FORM 10-Q

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

                  For the quarterly period ended March 31, 2000

                                       OR

              ( ) 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: 333-60991

                                AKI HOLDING CORP.
             (Exact name of registrant as specified in its charter)

           Delaware                                        74-2883163
(State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization                        Identification No.)

                        Commission File Number: 333-60989

                                    AKI, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                       13-3785856
(State or other jurisdiction of                       (I.R.S. Employer
 incorporation or organization                       Identification No.)

       1815 East Main Street
         Chattanooga, TN                                   37404
(Address of principal executive offices)                 (Zip Code)

                                 (423) 624-3301
              (Registrant's telephone number, including area code)

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 (X) Yes ( ) No

As of May 12, 2000, 1,000 shares of common stock of AKI Holding Corp.,  $.01 par
value,  were outstanding and 1,000 shares of common stock of AKI, Inc., $.01 par
value, were outstanding.

AKI Inc. meets the requirements set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this form with reduced disclosure format.

<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                  AKI Holding Corp. and Subsidiaries

                           Consolidated Condensed Balance Sheet

                           -   March 31, 2000 (unaudited)
                           -   June 30, 1999

                           Consolidated Condensed Statements of Operations

                           -   Three months ended March 31, 2000 (unaudited)
                           -   Three months ended March 31, 1999 (unaudited)
                           -   Nine months ended March 31, 2000 (unaudited)
                           -   Nine months ended March 31, 1999 (unaudited)

                           Consolidated Condensed Statement of Changes in
                           Stockholder's Equity

                           -   Nine months ended March 31, 2000 (unaudited)

                           Consolidated Condensed Statements of Cash Flows

                           -   Nine months ended March 31, 2000 (unaudited)
                           -   Nine months ended March 31, 1999 (unaudited)

                           Notes to Consolidated Condensed Financial Statements

<PAGE>

         Item 1.  Financial Statements (continued)

                  AKI, Inc. and Subsidiaries

                           Consolidated Condensed Balance Sheet

                           -   March 31, 2000 (unaudited)
                           -   June 30, 1999

                           Consolidated Condensed Statements of Operations

                           -   Three months ended March 31, 2000  (unaudited)
                           -   Three months ended March 31, 1999  (unaudited)
                           -   Nine months ended March 31, 2000  (unaudited)
                           -   Nine months ended March 31, 1999 (unaudited)

                           Consolidated Condensed Statement of Changes in
                           Stockholder's Equity

                           -   Nine months ended March 31, 2000 (unaudited)

                           Consolidated Condensed Statements of Cash Flows

                           -   Nine months ended March 31, 2000 (unaudited)
                           -   Nine months ended March 31, 1999 (unaudited)

                           Notes to Consolidated Condensed Financial Statements


         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations

Part II. OTHER INFORMATION

         Item 6.  Exhibits and Reports on Form 8-K

<PAGE>

<TABLE>
<CAPTION>
                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                (dollars in thousands, except share information)

                                                      March 31,        June 30,
                                                        2000             1999
                                                      ---------       ---------
                                                     (unaudited)

<S>                                                   <C>             <C>
ASSETS
Current assets
Cash and cash equivalents ......................      $     179       $   7,015
Accounts receivable, net .......................         22,677          16,287
Inventory ......................................          8,278           5,109
Income tax refund receivable ...................             32              32
Prepaid expenses ...............................            223             452
Deferred income taxes ..........................            400             400
                                                      ---------       ---------

   Total current assets ........................         31,789          29,295

Property, plant and equipment, net .............         17,741          18,511
Goodwill, net ..................................        162,774         147,990
Other intangible assets, net ...................          6,013           6,560
Deferred charges, net ..........................          7,100           6,839
Deferred income taxes ..........................          2,568           4,338
Other assets ...................................             89              46
                                                      ---------       ---------

   Total assets ................................      $ 228,074       $ 213,579
                                                      =========       =========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations ...      $   1,018       $     688
Accounts payable, trade ........................          3,877           3,400
Accrued income taxes ...........................            103             497
Accrued interest ...............................          2,987           6,047
Accrued expenses ...............................          5,238           3,810
                                                      ---------       ---------

   Total current liabilities ...................         13,223          14,442

Long-term portion of capital lease obligations .            509           1,349
Revolving credit line ..........................         14,200              --
Senior notes ...................................        110,510         115,000
Senior discount debentures .....................         26,982          29,651
Deferred income taxes ..........................          2,980           3,340
Other non-current liabilities ..................          1,399              --
                                                      ---------       ---------

   Total liabilities ...........................        169,803         163,782

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding ........             --              --
Additional paid-in capital .....................         86,444          78,364
Accumulated deficit ............................        (12,085)        (12,472)
Accumulated other comprehensive loss ...........           (358)           (365)
Carryover basis adjustment .....................        (15,730)        (15,730)
                                                      ---------       ---------

   Total stockholder's equity ..................         58,271          49,797
                                                      ---------       ---------


   Total liabilities and stockholder's equity ..      $ 228,074       $ 213,579
                                                      =========       =========
</TABLE>







       The accompanying notes are an integral part of these consolidated
                             financial statements.

<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                       Three months ended                        Nine months ended
                                                  --------------------------------        -------------------------------
                                                  March 31, 2000    March 31, 1999        March 31, 2000   March 31, 1999
                                                  --------------    --------------        --------------   --------------
                                                   (unaudited)       (unaudited)          (unaudited)       (unaudited)

<S>                                                <C>              <C>                    <C>              <C>
Net sales .......................................  $ 25,433         $ 24,518               $ 74,320         $ 68,979
Cost of goods sold ..............................    15,492           14,827                 44,572           43,908
                                                   --------         --------               --------         --------

    Gross profit ................................     9,941            9,691                 29,748           25,071

Selling, general and
    administrative expenses .....................     3,630            3,924                 12,285           10,333
Amortization of goodwill and
    other intangibles ...........................     1,373            1,151                  3,928            3,454
Loss (gain) from settlement of litigation,
     net.........................................        12               --                   (858)              --
                                                   --------         --------               --------         --------

    Income from operations ......................     4,926            4,616                 14,393           11,284

Other expenses:
    Interest expense, net .......................     4,382            4,258                 13,049           12,503
    Management fees and
        other, net...............................        62              242                    187              367
                                                   --------         --------               --------         --------

Income (loss) before income
    taxes and extraordinary gain ................       482              116                  1,157           (1,586)

Income tax expense...............................       714              480                  1,618              681
                                                   --------         --------               --------         --------

Loss before extraordinary gain ..................      (232)            (364)                  (461)          (2,267)

Extraordinary gain from early
    retirement of debt, net of tax...............         2               --                    848               --
                                                   --------         --------               --------         --------

    Net income (loss) ...........................  $   (230)        $   (364)              $    387         $ (2,267)
                                                   ========         ========               ========         ========
</TABLE>






              The accompanying notes are an integral part of these
                       consolidated financial statements.


<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
       CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
                (dollars in thousands, except share information)
<TABLE>
<CAPTION>

                                                                                            Accumulated
                                               Common Stock       Additional                   Other      Carryover
                                            -------------------     Paid-in   Accumulated   Comprehensive    Basis
                                            Shares      Dollars     Capital     Deficit         Loss       Adjustment      Total
                                            ------      -------   ----------  -----------   -------------  ----------      -----

<S>                                         <C>        <C>         <C>           <C>           <C>         <C>            <C>
Balances, June 30, 1999 ................    1,000      $   --      $ 78,364     $(12,472)      $(365)      $(15,730)      $49,797

Equity contribution by AHC I Acquistion
   Corporation (unaudited)..............                              8,080                                                 8,080

Net income (unaudited) .................                                             387                                      387

Other comprehensive income, net of tax:
     Foreign currency translation
       adjustment (unaudited) ..........                                                           7                            7
                                                                                                                          -------

Comprehensive income (unaudited) .......                                                                                      394
                                            -----      ------      --------      -------       -----       --------       -------

Balances, March 31, 2000 (unaudited) ...    1,000      $   --      $ 86,444     $(12,085)      $(358)      $(15,730)      $58,271
                                            =====      ======      ========     ========       =====       ========       =======
</TABLE>












              The accompanying notes are an integral part of these
                       consolidated financial statements.



<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                   Nine months ended
                                                           ---------------------------------
                                                           March 31, 2000     March 31, 1999
                                                           --------------     --------------
                                                             (unaudited)       (unaudited)

<S>                                                        <C>                <C>
Cash flows from operating activities
    Net income (loss) ...............................        $    387         $ (2,267)
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
        Depreciation and amortization of goodwill
            and other intangibles ...................           7,188            6,561
        Amortization of debt discount ...............           2,760            2,693
        Amortization of debt issuance costs .........             573              528
        Deferred income taxes .......................             867               47
        Net gain from early retirement of debt ......            (848)              --
        Other .......................................            (133)            (248)
        Changes in operating assets and liabilities:
            Accounts receivable .....................          (3,731)          (8,752)
            Inventory ...............................          (3,018)          (3,897)
            Prepaid expenses, deferred charges
              and other assets ......................             397             (595)
            Income taxes ............................             (32)           5,587
            Accounts payable and accrued expenses ...          (6,474)           3,197
                                                             --------         --------

            Net cash provided by (used in)
                operating activities ................          (2,064)           2,854
                                                             --------         --------

Cash flows from investing activities
    Purchases of equipment ..........................          (2,300)          (2,430)
    Payments for acquisitions, net of cash
        acquired ....................................         (16,162)              --
                                                             --------         ---------


            Net cash used in investing activities ...         (18,462)          (2,430)
                                                             --------         --------

Cash flows from financing activities
    Payments under capital leases for equipment .....            (510)            (460)
    Net proceeds on line of credit ..................          14,200              800
    Repayment of other notes payable ................              --           (1,330)
    Dividend paid to AHCI Acquisition Corp. .........              --           (1,863)
                                                             --------         --------

            Net cash provided by (used in) financing
                activities ..........................          13,690           (2,853)
                                                             --------         --------

Net (decrease) in cash and cash equivalents .........          (6,836)          (2,429)
Cash and cash equivalents, beginning of period ......           7,015            3,842
                                                             --------         --------

Cash and cash equivalents, end of period ............        $    179         $  1,413
                                                             ========         ========

Supplemental information
    Cash paid (received) during the period for:
        Interest, other .............................        $ 12,724         $  6,498
        Income taxes ................................           1,157           (4,953)

Significant non-cash activities
        Assets acquired under capital lease .........              --         $    561
        Contribution of equity and retirement of
          senior discount debentures and senior notes        $  8,080               --
</TABLE>




                 The accompanying notes are an integral part of
                    these consolidated financial statements.

<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1. BASIS OF PRESENTATION

          Arcade Holding  Corporation (the  "Predecessor") was organized for the
     purpose  of  acquiring  all the  issued and  outstanding  capital  stock of
     Arcade,  Inc.  ("Arcade")  on  November  4,  1993.  Arcade  is  engaged  in
     interactive advertising for consumer products companies and has a specialty
     in the design,  production and  distribution  of sampling  systems from its
     Chattanooga,  Tennessee  facilities,  and also  distributes its products in
     Europe through its French subsidiary,  Arcade Europe S.A.R.L.  DLJ Merchant
     Banking  Partners II, L.P.  and certain  related  investors  (collectively,
     "DLJMBII")  and  certain  members  of  the  Predecessor   organized  AHC  I
     Acquisition  Corp.  ("Acquisition  Corp.") and AHC I Merger Corp.  ("Merger
     Corp.") for purposes of acquiring  the  Predecessor.  On December 15, 1997,
     Merger Corp.  acquired all of the equity  interests of the  Predecessor and
     then merged with and into the  Predecessor  and the combined entity assumed
     the  name  of  AKI,  Inc.  and  Subsidiaries  ("AKI").  Subsequent  to  the
     acquisition,  Acquisition  Corp.  contributed  $1 and all of its  ownership
     interest in AKI to AKI Holding Corp. ("Holding") for all of the outstanding
     equity of Holding.

     Acquisition of Retcom Holdings Ltd.

          On  September  15, 1999,  AKI acquired all of the equity  interests in
     Retcom  Holdings  Ltd.  and its  subsidiaries  ("RHL")  for a total cost of
     approximately $12 million and refinanced RHL's working capital indebtedness
     of approximately $5 million. RHL businesses include a portfolio of sampling
     systems catering to the fragrance,  cosmetics and personal care industries,
     as well as microencapsulation  activities. The sampling systems and related
     microencapsulation  services  and  activities  have  been  integrated  into
     Arcade's  sampling  technology  group (named Arcade Sampling  Technologies,
     AST) and the  microencapsulated  products  have been combined with Arcade's
     product technology unit (named Arcade Product Technologies,  APT). RHL also
     has a creative services  division (renamed Arcade Direct,  AD) that handles
     marketing communications, catalogs and database marketing and a multi-media
     division (renamed Arcade Consumer Communications, ACC) for merchandising at
     point-of-sale.  The purchase  price and  refinancing of  indebtedness  were
     financed  by  borrowings  under the  credit  agreement.  The  purchase  was
     accounted  for  under  the  purchase  method  of  accounting.   Results  of
     operations  for the nine months ended March 31, 2000 include the results of
     RHL for the period from  September 15, 1999 to March 31, 2000. The purchase
     price  allocation  is not  finalized  at  this  time.  Management  has  not
     determined what impact, if any, that there would be on earnings.

     Interim financial statements

          The interim consolidated condensed balance sheet at March 31, 2000 and
     the interim  consolidated  condensed statements of operations for the three
     and nine months  ended March 31,  2000 and 1999,  the interim  consolidated
     condensed statements of cash flows for the nine months ended March 31, 2000
     and 1999 and the interim  consolidated  condensed  statement  of changes in
     stockholder's  equity  for  the  nine  months  ended  March  31,  2000  are
     unaudited, and certain information and footnote disclosure related thereto,
     normally included in the financial  statements  prepared in accordance with
     generally accepted accounting principles, have been omitted. In the opinion
     of  management,  the unaudited  interim  consolidated  condensed  financial
     statements were prepared following the same policies and procedures used in
     preparation  of the  audited  financial  statements  and  all  adjustments,
     consisting  only of normal  recurring  adjustments  to fairly  present  the
     financial  position,  results of operations  and cash flows with respect to
     the  interim  consolidated   condensed  financial  statements,   have  been
     included.  The  results  of  operations  for the  interim  periods  are not
     necessarily indicative of the results for the entire year.

<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

BASIS OF PRESENTATION (Continued)

2. INVENTORY

     The following table details the components of inventory:

                                     March 31, 2000     June 30, 1999
                                      (unaudited)
Raw materials
    Paper                                $4,176            $1,088
    Other raw materials                   2,371             2,328
                                         ------            ------

Net raw materials                         6,547             3,416
Work in process                           1,731             1,693
                                         ------            ------

Net inventory                            $8,278            $5,109
                                         ======            ======


3. RETIREMENT OF DEBT

        During  the nine  months  ended  March  31,  2000,  Acquisition  Corp.
   purchased $8,770 of Holding Corp. Senior Discount  Debentures and $4,490 of
   AKI, Inc. Senior Notes for $4,084 and $3,996  respectively.  The debentures
   and notes were contributed to Holding Corp. and subsequently retired.

<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

4. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

   The following  condensed  balance sheets at March 31, 2000  (unaudited) and
   June  30,  1999  and  condensed   statements  of  operations,   changes  in
   stockholder's  equity and cash flows for the nine  months  ended  March 31,
   2000 (unaudited) and 1999 (unaudited) for Holding have been prepared on the
   equity  basis of  accounting  and  should be read in  conjunction  with the
   consolidated statements and notes thereto.

<TABLE>
<CAPTION>
                                  BALANCE SHEET

                                                                  March 31, 2000    June 30, 1999
                                                                  --------------    -------------
                                                                   (unaudited)
<S>                                                                <C>                <C>

     Assets
     Cash ..................................................        $      --         $     --
     Investment in subsidiaries ............................           98,445           92,817
     Deferred charges ......................................            1,189            1,520
     Deferred income taxes .................................            1,707            1,206
                                                                    ---------         --------

         Total assets ......................................        $ 101,341         $ 95,543
                                                                    =========         ========

     Liabilities
     Senior discount debentures ............................        $  26,982         $ 29,651

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized;
         1,000 shares issued and outstanding ...............               --               --
     Additional paid-in capital ............................           86,444           78,364
     Accumulated deficit ...................................          (12,085)         (12,472)
                                                                    ---------         --------

         Total stockholder's equity ........................           74,359           65,892
                                                                    ---------         --------

         Total liabilities and stockholder's equity ........        $ 101,341         $ 95,543
                                                                    =========         ========
</TABLE>

                             STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                        Nine months ended
                                                               --------------------------------
                                                               March 31, 2000    March 31, 1999
                                                               --------------    --------------
                                                                 (unaudited)      (unaudited)
<S>                                                              <C>               <C>

     Equity in net income (loss) of subsidiaries .......          $ 1,632           $  (416)
     Interest expense ..................................            2,829             2,751
                                                                  -------           -------

         Loss before income taxes and extraordinary gain           (1,197)           (3,167)

     Income tax benefit ................................             (923)             (900)
                                                                  -------           -------

         Loss before extraordinary gain ................             (274)           (2,267)

     Extraordinary gain from early retirement of debt ..              661                --
                                                                  -------           -------

         Net income (loss) .............................          $   387           $(2,267)
                                                                  =======           =======

</TABLE>

<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)


4. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                  STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>

                                                                                      Additional
                                                               Common Stock             Paid-in          Accumulated
                                                            Shares       Amount         Capital           Deficit            Total
                                                            ------       ------       ----------         -----------         ------
<S>                                                       <C>            <C>             <C>              <C>                <C>
Balances, June 30, 1999 ........................          1,000          $   --          $78,364          $(12,472)          $65,892

Equity contribution by AHC I
    Acquisition Corporation ....................                                           8,080                               8,080

Net income (unaudited) .........................                                                               387               387
                                                          -----          ------          -------          --------           -------

Balance, March 31, 2000 (unaudited) ............          1,000          $   --          $86,444          $(12,085)          $74,359
                                                          =====          ======          =======          ========           =======
</TABLE>



                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                                      Nine months ended
                                                                                           -------------------------------------
                                                                                           March 31, 2000         March 31, 1999
                                                                                           --------------         --------------
                                                                                             (unaudited)            (unaudited)


<S>                                                                                            <C>                     <C>
Cash flows from operating activities
  Net income (loss) ...........................................................                $   387                 $(2,267)
    Adjustments to reconcile net loss to net cash
      provided by operating activities:
          Net change in investment in subsidiaries .............................                (1,632)                    416
          Amortization of debt discount ........................................                 2,760                   2,693
          Amortization of debt issuance costs ..................................                    70                      67
          Deferred income taxes ................................................                  (924)                   (900)
          Gain from early retirement of debt ...................................                  (661)                     --
          Increase in debt issuance costs ......................................                    --                    (347)
                                                                                               -------                 -------

          Net cash used by operating activities ...............................                     --                    (338)
                                                                                               -------                 -------

Cash flows from financing activities
  Dividend to AHC I Acquisition Corp. .........................................                     --                  (1,863)
                                                                                               -------                 -------

Net decrease in cash and cash equivalents .....................................                     --                  (2,201)
Cash and cash equivalents, beginning of period ................................                     --                   2,201
                                                                                               -------                 -------

Cash and cash equivalents, end of period ......................................                $    --                 $    --
                                                                                               =======                 =======

Significant non-cash activities
  Contribution of equity and retirement of
    senior discount debentures and senior note ................................                $ 8,080                      --
  Investment in subsidiaries ..................................................                $ 3,996                      --
</TABLE>

<PAGE>

                           AKI, INC., AND SUBSIDIARIES
                (a wholly-owned subsidiary of AKI Holding Corp.)
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                (dollars in thousands, except share information)

<TABLE>
<CAPTION>
                                                                     March 31,                June 30,
                                                                       2000                     1999
                                                                   -----------                --------
                                                                   (unaudited)

<S>                                                                <C>                       <C>
ASSETS
Current assets
Cash and cash equivalents .........................                $     179                 $   7,015
Accounts receivable, net ..........................                   22,677                    16,287
Inventory .........................................                    8,278                     5,109
Income tax refund receivable ......................                       32                        32
Prepaid expenses ..................................                      223                       452
Deferred income taxes .............................                      400                       400
                                                                   ---------                 ---------

   Total current assets ...........................                   31,789                    29,295

Property, plant and equipment, net ................                   17,741                    18,511
Goodwill, net .....................................                  162,774                   147,990
Other intangible assets, net ......................                    6,013                     6,560
Deferred charges, net .............................                    5,911                     5,319
Deferred income taxes .............................                      861                     3,132
Other assets ......................................                       89                        46
                                                                   ---------                 ---------

   Total assets ...................................                $ 225,178                 $ 210,853
                                                                   =========                 =========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations ......                $   1,018                 $     688
Accounts payable, trade ...........................                    3,877                     3,400
Accrued income taxes ..............................                      103                       497
Accrued interest ..................................                    2,987                     6,047
Accrued expenses ..................................                    5,238                     3,810
                                                                   ---------                 ---------

   Total current liabilities ......................                   13,223                    14,442

Long-term portion of capital lease obligations ....                      509                     1,349
Revolving credit line .............................                   14,200                        --
Senior notes ......................................                  110,510                   115,000
Deferred income taxes .............................                    2,980                     3,340
Other non-current liabilities .....................                    1,399                        --
                                                                   ---------                 ---------

   Total liabilities ..............................                  142,821                   134,131

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding ............                       --                        --
Additional paid-in capital ........................                  104,858                   100,862
Accumulated deficit ...............................                   (6,413)                   (8,045)
Accumulated other comprehensive loss ..............                     (358)                     (365)
Carryover basis adjustment ........................                  (15,730)                  (15,730)
                                                                   ---------                 ---------

   Total stockholder's equity .....................                   82,357                    76,722
                                                                   ---------                 ---------

   Total liabilities and stockholder's equity .....                $ 225,178                 $ 210,853
                                                                   =========                 =========
</TABLE>



              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>

                           AKI, INC., AND SUBSIDIARIES
                (a wholly-owned subsidiary of AKI Holding Corp.)
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)


<TABLE>
<CAPTION>
                                                       Three months ended                      Nine months ended
                                             -----------------------------------      -----------------------------------
                                             March 31, 2000       March 31, 1999      March 31, 2000       March 31, 1999
                                             --------------       --------------      --------------       --------------
                                              (unaudited)         (unaudited)          (unaudited)         (unaudited)

<S>                                             <C>                <C>                  <C>                <C>
Net sales ...............................       $25,433            $ 24,518             $74,320            $ 68,979
Cost of goods sold ......................        15,492              14,827              44,572              43,908
                                                -------            --------             -------            --------

    Gross profit ........................         9,941               9,691              29,748              25,071

Selling, general and
    administrative expenses .............         3,631               3,924              12,286              10,333
Amortization of goodwill and
    other intangibles ...................         1,373               1,151               3,928               3,454
Loss (gain) from settlement
    of litigation, net ..................            12                  --                (858)                 --
                                                -------            --------             -------            --------


    Income from operations ..............         4,925               4,616              14,392              11,284

Other expenses:
    Interest expense, net ...............         3,479               3,298              10,220               9,752
    Management fees and
        other, net ......................            62                 242                 187                 367
                                                -------            --------             -------            --------

Income before income taxes and
    extraordinary gain ..................         1,384               1,076               3,985               1,165

Income tax expense ......................         1,008                 795               2,540               1,581
                                                -------            --------             -------            --------

    Income (loss) before extraordinary
        gain............................            376                 281               1,445                (416)

Extraordinary gain from early
    retirement of debt, net of tax ......            --                  --                 187                  --
                                                -------            --------             -------            --------

    Net income (loss) ...................       $   376            $    281             $ 1,632            $   (416)
                                                =======            ========             =======            ========
</TABLE>




              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>

                           AKI, INC., AND SUBSIDIARIES
                (a wholly-owned subsidiary of AKI Holding Corp.)
      CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                (dollars in thousands, except share information)

<TABLE>
<CAPTION>

                                                                                            Accumulated
                                               Common Stock       Additional                   Other      Carryover
                                            -------------------     Paid-in   Accumulated   Comprehensive    Basis
                                            Shares      Dollars     Capital     Deficit         Loss       Adjustment      Total
                                            ------      -------   ----------  -----------   -------------  ----------      -----

<S>                                         <C>        <C>         <C>           <C>           <C>         <C>            <C>
Balances, June 30, 1999 ................    1,000      $   --      $100,862      $(8,045)      $(365)      $(15,730)      $76,722

Equity contribution by AKI Holding Corp.
   (unaudited) .........................                              3,996                                                 3,996

Net income (unaudited) .................                                           1,632                                    1,632

Other comprehensive income, net of tax:
     Foreign currency translation
       adjustment (unaudited) ..........                                                           7                            7
                                                                                                                          -------

Comprehensive income (unaudited) .......                                                                                    1,639
                                            -----      ------      --------      -------       -----       --------       -------

Balances, March 31, 2000 (unaudited) ...    1,000      $   --      $104,858      $(6,413)      $(358)      $(15,730)      $82,357
                                            =====      ======      ========      =======       =====       ========       =======
</TABLE>








              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>

                           AKI, INC., AND SUBSIDIARIES
                (a wholly-owned subsidiary of AKI Holding Corp.)
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                                       Nine months ended
                                                                            --------------------------------------
                                                                            March 31, 2000          March 31, 1999
                                                                            --------------          --------------
                                                                              (unaudited)             (unaudited)
                                                                            --------------          --------------

<S>                                                                          <C>                       <C>
Cash flows from operating activities
    Net income (loss) .................................................      $  1,632                  $  (416)
    Adjustments to reconcile net income to
      net cash provided by operating activities:
        Depreciation and amortization of goodwill
            and other intangibles .....................................         7,188                    6,561
        Amortization of debt issuance cost ............................           503                      461
        Deferred income taxes .........................................         1,790                      947
        Net gain from early retirement of debt ........................          (187)                      --
        Other .........................................................          (133)                    (248)
        Changes in operating assets and liabilities:
           Accounts receivable ........................................        (3,731)                  (8,752)
           Inventory ..................................................        (3,018)                  (3,897)
           Prepaid expenses, deferred charges
             and other assets .........................................           398                     (248)
           Income taxes ...............................................           (32)                   5,587
           Accounts payable and accrued expenses ......................        (6,474)                   3,197
                                                                             --------                  -------

           Net cash provided by (used in)
                   operating activities ...............................        (2,064)                   3,192
                                                                             --------                  -------

Cash flows from investing activities
    Purchases of equipment ............................................        (2,300)                  (2,430)
    Payments for acquisitions, net of cash
        acquired ......................................................       (16,162)                      --
                                                                             --------                  -------

            Net cash used in investing activities .....................       (18,462)                  (2,430)
                                                                             --------                  -------

Cash flows from financing activities
    Payments under capital leases for equipment .......................          (510)                    (460)
    Net proceeds  on line of credit ...................................        14,200                      800
    Repayment of other notes payable ..................................            --                   (1,330)
                                                                             --------                  -------

            Net cash provided by (used in) financing
               activities .............................................        13,690                     (990)
                                                                             --------                  -------

Net (decrease) in cash and cash equivalents ...........................        (6,836)                    (228)
Cash and cash equivalents, beginning of period ........................         7,015                    1,641
                                                                             --------                  -------

Cash and cash equivalents, end of period ..............................      $    179                  $ 1,413
                                                                             ========                  =======


Supplemental information
    Cash paid (received) during the period for:
        Interest, other ...............................................      $ 12,724                  $ 6,498
        Income taxes ..................................................         1,157                   (4,953)

Significant non-cash activities
        Assets acquired under capital lease ...........................            --                  $   561
        Contribution of equity and retirement of
             senior notes .............................................      $  3,996                       --
</TABLE>




              The accompanying notes are an integral part of these
                       consolidated financial statements.

<PAGE>

                           AKI, INC., AND SUBSIDIARIES
                (a wholly-owned subsidiary of AKI Holding Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1.   BASIS OF PRESENTATION

          Arcade Holding  Corporation (the  "Predecessor") was organized for the
     purpose  of  acquiring  all the  issued and  outstanding  capital  stock of
     Arcade,  Inc.  ("Arcade")  on  November  4,  1993.  Arcade  is  engaged  in
     interactive advertising for consumer products companies and has a specialty
     in the design,  production and  distribution  of sampling  systems from its
     Chattanooga,  Tennessee  facilities,  and also  distributes its products in
     Europe through its French subsidiary,  Arcade Europe S.A.R.L.  DLJ Merchant
     Banking  Partners II, L.P.  and certain  related  investors  (collectively,
     "DLJMBII")  and  certain  members  of  the  Predecessor   organized  AHC  I
     Acquisition  Corp.  ("Acquisition  Corp.") and AHC I Merger Corp.  ("Merger
     Corp.") for purposes of acquiring  the  Predecessor.  On December 15, 1997,
     Merger Corp.  acquired all of the equity  interests of the  Predecessor and
     then merged with and into the  Predecessor  and the combined entity assumed
     the  name  of  AKI,  Inc.  and  Subsidiaries  ("AKI").  Subsequent  to  the
     acquisition,  Acquisition  Corp.  contributed  $1 and all of its  ownership
     interest in AKI to AKI Holding Corp. ("Holding") for all of the outstanding
     equity of Holding.

     Acquisition of Retcom Holdings Ltd.

          On  September  15, 1999,  AKI acquired all of the equity  interests in
     Retcom  Holdings  Ltd.  and its  subsidiaries  ("RHL")  for a total cost of
     approximately $12 million and refinanced RHL's working capital indebtedness
     of approximately $5 million. RHL businesses include a portfolio of sampling
     systems catering to the fragrance,  cosmetics and personal care industries,
     as well as microencapsulation  activities. The sampling systems and related
     microencapsulation  services  and  activities  have  been  integrated  into
     Arcade's  sampling  technology  group (named Arcade Sampling  Technologies,
     AST) and the  microencapsulated  products  have been combined with Arcade's
     product technology unit (named Arcade Product Technologies,  APT). RHL also
     has a creative services  division (renamed Arcade Direct,  AD) that handles
     marketing communications, catalogs and database marketing and a multi-media
     division (renamed Arcade Consumer Communications, ACC) for merchandising at
     point-of-sale.  The purchase  price and  refinancing of  indebtedness  were
     financed  by  borrowings  under the  credit  agreement.  The  purchase  was
     accounted  for  under  the  purchase  method  of  accounting.   Results  of
     operations  for the nine months ended March 31, 2000 include the results of
     RHL for the period from  September 15, 1999 to March 31, 2000. The purchase
     price  allocation  is not  finalized  at  this  time.  Management  has  not
     determined what impact, if any, that there would be on earnings.

     Interim financial statements

          The interim consolidated condensed balance sheet at March 31, 2000 and
     the interim  consolidated  condensed statements of operations for the three
     and nine months  ended March 31,  2000 and 1999,  the interim  consolidated
     condensed statements of cash flows for the nine months ended March 31, 2000
     and 1999 and the interim  consolidated  condensed  statement  of changes in
     stockholder's  equity  for  the  nine  months  ended  March  31,  2000  are
     unaudited, and certain information and footnote disclosure related thereto,
     normally included in the financial  statements  prepared in accordance with
     generally accepted accounting principles, have been omitted. In the opinion
     of  management,  the unaudited  interim  consolidated  condensed  financial
     statements were prepared following the same policies and procedures used in
     preparation  of the  audited  financial  statements  and  all  adjustments,
     consisting  only of normal  recurring  adjustments  to fairly  present  the
     financial  position,  results of operations  and cash flows with respect to
     the  interim  consolidated   condensed  financial  statements,   have  been
     included.  The  results  of  operations  for the  interim  periods  are not
     necessarily indicative of the results for the entire year.

<PAGE>

2.   INVENTORY

     The following table details the components of inventory:

                                       March 31, 2000    June 30, 1999
                                       --------------    -------------
                                        (unaudited)
Raw materials
    Paper ........................       $4,176             $1,088
    Other raw materials ..........        2,371              2,328
                                         ------             ------

Net raw materials ................        6,547              3,416
Work in process ..................        1,731              1,693
                                         ------             ------

Net inventory ....................       $8,278             $5,109
                                         ======             ======


3. RETIREMENT OF DEBT

        During  the nine  months  ended  March  31,  2000,  Acquisition  Corp.
   purchased  $4,490 of AKI,  Inc.  Senior  Notes for  $3,996.  The notes were
   contributed to Holding Corp. and Holding Corp contributed the notes to AKI,
   Inc. The notes were subsequently retired.

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Item 2 is presented with respect to both AKI Holding Corp. and AKI, Inc. As
used  within  Item 2 the term  "Company"  refers to AKI  Holding  Corp.  and its
subsidiaries  including AKI, Inc.  ("AKI") and the term "Holding"  refers to AKI
Holding  Corp.   and  the  term  "RHL"  refers  to  Retcom   Holdings  Ltd.  and
subsidiaries.

General

     The sales of our company are derived  through its  multi-sensory  marketing
activities  primarily  from  the  sale  of  sampling  systems  and  products  to
fragrance,  cosmetics and consumer  products  companies,  and also from creative
services.  Substantially  all of our  company's  sales are made  directly to its
customers  while a small  portion are made through  advertising  agencies.  Each
customer's  sampling  program  is unique  and  pricing  is  negotiated  based on
estimated costs plus a margin.  While our company and its customers generally do
not  enter  into  long-term   contracts,   our  company  has  had  long-standing
relationships with the majority of its customer base.

Retcom Holdings Ltd. Acquisition

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital  stock of RHL at a purchase  price of  approximately  $12 million and
refinanced RHL's working capital  indebtedness of approximately $5 million.  The
purchase price and refinancing of indebtedness were financed by borrowings under
the credit agreement.

 Results of Operations

     Three Months Ended March 31, 2000  Compared to Three Months Ended March 31,
1999

     Net Sales.  Net sales for the three months ended March 31, 2000,  increased
$0.9 million,  or 3.7%, to $25.4  million,  as compared to $24.5 million for the
three months ended March 31, 1999.  The increase was primarily  attributable  to
increases  in domestic  and  international  sales of sampling  technologies  for
advertising and marketing of fragrance  products and sales from the RHL acquired
businesses,  offset by decreases in domestic sales of sampling  technologies for
advertising  and  marketing  of cosmetics  and consumer  products and changes in
foreign exchange rates.

     Gross  Profit.  Gross  profit for the three  months  ended March 31,  2000,
increased  $0.2 million,  or 2.1%, to $9.9 million,  as compared to $9.7 million
for three months ended March 31, 1999. Gross profit as a percentage of net sales
decreased to 39.0% in the three  months ended March 31, 2000,  from 39.6% in the
three  months  ended March 31,  1999.  The increase in gross profit is primarily
attributable to the increase in net sales discussed above,  offset by changes in
product mix and changes in foreign  exchange rates. The decrease in gross profit
as a  percentage  of net sales is primarily  attributable  to changes in product
mix.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the three  months  ended March 31, 2000,  decreased
$0.3 million, or 7.7% to $3.6 million, as compared to $3.9 million for the three
months ended March 31, 1999. The decrease in selling, general and administrative
expenses  was  primarily  due to a 1999  severance  charge  related  to a former
executive,  a decrease in sales commissions and legal expense,  offset partially
by  increased  sales  staffing  and  additional  expenses  associated  with  the
operation  of  RHL.  As  a  result  of  these  factors,   selling,  general  and
administrative  expenses  as a percent  of net sales  decreased  to 14.2% in the
three months  ended March 31,  2000,  from 15.9% in the three months ended March
31, 1999.

     Income from  Operations.  Income from operations for the three months ended
March 31, 2000 increased $0.3 million,  or 6.5%, to $4.9 million, as compared to
$4.6 million for the three months ended March 31, 1999.  Income from  operations
as a percentage of net sales  increased to 19.3% in the three months ended March
31, 2000,  from 18.8% in three months  ended March 31,  1999,  principally  as a
result of the factors described above.

     Interest  Expense.  Interest  expense for the three  months ended March 31,
2000  increased  $0.1  million,  or 2.3% to $4.4  million,  as  compared to $4.3
million  for the three  months  ended  March 31,  1999.  Interest  expense  as a

<PAGE>

percentage  of net sales  decreased to 17.3% in the three months ended March 31,
2000,  from 17.6% in the three  months  ended March 31,  1999.  The  increase in
interest  expense,  including the  amortization of deferred  financing costs, is
primarily  due to use of the  credit  line  for  working  capital  and  the  RHL
acquisition,  offset  partially by a decrease in interest expense related to the
repurchased and retired Senior Discount Debentures and Senior Notes.

     Interest  expense  for  AKI for the  three  months  ended  March  31,  2000
increased $0.2 million, or 6.1% to $3.5 million, as compared to $3.3 million for
the three months ended March 31, 1999.  Interest  expense as a percentage of net
sales increased to 13.8% in the three months ended March 31, 2000, from 13.5% in
the three  months  ended March 31,  1999.  The  increase  in  interest  expense,
including the amortization of deferred  financing costs, is primarily due to use
of the credit line for working capital and the RHL acquisition, offset partially
by a decrease in interest  expense related to the repurchased and retired Senior
Notes.

     Income Tax Expense. Income tax expense for the three months ended March 31,
2000 increased $0.2 million to $0.7 million. The increase is due to the increase
in income before income taxes and extraordinary  gain as a result of the factors
described  above.  The Company's  effective  tax rate,  after  consideration  of
non-deductible goodwill amortization,  was 42.7% in the three months ended March
31, 2000, and 44.5% in the three months ended March 31, 1999.

     Income  tax  expense  for AKI for the three  months  ended  March 31,  2000
increased  $0.2 million to $1.0 million.  The increase is due to the increase in
income  before  income taxes and  extraordinary  gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill  amortization,  was 39.0% in the three  months ended March 31, 2000 and
1999.

     EBITDA.  EBITDA for the three months ended March 31, 2000,  increased  $0.6
million,  or 8.8%,  to $7.4  million,  as compared to $6.8 million for the three
months ended March 31, 1999. The increase  principally  reflects the increase in
income from operations  discussed above. EBITDA as a percentage of net sales was
29.1% and 27.8% in the three months ended March 31, 2000 and 1999, respectively.
EBITDA is income from operations plus  depreciation and amortization of goodwill
and other intangibles.


     Nine Months  Ended March 31, 2000  Compared to Nine Months  Ended March 31,
1999

     Net Sales.  Net sales for the nine months ended March 31,  2000,  increased
$5.3 million,  or 7.7%, to $74.3  million,  as compared to $69.0 million for the
nine months ended March 31, 1999.  The increase was  primarily  attributable  to
increases  in  domestic  sales of  sampling  technologies  for  advertising  and
marketing of cosmetics  and consumer  products,  due  partially to the timing of
completion and delivery of certain  substantial orders which remained in process
at June 30, 1999, and sales from the RHL acquired business,  offset by decreases
in domestic  sales of sampling  technologies  for  advertising  and marketing of
fragrance  products  and  international  sales  of  sampling   technologies  for
advertising and marketing of consumer  products and changes in foreign  exchange
rates.

     Gross  Profit.  Gross  profit for the nine  months  ended  March 31,  2000,
increased $4.6 million, or 18.3%, to $29.7 million, as compared to $25.1 million
for nine months ended March 31, 1999.  Gross profit as a percentage of net sales
increased to 40.0% in the nine months  ended March 31,  2000,  from 36.4% in the
nine months ended March 31, 1999.  The increase in gross profit and gross profit
as a percentage  of net sales is primarily  attributable  to the increase in net
sales  discussed  above,  changes in product mix and more  efficient  production
levels, offset partially by changes in foreign exchange rates.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses for the nine months ended March 31, 2000, increased $2.0
million,  or 19.4% to $12.3  million,  as compared to $10.3 million for the nine
months ended March 31, 1999. The increase in selling, general and administrative
expenses was primarily due to an increase in sales and customer service staffing
levels and compensation and additional  expenses associated with the acquisition
and  operation  of RHL.  As a result  of these  factors,  selling,  general  and
administrative expenses as a percent of net sales increased to 16.6% in the nine
months ended March 31, 2000, from 14.9% in the nine months ended March 31, 1999.


<PAGE>

     Income from  Operations.  Income from  operations for the nine months ended
March 31, 2000 increased $3.1 million,  or 27.4%, to $14.4 million,  as compared
to $11.3  million  for the  nine  months  ended  March  31,  1999.  Income  from
operations  as a percentage  of net sales  increased to 19.4% in the nine months
ended  March  31,  2000,  from  16.4%  in nine  months  ended  March  31,  1999,
principally as a result of the factors described above.

     Interest  Expense.  Interest  expense for the nine  months  ended March 31,
2000,  increased $0.5 million,  or 4.0% to $13.0  million,  as compared to $12.5
million  for the nine  months  ended  March  31,  1999.  Interest  expense  as a
percentage  of net sales  decreased  to 17.5% in the nine months ended March 31,
2000,  from 18.1% in the nine  months  ended  March 31,  1999.  The  increase in
interest  expense,  including the  amortization of deferred  financing costs, is
primarily  due to use of the  credit  line  for  working  capital  and  the  RHL
acquisition,  offset  partially by a decrease in interest expense related to the
repurchased and retired Senior Discount Debentures and Senior Notes.

     Interest  expense  for  AKI for the  nine  months  ended  March  31,  2000,
increased $0.4 million,  or 4.1% to $10.2  million,  as compared to $9.8 million
for the nine months ended March 31, 1999.  Interest  expense as a percentage  of
net sales decreased to 13.7% in the nine months ended March 31, 2000, from 14.2%
in the nine  months  ended March 31,  1999.  The  increase in interest  expense,
including the amortization of deferred  financing costs, is primarily due to use
of the credit line for working capital and the RHL acquisition, offset partially
by a decrease in interest  expense related to the repurchased and retired Senior
Notes.

     Income Tax Expense.  Income tax expense for the nine months ended March 31,
2000 increased $0.9 million to $1.6 million. The increase is due to the increase
in income before income taxes and extraordinary  gain as a result of the factors
described  above.  The Company's  effective  tax rate,  after  consideration  of
non-deductible  goodwill  amortization  and non-taxable  gain from settlement of
litigation,  was 44.0% in the nine months  ended March 31, 2000 and 52.3% in the
nine months ended March 31, 1999.

     Income  tax  expense  for AKI for the nine  months  ended  March  31,  2000
increased  $0.9 million to $2.5 million.  The increase is due to the increase in
income  before  income taxes and  extraordinary  gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill  amortization and non-taxable  gain from settlement of litigation,  was
39.0% in the nine months ended March 31, 2000 and 1999.

     Extraordinary  gain from early retirement of debt.  Extraordinary gain from
early  retirement  of debt of $0.8  million for the nine months  ended March 31,
2000 resulted from the purchase and subsequent  contribution of Senior Notes and
Senior  Discount  Debentures by AHC I Acquisition  Corporation.  The contributed
securities were subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.2 million
for the nine months  ended March 31, 2000  resulted  from the purchase of Senior
Notes  by AHC I  Acquisition  Corporation  and  subsequent  contribution  by AKI
Holding Corp. The contributed securities were subsequently retired.

     EBITDA.  EBITDA for the nine months  ended March 31, 2000,  increased  $2.9
million,  or 16.3%, to $20.7 million,  as compared to $17.8 million for the nine
months ended March 31, 1999. The increase  principally  reflects the increase in
income from operations  discussed above. EBITDA as a percentage of net sales was
27.9% and 25.8% in the nine months ended March 31, 2000 and 1999,  respectively.
EBITDA is income from operations plus  depreciation and amortization of goodwill
and other intangibles less net gain from settlement of litigation.

Liquidity and Capital Resources

     Our company has  substantial  indebtedness  and  significant  debt  service
obligations.  As of March 31, 2000, our company had consolidated indebtedness in
an  aggregate  amount of  $153.2  million  (excluding  trade  payables,  accrued
liabilities,  deferred taxes and other  non-current  liabilities),  of which (1)
approximately  $27.0 million was a direct  obligation of Holding relating to its
debentures and (2)  approximately  $126.2 million was a direct obligation of AKI
relating to its notes,  revolving credit line and capital leases.  Borrowings at
March 31, 2000 included $14.2 million under the revolving  credit agreement that
was  incurred to finance the  acquisition  of RHL. At March 31, 2000 our company
had available  $5.2 million under the credit line  facility.  At March 31, 2000,
AKI also had $16.5  million in  additional  outstanding  liabilities  (including
trade  payables,  accrued  liabilities,  deferred  taxes and  other  non-current
liabilities) and letters of credit outstanding under the credit agreement in the
amount of $0.6 million.


<PAGE>

     Holding's   principal   liquidity   requirements   are  for  debt   service
requirements under the debentures.  AKI's principal  liquidity  requirements are
for debt service requirements and fees under the notes and the credit agreement.
Historically,  our company has funded its capital,  debt  service and  operating
requirements  with a combination  of net cash provided by operating  activities,
which was $2.9 million for the nine months ended March 31, 1999,  together  with
borrowings under revolving credit facilities. During the nine months ended March
31, 2000, cash totaling $2.1 million was used by operating  activities primarily
due to the  increase  in accounts  receivable  and  inventory  and a decrease in
accrued interest,  accounts payable and accrued  expenses.  Net cash provided by
operating  activities  during the nine months ended March 31, 1999 resulted from
net income before depreciation and amortization, the collection of an income tax
refund receivable and increases in accounts payable and accrued expenses.  These
factors were  partially  offset by increased  accounts  receivable and inventory
levels.

     In the nine months  ended March 31, 2000 and 1999,  our company had capital
expenditures of approximately $2.3 million and $2.4 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of an  electronic
prepress system,  manufacturing equipment,  furniture and fixtures and upgrading
its computer systems.

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RHL at a purchase price of  approximately  $12.2 million and
refinanced RHL's working capital  indebtedness of approximately $5 million.  The
purchase price and refinancing of indebtedness were financed by borrowings under
the credit agreement, a portion of which was subsequently repaid with cash flows
from operating activities.  Our company is exploring options for the longer-term
financing  of a  portion  of the  borrowings  incurred  in  connection  with the
acquisition.

     Our  company  may  from  time  to  time   evaluate   additional   potential
acquisitions.  There can be no assurance that additional capital sources will be
available  to our  company  to fund  additional  acquisitions  on terms that our
company finds acceptable, or at all.

     In September 1999,  Acquisition  Corp.  consummated a private  placement to
DLJMBII of  15,000,000  shares of its common stock at a purchase  price of $1.00
per share. In October 1999,  Acquisition Corp. purchased $8.8 million of Holding
Corp.  Senior Discount  Debentures and $4.5 million of AKI, Inc.,  Senior Notes.
The  debentures and notes were  contributed  to Holding Corp.  and  subsequently
retired.

     Capital  expenditures  for the  three  months  ending  June  30,  2000  are
currently  estimated  to be  approximately  $1.2  million.  Based on  borrowings
outstanding  (other than pursuant to the credit  agreement) as of March 31, 2000
and borrowings  outstanding  under the credit  agreement as of May 11, 2000, our
company expects total cash payments for debt service for the three months ending
June 30, 2000 to be  approximately  $0.5 million,  consisting of $0.2 million in
capital lease obligations and $0.3 million in interest and fees under the credit
agreement.  Our company also expects to make royalty  payments of  approximately
$0.2 million during the three months ending June 30, 2000.

     At March 31, 2000, our company's cash and cash  equivalents and net working
capital  were $0.2  million  and $18.6  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $6.8  million and an increase in net
working capital of $3.7 million from June 30, 1999. Account receivables, net, at
March 31, 2000  increased  39.3% or $6.4  million over the June 30, 1999 amount,
primarily due to increased sales.  Inventory  increased in anticipation of price
increases and changes in paper composition.

Seasonality

     Our  company's  sales and  operating  results have  historically  reflected
seasonal  variations.  Such seasonal  variations  are based on the timing of our
company's  customers'  advertising  campaigns,  which  have  traditionally  been
concentrated  prior to the Christmas and spring holiday seasons.  As a result, a
higher level of sales are reflected in our company's  first two fiscal  quarters
ended  December 31 when sales from such  advertising  campaigns are  principally
recognized  while our company's  fourth  fiscal  quarter ended June 30 typically
reflects the lowest sales level of the fiscal year. These seasonal  fluctuations
require our company to accurately allocate its resources to manage our company's


<PAGE>

manufacturing  capacity,  which  often  operates  at full  capacity  during peak
seasonal demand periods.

Recently Issued Accounting Standards

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective  for  fiscal  years  beginning  after  June 15,  1999.  SFAS  No.  133
established  accounting  and  reporting  standards for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities.  In June  1999,  the FASB  issued  Statement  of  Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities  Deferral of  Effective  Date" which is  effective  for fiscal  years
beginning  after  June  15,  2000.  Our  company  has only  utilized  derivative
financial  instruments  to hedge  our  company's  exposure  to  certain  foreign
currencies.  Such hedging activity has historically been minor and, as a result,
adoption of this  Statement  is not  expected  to have a material  impact on our
company's financial  condition or results of operations.  Our company will adopt
the provisions of this Statement on July 1, 2000.

Year 2000 Issues

     Our company worked to resolve the potential  impact of the Year 2000 on its
information  technology  systems and its  non-information  technology systems so
they would properly recognize and utilize dates beyond December 31, 1999.

     Our  company  had in place a Year 2000  program  which was  executed  by an
internal  project team.  The objective of the Year 2000 program was to determine
and assess the risks of the Year 2000 issue and to plan and institute mitigating
actions to  minimize  those risks to  acceptable  levels.  To date,  none of our
company's  systems have been  adversely  affected by the Year 2000.  Our company
relies on five computerized  systems all of which required  remediation,  two of
which are  maintained  internally  and the others are  maintained by third party
vendors. Our company believes that all of these systems are Year 2000 compliant.
Upon  review of our  company's  non-information  technology  systems our company
believes  that none of its  manufacturing  equipment is date  sensitive.  Of the
remaining  non-information  technology  systems,  our company  believes all such
systems are Year 2000 compliant.

     Our company has spent approximately  $100,000 on Year 2000 compliance.  All
expenditures  with  respect to Year 2000  compliance  were funded  from  working
capital.

     Our company  communicated  with its  significant  customers  and vendors to
understand  their Year 2000 issues and how they  prepared  themselves  to manage
those issues as they relate to our company. To date, no significant customers or
vendors have  informed our company that a material  Year 2000 issue exists which
will have a material effect on our company.

Forward-Looking Statements

     The  information   provided  in  this  document  contains   forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could cause actual results, performance, achievements of our company or industry
results to be  materially  different  from any future  results,  performance  or
achievements  expressed  or implied by such  forward-looking  statements.  These
factors  include,  but are not limited to: the  competitive  environment  in the
sampling industry in general and in our company's specific market areas; changes
in prevailing interest rates; inflation;  changes in cost of goods and services;
economic  conditions  in general and in our  company's  specific  market  areas;
changes in or failure to comply with postal regulations or other federal,  state
and/or local government regulations; liability and other claims asserted against
our company;  changes in operating strategy or development plans; the ability to
attract and retain  qualified  personnel;  the  significant  indebtedness of our
company; labor disturbances; changes in our company's capital expenditure plans;
and other factors.

     In addition, such forward-looking statements are necessarily dependent upon
assumptions,  estimates and dates that may be incorrect or imprecise and involve
known and  unknown  risk,  uncertainties  and other  factors.  Accordingly,


<PAGE>

any forward-looking  statements included herein do not purport to be predictions
of  future  events or  circumstances  and may not be  realized.  Forward-looking
statements can be identified by, among other things,  the use of forward-looking
terminology  such as  "believes,"  "expects,"  "may,"  "should,"  "seeks,"  "pro
forma,"  "anticipates,"  "intends"  or the  negative of any such word,  or other
variations  or  comparable  terminology,   or  by  discussions  of  strategy  or
intentions.  Given these  uncertainties,  readers are  cautioned not place undue
reliance  on  such  forward-looking   statements.   Our  company  disclaims  any
obligations  to update any such  factors or to publicly  announce the results of
any  revisions  to any of  the  forward-looking  statements  contained  in  this
document to reflect future events or developments.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Our company generates approximately 20% of its sales from customers outside
the United States,  principally in Europe.  International  sales are made mostly
from our  company's  foreign  subsidiary  located  in France  and are  primarily
denominated in the local currency.  Our company's foreign subsidiary also incurs
the majority of its expenses in the local  currency and uses the local  currency
as its functional currency.

     Our company's major principal cash balances are held in U.S. dollars.  Cash
balances in foreign  currencies are held to minimum balances for working capital
purposes and therefore have a minimum risk to currency fluctuations.

     Our company  periodically  enters into forward  foreign  currency  exchange
contracts to hedge certain exposures  related to selected  transactions that are
relatively  certain  as to both  timing and amount and to hedge a portion of the
production costs expected to be denominated in foreign  currencies.  The purpose
of entering into these hedge  transactions  is to minimize the impact of foreign
currency  fluctuations  on the results of operations  and cash flows.  Gains and
losses on the hedging activities are recognized  concurrently with the gains and
losses  from the  underlying  transactions.  At March 31,  2000,  there  were no
forward exchange contracts outstanding.


                            PART II OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

          27.1 Financial Data Schedule

          27.2 Financial Data Schedule


     (b) Reports on Form 8-K

          None

<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements  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.


                                      AKI HOLDING CORP.

Date:  May 15, 2000                  By:      /s/ Kenneth A. Budde
                                               --------------------
                                               Kenneth A. Budde
                                               Senior Vice President and
                                               Chief Financial Officer

                                      AKI, INC.

Date:  May 15, 2000                  By:      /s/ Kenneth A. Budde
                                               --------------------
                                               Kenneth A. Budde
                                               Senior Vice President and
                                               Chief Financial Officer