BUSINESS COMBINATIONS

3 Months Ended

Mar. 31, 2013

BUSINESS COMBINATIONS [Abstract]

BUSINESS COMBINATIONS

NOTE 12 — BUSINESS COMBINATIONS

On February 28, 2012, Akorn India Private Limited ("AIPL"), a wholly owned subsidiary of the Company completed and closed on its previously announced acquisition of selected assets of Kilitch Drugs (India) Limited ("KDIL").  This acquisition (the "Kilitch Acquisition") was pursuant to the terms of the Business Transfer Agreement (the "BTA") entered into among the Company, KDIL and the members of the promoter group of KDIL on October 5, 2011.  In accordance with terms contained in the BTA, the Company also closed on a related Product Transfer Agreement between the Company and NBZ Pharma Limited ("NBZ"), a company associated with KDIL.  The primary asset transferred in the Kilitch Acquisition was KDIL's manufacturing plant in Paonta Sahib, Himachal Pradesh, India, along with its existing book of business.  KDIL was engaged in the manufacture and sale of pharmaceutical products for contract customers in India and for export to various unregulated world markets.  While the Paonta Sahib manufacturing facility is not currently certified by the U.S. Food and Drug Administration (the "FDA") for the exporting of drugs to the U.S., the facility was designed with future FDA certification in mind.  Accordingly, the Kilitch Acquisition provided the Company with the potential for future expansion of its manufacturing capacity for products to be sold in the U.S., as well as the opportunity to expand the Company's footprint into markets outside the U.S.  The Company has determined that the assets acquired through the Kilitch Acquisition constitute a "business" as defined by Rule 11-01(d) of Regulation S-X and ASC 805, Business Combinations.  Accordingly, the Company has accounted for the Kilitch Acquisition as a business combination.

 AIPL paid the equivalent of approximately USD $60.1 million at closing.  Total purchase consideration was approximately $55.2 million which consisted of approximately $51.2 million in base consideration and $4.0 million in reimbursement for capital expenditures made by KDIL from April 1, 2011 to the closing date.  AIPL also paid $7.8 million related to compensation earned from the achievement of acquisition-related milestones, of which $0.5 million was recorded as expense in the quarter ended March 31, 2013, and paid $1.6 million at closing in stamp duties to transfer title to the land and buildings at Paonta Sahib from Kilitch to AIPL.  The compensation for acquisition-related milestones and other acquisition costs have been recorded within "acquisition related costs" as part of operating expenses in the Company's condensed consolidated statement of comprehensive income.  The BTA also contained a working capital guarantee which required KDIL to reimburse AIPL for the shortfall in the actual acquired working capital compared to the target working capital as established in the BTA.

The following table sets forth the consideration paid for the Kilitch Acquisition, the acquisition-related costs incurred, and the fair values of the assets acquired and the liabilities assumed (U.S. dollar amounts in thousands):

Consideration:	Initial Fair Valuation			Changes in Estimate			Adjusted Fair Valuation
Cash paid	$	55,224					$	55,224
Less working capital shortfall refunded by sellers		(890	)		(138	)		(1,028	)
	$	54,334		$	(138	)	$	54,196
Acquisition-related costs:
Stamp duties paid for transfer of land and buildings	$	1,583					$	1,583
Acquisition-related compensation expense		6,741			1,030			7,771
Due diligence, legal, travel and other acquisition-related costs		557			119			676
	$	8,881		$	1,149		$	10,030
Recognized amounts of identifiable assets acquired and liabilities assumed:
Accounts receivable	$	2,130					$	2,130
Inventory		1,799						1,799
Land		3,714			(1,131	)		2,583
Buildings, plant and equipment		8,474						8,474
Construction in progress		14,231						14,231
Goodwill, deductible		21,609			1,004			22,613
Other intangible assets, deductible		5,806			102			5,908
Other assets		38						38
Assumed liabilities		(2,099	)		(779	)		(2,878	)
Deferred tax liabilities		(1,368	)		666			(702	)
	$	54,334		$	(138	)	$	54,196

 The changes in estimate recorded subsequent to the initial accounting estimate were primarily related to refining the calculated fair value of certain acquired assets, adjustments to the working capital settlement amount due from the sellers to the Company, and final determination regarding the tax-deductibility of the acquired intangible assets.  The acquisition-related compensation expense recorded during 2012 and the first quarter of 2013 was primarily related to pre-negotiated compensation paid to members of the sellers' family based on achievement of various operational milestones.

     Goodwill represents expected synergies and intangible assets that do not qualify for separate recognition.  Based on a recent Indian Supreme Court ruling upholding the deductibility of goodwill for India tax purposes, the Company anticipates being able to deduct the value of goodwill for income tax purposes in India.  A later Indian Supreme Court ruling raised doubt as to the tax deductibility of the cost of the non-compete agreement entered into between AIPL and the sellers.  Accordingly, the Company amended its acquisition accounting to establish a deferred tax liability related to this intangible asset. The Company had initially recorded a deferred tax liability valued at $1.4 million and subsequently adjusted to $0.7 million related to intangible assets and other accrued liabilities that it does not believe will be amortizable for Indian tax purposes.  This remaining deferred tax liability of $0.7 million was reversed against goodwill during 2012.  

      For book purposes, the other intangible assets acquired are being amortized over lives of four to five years. Goodwill is not amortized for book purposes but is subject to impairment testing, per Company policy.  The tangible assets acquired consist primarily of construction in progress fair valued at $14.2 million, buildings, plant and equipment fair valued at a combined $8.5 million, land fair valued at $2.6 million, accounts receivable fair valued at $2.1 million and inventory fair valued at $1.8 million.

     The unaudited pro forma results presented below reflect the consolidated results of operation of the Company as if the Kilitch Acquisition had taken place at the beginning of the period presented.  The pro forma results include amortization associated with the acquired intangible assets and interest on funds used for the acquisition.  The unaudited pro forma financial information presented below does not reflect the impact of any actual or anticipated synergies expected to result from the acquisition.  Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date (amounts in thousands, except per share data):

	Three months ended March 31, 2012
Revenue	$	55,721
Net income	$	1,572
Net income per diluted share	$	0.01

     The business acquired through the Kilitch Acquisition generated revenue of $5.1 million and pre-tax loss of $1.2 million during the three months ended March 31, 2013.  During the post-acquisition one month ending March 31, 2012, the acquired business generated revenue of $0.9 million and a pre-tax loss of $8.3 million.  The pre-tax losses were net of acquisition-related costs of $0.5 million and $8.8 million recorded in the quarterly periods ended March 31, 2013 and 2012, respectively.