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Acura Pharmaceuticals/Inc · 10-K405 · For 12/31/99

Filed On 4/14/00 · SEC File 1-10113 · Accession Number 950123-0-3670

  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 4/14/00  Acura Pharmaceuticals/Inc         10-K405    12/31/99    8:162                                    Bowne of NY City...01/FA

Annual Report -- [X] Reg. S-K Item 405 · Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Halsey Drug Co., Inc.                                 67    226K 
 2: EX-3.1      Certificate of Incorporation and Amendments            3     11K 
 3: EX-10.72    Debenture and Warrant Purchase Agreement              50    187K 
 4: EX-10.73    Form of 5% Convertible Senior Secured Debenture       15     59K 
 5: EX-10.74    Form of Common Stock Purchase Warrant                 13     46K 
 6: EX-10.75    Lease Termination and Settlement Agreement            12     50K 
 7: EX-23.1     Consent of Grant Thornton Llp                          1      6K 
 8: EX-27       Financial Data Schedule                                1      7K

10-K405 · Halsey Drug Co., Inc.
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (RTF, XML, et al.) Business Certain Relationships and Related Transactions Cessation and Relocation of Brooklyn, New York Operations Directors and Executive Officers of the Registrant Executive Compensation Exhibits, Financial Statement Schedules and Reports on Form 8-K Financial Statements and Supplementary Data Generic Drug Enforcement Act Government Regulation Legal Proceedings Liquidity and Capital Resources Management's Discussion and Analysis of Financial Condition and Results of Operations Market Price for the Registrant's Common Equity and Related Security Holder Matters Properties Recent Events Security Ownership of Certain Beneficial Owners and Management Selected Financial Data Strategic Alliance with Watson Pharmaceuticals Submission of Matters to a Vote of Security Holders
1	1st Page
4	Item 1. Business
"	Recent Events
6	Strategic Alliance with Watson Pharmaceuticals
8	Cessation and Relocation of Brooklyn, New York Operations
11	Government Regulation
12	Generic Drug Enforcement Act
14	Item 2. Properties
15	Item 3. Legal Proceedings
"	Item 4. Submission of Matters to a Vote of Security Holders
16	Item 5. Market Price for the Registrant's Common Equity and Related Security Holder Matters
17	Item 6. Selected Financial Data
18	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
21	Liquidity and Capital Resources
23	Item 8. Financial Statements and Supplementary Data
"	Item 10. Directors and Executive Officers of the Registrant
"	Item 11. Executive Compensation
"	Item 12. Security Ownership of Certain Beneficial Owners and Management
"	Item 13. Certain Relationships and Related Transactions
25	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-K
 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999                     

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934                                                             

FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-10113

 HALSEY DRUG CO., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEW YORK                                      11-0853640    
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)                                                  

 695 NORTH PERRYVILLE ROAD, CRIMSON BUILDING NO. 2, ROCKFORD, ILLINOIS 61107
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (815) 399-2060
 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

    TITLE OF EACH CLASS                NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $0.01                 THE AMERICAN STOCK EXCHANGE       

 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
NONE

  Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange  
Act of 1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to such 
filing requirements for the past 90 days. Yes |X| No |_|                        

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, 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. |X|                                                

      As of March 31, 2000, the registrant had 14,427,619 shares of Common
Stock, par value $0.01, outstanding. Based on the closing price of the Common   
Stock on March 31, 2000 ($1.875), the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $26,781,000.         

 DOCUMENTS INCORPORATED BY REFERENCE

                                                                [Download Table]

        Document                                          Where Incorporated
        --------                                          ------------------
                                                                            
Proxy Statement for the 2000 Annual Meeting                    Part III     
of Shareholders                                                             

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CONTENTS                                                                        

                                                        [Enlarge/Download Table]

                                                                                                     PAGE
                                                                                                     ----
                                                                                                         
PART I                                                                                                   
    Item 1.   Business..............................................................................    4
    Item 2.   Properties............................................................................   14
    Item 3.   Legal Proceedings.....................................................................   15
    Item 4.   Submission of Matters to a Vote of Security Holders...................................   15

PART II                                                                                                  
    Item 5.   Market for Registrant's Common Equity and Related                                          
                Stockholder Matters.................................................................   16
    Item 6.   Selected Financial Data...............................................................   17
    Item 7.   Management's Discussion and Analysis of Financial Condition                                
                and Results of Operations...........................................................   18
    Item 8.   Financial Statements and Supplementary Data...........................................   23
    Item 9.   Changes in and Disagreement with Accountants on Accounting and                             
                Financial Disclosure................................................................   23

PART III                                                                                                 

    Item  10. Directors and Executive Officers of the Registrant....................................   23
    Item  11. Executive Compensation................................................................   23
    Item  12. Security Ownership of Certain Beneficial Owners and Management........................   23
    Item  13. Certain Relationships and Related Transactions........................................   23

PART IV                                                                                                  

    Item 14.  Exhibits, Financial Statement Schedules and Reports on                                     
                Form 8-K Signatures.................................................................   25
              Index to Consolidated Financial Statements............................................  F-1

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 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Report under the captions Item 7,  
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations," Item 1, "Business", Item 3, "Legal Proceedings" and elsewhere in   
this Report constitute "forward-looking statements" within the meaning of the   
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such       
forward-looking statements involve known and unknown risks, uncertainties and   
other factors which may cause the actual results, performance or achievements of
Halsey Drug Co., Inc. ("Halsey" or the "Company"), or industry results, to be   
materially different from any future results, performance, or achievements      
expressed or implied by such forward-looking statements. Such factors include,  
among others, the following: changes in general economic and business           
conditions; loss of market share through competition; introduction of competing 
products by other companies; the timing of regulatory approval and the          
introduction of new products by the Company; changes in industry capacity;      
pressure on prices from competition or from purchasers of the Company's         
products; regulatory changes in the generic pharmaceutical manufacturing        
industry; regulatory obstacles to the introduction of new products that are     
important to the Company's growth; availability of qualified personnel; the loss
of any significant customers; and other factors both referenced and not         
referenced in this Report. When used in this Report, the words "estimate,"      
"project," "anticipate," "expect," "intend," "believe," and similar expressions 
are intended to identify forward-looking statements.                            

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PART I

ITEM 1.  BUSINESS.                                                              

GENERAL                                                                         

  The Company, a New York corporation established in 1935, and its
subsidiaries, are engaged in the manufacture, sale and distribution of generic  
drugs. A generic drug is the chemical and therapeutic equivalent of a brand-name
drug for which patent protection has expired. A generic drug may only be        
manufactured and sold if patents (and any additional government-granted         
exclusivity periods) relating to the brand-name equivalent of the generic drug  
have expired. A generic drug is usually marketed under its generic chemical name
or under a brand name developed by the generic manufacturer. The Company sells  
its generic drug products under its Halsey label and under private-label        
arrangements with drugstore chains and drug wholesalers. While subject to the   
same governmental standards for safety and efficacy as its brand-name           
equivalent, a generic drug is usually sold at a price substantially below that  
of its brand-name equivalent.                                                   

     The Company manufactures its products at facilities in New York and
Indiana. During the last several years, the Company has sought to diversify its 
businesses through strategic acquisitions and alliances and through the         
development, manufacture and sale of bulk chemical products used by others as   
raw materials in the manufacture of finished drug forms.                        

RECENT EVENTS                                                                   

Regulatory Compliance                                                       

During the past several years, the Company's business has been
adversely affected by the discovery of various manufacturing and record keeping 
problems identified with certain products manufactured at its Brooklyn, New York
plant. In October 1991, the U.S. Food and Drug Administration (the "FDA") placed
the Company on the FDA's Application Integrity Policy list and its restrictions 
(collectively, the "AIP"). Under the AIP, the FDA suspended all of the parent   
company's applications for new drug approvals, including Abbreviate New Drug    
Applications ("ANDAs") and Supplements to ANDAs. During the period that         
followed, the U.S. Department of Justice ("DOJ") conducted an investigation into
the manufacturing and record keeping practices at the Company's Brooklyn plant. 
As a consequence, on June 21, 1993, the Company entered into a plea agreement   
(the "Plea Agreement") with the DOJ to resolve the DOJ's investigation. Under   
the terms of the Plea Agreement, the Company agreed to plead guilty to five     
counts of adulteration of a single drug product shipped in interstate commerce  
and related record keeping violations. The Plea Agreement also required the     
Company to pay a fine of $2,500,000 over five years in quarterly installments of
$125,000 commencing in September 1993. As of February 28, 1998, the Company was 
in default of the payment terms of the Plea Agreement and had made payments     
aggregating $350,000. On March 27, 1998, the Company and the DOJ signed a Letter
Agreement serving to amend the Plea Agreement relating to the terms of the      
Company's satisfaction of the fine assessed under the Plea Agreement. The Letter
Agreement provides, among other things, that the Company will satisfy the       
remaining $2,150,000 of the fine through the payment of $25,000 on a monthly    
basis commencing June 1, 1998, plus interest on the outstanding balance. See    
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" for a more detailed description 
of the Letter Amendment to the Plea Agreement between the DOJ and the Company.  

  On June 29, 1993, the Company entered into a consent decree (the
"Consent Decree") with the U.S. Attorney for the Eastern District of New York on
behalf of the FDA that resulted from the FDA's investigation into the Brooklyn  
plant's compliance with the FDA's Current Good Manufacturing Practices ("CGMP") 
regulations. Under the terms of the Consent Decree, the Company was enjoined    
from shipping any solid dosage drug products (i.e., excluding liquid drug       
formulations) manufactured at the Brooklyn plant until the Company established, 
to the satisfaction of the FDA, that the methods used in, and the facilities and
controls used for, manufacturing, processing, packing, labeling and holding any 
drug, were established, operated, and administered in conformity with the       
Federal Food, Drug, and Cosmetic Act and all CGMP Regulations. As part of       
satisfying these requirements, the Company was required to validate the         
manufacturing processes for each solid dosage drug product prior to             
manufacturing and shipping the drug product.                                    

        On October 23, 1996, the Company withdrew four of its ANDAs, including
its ANDA (the "Capsules ANDA") for                                              

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acetaminophen/oxycodone capsules (the "Capsules"), and halted sales of the      
affected products. Net sales derived from the withdrawn Capsule ANDA were       
approximately $3 million and $8 million for the years ended December 31, 1996   
and December 31, 1995, respectively, and accounted for approximately 24% and 40%
of the Company's total net sales during such twelve month periods. The Company  
instituted the withdrawal of the Capsule ANDA at the suggestion of the FDA and  
in anticipation of its release from the AIP. At the FDA's suggestion, the       
Company retained outside consultants to perform validity assessments of its drug
applications. Thereafter, in October 1996, the FDA recommended that several     
applications, including the Capsule ANDA, be withdrawn. As a basis for its      
decision, the FDA cited questionable and incomplete data submitted in connection
with the applications. The FDA indicated that the withdrawal of the four ANDAs  
was necessary for the release of the Company from the AIP. The FDA further      
required submission by the Company of a Corrective Action Plan, which was       
prepared and submitted by the Company and accepted by the FDA.                  

       On December 19, 1996, the FDA released the Company from the AIP. As a
consequence, for the first time since October 1991, the Company was permitted to
submit ANDAs to the FDA for review. Since its release from the AIP in December  
1996, through the fiscal year ended December 31, 1999, the Company submitted 9  
ANDAs for review by the FDA, including a new ANDA with respect to the Capsules. 
During the period from the Company's release from the AIP to March 31, 2000, the
Company received the following ANDA approvals, all of which relate to ANDA      
filings made with the FDA subsequent to the Company's release from the AIP:     

                                                        [Enlarge/Download Table]

PRODUCT NAME                                                                                       
(DRUG CLASS)                              STRENGTH   TRADE NAME                   STATUS           
------------                              --------   ----------                   ------           
                                                                                                   
Hydrocodone Bitartate and.............. 5mg/500mg    Vicodin(R)(1)    FDA approval of ANDA received
   Acetaminophen Tablets                                              September 26, 1997.          
  (narcotic analgesic)                                                                             

Hydrocodone Bitartate and.............. 7.5mg/750mg  VicodinES(R)(1)  FDA approval of ANDA received
   Acetaminophen Tablets                                              September 26, 1997           
  (narcotic analgesic)                                                                             

Hydrocodone Bitartate and.............. 7.5mg/650mg  Lorcet           FDA approval of ANDA received
   Acetaminophen Tablets, CIII                       Plus(R)(2)       November 26, 1997.           
  (narcotic analgesic)                                                                             

Hydrocodone Bitartrate and............. 10mg/650mg   Lorcet(R)(2)     FDA approval of ANDA received
   Acetaminophen Tablets, CIII                                        November 26, 1997.           
  (narcotic analgesic)                                                                             

Oxycodone HCI and...................... 5mg/50mg     Tylox(R)(3)      FDA approval of ANDA received
   Acetaminophen Capsules, CII                                        January 22, 1998.            
  (narcotic analgesic)                                                                             

Oxycodone HCI/Oxycodone................ 4.5mg/325mm  Percodan(R)(4)   FDA approval of ANDA received
   Terephthalate Tablets, CII                                         July 24, 1998                
  (narcotic analgesic)                                                                             

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                                                        [Enlarge/Download Table]

                                                                                              
Prednisolone Syrup, USP................ 15mg/15ml       Prelone(R)(5)   FDA approval of ANDA  
(systemic costicosteroid)                                               received May 28, 1999 

Hydrocodone Bitartrate and............. 5 mg/1.5mg/5ml   Hydocan(R)(6)  FDA approval of ANDA  
Homatropine Methylbromide Syrup                                         received July 21, 1999
(antitussive)                                                                                 

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

(1)      Registered trademark of Knoll Pharmaceutical Co.                       

(2)      Registered trademark of Forest Laboratories, Inc.                      

(3)      Registered trademark of McNeil Consumer Products Company               

(4)      Registered Trademark of DuPont Merck                                   

(5)      Registered Trademark of Muro Pharmaceuticals, Inc.                     

(6)      Registered Trademark of Endo Pharmaceuticals, Inc.                     

         During the fiscal year ended December 31, 1999, the Company submitted 1
ANDA for review by the FDA. The Company anticipates the submission during fiscal
2000 of 9 ANDA supplements or amendments. These supplements and amendments      
relate to the transfer of existing ANDAs from the Company's Brooklyn facility to
its Congers facility as well as the transfer of certain ANDAs obtained from Barr
Laboratories. Although the Company has been successful in receiving the ANDA    
approvals described above since its release from the AIP in December 1996, there
can be no assurance that any of its newly submitted ANDAs, or supplements or    
amendments thereto or those contemplated to be submitted, will be approved by   
the FDA. The Company will not be permitted to market any new product unless and 
until the FDA approves the ANDA relating to such product. Failure to obtain FDA 
approval for the Company's pending ANDAs, or a significant delay in obtaining   
such approval, would adversely affect the Company's business operations and     
financial condition.                                                            

Strategic Alliance with Watson Pharmaceuticals                            

     On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions with
Watson provided for Watson's purchase of a certain pending ANDA from the        
Company, for Watson's rights to negotiate for Halsey to manufacture and supply  
certain identified future products to be developed by Halsey, for Watson's      
marketing and sale of the Company's core products and for Watson's extension of 
a $17,500,000 term loan to the Company.                                         

 The product acquisition portion of the transactions with Watson
provided for Halsey's sale of a pending ANDA and related rights (the "Product") 
to Watson for aggregate consideration of $13,500,000 (the "Product Acquisition  
Agreement"). As part of the execution of the Product Acquisition Agreement, the 
Company and Watson executed ten year supply agreements covering the active      
pharmaceutical ingredient ("API") and finished dosage form of the Product       
pursuant to which Halsey, at Watson's discretion, will manufacture and supply   
Watson's requirements for the Product API and, where the Product API is sourced 
from the Company, finish dosage forms of the Product. The purchase price for the
Product is payable in three approximately equal installments as certain         
milestones are achieved.                                                        

   The Company and Watson also executed a right of first negotiation
agreement providing Watson with a first right to negotiate the terms under which
the Company would manufacture and supply certain specified APIs and finished    
dosage products to be developed by the Company. The right of first negotiation  
agreement provides that upon Watson's exercise of                               

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its right to negotiate for the supply of a particular product, the parties will 
negotiate the specific terms of the manufacturing and supply arrangement,       
including price, minimum purchase requirements, if any, territory and term. In  
the event Watson does not exercise its right of first negotiation upon receipt  
of written notice from the Company as to its receipt of applicable governmental 
approval relating to a covered product, or in the event the parties are unable  
to reach agreement on the material terms of a supply arrangement relating to    
such product within sixty (60) days of Watson's exercise of its right to        
negotiate for such product, the Company may negotiate with third parties for the
supply, marketing and sale of the applicable product. The right of first        
negotiation agreement has a term of ten years, subject to extension in the      
absence of written notice from either party for two additional periods of five  
years each. The right of first negotiation agreement applies only to API and    
finished dosage products identified in the agreement and does not otherwise     
prohibit the Company from developing APIs or finished dosage products for itself
or third parties.                                                               

  The Company and Watson also completed a manufacturing and supply
agreement providing for Watson's marketing and sale of the Company's existing   
core products portfolio (the "Core Products Supply Agreement"). The Core        
Products Supply Agreement obligates Watson to purchase a minimum amount of      
approximately $18,363,000 (the "Minimum Purchase Agreement") in core products   
from the Company, in equal quarterly installments over a period of 18 months    
(the "Minimum Purchase Period"). At the expiration of the Minimum Purchase      
Period if Watson does not continue to satisfy the Minimum Purchase Amount, the  
Company may market and sell the core products on its own or through a third     
party. Pending the Company's development and receipt of regulatory approval for 
its APIs and finished dosage products currently under development, including,   
without limitation, the Product sold to Watson, and the marketing and sale of   
same, of which there can be no assurance, substantially all the Company's       
revenues will be derived from the Core Products Supply Agreement with Watson.   

     The final component of the Company's strategic alliance with Watson
provided for Watson's extension of a $17,500,000 term loan to the Company. The  
loan will be funded in installments upon the Company's request for advances and 
the provision to Watson of a supporting use of proceeds relating to each such   
advance. The loan is secured by a first lien on all of the Company's assets,    
senior to the lien securing all other Company indebtedness, carries a floating  
rate of interest equal to prime plus two percent and matures on March 31, 2003. 
The net proceeds from the term loan will, in large part, be used to upgrade and 
equip the API manufacturing facility of Houba, Inc., the Company's wholly-owned 
subsidiary, to upgrade and equip the Company's Congers, New York leased         
facility, to satisfy approximately $3,300,000 in bridge financing provided by   
Galen Partners and for working capital to fund continued operations. See "Item  
7. Management's Discussion and Analysis of Financial Condition and Results of   
Operations" for a more detailed discussion of the $17,500,000 term loan from    
Watson.                                                                         

Private Offering                                                            

On May 26, 1999, the Company consummated a private offering of
securities for an aggregate purchase price of up to $22.8 million (the "Oracle  
offering"). The securities issued in the Oracle Offering consisted of five      
percent convertible senior secured debentures (the "1999 Debentures") and common
stock purchase warrants (the "1999 Warrants"). The 1999 Debentures and 1999     
Warrants were issued by the Company pursuant to a certain Debenture and Warrant 
Purchase Agreement dated May 26, 1999 (the "Oracle Purchase Agreement") by and  
among the Company, Oracle Strategic Partners, L.P. ("Oracle") and such other    
investors in the Company's March 10, 1998 offering electing to participate in   
the Oracle Offering (inclusive of Oracle, collectively, the "Oracle Investor    
Group").                                                                        

        The 1999 Debentures were issued at par and will become due and payable
as to principle on March 15, 2003. Approximately $12.8 million in principle     
amount of the 1999 Debentures were issued on May 26, 1999. Interest on the      
principle amount of the 1999 Debentures, at the rate of 5% per annum, is payable
on a quarterly basis.                                                           

     The maximum principal amount of the 1999 Debentures are convertible
into shares of the Company's common stock at a conversion price of $1.404 per   
share, for an aggregate of up to approximately 16,283,694 shares of the         
Company's common stock. The 1999 Warrants are exercisable for an aggregate of   
approximately 4,618,702 shares of the Company's common stock. Of such warrants, 
2,309,351 warrants are exercisable at $1.404 per share and the remaining        
2,309,351 warrants are exercisable at $2.279 per share. The 1999 Debentures and 
1999 Warrants are convertible and exercisable, respectively, for an aggregate of
approximately 20,902,396 shares of the Company's common stock.                  

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     Of the $22.8 million to be invested pursuant to the Oracle Purchase
Agreement, $5,000,000 was funded by Oracle on May 26, 1999, the closing date of 
the Oracle Purchase Agreement, and an additional $5,000,000 was funded on July  
27, 1999. On March 20, 2000, the Company and Oracle executed a Release Agreement
releasing Oracle from its obligation to make the remaining investment of        
$5,000,000 pursuant to the Oracle Purchase Agreement. After giving effect to the
Release Agreement with Oracle, the 1999 Debentures and 1999 Warrants are        
convertible and exercisable, respectively, for an aggregate of approximately    
16,331,043 shares of the Company's common stock.                                

      In addition to the $10,000,000 investment made by Oracle pursuant to
the Oracle Purchase Agreement, approximately $7,037,000 of the 1999 Debentures  
issues pursuant to the Oracle Purchase Agreement were issued in exchange for the
surrender of a like amount of principle and accrued interest outstanding under  
the Company's convertible promissory notes issued pursuant to various bridge    
loan transactions with Galen Partners, III, L.P., Galen Partners International, 
III, L.P., Galen Employee Fund, L.P. (collectively, "Galen Partners") and       
certain other investors, in the aggregate amount of $10,104,110 during the      
period from August, 1998 through and including May, 1999 (the "Galen Bridge     
Loans"). The remaining balance of the Galen Bridge Loans in the principal amount
of $3,495,001 plus accrued and unpaid interest were satisfied with a portion of 
the proceeds of Oracle's second $5,000,000 installment on made July 27, 1999    
pursuant to the Oracle Purchase Agreement.                                      

Acquisition of Product ANDAs                                                    

        On April 16, 1999, the Company completed an acquisition agreement with
Barr Laboratories, Inc. ("Barr") providing for the Company's purchase of the    
rights to 50 pharmaceutical products (the "Barr Products"). Under the terms of  
the acquisition agreement with Barr, the Company acquired all of Barr's rights  
in the Barr Products, including all related governmental approvals (including   
ANDAs) and related technical data and information. In consideration for the     
acquisition of the Barr Products, the Company issued to Barr a common stock     
purchase warrant exercisable for 500,000 shares of the Company's common stock   
having an exercise price of $1.0625 per share (the fair market value of the     
Common Stock on the date of issuance) and having a term of five years. The      
acquisition agreement with Barr also allows Barr to purchase any of the Barr    
Products manufactured by the Company for a period of five years.                

       The Barr Products acquired by the Company were previously marketed by
Barr, prior to its decision to strategically refocus its generic product        
portfolio several years ago. While the Barr Products cover a broad range of     
therapeutic applications and are the subject of approved ANDAs, the Company will
be required to obtain approval from the U.S. Food and Drug Administration       
("FDA") to permit manufacture and sale of any of the Barr Products, including   
site specific approval. The Company initially has identified 8 of the products  
for which it will devote substantial effort in seeking approval from the FDA for
manufacture and sale. The Company estimates that certain of these Barr Product  
will be available for sale in the fourth quarter of 2000, although no assurance 
can be given that any of the Barr Products will receive FDA approval or that if 
approved, that the Company will be successful in the manufacture and sale of the
such products. It is the Company's intention to continue to evaluate the        
remaining Barr Products on an ongoing basis to assess their prospects for       
commercialization and likelihood of obtaining regulatory approval.              

Cessation and Relocation of Brooklyn, New York Operations                       

On March 22, 2000 the Company executed a Lease Termination and
Settlement Agreement with the landlord of the Company's Brooklyn, New York      
manufacturing facility (the "Settlement Agreement"). The Settlement Agreement   
provides for the early termination of the lease covering the Brooklyn facility  
and provides the Company with the time necessary to transfer operations to the  
Company's Congers, New York facility and cease all manufacturing, research and  
development and warehouse operations currently conducted in Brooklyn. The       
Settlement Agreement provides for the termination of the Brooklyn facility lease
on August 31, 2000, subject to the Company's right to extend the term to March  
31, 2001. The original lease provided for a term expiring December 31, 2005 with
a rental payment obligation of $6,715,000 during the period from September 1,   
2000 through December 31, 2005.                                                 

  The Settlement Agreement provided for the Company's payment of a
termination fee of $1,150,000, the advance payment of rent through August 31,   
2000 and the deposit of a restoration escrow of $200,000 to be used for facility
repairs. The Company also deposited $390,600 in escrow with its counsel. This   
escrow amount represents the rental payments for the period September 1, 2000   
through March 31, 2001 and will be returned to the Company in the event it      
vacates the                                                                     

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Brooklyn facility on or prior to August 31, 2000. The Company recorded a total  
charge against earnings of approximately $3,220,000 resulting from the          
elimination of its Brooklyn, New York operations. See "Item 7. Management's     
Discussion and Analysis of Financial Condition and Results of Operations" for a 
more detailed discussion of this charge against earnings.                       

Lease of Congers, New York Facility                                         

 Effective March 22, 1999, the Company leased, as sole tenant, a
pharmaceutical manufacturing facility located in Congers, New York (the "Congers
Facility") from Par Pharmaceuticals, Inc. ("Par") pursuant to an Agreement to   
Lease (the "Lease"). The Congers Facility contains office, warehouse and        
manufacturing space and is approximately 35,000 square feet. The Lease provides 
for a term of three years, with a two year renewal option and provides for      
annual fixed rent of $500,000 per year during the primary term of the Lease and 
$600,000 per year during the option period. The Lease also covers certain       
manufacturing and related equipment previously used by Par in its operations at 
the Congers Facility (the "Leased Equipment"). In connection with the execution 
of the Lease, the Company and Par entered into a certain Option Agreement       
pursuant to which the Company may purchase the Congers Facility and the Lease   
Equipment at any time during the lease term for $5 million.                     

         As part of the execution of the Lease, the Company and Par entered into
a certain Manufacturing and Supply Agreement (the "M&S Agreement") having a     
minimum term of twenty seven months. The M&S Agreement provides for the         
Company's contract manufacture of certain designated products manufactured by   
Par at the Congers Facility prior to the effective date of the Lease. The M&S   
Agreement also provides that Par will purchase a minimum of $1,150,000 in       
product during the initial 18 months of the Agreement. The M&S Agreement further
provides that the Company will not manufacture, supply, develop or distribute   
the designated products to be supplied by the Company to Par under the M&S      
Agreement to or for any other person for a period of three years.               

PRODUCTS AND PRODUCT DEVELOPMENT                                                

Generic Drug Products                                                       

     The Company historically has manufactured and sold a broad range of
prescription and over-the-counter drug products. The Company's pharmaceutical   
product list currently includes a total of approximately 31 products, consisting
of 21 dosage forms and strengths of prescription drugs and 10 dosage forms and  
strengths of over-the-counter drugs. Each dosage form and strength of a         
particular drug is considered in the industry to be a separate drug product. The
Company's drug products are sold in various forms, including liquid and powder  
preparations, compressed tablets and two-piece, hard-shelled capsules.          

      Most of the generic drug products manufactured by the Company can be
classified within one of the following categories:                              

1.      Antibiotics,                                          

2.      Narcotic analgesics,                                  

3.      Anti-infective and anti-tubercular drugs,             

4.      Antihistamines and antihistaminic decongestants,      

5.      Antitussives, or                                      

6.      Steroids                                              

  During fiscal 1999, sales of antibiotics and narcotic analgesics
accounted for approximately 67% of total net sales during such year. The Company
anticipates that sales of antibiotics and narcotic analgesics will continue to  
represent a significant portion of the Company's revenue.                       

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      The Company's development strategy for new drug products has been to
focus on the development of a broad-range of generic form drugs, each of which  
(i) has developed a solid market acceptance with a wide base of customers, (ii) 
can be sold on a profitable basis notwithstanding intense competition from other
drug manufacturers, and (iii) is no longer under patent protection. The Company 
has also diversified its current product line to include some less widely       
prescribed drugs as to which limited competition might be expected. While the   
Company will continue the development of its finished goods pharmaceutical      
business, including the rehabilitation of the product ANDAs acquired from Barr, 
the Company's will dedicate increasing resources to the expansion and           
enhancement of its operations devoted to the development and manufacture of APIs
for use in the Company's finished dosage products as well as for sale to third  
party pharmaceutical companies, including Watson, in the form and API and       
finished dosage products.                                                       

        Development activities for each new generic drug product begin several
years in advance of the patent expiration date of the brand-name drug           
equivalent. This is because the profitability of a new generic drug usually     
depends on the ability of the Company to obtain FDA approval to market that drug
product upon or immediately after the patent expiration date of the equivalent  
brand-name drug. Being among the first to market a new generic drug product is  
vital to the profitability of the product. As other off-patent drug             
manufacturers receive FDA approvals on competing generic products, prices and   
revenues typically decline. Accordingly, the Company's ability to attain        
profitable operations will, in large part, depend on its ability to develop and 
introduce new products, the timing of receipt of FDA approval of such products  
and the number and timing of FDA approvals for competing products.              

Active Pharmaceutical Ingredients                                           

         In the last few years, the Company has increased its efforts to develop
and manufacture APIs, also known as bulk chemical products. The development and 
sale of APIs generally is not subject to the same level of regulation as is the 
development and sale of drug products. Accordingly, APIs may be brought to      
market substantially sooner than drug products. As described under the caption  
"Recent Events - Strategic Alliance with Watson Pharmaceuticals" above, the     
Company is a party to agreements with Watson Pharmaceuticals providing for      
Watson's right to negotiate for a supply of select APIs currently in development
and to be developed by the Company. In addition to its alliance with Watson, it 
is the Company's intention to develop APIs for its own manufacture and sale     
(both in API and finished dosage form) and in partnership with other            
pharmaceutical manufacturers. A significant portion of the net proceeds from the
Watson loan transaction described above will be devoted to the upgrade of its   
Culver, Indiana manufacturing facility operated by its Houba subsidiary,        
including HVAC, equipment and operational upgrades. During fiscal 1999, all of  
the Company's revenues were delivered from the sale of finished dosage products.
It is the Company's expectation that in connection with a strategic alliance    
with Watson and other API development efforts, in addition to assisting in the  
expansion of the Company's line of finished products, the Company will generate 
revenues from the sale of APIs starting in the latter part of 2000 and such     
revenue segment will likely increase thereafter as a percentage of total        
revenue.                                                                        

RESEARCH AND DEVELOPMENT                                                        

       The Company currently conducts research and development activities at
each of its Brooklyn and Indiana facilities. Once the cessation and relocation  
of the Company's Brooklyn, New York operations are completed, the Company's     
research and development activities previously conducted in Brooklyn will be    
transferred to its Congers, New York facility. The Company's research and       
development activities consist primarily of new generic drug product development
efforts and manufacturing process improvements, the development for sale of new 
chemical products and the development of APIs. New drug product development     
activities are primarily directed at conducting research studies to develop     
generic drug formulations, reviewing and testing such formulations for          
therapeutic equivalence to brand name products and additional testing in areas  
such as bioavailability, bioequivalence and shelf-life. For fiscal years 1999,  
1998 and 1997, total research and development expenditures were $1,075,000,     
$651,000 and $979,000, respectively. During 2000, the Company's research and    
development efforts will cover finished dosage products and APIs in a variety of
therapeutic applications.                                                       

         As of March 31, 2000, the Company maintained a full-time staff of 11 in
its Research and Development Departments.                                       

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MARKETING AND CUSTOMERS                                                         

       The application of the AIP to the Company's operations until December
1996, combined with the Company's continuing operating losses and lack of       
adequate working capital during fiscal 1997 and the first quarter of 1998       
resulted in the Company's inability to maintain sufficient raw materials and    
finish goods inventories to permit the Company to actively solicit customer     
orders, and when orders were received, to fill such orders promptly. Following  
the completion in March 1998 of the offering with Galen Partners (the "Galen    
Offering"), new Management adopted a marketing strategy focused on developing   
and maintaining sufficient raw materials and finish goods inventories so as to  
permit a targeted sales effort by the Company to a core customer group, with an 
emphasis on quality, prompt product delivery and excellent customer service.    

   The strategic alliance with Watson entered into on March 29, 2000
provides for the Company's core products portfolio to be sold by Watson's sales 
force under Watson's label. Accordingly, the Company intends to discontinue     
sales efforts of these products. The two companies are working together during  
the second quarter of 2000 to effect an orderly transition of existing sales    
agreements and orders from Halsey to Watson. The Company continues to perform   
limited contract manufacturing of certain non-core products for other           
pharmaceutical companies.                                                       

     During 1999, the Company had net sales to two customers aggregating
approximately 25.3% of total sales. The Company believes that the loss of these 
customers would have a material adverse effect on the Company. During 1998 the  
Company had net sales to two customers, aggregating 19.1% of total sales. During
1997, the Company had net sales to one customer in excess of 10% of total sales,
aggregating 22.3% of total sales.                                               

 The estimated dollar amount of the backlog of orders for future
delivery as of March 31, 2000 was approximately $800,000 as compared with       
approximately $500,000 as of March 15, 1999. Although these orders are subject  
to cancellation, management expects to fill substantially all orders by the     
second quarter of 2000. The increase in the Company's backlog as of March 31,   
2000 compared to that in 1999 is largely a function of an increase in market    
penetration.                                                                    

GOVERNMENT REGULATION                                                           

General                                                                     

         All pharmaceutical manufacturers, including the Company, are subject to
extensive regulation by the Federal government, principally by the FDA, and, to 
a lesser extent, by state and local governments. Additionally, the Company is   
subject to extensive regulation by the U.S. Drug Enforcement Agency ("DEA") as a
manufacturer of controlled substances. The Company cannot predict the extent to 
which it may be affected by legislative and other regulatory developments       
concerning its products and the healthcare industry generally. The Federal Food,
Drug, and Cosmetic Act, the Generic Drug Enforcement Act of 1992, the Controlled
Substance Act and other Federal statutes and regulations govern or influence the
testing, manufacture, safe labeling, storage, record keeping, approval, pricing,
advertising, promotion, sale and distribution of pharmaceutical products.       
Noncompliance with applicable requirements can result in fines, recall or       
seizure of products, criminal proceedings, total or partial suspension of       
production, and refusal of the government to enter into supply contracts or to  
approve new drug applications. The FDA also has the authority to revoke         
approvals of new drug applications. The ANDA drug development and approval      
process now averages approximately eight months to two years. The approval      
procedures are generally costly and time consuming.                             

         FDA approval is required before any "new drug," whether prescription or
over-the-counter, can be marketed. A "new drug" is one not generally recognized 
by qualified experts as safe and effective for its intended use. Such general   
recognition must be based on published adequate and well controlled clinical    
investigations. No "new drug" may be introduced into commerce without FDA       
approval. A drug which is the "generic" equivalent of a previously approved     
prescription drug also will require FDA approval. Furthermore, each dosage form 
of a specific generic drug product requires separate approval by the FDA. In    
general, as discussed below, less costly and time consuming approval procedures 
may be used for generic equivalents as compared to the innovative products.     
Among the requirements for drug approval is that the prospective manufacturer's 
methods must conform to the CGMPs. CGMPs apply to the manufacture, receiving,   
holding and shipping of all drugs, whether or not approved by the FDA. CGMPs    
must be followed at all times during which the drug is manufactured. To ensure  
full compliance with standards, some of which are set forth in regulations, the 
Company must continue to expend time, money and effort in the areas of          
production and quality control. Failure to so comply risks delays in approval of
drugs, disqualification from eligibility to sell to the government, and possible
FDA enforcement actions, such as an injunction against shipment of the Company's
products, the seizure of noncomplying drug products, and/or, in serious         

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cases, criminal prosecution. The Company's manufacturing facilities are subject 
to periodic inspection by the FDA.                                              

        In addition to the regulatory approval process, the Company is subject
to regulation under Federal, state and local laws, including requirements       
regarding occupational safety, laboratory practices, environmental protection   
and hazardous substance control, and may be subject to other present and future 
local, state, Federal and foreign regulations, including possible future        
regulations of the pharmaceutical industry.                                     

Drug Approvals                                                              

      There are currently three ways to obtain FDA approval of a new drug.

1. New Drug Applications ("NDA"). Unless one of the procedures
discussed in paragraph 2 or 3 below is available, a prospective manufacturer    
must conduct and submit to the FDA complete clinical studies to prove a drug's  
safety and efficacy, in addition to the bioavailability and/or bioequivalence   
studies discussed below, and must also submit to the FDA information about      
manufacturing practices, the chemical make-up of the drug and labeling.         

2. Abbreviated New Drug Applications ("ANDA"). The Drug Price 
Competition and Patent Term Restoration Act of 1984 (the "1984 Act") established
the ANDA procedure for obtaining FDA approval for those drugs that are          
off-patent or whose exclusivity has expired and that are bioequivalent to       
brand-name drugs. An ANDA is similar to an NDA, except that the FDA waives the  
requirement of conducting complete clinical studies of safety and efficacy,     
although it may require expanded clinical bioavailability and/or bioequivalence 
studies. "Bioavailability" means the rate of absorption and levels of           
concentration of a drug in the blood stream needed to produce a therapeutic     
effect. "Bioequivalence" means equivalence in bioavailability between two drug  
products. In general, an ANDA will be approved only upon a showing that the     
generic drug covered by the ANDA is bioequivalent to the previously approved    
version of the drug, i.e., that the rate of absorption and the levels of        
concentration of a generic drug in the body are substantially equivalent to     
those of a previously approved equivalent drug. The principle advantage of this 
approval mechanism is that an ANDA applicant is not required to conduct the same
preclinical and clinical studies to demonstrate that the product is safe and    
effective for its intended use.                                                 

       The 1984 Act, in addition to establishing the ANDA procedure, created
new statutory protections for approved brand-name drugs. In general, under the  
1984 Act, approval of an ANDA for a generic drug may not be made effective until
all product and use patents listed with the FDA for the equivalent brand name   
drug have expired or have been determined to be invalid or unenforceable. The   
only exceptions are situations in which the ANDA applicant successfully         
challenges the validity or absence of infringement of the patent and either the 
patent holder does not file suit or litigation extends more than 30 months after
notice of the challenge was received by the patent holder. Prior to enactment of
the 1984 Act, the FDA gave no consideration to the patent status of a previously
approved drug. Additionally, under the 1984 Act, if specific criteria are met,  
the term of a product or use patent covering a drug may be extended up to five  
years to compensate the patent holder for the reduction of the effective market 
life of that patent due to federal regulatory review. With respect to certain   
drugs not covered by patents, the 1984 Act sets specified time periods of two to
ten years during which approvals of ANDAs for generic drugs cannot become       
effective or, under certain circumstances, ANDAs cannot be filed if the         
equivalent brand-name drug was approved after December 31, 1981.                

      3. "Paper" NDA. An alternative NDA procedure is provided by the 1984
Act whereby the applicant may rely on published literature and more limited     
testing requirements. While that alternative sometimes provides advantages over 
the ANDA procedure, it is not frequently used.                                  

Generic Drug Enforcement Act                                                

         As a result of hearings and investigations concerning the activities of
the generic drug industry and the FDA's generic drug approval process, Congress 
enacted the Generic Drug Enforcement Act of 1992 (the "Generic Drug Act"). The  
Generic Drug Act confers significant new authority upon the FDA to impose       
debarment and civil penalties for individuals and companies who commit certain  
illegal acts relating to the generic drug approval process.                     

       The Generic Drug Act requires the mandatory debarment of companies or
individuals convicted of a federal felony for conduct relating to the           
development or approval of any ANDA, and gives the FDA discretion to debar      
corporations or                                                                 

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individuals for similar conduct resulting in a federal misdemeanor or state     
felony conviction. The FDA may not accept or review during the period of        
debarment (one to ten years in the case of mandatory, or up to five years in the
case of permissive, debarment of a corporation) any ANDA submitted by or with   
the assistance of the debarred corporation or individual. The Generic Drug Act  
also provides for temporary denial of approval of generic drug applications     
during the investigation of crimes that could lead to debarment. In addition, in
more limited circumstances, the Generic Drug Act provides for suspension of the 
marketing of drugs under approved generic drug applications sponsored by        
affected companies. The Generic Drug Act also provides for fines and confers    
authority on the FDA to withdraw, under certain circumstances, approval of a    
previously granted ANDA if the FDA finds that the ANDA was obtained through     
false or misleading statements. The Company was not debarred as a result of the 
FDA investigation and settlement and the Consent Decree with the FDA makes no   
provision therefor.                                                             

Healthcare Reform                                                           

         Several legislative proposals to address the rising costs of healthcare
have been introduced in Congress and several state legislatures. Many of such   
proposals include various insurance market reforms, the requirement that        
businesses provide health insurance coverage for all their employees,           
significant reductions in the growth of future Medicare and Medicaid            
expenditures, and stringent government cost controls that would directly control
insurance premiums and indirectly affect the fees of hospitals, physicians and  
other healthcare providers. Such proposals could adversely affect the Company's 
business by, among other things, reducing the demand, and the prices paid, for  
pharmaceutical products such as those produced and marketed by the Company.     
Additionally, other developments, such as (i) the adoption of a nationalized    
health insurance system or a single payor system, (ii) changes in needs-based   
medical assistance programs, or (iii) greater prevalence of capitated           
reimbursement of healthcare providers, could adversely affect the demand for the
Company's products.                                                             

COMPETITION                                                                     

        The Company competes in varying degrees with numerous companies in the
health care industry, including other manufacturers of generic drugs (among     
which are divisions of several major pharmaceutical companies) and manufacturers
of brand-name drugs. Many of the Company's competitors have substantially       
greater financial and other resources and are able to expend more money and     
effort than the Company in areas such as marketing and product development.     
Although a company with greater resources will not necessarily receive FDA      
approval for a particular generic drug before its smaller competitors,          
relatively large research and development expenditures enable a company to      
support many FDA applications simultaneously, thereby improving the likelihood  
of being among the first to obtain approval of at least some generic drugs.     

        One of the principal competitive factors in the generic pharmaceutical
market is the ability to introduce generic versions of brand-name drugs promptly
after a patent expires. The Company believes that it was at a competitive       
disadvantage until its release from the AIP program and the FDA's resumption of 
review of ANDAs submitted by the Company's Brooklyn plant. See "Government      
Regulation--Generic Drug Enforcement Act" above. Other competitive factors in   
the generic pharmaceutical market are price, quality and customer service       
(including maintenance of sufficient inventories for timely deliveries).        

RAW MATERIALS                                                                   

The raw materials essential to the Company's business are bulk
pharmaceutical chemicals purchased from numerous sources. Raw materials are     
generally available from several sources. The Federal drug application process  
requires specification of raw material suppliers. If raw materials from a       
supplier specified in a drug application were to become unavailable on          
commercially acceptable terms, FDA supplemental approval of a new supplier would
be required. During 1999 and 1998, the Company purchased approximately          
$1,107,000 and $2,583,000, respectively, of its raw materials (constituting 15% 
and 29%, respectively, of its aggregate purchases of raw materials) from        
Mallinckrodt. Although the Company is now able to submit supplements to the FDA 
in order to allow the Company to purchase raw materials from alternate sources, 
there can be no assurance that if the Company were unable to continue to        
purchase raw materials from this supplier, that the Company would be successful 
in receiving FDA approval to such supplement or that it would not face          
difficulties in obtaining raw materials on commercially acceptable terms.       
Failure to receive FDA approval for, and to locate, an acceptable alternative   
source of raw materials would have a material adverse effect on the Company.    

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         The DEA limits the quantity of the Company's inventories of certain raw
materials used in the production of controlled substances based on historical   
sales data. In view of the Company's recently depressed sales volume, these DEA 
limitations could increase the likelihood of raw material shortages and of      
manufacturing delays in the event the Company experiences increased sales volume
or is required to find new suppliers of these raw materials.                    

SUBSIDIARIES                                                                    

        The Company's Indiana manufacturing operations are conducted by Houba,
Inc., an Indiana corporation and wholly-owned subsidiary of the Company. Halsey 
Pharmaceuticals, Inc., a Delaware corporation, is a wholly-owned subsidiary     
which is currently inactive. The Company also has the following additional      
subsidiaries, each of which is currently inactive and anticipated to be         
dissolved during the remainder of the 2000 fiscal year: Indiana Fine Chemicals  
Corporation, a Delaware corporation, H.R. Cenci Laboratories, Inc., a California
corporation, Cenci Powder Products, Inc., a Delaware corporation, Blue Cross    
Products, Inc., a New York corporation, and The Medi-Gum Corporation, a Delaware
corporation.                                                                    

EMPLOYEES                                                                       

   As of March 31, 2000, the Company had approximately 179 full-time
employees. Approximately 39 employees are administrative and professional       
personnel and the balance are in production and shipping. Among the professional
personnel, 11 are engaged in research and product development. Approximately 46 
employees at the Company's Brooklyn facility are represented by a local         
collective bargaining unit. The collective bargaining agreement between the     
Company and the union was extended on March 5, 1998 (retroactive to July 2,     
1997) and expires June 30, 2000. As discussed above under the caption "Recent   
Events - Cessation and Relocation of Brooklyn, New York Operations", the Company
is in the process of ceasing operations at its leased facility in Brooklyn, New 
York. The Company estimates that it will complete its relocation of the         
operations conducted in Brooklyn to its Congers, New York facility by August 31,
2000. After giving effect to the cessation of operations in Brooklyn, New York, 
the Company estimates that it will have approximately 107 employees. Management 
believes that its relations with its employees are satisfactory.                

ITEM 2.  PROPERTIES.                                                            

        Halsey leases, as sole tenant, a pharmaceutical manufacturing facility
of approximately 35,000 square feet located at 77 Brenner Drive, Congers, New   
York. The Agreement of Lease, with an unaffiliated third party, contains a three
year term with a two year renewal option and provides for annual fixed rent of  
$500,000 per year during the primary term of the Lease and $600,000 per year    
during the renewal period. The primary term of the Lease expires on March 21,   
2002. The Leased facility houses a portion of the Company's manufacturing       
operations and includes office and warehouse space. The Lease also contains an  
option pursuant to which the Company may purchase the leased premises and       
improvements (including certain production and related equipment) for a purchase
price of $5 million, exercisable at any time during the Lease term.             

        Halsey leases, as sole tenant, a total of approximately 147,000 square
feet in three buildings on Pacific Street and Dean Street in Brooklyn, New York.
Each of these leases is between Halsey and unaffiliated lessors. The approximate
aggregate minimum rental commitments under these operating leases are as        
follows: $1,023,000 for the year 1999 and $781,000 for the year 2000. The leases
of the Brooklyn, New York facility expire on August 31, 2000, subject to the    
Company's right to extend the lease term to March 31, 2001. The Company is in   
the process of ceasing and relocating its Brooklyn operations to its Congers,   
New York facility. See "Item 1. Business - Recent Events - Cessation and        
Relocation of Brooklyn, New York Operations."                                   

       Halsey leases approximately 4,700 square feet of office space located
at 695 North Perryville Road, Building No. 2, Rockford, Illinois. The lease is  
between the Company and an unaffiliated lessor. The lease has a term of two     
years expiring August 31, 2000 and calls for annual rental, including           
maintenance and common area expense, of approximately $50,000 per year. The     
Company is currently in discussion with the landlord to extend the term of the  
lease of this facility. This leased facility houses the Company's principal     
executive offices, including its sales, administration and finance operations.  

       The Company's Houba, Inc. subsidiary owns approximately 45,000 square
feet of building space on approximately 30 acres of land in Culver, Indiana,    
which includes a 15,000 square foot manufacturing facility. This manufacturing  
facility                                                                        

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houses separate plants for the production of certain raw materials, capsules and
tablets. In 1996, in conjunction with a settlement with two former employees,   
the Company acquired real property, improved by a residential property, in      
Culver, Indiana adjacent to the manufacturing facility.                         

ITEM 3. LEGAL PROCEEDINGS.                                                      

GOVERNMENTAL PROCEEDINGS                                                        

Reference is also made to the discussion of the Company's Plea
Agreement and Letter Agreement with the DOJ contained in "Item 1.               
Business--Recent Events" and "Item 7. Management's Discussion and Analysis of   
Financial Condition and Results of Operations."                                 

OTHER LEGAL PROCEEDINGS                                                         

   Beginning in 1992, actions were commenced against the Company and
numerous other pharmaceutical manufacturers in the Pennsylvania Court of Common 
Pleas, Philadelphia Division, in connection with the alleged exposure to        
diethylstilbestrol ("DES"). The defense of all of such matters was assumed by   
the Company's insurance carrier, and a substantial number have been settled by  
the carrier. Currently, several actions remain pending with the Company as a    
defendant, and the insurance carrier is defending each action. Similar actions  
were brought in Ohio, and have been dismissed based on Ohio law. The Company    
does not believe any of such actions will have a material impact on the         
Company's financial condition.                                                  

    The Company has been named as a defendant in one additional action
which has been referred to the Company's insurance carrier and has been accepted
for defense. The action, Alonzo v. Halsey Drug Co., Inc. and K-Mart Corp., No.  
64DOT-95111-CT-2736 (Indiana Superior Court, Porter County), was commenced on   
November 7, 1995 and involves a claim for unspecified damages relating to the   
alleged ingestion of "Doxycycline 100." The Company does not believe this action
will have a material impact on the Company's financial condition.               

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                   

    No matters were submitted to a vote of security holders during the
fourth quarter of 1999.                                                         

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 PART II

ITEM 5. MARKET PRICE FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY    
HOLDER MATTERS.                                                                 

MARKET AND MARKET PRICES OF COMMON STOCK                                        

     The Company's Common Stock is listed on the American Stock Exchange
(the "Exchange") under the symbol "HDG." Set forth below for the periods        
indicated are the high and low sales prices for the Common Stock as reported on 
the Exchange.                                                                   

                                                                [Download Table]

PERIOD                                           HIGH    LOW   
------                                           ----    ---   
                                                               
2000 Fiscal Year                                               
         First Quarter (through March 31, 2000)  2 3/8    1    

1999 Fiscal Year                                               
         First Quarter                           1 9/16   1    
         Second Quarter                          3 3/16   1    
         Third  Quarter                          3 1/8    2    
         Fourth Quarter                          2 3/4    3/4  

1998 Fiscal Year                                               
         First Quarter                           3 5/8    1 1/4
         Second Quarter                          3 1/8    2 3/8
         Third Quarter                           2 3/4    1 1/2
         Fourth Quarter                          1 7/8    1    

  The Company does not meet certain of the Exchange's criteria for
continued listing. The Company was informed by the Exchange that it has         
determined to delist the Company's Common Stock as it does not meet the         
Exchange's criteria for continued listing. Such criteria include minimum levels 
of shareholders equity and the absence of years of net losses from continuing   
operations. The Company has exercised its right to appeal the Exchange's        
decision. There can be no assurance that the Company's common stock will remain 
listed on the Exchange. If the Common Stock should become delisted from the     
Exchange, trading, if any, in the Common Stock would continue on the OTC        
Bulletin Board, an NASD-sponsored inter-dealer quotation system, or in what is  
commonly referred to as the "Pink Sheets". In such event, a shareholder may find
it more difficult to dispose of, or to obtain accurate quotations as to the     
market value of the Common Stock.                                               

HOLDERS                                                                         

         There were 788 holders of record of the Company's common stock on March
31, 2000. This number, however, does not reflect the ultimate number of         
beneficial holders of the Company's common stock.                               

DIVIDEND POLICY                                                                 

       The payment of cash dividends from current earnings is subject to the
discretion of the Board of Directors and is dependent upon many factors,        
including the Company's earnings, its capital needs and its general financial   
condition. The terms of the Company's 5% convertible senior secured debentures  
and the Term Loan Agreement with Watson Pharmaceuticals prohibit the Company    
from paying cash dividends. The Company does not intend to pay any cash         
dividends in the foreseeable future.                                            

PRIVATE OFFERINGS                                                               

         The Company secured bridge financing from Galen in the aggregate amount
of approximately $1,500,000, funded through two separate bridge loan            
transactions in December, 1999 (collectively, the "Bridge Loans"). In           
consideration for the extension for the Bridge Loans, the Company issued common 
stock purchase warrants to purchase an aggregate of 75,000                      

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shares of the Company's Common Stock having an exercise price equal to the fair 
market value of the Common Stock at the date of issuance.                       

     Each of the lenders in the Bridge Loans are accredited investors as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act of  
1933, as amended (the "Act"). The warrants issued in connection with the Bridge 
Loans were issued without registration under the Act in reliance upon Section   
4(2) of the Act and Regulation D promulgated thereunder.                        

ITEM 6.  SELECTED FINANCIAL DATA.                                               

     The selected consolidated financial data presented on the following
pages for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 are      
derived from the Company's audited Consolidated Financial Statements. The       
Consolidated Financial Statements as of December 31, 1999 and December 31, 1998,
and for each of the years in the three year period ended December 31, 1999, and 
the report thereon, are included elsewhere herein. The selected financial       
information as of and for the years ended December 31, 1997, 1996 and 1995 are  
derived from the audited Consolidated Financial Statements of the Company not   
presented herein.                                                               

   The information set forth below is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements and   
related notes thereto included elsewhere in this Report and "Item 7.            
Management's Discussion and Analysis of Financial Condition and Results of      
Operations."                                                                    

                                                        [Enlarge/Download Table]

                                                               YEARS ENDED DECEMBER 31,                              
                                      1999           1998                1997                1996           1995     
                                  ------------   ------------        ------------        ------------   ------------ 
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)                       
                                                                                                                     
OPERATING DATA:                                                                                                      

Net sales                         $     11,420   $      8,841        $      9,088        $     12,379   $     20,225 
Costs and expenses                                                                                                   
  Cost of sales                         15,316         12,712              15,407              16,826         18,097 
Research and development                 1,075            651                 979               1,854            818 
Selling, general and                                                                                                 
   administrative                        7,383          8,078               6,308               7,486          6,098 
Plant shutdown costs                     3,220             --                  --                  --             -- 
Interest expense                         2,851          1,285               1,144               1,708          1,307 
Amortization of deferred debt                                                                                        
   discount and private offering                                                                                     
   cost                                  1,825            661                                                        
Other (income) expense                    (187)        (1,822)                264              (1,000)        (2,288)
Income (loss) before provision                                                                                       
   for income taxes                    (20,063)       (12,724)            (15,014)            (14,495)        (3,807)
Provision (benefit) for                                                                                              
   income taxes                             --             --                  --                  --            296 
Net income (loss)                 $    (20,063)  $    (12,724)       $    (15,014)       $    (14,495)  $     (4,103)
                                  ============   ============        ============        ============   ============ 
Net income (loss)                                                                                                    
   per share                      $      (1.40)  $       (.92)       $      (1.12)       $      (1.49)  $       (.52)
                                  ============   ============        ============        ============   ============ 
Weighted average                                                                                                     
   common shares                                                                                                     
   outstanding                      14,325,551     13,812,529          13,434,215           9,724,106      7,886,101 
                                  ============   ============        ============        ============   ============ 

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                                                        [Enlarge/Download Table]

                                               DECEMBER 31,                          
                        1999       1998            1997            1996       1995   
                      --------   --------        --------        --------   -------- 
                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)              
                                                                                     
BALANCE SHEET DATA:                                                                  
Working capital                                                                      
  (deficiency)        $ (5,181)  $ (6,665)       $(22,304)       $(12,201)  $ (7,393)
Total assets            12,495     16,413           7,667          11,982     18,862 
Total liabilities       54,869     45,366          27,524          19,063     20,402 
Retained earnings                                                                    
  (accumulated                                                                       
  deficit)             (77,284)   (57,221)        (44,497)        (29,484)   (14,989)
Stockholders' equity                                                                 
  (deficit)            (42,374)   (28,953)        (19,857)         (7,081)    (1,540)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS.                                                                  

Certain statements set forth under this caption constitute    
"forward-looking statements" within the meaning of the Reform Act. See "Special 
Note Regarding Forward-Looking Statements " on page 1 of this Report for        
additional factors relating to such Statements.                                 

OVERVIEW                                                                        

       The Company reported a net loss of $20,063,000 or $1.40 per share for
the year ended December 31, 1999 as compared with the net loss of $12,724,000 or
$ .92 per share for 1998. Included in the loss for 1999 is a one-time charge of 
$3,220,000 resulting from the Company's decision to shutdown its Brooklyn       
operation. Net Sales for the year ended December 31, 1999 were approximately    
$11,420,000 as compared to net sales of approximately $8,841,000 for 1998.      
Notwithstanding these results, the Company had the following achievements in    
1999:                                                                           

-        Obtained a state-of-the-art pharmaceutical facility by leasing a 35,000
square foot facility in Congers, NY.                          

-        Acquired rights to over 50 products from Barr Laboratories. Certain of 
     these products will be systematically updated and introduced to the
market over the next three years.                             

-        Received approval from the FDA of two ANDA's and submitted one other   
for approval.                                                 

-        Subsequent to year end, the Company completed various strategic        
alliance transactions with Watson Pharmaceuticals, Inc.       

RESULTS OF OPERATIONS                                                           

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     The following chart reflects expenses, earnings, income, losses and
profits expressed as a percentage of net sales for the years 1999, 1998 and     
1997.                                                                           

                                                        [Enlarge/Download Table]

                                                                               PERCENTAGE CHANGE       
                                                                                  YEAR-TO-YEAR         
                                                                               INCREASE (DECREASE)     
                                                PERCENTAGE OF NET SALES           YEARS ENDED          
                                                  YEAR ENDED DECEMBER             DECEMBER 31,         
                                                  -------------------             ------------         
                                        1999         1998          1997    1998 TO 1999    1997 TO 1998
                                        ----         ----          ----    ------------    ------------
                                                                                                       
Net sales                                100%         100%          100%       29.2            (2.7)   
Cost of Goods                          134.1        143.8         169.5        20.5                    
                                                                                              (17.5)   
Gross Profit                           (34.1)       (43.8)        (69.5)         .6           (38.7)   
Research & Development                   9.4          7.4          10.8        65.1           (33.5)   
Selling, general and                                                                                   
administrative expense                  64.6         91.4          69.4        (8.6)           29.5    
Plant shutdown costs                    28.2           --            --          --              --    

(Loss) from operations                (136.4)      (142.5)       (149.7)       23.6            (6.7)   
Interest expense                        25.0         14.5          12.6       121.9            70.1    
Amortization of deferred debt                                                                          
  discount and private offering cost    16.0          7.5            --       176.1              --    
Other (income) expenses                 (1.6)       (20.6)          2.9       (89.7)             --    
(Loss) before income taxes            (175.7)      (143.9)       (165.2)       57.7           (14.6)   
Net (loss)                            (175.7)%     (143.9)%      (165.2)%      57.7%          (14.6)%  

NET SALES                                                                       

Net sales for 1999 of $11,420,000 represents an increase of $2,579,000 as       
compared to net sales for 1998. The increase is attributable to greater market  
penetration as well as the introduction of additional products, primarily       
prednisolone, which accounted for approximately $815,000 of new sales.          

Net sales for 1998 of $8,841,000 represents a decrease of $247,000 as compared  
to net sales for 1997. The decrease is attributable in part to a reduction in   
toll manufacturing revenue from Mallinckrodt of approximately $878,000 from the 
prior year. Additionally, the Company was unable to market successfully to the  
retail pharmacy marketplace until the third quarter of 1998 because during      
fiscal 1996 and 1997, the Company had failed to pay required rebates to state   
Medicaid agencies. This caused those states to deny medicaid reimbursement to   
the retail pharmacies on their sales of the Company's products. Commensurate    
with the infusion of new capital and management in March, 1998, the Company     
began reestablishing itself in good standing with all states. In April 1998, the
Company entered into a new contract with the Health Care Finance Authority      
("HCFA") and paid outstanding rebates due to various states. The states         
completed the reinstatement of the Company on their medicaid reimbursement by   
July, 1998. The Company has been in good standing with HCFA and the individual  
states since July 1998 and expects this past non-compliance will have no impact 
on future results of operations or liquidity. Also during much of 1998, the     
Company experienced difficulty in obtaining certain raw materials which reduced 
sales. These shortages were remedied by December 31, 1998.                      

GROSS MARGINS                                                                   

The Company's gross margin for 1999 improved to (34.1)% versus (43.8)% for 1998.
The improvement in 1999 is due primarily to the leveraging effect of greater    
sales over certain fixed manufacturing expenses.                                

       The Company's gross margin for 1998 of (43.8)% is a 38.7% improvement
over gross margin for 1997. This improvement is due, in part, to the elimination
of non-core manufacturing operations in California, tighter inventory controls  
and a general reduction in manufacturing labor. Additionally, the Company's     
revenues in 1998 from sales to Mallinckrodt under a toll manufacturing agreement
decreased by approximately $878,000. The gross margins on these products were   
substantially less than on the Company's other products.                        

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RESEARCH & DEVELOPMENT EXPENSES                                                 

       For 1999, research and development expenses amounted to $1,075,000 as
compared to $651,000 for 1998. The increase primarily reflects the costs of     
additional regulatory personnel hired during 1999 to perform work in conjunction
with new product development and the transfer of certain Barr ANDAs acquired    
during 1999.                                                                    

     For 1998, research and development expenses amounted to $651,000 as
compared to $979,000 for 1997. The decrease primarily reflects the costs of     
biostudies performed in 1997 that were not duplicated in 1998.                  

   The Company expects research and development expenses to increase
significantly in 2000 consistent with its plans to increase the number of Barr  
ANDA's transferred as compared to 1999 and to develop additional active         
pharmaceutical ingredients at its Culver, Indiana facility.                     

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                    

         Selling, general and administrative costs were $7,383,000 (64.6% of net
sales) for 1999 compared to $8,078,000 (91.4% of net sales) for 1998. This      
decrease is primarily due to the reduced legal expenses in 1999 as compared to  
1998.                                                                           

         Selling, general and administrative costs were $8,078,000 (91.4% of net
sales) for 1998 compared to $6,308,000 (69.4% of net sales) for 1997. This      
increase is primarily due to costs associated with legal expenses and settlement
costs of certain litigation ($550,000), severance costs associated with         
personnel reductions ($250,000), installation of a new information system       
($100,000) and costs associated with expanded regulatory and compliance         
departments ($300,000).                                                         

PLANT SHUTDOWN COSTS                                                            

In the fourth quarter of 1999, the Company decided to discontinue its 
Brooklyn operations. The total charge against earnings of approximately         
$3,220,000 resulting from eliminating the Brooklyn operation includes the lease 
termination payment of $1,150,000, a provision of $200,000 for plant repairs,   
the write-off of leasehold improvements of $1,778,000, severance and other costs
for terminated employees of $730,000, less deferred rent previously expensed of 
$638,000.                                                                       

INTEREST EXPENSE                                                                

 Interest expense for 1999 increased by 121.9% over that of 1998
reflecting the issuance of an additional $17,800,000 of convertible debentures  
in 1999.                                                                        

         Interest expense for 1998 increased by 13% over that of 1997 reflecting
the substantial new debt in the form of $25,800,000 of convertible debentures   
that was added in 1998.                                                         

AMORTIZATION OF DEFERRED DEBT DISCOUNT AND DEBT ISSUANCE COSTS                  

 In 1999 and 1998 the Company issued warrants and incurred costs
associated with private placements and bridge financings. The value of warrants 
issued in 1999 and 1998, as determined by use of the Black-Scholes valuation    
model, was $5,234,000 and $2,618,000, respectively. Additionally, the Company   
incurred approximately $907,000 and $1,516,000 of debt issuance costs in 1999   
and 1998, respectively. These amounts are being amortized over the life of the  
underlying debentures which expire in March, 2003. Accordingly, the Company     
amortized $1,825,000 and $661,000 in 1999 and 1998, respectively.               

OTHER INCOME                                                                    

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        Included in other income for 1998 is $1,900,000 realized from the sale
of certain assets to Mallinckrodt. This transaction was entered into in 1997 but
the conditions for realization of the gain from the sale were not met until     
1998.                                                                           

LIQUIDITY AND CAPITAL RESOURCES                                                 

    At December 31, 1999, the Company had cash and cash equivalents of
$786,000 as compared to $1,850,000 at December 31, 1998. The Company had a      
working capital deficit at December 31, 1999 of $(5,181,000).                   

On May 26, 1999, the Company consummated a private offering of
securities for an aggregate purchase price of up to $22.8 million (the "Oracle  
Offering"). The securities issued in the Oracle Offering consisted of 5%        
convertible senior secured debentures (the "1999 Debentures") and common stock  
purchase warrants (the "1999 Warrants"), each of which are substantially similar
to the debentures and warrants issued by the Company in the Galen Offering      
completed in March, 1998. Of the $22.8 million to be invested pursuant to the   
Oracle Offering, $5 million was funded by Oracle Strategic Partners, L.P.       
("Oracle") on May 26, 1999, the closing date of the Oracle Offering, with an    
additional $10 million to be funded by Oracle in two (2) installments of $5     
million each. The first installment of the additional $10 million Oracle        
investment was funded on July 27, 1999. Pursuant to an agreement reached between
the Company and Oracle on March 20, 2000, the final $5 million investment to be 
made by Oracle has been waived.                                                 

         In addition to the $10 million investment made by Oracle, approximately
$7,037,000 of the 1999 Debentures issued pursuant to the Oracle Offering were   
issued in exchange for the surrender of a like amount of principal and accrued  
interest outstanding under the Company's convertible promissory notes issues    
pursuant to various bridge loan transactions with Galen Partners III, L.P.,     
Galen Partners International III, L.P., Galen Employee Fund III, L.P.           
(collectively, "Galen") and certain other investors in the aggregate amount of  
$10,104,110 during the period from August 1998 through and including May, 1999  
(the "1999 Galen Bridge Loans"). The remaining balance of the 1999 Galen Bridge 
Loans in the principal amount of $3,495,000 plus accrued and unpaid interest was
satisfied with a portion of the proceeds of the second $5 million installment of
Oracle's investment funded on July 27, 1999. After giving effect to the         
satisfaction of approximately $7 million of indebtedness under the 1999 Galen   
Bridge Loans through the issuance of a like principal amount of 1999 Debentures,
the repayment of the balance of the 1999 Galen Bridge Loans in the principal    
amount of approximately $3.5 million plus accrued and unpaid interest, and the  
waiver by the Company of the final $5 million installment to be made by Oracle  
pursuant to the Oracle Offering, the Company received net cash proceeds from the
Oracle Offering of approximately $7.3 million.                                  

    The net proceeds from the issuance of the 1999 Debentures and 1999
Warrants pursuant to the Oracle Offering, in addition to satisfying the         
principal and accrued interest under the 1999 Galen Bridge Loans, were used to  
fund working capital, including the purchase of raw materials, payroll expenses 
and other Company operating expenses.                                           

         During the period from May 1997 through July 1997, the Company borrowed
approximately $3 million from Mylan Laboratories, Inc. pursuant to five         
unsecured, demand promissory notes. The advances made by Mylan Laboratories,    
Inc. were part of a proposed investment by Mylan Laboratories, Inc. in the      
Company, including the proposed purchase of the Company's Houba Indiana facility
as well as a partial tender offer for the Company's common stock. The Company   
used the proceeds of these borrowings for working capital. To date, $621,000 has
been paid by the Company to Mylan against such indebtedness in the form of      
product deliveries to Mylan. Pursuant to an agreement reached between the       
parties, the Company is required to satisfy interest on the outstanding         
indebtedness on an annual basis while the indebtedness remains outstanding and  
to satisfy the principal amount of such indebtedness in the form of product     
deliveries to Mylan until such time as the indebtedness is satisfied in full.   

        In addition to the 1999 Galen Bridge Loans, the Company secured bridge
financing from Galen in the aggregate amount of approximately $3,300,000, funded
through six separate bridge loan transactions during the period from December 8,
1999 through March 29, 2000 (collectively, the "2000 Galen Bridge Loans"). The  
principal amount of the 2000 Galen Bridge Loans and accrued and unpaid interest 
were satisfied in full with a portion of the proceeds of the Watson Term Loan   
(as described below). Prior to repayment, the 2000 Galen Bridge Loans accrued   
interest at the rate of 18% per annum and were secured by a first lien on all of
the Company's assets. In consideration for the extension of the 2000 Galen      
Bridge Loans, the Company issued common stock purchase warrants to Galen to     
purchase an aggregate of 150,000 shares of the Company's common stock           
(representing warrants to purchase 50,000 shares of common stock for each       
$1,000,000 in                                                                   

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principal amount of the 2000 Galen Bridge Loans). The warrants issued pursuant  
to the 2000 Galen Bridge Loans have an exercise price equal to the fair market  
value of the Company's common stock on the date of issuance and are             
substantially identical to those issued by the Company in the Oracle Offering.  
The 2000 Galen Bridge Loans were obtained by the Company in order to provide    
necessary working capital prior to the completion of the Watson Term Loan as    
described below.                                                                

 On March 22, 2000, the Company executed a Lease Termination and
Settlement Agreement with the landlord of the Company's Brooklyn, New York      
manufacturing facility (the "Settlement Agreement"). The Settlement Agreement   
accelerates the termination of the lease covering the Company's Brooklyn        
facility and provides the Company with the time necessary to transfer operations
to the Company's Congers, New York facility and cease all manufacturing,        
research and development and warehouse operations currently conducted in        
Brooklyn. The Settlement Agreement provided for the termination of the Brooklyn 
lease on August 31, 2000, subject to the Company's right to extend the lease    
term to March 31, 2001. The original lease provided for a term expiring December
31, 2005 with a rental payment obligation of $6,715,000 during the period from  
September 1, 2000 through December 31, 2005. The Settlement Agreement provided  
for the Company's payment of a lease termination fee of $1,150,000, the advance 
payment of rent through August 31, 2000 and a restoration escrow deposit of     
$200,000 for plant repairs. The Company also deposited in escrow with its       
counsel $390,600 which represents rental payments for the period September 1,   
2000 through March 31, 2001. Such escrow amount will be returned to the Company 
in the event it vacates the Brooklyn facility on or prior to August 31, 2000.   
The Company funded the termination fee payment, the advance rental payment      
obligations and restoration amount required pursuant to the Settlement Agreement
with the proceeds received from the Watson Term Loan described below.           

    In addition to the lease termination and escrow payments described
above, the Company estimates that it will incur severance and other costs for   
terminated employees of approximately $730,000 which are expected to be paid in 
the third quarter of 2000. Also, the Company expects to incur capital costs of  
approximately $500,000 associated with the transfer of certain operations from  
Brooklyn to the Congers facility.                                               

      In addition to the other strategic alliance transactions with Watson
Pharmaceuticals, Inc. ("Watson") completed on March 29, 2000 (see "Item 1.      
Business - Recent Events - Strategic Alliance with Watson Pharmaceuticals"), the
Company and Watson executed a Loan Agreement providing for Watson's extension of
a $17,500,000 term loan to the Company (the "Watson Term Loan"). The Watson Term
Loan will be funded in installments upon the Company's request for advances and 
the provision to Watson of a supporting use of proceeds relating to each such   
advance. As of March 31, 2000, $9 million had been advanced by Watson to the    
Company under the Watson Term Loan. The Watson Term Loan is secured by a first  
lien on all of the Company's assets, senior to the liens securing all other     
Company indebtedness, carries a floating rate of interest equal to prime plus   
two percent and matures on March 31, 2003. At March 31, 2000, a portion of the  
net proceeds of the Watson Term Loan were used to satisfy in full the 2000 Galen
Bridge Loans, to satisfy the Company's payment obligations under the Settlement 
Agreement with the landlord of its Brooklyn, New York facility and for working  
capital. The remaining net proceeds of the Watson Term Loan will, in large part,
be used to upgrade and equip the API manufacturing facility of Houba, Inc., the 
Company's wholly-owned subsidiary, to upgrade and equip the Company's Congers,  
New York leased facility, to fund the relocation of the Company's research and  
development and manufacturing operations from its Brooklyn, New York facility to
its Congers, New York facility and for working capital to fund continued        
operations.                                                                     

         The net proceeds from the Watson Term Loan has permitted the Company to
satisfy its current liabilities and accounts payable. In addition, the net      
proceeds from the Watson Term Loan combined with the payments to be received by 
the Company from Watson under each of the Product Acquisition Agreement and the 
Core Products Supply Agreement will provide the Company with sufficient working 
capital to fund operations for at least the next twelve months.                 

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CAPITAL EXPENDITURES                                                            

    The Company's capital expenditures during 1999, 1998 and 1997 were
$849,000 $1,545,000, and $85,000, respectively. The decrease in capital         
expenditures in 1999 as compared to prior years is attributable to the          
completion of certain equipment and facility upgrades that had been delayed in  
prior years due to the Company's cash conservation measures in those years. The 
Company has budgeted for capital expenditures approximately $2,500,000 in fiscal
2000. Such amounts will be funded from the net proceeds of the Watson Term Loan 
and the payments to be received by the Company pursuant to each of the Product  
Acquisition Agreement and Core Products Supply Agreement with Watson.           

YEAR 2000 COMPLIANCE                                                            

In anticipation of the Year 2000, the Company installed a new 
information system, including hardware and software. To date, neither the       
Company nor any of its customers or suppliers has experienced any material Year 
2000 failures relating to their computer systems.                               

IMPACT OF INFLATION                                                             

       The Company believes that inflation did not have a material impact on
its operations for the periods reported. Significant increases in labor,        
employee benefits and other expenses could have a material adverse effect on the
Company's performance.                                                          

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                            

      The response to this item is submitted as a separate section of this
Report commencing on page F-1.                                                  

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND         
FINANCIAL DISCLOSURE.                                                           

Not Applicable.                                               

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.                    

       The information required by Item 10 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December 31, 
1999, and is hereby incorporated herein by reference to such Proxy Statement.   

ITEM 11. EXECUTIVE COMPENSATION.                                                

       The information required by Item 11 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December 31, 
1999, and is hereby incorporated herein by reference to such Proxy Statement.   

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.        

       The information required by Item 12 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December 31, 
1999, and is hereby incorporated herein by reference to such Proxy Statement.   

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                        

       The information required by Item 13 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December     

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31, 1999, and is hereby incorporated herein by reference to such Proxy          
Statement.                                                                      

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 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.       

(a)  Financial Statements--See Index to Financial Statements. 

(b)  Reports on Form 8-K                                      

         No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.                                

(c)  Exhibits                                                 

        The following exhibits are included as a part of this Annual Report on
Form 10-K or incorporated herein by reference.                                  

                                                        [Enlarge/Download Table]

EXHIBIT                                                                                                          
NUMBER                                          DOCUMENT                                                         
------                                          --------                                                         
                                                                                                                 
*3.1     Certificate of Incorporation and amendments.                                                            

 3.2     Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form  
         10-Q for the quarter ended June 30, 1993).                                                              

 3.3     Restated By-Laws (incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report Form 10-K  
         for the year ended December 31, 1998 (the "1998 Form 10-K")).                                           

10.1     Credit Agreement, dated as of December 22, 1992, among the Registrant and The Chase Manhattan Bank, N.A.
         (incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year  
         ended December 31, 1992 (the "1992 Form 10-K")).                                                        

10.2     Amendment Two, dated as of January 12, 1994, to Credit Agreement among the Registrant and The Chase     
         Manhattan Bank, N.A., together with forms of Stock Warrant and Registration Rights Agreement            
         (incorporated by reference to Exhibit 10.1. to the Registrant's Annual Report on Form 10-K for the year 
         ended December 31, 1993 (the "1993 Form 10-K")).                                                        

10.3     Amendment Three, dated as of May 31, 1994, to Credit Agreement among the Registrant and The Chase       
         Manhattan Bank, N.A. (incorporated by reference to Exhibit 6(a) to the Registrant's Quarterly Report on 
         Form 10-Q for the quarter ended March 31, 1994).                                                        

10.4     Amendment Four, dated as of July 1994, to Credit Agreement among the Registrant and The Chase Manhattan 
         Bank, N.A. (incorporated by reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q 
         for the quarter ended June 30, 1994).                                                                   

10.5     Amendment Five, dated as of March 21, 1995, to Credit Agreement among the Registrant and The Chase      
         Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.7 to the Registrant's Current Report on   
         Form 8-K dated March 21, 1995 (the "March 8-K")).                                                       

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                                                        [Enlarge/Download Table]

EXHIBIT                                                                                                                     
NUMBER                                           DOCUMENT                                                                   
------                                           --------                                                                   
                                                                                                                            
10.5(l)   Form of Warrants issued to The Bank of New York, The Chase Manhattan Bank, N.A. and the Israel Discount           
          Bank (incorporated by reference to Exhibit 10.5(i) to the Registrant's Annual Report on Form 10-K for the         
          year ended December 31, 1995 (the "1995 Form 10-K")).                                                             

10.5(2)   Letter Agreement, dated July 10, 1995, among Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A., The           
          Bank of New York and Israel Discount Bank of New York (incorporated by reference to Exhibit 6(a) to the           
          Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (the "June 10-Q")).                

10.5(3)   Letter Agreement, dated November 16, 1995, among Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A.,           
          The Bank of New York and Israel Discount Bank of New York (incorporated by reference to Exhibit 10.25(iv)         
          to the 1995 10-K).                                                                                                

10.5(4)   Amendment 6, dated as of August 6, 1996, to Credit Agreement among Halsey Drug Co., Inc., The Chase Manhattan     
          Bank, N.A., The Bank of New York and Israel Discount Bank of New York (incorporated by reference to Exhibit 10.1  
          to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the     
          "June 1996 10-Q").                                                                                                

10.5(5)   Letter Agreement, dated March 25, 1997 among Halsey Drug Co., Inc., The Chase Manhattan Bank, as                  
          successor in interest to The Chase Manhattan Bank (National Association), The Bank of New York and Israel         
          Discount Bank.                                                                                                    

10.6      Agreement Regarding Release of Security Interests dated as of March 21, 1995 by and among the Company,            
          Mallinckrodt Chemical Acquisition, Inc. and The Chase Manhattan Bank, N.A. (incorporated by reference to          
          Exhibit 10.9 of the March 8-K).                                                                                   

10.7      Consulting Agreement dated as of September, 1993 between the Registrant and Joseph F. Limongelli                  
          (incorporated by reference to Exhibit 10.6 to the 1993 Form 10-K).                                                

10.8      Employment Agreement, dated as of January 1, 1993, between the Registrant and Rosendo Ferran (incorporated by     
          reference to Exhibit 10.2 to the 1992 Form 10-K).                                                                 

10.10(1)  Halsey Drug Co., Inc. 1984 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 to            
          the 1992 Form 10-K).                                                                                              

10.10(2)  Halsey Drug Co., Inc. 1995 Stock Option and Restricted Stock Purchase Plan (incorporated by reference to          
          Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-98396).                           

10.10(3)  Halsey Drug Co., Inc. Non-Employee Director Stock Option Plan.                                                    

10.11     Leases, effective February 13, 1989 and January 1, 1990, respectively, among the Registrant and Milton J.         
          Ackerman, Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn Weiss (incorporated by reference          
          to Exhibits 10.6 and 10.7, respectively, to the Registrant's Annual Report on Form 10-K for the year              
          ended December 31, 1989).                                                                                         

10.12     Lease, effective as of April 15, 1988, among the Registrant and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein,
          Thelma Hinderstein and Marilyn Weiss, and Rider thereto (incorporated by reference to Exhibit 10.12 to the        
          Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).                                    

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                                                        [Enlarge/Download Table]

EXHIBIT                                                                                                                     
NUMBER                                           DOCUMENT                                                                   
------                                           --------                                                                   
                                                                                                                            
10.12(l)  Lease, as of October 31, 1994, among Registrant and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein, Thelma     
          Hinderstein and Marilyn Weiss, together with Modification, Consolidation and Extension Agreement (incorporated by 
          reference to Exhibit 10. 12(i) to the 1995 Form 10-K).                                                            

10.13     Asset Purchase Agreement dated as of March 21, 1995 among Mallinckrodt Chemical Acquisition, Inc. ("Acquisition"),
          Mallinckrodt Chemical, Inc., as guarantor and the Registrant (incorporated by reference to Exhibit 10.1 to the    
          March 8-K).                                                                                                       

10.14     Toll Manufacturing Agreement for APAP/Oxycodone Tablets dated as of March 21, 1995 between Acquisition            
          and the Registrant (incorporated by reference to Exhibit 10.2 to the March 8-K).                                  

10.15     Capsule ANDA Option Agreement dated as of March 21, 1995 between Acquisition and the Registrant                   
          (incorporated by reference to Exhibit 10.3 to the March 8-K).                                                     

10.16     Tablet ANDA Noncompetition Agreement dated as of March 21, 1995 between the Registrant and Acquisition            
          (incorporated by reference to Exhibit 10.4 to the March 8-K).                                                     

10.17     Subordinated Non-Negotiable Promissory Term Note in the amount of $1,200,00 dated March 21, 1995 issued by the    
          Registrant to Acquisition (incorporated by reference to Exhibit 10.5 to the March 8-K).                           

10.18     Term Note Security Agreement dated as of March 21, 1995 among the Company, Houba, Inc. and Acquisition            
          (incorporated by reference to Exhibit 10.6 to the March 8-K).                                                     

10.19     Amendment dated March 21, 1995 to Subordination Agreement dated as of July 21, 1994 between Mallinckrodt Chemical,
          Inc., Mallinckrodt Chemical Acquisition, Inc., the Registrant, The Chase Manhattan Bank (National Association),   
          Israel Discount Bank of New York, The Bank of New York, and The Chase Manhattan Bank (National Association)       
          (incorporated by reference to Exhibit 10.8 to the March 8-K).                                                     

10.20     Agreement dated as of March 30, 1995 between the Registrant and Zatpack, Inc. (incorporated by reference          
          to Exhibit 10.10 to the March 8-K).                                                                               

10.21     Waiver and Termination Agreement dated as of March 30, 1995 between Zuellig Group, W.A., Inc. and Indiana Fine    
          Chemicals Corporation (incorporated by reference to Exhibit 10.11 to the March 8-K).                              

10.22     Convertible Subordinated Note of the Registrant dated December 1, 1994 issued to Zatpack, Inc.                    
          (incorporated by reference to Exhibit 10.12 to the March 8-K).                                                    

10.23     Agreement dated as of March 30, 1995 among the Registrant, Indiana Fine Chemicals Corporation, Zuellig            
          Group, N.A., Inc., Houba Inc., Zetapharm, Inc. and Zuellig Botanical, Inc. (incorporated by reference to          
          Exhibit 10.13 to the March 8-K).                                                                                  

10.24     Supply Agreement dated as of March 30, 1995 between Houba, Inc. and ZetaPharm, Inc. (incorporated by              
          reference to Exhibit 10.14 to the March 8-K).                                                                     

10.25     Form of 10% Convertible Subordinated Debenture (incorporated by reference to Exhibit 6(a) to the June 10-Q).      

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EXHIBIT                                                                                                                  
NUMBER                                          DOCUMENT                                                                 
------                                          --------                                                                 
                                                                                                                         
10.26    Form of Redeemable Common Stock Purchase Warrant (incorporated by reference to Exhibit 6(a) to the June 10-Q).  

10.27    Form of 10% Convertible Subordinated Debenture (incorporated by reference to Exhibit 4.1 to the Registrant's    
         Current Report on Form 8-K dated December 4, 1995 (the "December 8-K")).                                        

10.28    Form of Redeemable Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the December 8-K).

10.29    Form of 10% Convertible Subordinated Debenture (incorporated by reference to Exhibit 99 to the June 1996 10-Q). 

10.30    Form of Redeemable Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to
         the June 1996 10-Q).                                                                                            

10.31    Form of 5% Convertible Senior Secured Debenture (incorporated by reference to Exhibit 4.1 to the                
         Registrant's Current Report on Form 8-K dated March 24, 1998 (the "March 1998 8-K")).                           

10.32    Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the March 1998 8-K).         

10.33    Debenture and Warrant Purchase Agreement dated March 10, 1998, by and among the Registrant,                     
         Galen Partners III, L.P. and the other Purchasers listed on the Signature Page thereto                          
         (incorporated by reference to Exhibit 10.1 to the March 1998 8-K).                                              

10.34    Form of General Security Agreement of Halsey Drug Co., Inc. dated March 10, 1998 (incorporated by               
         reference to Exhibit 10.2 to the March 1998 8-K).                                                               

10.35    Form of Agreement of Guaranty of Subsidiaries of Halsey Drug Co., Inc. dated March 10, 1998 (incorporated       
         by reference to Exhibit 10.3 to the March 1998 8-K).                                                            

10.36    Form of Guarantor General Security Agreement dated March 10, 1998 (incorporated by reference to Exhibit         
         10.4 to the March 1998 8-K).                                                                                    

10.37    Stock Pledge Agreement dated March 10, 1998 by and between the Registrant and Galen Partners III, L.P.,         
         as agent (incorporated by reference to Exhibit 10.5 to the March 1998 8-K).                                     

10.38    Form of Irrevocable Proxy Agreement (incorporated by reference to Exhibit 10.6 to the March 1998 8-K).          

10.39    Agency Letter Agreement dated March 10, 1998 by and among the Purchasers a party to the Debenture and           
         Warrant Purchase Agreement, dated March 10, 1998 (incorporated by reference to Exhibit 10.7 to the March        
         1998 8-K).                                                                                                      

10.40    Press Release of Registrant dated March 13, 1998 (incorporated by reference to Exhibit 99.1 to the March        
         1998 8-K).                                                                                                      

10.41    Current Report on Form 8-K as filed by the Registrant with the Securities and Exchange Commission on            
         March 24, 1998.                                                                                                 

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                                                        [Enlarge/Download Table]

EXHIBIT                                                                                                                  
NUMBER                                          DOCUMENT                                                                 
------                                          --------                                                                 
                                                                                                                         
10.42    Letter Agreement between the Registrant and the U.S. Department of Justice dated March 27, 1998 relating        
         to the restructuring of the fine assessed by the Department of Justice under the Plea Agreement dated           
         June 21, 1993.                                                                                                  

10.43    Employment Agreement dated as of March 10, 1998 between the Registrant and Michael K. Reicher                   
         (incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report of Form 10-K for the year         
         ended December 31, 1997 (the "1997 Form 10-K")).                                                                

10.44    Employment Agreement dated as of March 10, 1998 between the Registrant and Peter Clemens (incorporated by       
         reference to Exhibit 10.44 to the 1997 Form 10-K.                                                               

10.45    Amended, Restated and Consolidated Bridge Loan Agreement dated as of December 2, 1998 between the               
         Company, Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee Fund III, L.P. and the
         other signatures thereto (incorporated by reference to Exhibit 10.45 to the 1998 Form 10-K).                    

10.46    First Amendment to Amended, Restated and Consolidated Bridge Loan Agreement dated December 7, 1998              
         between the Company and the lenders listed on the signature page thereto (incorporated by reference to          
         Exhibit 10.46 to the 1998 Form 10-K).                                                                           

10.47    Second Amendment to Amended, Restated and Consolidated Bridge Loan Agreement dated March 8, 1999 between        
         the Company and the lenders listed on the signature page thereto (incorporated by reference to Exhibit          
         10.47 to the 1998 Form 10-K).                                                                                   

10.48    Form of 10% Convertible Secured Note due May 30, 1999 (incorporated by reference to Exhibit 10.48 to the        
         1998 Form 10-K).                                                                                                

10.49    Form of Common Stock Purchase Warrant issued pursuant to be Amended, Restated and Consolidated Bridge           
         Loan Agreement (incorporated by reference to Exhibit 10.49 to the 1998 Form 10-K).                              

10.50    Amended and Restated General Security Agreement dated December 2, 1998 between the Company and Galen            
         Partners III, L.P., as Agent (incorporated by reference to Exhibit 10.50 to the 1998 Form 10-K).                

10.51    Subordination Agreement dated December 2, 1998 between the Registrant and Galen Partners III, L.P., as          
         Agent (incorporated by reference to Exhibit 10.51 to the 1998 Form 10-K).                                       

10.52    Agency Letter Agreement dated December 2, 1998 by and among the lenders a party to the Amended, Restated        
         and Consolidated Bridge Loan Agreement, as amended (incorporated by reference to Exhibit 10.52 to the           
         1998 Form 10-K).                                                                                                

10.53    Lease Agreement dated March 17, 1999 between the Registrant and Par Pharmaceuticals, Inc. (incorporated         
         by reference to Exhibit 10.53 to the 1998 Form 10-K).                                                           

10.54    Lease Agreement dated September 1, 1998 between the Registrant and Crimson Ridge Partners (incorporated         
         by reference to Exhibit 10.54 to the 1998 Form 10-K).                                                           

10.55    Manufacturing and Supply Agreement dated March 17, 1999 between the Registrant and Par Pharmaceuticals,         
         Inc. (incorporated by reference to Exhibit 10.55 to the 1998 Form 10-K).                                        

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                                                        [Enlarge/Download Table]

EXHIBIT                                                                                                                     
NUMBER                                          DOCUMENT                                                                    
------                                          --------                                                                    

                                                                                                                            
10.56    Halsey Drug Co., Inc. 1998 Stock Option Plan (incorporated by ] reference to Exhibit 10.56 to the 1998 Form 10-K). 

10.57    Loan Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc. (incorporated by       
         reference to Exhibit 10.57 to the Registrant's Current Report on Form 8-K dated March 29, 2000 (the "March 2000    
         8-K")). +                                                                                                          

10.58    Amendment to Loan Agreement dated March 31, 2000 between the Registrant and Watson Pharmaceuticals, Inc.           
         (incorporated by reference to Exhibit 10.58 to the March 2000 8-K).                                                

10.59    Secured Promissory Note in the principal amount of $17,500,000 issued by the Registrant, as the maker, in favor of 
         Watson Pharmaceuticals, Inc. dated March 31, 2000. (incorporated by reference to Exhibit 10.59 to the March 2000   
         8-K).                                                                                                              

10.60    Watson Security Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.             
         (incorporated by reference to Exhibit 10.60 to the March 2000 8-K).                                                

10.61    Stock Pledge Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc. (incorporated  
         by reference to Exhibit 10.61 to the March 2000 8-K).                                                              

10.62    Watson Guarantee dated March 29, 2000 between Houba, Inc. and Watson Pharmaceuticals, Inc., as the guarantors, in  
         favor of Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.62 to the March 2000 8-K).          

10.63    Watson's Guarantors Security Agreement dated March 29, 2000 between Halsey Pharmaceuticals, Inc., Houba, Inc. and  
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.63 to the March 2000 8-K).                   

10.64    Subordination Agreement dated March 29, 2000 by and among the Registrant, Watson Pharmaceuticals, Inc. and the     
         holders of the Registrant's outstanding 5% convertible debentures due March 10, 2003. (incorporated by reference to
         Exhibit 10.64 to the March 2000 8-K).+                                                                             

10.65    Real Estate Mortgage dated March 29, 2000 between Houba, Inc. and Watson Pharmaceuticals, Inc. (incorporated by    
         reference to Exhibit 10.65 to the March 2000 8-K).                                                                 

10.66    Subordination Agreement by and among Houba, Inc., Galen Partners, III, L.P., Oracle Strategic Partners, L.P. and   
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.66 to the March 2000 8-K).                   

10.67    Product Purchase Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.            
         (incorporated by reference to Exhibit 10.67 to the March, 2000 8-K). +                                             

10.68    Finished Goods Supply Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.       
         (incorporated by reference to Exhibit 10.68 to the March 2000 8-K). +                                              

10.69    Active Ingredient Supply Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.    
         (incorporated by reference to Exhibit 10.69 to the March 2000 8-K). +                                              

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                                                                [Download Table]

EXHIBIT                                                                          
NUMBER                           DOCUMENT                                        
------                           --------                                        
                                                                                 
 10.70   Right of First Negotiation Agreement dated March 29, 2000               
         between the Registrant and Watson Pharmaceuticals, Inc.                 
         (incorporated by reference to Exhibit 10.70 to the March 2000           
         8-K). +                                                                 

 10.71   Finished Goods Supply Agreement (Core Products) dated March             
         29, 2000 between the Registrant and Watson Pharmaceuticals,             
         Inc. (incorporated by reference to Exhibit 10.71 to the March           
         2000 8-K). +                                                            

*10.72   Debenture and Warrant Purchase Agreement dated May 26, 1999 by          
         and among the Registrant, Oracle Strategic Partners, L.P. and           
         the other purchasers listed on the signature page thereto (the          
         "Oracle Purchase Agreement").                                           

*10.73   Form of 5% Convertible Senior Secured Debenture issued                  
         pursuant to the Oracle Purchase Agreement.                              

*10.74   Form of Common Stock Purchase Warrant issued pursuant to the            
         Oracle Purchase Agreement.                                              

*10.75   Lease Termination and Settlement Agreement dated March 20, 2000         
         between the Registrant and Atlantic Properties Company in               
         respect of the Registrant's Brooklyn, New York leased facility.         

 21      Subsidiaries of the Registrant (incorporated by reference to            
         Exhibit 22 to the 1993 Form 10-K).                                      

*23.1    Consent of Grant Thornton LLP, independent certified public accountants.

*27      Financial Data Schedule, which is submitted electronically to           
         the Securities and Exchange Commission for informational                
         purposes only and not filed.                                            

* Filed herewith.                                                               
+ A portion of this exhibit has been omitted pursuant to an application for     
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 
1934, as amended.                                                               

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SIGNATURES

            Pursuant to the requirements of 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.          

     HALSEY DRUG CO., INC.

       By: /s/ MICHAEL REICHER
           -------------------
              Michael Reicher, President and
                                    Chief Executive Officer (Principal Executive
          Officer)

Date: April 14, 2000                                                            

      Pursuant to the requirements of 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.                    

                                                        [Enlarge/Download Table]
                                                                                            
/s/ WILLIAM G. SKELLY                Chairman and Director                    April 14, 2000
-----------------------------------                                                         
William G. Skelly                                                                           

/s/ MICHAEL REICHER                  President, Chief Executive Officer       April 14, 2000
-----------------------------------    and Director (Principal Executive                    
Michael Reicher                        Officer)                                             

/s/ PETER CLEMENS                    Vice President, Chief Financial Officer  April 14, 2000
-----------------------------------    (Principal Financial and accounting                  
Peter Clemens                          Officer) and Director                                

/s/ ALAN J. SMITH                    Director                                 April 14, 2000
-----------------------------------                                                         
Alan J. Smith                                                                               

/s/ BRUCE F. WESSON                  Director                                 April 14, 2000
-----------------------------------                                                         
Bruce F. Wesson                                                                             

/s/ WILLIAM SUMNER                   Director                                 April 14, 2000
-----------------------------------                                                         
William Sumner                                                                              

/s/ SRINI CONJEEVARAM                Director                                 April 14, 2000
-----------------------------------                                                         
Srini Conjeevaram                                                                           

/s/ ZUBEEN SHROFF                    Director                                 April 14, 2000
-----------------------------------                                                         
Zubeen Shroff                                                                               

/s/ Joel Liffman                     Director                                 April 14, 2000
-----------------------------------                                                         
Joel Liffman                                                                                


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 INDEX TO FINANCIAL STATEMENTS

                                                                [Download Table]

                                                         PAGE      
                                                         ----      
                                                                   

Report of Independent Certified Public Accountants       F-2       
Consolidated Balance Sheets                              F-3       
Consolidated Statements of Operations                    F-4       
Consolidated Statement of Stockholders' Equity           F-5       
Consolidated Statements of Cash Flows                    F-6       
Notes to Consolidated Financial Statements               F-8 - F-25


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 INDEX TO FINANCIAL STATEMENTS

                                                              Page
                                                              ----

Report of Independent Certified Public Accountants                   F-2        

Consolidated Balance Sheets                                          F-3 - F-4  

Consolidated Statements of Operations                                F-5        

Consolidated Statements of Stockholders' Equity                      F-6 - F-8  

Consolidated Statements of Cash Flows                                F-9 - F-10 

Notes to Consolidated Financial Statements                           F-11 - F-34

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors                                                              
HALSEY DRUG CO., INC.                                                   

We have audited the accompanying consolidated balance sheets of Halsey Drug Co.,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related         
consolidated statements of operations, stockholders' equity and cash flows for  
each of the three years in the period ended December 31, 1999. These financial  
statements are the responsibility of the Company's management. Our              
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of Halsey Drug Co.,  
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated    
results of their operations and their consolidated cash flows for each of the   
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.                             

GRANT THORNTON LLP                                                              

New York, New York                                                              
March 30, 2000                                                                  

F-2 

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Halsey Drug Co., Inc. and Subsidiaries

 CONSOLIDATED BALANCE SHEETS

December 31,
(in thousands)

                                                                [Download Table]

                                                               1999        1998 
                                                             -------     -------
                                                                                

 CURRENT ASSETS                                                                 
    Cash                                                     $   786     $ 1,850
    Accounts receivable - trade, net of allowances                              
       for doubtful accounts of $425 and $280                                   
       in 1999 and 1998, respectively                          2,716       1,439
    Inventories                                                3,502       6,354
    Prepaid expenses and other current assets                    213         148
                                                             -------     -------

         Total current assets                                  7,217       9,791

PROPERTY, PLANT AND EQUIPMENT, NET                             3,013       4,787

DEFERRED PRIVATE OFFERING COSTS                                1,623       1,700

OTHER ASSETS AND DEPOSITS                                        642         135
                                                             -------     -------

                                                             $12,495     $16,413
                                                             =======     =======

The accompanying notes are an integral part of these statements.                

F-3 

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Halsey Drug Co., Inc. and Subsidiaries

 CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31,
(in thousands)

                                                                [Download Table]

                                                            1999         1998   
                                                          --------     -------- 
                                                                                

CURRENT LIABILITIES                                                             
    Notes payable                                         $  4,038     $ 10,850 
    Accounts payable                                         2,283        1,834 
    Accrued expenses                                         5,777        3,972 
    Department of Justice Settlement                           300          300 
                                                          --------     -------- 

         Total current liabilities                          12,398       16,956 

CONVERTIBLE SUBORDINATED DEBENTURES,                                            
   NET                                                      41,096       26,186 

OTHER LIABILITIES                                                           549 

DEPARTMENT OF JUSTICE SETTLEMENT                             1,375        1,675 

COMMITMENTS AND CONTINGENCIES                                                   

STOCKHOLDERS' EQUITY (DEFICIT)                                                  
    Common stock - $.01 par value; authorized,                                  
       80,000,000 shares; issued 14,829,511 shares                              
       and 14,443,212 shares in 1999 and 1998,                                  
       respectively                                            148          144 
    Additional paid-in capital                              35,751       29,113 
    Accumulated deficit                                    (77,284)     (57,221)
                                                          --------     -------- 

                                                           (41,385)     (27,964)

    Less treasury stock - at cost                                               
       (439,603 shares)                                       (989)        (989)
                                                          --------     -------- 

                                                           (42,374)     (28,953)
                                                          --------     -------- 

                                                          $ 12,495     $ 16,413 
                                                          ========     ======== 

The accompanying notes are an integral part of these statements.                

F-4 

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Halsey Drug Co., Inc. and Subsidiaries

 CONSOLIDATED STATEMENTS OF OPERATIONS

 Year ended December 31,
 (in thousands, except per share data)

                                                                [Download Table]

                                                   1999       1998       1997   
                                                 --------   --------   -------- 
                                                                                

Net sales                                        $ 11,420   $  8,841   $  9,088 
Cost of goods sold                                 15,316     12,712     15,406 
                                                 --------   --------   -------- 

         Gross margin                              (3,896)    (3,871)    (6,318)

Operating costs                                                                 
   Research and development                         1,075        651        979 
   Selling, general and administrative expenses     7,383      8,078      6,308 
   Plant shutdown costs                             3,220                       
                                                 --------   --------   -------- 

    Total operating costs                         (11,678)    (8,729)    (7,287)
                                                 --------   --------   -------- 

         Loss from operations                     (15,574)   (12,600)   (13,605)

Other income(expense)                                                           
    Interest expense                               (2,851)    (1,285)    (1,017)
   Amortization of deferred debt discount and                                   
       private offering costs                      (1,825)      (661)      (127)
   Other                                              187      1,822       (264)
                                                 --------   --------   -------- 

                                                   (4,489)      (124)    (1,408)
                                                 --------   --------   -------- 

         NET LOSS                                $(20,063)  $(12,724)  $(15,013)
                                                 ========   ========   ======== 

Basic and diluted loss per common share          $  (1.40)  $   (.92)  $  (1.12)
                                                 ========   ========   ======== 

Weighted average number of outstanding shares      14,326     13,813     13,434 
                                                 ========   ========   ======== 

The accompanying notes are an integral part of these statements.                

F-5 

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Halsey Drug Co., Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Years ended December 31, 1999, 1998 and 1997
(in thousands)

                                                        [Enlarge/Download Table]

                                          Common stock,                                 Treasury stock,               
                                         $.01 par value     Additional                      at cost                   
                                     ---------------------   paid-in    Accumulated  ---------------------            
                                      Shares       Amount    capital      deficit     Shares       Amount      Total  
                                     --------     --------   --------     --------   --------     --------   -------- 
                                                                                                                      

Balance at December 31, 1996           13,176     $    131   $ 23,316     $(29,484)      (475)    $ (1,044)  $ (7,081)

Issuance of common stock -                                                                                            
   conversion of debentures               643            7      1,529                                          1,536  
Issuance of shares as payment of                                                                                      
   Interest                                69            1        224                                            225  
Sale of treasury stock                     25                      45                      35           55       100  
Exercise of warrants of convertible                                                                                   
   debentures                              22                      72                                             72  
Stock options exercised                    95            1        303                                            304  
Net loss for the year ended                                                                                           
   December 31, 1997                                                       (15,013)                           (15,013)
                                     --------     --------   --------     --------   --------     --------   -------- 

Balance at December 31, 1997                                                                                          
    (carried forward)                  14,030          140     25,489      (44,497)      (440)        (989)   (19,857)

F-6 

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Halsey Drug Co., Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)

Years ended December 31, 1999, 1998 and 1997
(in thousands)

                                                        [Enlarge/Download Table]

                                         Common stock,                                 Treasury stock,               
                                        $.01 par value     Additional                      at cost                   
                                    ---------------------   paid-in    Accumulated  ---------------------            
                                     Shares       Amount    capital      deficit     Shares       Amount      Total  
                                    --------     --------   --------     --------   --------     --------   -------- 
                                                                                                                     
Balance at December 31, 1997                                                                                         
    (brought forward)                 14,030     $    140   $ 25,489     $(44,497)      (440)    $   (989)  $(19,857)

Issuance of common stock -                                                                                           
   conversion of notes payable           110            1        213                                             214 
Issuance of shares as payment of                                                                                     
   interest                              263            3        592                                             595 
Issuance of common stock -                                                                                           
   settlement of trade payables           40                      55                                              55 
Deferred debt discount on warrants                                                                                   
   issued with convertible                                                                                           
   debentures                                                   2,764                                           2,764

Net loss for the year ended                                                                                          
   December 31, 1998                                                      (12,724)                           (12,724)
                                    --------     --------   --------     --------   --------     --------   -------- 

Balance at December 31, 1998                                                                                         
    (carried forward)                 14,443          144     29,113      (57,221)      (440)        (989)   (28,953)

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Halsey Drug Co., Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)

Years ended December 31, 1999, 1998 and 1997
(in thousands)

                                                        [Enlarge/Download Table]

                                          Common stock,                                 Treasury stock,               
                                         $.01 par value     Additional                      at cost                   
                                     ---------------------   paid-in    Accumulated  ---------------------            
                                      Shares       Amount    capital      deficit     Shares       Amount      Total  
                                     --------     --------   --------     --------   --------     --------   -------- 
                                                                                                                      

Balance at December 31, 1998                                                                                          
    (brought forward)                  14,443     $    144   $ 29,113     $(57,221)      (440)    $   (989)  $(28,953)

Issuance of shares as payment of                                                                                      
   interest                               322            3        524                                             527 

Deferred debt discount on warrants                                                                                    
   and private issuance costs                                   5,641                                           5,641 

Warrants issued for acquisition of                                350                                             350 
    ANDA                                                                                                              
Exercise of warrants                       29            1         49                                              50 
Issuance of common stock as payment                                                                                   
    of legal fees                          26                      50                                              50 
Issuance of common stock as payment        10                      24                                              24 
   of payables                                                                                                        

Net loss for the year ended                                                                                           
   December 31, 1999                                                       (20,063)                           (20,063)
                                     --------     --------   --------     --------   --------     --------   -------- 

BALANCE AT DECEMBER 31, 1999           14,830     $    148   $ 35,751     $(77,284)      (440)    $   (989)  $(42,374)
                                     ========     ========   ========     ========   ========     ========   ======== 

The accompanying notes are an integral part of this statement.                  

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Halsey Drug Co., Inc. and Subsidiaries

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 Year ended December 31,
(in thousands)

                                                        [Enlarge/Download Table]

                                                               1999       1998       1997   
                                                             --------   --------   -------- 
                                                                                            

Cash flows from operating activities                                                        
    Net loss                                                 $(20,063)  $(12,724)  $(15,013)
                                                             --------   --------   -------- 
    Adjustments to reconcile net loss to net cash used                                      
      in operating activities                                                               
         Depreciation and amortization                            914      1,113      1,606 
         Amortization of deferred debt discount and private                                 
            offering costs                                      1,825        661        127 
         Provision for losses on accounts receivable              145       (262)       118 
         Loss on disposal of assets                             1,709        170         38 
         Stock issued for legal expense                            50                       
         Stock issued for trade payables                           24                       
         Debentures and stock issued for interest expense         939                       
         Changes in assets and liabilities                                                  
             Accounts receivable                               (1,422)    (1,115)        45 
             Inventories                                        2,852     (3,898)     1,302 
             Prepaid  expenses and other current assets           (65)       126        165 
             Other assets and deposits                           (157)                      
             Accounts payable                                     399     (4,197)     1,851 
             Deferred gain                                                (1,900)           
             Other liabilities                                   (549)                      
             Accrued expenses                                   1,444     (2,665)     4,553 
                                                             --------   --------   -------- 
         Total adjustments                                      8,108    (11,967)     9,805 
                                                             --------   --------   -------- 
         Net cash used in operating activities                (11,955)   (24,691)    (5,208)
                                                             --------   --------   -------- 
Cash flows from investing activities                                                        
    Capital expenditures                                         (918)    (1,545)       (85)
    Net proceeds from sale of assets                               69         96            
    Collection of notes receivable                                                    1,000 
                                                             --------   --------   -------- 
         Net cash provided by(used in) investing activities      (849)    (1,449)       915 
                                                             --------   --------   -------- 
Cash flows from financing activities                                                        
    Proceeds from issuance of notes payable                     4,000      6,495      3,881 
    Reissuance of treasury stock                                                         70 
    Payments to Department of Justice                            (300)      (178)           
    Bank overdraft                                                          (159)      (127)
    Due to banks                                                          (2,476)           
    Payments on notes payable, net                             (9,464)                      
    Proceeds from issuance of convertible subordinated                                      
      Debentures                                               17,862     25,800            
    Proceeds from exercise of stock warrants                       49                   377 
    Deferred private offering costs                              (407)     1,518            
                                                             --------   --------   -------- 
         Net cash provided by financing activities             11,740     27,964      4,201 
                                                             --------   --------   -------- 
         NET INCREASE (DECREASE) IN CASH                                                    
             AND CASH EQUIVALENTS                              (1,064)     1,824        (92)
Cash and cash equivalents at beginning of year                  1,850         26        118 
                                                             --------   --------   -------- 
Cash and cash equivalents at end of year                     $    786   $  1,850   $     26 
                                                             ========   ========   ======== 

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 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 Year ended December 31,
(in thousands)

Supplemental disclosures of noncash activities:                                 

Year ended December 31, 1999                                                    

   1.  The Company issued 321,777 shares of common stock as payment for $526,779
in accrued interest.                                              

 2.  The Company issued 26,106 shares of common stock as payment for $50,500
      in legal fees and 9,846 shares of common stock as payment for $24,000 in
trade payables.                                                   

 3.  The Company issued approximately 3,608,604 warrants (Note G) valued and
      recorded in the aggregate as $5,234,000 of unamortized debt discount and
a reduction in the amount of the related obligation.              

4.  The Company converted approximately $6,609,000 of notes payable and   
approximately $428,000 of accrued interest on notes payable into  
convertible subordinated debentures.                              

   5.  The Company converted approximately $939,000 of accrued interest due from
convertible subordinated debentures into additional debentures.   

6.  The Company issued 1,022,284 warrants for funding fees valued and     
recorded as $907,000 in deferred private issuance costs.          

7.  The Company issued 500,000 warrants to Barr Laboratories, Inc.(to     
       purchase of the rights to 50 pharmaceutical products) valued and recorded
as $350,000 for the acquisition of certain product rights.        

Year ended December 31, 1998                                                    

   1.  The Company issued 262,836 shares of common stock as payment for $593,313
in accrued interest.                                              

   2.  The Company reissued 20,000 shares of common stock as payment for $25,000
       in legal fees and 20,000 shares of common stock as payment for $30,000 in
trade payables.                                                   

3.  The Company issued 110,658 shares of common stock as payment of       
    outstanding notes payable in amounts of $214,000 and $1,782 in accrued
interest.                                                         

 4.  The Company issued approximately 5,500,086 warrants (Note G) valued and
      recorded in the aggregate as $2,263,434 of unamortized debt discount and
a reduction in the amount of the related obligation.              

Year ended December 31, 1997                                                    

  1.  The Company issued 25,000 shares of common stock as payment for $225,452
in accrued interest.                                              

2.  The Company issued 642,407 shares of common stock to Zatpack, Inc. as 
  payment for an outstanding note payable in the amount of $1,536,000.

3.  The Company reissued 25,000 shares of treasury stock as payment for   
$30,000 in consulting fees and the receipt of $70,000 in cash.    

4.  The Company recorded the satisfaction of $1,400,000 of subordinated   
 promissory notes, related accrued interest of $200,000 and accounts
   payable of $300,000 due to a supplier, in lieu of the supplier paying
$1,900,000 owed to the Company as described in Note K.            

The accompanying notes are an integral part of these statements.                

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Halsey Drug Co., Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999, 1998 and 1997

NOTE A - SUMMARY OF ACCOUNTING POLICIES                                         

   Halsey Drug Co., Inc. (the "Company" or "Halsey"), a New York corporation
   established in 1935, and its subsidiaries are engaged in the manufacture,
    sale and distribution of generic drugs. The Company sells its generic drug
   products under its Halsey label and under private-label arrangements with
drug store chains and drug wholesalers throughout the United States.  

  A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements 
follows.                                                              

1.  Principles of Consolidation and Basis of Presentation             

       The consolidated financial statements include 100% of the accounts of
         the Company and its wholly-owned subsidiaries, Blue Cross Products Co.,
         Inc., Houba, Inc., Halsey Pharmaceuticals, Inc., Indiana Fine Chemicals
    Corporation, Cenci Powder Products, Inc., H.R. Cenci Laboratories,
        Inc., and The Medi-Gum Corporation. Except for Houba, Inc., all of the
         other subsidiaries are inactive. All material intercompany accounts and
transactions have been eliminated.                            

2.  Inventories                                                       

Inventories are stated at the lower of cost or market; cost is
determined using the first-in, first-out method.              

3.  Property, Plant and Equipment                                     

   Property, plant and equipment are stated at cost less accumulated
  depreciation and amortization. Depreciation and amortization are
      provided for in amounts sufficient to relate the cost of depreciable
         assets to operations over their estimated service lives, principally on
a straight-line basis. The estimated lives used in determining
depreciation and amortization are:                            

                                                                [Download Table]
                                                       
Buildings                                      25 years
Machinery and equipment                    5 - 10 years

         Leasehold improvements were written off during the year.  (See Note J).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE A (CONTINUED)                                                              

4.  Deferred Debt Discount and Private Issuance Costs                 

Debt discount resulting from the issuance of stock warrants in
        connection with the issuance of subordinated debt (Note G) is recorded
     as a reduction of the related obligations and is amortized over the
        remaining life of the related obligations. Debt discount is determined
       by a calculation which is based, in part, by the fair valued ascribed
         to such warrants determined by an independent valuation or management's
     use of the Black-Scholes valuation model. Deferred private issuance
      costs resulting from the issuance of warrants in connection with the
         extension of bridge loan maturity dates are recorded as deferred assets
         and amortized as additional interest expense over the remaining life of
the related obligations.                                      

5.  Income Taxes                                                      

    The Company accounts for income taxes utilizing an asset liability
       method for financial accounting and reporting for income taxes. Under
       this method, deferred tax assets and liabilities are determined based
        on differences between financial reporting and tax bases of assets and
        liabilities and are measured using the enacted tax rates and laws that
 will be in effect when the differences are expected to reverse.

6.  Statements of Cash Flows                                          

         For purposes of the statements of cash flows, the Company considers all
       highly liquid debt instruments purchased with an original maturity of
  three months or less to be cash equivalents. The Company paid no
      substantial income taxes for the years ended December 31, 1999, 1998
   and 1997. In addition, the Company paid interest of approximately
        $720,000, $1,946,000 and $1,113,000, respectively, for the years ended
December 31, 1999, 1998 and 1997.                             

7.  Use of Estimates in Consolidated Financial Statements             

   In preparing consolidated financial statements in conformity with
      generally accepted accounting principles, management makes estimates
and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the
        date of the consolidated financial statements, as well as the reported
      amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.                    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE A (CONTINUED)                                                              

8.  Research and Development Costs                                    

   All research and development costs, including payments related to
 licensing agreements on products under development and research
consulting agreements are expensed when incurred.             

9.  Impairment of Long-Lived Assets                                   

The Company reviews long-lived assets and certain identifiable
      intangibles held and used for possible impairment whenever events or
        changes in circumstances indicate that the carrying amount of an asset
      may not be recoverable. See Note J for the impairment charge related
      to the write-off of leasehold improvements of the Company's Brooklyn
New York Plant.                                               

10.  Stock-Based Compensation                                           

      The Company accounts for stock-based compensation under Statement of
      Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting
       for Stock-Based Compensation," and continues to apply APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related   
interpretations in accounting for its plans (Note M).         

        Equity instruments issued to nonemployees in exchange for goods and/or
         services are accounted for under the fair value method of SFAS No. 123.

11.  Earnings (Loss) Per Share                                          

       The computation of basic earnings (loss) per share of common stock is
     based upon the weighted average number of common shares outstanding
    during the period. Diluted earnings per share is presented, and is
         equal to basic earnings per share for all years presented as the effect
      of other potentially dilutive securities would be antidilutive (Note
M).                                                           

12.  Revenue Recognition                                                

  Revenue is recognized from sales when title to product passes to
customers.                                                    

13.  Reclassifications                                                  

Certain reclassifications have been made to the 1998 and 1997 
presentations to conform to the 1999 presentation.            

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE B - LIQUIDITY MATTERS                                                      

At December 31, 1999, the Company had a working capital deficiency of 
approximately $5,181,000, had an accumulated deficit of approximately 
  $77,284,000 and had incurred a loss of approximately $20,063,000 for the
year then ended.                                                      

During 1999 the Company used the net proceeds from its 1999 private   
    issuances of debentures and warrants (Note G) to satisfy the principal and
   accrued interest requirements of prior issued debentures and in addition,
   used such proceeds to fund working capital, including the purchase of raw
materials, payroll expenses and other Company operating expenses.     

On March 29, 2000, the Company completed various strategic alliance   
     transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions
with Watson provided for (i) Watson's purchase, for $13,500,000, of a 
  certain pending ANDA from the Company, (ii) Watson's rights to negotiate
    for Halsey to manufacture and supply certain identified future products to
    be developed by Halsey, (iii) Watson's marketing and sale of the Company's
     core products and (iv) Watson's extension of a $17,500,000 term loan to the
Company.                                                              

 The net proceeds from the Watson Term Loan has permitted the Company to
satisfy its current liabilities and accounts payable. In addition,    
 management believes the net proceeds from the Watson Term Loan combined
   with the payments to be received by the Company from Watson under each of
  the Product Acquisition Agreement and the Core Products Supply Agreement
     will provide the Company with sufficient working capital to fund operations
for at least the next twelve months.                                  

NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS                                    

Long-term and Short-term Debt and senior convertible subordinated     
debentures                                                            

  The fair value of the Company's long-term and short-term debt and Senior
Convertible Subordinated Debentures cannot be made without incurring  
excessive costs.                                                      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE D - INVENTORIES                                                            

Inventories consist of the following:                                 

                                                                [Download Table]

                                                         December 31,     
                                                 -------------------------
                                                  1999               1998 
                                                 ------             ------
                                                       (in thousands)     
                                                                          
Finished goods                                   $  725             $2,675
Work-in-process                                     720              1,166
Raw materials                                     2,057              2,513
                                                 ------             ------

                                                 $3,502             $6,354
                                                 ======             ======

NOTE E - PROPERTY, PLANT AND EQUIPMENT                                          

Property, plant and equipment are summarized as follows:              

                                                                [Download Table]

                                                          December 31,    
                                                      --------------------
                                                       1999         1998  
                                                      -------      -------
                                                         (in thousands)   
                                                                          

Machinery and equipment                               $12,893      $12,278
Leasehold improvements                                    325        6,103
Building                                                  747          747
Land                                                       44           44
                                                      -------      -------

                                                       14,009       19,172
Less accumulated depreciation and amortization         10,996       14,385
                                                      -------      -------

                                                      $ 3,013      $ 4,787
                                                      =======      =======

Depreciation and amortization expense for the years ended December 31,
    1999, 1998 and 1997 was approximately $914,000, $1,113,000 and $1,606,000,
respectively.                                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE F- ACCRUED EXPENSES                                                        

Accrued expenses are summarized as follows:                           

                                                                [Download Table]

                                                         December 31,     
                                                  ------------------------
                                                   1999              1998 
                                                  ------            ------
                                                       (in thousands)     

                                                                          
Payroll taxes payable                             $1,503            $1,714
Rent                                               1,454                  
Interest                                             764               619
Accrued payroll                                      736                92
Professional fees                                    362               539
Other                                                958             1,008
                                                  ------            ------

                                                  $5,777            $3,972
                                                  ======            ======

At December 31, 1999, payroll taxes payable include approximately     
     $1,467,000 and $31,000 of delinquent payroll taxes (including penalties and
  interest) due to the Internal Revenue Service and the State of New York,
 respectively, all of which liability was incurred in 1997 and 1996. The
Company expects that the Federal liability will be partially offset by
   income tax refund claims which were filed and are pending before the IRS.
Until such time as the IRS completes its review, the Company has not  
recorded any expected tax refund claims. The Company has negotiated a 
     payment plan with the State of New York and the balance will be paid by the
end of 2000.                                                          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE G - CONVERTIBLE SUBORDINATED DEBENTURES AND STOCK WARRANTS                 

At December 31, 1999 and 1998 convertible subordinated debentures     
  outstanding and related debt discount related to the following issuances
are discussed below:                                                  

                                                                [Download Table]

                                                                 December 31,       
                                                            ----------------------- 
                                                              1999           1998   
                                                            --------       -------- 
                 Issuance of debentures                          (in thousands)     
                 ----------------------                                             
                                                                                    

Debentures - August 1996 (a)                                $  2,500       $  2,500 
Debentures - March 1998 (b)                                   20,800         20,800 
Debentures - issued in lieu of interest for March 1998 (b)       667                
Debentures - June 1998 (c)                                     5,000          5,000 
Debentures - issued in lieu of interest for June 1998 (c)        158                
Debentures - May 1999 (d)                                     12,862                
Debentures - issued in lieu of interest for May 1999 (d)         114                
Debentures - July 1999 (e)                                     5,000                
                                                            --------       -------- 

                                                              47,101         28,300 

                Less: Debt discount                           (6,005)        (2,114)
                                                            --------       -------- 

                                                            $ 41,096       $ 26,186 
                                                            ========       ======== 

     (a)   On August 6, 1996, the Company issued 250 units, at $10,000 per unit,
in a private placement of its securities ("August Private 
Placement"). Each unit consisted of: (i) a 10% convertible
          subordinated debenture due August 6, 2001 in the principal amount of
         $10,000, interest payable quarterly, and convertible into shares of
          the Company's common stock at a conversion price of $3.25 per share,
        subject to dilution, and (ii) 461 redeemable common stock purchase
         warrants ("warrants"). Each warrant entitled the holder to purchase
           one share of common stock for $3.25, subject to adjustment during the
five-year period commencing August 6, 1996.               

(b)   On March 10, 1998, the Company completed a private offering (the
         "Offering") of securities to an investor group ("Galen") consisting
         of 5% convertible senior secured debentures due March 15, 2003, and
         common stock purchase warrants (with a 7 year life) exercisable for
         2,244,667 shares of the Company's common stock at an exercise price
        of $1.404 and 2,189,511 shares at an exercise price of $2.279. The
          debentures are convertible into shares of the Company's common stock
           at a conversion price of $1.404. The net proceeds to the Company from
       the Offering, after the deduction of related offering expenses of
        $1,518,000 for legal and investment banker fees, was approximately
        $19,300,000. These related offering costs are being amortized over
the remaining five year life of the related debentures.   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE G (CONTINUED)                                                              

(c)   In accordance with the terms of the Offering, during June 1998, 
        Galen invested an additional $5,000,000 in the Company in exchange
           for debentures and warrants having terms identical to those issued in
           the Offering (539,583 and 526,325 common stock purchase warrants with
an exercise price of $1.404, respectively).               

(d)   On May 26, 1999, the Company consummated a private offering of  
          securities for an aggregate purchase price of up to $22,800,000 (the
      "Oracle Offering"). The securities issued in the Oracle Offering
      consisted of 5% convertible senior secured debentures (the "1999
Debentures") and common stock purchase warrants (the "1999
           Warrants"), each of which are substantially similar to the debentures
           and warrants issued by the Company in the Galen Offering completed in
           March, 1998. Of the $22,800,000 to be invested pursuant to the Oracle
        Offering, $5,000,000 was funded by Oracle Strategic Partners, L.P.
          ("Oracle") on May 26, 1999, the closing date of the Oracle Offering,
  with an additional $10,000,000 to be funded by Oracle in two
          installments of $5,000,000 each. The first $5,000,000 installment of
         the additional $10,000,000 Oracle investment was funded on July 27,
           1999. Pursuant to an agreement reached between the Company and Oracle
         on March 20, 2000, the final $5,000,000 investment has been waived.

    The 1999 Debentures were issued at par and will become due and
          payable as to principle on March 15, 2003. Approximately $12,800,000
       in principle amount of the 1999 Debentures were issued on May 26,
          1999. Interest on the principle of the 1999 Debentures is accrued at
   the rate of 5% per annum and is payable on a quarterly basis.

      The 1999 Debentures are convertible into shares of the Company's
    common stock at a conversion price of $1.404 per share, for an
         aggregate of up to approximately 12,678,063 shares of the Company's
         common stock. The 1999 Warrants are exercisable for an aggregate of
           approximately 4,618,702 shares of the Company's common stock. Of such
          warrants, 2,309,351 warrants are exercisable at $1.404 per share and
           the remaining 2,309,351 warrants are exercisable at $2.279 per share.
The 1999 Debentures and 1999 Warrants are convertible and 
  exercisable, respectively, for an aggregate of approximately
17,296,765 shares of the Company's common stock.          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE G (CONTINUED)                                                              

  (e)   Approximately $7,037,000 of the 1999 Debentures issued pursuant to
        the Oracle Offering were issued in exchange for the surrender of a
         like amount of principal and accrued interest outstanding under the
       Company's convertible promissory notes issued pursuant to various
   bridge loan transactions with Galen Partners III, L.P., Galen
     Partners International III, L.P., Galen Employee Fund III, L.P.
          (collectively, "Galen") and certain other investors in the aggregate
          amount of $10,104,110 during the period from August 1998 through and
          including May, 1999 (the "1999 Galen Bridge Loans"). In exchange for
        Galen and other investors granting extensions to maturity dates of
    the Company's convertible promissory notes, the Company issued
         1,022,284 common stock purchase warrants at exercise prices ranging
      from $1.18 to $2.32. These warrants resulted in deferred private
        offering costs which are being amortized over the remaining 5 year
        life of the related obligations. The remaining balance of the 1999
           Galen Bridge Loans in the principal amount of $3,495,000 plus accrued
and unpaid interest was paid on July 27, 1999.            

(f)   In connection with certain 1995 amendments to a line of credit  
   agreement then existing with a bank, the Company issued stock
         warrants to the bank, expiring July 17, 2000, to purchase shares of
      the Company's common stock at various exercise prices per share,
          subject to certain antidilution provisions. At December 31, 1999 the
           number of common stock warrants, as adjusted, equal 955,509 shares at
           exercise prices ranging from $1.48 to $1.51 per share. In March 1998,
           the Company completely satisfied its bank indebtedness and terminated
the line of credit agreement.                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE G (CONTINUED)                                                              

   Debt discount resulting from the issuance of stock warrants in connection
  with the issuance of subordinated debt is recorded as a reduction of the
     related obligations at the warrants relative fair value and is amortized as
additional interest expense over the remaining life of the related    
    obligations. At December 31, 1999 outstanding warrants giving rise to debt
discount for related debentures are as follows:                       

                                                        [Enlarge/Download Table]

                                                 Accumulated    Unamortized             
 Warrants                                       Amortization   debt discount            
related to                           Original        at              at        Remaining
debentures  Exercise     Number of     debt     December 31,     December 31,    life   
  above      prices       Warrants   discount       1999            1999        (months)
  -----      ------       --------   --------       ----            ----        --------
                                                                                        
                                               (in thousands)                           

   (a)      $3.25       $   115,250    $  355      $  237           $  118         20   
            $1.404 and                                                                  
   (b)      $2.279        4,434,178     2,263         793            1,470         39   
            $1.404 and                                                                  
   (c)      $2.279        1,065,908     1,200         248              952         46   
            $1.404 and                                                                  
   (d)      $2.279        3,608,604     4,034         569            3,465         39   
            $1.48 to                                                                    
   (f)      $1.51           955,509       200         200             -             -   
                        -----------    ------      ------           ------              

                        $10,179,449    $8,052      $2,047           $6,005              
                        ===========    ======      ======           ======              

 At December 31, 1999 outstanding warrants giving rise to deferred private
offering costs are as follows:                                                  

                                                        [Enlarge/Download Table]

                                                                     Unamortized            
                                                     Accumulated       Private              
                                     Original       Amortization   issuance costs           
                                     deferred            at              at        Remaining
            Exercise  Number of       private        December 31,    December 31,    life   
Warrants     prices    Warrants   issuance costs        1999            1999        (months)
--------     ------    --------   --------------        ----            ----        --------
                                                  (in thousands)                            
                                                                                            

          $1.18 to                                                                          
  (e)     $2.32       $1,022,284     $    907           $181            $726           48   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE H -NOTES PAYABLE                                                           

  At December 31, 1999 and 1998, notes payable consisted of the following:

                                                                [Download Table]

                                               December 31,    
                                           --------------------
                                            1999         1998  
                                           -------      -------
                                             (in thousands)    
                                                               

Unsecured promissory demand notes (a)      $ 2,529      $ 2,817
Bridge Loans (b)                             1,509        8,033
                                           -------      -------

                                           $ 4,038      $10,850
                                           =======      =======

 (a) At December 31, 1999 unsecured promissory demand notes consisted of
       $2,379,000 due to Mylan and $150,000 due to a former employee. During
  the period from May 1997 through July 1997, the Company borrowed
  approximately $3 million from Mylan Laboratories, Inc. ("Mylan")
        pursuant to five unsecured, demand promissory notes. The advances made
         by Mylan Laboratories, Inc. were part of a proposed investment by Mylan
  in the Company, including the proposed purchase of the Company's
      Indiana facility as well as a partial tender offer for the Company's
       common stock. To date, $620,000 has been paid by the Company to Mylan
       against such indebtedness in the form of product deliveries to Mylan.
      Pursuant to an agreement reached between the parties, the Company is
    required to satisfy interest on the outstanding indebtedness on an
        annual basis while the indebtedness remains outstanding and to satisfy
  the principal amount of such indebtedness in the form of product
         deliveries to Mylan until such time as the indebtedness is satisfied in
full.                                                         

 (b) In addition to the 1999 Galen Bridge Loans discussed in Note G, the
        Company secured bridge financing from Galen order to provide necessary
    working capital prior to the completion of the Watson Term Loan as
  described in Note Q. These bridge loans aggregated approximately
$3,300,000 and were funded through six separate bridge loan   
        transactions during the period from December 8, 1999 through March 29,
     2000 (collectively, the "2000 Galen Bridge Loans"). At December 31,
         1999 $1,509,000 relating to such bridge loans was outstanding. On March
        31, 1999 the total principal amount of the 2000 Galen Bridge Loans and
      accrued and unpaid interest were satisfied in full with a portion of
     the proceeds of the Watson Term. Prior to repayment, the 2000 Galen
     Bridge Loans accrued interest at the rate of 18% per annum and were
secured by a first lien on all of the Company's assets. In    
     consideration for the extension of the 2000 Galen Bridge Loans, the
       Company issued common stock purchase warrants to Galen to purchase an
aggregate of 125,000 shares of the Company's common stock.    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE H (CONTINUED)                                                              

     The warrants issued pursuant to the 2000 Galen Bridge Loans have an
       exercise price equal to the fair market value of the Company's common
        stock on the date of issuance and are substantially identical to those
issued by the Company in the Oracle Offering (Note G).        

NOTE I- INCOME TAXES                                                            

The actual income tax expense varies from the Federal statutory rate  
applied to consolidated operations as follows:                        

                                                        [Enlarge/Download Table]

                                                  Year ended December 31,                       
                               ---------------------------------------------------------------  
                                     1999                    1998                    1997       
                               -----------------      -----------------      -----------------  
                                AMOUNT        %        Amount       %         Amount       %    
                               -------      ----      -------      ----      -------      ----  
                                                        (in thousands)                          

                                                                                                
Federal statutory rate         $(6,116)      (34%)    $(4,326)    (34.0)%    $(5,105)    (34.0)%
Loss for which no tax benefit                                                                   
   was provided                  5,997      33.8%       4,247      33.8        4,924      32.8  
Losses of subsidiaries with                                                                     
   no tax benefit                                                                               
Amortization of warrants                                                          24        .2  
Goodwill amortization                                                             12        .1  
Department of Justice                                                                           
   settlement                       31        .1           42        .1                         
Other                               88        .1           37        .1          145        .9  
                               -------      ----      -------      ----      -------      ----  

Actual tax expense             $  --          --%     $    --        --%     $    --        --% 
                               =======      ====      =======      ====      =======      ====  

    The Company has net operating loss carryforwards aggregating approximately
$58,796,146, expiring during the years 2011 through 2019. In addition,
 certain of the Company's subsidiaries filed separate Federal income tax
   returns in prior years and have separate net operating loss carryforwards
     aggregating approximately $4,062,758 expiring during the years 1999 through
2018.                                                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE I (CONTINUED)                                                              

    The tax loss carryforwards of the Company and its subsidiaries are subject
   to limitation by Section 382 of the Internal Revenue Code with respect to
the amount utilizable each year. This limitation reduces the Company's
 ability to utilize net operating loss carryforwards included above each
    year. The amount of the limitation has not been quantified by the Company.

     The components of the Company's deferred tax assets (liabilities), pursuant
to SFAS No. 109, are summarized as follows:                           

                                                                [Download Table]

                                                       December 31,       
                                                  ----------------------- 
                                                    1999           1998   
                                                  --------       -------- 
                                                      (in thousands)      
                                                                          

Deferred tax assets                                                       
    Net operating loss carryforwards              $ 27,349       $ 21,831 
    Allowance for doubtful accounts                     50             75 
    Research and development tax credit                212            212 
    Reserve for inventory                              218            169 
    Reserve for chargebacks                             21                
    Shutdown costs                                   1,352                
    Severance package                                  242                
    Litigation settlement                               44             73 
    Rent                                                44            231 
    Reserve for Medicaid                                93             71 
    Capital loss carryforwards                         210                
    Reserve for contingencies                           14                
    Charitable contribution carryforwards                1                
    Other                                               26             15 
                                                  --------       -------- 

         Gross deferred tax assets                  29,876         22,677 
                                                  --------       -------- 

Deferred tax liabilities                                                  
    Depreciation                                      (430)          (332)
    Installment sale gain                                                 
    Other                                              (42)           (42)
                                                  --------       -------- 

                                                      (472)          (374)
                                                  --------       -------- 

         Net deferred tax assets before                                   
             valuation allowance                    29,404         22,303 
 Valuation allowance                               (29,404)       (22,303)
                                                  --------       -------- 

         Net deferred tax assets                  $   --         $   --   
                                                  ========       ======== 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE I (CONTINUED)                                                              

     SFAS No. 109 requires a valuation allowance against deferred tax assets if,
    based on the weight of available evidence, it is more likely than not that
   some or all of the deferred tax assets may not be realized. The valuation
 allowance at December 31, 1999 primarily pertains to uncertainties with
respect to future utilization of net operating loss carryforwards.    

NOTE J - CESSATION AND RELOCATION OF BROOKLYN, NY PLANT                         
OPERATIONS                                                

  The Company's formal decision to discontinue its Brooklyn operations was
     initiated in the fourth quarter of 1999 with notification to its union. The
 total charge of approximately $3,220,000 resulting from eliminating the
    Brooklyn operation includes the lease termination payment of $1,150,000, a
provision of $200,000 for plant repairs, the write-off of leasehold   
improvements of $1,778,000, severance and other costs for terminated  
    employees of $730,000, less deferred rent previously expensed of $638,000.

     At December 31, 1999 the Company was obligated to pay rent through December
    31, 2005 pursuant to a noncancellable lease obligation for its facility in
Brooklyn, New York. Under a termination and settlement agreement      
     consummated on March 22, 2000 (the "Settlement Agreement"), in exchange for
    a termination payment of $1,150,000, the termination of the lease has been
 accelerated to August 31, 2000. The total base rent payments that would
have been required from September 1, 2000 to December 31, 2005, were  
    approximately $6,715,000. The agreement does allow the Company to continue
   to lease the facility beyond August 31, 2000, but requires the Company to
vacate the premises no later than March 31, 2001. In addition, the    
Settlement agreement provides for the advance payment of rent through 
August 31, 2000 and a restoration escrow deposit of $200,000 for plant
 repairs. The Company also deposited in escrow with its counsel $390,600
   which represents rental payments for the period September 1, 2000 through
   March 31, 2001. Such escrow amount will be returned to the Company in the
    event it vacates the Brooklyn facility on or prior to August 31, 2000. The
Company funded the termination fee payment, the advance rental payment
obligations and restoration amount required pursuant to the Settlement
  Agreement with the proceeds received from the Watson Term Loan (Note Q).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE K - SALE AND ACQUISITION OF ABBREVIATED NEW DRUG APPLICATIONS              
("ANDA")                                                    

Sale of ANDA                                                          

  On March 21, 1995, the Company sold its ANDA for 5mg Oxycodone HCL/325mg
Acetaminophen Tablets ("Tablets") and certain equipment used in the   
     production of the tablets. Pursuant to the agreement the Company recognized
   the final portion of the gain, $1,900,000, as other income in March 1998.

Acquisition of Barr Laboratories, Inc. ANDA                           

     On April 16, 1999, the Company completed an acquisition agreement with Barr
 Laboratories, Inc. ("Barr") providing for the Company's purchase of the
     rights to 50 pharmaceutical products (the "Barr Products"). Under the terms
    of the acquisition agreement with Barr, the Company acquired all of Barr's
   rights in the Barr Products, including all related governmental approvals
(including ANDAs) and related technical data and information. In      
    consideration for the acquisition of the Barr Products, the Company issued
   to Barr a common stock purchase warrant exercisable for 500,000 shares of
  the Company's common stock having an exercise price of $1.0625 per share
   (the fair value of the Common Stock on the date of issuance) and having a
   term of five years. The Company valued the warrants at $350,000 using the
 Black Scholes option pricing model. Accordingly, the Company recorded a
   deferred charge to be amortized as an expense to the Company's operations
    over a 10 year period which is the estimated life of the related ANDA. The
 acquisition agreement with Barr also allows Barr to purchase any of the
Barr Products manufactured by the Company for a period of five years. 

NOTE L - PENSION EXPENSE                                                        

1.  Management Pension Plan                                           

The Company had maintained a defined benefit plan covering    
       substantially all nonunion employees which was terminated in November
        1996. Subsequently, all Plan assets were converted to cash and held in
   a money market fund (to continue the Trust) from which all vested
      participant interests were to be paid. In 1998, the Company received
 approval to terminate the Plan by the Pension Benefit Guarantee
      Corporation, all assets were distributed to the vested participants,
        the Trust was terminated and a final filing was made with the Internal
Revenue Service.                                              

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE L (CONTINUED)                                                              

2.  Employees' Pension Plan                                           

        The Company contributed approximately $67,872, $421,000, and $407,000,
       in 1999, 1998 and 1997, respectively, to a multiemployer pension plan
         for employees covered by collective bargaining agreements. This plan is
     not administered by the Company and contributions are determined in
       accordance with provisions of negotiated labor contracts. Information
     with respect to the Company's proportionate share of the excess, if
    any, of the actuarially computed value of vested benefits over the
         total of the pension plan's net assets is not available from the plan's
administrator.                                                

   The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
       significantly increased the pension responsibilities of participating
      employers. Under the provision of the Act, if the plans terminate or
      the Company withdraws, the Company could be subject to a "withdrawal
liability."                                                   

NOTE M - STOCK OPTION PLAN                                                      

  In June 1998, the stockholders of the Company approved the adoption of a
  stock option and restricted stock purchase plan (the "1998 Option Plan).
    The 1998 Option Plan provides for the granting of (i) nonqualified options
 to purchase the Company's common stock at not less than the fair market
   value on the date of the option grant and (ii) incentive stock options to
    purchase the Company's common stock at not less than the fair market value
on the date of the option grant. As of December 31, 1999, there was no
    exercise of any options to purchase any common stock under the 1998 Option
    Plan. The total number of shares which may be sold pursuant to options and
  rights granted under the 1998 Option Plan is 3,600,000. No option can be
   granted under the 1998 Option Plan after April, 2008 and no option can be
outstanding for more than ten years after its grant.                  

     The Company has adopted the disclosure provisions of Statement of Financial
    Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
    Compensation." It applies APB Opinion No. 25, "Accounting for Stock Issued
    to Employees," and related interpretations in accounting for its plans and
  does not recognize compensation expense for its stock-based compensation
plans other than for restricted stock. If the Company had elected to  
    recognize compensation expense based upon the fair value at the grant date
    for awards under these plans consistent with the methodology prescribed by
SFAS No. 123, the Company's net income and earnings per share would be
reduced to the pro forma amounts indicated below:                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE M (CONTINUED)                                                              

                                                                [Download Table]

                           Year ended December 31,            
                 -------------------------------------------- 
                     1999             1998             1997   
                 ----------       ----------       ---------- 
                     (thousands, except per share amounts)    
                                                              

Net loss                                                      
    As reported  $  (20,063)      $  (12,724)      $  (15,013)
    Pro forma       (20,954)         (13,663)         (15,323)
Loss per share                                                
    As reported  $    (1.40)      $     (.92)      $    (1.12)
    Pro forma         (1.46)            (.98)           (1.14)

 These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expenses  
 related to grants made before 1995. The fair value of these options was
     estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for the years ended   
     December 31, 1999, 1998 and 1997, respectively: expected volatility of 73%,
67%, and 65%; risk-free interest rates of 6.8%, 5.6%, and 6.0%; and   
  expected lives of 10 years, 10 years, and 4 years. At the date of grant,
all exercise prices equaled the market value of the stock.            

The Black-Scholes option valuation model was developed for use in     
estimating the fair value of traded options which have no vesting     
restrictions and are fully transferable. In addition, option valuation
 models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock 
   options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can  
  materially affect the fair market estimate, in management's opinion, the
     existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE M (CONTINUED)                                                              

Transactions involving stock options are summarized as follows:       

                                                                [Download Table]

                                           Weighted  Weighted
                                Stock       average   average
                                options    exercise    fair  
                              outstanding    Price     value 
                              ----------   --------  --------

                                                             
Balance at December 31, 1996     656,007      3.53           

Exercised                        (89,300)     3.22     $3.39 
Cancelled                        (84,968)     5.16      3.39 
                              ----------                     

Balance at December 31, 1997     481,739      3.60           
                              ==========                     

Granted                        2,254,850      2.37      1.71 
Cancelled                       (511,303)     3.16      2.08 
                              ----------                     

Balance at December 31, 1998   2,225,286      2.46           
                              ==========                     

Granted                          503,500      1.19       .80 
Cancelled                       (118,567)     3.08      2.00 
                              ----------                     

Balance at December 31, 1999   2,610,219      2.19           
                              ==========                     

The following table summarizes information concerning currently outstanding and 
exercisable stock options:                                                      

                                                        [Enlarge/Download Table]

                                 Options outstanding                  Options exercisable    
                 ---------------------------------------------  -----------------------------
                                      Weighted                                               
                    Number             average        Weighted      Number           Weighted
                 outstanding at       remaining        average  exercisable at        average
   Ranges of     December 31,        contractual      exercise   December 31,        exercise
exercise prices      1999            Life(years)        price        1999              price 
---------------  --------------      -----------      --------  --------------       --------
                                                                                             

$1.00 -  $2.00        518,100           9.09            $1.17       86,250            $1.30  
  2.01 -   3.00     2,023,850           8.21             2.40      918,463             2.39  
  3.01  -  4.88        68,269           6.23             3.78       62,019             3.64  
                   ----------                                    ---------                   

                    2,610,219                                    1,066,732                   
                   ==========                                    =========                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE N - COMMITMENTS                                                            

The Company occupies plant and office facilities under noncancellable 
operating leases which expire in December 2005. These operating leases
provide for scheduled base rent increases over the term of the lease, 
however, the total amount of the base rent payments will be charged to
   operations using the straight-line method over the term of the lease. The
    leases provide for payment of real estate taxes based upon a percentage of
     the annual increase. In addition, the Company rents certain equipment under
     operating leases, generally for terms of four years. Total rent expense for
the years ended December 31, 1999, 1998 and 1997 was approximately    
    $1,574,000, $1,243,000, $884,000, respectively. See Note J for information
relating to the shutdown of the Brooklyn, New York facility.          

Lease of Congers, New York Facility                                   

Effective March 22, 1999, the Company leased, as sole tenant, a       
 pharmaceutical manufacturing facility located in Congers, New York (the
  "Congers Facility") from Par Pharmaceutical, Inc. ("Par") pursuant to an
 Agreement to Lease (the "Lease"). The Congers Facility contains office,
   warehouse and manufacturing space. The Lease provides for a term of three
     years, with a two-year renewal option and provides for annual fixed rent of
 $500,000 per year during the primary term of the Lease and $600,000 per
    year during the option period. The Lease also covers certain manufacturing
and related equipment previously used by Par in its operations at the 
     Congers Facility (the "Leased Equipment"). In connection with the execution
   of the Lease, the Company and Par entered into a certain Option Agreement
 pursuant to which the Company may purchase the Congers Facility and the
Leased Equipment at any time during the lease term for $5,000,000.    

   As part of the execution of the Lease, the Company and Par entered into a
   certain Manufacturing and Supply Agreement (the "M&S Agreement") having a
  term of two years. The M&S Agreement provides for the Company's contract
     manufacture of certain designated products. The M&S Agreement also provides
that Par will purchase a minimum of $1,150,000 in product during the  
     initial 18 months of the Agreement. The M&S Agreement further provides that
the Company will not manufacture, supply, develop or distribute the   
designated products to be supplied by the Company to Par under the M&S
Agreement to or for any other person for a period of three years.     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE N (CONTINUED)                                                              

   As of December 31, 1999, the approximate minimum rental commitments under
these operating leases are as follows:                                

                                                                [Download Table]

Twelve months ending December 31,               (in thousands)
                                                              
    2000                                             $1,360   
    2001                                                509   
    2002                                                104   
    2003 and thereafter                                   7   
                                                     ------   

       Total minimum payments required               $1,980   
                                                     ======   

Employment Contracts                                                  

    During March 1998, the Company entered into employment contracts with each
    of two new officers/employees of the Company which cover a five-year and a
 three-year period, respectively. The contracts provide for, among other
  things: (i) annual salaries of $170,000 and $140,000 to be paid over the
 five-year and three-year periods, respectively and (ii) an aggregate of
  1,300,000 options (included in the 1998 grants - Note M) to purchase the
  Company's stock at an exercise price of $2.38 per common share that vest
  evenly over a three-to-five-year service period and expire in ten years.

NOTE O - CONTINGENCIES                                                          

American Stock Exchange                                               

   The Company has been advised by the American Stock Exchange ("Amex") that
  the Amex has determined to delist the Common Stock of the Company (stock
symbol "HDG") as it does not meet the Amex's criteria for continued   
   listing. Such criteria include minimum levels of shareholders' equity and
    the absence of years of net losses from continuing operations. In response
to the Amex notice, the Company has exercised its right to appeal the 
Amex's decision and has requested a formal hearing in order to further
    consider the decision. There can be no assurance that the Company's common
stock will remain listed on the Amex. In the event the Company is     
    unsuccessful in its appeal to maintain the listing of the Company's Common
   Stock on the Amex, it is anticipated that the Company's Common Stock will
    trade on the Over the Counter Bulletin Board. In such event, a shareholder
    may find it more difficult to dispose of, or to obtain accurate quotations
as to the market value of the Common Stock.                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE O (CONTINUED)                                                              

Department of Justice ("DOJ") Settlement                              

     On June 21, 1993, the Company entered into a Plea Agreement with the DOJ to
   resolve the DOJ's investigation into the manufacturing and record keeping
    practices of the Company's Brooklyn plant. The Plea Agreement required the
Company to pay a fine of $2,500,000 over five years in quarterly      
installments of $125,000, commencing on or about September 15, 1993.  

     As of February 28, 1998, the Company was in default of the payment terms of
     the Plea Agreement and had made payments aggregating $350,000. On March 27,
    1998, the Company and the DOJ signed the Letter Agreement serving to amend
   the Plea Agreement relating to the terms of the Company's satisfaction of
the fine assessed under the Plea Agreement. Specifically, the Letter  
   Agreement provided that the Company will satisfy the remaining $2,150,000
  of the fine through the payment of $25,000 on a monthly basis commencing
June 1, 1998, plus interest on such outstanding balance (at the rate  
calculated pursuant to 28 U.S.C Section 1961)(currently 5.319%). Such 
  payment schedule will result in the full satisfaction of the DOJ fine in
    December, 2005. The Letter Agreement also provides certain restrictions on
the payment of salary or compensation to any individual in excess of  
  $150,000 without the written consent of the DOJ. In addition, the Letter
   Agreement requires the repayment of the outstanding fine to the extent of
     25% of the Company's after-tax profit or the remaining balance owed and 25%
    of the net proceeds received by the Company on any sale of a capital asset
for a sum in excess of $10,000. At December 31, 1999, the Company is  
current in its payment obligations with a remaining obligation of     
$1,675,000.                                                           

Other Legal Proceedings                                               

    Beginning in 1992, actions were commenced against the Company and numerous
other pharmaceutical manufacturers in the Pennsylvania Court of Common
  Pleas, Philadelphia Division, in connection with the alleged exposure to
    diethylstilbestrol ("DES"). The defense of all of such matters was assumed
by the Company's insurance carrier, and a substantial number have been
    settled by the carrier. Currently, several actions remain pending with the
     Company as a defendant, and the insurance carrier is defending each action.
     Similar actions were brought in Ohio, and have been dismissed based on Ohio
   law. The Company and its legal counsel do not believe any of such actions
will have a material impact on the Company's financial condition. The 
   ultimate outcome of these lawsuits cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.                                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE O (CONTINUED)                                                              

  The Company has been named as a defendant in one additional action which
has been referred to the Company's carrier and has been accepted for  
    defense. This action, Alonzo v. Halsey Drug Co., Inc. and K-Mart Corp. was
    commenced on November 5, 1995 and involves a claim for unspecified damages
relating to the alleged ingestion of "Doxycycline 100." The ultimate  
outcome of these lawsuits cannot be determined at this time, and      
accordingly, no adjustment has been made to the consolidated financial
statements.                                                           

NOTE P - SIGNIFICANT CUSTOMERS AND SUPPLIERS                                    

The Company sells its products to a large number of customers who are 
   primarily drug distributors, drugstore chains and wholesalers and are not
  concentrated in any specific region. The Company performs ongoing credit
 evaluations of its customers and generally does not require collateral.
    During 1999, the Company had net sales to one customer in excess of 10% of
     total sales, aggregating 16.3% of total sales. During 1998, the Company had
   net sales to one customer in excess of 10% of total sales, accounting for
17.6% of total sales. During 1997, the Company had net sales to one   
     customer in excess of 10% of total sales, aggregating 22.3% of total sales.

  During 1999 and 1998, the Company purchased approximately $1,107,000 and
    $2,583,000, respectively, of its raw materials, representing approximately
15% and 29%, respectively, of total raw material purchases from one   
supplier.                                                             

NOTE Q - SUBSEQUENT EVENT -  STRATEGIC ALLIANCE WITH                            
WATSON PHARMACEUTICALS                                      

On March 29, 2000, the Company completed various strategic alliance   
     transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions
   with Watson provided for Watson's purchase of a certain pending ANDA from
     the Company, for Watson's rights to negotiate for Halsey to manufacture and
  supply certain identified future products to be developed by Halsey, for
     Watson's marketing and sale of the Company's core products and for Watson's
extension of a $17,500,000 term loan to the Company.                  

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Halsey Drug Co., Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE Q (CONTINUED)                                                              

  The product acquisition portion of the transactions with Watson provided
   for Halsey's sale of a pending ANDA and related rights (the "Product") to
     Watson for aggregate consideration of $13,500,000 (the "Product Acquisition
     Agreement"). As part of the execution of the Product Acquisition Agreement,
 the Company and Watson executed ten year supply agreements covering the
  active pharmaceutical ingredient ("API") and finished dosage form of the
    Product pursuant to which Halsey, at Watson's discretion, will manufacture
     and supply Watson's requirements for the Product API and, where the Product
  API is sourced from the Company, finish dosage forms of the Product. The
purchase price for the Product is payable in three approximately equal
 installments as certain milestones are achieved. Management expects the
 last of these milestones to be achieved by no later than the end of the
second fiscal quarter of year 2000.                                   

     The Company and Watson also executed a right of first negotiation agreement
    providing Watson with a first right to negotiate the terms under which the
  Company would manufacture and supply certain specified APIs and finished
dosage products to be developed by the Company. The right of first    
    negotiation agreement provides that upon Watson's exercise of its right to
negotiate for the supply of a particular product, the parties will    
   negotiate the specific terms of the manufacturing and supply arrangement,
     including price, minimum purchase requirements, if any, territory and term.
   In the event Watson does not exercise its right of first negotiation upon
    receipt of written notice from the Company as to its receipt of applicable
  governmental approval relating to a covered product, or in the event the
 parties are unable to reach agreement on the material terms of a supply
     arrangement relating to such product within sixty days of Watson's exercise
    of its right to negotiate for such product, the Company may negotiate with
     third parties for the supply, marketing and sale of the applicable product.
   The right of first negotiation agreement has a term of ten years, subject
 to extension in the absence of written notice from either party for two
additional periods of five years each. The right of first negotiation 
  agreement applies only to API and finished dosage products identified in
   the agreement and does not otherwise prohibit the Company from developing
other APIs or finished dosage products for itself or third parties.   

    The Company and Watson also completed a manufacturing and supply agreement
  providing for Watson's marketing and sale of the Company's existing core
products portfolio (the "Core Products Supply Agreement"). The Core   
    Products Supply Agreement obligates Watson to purchase a minimum amount of
    approximately $18,363,000 (the "Minimum Purchase Amount") in core products
from the Company, in equal quarterly installments over a period of 18 
  months (the "Minimum Purchase Period"). At the expiration of the Minimum
Purchase Period, if Watson does not continue to satisfy the           

F-33

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Halsey Drug Co., Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1999, 1998 and 1997

NOTE Q (CONTINUED)                                                              

    Minimum Purchase Amount, the Company may market and sell the core products
    on its own or through a third party. Pending the Company's development and
  receipt of regulatory approval for its APIs and finished dosage products
 currently under development, including, without limitation, the Product
   sold to Watson, and the marketing and sale of same, of which there can be
     no assurance, substantially all the Company's revenues expect to be derived
from the Core Products Supply Agreement with Watson.                  

The final component of the Company's strategic alliance with Watson   
    provided for Watson's extension of a $17,500,000 term loan to the Company.
The loan will be funded in installments upon the Company's request for
advances and the provision to Watson of a supporting use of proceeds  
   relating to each such advance. The loan is secured by a first lien on all
of the Company's assets, senior to the lien securing all other Company
   indebtedness, carries a floating rate of interest equal to prime plus two
percent and matures on March 31, 2003.                                

F-34

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10-K405 Filing	Date	First	Last	Other Filings

	12/22/92	25
	12/31/92	25
	1/1/93	26
	6/21/93	4	64
	6/29/93	4
	6/30/93	25
	9/15/93	64
	12/31/93	25
	1/12/94	25
	3/31/94	25
	5/31/94	25
	6/30/94	25
	7/21/94	27
	10/31/94	27
	12/1/94	27
	3/21/95	25	58
	3/30/95	27
	6/30/95	26		10-Q/A
	7/10/95	26
	11/5/95	65
	11/7/95	15
	11/16/95	26
	12/4/95	28
	12/31/95	5	26	10-K/A
	6/30/96	26		10-Q/A, 10-Q
	8/6/96	26	50	8-K
	10/23/96	4
	12/19/96	5
	12/31/96	5	17	10-K/A, 10-K, NT 10-K
	3/25/97	26
	7/2/97	14
	9/26/97	5
	11/26/97	5
	12/31/97	17	67	NT 10-K, 10-K/A, 10-K
	1/22/98	5
	2/28/98	4	64
	3/5/98	14
	3/10/98	7	50	8-K, 3
	3/13/98	28		3
	3/24/98	28		8-K, SC 13G
	3/27/98	4	64
	6/1/98	4	64
	7/24/98	5
	9/1/98	29
	12/2/98	29
	12/7/98	29
	12/31/98	17	67	10-K/A, 10-K
	3/8/99	29
	3/15/99	11
	3/17/99	29
	3/22/99	9	62
	3/31/99	54		10-Q/A, 10-Q, 4, 10-K
	4/16/99	8	58	PRE 14A
	5/26/99	7	51
	5/28/99	6
	5/30/99	29
	7/21/99	6
	7/27/99	8	52
	12/8/99	21	54
For The Period Ended	12/31/99	1	67	NT 10-K
	3/20/00	8	51
	3/22/00	8	57	8-K
	3/29/00	6	65	8-K
	3/30/00	35		NT 10-K
	3/31/00	1	30	10-Q
Filed On / Filed As Of	4/14/00	32
	6/30/00	14		10-Q
	7/17/00	52
	8/31/00	8	57
	9/1/00	8	57
	3/31/01	8	57	10-Q
	8/6/01	50
	3/21/02	14
	3/10/03	30		SC 13D/A
	3/15/03	7	51
	3/31/03	7	67	10-Q, NT 10-Q, NT 10-K
	12/31/05	8	57	10-K

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Acura Pharmaceuticals/Inc · 10-K405 · For 12/31/99

Filed On 4/14/00 · SEC File 1-10113 · Accession Number 950123-0-3670

Annual Report -- [X] Reg. S-K Item 405 · Form 10-KFiling Table of Contents

10-K405 · Halsey Drug Co., Inc.Document Table of Contents

Dates Referenced Herein and Documents Incorporated By Reference

Annual Report -- [X] Reg. S-K Item 405 · Form 10-K
Filing Table of Contents

10-K405 · Halsey Drug Co., Inc.
Document Table of Contents