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 December 31,1999

                                       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                                               74-2883163
(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 February 11, 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

               -    December 31, 1999 (unaudited)
               -    June 30, 1999

               Consolidated Condensed Statements of Operations

               -    Three months ended December 31, 1999 (unaudited)
               -    Three months ended December 31, 1998 (unaudited)
               -    Six months ended December 31, 1999 (unaudited)
               -    Six months ended December 31, 1998 (unaudited)

               Consolidated  Condensed  Statement  of Changes  in  Stockholder's
               Equity

               -    Six months ended December 31, 1999 (unaudited)

               Consolidated Condensed Statements of Cash Flows

               -    Six months ended December 31, 1999  (unaudited)
               -    Six months ended December 31, 1998 (unaudited)

               Notes to Consolidated Condensed Financial Statements



<PAGE>

     Item 1. Financial Statements (continued)

          AKI, Inc. and Subsidiaries

               Consolidated Condensed Balance Sheet

               -    December 31, 1999 (unaudited)
               -    June 30, 1999

               Consolidated Condensed Statements of Operations

               -    Three months ended December 31, 1999 (unaudited)
               -    Three months ended December 31, 1998 (unaudited)
               -    Six months ended December 31, 1999 (unaudited)
               -    Six months ended December, 1998 (unaudited)

               Consolidated  Condensed  Statement  of Changes  in  Stockholder's
               Equity

               -    Six months ended December 31, 1999 (unaudited)

               Consolidated Condensed Statements of Cash Flows

               -    Six months ended December 31, 1999 (unaudited)
               -    Six months ended December 31, 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 SHEETS
                (dollars in thousands, except share information)

                                                       December 31,    June 30,
                                                          1999           1999
                                                        ---------     ---------
                                                       (unaudited)

ASSETS
Current assets
Cash and cash equivalents ..........................    $     555     $   7,015
Accounts receivable, net ...........................       17,779        16,287
Inventory ..........................................        5,350         5,109
Prepaid expenses ...................................          361           484
Deferred income taxes ..............................          400           400
                                                        ---------     ---------

   Total current assets ............................       24,445        29,295

Property, plant and equipment, net .................       17,647        18,511
Goodwill, net ......................................      163,964       147,990
Other intangible assets, net .......................        6,195         6,560
Deferred charges, net ..............................        7,136         6,839
Deferred income taxes and other assets                      2,455         4,384
                                                        ---------     ---------

   Total assets ....................................    $ 221,842     $ 213,579
                                                        =========     =========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations .......    $   1,186     $     688
Accounts payable, trade ............................        2,498         3,400
Accrued income taxes ...............................          162           497
Accrued interest ...................................        6,023         6,047
Accrued expenses ...................................        5,846         3,810
                                                        ---------     ---------

   Total current liabilities .......................       15,715        14,442

Long-term portion of capital lease obligations .....          515         1,349
Revolving credit line ..............................        6,100          --
Senior notes .......................................      110,510       115,000
Senior discount debentures .........................       26,113        29,651
Deferred income taxes and other
 non-current liabilities ......................             4,423         3,340
                                                        ---------     ---------

   Total liabilities ...............................      163,376       163,782

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding ............         --            --
Additional paid-in capital .........................       86,435        78,364
Accumulated deficit ................................      (11,855)      (12,472)
Accumulated other comprehensive loss ...............         (384)         (365)
Carryover basis adjustment .........................      (15,730)      (15,730)
                                                        ---------     ---------

   Total stockholder's equity ......................       58,466        49,797
                                                        ---------     ---------


   Total liabilities and stockholder's equity ......    $ 221,842     $ 213,579
                                                        =========     =========

              The accompanying notes are an integral part of these
                  consolidated condensed 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                        Six months ended
                                                       -------------------------------------   -------------------------------------
                                                       December 31, 1999   December 31, 1998   December 31, 1999   December 31, 1998
                                                       -----------------   -----------------   -----------------   -----------------
                                                          (unaudited)         (unaudited)         (unaudited)         (unaudited)
<S>                                                         <C>                 <C>                 <C>                <C>
Net Sales ..........................................        $ 20,508            $ 20,437            $ 48,887           $ 44,461
Cost of goods sold .................................          13,288              13,660              29,080             29,081
                                                            --------            --------            --------           --------

    Gross profit ...................................           7,220               6,777              19,807             15,380

Selling, general and
    administrative expenses ........................           4,497               3,294               8,655              6,409
Amortization of goodwill and
    other intangibles ..............................           1,391               1,152               2,555              2,303
Gain from settlement of
    litigation, net ................................            (870)               --                  (870)              --
                                                            --------            --------            --------           --------

    Income from operations .........................           2,202               2,331               9,467              6,668

Other expenses:
    Interest expense, net ..........................           4,295               4,149               8,667              8,245
    Management fees and
        other, net .................................              62                  62                 125                125
                                                            --------            --------            --------           --------

Income (loss) before income
    taxes and extraordinary gain ...................          (2,155)             (1,880)                675             (1,702)

Income tax expense (benefit) .......................            (645)               (301)                904                201
                                                            --------            --------            --------           --------


Loss before extraordinary gain .....................          (1,510)             (1,579)               (229)            (1,903)

Extraordinary gain from early
    retirement of debt, net of tax .................             846                --                   846               --
                                                            --------            --------            --------           --------

    Net income (loss) ..............................        $   (664)           $ (1,579)           $    617           $ (1,903)
                                                            ========            ========            ========           ========
</TABLE>




              The accompanying notes are an integral part of these
                  consolidated condensed 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
   Acquisition Corp. (unaudited)..........                            8,071                                                  8,071

 Net income (unaudited)...................                                            617                                      617

 Other comprehensive income, net of
   tax:
     Foreign currency translation
         adjustment (unaudited)...........                                                         (19)                        (19)
                                                                                                                           -------
Comprehensive income (unaudited)..........                                                                                     598
                                             -------  --------    ---------     ---------     --------       --------      -------

Balances, December 31, 1999 (unaudited) ..     1,000  $     --    $  86,435     $ (11,855)    $   (384)      $(15,730)     $58,466
                                             =======  ========    =========     =========     ========       ========      =======
</TABLE>

              The accompanying notes are an integral part of these
                  consolidated condensed 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>
                                                                Six months ended
                                                       ------------------------------------
                                                       December 31, 1999  December 31, 1998
                                                       -----------------  -----------------
                                                          (unaudited)        (unaudited)
<S>                                                         <C>               <C>
Cash flows from operating activities
    Net income (loss) .................................     $    617          $ (1,903)
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
        Depreciation and amortization of goodwill
            and other intangibles .....................        4,734             4,374
        Amortization of debt discount .................        1,876             1,756
        Amortization of debt issuance costs ...........          401               329
        Deferred income taxes .........................        1,192              (918)
        Gain from early retirement of debt ............         (846)             --
        Other .........................................          (19)              116
        Changes in operating assets and liabilities:
            Accounts receivable .......................        1,167            (3,980)
            Inventory .................................          (90)           (2,660)
            Prepaid expenses, deferred charges
              and other assets ........................          213              (773)
            Income taxes ..............................          (32)            6,182
            Accounts payable and accrued expenses .....       (4,150)            5,937
                                                            --------          --------

            Net cash provided by
                operating activities ..................        5,063             8,460
                                                            --------          --------

Cash flows from investing activities
    Purchases of equipment ............................       (1,125)           (1,657)
    Payments for acquisitions, net of cash
        acquired ......................................      (16,162)             --
                                                            --------          --------

            Net cash used in investing activities .....      (17,287)           (1,657)
                                                            --------          --------

Cash flows from financing activities
    Payments under capital leases for equipment .......         (336)             (301)
    Net proceeds on line of credit ....................        6,100              --
        Repayment of other notes payable ..............         --              (1,330)
        Dividend paid to AHCI Acquisition Corp. .......         --              (1,863)
                                                            --------          --------

        Net cash provided by (used in) financing
          activities ..................................        5,764            (3,494)
                                                            --------          --------

Net increase (decrease) in cash and cash equivalents ..       (6,460)            3,309
Cash and cash equivalents, beginning of period ........        7,015             3,842
                                                            --------          --------

Cash and cash equivalents, end of period ..............     $    555          $  7,151
                                                            ========          ========

Supplemental information
    Cash paid (received) during the period for:
        Interest, other ...............................     $  6,177          $     89
        Income taxes ..................................           47            (5,062)

Significant non-cash activities
        Assets acquired under capital lease ...........         --            $    561
        Contribution of equity and retirement of
            senior discount debentures and senior notes     $  8,071              --
</TABLE>

              The accompanying notes are an integral part of these
                  consolidated condensed 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 Corp. (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  ("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 six months ended  December 31, 1999 include the results
     of RHL for the period from  September  15, 1999 to December 31,  1999.  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 December 31, 1999
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  1999 and  1998,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 1999 and 1998 and the interim consolidated condensed statement
     of changes in  stockholder's  equity for the six months ended  December 31,
     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)

2.   INVENTORY

          The following table details the components of inventory:

                                          December 31, 1999 June 30, 1999
                                          ----------------- -------------
                                             (unaudited)
               Raw materials
                   Paper ..................     $2,200          $1,088
                   Other raw materials ....      1,813           2,328
                                                ------          ------

               Net raw materials ..........      4,013           3,416
               Work in process ............      1,337           1,693
                                                ------          ------

               Net inventory ..............     $5,350          $5,109
                                                ======          ======

3.   RETIREMENT OF DEBT

          Acquisition  Corp.  purchased $8,750 of Holding Corp.  Senior Discount
     Debentures  and $4,490 of AKI,  Inc.  Senior  Notes for $4,075 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 December 31, 1999 (unaudited) and
     June  30,  1999  and  condensed   statements  of  operations,   changes  in
     stockholder's  equity and cash flows for the six months ended  December 31,
     1999 (unaudited) and 1998 (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.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                             December 31, 1999      June 30, 1999
                                                             -----------------      -------------
                                                                (unaudited)
<S>                                                              <C>                  <C>
     Assets
     Cash ..................................................     $    --              $    --
     Investment in subsidiaries ............................        98,069               92,817
     Deferred charges ......................................         1,212                1,520
     Deferred income taxes .................................         1,412                1,206
                                                                 ---------            ---------

         Total assets ......................................     $ 100,693            $  95,543
                                                                 =========            =========

     Liabilities
     Senior discount debentures ............................     $  26,113            $  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 ............................        86,435               78,364
     Accumulated deficit ...................................       (11,855)             (12,472)
                                                                 ---------            ---------

         Total stockholder's equity ........................        74,580               65,892
                                                                 ---------            ---------

         Total liabilities and stockholder's equity ........     $ 100,693            $  95,543
                                                                 =========            =========
</TABLE>


                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   Six months ended
                                                        -----------------------------------
                                                        December 31, 1999 December 31, 1998
                                                        ----------------- -----------------
                                                           (unaudited)       (unaudited)
<S>                                                          <C>               <C>
     Equity in net income (loss) of subsidiaries .......     $ 1,256           $  (697)
     Interest expense ..................................       1,926             1,791
                                                             -------           -------

         Loss before income taxes and extraordinary gain        (670)           (2,488)

     Income tax benefit ................................        (628)             (585)
                                                             -------           -------

         Loss before extraordinary gain ................         (42)           (1,903)

     Extraordinary gain from early retirement of debt ..         659              --
                                                             -------           -------

         Net income (loss) .............................     $   617           $(1,903)
                                                             =======           =======
</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>
                                                    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

     Equity contribution by AHC I
         Acquisition Corp. ................                                  8,071                      8,071

     Net income (unaudited) ...............                                                 617           617
                                                --------     --------     --------     --------      --------

     Balance, December 31, 1999 (unaudited)        1,000     $   --       $ 86,435     $(11,855)     $ 74,580
                                                ========     ========     ========     ========      ========
</TABLE>



                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 Six months ended
                                                     -----------------------------------------
                                                     December 31, 1999       December 31, 1998
                                                     -----------------       -----------------
                                                         (unaudited)            (unaudited)
<S>                                                        <C>                    <C>
     Cash flows from operating activities
       Net income (loss) .............................     $   617                $(1,903)
         Adjustments to reconcile net loss to net cash
           provided by operating activities:
           Net change in investment in subsidiaries ..      (1,256)                   697
           Amortization of debt discount .............       1,876                  1,756
           Amortization of debt issuance costs .......          50                     44
           Deferred income taxes .....................        (628)                  (585)
           Gain from early retirement of debt ........        (659)                  --
           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 notes    $ 8,071                   --

       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)

                                                      December 31,     June 30,
                                                          1999           1999
                                                       ---------      ---------
                                                      (unaudited)

ASSETS
Current assets
Cash and cash equivalents ........................     $     555      $   7,015
Accounts receivable, net .........................        17,779         16,287
Inventory ........................................         5,350          5,109
Prepaid expenses .................................           361            484
Deferred income taxes ............................           400            400
                                                       ---------      ---------

   Total current assets ..........................        24,445         29,295

Property, plant and equipment, net ...............        17,647         18,511
Goodwill, net ....................................       163,964        147,990
Other intangible assets, net .....................         6,195          6,560
Deferred charges, net ............................         5,924          5,319
Deferred income taxes and other assets                     1,043          3,178
                                                       ---------      ---------

   Total assets ..................................     $ 219,218      $ 210,853
                                                       =========      =========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations .....     $   1,186      $     688
Accounts payable, trade ..........................         2,498          3,400
Accrued income taxes .............................           162            497
Accrued interest .................................         6,023          6,047
Accrued expenses .................................         5,866          3,810
                                                       ---------      ---------

   Total current liabilities .....................        15,715         14,442

Long-term portion of capital lease obligations ...           515          1,349
Revolving credit line ............................         6,100           --
Senior notes .....................................       110,510        115,000
Deferred income taxes and other
   non-current liabilities........................         4,423          3,340
                                                       ---------      ---------
   Total liabilities .............................       137,263        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 ..............................        (6,789)        (8,045)
Accumulated other comprehensive loss .............          (384)          (365)
Carryover basis adjustment .......................       (15,730)       (15,730)
                                                       ---------      ---------

   Total stockholder's equity ....................        81,955         76,722
                                                       ---------      ---------

   Total liabilities and stockholder's equity ....     $ 219,218      $ 210,853
                                                       =========      =========


              The accompanying notes are an integral part of these
                  consolidated condensed 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                       Six months ended
                                                       -------------------------------------   -------------------------------------
                                                       December 31, 1999   December 31, 1998   December 31, 1999   December 31, 1998
                                                       -----------------   -----------------   -----------------   -----------------
                                                          (unaudited)         (unaudited)         (unaudited)         (unaudited)
<S>                                                         <C>                 <C>                 <C>                 <C>
Net sales ..........................................        $ 20,508            $ 20,437            $ 48,887            $ 44,461
Cost of goods sold .................................          13,288              13,660              29,080              29,081
                                                            --------            --------            --------            --------

    Gross profit ...................................           7,220               6,777              19,807              15,380
Selling, general and
    administrative expenses ........................           4,497               3,294               8,655               6,409
Amortization of goodwill and
    other intangibles ..............................           1,391               1,152               2,555               2,303
Gain from settlement of
    litigation, net ................................            (870)               --                  (870)               --
                                                            --------            --------            --------            --------

    Income from operations .........................           2,202               2,331               9,467               6,668

Other expenses:
    Interest expense to others, net ................           3,393               3,244               6,741               6,454
    Management fees and
        other, net .................................              62                  62                 125                 125
                                                            --------            --------            --------            --------

Income (loss) before income taxes and
    extraordinary gain .............................          (1,253)               (975)              2,601                  89

Income tax expense (benefit) .......................            (353)                 (5)              1,532                 786
                                                            --------            --------            --------            --------

    Income (loss) before
extraordinary ......................................            (900)               (970)              1,069                (697)
        gain

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

    Net income (loss) ..............................        $   (713)           $   (970)           $  1,256            $   (697)
                                                            ========            ========            ========            ========
</TABLE>


              The accompanying notes are an integral part of these
                  consolidated condensed 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) .....................                                           1,256                                  1,256

Other comprehensive income, net of tax:
     Foreign currency translation
       adjustment (unaudited) ..............                                                          (19)                      (19)
                                                                                                                           --------

Comprehensive income (unaudited) ...........                                                                                  1,237
                                                --------    --------    --------    --------     --------     --------     --------

Balances, December 31, 1999 (unaudited) ....       1,000    $   --      $104,858    $ (6,789)    $   (384)    $(15,730)    $ 81,955
                                                ========    ========    ========    ========     ========     ========     ========
</TABLE>



              The accompanying notes are an integral part of these
                  consolidated condensed 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>
                                                                 Six months ended
                                                       -----------------------------------
                                                       December 31, 1999 December 31, 1998
                                                       ----------------- -----------------
                                                          (unaudited)       (unaudited)
<S>                                                         <C>              <C>
Cash flows from operating activities
    Net income (loss) ..............................           1,256             (697)
    Adjustments to reconcile net income to
      net cash provided by operating activities:
        Depreciation and amortization of goodwill
            and other intangibles ..................           4,734            4,374
        Amortization of debt issuance cost .........             351              285
        Deferred income taxes ......................           1,820             (334)
        Gain from early retirement of debt .........            (187)            --
        Other ......................................             (19)             116
        Changes in operating assets and liabilities:
           Accounts receivable .....................           1,167           (3,980)
           Inventory ...............................             (90)          (2,660)
           Prepaid expenses, deferred charges
             and other assets ......................             213             (425)
           Income taxes ............................             (32)           6,182
           Accounts payable and accrued expenses ...          (4,150)           5,937
                                                            --------         --------

           Net cash provided by
                   operating activities ............           5,063            8,798
                                                            --------         --------

Cash flows from investing activities
    Purchases of equipment .........................          (1,125)          (1,657)
    Payments for acquisitions, net of cash
        acquired ...................................         (16,162)            --
                                                            --------         --------

            Net cash used in investing activities ..         (17,287)          (1,657)
                                                            --------         --------

Cash flows from financing activities
    Payments under capital leases for equipment ....            (336)            (301)
    Net proceeds on line of credit .................           6,100             --
    Repayment of other notes payable ...............            --             (1,330)
                                                            --------         --------

        Net cash provided by (used in) financing
           activities ..............................           5,764           (1,631)
                                                            --------         --------

Net increase (decrease) in cash and cash equivalents          (6,460)           5,510
Cash and cash equivalents, beginning of period .....           7,015            1,641
                                                            --------         --------
Cash and cash equivalents, end of period ...........        $    555         $  7,151
                                                            ========         ========

Supplemental information
    Cash paid (received) during the period for:
        Interest, other.............................           6,177         $     89
        Income taxes................................              47           (5,062)

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 condensed 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 Corp. (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  ("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 six months ended  December 31, 1999 include the results
     of RHL for the period from  September  15, 1999 to December 31,  1999.  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 December 31, 1999
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  1999 and  1998,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 1999 and 1998 and the interim consolidated condensed statement
     of changes in  stockholder's  equity for the six months ended  December 31,
     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>

2.   INVENTORY

     The following table details the components of inventory:

                                    December 31, 1999   June 30, 1999
                                    -----------------   -------------
                                       (unaudited)
          Raw materials
              Paper .............        $2,200             $1,088
              Other raw materials         1,813              2,328
                                         ------             ------

          Net raw materials .....         4,013              3,416
          Work in process .......         1,337              1,693
                                         ------             ------

          Net inventory .........        $5,350             $5,109
                                         ======             ======

3.   RETIREMENT OF DEBT

          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 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.

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  December  31,  1999  Compared to Three  Months  Ended
December 31, 1998

     Net  Sales.  Net  sales for the  three  months  ended  December  31,  1999,
increased  $0.1 million,  or 0.5%, to $20.5 million as compared to $20.4 million
for the three months  ended  December  31,  1998.  The  increase  was  primarily
attributable  to  increases  in  domestic  sales of  sampling  technologies  for
advertising and marketing of cosmetics and consumer  products and sales from the
RHL acquired  businesses offset by decreases in domestic and international sales
of sampling technologies for advertising and marketing of fragrance products.

     Gross  Profit.  Gross profit for the three months ended  December 31, 1999,
increased $0.4 million, or 5.9%, to $7.2 million as compared to $6.8 million for
three months ended December 31, 1998.  Gross profit as a percentage of net sales
increased to 35.1% in the three months  ended  December 31, 1999,  from 33.3% in
the three months ended December 31, 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 December 31, 1999, increased
$1.2 million, or 36.4% to $4.5 million as compared to $3.3 million for the three
months  ended  December  31,  1998.   The  increase  in  selling,   general  and
administrative  expenses  was  primarily  due to  increased  compensation  costs
including additional personnel associated with the operation of RHL. As a result
of these factors,  selling,  general and administrative expenses as a percent of
net sales  increased to 22.0% in the three  months ended  December 31, 1999 from
16.2% in the three months ended December 31, 1998.

     Income from  Operations.  Income from operations for the three months ended
December 31, 1999 decreased  $0.1 million,  or 4.4%, to $2.2 million as compared
to $2.3  million for the three  months  ended  December  31,  1998.  Income from
operations  included  a net  gain of $0.9  million  resulting  from a  favorable
litigation  settlement  with the  sellers of Arcade  Holding  Corp.  Income from
operations as a percentage  of net sales  decreased to 10.7% in the three months
ended  December  31, 1999,  from 11.3% in three months ended  December 31, 1998,
principally  as a  result  of  increased  selling,  general  and  administrative
expenses.

     Interest Expense.  Interest expense for the three months ended December 31,
1999  increased  $0.2  million,  or 4.9% to $4.3  million,  as  compared to $4.1
million for the three months ended December 31, 1998. Interest



<PAGE>

expense as a  percentage  of net sales  increased  to 21.0% in the three  months
ended  December 31, 1999 from 20.1% in the three months ended December 31, 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 RHL  acquisition  offset  partially  by a decrease in  interest  expense
related to the repurchase and retirement of certain Senior  Discount  Debentures
and Senior Notes.

     Interest  expense  for AKI for the three  months  ended  December  31, 1999
increased $0.2 million, or 6.3% to $3.4 million, as compared to $3.2 million for
the three months ended  December 31, 1998.  Interest  expense as a percentage of
net sales  increased to 16.6% in the three  months ended  December 31, 1999 from
15.7% in the three  months ended  December  31,  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 RHL acquisition offset
partially  by a decrease  in  interest  expense  related to the  repurchase  and
retirement of certain Senior Notes.

     Income Tax Benefit.  Income tax benefit for the three months ended December
31, 1999  increased  $0.3  million to $0.6  million.  The increase is due to the
decrease 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 35.6% in the three months ended  December 31, 1999 and 32.8% in
the three months ended December 31, 1998.

     Income tax benefit for AKI for the three  months  ended  December  31, 1999
increased  $0.4 million to $0.4 million.  The increase is due to the decrease 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 three months ended December 31, 1999 and 1998.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early retirement of debt of $0.8 million for the three months ended December 31,
1999 resulted from the purchase and subsequent  contribution of Senior Notes and
Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities
were subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.2 million
for the three  months  ended  December  31, 1999  resulted  from the purchase of
Senior Notes by AHC I  Acquisition  Corp.  and  subsequent  contribution  by AKI
Holding Corp. The contributed securities were subsequently retired.

     EBITDA. EBITDA for the three months ended December 31, 1999, increased $0.2
million,  or 4.4%,  to $4.7  million as compared  to $4.5  million for the three
months ended December 31, 1998. The increase  principally  reflects the increase
in income from operations  discussed above.  EBITDA as a percentage of net sales
was 22.9%  and  22.1% in the three  months  ended  December  31,  1999 and 1998,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other intangibles.

     Six Months Ended  December 31, 1999  Compared to Six Months Ended  December
31, 1998

     Net Sales. Net sales for the six months ended December 31, 1999,  increased
$4.4 million, or 9.9%, to $48.9 million as compared to $44.5 million for the six
months ended  December 31, 1998.  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 businesses offset by decreases
in domestic and international sales of sampling technologies for advertising and
marketing of fragrance products.

     Gross  Profit.  Gross  profit for the six months  ended  December 31, 1999,
increased $4.4 million,  or 28.6%, to $19.8 million as compared to $15.4 million
for six months  ended  December 31,  1998.  Gross profit as a percentage  of net
sales  increased to 40.5% in the six months ended December 31, 1999,  from 34.6%
in the six months  ended  December  31,  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.



<PAGE>

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the six months ended  December 31, 1999,  increased
$2.3  million,  or 35.9% to $8.7 million as compared to $6.4 million for the six
months  ended  December  31,  1998.   The  increase  in  selling,   general  and
administrative  expenses  was  primarily  due to  increased  compensation  costs
including  personnel  expenses  associated with the operation and acquisition of
RHL,  increased  sales  commissions  related to the  increase  in net  sales,  a
severance charge related to a former executive, and an increase in the allowance
for  doubtful  accounts.  As a result of these  factors,  selling,  general  and
administrative  expenses as a percent of net sales increased to 17.8% in the six
months ended  December 31, 1999 from 14.4% in the six months ended  December 31,
1998.

     Income from  Operations.  Income from  operations  for the six months ended
December 31, 1999 increased $2.8 million,  or 41.8%, to $9.5 million as compared
to $6.7  million  for the six  months  ended  December  31,  1998.  Income  from
operations  included  a net  gain of $0.9  million  resulting  from a  favorable
litigation  settlement  with the  sellers of Arcade  Holding  Corp.  Income from
operations  as a  percentage  of net sales  increased to 19.4% in the six months
ended  December  31,  1999,  from 15.1% in six months  ended  December 31, 1998,
principally as a result of the factors described above.

     Interest  Expense.  Interest  expense for the six months ended December 31,
1999,  increased  $0.5  million,  or 6.1% to $8.7  million,  as compared to $8.2
million  for the six months  ended  December  31,  1998.  Interest  expense as a
percentage of net sales  decreased to 17.8% in the six months ended December 31,
1999 from 18.4% in the six months  ended  December  31,  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  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 six  months  ended  December  31,  1999,
increased $0.2 million, or 3.1% to $6.7 million, as compared to $6.5 million for
the six months ended December 31, 1998.  Interest expense as a percentage of net
sales  decreased to 13.7% in the six months ended December 31, 1999,  from 14.6%
in the six months ended  December 31,  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 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 six months  ended  December
31, 1999  increased  $0.7  million to $0.9  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 45.3% in the six months ended December 31, 1999 and 89.7% in the
six months ended December 31, 1998.

     Income tax  expense  for AKI for the six months  ended  December  31,  1999
increased  $0.7 million to $1.5 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 six months ended December 31, 1999 and 1998.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early  retirement of debt of $0.8 million for the six months ended  December 31,
1999 resulted from the purchase and subsequent  contribution of Senior Notes and
Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities
were subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.2 million
for the six months ended  December 31, 1999 resulted from the purchase of Senior
Notes by AHC I Acquisition  Corp.  and  subsequent  contribution  by AKI Holding
Corp. The contributed securities were subsequently retired.

     EBITDA.  EBITDA for the six months ended December 31, 1999,  increased $3.2
million,  or 29.1%,  to $14.2  million as compared to $11.0  million for the six
months ended December 31, 1998. The increase  principally  reflects the increase
in income from operations  discussed above.  EBITDA as a percentage of net sales
was  29.0%  and  24.7% in the six  months  ended  December  31,  1999 and  1998,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other intangibles.



<PAGE>

Liquidity and Capital Resources

     Our company has  substantial  indebtedness  and  significant  debt  service
obligations.  As of December 31, 1999, our company had consolidated indebtedness
in an aggregate  amount of $144.4 million  (excluding  trade  payables,  accrued
liabilities,  deferred taxes and other  non-current  liabilities),  of which (1)
approximately  $26.1 million was a direct  obligation of Holding relating to its
debentures and (2)  approximately  $118.3 million was a direct obligation of AKI
relating to its notes,  revolving credit line and capital leases.  Borrowings at
December 31, 1999 included $6.1 million  under the  revolving  credit  agreement
that was  incurred to finance the  acquisition  of RHL. At December 31, 1999 our
company had available $13.3 million under the credit line facility.  At December
31,  1999,  AKI also had $19.0  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.

     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 $5.1 million and $8.5  million for the six months  ended  December 31,
1999 and 1998,  respectively,  together with borrowings  under revolving  credit
facilities.  During the six months ended December 31, 1999, net cash provided by
operating   activities   resulted  from  net  income  before   depreciation  and
amortization and decreases in accounts receivable and inventory offset partially
by  decreases in accounts  payable and accrued  expenses.  Net cash  provided by
operating activities during the six months ended December 31, 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 six months ended December 31, 1999 and 1998, our company had capital
expenditures of approximately $1.1 million and $1.7 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 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.



<PAGE>


     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 six months ending June 30, 2000 are currently
estimated to be  approximately  $2.9 million.  Based on  borrowings  outstanding
(other  than  pursuant  to the credit  agreement)  as of  December  31, 1999 and
borrowings  outstanding  under the credit agreement as of February 11, 2000, our
company  expects  total cash payments for debt service for the six months ending
June 30, 2000 to be  approximately  $6.8 million,  consisting of $5.8 million in
interest  payments on the notes,  $0.4 million in capital lease  obligations and
$0.6 million in interest and fees under the credit  agreement.  Our company also
expects to make royalty  payments of  approximately  $0.8 million during the six
months ending June 30, 2000.

     At December 31,  1999,  our  company's  cash and cash  equivalents  and net
working capital were $0.6 million and $8.7 million, respectively, representing a
decrease  in cash and cash  equivalents  of $6.4  million  and a decrease in net
working capital of $6.2 million from June 30, 1999. Account receivables, net, at
December 31, 1999  increased 9.2% or $1.5 million over the June 30, 1999 amount,
primarily due to increased sales and the acquisition of RHL.

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



<PAGE>

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,  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 December 31, 1999,  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: February 14, 2000              By: /s/ Kenneth A. Budde
                                         --------------------------------------
                                         Kenneth A. Budde
                                         Senior Vice President & Chief Financial
                                         Officer

                                     AKI, INC.

Date: February 14, 2000              By: /s/ Kenneth A. Budde
                                         --------------------------------------
                                         Kenneth A. Budde
                                         Senior Vice President & Chief Financial
                                         Officer