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 September 30, 1999

                                       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                                           74-288316
(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 November 12, 1999, 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

             -   September 30, 1999 (unaudited)
             -   June 30, 1999

             Consolidated Condensed Statements of Operations

             -   Three months ended September 30, 1999 (unaudited)
             -   Three months ended September 30, 1998 (unaudited)

             Consolidated Condensed Statement of Changes in Stockholder's Equity

             -   Three months ended September 30, 1999 (unaudited)

             Consolidated Condensed Statements of Cash Flows

             -   Three months ended September 30, 1999 (unaudited)
             -   Three months ended September 30, 1998 (unaudited)

             Notes to Consolidated Condensed Financial Statements



<PAGE>


    Item 1.  Financial Statements (continued)

         AKI, Inc. and Subsidiaries

             Consolidated Condensed Balance Sheet

             -   September 30, 1999 (unaudited)
             -   June 30, 1999

             Consolidated Condensed Statements of Operations

             -   Three months ended September 30, 1999 (unaudited)
             -   Three months ended September 30, 1998 (unaudited)

             Consolidated Condensed Statement of Changes in Stockholder's Equity

             -   Three months ended September 30, 1999 (unaudited)

             Consolidated Condensed Statements of Cash Flows

             -   Three months ended September 30, 1999 (unaudited)
             -   Three months ended September 30, 1998 (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>


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


                                                       September 30,   June 30,
                                                          1999           1999
                                                        ---------     ---------
                                                       (unaudited)

ASSETS
Current assets
Cash and cash equivalents ..........................    $     473     $   7,015
Accounts receivable, net ...........................       26,138        16,287
Inventory ..........................................        6,252         5,109
Income tax refund receivable .......................          164            32
Prepaid expenses ...................................          433           452
Deferred income taxes ..............................          399           400
                                                        ---------     ---------

   Total current assets ............................       33,859        29,295

Property, plant and equipment, net .................       18,257        18,511
Goodwill, net ......................................      161,746       147,990
Other intangible assets, net .......................        6,378         6,560
Deferred charges, net ..............................        9,295         6,839
Deferred income taxes ..............................        2,295         4,338
Other assets .......................................           92            46
                                                        ---------     ---------

   Total assets ....................................    $ 231,922     $ 213,579
                                                        =========     =========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations .......    $   1,349     $     688
Accounts payable, trade ............................        6,046         3,400
Accrued income taxes ...............................          164           497
Accrued interest ...................................        3,087         6,047
Accrued expenses ...................................        5,903         3,810
                                                        ---------     ---------

   Total current liabilities .......................       16,549        14,442

Long-term portion of capital lease obligations .....          521         1,349
Revolving credit line ..............................       14,750          --
Senior notes .......................................      115,000       115,000
Senior discount debentures .........................       30,652        29,651
Deferred income taxes ..............................        3,220         3,340
                                                        ---------     ---------

   Total liabilities ...............................      180,692       163,782

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding ............         --            --
Additional paid-in capital .........................       78,364        78,364
Accumulated deficit ................................      (11,191)      (12,472)
Accumulated other comprehensive loss ...............         (213)         (365)
Carryover basis adjustment .........................      (15,730)      (15,730)
                                                        ---------     ---------

   Total stockholder's equity ......................       51,230        49,797
                                                        ---------     ---------


   Total liabilities and stockholder's equity ......    $ 231,922     $ 213,579
                                                        =========     =========




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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
              (a wholly-owned subsidiary of AHCI Acquisition Corp.)
                 CONSOLIDATED CONDENSED STATEMENT SOF OPERATIONS
                             (dollars in thousands)




                                           Three months         Three months
                                               ended               ended
                                         September 30, 1999   September 30, 1998
                                         ------------------   ------------------
                                            (unaudited)          (unaudited)

Net Sales ...........................      $     28,379          $     24,024
Cost of goods sold ..................            15,792                15,421
                                           ------------          ------------

    Gross profit ....................            12,587                 8,603

Selling, general and
    administrative expenses .........             4,158                 3,115
Amortization of goodwill and
    other intangibles ...............             1,164                 1,151
                                           ------------          ------------

    Income from operations ..........             7,265                 4,337

Other expenses:
    Interest expense, net ...........             4,372                 4,096
    Management fees and
        other, net ..................                63                    63
                                           ------------          ------------

Income before
    income taxes ....................             2,830                   178

Income tax expense ..................             1,549                   502
                                           ------------          ------------

    Net income (loss) ...............      $      1,281          $       (324)
                                           ============          ============















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 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

 Net income (unaudited) ................                                           1,281                                  1,281

 Other comprehensive income, net of
   tax:
     Foreign currency translation
         adjustment (unaudited) ........                                                          152                       152
                                                                                                                       --------
Comprehensive income (unaudited) .......                                                                                  1,433
                                            --------    --------    --------    --------     --------     --------     --------

Balances, September 30, 1999 (unaudited)       1,000    $   --      $ 78,364    $(11,191)    $   (213)    $(15,730)    $ 51,230
                                            ========    ========    ========    ========     ========     ========     ========
</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>
                                                      Three months        Three months
                                                          ended              ended
                                                    September 30, 1999  September 30, 1998
                                                    ------------------  ------------------
                                                       (unaudited)        (unaudited)
<S>                                                      <C>               <C>
Cash flows from operating activities
    Net income (loss) ..............................     $  1,281          $   (324)
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
        Depreciation and amortization of goodwill
            and other intangibles ..................        2,212             2,186
        Amortization of debt discount ..............        1,001               878
        Amortization of debt issuance costs ........          199               143
        Deferred income taxes ......................        1,925              (403)
        Other ......................................          152               112
        Changes in operating assets and liabilities:
            Accounts receivable ....................       (6,654)           (7,872)
            Inventory ..............................         (174)           (1,906)
            Prepaid expenses, deferred charges
              and other assets .....................           30              (387)
            Income taxes ...........................         (333)            5,958
            Accounts payable and accrued expenses ..       (3,992)            3,132
                                                         --------          --------

            Net cash provided by (used in)
                operating activities ...............       (4,353)            1,517
                                                         --------          --------

Cash flows from investing activities
    Purchases of equipment .........................         (609)             (678)
    Payments for acquisitions, net of cash
        acquired ...................................      (16,163)             --
                                                         --------          --------


            Net cash used in investing activities ..      (16,772)             (678)
                                                         --------          --------

Cash flows from financing activities
    Payments under capital leases for equipment ....         (167)             (147)
    Net proceeds on line of credit .................       14,750              --
        Repayment of other notes payable ...........         --              (1,330)
        Dividend paid to AHCI Acquisition Corp. ....         --              (1,863)
                                                         --------          --------

        Net cash provided by (used in) financing
          activities ...............................       14,583            (3,340)
                                                         --------          --------

Net (decrease) in cash and cash equivalents ........       (6,542)           (2,501)
Cash and cash equivalents, beginning of period .....        7,015             3,842
                                                         --------          --------

Cash and cash equivalents, end of period ...........     $    473          $  1,341
                                                         ========          ========

Supplemental information
    Cash paid (received) during the period for:
        Interest, other ............................     $  6,130          $     39
        Income taxes ...............................           89            (5,053)
</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 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 for a total cost of approximately
     $12 million and refinanced working capital indebtedness of approximately $5
     million of Retcom Holdings Ltd. and its subsidiaries.  Retcom Holdings Ltd.
     businesses  include  a  portfolio  of  sampling  systems  catering  to  the
     fragrance,   cosmetics   and   personal   care   industries,   as  well  as
     microencapsulation  activities.  Retcom  Holdings  Ltd. also has a creative
     services division that handles marketing communications,  catalogs and data
     base   marketing  and  a   multi-media   division  for   merchandising   at
     point-of-sale.  The purchase  price and  refinancing of  indebtedness  were
     initially  financed by borrowings under the credit agreement.  The purchase
     was accounted for under the purchase method of accounting and management is
     in the process of finalizing  the  allocation of the purchase  price to the
     assets  acquired and  liabilities  assumed.  Results of operations  for the
     three months ended September 30, 1999 include the results of Retom Holdings
     Ltd. for the fifteen days ended September 30, 1999.

     Interim financial statements

          The interim  consolidated  condensed  balance  sheets at September 30,
     1999 and the interim consolidated condensed statement of operations for the
     three months ended  September 30, 1999 and 1998,  the interim  consolidated
     condensed  statement of cash flows for the three months ended September 30,
     1999 an 1998 and the interim consolidated condensed statement of changes in
     stockholder's  equity for the three  months  ended  September  30, 1999 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)




1.   BASIS OF PRESENTATION (Continued)

          Unaudited pro forma results for Holding  assuming the  acquisition of
     Retcom  Holdings  Ltd.  had  occurred  as of July 1,  1999 and 1998 are not
     presented  because  management  has  not  been  able to  obtain  all of the
     necessary Retcom Holdings Ltd. financial information for prior periods. The
     inclusion  of  Retcom  Holdings  Ltd.  for  the  fifteen  day  period  was
     immaterial to Holding's  results of  operations  for the three months ended
     September 30, 1999.

2.   INVENTORY

     The following table details the components of inventory:

                                            September 30, 1999  June 30, 1999
                                            ------------------  -------------
                                               (unaudited)
     Raw materials
         Paper ............................     $     2,487     $     1,088
         Other raw materials ..............           1,384           2,328
                                                -----------     -----------

     Net raw materials ....................           3,871           3,416
     Work in process ......................           2,381           1,693
                                                -----------     -----------

     Net inventory ........................     $     6,252     $     5,109
                                                ===========     ===========





<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)


3.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

     The following  condensed  balance sheets at September 30, 1999  (unaudited)
     and June 30,  1999 and  condensed  statements  of  operations,  changes  in
     stockholder's  equity and cash flows for the three months  ended  September
     30, 1999 and 1998  (unaudited) for Holding have been prepared on the equity
     basis  of  accounting  and  should  be read  in  conjunction  on  with  the
     consolidated statements and notes thereto.

<TABLE>
<CAPTION>
                                           BALANCE SHEET

                                                              September 30, 1999    June 30, 1999
                                                              ------------------    -------------
                                                                 (unaudited)
<S>                                                              <C>               <C>
     Assets
     Cash ..................................................     $       --        $       --
     Investment in subsidiaries ............................           94,786            92,817
     Deferred charges ......................................            1,495             1,520
     Deferred income taxes .................................            1,544             1,206
                                                                 ------------      ------------

         Total assets ......................................     $     97,825      $     95,543
                                                                 ============      ============

     Liabilities
     Senior discount debentures ............................     $     30,652      $     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 ............................           78,364            78,364
     Accumulated deficit ...................................          (11,191)          (12,472)
                                                                 ------------      ------------

         Total stockholder's equity ........................           67,173            65,892
                                                                 ------------      ------------

         Total liabilities and stockholder's equity ........     $     97,825      $     95,543
                                                                 ============      ============
</TABLE>


<TABLE>
<CAPTION>
                                    STATEMENT OF OPERATIONS

                                                Three months         Three months
                                                   ended                ended
                                             September 30, 1999   September 30, 1998
                                             ------------------   ------------------
                                                (unaudited)          (unaudited)
<S>                                             <C>                 <C>
     Equity in net income of subsidiaries..     $      1,969        $        273
     Interest expense .....................            1,024                 886
                                                ------------        ------------

       Income (loss) before income taxes..               945                (613)

     Income tax benefit ...................             (336)               (289)
                                                ------------        ------------

         Net income (loss) ................     $      1,281        $       (324)
                                                ============        ============
</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)



3.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)

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

                                                       Common Stock            Additional
                                                 -------------------------       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

     Net income (unaudited) ................           --             --             --            1,281           1,281
                                                 ----------     ----------     ----------     ----------      ----------

     Balance, September 30, 1999 (unaudited)          1,000     $     --       $   78,364     $  (11,191)     $   67,173
                                                 ==========     ==========     ==========     ==========      ==========
</TABLE>


<TABLE>
<CAPTION>
                                        STATEMENT OF CASH FLOWS

                                                           Three months           Three months
                                                               ended                  ended
                                                         September 30, 1999     September 30, 1998
                                                         ------------------     ------------------
                                                            (unaudited)            (unaudited)
<S>                                                        <C>                   <C>
     Cash flows from operating activities
       Net income (loss) .............................     $      1,281          $       (324)
         Adjustments to reconcile net loss to net cash
           provided by operating activities:
           Net change in investment in subsidiaries ..           (1,969)                 (273)
           Amortization of debt discount .............            1,001                   878
           Amortization of debt issuance costs .......               23                    17
           Deferred income taxes .....................             (336)                 (289)
           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 ........     $       --            $       --
                                                           ============          ============
</TABLE>


<PAGE>




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

<TABLE>
<CAPTION>
                                                      September  30,    June 30,
                                                           1999           1999
                                                       ------------   ------------
                                                       (unaudited)
<S>                                                    <C>            <C>
ASSETS
Current assets
Cash and cash equivalents ........................     $        473   $      7,015
Accounts receivable, net .........................           26,138         16,287
Inventory ........................................            6,252          5,109
Income tax refund receivable .....................              164             32
Prepaid expenses .................................              433            452
Deferred income taxes ............................              399            400
                                                       ------------   ------------

   Total current assets ..........................           33,859         29,295

Property, plant and equipment ....................           18,257         18,511
Goodwill, net ....................................          161,746        147,990
Other intangible assets, net .....................            6,378          6,560
Deferred charges, net ............................            7,800          5,319
Deferred income taxes ............................              751          3,132
Other assets .....................................               92             46
                                                       ------------   ------------

   Total assets ..................................     $    228,883   $    210,853
                                                       ============   ============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations .....     $      1,349   $        688
Accounts payable, trade ..........................            6,046          3,400
Accrued income taxes .............................              164            497
Accrued interest .................................            3,087          6,047
Accrued expenses .................................            5,903          3,810
                                                       ------------   ------------

   Total current liabilities .....................           16,549         14,442

Long-term portion of capital lease obligations ...              521          1,349
Revolving credit line ............................           14,750           --
Senior notes .....................................          115,000        115,000
Deferred income taxes ............................            3,220          3,340
                                                       ------------   ------------

   Total liabilities .............................          150,040        134,131

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding ...........             --             --
Addition paid-in capital .........................          100,862        100,862
Accumulated deficit ..............................           (6,076)        (8,045)
Accumulated other comprehensive loss .............             (213)          (365)
Carryover basis adjustment .......................          (15,730)       (15,730)
                                                       ------------   ------------

   Total stockholder's equity ....................           78,843         76,722
                                                       ------------   ------------

   Total liabilities and stockholder's equity ....     $    228,883   $    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)




                                           Three months         Three months
                                               ended               ended
                                         September 30, 1999   September 30, 1998
                                         ------------------   ------------------
                                            (unaudited)          (unaudited)

Net sales .........................        $     28,379          $     24,024
Cost of goods sold ................              15,792                15,421
                                           ------------          ------------

    Gross profit ..................              12,587                 8,603
Selling, general and
    administrative expenses .......               4,158                 3,115
Amortization of goodwill and
    other intangibles .............               1,164                 1,151
                                           ------------          ------------

    Income from operations ........               7,265                 4,337

Other expenses:
    Interest expense to others, net               3,348                 3,210
    Management fees and
        other, net ................                  63                    63
                                           ------------          ------------

Income  before
    income taxes ..................               3,854                 1,064

Income tax expense ................               1,885                   791
                                           ------------          ------------

    Net income ....................        $      1,969          $        273
                                           ============          ============









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

Net income (unaudited) .................                                           1,969                                  1,969

Other comprehensive income, net of tax:
     Foreign currency translation
       adjustment (unaudited) ............                                                        152                       152
                                                                                                                       --------

Comprehensive income (unaudited) .......                                                                                  2,121
                                            --------    --------    --------    --------     --------     --------     --------
Balances, September 30, 1999 (unaudited)       1,000    $   --      $100,862    $ (6,076)    $   (213)    $(15,730)    $ 78,843
                                            ========    ========    ========    ========     ========     ========     ========
</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>
                                                             Three Months         Three Months
                                                                 Ended                Ended
                                                           September 30, 1999   September 30, 1998
                                                           ------------------   ------------------
                                                              (unaudited)           (unaudited)
<S>                                                           <C>                <C>
Cash flows from operating activities
    Net income .....................................          $      1,969       $        273
    Adjustments to reconcile net income to
      net cash provided by operating  activities:
        Depreciation and amortization of goodwill
            and other intangibles ..................                 2,212              2,186
        Amortization of debt issuance cost .........                   176                143
        Deferred income taxes ......................                 2,261               (114)
        Other ......................................                   152                112
        Changes in operating assets and liabilities:
           Accounts receivable .....................                (6,654)            (7,872)
           Inventory ...............................                  (174)            (1,906)
           Prepaid expenses, deferred charges
             and other assets ......................                    30                (57)
           Income taxes ............................                  (333)             5,958
           Accounts payable and accrued expenses ...                (3,992)             3,132
                                                              ------------       ------------

           Net cash provided by (used in)
                   operating activities ............                (4,353)             1,855
                                                              ------------       ------------

Cash flows from investing activities
    Purchases of equipment .........................                  (609)              (678)
    Payments for acquisitions, net of cash
        acquired ...................................               (16,163)              --
                                                              ------------       ------------

            Net cash used in investing activities ..               (16,772)              (678)
                                                              ------------       ------------


Cash flows from financing activities
    Payments under capital leases for equipment ....                  (167)              (147)
    Net proceeds  on line of credit ................                14,750               --
    Repayment of other notes payable ...............                  --               (1,330)
                                                              ------------       ------------

        Net cash provided by (used in) financing
           activities ..............................                14,583             (1,477)
                                                              ------------       ------------

Net (decrease) in cash and cash equivalents ........                (6,542)              (300)
Cash and cash equivalents, beginning of period .....                 7,015              1,641
                                                              ------------       ------------

Cash and cash equivalents, end of period ...........          $        473       $      1,341
                                                              ============       ============


Supplemental information
    Cash paid (received) during the period for:
        Interest, other ............................          $      6,130       $         39
        Income taxes ...............................                    89             (5,053)
</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 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 for a total cost of approximately
     $12 million and refinanced working capital indebtedness of approximately $5
     million of Retcom Holdings Ltd. and its subsidiaries.  Retcom Holdings Ltd.
     businesses  include  a  portfolio  of  sampling  systems  catering  to  the
     fragrance,   cosmetics   and   personal   care   industries,   as  well  as
     microencapsulation  activities.  Retcom  Holdings  Ltd. also has a creative
     services division that handles marketing communications,  catalogs and data
     base   marketing  and  a   multi-media   division  for   merchandising   at
     point-of-sale.  The purchase  price and  refinancing of  indebtedness  were
     initially  financed by borrowings under the credit agreement.  The purchase
     was accounted for under the purchase method of accounting and management is
     in the process of finalizing  the  allocation of the purchase  price to the
     assets  acquired and  liabilities  assumed.  Results of operations  for the
     three months ended September 30, 1999 include the results of Retom Holdings
     Ltd. for the fifteen days ended September 30, 1999.

     Interim financial statements

          The interim  consolidated  condensed  balance  sheets at September 30,
     1999 and the interim consolidated condensed statement of operations for the
     three months ended  September 30, 1999 and 1998,  the interim  consolidated
     condensed  statement of cash flows for the three months ended September 30,
     1999 an 1998 and the interim consolidated condensed statement of changes in
     stockholder's  equity for the three  months  ended  September  30, 1999 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, 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 (Continued)

          Unaudited pro forma results for AKI assuming the acquisition of Retcom
     Holdings  Ltd. had  occurred as of July 1, 1999 and 1998 are not  presented
     because  management has not been able to obtain all of the necessary Retcom
     Holdings Ltd.  financial  information  for prior periods.  The inclusion of
     Retcom  Holdings  Ltd. for the fifteen day period was immaterial to AKI's
     results of operations for the three months ended September 30, 1999.

2.   INVENTORY

The following table details the components of inventory:

                                        September 30, 1999       June 30, 1999
                                        ------------------       -------------
                                            (unaudited)
     Raw materials
         Paper......................        $     2,487           $     1,088
         Other raw materials........              1,384                 2,328
                                            -----------           -----------

     Net raw materials..............              3,871                 3,416
     Work in process................              2,381                 1,693
                                            -----------           -----------

     Net inventory..................        $     6,252           $     5,109
                                            ===========           ===========




<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.

General

     The sales of our  company are derived  through its  multisensory  marketing
activities primarily from the sale of sampling products and systems to cosmetics
and consumer  products  companies.  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.  The
introduction  of our  company's new products,  such as  BeautiSeal,  PowdaTouch,
BeautiTouch and LiquaTouch, has affected our company's results of operations for
certain of the periods discussed below.

Retcom Holdings Ltd. Acquisition

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

Results of Operations

     Three  Months  Ended  September  30, 1999  Compared to Three  Months  Ended
     September 30, 1998

     Net  Sales.  Net sales for the  three  months  ended  September  30,  1999,
increased $4.4 million,  or 18.3%, to $28.4 million as compared to $24.0 million
for the three  months ended  September  30,  1998.  The  increase was  primarily
attributable to a $2.5 million  increase in domestic sales of cosmetic  sampling
products and sales of consumer product  samples,  due partially to the timing of
completion and delivery of certain  substantial orders which remained in process
at June 30, 1999.

     Gross Profit.  Gross profit for the three months ended  September 30, 1999,
increased $4.0 million,  or 46.5%,  to $12.6 million as compared to $8.6 million
for three months ended  September 30, 1998.  Gross profit as a percentage of net
sales  increased  to 44.4% in the three months ended  September  30, 1999,  from
35.8% in the three months ended September 30, 1998. 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.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses for the three months ended September 30, 1999, increased
$1.1 million, or 35.5% to $4.2 million as compared to $3.1 million for the three
months  ended  September  30,  1998.  The  increase  in  selling,   general  and
administrative  expenses was  primarily due to a severance  charge  related to a
former  executive,  increased sales  commissions  related to the increase in net
sales, an increase in the allowance for doubtful accounts,  additional  expenses
associated with the operation of Retcom  Holdings Ltd. and a bonus associated
with  the  Retcom  Holdings  Ltd.  acquisition.  As a result  of these  factors,
selling, general and administrative expenses as a percent of net sales increased
to 14.1% in the three  months ended  September  30, 1999 from 12.9% in the three
months ended September 30, 1998.

     Income from  Operations.  Income from operations for the three months ended
September 30, 1999 increased $3.1 million, or 72.1%, to $7.4 million as compared
to $4.3  million for the three  months ended  September  30,  1998.  Income from
operations as a percentage  of net sales  increased to 26.1% in the three months
ended  September 30, 1999,  from 17.9% in three months ended September 30, 1998,
principally as a result of the factors described above.


<PAGE>


     Interest Expense. Interest expense for the three months ended September 30,
1999  increased  $0.3  million,  or 7.3% to $4.4  million,  as  compared to $4.1
million for the three months ended  September  30, 1998.  Interest  expense as a
percentage of net sales  decreased to 15.5% in the three months ended  September
30, 1999 from 17.1% in the three months ended  September 30, 1998.  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 Retcom
Holdings Ltd. acquisition.

     Interest  expense for AKI for the three  months  ended  September  30, 1999
increased $0.1 million, or 3.1% to $3.3 million, as compared to $3.2 million for
the three months ended September 30, 1998.  Interest  expense as a percentage of
net sales  decreased to 11.6% in the three months ended  September 30, 1999 from
12.9% in the three months  ended  September  30, 1998.  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 Retcom  Holdings Ltd.
acquisition.

     Income Tax Expense. Income tax expense for the three months ended September
30, 1999  increased  $1.0  million to $1.5  million.  The increase is due to the
increase in income  before  income  taxes as a result of the  factors  described
above. The Company's  effective tax rate, after  consideration of non-deductible
goodwill  amortization,  was 40.7% in the three months ended  September 30, 1999
and 43.5% in the three months ended September 30, 1998.

     Income tax expense for AKI for the three  months ended  September  30, 1999
increased  $1.1 million to $1.9 million.  The increase is due to the increase in
income before  income taxes 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 September 30, 1999 and 1998.

     EBITDA.  EBITDA for the three months ended  September  30, 1999,  increased
$3.1  million,  or 47.7%,  to $9.6  million as compared to $6.5  million for the
three months ended  September 30, 1998.  The increase  principally  reflects the
increase  in income  from  operations  discussed  above.  EBITDA is income  from
operations plus depreciation and amortization of goodwill and other intangibles.

Liquidity and Capital Resources

     Our company has  substantial  indebtedness  and  significant  debt  service
obligations. As of September 30, 1999, our company had consolidated indebtedness
in an aggregate  amount of $162.3 million  (excluding  trade  payables,  accrued
liabilities and deferred taxes), of which (1) approximately  $30.7 million was a
direct  obligation of Holding  relating to its debentures and (2)  approximately
$131.6 million was a direct  obligation of AKI relating to its notes,  revolving
credit line and capital leases.  Borrowings at September 30, 1999 included $14.8
million under the revolving  credit  agreement  that was incurred to finance the
acquisition  of Retcom  Holdings Ltd. At September 30, 1999,  AKI also had $18.4
million in additional outstanding liabilities (including trade payables, accrued
liabilities  and  deferred  taxes) and letters of credit  outstanding  under the
credit agreement in the amount of $0.6 million.

     Borrowings under the credit agreement are limited to a maximum amount equal
to $20.0 million, subject to a borrowing base calculation and the achievement of
specified  financial  ratios  and  compliance  with  specified  conditions.   At
September 30, 1999 our company had available  $4.6 million under the credit line
facility. The

<PAGE>


interest rate for borrowings  under the credit agreement is determined from time
to time based on our  company's  choice of formulas,  plus a margin.  The credit
agreement will mature on December 31, 2002.

     The indentures and the credit  agreement  permit Holding and its Restricted
Subsidiaries to incur additional indebtedness, subject to specified limitations.
In addition,  the indentures  contains  restrictive  covenants that, among other
things,  limit the ability of Holding and its  Restricted  Subsidiaries  to: pay
dividends or make certain  restricted  payments;  issue preferred stock;  create
liens;  incur dividend and other payment  restrictions  affecting  subsidiaries;
enter into mergers,  consolidations  or sales of all or substantially all of the
assets of our company; enter into certain transactions with affiliates; and sell
certain assets.

     Payment of  Holding's  debentures  is not  guaranteed  by AKI or any of its
subsidiaries.   Because  Holding  is  a  holding  company  with  no  substantive
operations,  it is dependent upon the cash flows of AKI and its subsidiaries and
the  payment  of funds by AKI and its  subsidiaries  to  Holding  in the form of
loans, dividends or otherwise to pay its obligations.

     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 $1.5 million for the three months ended  September 30, 1998,  together
with borrowings under revolving credit facilities. During the three months ended
September 30, 1999, cash totaling $4.4 million was used by operating  activities
primarily due to the increase in accounts  receivable  and a decrease in accrued
interest offset partially by increases in accounts payable and accrued expenses.
Net cash  provided  by  operating  activities  during  the  three  months  ended
September  30,  1998  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 three  months  ended  September  30, 1999 and 1998,  our company had
capital   expenditures   of   approximately   $0.6  million  and  $0.7  million,
respectively.  These capital expenditures consisted primarily of the purchase of
manufacturing equipment and furniture and fixtures and maintaining and upgrading
its computer systems.

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom  Holdings Ltd. at a purchase  price of  approximately
$12.2 million and refinanced working capital  indebtedness of approximately $5.1
million of RetCom  Holdings Ltd. and its  subsidiaries.  The purchase  price and
refinancing  of  indebtedness  were initially  financed by borrowings  under the
credit agreement. 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.

     At September 30, 1999, Acquisition Corp. had outstanding (1) $33 million of
Floating  Rate Notes  which bear  interest  at  approximately  15% per annum and
mature on December  15,  2009,  and (2)  approximately  $50.8  million of Senior
Preferred Stock which accrue  dividends at 15% per annum and must be redeemed by
December 15,  2012.  Interest on the  floating  rate notes and  dividends on the
senior  preferred  stock may be  settled  through  the  issuance  of  additional
floating rate notes and senior  preferred stock through  maturity or redemption,
respectively.  The floating  rate notes are general,  unsecured  obligations  of
Acquisition  Corp. and are not obligations of, or guaranteed by Holding,  AKI or
any of its subsidiaries. Acquisition Corp. is a holding company and is dependant
upon the cash flows of its  subsidiaries  and the  payment to it of funds by its
subsidiaries.  The indenture relating to the debentures restricts the payment of
dividends or the making of other  restricted  payments by Holding to Acquisition
Corp.

     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.  A portion of the  proceeds  may become  available  to the

<PAGE>


Company to reduce  outstanding  indebtedness  of  Holding or AKI or for  working
capital or other general corporate  purposes,  but there is no obligation on the
part of Acquisition Corp. to make any of these funds available.

     Capital  expenditures  for the twelve months ending  September 30, 2000 are
budgeted to be  approximately  $4.0  million.  Based on  borrowings  outstanding
(other  than  pursuant to the credit  agreement)  as of  September  30, 1999 and
borrowings  outstanding  under the credit agreement as of November 11, 1999, our
company  expects  total cash  payments  for debt  service for the twelve  months
ending September 30, 2000 to be approximately $14.6 million, consisting of $12.1
million in  interest  payments  on the  notes,  $1.5  million  in capital  lease
obligations  and $1.0 million in interest  and fees under the credit  agreement.
Our company also expects to make royalty payments of approximately  $1.1 million
during the twelve months ending September 30, 2000.

     Our company  believes  that,  in the absence of future  acquisitions,  cash
flows from existing  operations and available  borrowings  will be sufficient to
fund budgeted capital  expenditures,  working capital  requirements and interest
and principal  payments on its  indebtedness,  including the  debentures and the
notes in the twelve months  ending  September 30, 2000. In the event our company
consummates  any additional  acquisitions  it may seek additional debt or equity
financings subject to compliance with the terms of the indentures.

     At September 30, 1999,  our  company's  cash and cash  equivalents  and net
working capital were $0.5 million and $17.3 million, respectively,  representing
a decrease in cash and cash  equivalents  of $6.5 million and an increase in net
working capital of $2.4 million from June 30, 1999. Account receivables, net, at
September  30,  1999  increased  60.5% or $9.9  million  over the June 30,  1999
amount,  primarily due to increased sales and the acquisition of Retcom Holdings
Ltd. offset partially by a decrease in days sales outstanding.

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
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 is  currently  working to resolve the  potential  impact of the
Year  2000  on  its  information  technology  systems  and  its  non-information
technology  systems so they will  properly  recognize  and utilize  dates beyond
December 31, 1999.


<PAGE>


     Our company has in place a Year 2000 program which is being  executed by an
internal  project  team.  The objective of the Year 2000 program is 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,  all of our
company's  systems  have been  assessed  for Year 2000  compliance.  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 currently 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.  If,  however,  all necessary  actions are not
taken on a timely  basis to ensure  Year 2000  compliance,  the Year 2000  issue
could have a material adverse effect on our company.

     To  date,  our  company  has  spent  approximately  $91,000  on  Year  2000
compliance.  Although our company expects the above referenced expenditures will
be  sufficient  to ensure our  company is Year 2000  compliant,  our company has
budgeted an additional  $9,000 for any unforeseen  problems which may arise with
respect to Year 2000  compliance  between October 1, 1999 and the Year 2000. All
expenditures  with respect to Year 2000  compliance  will be funded from working
capital.

     Our company is continuing to communicate with its significant customers and
vendors  to  understand  their  Year  2000  issues  and how they  might  prepare
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.

     Our company has not  formulated a  contingency  plan in the event it or its
significant customers or vendors are not Year 2000 compliant.

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,  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.


<PAGE>


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 September 30, 1999, our company's
forward exchange  contracts  consisted of forward  contracts to sell Euros at an
exchange rate of 1.0509 per U.S.  dollar and to buy British pound sterling at an
exchange rate of 1.6127 per U.S. dollar. The notational  principal amounts under
these  foreign   exchange   contracts   were  $0.6  million  and  $0.4  million,
respectively.

                            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
               27.3     Financial Data Schedule
               27.4     Financial Data Schedule


          (b)  Reports on Form 8-K

               On  September  21,  1999,  AKI  Holding  Corp.  filed a Form 8-K,
               reporting   the   acquisition   of  Retcom   Holdings   Ltd.  and
               subsidiaries  and  announced  earnings for the quarter and fiscal
               year ended June 30, 1999

<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 November 15, 1999                      By:      /s/ Kenneth A. Budde
                                                     ---------------------------
                                                     Kenneth A. Budde
                                                     Chief Financial Officer

                                            AKI, INC.

Date November 15, 1999                      By:      /s/ Kenneth A. Budde
                                                     ---------------------------
                                                     Kenneth A. Budde
                                                     Chief Financial Officer