NOTE 9 — FINANCING ARRANGEMENTS

Convertible Notes

On June 1, 2011, the Company closed its offering of $120,000,000 aggregate principal amount of 3.50% Convertible Senior Notes due 2016 (the "Notes") which includes $20,000,000 in aggregate principal amount of the Notes issued in connection with the full exercise by the initial purchasers of their over-allotment option. The Notes are governed by the Company's indenture with Wells Fargo Bank, National Association, as trustee (the "Indenture"). The Notes were offered and sold only to qualified institutional buyers. The net proceeds from the sale of the Notes were approximately $115,317,000, after deducting underwriting fees and other related expenses.

The Notes have a maturity date of June 1, 2016 and pay interest at an annual rate of 3.50% semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2011. The Notes are convertible into Akorn's common stock, cash or a combination thereof at an initial conversion price of $8.76 per share, which is equivalent to an initial conversion rate of approximately 114.1553 shares per $1,000 principal amount of Notes. The conversion price is subject to adjustment for certain events described in the Indenture, including certain corporate transactions which will increase the conversion rate and decrease the conversion price for a holder that elects to convert its Notes in connection with such corporate transaction.

The Notes are not listed on any securities exchange or on any automated dealer quotation system. The initial purchasers of the Notes advised the Company of their intent to make a market in the Notes following the offering, though they are not obligated to do so and may discontinue any market making at any time. As of September 30, 2012 the Notes were trading at approximately 167% of their face value, resulting in a total market value of approximately $200.0 million compared to their face value of $120.0 million. The actual conversion value of the Notes is based on the product of the conversion rate and the market price of the Company's common stock at conversion, as defined in the Indenture. As of September 30, 2012, the Company's common stock closed at $13.22 per share, resulting in a pro forma conversion value for the Notes of approximately $181.1 million. Increases in the market value of the Company's common stock increase the Company's obligation accordingly. There is no upper limit placed on the possible conversion value of the Notes.

The Notes may be converted at any time prior to the close of business on the business day immediately preceding December 1, 2015 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2011, if the closing sale price of the Company's common stock, for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price in effect on each applicable trading day; (2) during the five consecutive trading-day period following any five consecutive trading-day period in which the trading price for the Notes per $1,000 principal amount of Notes for each such trading day was less than 98% of the closing sale price of the Company's common stock on such date multiplied by the then-current conversion rate; or (3) upon the occurrence of specified corporate events. On or after December 1, 2015 until the close of business on the business day immediately preceding the stated maturity date, holders may surrender all or any portion of their Notes for conversion at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, at the Company's option, cash, shares of the Company's common stock, or a combination thereof. If a fundamental change (as defined in the Indenture) occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or a portion of their Notes.

The Notes became convertible as of April 1, 2012 and will continue to be convertible at least through December 31, 2012. Convertibility was triggered when the Company's common stock closed above the required trading price of $11.39 per share for 20 of the last 30 consecutive trading days in the quarters ended March 31, 2012. This convertibility condition was likewise met at the end of the quarters ended June 30, 2012 and September 30, 2012 as well. As of the date of this report, no holders have submitted their Notes for conversion.

The Notes are accounted for in accordance with ASC 470-20. Under ASC 470-20, issuers of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, are required to separately account for the liability (debt) and equity (conversion option) components.

The application of ASC 470-20 resulted in the recognition of $20,470,000 as the value for the equity component. At September 30, 2012 and December 31, 2011, the net carrying amount of the equity and liability components and the remaining unamortized debt discount were as follows (in thousands):

		SEPTEMBER 30, 2012	DECEMBER 31, 2011
Carrying amount of equity component	$	20,470	$	20,470
Carrying amount of the liability component		103,653		100,808
Unamortized discount of the liability component		16,347		19,192
Unamortized deferred financing costs		2,956		3,470

The Company incurred debt issuance costs of $4,683,000 related to its issuance of the Notes. In accordance with ASC 470-20, the Company allocated this debt issuance cost ratably between the liability and equity components of the Notes, resulting in $3,852,000 of debt issuance costs allocated to the liability component and $831,000 allocated to the equity component. The portion allocated to the liability component was classified as deferred financing costs and is being amortized by the effective interest method through the earlier of the maturity date of the Notes or the date of conversion, while the portion allocated to the equity component was recorded as an offset to additional paid-in capital upon issuance of the Notes.

For the three and nine months ended September 30, 2012, the Company recorded the following expenses related to the Notes (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Interest expense at 3.50% coupon rate (1)	$	1,050	$	1,050	$	3,150	$	1,400
Debt discount amortization (2)		965		909		2,845		1,195
Deferred financing cost amortization (3)		174		165		514		216
	$	2,189	$	2,124	$	6,509	$	2,811

Line Item in which each item is included within the Condensed Consolidated Statements of Comprehensive Income:

(1)

Interest (expense) income, net

(2)

Non-cash interest expense

(3)

Amortization of deferred financing costs

Upon issuing the Notes in 2011, the Company established a deferred tax liability of $8,597,000 related to the debt discount of $21,301,000, with an offsetting reduction of $8,597,000 to Common stock. The deferred tax liability was established because the amortization of the debt discount generates non-cash interest expense that is not deductible for income tax purposes. Since the Company's net deferred tax assets were fully reserved by valuation allowance at the time the Notes were issued, the Company reduced its valuation allowance by $8,597,000 upon recording the deferred tax liability related to the debt discount with an offsetting credit of $8,597,000 to Common stock. As a result, the net impact of these entries was a debit of $8,597,000 to the valuation reserve against the Company's deferred tax assets and a credit of $8,597,000 to deferred tax liability. The deferred tax liability is being amortized monthly as the Company records non-cash interest from its amortization of the debt discount on the Notes.

Bank of America Credit Facility

On October 7, 2011, the Company and its domestic subsidiaries (the "Borrowers") entered into a Loan and Security Agreement (the "B of A Credit Agreement") with Bank of America, N.A. (the "Agent") and other financial institutions (collectively with the Agent, the "B of A Lenders") through which it obtained a $20.0 million revolving line of credit (the "Facility"), which includes a $3.0 million letter of credit facility. The Company may request expansion of the Facility from time to time in increments of at least $5.0 million up to a maximum commitment of $35.0 million, so long as no default or event of default has occurred and is continuing. The facility matures in March 2016. The Company may early terminate the B of A Lenders' commitments under the Facility upon 90 days' notice to the Agent at any time after the first year.

Under the terms of the B of A Credit Agreement, amounts outstanding will bear interest at the Company's election at (a) LIBOR or (b) the bank's Base Rate (which is the greatest of: (i) the prime rate, (ii) the federal funds rate plus 0.50%, or (iii) LIBOR plus 1.0%), plus an applicable margin, which margin is based on the consolidated fixed charge coverage ratio of the Company and its subsidiaries from time to time. Additionally, the Borrowers will pay an unused line fee of 0.250% per annum on the unused portion of the Facility. Interest and unused line fees will be accrued and paid monthly. In addition, with respect to any letters of credit that may be issued, the Borrowers will pay: (i) a fee equal to the applicable margin times the average amount of outstanding letters of credit, (ii) a fronting fee equal to 0.125% per annum on the stated amount of each letter of credit, and (iii) any additional fees incurred by the applicable issuer in connection with issuing the letter of credit. During an event of default, any interest or fees payable will be increased by 2% per annum.

Availability under the revolving credit line is equal to the lesser of (a) $20.0 million reduced by outstanding letter of credit obligations or (b) the amount of a Borrowing Base (as defined in accordance with the terms of the B of A Credit Agreement) determined by reference to the value of the Borrowers' eligible accounts receivable, eligible inventory and fixed assets as of the closing date and the end of each calendar month thereafter.

Obligations under the B of A Credit Agreement are secured by substantially all of the assets of each of the Borrowers and a pledge by the Borrowers of their respective equity interest in each domestic subsidiary of the Company and 65% of their respective equity interests in any foreign subsidiary of the Company. The B of A Credit Agreement contains representations and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on: distributions while the Company has any outstanding commitments or obligations under the B of A Credit Agreement; additional borrowings and liens; additional investments and asset sales; and fundamental changes to corporate structure or organization documents. The financial covenants require the Borrowers to maintain a fixed charge coverage ratio of at least 1.1 to 1.0 during any period commencing on the date that an event of default occurs or availability under the B of A Credit Agreement is less than 15% of the aggregate B of A Lenders' commitments under the B of A Credit Agreement. During the term of the agreement, the Company must provide the Agent with monthly, quarterly and annual financial statements, monthly compliance certificates, annual budget projections and copies of press releases and SEC filings.

As of September 30, 2012, the Company's borrowing availability under the B of A Credit Agreement was $19.7 million. There were no outstanding borrowings against the Facility as of September 30, 2012.

EJ Funds Credit Facility

From January 7, 2009 to June 17, 2011, the Company was party to a credit facility originally entered into with General Electric Capital Corporation, and subsequently assigned to EJ Funds, LP on March 31, 2009. The Company early terminated this credit facility on June 17, 2011.

The Company had not borrowed against the EJ Funds Credit Agreement since repaying its outstanding balance in the first quarter of 2010. Upon terminating the EJ Funds Credit Agreement, the Company expensed $1.2 million in remaining unamortized deferred financing costs incurred related to entering into the EJ Funds Credit Agreement. No fees or penalties were incurred related to the early termination of the EJ Funds Credit Agreement.