provided in
Section 8.5(d).

                  "Net Receipts" shall mean, for any period, an amount equal to
(i) the amount of Gross Receipts for such period, minus (ii) the amount of all
of the cash expenditures of Borrowers during such period, excluding only capital
expenditures that are permitted under the provisions of Section 6.10 of this
Agreement all determined on a cash basis. This definition amends and restates
the definition contained in the Credit Agreement for all purposes.

                  "Net Trade Accounts Receivable" shall, for any date, mean (a)
Gross Trade Accounts Receivable on such date less (b) the Reserves applicable to
such date.

                  "Notice of Tranche B Borrowing" shall have the meaning
provided in Section 8.1.

                  "Obligations" shall mean any and all obligations and
liabilities of the Borrowers to the Lender, of every kind and description,
direct and indirect, absolute and contingent, sole, joint, several, or joint and
several, primary or secondary, due or to become due, now existing or hereafter
arising, regardless of how they arise or by what agreement or instrument they
may be evidenced or whether evidenced by any agreement or instrument and
includes obligations to perform acts and refrain from taking actions as well as
obligations to pay money.


                                      -4-

                  "Participant" shall mean any Person from time to time having a
participation interest in the Obligations granted by the Lender.

                  "Payment Default" shall have the meaning provided in the
second recital to this Agreement.

                  "Proposed Restructuring" shall have the meaning provided in
the third recital to this Agreement.

                  "Related Parties" shall have the meaning provided in Section
11.6.

                  "Reserves" shall mean, for any day, an amount equal to the sum
of (a) allowance for doubtful accounts, (b) returns reserve, (c) discounts and
allowances, (d) chargeback reserve and (e) rebates reserve, all as determined
based on the corresponding amounts shown on the monthly Balance Sheet generated
by the Borrowers' JD Edwards accounting system for the last day of the month
most recently ended for which such report has been provided to the Lender;
provided, however, that if no financial statements have been provided for any
month by the close of business on the 15th day of the next succeeding month,
"Reserves" shall be set as 110% of the amount as determined for the last day of
the month most recently ended for which such financial statements have been
provided until such financial statements (or the next month's) are subsequently
provided.

                  "Security Agreement" shall have the meaning provided in the
first recital to this Agreement.

                  "SG&A" shall mean, for any period, sales, general and
administrative expense for Akorn and its subsidiaries during such period, as
determined on a consolidated basis in accordance with GAAP.

                  "Tranche A Loans" shall mean the aggregate amount of advances
made by the Lender under the Credit Agreement prior to the Agreement Closing
Date that are outstanding on such date. As of the opening of business on the
Agreement Closing Date, the outstanding principal amount of Tranche A Loans is
$39,200,000.00 (the "Existing Tranche A Amount").

                  "Tranche B Commitment" shall mean, at any time, the commitment
of the Lender to make Tranche B Loans during the Forbearance Period, which
commitment shall be equal to the lower of (a) the difference between (i) the
Existing Tranche A Amount and (ii) the aggregate amount of Tranche A Loans
outstanding at such time, (b) $1,750,000 and (c) the Borrowing Base at such
time.

                  "Tranche B Loans" shall have the meaning provided in Section
8.1.

                  "Tranche B Note" shall have the meaning provided in Section
8.2.

         1.2      Principles of Construction.

                  (a)      All references to sections, schedules and exhibits
are to sections, schedules and exhibits in or to this Agreement unless otherwise
specified. The words "hereof," "herein" and


                                      -5-

"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement.

                  (b)      All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
in the United States in effect on the Agreement Closing Date.

                                   ARTICLE II
                                 ACKNOWLEDGMENTS

         2.1      Acknowledgment of Existing Events; Existing Loan Documents.
Each Borrower agrees and acknowledges that:

                  (a)      the Obligations are valid and enforceable against
such Borrower in every respect and not subject to any offset, counterclaim,
cause of action, reduction or defense under any theory at law or in equity, and
all of the terms and conditions of the Loan Documents are binding and
enforceable upon such Borrower on their terms;

                  (b)      the Existing Events have occurred and are continuing;

                  (c)      the Existing Events are material in nature; and

                  (d)      as a result of the Existing Events, the Lender is
entitled immediately and without further notice or declaration to any Borrower
to exercise all rights and remedies under the Loan Documents and applicable law.

         2.2      Waiver of Notice. With respect to the Existing Events, to the
extent that any of the Loan Documents require notification to any Borrower of
(a) the existence of a default and an opportunity to cure such a default or (b)
the acceleration and maturity of the Obligations, such notices have been
properly given by the Lender or hereby are waived by each Borrower, and such
cure periods have lapsed or hereby are waived by each Borrower.

         2.3      Acknowledgment of Current Outstanding Obligations. Each
Borrower agrees and acknowledges that, as of the Agreement Closing Date, the
Borrowers are jointly and severally indebted to the Lender under the Loan
Documents in an aggregate amount equal to the principal sum of $39,200,000.00,
plus accrued and unpaid interest thereon, plus the costs and expenses incurred
by the Lender, including, without limitation, reasonable attorneys' fees
incurred by the Lender in the negotiation and preparation of the Loan Documents,
this Agreement and the documents related hereto or in connection with the
Existing Events through the Agreement Closing Date (the foregoing amounts are
hereafter collectively referred to as the "Current Outstanding Obligations"),
which amounts are due and payable in full as of the Agreement Closing Date and
are not subject to any offset, reduction, counterclaim, cause of action or
defense of any kind. Nothing contained herein shall alter, amend, modify or
extinguish the joint and several obligation of each Borrower to repay the
Current Outstanding Obligations, and neither this Agreement nor any of the other
documents related hereto constitutes a novation or modification of any of the
Loan Documents.


                                      -6-

         2.4      Acknowledgment of Liens and Priority. Each Borrower agrees and
acknowledges that pursuant to the Loan Documents and except as specifically set
forth therein, the Lender holds (a) first priority, perfected security interests
in and liens upon all of each Borrower's assets and property rights (other than
those specified in clause (b) below), wherever located, including assets now
owned or hereafter acquired, as more specifically described in the Security
Agreements and (b) second priority, perfected security interests in and liens
upon all of Akorn's right, title and interest in and to the real property
located in Macon County, State of Illinois, all improvements located thereon,
and all rents, profits and income generated thereby, as more specifically
described in the Junior Mortgage. Such security interests and liens secure all
of the Obligations now or hereafter incurred, including, without limitation, the
Current Outstanding Obligations and all other amounts now or hereafter owed by
the Borrowers to the Lender under any of the Loan Documents.

         2.5      Reaffirmation of Security Interests. Each Borrower agrees and
acknowledges that all of the assets of the Borrowers pledged, assigned,
conveyed, mortgaged, hypothecated or transferred to the Lender pursuant to the
Loan Documents, including without limitation, the Collateral, constitute
collateral security for all of the Obligations. Each Borrower hereby reaffirms
its prior conveyance to the Lender of a continuing security interest in and lien
on the Collateral, including, without limitation, a security interest in and
lien upon any and all funds and/or monies of each Borrower.

                                   ARTICLE III
                                 COMMUNICATIONS

         3.1      Professional Advisors. Each Borrower acknowledges that the
Lender has retained legal counsel and a financial advisor and may from time to
time retain Collateral review personnel and other consultants (collectively, the
"Advisors"). Each Borrower consents and agrees to (a) the payment of all
reasonable fees and expenses of the Advisors within five (5) Business Days of
receipt from the Lender of invoices in respect thereof which may be submitted at
any time after the Agreement Closing Date and (b) direct communication between
the Lender and the Advisors and any consultants engaged by either of the
Borrowers, including, without limitation, the Consultant. Each Borrower further
acknowledges and agrees that (i) the Advisors will from time to time, and with
such frequency as the Lender deems appropriate, make visits to the Borrowers'
places of business to inspect the Collateral, review the books and records of
the Borrowers and confer with the Borrowers personnel and any consultants
engaged by either of the Borrowers, including, without limitation the
Consultant, (ii) it shall cooperate with the Advisors and allow them to have
access to such Borrower's books and records, personnel and consultants
(including, without limitation the Consultant) and the Collateral, (iii) it
shall cause its officers and consultants to participate from time to time, and
with such frequency as the Lender deems appropriate, in personal and telephone
conferences with the Lender and the Advisors concerning the business and affairs
of the Borrowers.

         3.2      Communications. Each Borrower has informed the Lender of its
desire to restructure the Obligations. In connection with any such
restructuring, all oral, telephonic, electronic, and written communications
between or among the Borrowers and their respective employees, officers,
directors, members, partners, shareholders, agents, representatives, advisors
and attorneys (collectively, the "Borrower Parties") and the Lender, the
Participants, the Advisors and their respective employees, officers, directors,
members, partner, shareholders, agents,


                                      -7-

representatives, advisors and attorneys (collectively, the "Lender Parties"),
including, without limitation, all conversations, discussions, meetings,
correspondence, memoranda or writings of any nature whatsoever related to or
arising in connection with the subject matter hereof (collectively, the
"Communications"), unless specifically agreed to in writing by the Borrowers and
the Lender, shall be considered to be for settlement purposes only and shall not
constitute or be used as an admission of any fact, circumstance, event or
condition, or the absence thereof, and shall not be material, relevant or
admissible in any proceedings at law or otherwise, or for any other purpose
whatsoever. The Communications will not effect or be deemed to effect or act as
a waiver, release, amendment or modification of any of the rights and
obligations of the Borrower Parties or the Lender Parties, or their respective
Affiliates, predecessors, successors or assigns, except as may be expressly
provided in an agreement recorded on all points of discussion, which agreement
is reduced to a writing satisfactory to and executed and delivered by all
required parties thereto. In connection therewith, each Borrower, on behalf of
all of the Borrower Parties and their Affiliates, predecessors, successors and
assigns, acknowledge that (a) the Communications do not evidence an agreement on
the part of Lender to modify or revise in any way the Obligations; (b) any
discussions, statements, questions or comments posed or made by the Lender
Parties or their Affiliates, during, related to, or in connection with any
Communications shall not be considered by the Borrower Parties to be a binding
commitment by the Lender or any of the Lender Parties to accede to any request
or proposals made by any of the Borrower Parties during any such discussions or
meetings; (c) even if any understanding in principle is reached, none of the
parties shall be legally bound until all required parties have duly executed and
delivered definitive documents evidencing such terms; and (d) the Communications
shall in no way invalidate, nullify or waive the rights and remedies of any of
the Lender Parties or signify their agreement to postpone the exercise of any of
their respective rights or remedies. These discussions may be lengthy and
complex and while the parties may reach agreement on one or more preliminary
matters that are part of the disputes and issues that the parties are trying to
resolve, none of the parties shall be bound by any agreement until said
agreement has been reduced to a written agreement and signed by each of the
required parties. Thus, no party can rely upon any understanding or agreement
which is not reduced to a written agreement and signed by the party against whom
enforcement is sought.

         3.3      Third Party Communications and Discussions. Each Borrower
hereby (a) acknowledges and agrees that in the course of and in connection with
the development, negotiation and consummation of a restructuring of the
Obligations, it may be necessary for the Lender Parties to initiate, conduct and
maintain discussions and meetings with third parties involved with or having a
relationship with the Borrowers, including, without limitation, NASDAQ and any
Governmental Authority, and (b) waives any right of objection to such
discussions and meetings and any claim, counterclaim, defense, offset or cause
of action against any of the Lender Parties arising from, or in connection with,
those discussions and meetings.

                                   ARTICLE IV
                                   FORBEARANCE

         4.1      Forbearance Period. Subject to compliance by each Borrower
with each of the terms and conditions of this Agreement, and without waiving the
Existing Events, the Lender hereby agrees to forbear from enforcing its rights
or remedies pursuant to the Loan Documents and applicable law (including,
without limitation, to make a demand for payment as a result of the


                                      -8-

Payment Default) as a result of the Existing Events from the Agreement Closing
Date until the earlier to occur of the following (as the case may be, the
"Forbearance Termination Date"): (i) January 3, 2003 and (ii) the date on which
a Borrowing Condition Failure occurs.

                                    ARTICLE V
                              CONDITIONS TO CLOSING

         5.1      Conditions to Closing. The obligations of the Lender under
this Agreement are subject to:

                  (a)      the receipt by the Lender of the following:

                           (i)      this Agreement duly executed by each
         Borrower and the Lender, together with a consent thereto duly executed
         and delivered by each Participant;

                           (ii)     Secretary Certificates certifying the
         incumbency and signature of the officers of each Borrower executing
         this Agreement and all other documents to be delivered by such Borrower
         pursuant hereto, together with (x) evidence of the incumbency of such
         Secretary, (y) the Constituent Documents of such Borrower and (z) a
         Good Standing Certificate from such Borrower from its state of
         incorporation, each in form and substance satisfactory to the Lender
         and its counsel;

                           (iii)    an opinion of special Illinois counsel to
         the Borrowers, in form and substance satisfactory to counsel to the
         Lender, as to non-contravention, required consents, approvals, and the
         due authorization, execution, delivery and enforceability against each
         Borrower of this Agreement;

                           (iv)     evidence of the maintenance of insurance
         coverage with respect to the Collateral, as required under the Loan
         Documents, in form and substance satisfactory to the Lender;

                           (v)      the Tranche B Note, duly executed and
         delivered by each Borrower; and

                           (vi)     any and all documents and instruments that
         the Lender reasonably deems necessary to carry out the terms and
         provisions of this Agreement;

                  (b)      on the Agreement Closing Date, all representations
and warranties contained herein and in all other Loan Documents (and any
documents executed and delivered in connection therewith) shall be true and
correct in all material respects; and

                  (c)      on the Agreement Closing Date, the Borrowers shall
deposit with the Lender an amount equal to $200,000.00, which shall be applied
against the Lender's expenses and costs (including, without limitation, fees and
expenses of the Advisors) incurred (i) through the Agreement Closing Date in
connection with the Existing Events, the Loan Documents, this Agreement, and all
documents executed and negotiations undertaken in connection with any of the
foregoing and (ii) thereafter in connection with the Loan Documents and the
Obligations.


                                      -9-

                                   ARTICLE VI
                                    COVENANTS

         Each Borrower covenants and agrees that from the date hereof and until
the indefeasible satisfaction in full in cash of all Obligations and the
termination of the Loan Documents, unless the Lender shall otherwise consent in
writing:

         6.1      Costs and Expenses. Each Borrower hereby reaffirms, to the
extent provided in the Loan Documents, its obligation under the Loan Documents
to reimburse the Lender in cash for, inter alia, all costs and expenses incurred
by the Lender in connection with the Obligations pursuant to the Loan Documents,
this Agreement, or the protection, perfection or insurance of the Lender's liens
upon and security interests on the Collateral, including, but not limited to,
(a) legal fees and expenses and (b) fees and expenses of the Advisors and/or
other professionals retained by or on behalf of the Lender or the Agent.

         6.2      Existing Obligations.

                  (a)      Unless otherwise specifically provided herein, each
Borrower shall fully comply with each of its respective obligations, conditions
and covenants set forth in the Loan Documents, it being understood that the
Borrowers' failure to remedy the Existing Events shall not constitute a default
of this covenant.

                  (b)      Each Borrower shall fully comply with each of its
respective obligations and agreements under the Subordinated Loan Agreement and
each of its respective obligations and agreements under the Subordination and
Standby Agreement.

         6.3      Cooperation with Lenders. Each Borrower's management, upon
reasonable advance notice, will be available to meet generally with, and answer
the questions of, the Lender Parties and each Borrower shall use its best
efforts to cause professionals employed by such Borrower to meet generally with
the Lender Parties, answer questions and provide such written materials as
reasonably may be requested, and in each case, other than documents, materials
or other information subject to a privilege under applicable law.

         6.4      Consultant. The Borrowers shall, no later than September 27,
2002, retain a single crisis manager with experience in turnaround management
consulting from the list set forth on Schedule 6.4 (the "Consultant"), pursuant
to an agreement (the "Consultant Agreement") acceptable to the Lender in its
sole discretion setting forth the basis on which the Consultant will be
retained. Following the execution thereof, the Borrowers shall not amend,
modify, supplement or terminate the Consultant Agreement.

         6.5      Restructuring Proposal. The Borrowers shall submit a
comprehensive proposal regarding the Proposed Restructuring to the Lender on or
before December 1, 2002.

         6.6      Budget. The Borrowers shall submit to the Lender a proposed
weekly cash operating budget, in form and content satisfactory to the Lender and
approved by the Consultant, on or before October 18, 2002 (the "Budget").


                                      -10-

         6.7      Additional Reporting Requirements. In addition to their
existing reporting requirements under the Credit Agreement, the Borrowers shall
deliver or cause to be delivered to the Lender the following information:

                  (a)      Monthly Sales Pipeline Report. Within 15 calendar
days following the end of each calendar month, a report detailing the sales
activity by major customer type (sales channel) and salesperson, key accounts
summary of booked orders, top sales prospects with dollar values and estimated
probability of closing, in such form and content as acceptable to the Lender.

                  (b)      Annual and Quarterly Sales and Marketing Plan. Within
15 calendar days following the end of each calendar quarter and year, a detailed
sales and marketing plan indicating key sales and marketing expectations by
customer type (sales channel) and product for such quarter or year, as the case
may be, in such form and content as acceptable to the Lender.

                  (c)      Sales by Channel Report. Within 15 calendar days
following the end of each calendar month and quarter, a report detailing by
channel all sales, showing both unit volume and dollar amount thereof, during
such period and during the elapsed portion of the year ended with the last day
of such period, in such form and content as acceptable to the Lender.

                  (d)      Key Product Analysis. Within 15 calendar days
following the end of each calendar month and quarter, a report detailing by
product all sales and gross margins during such period and during the elapsed
portion of the year ended with the last day of such period, in such form and
content as acceptable to the Lender.

                  (e)      Accounts Receivable Reconciliation. Within 15
calendar days following the end of each calendar month, a statement which
reconciles the accounts receivable balance per the Balance Sheet with the
balance per the accounts receivable aging report generated by the Borrowers' JD
Edwards accounting system, which shall set forth in detail all Reserves and
showing the basis of calculation thereof, prepared for such month in such form
and content as acceptable to the Lender.

                  (f)      Accounts Payable Reconciliation. Within 15 calendar
days following the end of each calendar month, a statement which reconciles the
accounts payable balance per the Balance Sheet with the accounts payable balance
shown in the accounts payable aging report generated by the Borrowers' JD
Edwards accounting system, prepared for such month in such form and content as
acceptable to the Lender.

                  (g)      Inventory Reconciliation. Within 15 calendar days
following the end of each calendar month, a statement which reconciles inventory
balance per the Balance Sheet with the balance per the inventory detail
generated by the Borrowers' JD Edwards accounting system, prepared for such
month in such form and content as acceptable to the Lender.

                  (h)      Priced Out Inventory Report. Within 15 calendar days
following the end of each calendar quarter, a detailed priced physical inventory
report by each individual product, which report shall (i) set forth unit volume,
product aging indication, prices and extended dollar value, (ii) be reconciled
to the general ledger and (iii) be prepared in such form and content as
acceptable to the Lender.


                                      -11-

                  (i)      SG&A Variance Analysis. Within 15 calendar days
following the end of each calendar month, quarter and year, a report showing and
explaining the variance between actual SG&A expense during such period and the
amount of SG&A projected in the Budget for such period, in such form and content
as acceptable to the Lender.

                  (j)      Manufacturing Variance Analysis. Within 15 calendar
days following the end of each calendar month, quarter and year, a report
detailing variances between actual results during such period and the
corresponding amounts projected in the Budget for such period, in such form and
content as acceptable to the Lender. Such report shall (i) detail volume
variances, price variances and unexplained variances (any variance not detected
in volume or price variances will require more in depth analysis) and (ii) also
include a "fixed cost variance analysis," which is an allocation analysis of
fixed costs that are uncontrollable by production floor operations.

                  (k)      Daily Borrowing Base Computation. No later than 10:00
a.m. (Chicago time) on each Business Day on which the Borrowers incur no Tranche
B Loan, a computation of the Borrowing Base as in effect on such day (in the
form of Annex I to Exhibit A).

         6.8      Dividends.

                  (a)      Neither of the Borrowers will declare or pay any
dividends, or return any capital, to its stockholders or authorize or make any
other distribution, payment or delivery of property or cash to its stockholders
as such, or redeem, retire, purchase or otherwise acquire, directly or
indirectly, for a consideration, any shares of any class of its capital stock
now or hereafter outstanding (or any options or warrants issued by such Borrower
with respect to its capital stock), or set aside any funds for any of the
foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise
acquire for a consideration any shares of any class of the capital stock of such
Borrower now or hereafter outstanding (or any options or warrants issued by such
Borrower with respect to its capital stock).

                  (b)      Neither of the Borrowers will permit any of its
Subsidiaries to declare or pay any dividends, or return any capital, to its
stockholders or authorize or make any other distribution, payment or delivery of
property or cash to its stockholders as such, or redeem, retire, purchase or
otherwise acquire, directly or indirectly, for a consideration, any shares of
any class of its capital stock now or hereafter outstanding (or any options or
warrants issued by such Subsidiary with respect to its capital stock), or set
aside any funds for any of the foregoing purposes, or permit any of its
Subsidiaries to purchase or otherwise acquire for a consideration any shares of
any class of the capital stock of such Subsidiary now or hereafter outstanding
(or any options or warrants issued by such Subsidiary with respect to its
capital stock), except that any Subsidiary of any Borrower may pay dividends to
such Borrower or any Wholly-Owned Subsidiary of such Borrower.

         6.9      Minimum Receipts. For the periods commencing on September 1,
2002, and ending on the last day of each of the months set forth below, the
Gross Receipts, Cumulative Gross Receipts, Net Receipts and Cumulative Net
Receipts of the Borrowers shall be not less than the amount set forth for such
month:


                                      -12-

- -------------------------------------------------------------------------------------------- CUMULATIVE CUMULATIVE MONTH GROSS RECEIPTS GROSS RECEIPTS NET RECEIPTS NET RECEIPTS - -------------------------------------------------------------------------------------------- September, 2002 $3,800,000 $3,800,000 ($320,000) ($320,000) October, 2002 $3,955,000 $7,750,000 ($180,000) ($253,000) November, 2002 $3,895,000 $11,650,000 ($380,000) ($383,000) December, 2002 $3,895,000 $15,550,000 $225,000 $91,000
The Borrowers acknowledge and agree that the amounts provided for in this clause have been established at levels that are substantially lower than the Borrowers' actual expectations, and that any failure to satisfy the foregoing condition of this clause shall be deemed to be material, regardless of the amount of such failure. 6.10 Capital Expenditures. The Borrowers will not, and will not permit any of their Subsidiaries to, make any expenditure for fixed or capital assets without the prior written consent of the Lender at any time after the Agreement Closing Date; provided, however, that after the Budget has been received and approved by the Lender, the Lender's consent shall not be required with respect to any such expenditures approved by the Consultant as provided for in the Budget. 6.11 Accounting Practices. The Borrowers will not, and will not permit their Subsidiaries, to make any changes in their accounting policies or practices (including, without limitation, estimations used in calculating reserves) after the Agreement Closing Date without the prior written consent of the Lender. 6.12 Tax Refunds. Upon receipt of any amounts from any Governmental Authority as a credit or refund for any Charges previously withheld or otherwise paid, the Borrowers will hold all such amounts in trust for the benefit of the Lender as collateral securing the Obligations and shall as promptly as possible, but in any event within two Business Days, deliver all such amounts to the Lender as repayment of Tranche A Loans. ARTICLE VII PAYMENTS 7.1 Payments. The Lender shall, and the Borrowers hereby irrevocably authorize the Lender to, (a) on the Agreement Closing Date withdraw all cash amounts on deposit (including arising from the liquidation of any cash equivalent then on deposit and from the transfer on such date of cash from the Lock-Box Account to the Concentration Account) and apply same to (i) the payment of the $200,000 fee referred to in Section 5.1(c) and (ii) thereafter repay outstanding Tranche A Loans and (b) on each Business Day thereafter, withdraw all cash amounts on deposit in the Concentration Account (including any cash transferred thereto on such date from the Lock-Box Account) and apply same to (i) first, to all Obligations (other than principal of the Loans) then due and payable, (ii) second, to the outstanding principal amount of all Tranche B Loans and (iii) thereafter, to the outstanding principal amount of all Tranche A Loans. -13- ARTICLE VIII TRANCHE B FACILITY 8.1 Tranche B Loans. Subject to the terms and conditions of this Agreement and the Loan Documents, the Lender agrees to make advances (each, a "Tranche B Loan" and, collectively, the "Tranche B Loans") to the Borrowers, from time to time during the Forbearance Period, at such times and in such amounts as the Borrowers may request, not to exceed in the aggregate at any one time outstanding the Tranche B Commitment at such time. During such time, the Borrowers may from time to time borrow, repay and reborrow under this Section 8.1. Each Tranche B Loan 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 10:00 a.m. (Chicago time) on the Business Day of the proposed Tranche B Loan; provided, however, that any Tranche B Loan requested shall be in a minimum amount of $100,000. Each such notice (a "Notice of Tranche B Borrowing") shall be substantially in the form of Exhibit A, co-signed by the Consultant, specifying therein the requested date and the amount of such Tranche B Loan, and such other information as may be required by Lender and shall be given in writing (by telecopy or overnight courier) or by telephone (to the extent the Consultant is part of such telephonic notice) confirmed immediately in writing if requested by the Lender. Lender shall be entitled to rely upon, and shall be fully protected under this Agreement and the Loan Documents in relying upon, any Notice of Tranche B Borrowing believed by Lender to be genuine and to assume that each Person executing and delivering the same was duly authorized. 8.2 Tranche B Note. Borrowers shall execute and deliver to the Lender a note to evidence the Tranche B Loans, such note to be in the maximum amount of the Tranche B Commitment, dated the date hereof and in form and content acceptable to the Lender (the "Tranche B Note"). The Tranche B Note shall represent the joint and several obligation of each Borrower to pay the amount of the Tranche B Commitment or, if less, the aggregate unpaid principal amount of all Tranche B Loans made by the Lender to the Borrowers with interest thereon as prescribed in Section 8.5. The date and amount of each Tranche B Loan 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 Tranche B Loans shall be immediately due and payable on the Forbearance Termination Date. 8.3 Designated Borrower. Each Borrower hereby irrevocably designates Akorn as its sole agent for the purposes of issuing Notices of Tranche B Borrowings and receiving notices and consents in respect of Tranche B Loans. 8.4 Payments; Prepayment, Commitment Reduction. (a) The Borrowers shall repay all outstanding principal of the Tranche B Loans on the Forbearance Termination Date. (b) On any date on which the sum of the aggregate outstanding principal amount of the Tranche B Loans exceeds the Tranche B Loan Commitment then in effect, the Borrowers shall repay Tranche B Loans in an amount equal to such excess. -14- (c) Borrowers shall have the right at any time to voluntarily prepay all or part of the Tranche B Loans and permanently reduce or terminate the Tranche B Commitment, and no prepayment fee, premium or penalty shall be payable in connection with any such voluntary prepayment. Upon any such prepayment and permanent reduction or termination of the Tranche B Commitment, Borrowers' right to receive Tranche B Loans shall simultaneously terminate or be permanently reduced, as the case may be. 8.5 Interest on Tranche B Loans. (a) Borrowers shall pay interest to Lender, in arrears on the last Business Day of each calendar month, based on the amounts outstanding from time to time under the Tranche B Loans, at a rate equal to the sum of the Prime Rate and 3.0% per annum. (b) If any payment on the Tranche B 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 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 shall be determined each day based upon the Prime Rate 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) Notwithstanding anything to the contrary set forth in this Section 8.5, if, at any time until payment in full of all of the Obligations, the rate of interest payable in respect of the Trache B Loans 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 in respect of the Tranche B Loans 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 Tranche B Loans 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 Agreement Closing Date as otherwise provided in this Agreement. Thereafter, the interest rate payable hereunder shall be the rate of interest provided in Sections 8.5(a) through (c) 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 8.5(d), 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 -15- applicable law, promptly apply such excess first to any interest due and not yet paid hereunder in respect of the Tranche B Loans, then to the outstanding principal of the Tranche B 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. 8.6 Application and Allocation of Payments. Lender is authorized to, and at its option may, make or cause to be made Tranche B Loans on behalf of the Borrowers for payment of all Fees, expenses, Charges, costs, principal, interest, or other Obligations owing by any 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. At Lender's option and to the extent permitted by applicable law, any advances so made shall be deemed Tranche B Loans constituting part of the Tranche B Loans hereunder. 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 Loans as Lender may deem advisable notwithstanding any previous entry by Lender upon the Loan Account or any other books and records. 8.7 Conditions Precedent to Tranche B Borrowings. 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 Tranche B Loan, 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) Accuracy of Representations and Warranties. All of each Borrowers' representations and warranties contained herein or in any of the other Loan Documents shall be true and correct on and as of the Agreement Closing Date and the date on which each such Tranche B Loan is made 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. (b) No Material Adverse Change. Except for the Existing Events, no Material Adverse Effect shall have occurred since the Agreement Closing Date (including, without limitation, in respect of events or circumstances that commenced prior to the Agreement Closing Date). (c) No Default. Except for the Existing Events, no event shall have occurred and be continuing, or would result from the making of any Tranche B Loan, which constitutes or would constitute a Default or an Event of Default. The request and acceptance by any Borrower of the proceeds of any Tranche B Loan shall be deemed to constitute, as of the date of such request or acceptance, a representation and warranty by the Borrowers to the Lender that the conditions in this Section 8.7 have been satisfied. -16- ARTICLE IX REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement and as partial consideration for the terms and conditions contained herein, each Borrower makes the following representations and warranties to the Lender, each and all of which shall survive the execution and delivery of this Agreement and all of the other documents executed in connection herewith: 9.1 Organization and Location. (a) Akorn is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana and duly qualified to do business and in good standing in the States of Illinois and California, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. (b) Akorn NJ is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois and duly qualified to do business and in good standing in the Sate of New Jersey, has all necessary power to carry on its present business, and has full right, power and authority to enter into and execute and deliver this Agreement and to otherwise perform and consummate the transactions contemplated thereby. 9.2 Corporate Power and Authority. This Agreement has been duly authorized, executed and delivered by the Borrowers and constitutes the valid and legally binding obligation enforceable against the Borrowers in accordance with their terms, subject to bankruptcy, insolvency and other laws of general application relating to the enforcement of creditors rights. The execution and delivery of this Agreement and compliance with the provisions thereof under the circumstances contemplated therein do not and will not conflict with or constitute a breach or violation of or default under the articles of incorporation or bylaws of either of the Borrowers, or any agreement or other instrument to which either of the Borrowers are party, or by which either of them are bound, or to which their properties are subject, or any existing law, administrative regulation, court order or consent decree to which either of them are subject. 9.3 Litigation. (a) There is no litigation or administrative proceeding pending or threatened to restrain or enjoin the transactions contemplated by this Agreement or any of the other Loan Documents, or questioning the validity thereof, or in any way contesting the existence or powers of either of the Borrowers, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement or any of the other Loan Documents. (b) Except as disclosed in Schedule 9.3, there is no litigation or administrative proceeding pending or threatened against either of the Borrowers. 9.4 Identification and Location of Assets. Except as set forth on Schedule 9.4, all of each Borrower's assets are the same and remain in the same location(s) as reflected in the Loan Documents heretofore delivered to the Lender. -17- 9.5 Financial Statements; Reporting. (a) All balance sheets, reports, budgets, reconciliations, accounts receivable reports, and other financial information prepared for and supplied to the Lender with respect to any Borrower will be prepared, if applicable, in conformity with GAAP, and will present fairly the financial condition and results of operations for the period covered thereby. Other financial information maintained in the ordinary course of any Borrower's business that shall be requested by the Lender or the Advisors shall conform to and be reflective of such Borrower's normal accounting procedures. (b) Neither Borrower has any knowledge of any facts, other than those already disclosed in writing to the Lender that materially adversely affect or, in so far as can be foreseen, will materially adversely affect any Borrower's ability to perform its obligations under this Agreement and the Loan Documents. After the Agreement Closing Date, each Borrower will notify the Lender of any facts which became known to such Borrower on or after the Agreement Closing Date which may materially adversely affect any Borrower's ability to perform its obligations under this Agreement and the Loan Documents. 9.6 No Untrue or Misleading Statements. Neither this Agreement nor any other document executed or delivered by any Borrower in connection herewith contains any untrue statement of a material fact or omits any material fact necessary in order to make the statement made, in light of the circumstances under which it was made, accurate. 9.7 No Events of Default. Each Borrower hereby reaffirms that other than the Existing Events, no Default or Event of Default has occurred as of the date hereof under any of the Loan Documents that would produce a Material Adverse Effect. 9.8 Other Representations and Warranties. Each Borrower hereby reaffirms all of its representations and warranties to the Lender contained in the Loan Documents, and warrants that such representations and warranties, not otherwise rendered untrue by the Existing Events as disclosed by the Borrowers herein, are true and correct as of the date of this Agreement, provided however, that to the extent any such representations and warranties refer to a Schedule, Schedule 9.8 attached to this Agreement contains accurate and complete current updates of the information contained in the corresponding Schedules attached to the Credit Agreement. ARTICLE X DEFAULTS AND REMEDIES 10.1 Events of Default. It shall constitute an Event of Default under the Credit Agreement, if either Borrower (i) fails to perform or observe any covenant, term, agreement or condition in this Agreement or (ii) is in violation of or non-compliance with any provision of this Agreement after the expiry of any cure period specified thereto. Each Borrower specifically agrees that, upon and at any time after the Forbearance Termination Date, all Obligations shall be due in full and payable, and the Lender may, in its sole discretion, without any prior notice to any Borrower, exercise or enforce any or all of its rights and remedies under this Agreement, the other Loan Documents, and/or applicable law, against any one or more of the Borrowers. -18- 10.2 Reservation of Rights. The Borrowers acknowledge and agree that the Lender has made no agreement, and has given no assurances of any sort, as to any forbearance by the Lender after the Forbearance Termination Date, and the Borrowers understand, acknowledge and agree that the Lender will be entitled to exercise any and all remedies under the Loan Documents after the Forbearance Termination Date, if and to the extent that all of the Obligations under the Loan Documents have not been fully and indefeasibly paid in cash and performed as of the Forbearance Termination Date. 10.3 Collection and Deposit of Cash Receipts. (a) The Lender hereby grants to the Borrowers the authority to collect their accounts receivable during the Forbearance Period, and will not, during the Forbearance Period, exercise its right under Section 7 of the Security Agreement to make direct collections from the Borrowers' account debtors, but such grant of authority by the Lender to the Borrowers to collect their accounts receivable shall be subject to the terms and conditions hereinafter set forth in this Section 10.3. The authority granted to the Borrowers by the Lender in this Section 10.3(a) to collect their accounts receivable shall terminate at the end of the Forbearance Period. (b) Except as provided in paragraph (e) of this Section 10.3, at all times on and after the date of this Agreement, (i) all cash receipts received by either of the Borrowers, including, without limitation, payments of accounts receivable, amounts previously deposited in the Lock-Box Account, and proceeds of the loans under the Subordinated Loan Agreement, whether by check or in any other form, shall be deposited by the Borrowers not later than the first Business Day after the date or receipt, in the Concentration Account; and (ii) the Borrowers shall have all of their cash and investments (whether derived from collections of accounts receivable or other sources) on deposit in accounts maintained with the Lender (all such accounts with the Lender, including the Lock-Box Account, are hereinafter referred to as the "Bank Accounts"). The Borrowers hereby acknowledge and reaffirm the grant to the Lender of a security interest in the Bank Accounts as provided in the Security Agreement. (c) The Borrowers agree that they shall have no right to receive, or be paid, any amounts deposited in the Concentration Account or the Lock-Box Account. All amounts on deposit in the Lock-Box Account on the Agreement Closing Date will be transferred to the Concentration Account on such date and all amounts thereafter deposited in the Lock-Box Account will be transferred to the Concentration Account on the date received. All cash in the Concentration Account will be withdrawn by the Lender on each Business Day on and after the Agreement Closing Date and applied as provided in Section 7.1. The rights of the Lender to withdraw amounts from the Bank Accounts as specified in Section 7.1 and/or in this Section 10.3 shall continue until all Obligations have been repaid in full notwithstanding any termination or expiration of the Forbearance Period. (d) The Borrowers currently maintain a lockbox account arrangement with the Lender for the purpose of receiving payment of accounts receivable. From and after the date of this Agreement, such lockbox account arrangement shall be mandatory and shall be used by the Borrowers for the collection of all of their accounts receivable, except as otherwise permitted by paragraph (e) below. The Borrowers shall instruct their account debtors to make payment of their accounts directly to such lockbox account (the "Lock-Box Account"), except as otherwise -19- permitted by paragraph (e) below. The Borrowers hereby irrevocably designate, make, constitute and appoint the Lender, and all persons designated by the Lender, as the Borrowers' true and lawful attorney and agent-in-fact, and the Lender, or the Lender's agent may, without notice to the Borrowers, endorse any Borrower's name on any checks, notes, drafts or any other items of payment which come into the possession of the Lender or under the Lender's control and at any time and from time to time (including, without limitation, during the Forbearance Period), apply such payment or proceeds to the Obligations of the Borrowers under the Loan Documents as provided in Sections 7.1 and/or 10.3(c). (e) Notwithstanding the foregoing provisions of this Section 10.3, during the Forbearance Period, the Borrowers may maintain a bank account at American National Bank and Trust Company of Chicago for the purpose of processing credit card payments, provided that the balance on deposit in such account shall not at any time be in excess of $150,000. ARTICLE XI MISCELLANEOUS 11.1 Continuing Effect. Except as amended hereby, all of the Loan Documents shall remain in full force and effect and bind and inure to the benefit of the parties thereto and are hereby ratified and confirmed. 11.2 Governing Law; Jurisdiction. This Agreement shall be governed by and be construed and enforced in accordance with the laws of the State of Illinois. Each Borrower hereby irrevocably submits to the jurisdiction of any Illinois State or United States Federal Court sitting in Chicago over any action or proceeding arising out of or relating to this Agreement, and each Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard or determined in such Illinois State or Federal Court. As an alternative method of service, each Borrower also irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to such Borrower at its address specified on the signature page hereof. Each Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Borrower further waives any objection to venue in any court referred to in the first sentence of this Section 11.2 and any objection to an action or proceeding in such court on the basis of forum non conveniens. Each Borrower further agrees that any action or proceeding brought against the Lender shall be brought only in a Illinois State or United States Federal Court sitting in Chicago. 11.3 Cooperation; Other Documents. At all times following the execution of this Agreement, each Borrower shall execute and deliver to the Lender, or shall cause to be executed and delivered to the Lender, and shall do or cause to be done all such other acts and things as the Lender may reasonably deem to be necessary or desirable to assure the Lender of the benefit of this Agreement and the documents comprising or relating to this Agreement. Each Borrower will execute, deliver and file, within five (5) Business Days of submission to such Borrower by the Lender or the Agent, any and all documents reasonably necessary or convenient to maintain continuously perfected the first priority liens and security interests of the Lender in the Collateral. -20- 11.4 Remedies Cumulative; No Waiver. The respective rights, powers and remedies of the Lender under this Agreement are cumulative and not exclusive of any right, power or remedy provided in the Loan Documents, by law or equity and no failure or delay on the part of the Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. Nothing contained in this Agreement or in any prior communications between or among any of the Borrowers and/or the Lender shall constitute a waiver or modification of any rights or remedies that the Lender may have under the Loan Documents and applicable law, and the Lender expressly reserves and preserves all of its rights and remedies under each of the Loan Documents. 11.5 Notices. Any notice given pursuant to this Agreement or pursuant to any document comprising or relating to this Agreement or any of the other Loan Documents shall be in writing, including telecopies. Notice given (i) by telecopy shall be deemed to have been given and received when sent, (ii) by overnight mail courier shall be deemed to have been given and received one (1) Business Day after the date delivered to such overnight courier by the party sending such notice, (iii) by mail shall be deemed to have been given and received three (3) Business Days after the date deposited, when sent by first class certified mail, postage prepaid, in each case addressed to the respective address specified on the signature page hereof; provided that any notice given to Akorn shall be deemed to be given to both Borrowers. A party may change its address by giving written notice of the changed address to the other parties, as specified herein. 11.6 Indemnification. Each Borrower jointly and severally agrees to indemnify the Lender Parties and their respective Affiliates, successors and assigns (collectively, the "Related Parties") and to hold them harmless from and against any and all claims, losses and liabilities growing out of or resulting from a breach of its obligations under this Agreement, except to the extent determined by the final and nonappealable judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Related Party seeking indemnification. 11.7 RELEASE. EACH BORROWER ON BEHALF OF ITSELF AND ITS AFFILIATES, SUBSIDIARIES, SUCCESSORS, ASSIGNS, PRINCIPALS, SHAREHOLDERS, BENEFICIARIES, OFFICERS, MANAGERS, DIRECTORS, AGENTS, REPRESENTATIVES, ADVISORS, EMPLOYEES AND ATTORNEYS, HEREBY JOINTLY AND SEVERALLY RELEASES, WAIVES AND FOREVER DISCHARGES EACH OF THE LENDER, THE ADVISORS, AND THEIR RESPECTIVE AFFILIATES, SUBSIDIARIES, SUCCESSORS, ASSIGNS, PRINCIPALS, SHAREHOLDERS, BENEFICIARIES, OFFICERS, MANAGERS, DIRECTORS, AGENTS, REPRESENTATIVES, ADVISORS, EMPLOYEES AND ATTORNEYS OF, FROM, AND WITH RESPECT TO ANY AND ALL MANNER OF ACTIONS, CAUSES OF ACTIONS, SUITS, DISPUTES, CLAIMS, COUNTERCLAIMS AND/OR LIABILITIES, CROSS CLAIMS, DEFENSES THAT ARE KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, PAST OR PRESENT, ASSERTED OR UNASSERTED, CONTINGENT OR LIQUIDATED, WHETHER OR NOT WELL FOUNDED IN FACT OR LAW, WHETHER IN CONTRACT, IN TORT OR OTHERWISE, AT LAW OR IN EQUITY, BASED UPON, RELATING TO OR ARISING OUT OF ANY AND ALL TRANSACTIONS, -21- RELATIONSHIPS OR DEALINGS WITH OR LOANS MADE TO THE BORROWERS PURSUANT TO THE LOAN DOCUMENTS PRIOR TO THE DATE HEREOF. 11.8 Survival of Representations and Warranties. All representations and warranties of each Borrower contained in this Agreement and in all other documents and instruments executed in connection herewith or otherwise relating to this Agreement shall survive the execution of this Agreement and are material and have been or will be relied upon by the Lender, notwithstanding any investigation made by any person, entity or organization on the Lender's behalf. No implied representations or warranties are created or arise as a result of this Agreement or the documents comprising or relating to this Agreement. 11.9 Headings. The headings and underscoring of articles, sections and clauses have been included herein for convenience only and shall not be considered in interpreting this Agreement. 11.10 Integration. This Agreement and all documents and instruments executed in connection herewith or otherwise relating to this Agreement, including, without limitation, the Loan Documents, constitute the sole agreement of the parties with respect to the subject matter hereof and thereof and supersede all oral negotiations and prior writings with respect to the subject matter hereof and thereof. 11.11 Amendment and Waiver. No amendment of this Agreement, and no waiver, discharge or termination of any one or more of the provisions thereof, shall be effective unless set forth in writing and signed by all of the parties hereto. 11.12 Successors and Assigns. This Agreement (a) shall be binding upon each of the Borrowers and the Lender and upon their respective successors and assigns and (b) shall inure to the benefit of each of the Borrowers and the Lender; provided, however, that neither Borrower may assign any rights hereunder or any interest herein without obtaining the prior written consent of the Lender, and any such assignment or attempted assignment shall be void and of no effect with respect to the Lender. 11.13 Severability of Provisions. Any provision of this Agreement that is held to be inoperative, unenforceable, void or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of that provision in any other jurisdiction, and to this end the provisions of this Agreement are declared to be severable. 11.14 Conflicting Provisions. To the extent that any of the terms in this Agreement contradict any of the terms contained in any of the Loan Documents including, but not limited to, the Credit Agreement, the terms of this Agreement shall control. 11.15 Joint and Several Liability. The obligations and liabilities of the Borrowers hereunder are joint and several. 11.16 Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same -22- Agreement. This Agreement shall be deemed to have been executed and delivered when the Lender has received counterparts hereof executed by all parties listed on the signature pages hereto. 11.17 Time of Essence. Time is of the essence of this Agreement and each of the provisions hereof. 11.18 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENTS OR INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH (INCLUDING WITHOUT LIMITATION, THE TRANCHE B NOTE), OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AGREEMENT. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -23- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. Address for Notices: AKORN, INC. 2500 Millbrook Drive Buffalo Grove, IL 60089 Attention: Chief Financial Officer By__________________________________ Telecopier No.: (847) 279-6191 Name:_____________________________ Telephone No.: (847) 279-6100 Title:____________________________ AKORN (NEW JERSEY), INC. By__________________________________ Name:_____________________________ Title:____________________________ 50 South LaSalle Street THE NORTHERN TRUST COMPANY Chicago, Illinois 60675 Attention: Olga Georgiev Telecopier No.: (312) 630-6105 Telephone No.: (312) 444-2438 By__________________________________ Name:_____________________________ With a copy to Title:____________________________ White & Case LLP 200 S. Biscayne Blvd., Suite 4900 Miami, FL 33131 Attention: John K. Cunningham, Esq. -24- Schedule 1.1 Existing Events (other than the Payment Default) None. Schedule 6.4 Consultants Larry Adelman AEG Restructuring Services 1849 Green Bay Road Suite 270 Highland Park IL 60035 Telephone: 847-681-1818 (direct line: 847-579-5007) Robert J. Rock Principal AlixPartners LLC 2000 Town Center, Suite 2400 Southfield, MI 48075 Telephone: 248-262-8449 Edward Casas Gerald Benjamin Casas, Benjamin & White LLC 5215 Old Orchard Rd Suite 850 Skokie IL 60077 Telephone: 847-583-1619 Schedule 9.3 Litigation 1. Matters relating to 483 Warning Letter issued to Akorn, Inc. by the United States Food and Drug Administration. 2. Investigation by the United States Securities and Exchange Commission described in the letter dated March 27, 2003. 3. Investigation by the United States Drug Enforcement Administration described in the letter dated March 6, 2002 from the United States Attorney for the Central District of Illinois. Schedule 9.4 Location of Assets No change. Schedule 9.8 Update of Existing Schedules No change. EXHIBIT A NOTICE OF TRANCHE B BORROWING [Date] The Northern Trust Company 50 South LaSalle Street Chicago, Illinois 60675 Attention: Olga Georgiev Ladies and Gentlemen: The undersigned, Akorn, Inc. (the "Designated Borrower"), refers to the Pre-Negotiation Agreement, dated as of September 13, 2002 (as modified, supplemented or amended from time to time, the "Agreement," the terms defined therein being used herein as therein defined), among the Designated Borrower, Akorn (New Jersey), Inc., a corporation organized and existing under the laws of Illinois, and The Northern Trust Company, and hereby gives notice, irrevocably, pursuant to Section 8.1 of the Agreement, that the undersigned requests a Tranche B Loan under the Agreement, and in that connection sets forth below the information relating to such borrowing (the "Proposed Borrowing"): (a) The Business Day of the Proposed Borrowing is _____ ___, 20__; and (b) The aggregate principal amount of the Proposed Borrowing is $________. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 9 of the Agreement are true and correct in all material respects, before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as though made on and as of such date; (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof; and (C) the Borrowing Base on and as of the date of the Proposed Borrowing is $_______, and attached hereto as Annex I are true and correct calculations showing in reasonable detail the basis of calculation thereof. Very truly yours, AKORN, INC. By___________________________ Name: Title: Exhibit A Annex I Borrowing Base Calculations Gross Trade Accounts Receivables Less Payments in transit Less Reserves: Allowance for doubtful accounts Returns Reserve Discounts & Allowances Chargeback Reserve Rebates Reserve Equals Net Trade Accounts Receivable Multiplied by 0.50% Equals Borrowing Base -31-

                                                                    EXHIBIT 21.1

                           SUBSIDIARIES OF THE COMPANY

         Name                                   State of Incorporation
- ---------------------------                     ----------------------

Akorn (New Jersey), Inc.                               Illinois

























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 September 24, 2002, except for paragraph 5 of Note T, as to which the date
is October 1, 2002, (which report expresses an unqualified opinion and includes
explanatory paragraphs relating to the Company's ability to continue as a going
concern and the restatement of the 2000 and 2001 financial statements),
appearing in this annual report on Form 10-K/A (Amendment No. 2) of Akorn, Inc.
for the year ended December 31, 2001.


Deloitte & Touche LLP

Chicago, Illinois
October 4, 2002






                                                                    Exhibit 99.1


                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Akorn, Inc. (the "Company") on Form
10-K/A for the period ending December 31, 2001, as filed with the Securities and
Exchange Commission and to which this Certification is an exhibit (the
"Report"), each of the undersigned officers of Akorn, Inc. does hereby certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

      (1)   The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company for the period reflected therein.

Date: October 4, 2002

                                                /s/      JOHN N. KAPOOR
                                                --------------------------------
                                                         John N. Kapoor
                                                     Chief Executive Officer



                                                /s/      BEN J. POTHAST
                                                --------------------------------
                                                         Ben J. Pothast
                                                     Chief Financial Officer


                                       61