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                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
 
                               ----------------
 
                                   FORM 10-K
 
               FOR ANNUAL REPORT AND TRANSITION REPORTS PURSUANT
         TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                                      or
 
[_] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
 
                For the Transition Period From       to      .
 
                       Commission File Number: 333-48821
 
                               IMPAC GROUP, INC.
            (Exact Name of Registrant as Specified in Its Charter)
 
               DELAWARE                              23-2923682
                                         (I.R.S. EmployerIdentification No.)
    (State or other jurisdiction of
    incorporation or organization)
 
             1950 North Ruby Street, Melrose Park, Illinois 60160
                   (Address of Principal Executive Offices)
 
              Registrant's telephone number, including area code
                                (708) 344-9100
 
                               ----------------
 
       Securities registered pursuant to Section 12(b) of the Act: None
 
<TABLE>
<CAPTION>
             Title of each class Name of each exchange on which registered
             ------------------- -----------------------------------------
<S>                              <C>
       None                                        None
</TABLE>
 
       Securities registered pursuant to Section 12(g) of the Act: None:
 
   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
   Number of shares of Series A Common Stock, $0.001 par value per share (the
"Series A Common Stock") and Series B Common Stock, $0.001 par value per share
(the "Series B Common Stock" and, together with the Series A Common Stock, the
"Common Stock") outstanding as of the close of business on March 15, 1999:
 
<TABLE>
<CAPTION>
                    Class Number of Shares Outstanding
                    ----- ----------------------------
<S>                       <C>
Series A Common Stock               161,658
Series B Common Stock                4,500
</TABLE>
 
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<PAGE>
 
                                    CONTENTS
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>       <S>                                                             <C>
                                    PART I
 Item  1.  Business.....................................................     1
 Item  2.  Properties...................................................     8
 Item  3.  Legal Proceedings............................................     9
 Item  4.  Submission of Matters to Vote of Security Holders............     9
 
                                    PART II
 
 Item  5.  Market for Registrant's Common Equity and Related Stockholder
            Matters.....................................................    10
 Item  6.  Selected Pro Forma and Historical Financial Data.............    12
 Item  7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................    14
 Item  7A. Quantitative and Qualitative Disclosures About Market Risk...    26
 Item  8.  Financial Statements and Supplementary Data..................    27
 Item  9.  Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure....................................    27
 
                                   PART III
 
 Item 10.  Directors and Executive Officers of the Registrant...........    28
 Item 11.  Executive Compensation.......................................    31
 Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................    34
 Item 13.  Certain Relationships and Related Transactions...............    36
 
                                    PART IV
 
 Item 14.  Exhibits, Financial Statements Schedules and Reports on Form
            8-K.........................................................    40
</TABLE>
 
                                       i
<PAGE>
 
                                    PART I.
 
ITEM 1. BUSINESS
 
Company Overview
 
   IMPAC Group, Inc. ("IMPAC" or the "Registrant", and, collectively with its
consolidated subsidiaries, the "Company") is an international designer,
manufacturer and marketer of high-end, value-added specialty packaging for
various consumer products markets including entertainment, cosmetics and
personal care. The Company offers innovative specialty packaging solutions for
customers that seek to differentiate their products in the consumer
marketplace. In addition, the Company utilizes a broad range of paper,
paperboard and transparent rigid plastic materials for its products. As used
in this Annual Report on Form 10-K (the "Report"), the terms "fiscal 1996",
"fiscal 1997", "fiscal 1998" and "fiscal 1999" refer to the fiscal years of
the Company ended or ending on December 31 of the applicable calendar year.
 
   The Company has built strong relationships with marketing-driven customers
in diverse industries, including Avon Products, Inc. and Revlon Consumer
Products Corporation in the cosmetics industry, EMI Group plc ("EMI")
(including the Capitol and Virgin Records labels), Universal Music Group (a
business unit of the Seagram Company Ltd. including the Geffen, Mercury and
Motown labels) and Fox Entertainment Group, Inc. in the entertainment
industry, and Clairol, Inc. and Colgate-Palmolive Company in the personal care
industry. In the entertainment industry, examples of the Company's products
include printed paper inserts for standard compact disc ("CD") packaging as
well as specialty paperboard-based CD packaging and specialty packaging for
home videos and digital versatile discs ("DVD"). In the cosmetics and personal
care industries, the Company offers products such as paperboard and plastic
folding cartons, transparent rigid plastic toothbrush packages and windowed
boxes made of paperboard and transparent rigid plastic for face creams,
lipsticks and other skin care products.
 
   In March, 1998, KFI Holding Corporation ("KFI"), the parent company of
Klearfold, Inc. ("Klearfold") acquired AGI Incorporated ("AGI"). Upon
completion of the acquisition of AGI, KFI changed its name to "IMPAC Group,
Inc." This combination of AGI and Klearfold under common ownership is referred
to as the "Combination". AGI is a supplier of standard and specialty printed
packaging in the United States for the entertainment, cosmetics and personal
care industries. Klearfold is a supplier of innovative display packaging using
specialty windowed folding cartons that combine rigid plastic film with
paperboard for the cosmetics and other consumer products industries.
Subsequently, in September 1998, the Company acquired all of the issued and
outstanding shares of capital stock of Tinsley Robor plc (together with its
subsidiaries, "Tinsley", with the acquisition referred to as the "Tinsley
Acquisition"). Similar to the Company's domestic operations, Tinsley is a
supplier of printed packaging for the United Kingdom music and multimedia
markets and has an established presence in Europe. Tinsley's plants in the
U.K., The Netherlands, Ireland and Austria enable it to offer fast turn around
times, high quality and large volumes to satisfy customer demand. Tinsley also
provides design and pre-press services to a wide customer base from its
operations in the U.K. and has facilities which produce self-adhesive labels.
 
   In March, 1998, IMPAC issued $100,000,000 aggregate principal amount of its
10 1/8% Senior Subordinated Notes due 2008 (the "Original Notes") in a
transaction exempt from the registration requirements under the Securities Act
of 1933, as amended (the "Offering"). In October 1998, IMPAC exchanged
$100,000,000 in aggregate principal amount of its 10 1/8% Senior Subordinated
Notes due 2008, Series B (the "Exchange Notes") that had been registered under
the Securities Act of 1933, as amended, for a like principal amount of the
Original Notes, which were retired. Each of the Exchange Notes and the
Original Notes have been guaranteed by certain of IMPAC's subsidiaries (the
"Subsidiary Guarantors"). The Exchange Notes are referred to hereinafter
interchangeably with the Original Notes as the "Senior Subordinated Notes".
 
                                       1
<PAGE>
 
Business Information
 
 Product and Services
 
   The Company designs, manufactures and markets high-end specialty packaging
for a variety of applications in the consumer products industry. The Company
believes it offers its customers one of the most extensive product lines in
the specialty packaging industry. Principal product areas include (i) standard
music packaging, (ii) specialty music packaging, (iii) multimedia packaging,
(iv) specialty video packaging, (v) paperboard folding cartons, (vi) plastic
folding cartons, (vii) specialty windowed folding cartons, (viii) rigid
paperboard set-up boxes, (ix) self-adhesive labels, and (x) design and pre-
press services. The following table details the proprietary products sold by
the Company:
 
<TABLE>
<CAPTION>
 Product                        Description                          Sample Applications
 -------                        -----------                          -------------------
 <C>             <S>                                         <C>
 DIGIPAK(R)       A paperboard-based package that can        Music releases by leading artists
                  fold open in a variety of ways and hold    such as Pearl Jam, Eric Clapton,
                  single or multiple CDs as well as DVDs.    Counting Crows, Beastie Boys and R.
                                                             Kelly.
 
 Digilite(TM)     A lighter version of the DIGIPAK           Music releases by leading artists
                  typically utilized for packaging CD        such as Kenny G, Carly Simon and
                  singles.                                   Duran Duran.
 
 DIGI-BOKS(R)     A rigid one-piece paperboard set-up box    Multi-CD boxed releases by The
                  used in a wide variety of applications.    Police and Frank Sinatra and multi-
                                                             product cosmetics packages including
                                                             Ralph Lauren(R) and Polo Sport(R).
 
 Klearfold(R)     Plastic folding cartons produced from      Colgate's toothbrush line, Jockey(R)
                  transparent rigid plastic, offering        International, Inc. brand underwear,
                  maximum visibility for the consumer        Clairol's haircolor products and
                  product at the retail level.               Totes(R) umbrellas.
 
 Duofold(R)       Durable, windowed boxes made from          Chesebrough-Pond's(R) skin care
                  paperboard and scored rigid film.          products and Revlon's Colorstay(R)
                  Because the Company's rigid film can       lipsticks and mascara.
                  wrap around any edge, Duofold(R)
                  cartons allow far more visibility than
                  conventional windowed cartons.
 
 KlearPOP(TM)     Plastic folding cartons which utilize      BIC(R) writing instruments, Andes(R)
                  Klearfold transparent packaging to         candies and other products
                  provide multi-unit dispensers and          frequently sold at impulse purchase
                  displays that can be hung or placed on     locations.
                  shelves.
 
 KlearForm(TM)    An alternative type of plastic folding     Small consumer products such as
                  carton which combines thermoformed         pocket knives and personal care
                  plastic parts with printed film. The       products.
                  result is a striking package that holds
                  the packaged product securely.
 
 Hologravure(TM)  Licensed three-dimensional printing        Point-of-sale posters, packaging for
                  technology that provides a cost-           CDs and candy and other consumer
                  effective means of adding three-           products packaging such as labels
                  dimensional visual effects to standard     for Apple's iMac(R) personal
                  transparent plastic materials.             computers.
</TABLE>
 
   Set forth below is a description of the categories of products sold by the
Company utilizing the proprietary products described above as well as various
other products.
 
   Standard Music Packaging. The Company's standard music packaging products
for CDs, cassette tapes and computer games include paper inlay cards, folders
and booklets for CD jewel boxes and insert cards for
 
                                       2
<PAGE>
 
cassette tape boxes, as well as the Company's patented DIGIPAK(R) and
Digilite(TM) products. The Company provides standard CD and cassette packaging
components to a wide variety of customers in the recorded music industry.
These products are manufactured in a variety of size configurations and
process printing color combinations. Examples of the Company's recent standard
music packaging include the CD inserts for Sheryl Crow's The Globe Sessions
and the soundtrack for The Prince of Egypt.
 
   Specialty Music Packaging. The Company's creative staff often works in
close collaboration with music customers to create and develop ideas for
unique or unusual custom packaging. These packages are designed to be highly
distinctive and often incorporate a variety of materials and advanced
manufacturing processes into a single package. The Company's patented
DIGIPAK(R), Digilite(TM) and DIGIBOKS(R) products have provided the recorded
music industry with the flexibility to create innovative and interesting CD
packaging. Specialty music packages have been used for music releases such as
Madonna's Ray of Light and The Complete Hank Williams box set, both of which
won Grammy Awards in 1999 for package design.
 
   Multimedia Packaging. The Company's multimedia packaging for CD-ROM
applications include many of the same CD packaging components sold to music
customers such as paper inlay cards, folders and booklets for CD jewel boxes
as well as DIGIPAK(R) products. In addition, the Company supplies folding
cartons to certain customers in this market. The Company also provides paper
packaging components such as booklets and tray cards for cassette based
computer games. Examples of the Company's recent multimedia packaging include
Sony Playstation's NHL Powerplay '98 and GT Interactive's Deer Hunter II.
 
   Specialty Video Packaging. In the home video market, the Company provides
paperboard packaging for major event titles and multi-title collections
combined for re-release principally directed to the sell-through market. The
Company manufactures specialty video packaging utilizing any combination of
its innovative manufacturing processes and its well-developed network of
specialized outside suppliers. Creative specialty video packages were recently
utilized for the Star Wars and James Bond 007 multi-title video collections as
well as the Titanic video release.
 
   Paperboard Folding Cartons. Premium paperboard folding cartons are
manufactured using a variety of production and design techniques including
special prints and coatings, foil stamping, laminates and other special
materials which help customers achieve product differentiation and add to the
perceived value of the product. Premium paperboard folding cartons are used to
package a wide variety of products for the Company's cosmetics and personal
care customers and are frequently included in packaging solutions for CD-ROM
multimedia industry customers.
 
   Plastic Folding Cartons. The Company manufacturers plastic folding cartons
under the Klearfold(R), KlearPOP(TM) and KlearForm(TM) brand names. The vast
majority of these cartons are produced from transparent rigid plastic film,
offering maximum visibility of the product packaged in the carton. Like more
conventional folding cartons produced from paperboard, Klearfold(R) cartons
ship and store in flat form, minimizing storage space. The Company's patented
Soft Crease feature enables Klearfold(R) cartons to be used easily and
effectively in manual or automatic filling of its cartons on its customers'
packaging lines. In addition, the Company's manufacturing process produces a
Smooth Edge feature, which minimizes sharp edges along the perimeter of the
cartons and provides safer handling than most competitive products. The
Company prints on the plastic film used in the manufacture of its products,
offering a variety of printing processes to enhance the package's appearance.
Klearfold(R) cartons are also manufactured from tinted, opaque, or embossed
plastic film, increasing the options available to customers.
 
   Specialty Windowed Folding Cartons. The Company has created its line of
Duofold(R) cartons in order to offer many of the benefits of its fully
transparent cartons, in combination with the advantages of additional graphics
capabilities and rigidity offered by incorporating paperboard into the
package. In addition, by substituting less expensive paperboard for plastic in
a portion of the carton, Duofold(R) cartons are more cost efficient than all-
plastic cartons. Unlike the typical thin film in windowed cartons, the rigid
film used in Duofold(R) cartons resists tearing and puncturing and contributes
to the stability of the carton. Additionally, the Duofold(R)
 
                                       3
<PAGE>
 
manufacturing process allows the transparent rigid plastic film to wrap around
any edge of the carton without compromising structural strength. Duofold(R)
cartons are available in a wide variety of structures that can be stacked,
racked or hung in virtually any configuration without sacrificing visual
impact or display density. Also, as with Klearfold(R) transparent cartons,
Duofold(R) cartons are shipped flat, can be easily set up manually or
automatically, and can be enhanced using a wide variety of processes,
including printing directly on the transparent film portion of the package.
Examples of products utilizing Duofold(R) cartons include Chesebrough-
Pond's(R) Skin Cream and Revlon's Colorstay(R) lipsticks and mascara.
 
   Rigid Paperboard Set-Up Boxes. The Company's licensed DIGIBOKS(R) product
and the Company's two-piece rigid setup boxes are used to provide creative
packaging solutions for special music releases, special promotions and
cosmetics boxed sets which include multiple products. Most notably, these
products have been used to package multi-CD boxed releases by John Lennon and
The Smashing Pumpkins and to package Ralph Lauren Safari(R) and Polo Sport(R)
multi-product sets.
 
   Self-Adhesive Labels. The Company provides self-adhesive labels for various
consumer products including toiletries, drinks and foods. Examples of the
Company's products include toiletries for Sara Lee Corporation and body washes
for Safeway Stores plc supermarkets.
 
   Design and Pre-Press Services. The Company provides high quality creative
design and pre-press services to customers across all consumer products
industries. Designers have access to a full range of computer graphics
equipment, including digital print capabilities. This enables the Company to
provide competitive short run, fast turnaround color print typically used for
promotional literature.
 
Markets And Customers
 
   The Company's markets are divided into three principal categories: (i)
entertainment, (ii) cosmetics, and (iii) other consumer products. The
following chart illustrates the Company's unaudited pro forma combined sales
in each of these markets for each of the last three fiscal years:
 
<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                            ----------------------------------------------------------------------
                                     1996                    1997                    1998
                            ----------------------  ----------------------  ----------------------
                            (dollars in millions)   (dollars in millions)   (dollars in millions)
   <S>                      <C>         <C>         <C>         <C>         <C>         <C>
   Entertainment........... $     133.4       53.9% $     164.5       58.5% $     152.5       56.3%
   Cosmetics...............        46.9       18.9%        41.4       14.7%        39.9       14.7%
   Other Consumer
    Products...............        67.3       27.2%        75.3       26.8%        78.6       29.0%
                            ----------- ----------  ----------- ----------  ----------- ----------
     Total................. $     247.6      100.0% $     281.2      100.0% $     271.0      100.0%
                            =========== ==========  =========== ==========  =========== ==========
</TABLE>
 
Strategy
 
   The Company's principal growth strategy is to leverage its reputation for
product innovation, high quality and customer service in order to expand into
new and existing markets and customers. Key elements of the Company's strategy
include:
 
   Capitalize on Cross-Selling Opportunities. The Company believes that it
will create significant additional revenue opportunities with existing
customers by marketing its expanded array of high-end packaging solutions. The
Company believes that AGI, Klearfold and Tinsley each bring a strong position
in certain closely related consumer products markets that the other companies
should be able to leverage. In particular, the Company believes that Tinsley
represents an excellent platform from which to offer the Klearfold product
capabilities, while AGI and Tinsley will each benefit from the other's strong
position in closely related entertainment markets such as video and multimedia
packaging.
 
   Further Integrate with Key Customers. Historically, the Company has enjoyed
cooperative integrated relationships with its key customers. The Company's
recent expansion into international markets through the
 
                                       4
<PAGE>
 
Tinsley Acquisition allows it to further integrate with its global customers
in an environment in which the general trend is to limit the number of outside
suppliers. Furthermore, in an effort to enhance its service and turnaround
time, the Company has strategically positioned several of its facilities in
close proximity to one or several major music or multimedia customers.
 
   Pursue New Market Opportunities. The Company intends to expand into related
product lines that serve new markets, which will provide an opportunity for
additional revenue growth. As a result of the Combination, the Company's
creative design team has an enhanced capability to develop new packaging
products based on the most suitable type of materials or combinations. The
Company believes that its innovative product development experience positions
it to capture additional customers in new and existing markets.
 
   Increase Operating Efficiencies. The Company believes that combining the
operations of AGI, Klearfold and Tinsley presents opportunities to effectively
capitalize on operating efficiencies and economies of scale. A portion of
AGI's and Klearfold's printing capacity is interchangeable, allowing work to
be processed wherever capacity is available during times of peak demand. The
Tinsley Acquisition gives the Company access to international manufacturing
operations which allows the Company to produce packaging in close proximity to
its customers' global distribution channels. The Company intends to utilize
the most efficient practices currently used in each of its facilities to
enhance manufacturing capabilities and improve cost structures.
 
   Pursue Strategic Acquisitions. The Company may pursue other strategic
acquisitions within the specialty packaging industry. The Company believes
that significant opportunities exist to acquire distinctive businesses that
would enable the Company to further broaden its product offerings as well as
to expand its operations both domestically and internationally. For example,
in November, 1998 the Company acquired Music Print B.V. ("Music Print") a
Netherlands company operating a music packaging plant close to major global
customers.
 
Sales And Marketing
 
   Customer relationships in the specialty packaging industry are generally
developed and maintained over extended periods. These relationships develop
because of the high degree of coordination necessary between packaging
suppliers and their customers to ensure that packaging conforms precisely to
the needs of the customer. The integration of product design and manufacturing
together with inventory management and distribution systems provide the
Company with a competitive advantage in maintaining and expanding business
with established customers. This integrated marketing, design and
manufacturing operation also represents an important source of new business
opportunities through the modification of existing packaging and the
development of new applications. The Company has approximately 63 sales
professionals together offering the combined product lines of Tinsley, AGI and
Klearfold allowing for broader product offerings and creating opportunities
for significant cross-selling to existing customers.
 
Industry And Customer Concentrations
 
 Industry Concentrations
 
   Although the Company markets its packaging to various consumer products
industries, a substantial portion of its products are sold to the
entertainment industry and the cosmetics industry. In 1998, on an unaudited
pro forma combined basis, approximately 56.3% and 14.7% of the Company's total
sales represented sales to the entertainment industry and the cosmetics
industry, respectively.
 
 Customer Concentration
 
   The Company has been successful in establishing strong relationships with
its key customers. In fiscal year 1998, on a combined historical basis, EMI
and Universal Music Group accounted for approximately 23.1% of the Company's
net sales.
 
                                       5
<PAGE>
 
Distribution
 
   A significant amount of the Company's products are shipped directly from
its manufacturing facilities to its customers' facilities. Because of this,
the proximity of the manufacturing facility to the customer's plant can
significantly affect the price of products. The Company believes that its
manufacturing facilities are well-positioned to serve national markets. In an
effort to enhance its service and turnaround time, the Company has positioned
several of its facilities in close proximity to one or several major music or
multimedia customers. The Company has established its strategically located
facilities by constructing new facilities, leasing existing facilities and
acquiring existing businesses. Examples of each of these initiatives include
the construction of the Grover, North Carolina facility in 1998, the lease of
the Swindon, U.K. facility in 1995 and the acquisition of Irish Printing
Resources Limited in Dublin, Ireland in 1995. In part because of the foregoing
factors, the Company does not have significant warehouse facilities.
 
Competition
 
   The Company's business is highly competitive. Major competitive factors
include product quality, service and price. In addition, as more of the
Company's customers adopt "just-in-time" inventory systems, delivery lead time
has increased in importance. The Company believes that its manufacturing
facilities are well-positioned to serve national markets.
 
   The Company believes that some of its primary competitors are Ivy Hill
Corporation and Shorewood Packaging Corporation in the United States and
Gerhard Kaiser GMBH, St. Ives plc and CMCS Group plc in the U.K. and Europe,
some of which are larger than the Company and may have substantially greater
financial resources.
 
Government Regulation
 
   The past and present operations of the Company and the past and present
ownership and use of real property by the Company are subject to extensive and
changing federal, state and local environmental laws and regulations
pertaining to the discharge of materials into the environment, the handling
and disposition of wastes, the recycling, composition and recycled content of
packaging, or otherwise relating to the protection of the environment. These
laws include, but are not limited to, the Comprehensive Environmental Response
Compensation and Liability Act, the Water Pollution Control Act, the Clean Air
Act and the Resource Conservation and Recovery Act, as those laws have been
amended and supplemented, the regulations promulgated thereunder, and any
applicable state analogs. The Company's operations are also governed by laws
and regulations relating to employee health and safety. Governmental
authorities have the power to enforce compliance with their regulations and
violations may result in the payment of fines or the entry of injunctions or
both. The Company believes that it is in material compliance with such
applicable laws and regulations and that its current environmental controls
are adequate to address existing regulatory requirements.
 
   As is the case with other companies engaged in similar businesses, the
Company could incur costs relating to environmental compliance, including
remediation costs related to historical hazardous materials handling and
disposal practices at certain facilities. In the past the Company has
undertaken remedial activities to address on-site soil contamination caused by
historic operations. None of these cleanups has resulted in any material
liability. It is possible that future developments (e.g., new regulations or
stricter regulatory requirements) could result in the Company incurring
material costs to comply with applicable environmental laws and regulations.
In addition, the Company has not undertaken an independent investigation of
all of its facilities; accordingly, there can be no assurance that in the
future conditions requiring remediation will not be identified.
 
Technology, Product Development and Patents
 
   The Company produces high-quality, value-added, specialized packaging
products through the development of creative designs and innovative
manufacturing techniques. The Company's technical and product development
centers that support the Company's marketing efforts are staffed with 36 full-
time personnel as of December 31, 1998 and feature extensive in-house design,
engineering, tooling, prototype production, graphics and processing
capabilities. The Company's in-house design and production engineers work
closely with existing and potential customers in the preliminary stages of
product design and development, in many instances producing real-time
prototypes. The Company believes that its in-house design, engineering and
graphics capabilities, which utilize
 
                                       6
<PAGE>
 
CAD/CAM technology, are among the more extensive and sophisticated in the
industry and enhance the Company's ability to better integrate its creative
design capabilities with its customers' conceptual design processes.
 
   The Company has patented some of its various technology and processes. The
Company currently owns approximately 57 patents and patent applications, with
its patents expiring on various dates between 1999 and 2016. However, the
Company believes that the design, innovation and quality of its products and
its relationships with its customers are substantially more important to the
maintenance and growth of its business than its patents. Accordingly, the
Company does not believe that its business is dependent to any material extent
upon any single patent. Certain of the Company's patents are expiring in the
next few years.
 
Manufacturing And Supplies
 
   The Company operates in an industry that requires continued investment in
equipment to support growth, quality and efficient operations. The Company
intends to continue this level of commitment by investing in equipment. The
Company utilizes its modern machinery to lower turnaround time while reducing
staffing requirements and maintaining "just-in-time" manufacturing.
 
   The Company, like its competitors, is subject to rigorous quality control
standards imposed by its customers. The Company has implemented a
comprehensive quality assurance program, which includes computer-aided testing
of parts for size, color and strength. Using advanced measurement technology,
the Company is able to satisfy and exceed the most demanding customer
requirements. Statistical quality control methods are also used to promote
total customer satisfaction.
 
   The Company believes that it is generally able to pass raw material price
increases on to its customers, given the customized and high-end nature of its
packaging and the relatively low proportion of packaging cost in relation to
the cost of the end-product. In addition, the Company's customer contracts for
longer production runs generally include provisions for raw material cost
escalation.
 
Employees
 
   As of December 31, 1998, the Company had 1,821 employees, of which 1,506
were engaged in production or product support, 36 in research, development and
engineering, 98 in marketing and sales and 181 in corporate management and
administration. The 214 member hourly workforce at the Company's Warrington,
Pennsylvania facility is represented by the United Paperworkers International
Union under a collective bargaining agreement which expires on November 30,
2002. Most of the Company's European facilities have separate house union
agreements or series of agreements specific to the workforce at such facility.
Approximately 340 of the Company's European workforce are members of these
house unions. The Company believes that its relations with employees are good,
and it has not experienced any strikes or work stoppages.
 
Financial Information About Foreign and Domestic Operations
 
   Sales and manufacturing operations outside the United States are conducted
through subsidiaries located principally in the U.K. and Europe. The Company
has 17 manufacturing facilities: six in the U.S. and eleven in the U.K. and
Europe. During fiscal 1998, on an unaudited pro forma combined basis, 56.8% of
the Company's net sales were attributable to domestic operations and 43.2% of
the Company's net sales were attributable to foreign operations. (For more
information about domestic and foreign segments and sales, see Note 15 to the
Company's Consolidated Financial Statements).
 
                                       7
<PAGE>
 
ITEM 2. PROPERTIES
 
   The Company's operations are conducted through 26 facilities located in the
United States, U.K., Ireland, The Netherlands and Austria. The Company's
principal executive offices are located in Melrose Park, Illinois. The leases
for the Warrington, Pennsylvania, Louisa, Virginia, Melrose Park, Illinois and
Uden, Holland facilities provide the Company with an option to renew for an
additional five year period. The Company's facilities are designed to provide
for efficient manufacturing, material handling and storage of its products and
no facility is materially underutilized, with the exception of the Rustington,
West Sussex facility. This facility previously functioned as a manufacturing
operation; however, such facility is currently not used by the Company. The
Company believes that substantially all of its property and equipment is in
good condition and that it has sufficient capacity to meet its current
manufacturing and distribution requirements.
 
   The Company provides its multimedia customers with complete turnkey
fulfillment solutions, which often includes the purchase of materials as well
as assembly, warehousing and distribution of finished product, from its
Franklin Park, Illinois facility. The Company's long-range plans for this
operation are currently under review by management.
 
   The following table provides certain information regarding the Company's
operating facilities as of December 31, 1998:
 
<TABLE>
<CAPTION>
                                   Building
                                   sq. feet
        Facility         Ownership (approx.)         Function              Lease expiration
        --------         --------- ---------         --------              ----------------
<S>                      <C>       <C>       <C>                       <C>
U.S. Facilities
Franklin Park, IL.......  Leased     41,000  Fulfillment Center/Office September 30, 2000
Grover, NC..............   Owned     51,000  Manufacturing             N/A
Horsham, PA.............  Leased      3,000  Office                    June 30, 1999
Jacksonville, IL........   Owned     77,000  Manufacturing/Office      N/A
Los Angeles, CA.........  Leased      3,000  Sales                     August 31, 1999
Louisa, VA..............  Leased     78,000  Manufacturing             December 31, 2005
Melrose Park, IL........  Leased    257,000  Manufacturing/Office      September 30, 2002
Melrose Park, IL........  Leased     41,000  Warehouse                 March 31, 2002
New York, NY............  Leased      5,000  Sales                     April 30, 2000
Warrington, PA..........  Leased    100,000  Manufacturing             December 31, 2005
Warrington, PA..........  Leased     86,000  Warehouse/Manufacturing   December 31, 1999
U.K. and European Facilities
Chichester, UK..........  Leased      6,000  Office                    February 26, 2000
London, UK..............   Owned      2,000  Sales/Office              N/A
London, UK..............  Leased      6,000  Manufacturing             March 25, 2005
London, UK..............  Leased      5,000  Manufacturing             April 27, 2003
Slough, UK..............   Owned     13,000  Manufacturing             N/A
Birmingham, UK..........   Owned     74,000  Manufacturing             N/A
Swindon, UK.............  Leased     25,000  Manufacturing             May 1, 2010
West Sussex, UK.........  Leased     10,000  Not in use                June 19, 2003
Littlehampton, UK.......  Leased     29,000  Manufacturing             September 30, 2008
Southhampton, UK........  Leased     25,000  Sublet                    Unit 7-December 25, 2009
                                                                       Unit 8-December 1, 2008
Dublin, Ireland.........  Leased     24,000  Manufacturing             January 7, 2016
Uden, Holland...........  Leased     31,000  Manufacturing             August, 2000
Enschede, Holland.......   Owned     55,000  Manufacturing             N/A
Salzburg, Austria.......  Leased     24,000  Manufacturing             August 31, 2006
Weesp, Holland..........   Owned     24,000  Manufacturing             N/A
</TABLE>
 
                                       8
<PAGE>
 
ITEM 3. LEGAL PROCEEDINGS
 
   The Company is a party to various legal actions arising in the ordinary
course of its business. The Company believes that the resolution of these
legal actions will not have a material adverse effect on the Company's
financial position or results of operation.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
 
   On December 18, 1998, IMPAC's stockholders consented, in lieu of a meeting,
to the restatement of IMPAC's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws. Such stockholder action was
consented to by the affirmative vote of the holders of approximately 128,236
shares of IMPAC's Common Stock.
 
   On January 8, 1999, IMPAC's stockholders consented, in lieu of a meeting,
to an additional restatement of IMPAC's Amended and Restated Certificate of
Incorporation. Such stockholder action was consented to by the affirmative
vote of the holders of approximately 119,586 shares of IMPAC's Common Stock.
 
   On March 26, 1999, IMPAC's stockholders consented, in lieu of a meeting, to
the election of M. Shaun Lawson and Lee Newbon to IMPAC's Board of Directors
with each of Richard Block, Zenas Block, David Horowitz, Melvin B. Herrin, H.
Scott Herrin, Michael Gilligan and Michel Reichert continuing as directors of
IMPAC. Such stockholder action was consented to by the affirmative vote of the
holders of approximately 132,735 shares of IMPAC's Common Stock.
 
                                       9
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
 Market Information
 
   IMPAC's Common Stock is not publicly traded.
 
 Holders
 
   As of March 15, 1999, IMPAC had 161,658 shares of Series A Common Stock
outstanding held by approximately 24 stockholders of record and 4,500 shares
of Series B Common Stock outstanding held by one stockholder of record.
 
 Dividends
 
   IMPAC has never paid dividends on its Common Stock nor does it expect to
pay dividends on its Common Stock in the foreseeable future. IMPAC's ability
to pay future dividends on its Common Stock is limited by the Indenture, as
defined below, IMPAC's Fourth Amended and Restated Certificate of
Incorporation (the "Charter") and the Company's Amended and Restated
Multicurrency Credit Facility, dated as of July 7, 1998, among the Company and
Bank of America, National Trust and Savings Association, as agent, and certain
other financial instititutions parties thereto (the "Amended and Restated
Credit Facility").
 
 Recent Sales of Unregistered Securities
 
   On February 19, 1998, KFI (now known as "IMPAC Group, Inc.") issued an
aggregate of 100,000 shares of its Series A Common Stock to 22 of its
shareholders, all of whom were either (i) shareholders of KFI who contributed
to KFI the entire outstanding capital stock of KFI and a warrant to purchase
capital stock of KFI and invested approximately $4.6 million in cash or (ii)
stockholders and holders of stock appreciation rights of AGI, who contributed
to KFI shares of AGI common stock and invested the proceeds of their stock
appreciation rights, totaling an aggregate of $14.4 million. The issuances of
Series A Common Stock were made by KFI in reliance on the exemption from
registration provided by Section 4(2) under the Securities Act of 1933, as
amended (the "Securities Act").
 
   On March 12, 1998, IMPAC issued $100,000,000 in the aggregate principal
amount of Original Notes to Goldman Sachs & Co. and Donaldson, Lufkin &
Jennette Securities Corporation (the "Initial Purchasers") in a transaction
exempt under Regulation D under the Securities Act. The Initial Purchasers
resold the Original Notes to certain qualified institutional buyers in
reliance upon, and subject to the restrictions imposed pursuant to, Rule 144A
and Regulation S under the Securities Act.
 
   On September 3, 1998, IMPAC commenced an offer to exchange $100,000,000 in
the aggregate principal amount of Exchange Notes that had been registered
under the Securities Act for a like principal amount of the Original Notes.
This exchange was commenced pursuant to the terms of the Registration Rights
Agreement, dated March 12, 1998, between IMPAC, its subsidiaries, and the
Initial Purchasers. Each of the Exchange Notes and the Original Notes have
been guaranteed by the Subsidiary Guarantors. $100,000,000 in the aggregate
principal amount of Exchange Notes were issued in exchange for the Original
Notes on October 20, 1998, and the Original Notes were retired.
 
   In connection with the Tinsley Acquisition on September 10, 1998, the
Company issued 96,246 shares of Common Stock to six (6) of the Company's
existing stockholders or their affiliates, for aggregate consideration of
$58,575,000. Each of such issuances of such Common Stock were made by IMPAC in
reliance on the exemption from registration provided by Section 4(2) under the
Securities Act.
 
                                      10
<PAGE>
 
   On January 12, 1999, IMPAC issued to BT Capital Investors, L.P. and Phoenix
Home Life Mutual Insurance Company, for an aggregate consideration of
$20,000,000, (i) an aggregate of 20,000 shares of Series A Mandatorily
Redeemable Preferred Stock, $0.001 par value per share (the "Preferred Stock")
and (ii) detachable, ten-year warrants (the "Warrants") to purchase an
aggregate of 6,913 shares of IMPAC's Series A Common Stock at an exercise
price of $0.01 per share. The Company used the net proceeds from the sale of
Preferred Stock to acquire 30,087 shares of outstanding Series A Common Stock.
The Warrants are exercisable at any time during the ten-year period subsequent
to their issuance. The issuances of such Preferred Stock and Warrants (the
"Preferred Stock Issuance") were made by IMPAC in reliance on the exemption
from registration provided under Regulation D under the Securities Act. See
"Note 17 to Consolidated Financial Statements".
 
                                      11
<PAGE>
 
ITEM 6. SELECTED PRO FORMA AND HISTORICAL FINANCIAL DATA
 
             Selected Unaudited Pro Forma Combined Financial Data
 
   The selected unaudited pro forma combined data for the years ended December
31, 1996, 1997 and 1998 are based on the historical consolidated financial
statements of the Company included elsewhere in this Report, adjusted to give
effect to the Combination, the Tinsley Acquisition and the additional
borrowings incurred to fund those transactions as if they had occurred as of
January 1, 1996. As a result of these transactions, the Company's historical
consolidated financial statements for the years ended December 31, 1996, 1997
and 1998 are not comparable due to the inclusion in the consolidated financial
statements of AGI's and Tinsley's assets, liabilities and operating results
from the dates of acquisitions. Management believes the following unaudited
pro forma combined financial data presents a more meaningful comparison of the
Company's operating results from year to year. However, the unaudited pro
forma combined financial data do not purport to represent what the Company's
financial position or results of operations would actually have been had the
Combination, the Tinsley Acquisition and the incurrence of the related
indebtedness occurred on the assumed date or to project the Company's
financial position or results of operations for any future date or period. The
information contained in the following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and the related notes thereto
included elsewhere in this Report.
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                 1996 (1)    1997      1998
                                                 --------  --------  --------
                                                   (dollars in thousands)
<S>                                              <C>       <C>       <C>
Income Statement Data
Net sales....................................... $247,604  $281,170  $271,049
Cost of goods sold..............................  178,201   198,669   196,642
                                                 --------  --------  --------
Gross profit....................................   69,403    82,501    74,407
Selling, general and administrative expenses....   45,826    55,171    53,245
                                                 --------  --------  --------
Operating expenses..............................   23,576    27,330    21,162
Interest expense, net...........................   21,259    21,352    21,537
Other (income) expense..........................      181      (139)      456
                                                 --------  --------  --------
Income (loss) from continuing operations before
 income taxes...................................    2,136     6,118      (831)
Income taxes....................................    2,376     4,038     1,149
                                                 --------  --------  --------
Income (loss) from continuing operations(2)..... $   (240) $  2,080  $ (1,980)
                                                 ========  ========  ========
Other Data
EBITDA (as defined)(3).......................... $ 35,686  $ 45,858  $ 40,306
Depreciation and amortization...................   12,841    18,561    19,144
Capital expenditures............................   31,263    21,494    27,426
</TABLE>
--------
(1) The unaudited pro forma combined financial data for the year ended
    December 31, 1996 includes the results of operations for Tinsley for the
    year ended March 31, 1997.
(2) The results of operations for the year ended December 31, 1998 include an
    extraordinary loss of $552 (net of tax benefit of $368) due to the write-
    off of deferred financing costs.
(3) EBITDA is defined as income from continuing operations before deducting
    interest expense, income taxes, depreciation and amortization and
    excludes, to the extent applicable for the relevant period, (i) other
    (income) expense, (ii) stock-based compensation expense of $171, $2,326
    and $1,171 for the years ended December 31, 1996, 1997 and 1998,
    respectively, and (iii) PTP Industries, Inc. ("PTP") royalty and
    commission income of $731 and $33 for the years ended December 31, 1996
    and 1997, respectively. EBITDA is not a substitute for operating income,
    net earnings and cash flow from operating activities as determined in
    accordance with generally accepted accounting principles as a measure of
    profitability or liquidity. EBITDA is presented as additional information
    because management believes it to be a useful indicator of the Company's
    ability to service and/or incur indebtedness.
 
                                      12
<PAGE>
 
                Selected Historical Consolidated Financial Data
 
   The selected historical consolidated financial data set forth below as of
and for each of the four years ended December 31, 1997 have been derived from
the Company's financial statements audited by KPMG LLP, independent public
accountants. The selected historical consolidated financial data set forth
below as of and for the year ended December 31, 1998 have been derived from
the Company's financial statements audited by PricewaterhouseCoopers LLP,
independent public accountants. The audited consolidated financial statements
of the Company as of December 31, 1997 and 1998 and for each of the three
years ended December 31, 1998 are included elsewhere herein. The selected
historical consolidated financial data of the Company include AGI from March
13, 1998, Tinsley from September 12, 1998 and Klearfold for all periods
presented. The information contained in the following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the related notes
thereto included elsewhere in this Report.
 
<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                  --------------------------------------------
                                   1994     1995     1996     1997      1998
                                  -------  -------  -------  -------  --------
                                           (dollars in thousands)
<S>                               <C>      <C>      <C>      <C>      <C>
Income Statement Data
Net sales.......................  $47,714  $51,214  $54,218  $52,493  $184,298
Cost of goods sold..............   35,223   36,757   40,094   39,322   134,643
                                  -------  -------  -------  -------  --------
Gross profit....................   12,491   14,457   14,124   13,171    49,655
Selling, general and
 administrative expenses........    7,029    7,942    7,594    7,589    31,762
PTP royalty and commission
 (income)(1)....................     (200)    (377)    (731)     (33)      --
                                  -------  -------  -------  -------  --------
Operating income................    5,662    6,892    7,261    5,615    17,893
Interest expense, net...........   (1,020)  (1,197)  (2,324)  (3,469)  (13,514)
Other expense, net..............      --       --       --       --       (457)
                                  -------  -------  -------  -------  --------
Income from continuing
 operations before income
 taxes..........................    4,642    5,695    4,937    2,146     3,922
Income (taxes) benefit..........   (1,616)  (2,417)  (2,003)    (754)   (1,879)
                                  -------  -------  -------  -------  --------
Income (loss) from continuing
 operations(2)..................  $ 3,026  $ 3,278  $ 2,934  $ 1,392  $  2,043
                                  =======  =======  =======  =======  ========
Balance Sheet Data(3) (at period
 end)
Total assets....................  $33,602  $38,025  $27,275  $28,293  $366,335
Long-term debt, including
 current portion................    9,120    6,623   30,950   33,850   240,559
Stockholders' equity (deficit)..    8,807   11,511  (15,279) (13,887)   65,583
</TABLE>
-------
(1) Klearfold received commissions and royalties on certain sales made by PTP.
    Klearfold owned 51% of PTP prior to the sale of this subsidiary on April
    19, 1996. PTP ceased operations in 1997.
(2) The results of operations for the year ended December 31, 1998 include an
    extraordinary loss of $552 (net of tax benefit of $368) due to the write-
    off of deferred financing costs.
(3) Balance sheet data includes amounts related to PTP at December 31, 1994
    and 1995 prior to the sale of PTP on April 19, 1996.
 
                                      13
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
General
 
   On March 12, 1998, KFI, the parent company of Klearfold, completed both its
acquisition of AGI and also the issuance of the Company's Senior Subordinated
Notes. Upon consummation of these transactions KFI changed its corporate name
to IMPAC Group, Inc. On September 11, 1998, IMPAC acquired substantially all
of the outstanding capital stock of Tinsley. IMPAC funded the Tinsley
Acquisition through borrowings under the Amended and Restated Credit Facility,
proceeds from the sale of common stock to IMPAC's existing stockholders or
their affiliates and the issuance of five year promissory notes ("Loan Notes")
to former Tinsley shareholders. References below to the "Company" mean IMPAC
Group, Inc. and its consolidated subsidiaries.
 
   As a result of these transactions, the Company's historical consolidated
financial statements for the years ended December 31, 1996, 1997 and 1998 are
not comparable due to the inclusion in the consolidated financial statements
of AGI's and Tinsley's assets, liabilities and operating results from the
dates of acquisition. Management believes the pro forma financial information
included in the Selected Unaudited Pro Forma Combined Financial Data table in
Item 6 presents a more meaningful comparison of the Company's operating
results from year to year. As such, the discussion and analysis of the
historical results of operations and financial position for the years ended
December 31, 1996, 1997 and 1998 are supplemented with the discussion and
analysis of the unaudited pro forma results of operations and financial
position for the years ended December 31, 1996, 1997 and 1998 as if the
acquisitions of AGI and Tinsley and the borrowings incurred to fund those
acquisitions occurred as of January 1, 1996.
 
   IMPAC is a holding company with no material assets or operations other than
its investments in its wholly-owned subsidiaries. All of the Company's
domestic subsidiaries and certain foreign subsidiaries of the Company have
guaranteed the Senior Subordinated Notes on a full, unconditional, joint and
several basis, subject to the subordination provisions in the related
Indenture. Separate financial statements and other disclosures of the
Subsidiary Guarantors have not been presented in this Report because the
Company believes that such financial statements and other information would
not provide additional information that is material to investors. However, the
condensed consolidating financial information of the parent Company and its
Subsidiary Guarantors have been presented in Note 16 to Notes to Consolidated
Financial Statements for purposes of complying with the reporting
requirements.
 
 Overview
 
   IMPAC is a designer, manufacturer and marketer of high-end, value-added
specialty packaging for various consumer products markets including
entertainment, cosmetics and personal care. The Company offers innovative
specialty packaging solutions for customers that seek to differentiate their
products in the consumer marketplace. In addition, the Company utilizes a
broad range of paper, paperboard and transparent rigid plastic materials for
its products.
 
                                      14
<PAGE>
 
Unaudited Pro Forma Results of Operations
 
 Unaudited Pro Forma Year Ended December 31, 1998 Compared to Unaudited Pro
 Forma Year Ended December 31, 1997
 
   The following table sets forth certain unaudited income statement data
(expressed as a percentage of net sales) for the years ended December 31, 1997
(the "1997 period") and 1998 (the "1998 period") on a pro forma basis as if
the acquisitions of AGI and Tinsley and the borrowings incurred to fund those
acquisitions occurred as of January 1, 1996.
 
<TABLE>
<CAPTION>
                              1997    1998
                              -----   -----
     <S>                      <C>     <C>
     Income Statement Data:
     Net sales............... 100.0%  100.0%
     Cost of goods sold......  70.7%   72.6%
                              -----   -----
     Gross profit............  29.3%   27.4%
     Selling, general and
      administrative
      expenses...............  19.6%   19.6%
                              -----   -----
     Operating income........   9.7%    7.8%
     Interest expense, net...   7.6%    7.9%
     Other (income) expense,
      net....................  (0.1%)   0.2%
                              -----   -----
     Income (loss) before
      income taxes and
      extraordinary item.....   2.2%   (0.3%)
     Income taxes............   1.5%    0.4%
                              -----   -----
     Income (loss) before
      extraordinary item.....   0.7%   (0.7%)
                              =====   =====
</TABLE>
 
   Net Sales for the 1998 period were $271.0 million compared to $281.2
million for the 1997 period, a decrease of 3.6%. This decrease was due to a
$12.0 million decline in entertainment packaging and a $1.5 million decline in
cosmetics packaging, partially offset by a $3.3 million increase in other
consumer products packaging. The entertainment packaging reduction was due to
a decline in sales of special video packaging compared to strong 1997 sales
related to the successful releases of several popular titles by the Company's
existing customers. The decrease in cosmetics sales relates primarily to a
decision by one of the Company's significant cosmetics packaging customers to
begin to manufacture certain of its packaging internally and to lower than
expected retail sales of one product line of another significant cosmetics
customer. The increase in other consumer products packaging resulted from
increases in sales in the personal care and food and beverage markets.
 
   Gross Profit for the 1998 period was $74.4 million compared to $82.5
million for the 1997 period, a decrease of 9.8%. The resulting decline in
gross margin from 29.3% to 27.4% was primarily due to the decrease in sales of
higher value-added packaging products to the entertainment industry, as
discussed above. Gross margin was also negatively impacted by the less
favorable absorption of fixed costs due to the lower overall sales volume, the
start-up of the Company's Grover, North Carolina facility and developmental
costs associated with new packaging for two significant customers.
Additionally, the 1997 period benefited from a supply contract termination
settlement of $0.8 million and a favorable insurance adjustment of $0.4
million.
 
   Selling, General and Administrative Expenses for the 1998 period were $53.2
million compared to $55.2 million for the 1997 period, a decrease of 3.5%. The
decrease is due primarily to reductions in anticipated payouts under various
compensation programs tied to sales and profitability offset by start-up costs
associated with the Company's Grover, North Carolina facility and by expenses
associated with the relocation and consolidation of certain of the Company's
foreign operations. SG&A as a percentage of sales did not change.
 
   Operating Income for the 1998 period was $21.2 million compared to $27.3
million for the 1997 period, a decrease of 22.6% due to the factors discussed
above.
 
   Net Interest Expense for the 1998 period was $21.5 million compared to
$21.4 million for the 1997 period. The increase was due to the issuance of
$4.0 million of industrial revenue bonds in August, 1997.
 
                                      15
<PAGE>
 
   Income Taxes for the 1998 period were $1.1 million compared to $4.0 million
for the 1997 period. The Company's effective tax rates for the periods
exceeded the U.S. federal statutory rate primarily due to the effect of non-
deductible goodwill amortization of approximately $4.0 million in each period.
 
   Net Loss for the 1998 period was $2.0 million compared to net income of
$2.1 million for the 1997 period due to the factors discussed above. The pro
forma loss for the 1998 period does not include an extraordinary charge of
$0.8 million, net of tax, related to the early extinguishment of debt arising
from the Combination and the Tinsley Acquisition.
 
 Unaudited Pro Forma Year Ended December 31, 1997 Compared to Unaudited Pro
 Forma Year Ended December 31, 1996
 
   The following table sets forth certain unaudited income statement data
(expressed as a percentage of net sales) for the years ended December 31, 1996
(the "1996 period") and 1997 (the "1997 period") on a pro forma basis as if
the acquisitions of AGI and Tinsley and the borrowings incurred to fund those
acquisitions occurred as of January 1, 1996.
 
<TABLE>
<CAPTION>
                                                                 1996    1997
                                                                 -----   -----
     <S>                                                         <C>     <C>
     Income Statement Data:
     Net sales.................................................. 100.0%  100.0%
     Cost of goods sold.........................................  72.0%   70.7%
                                                                 -----   -----
     Gross profit...............................................  28.0%   29.3%
     Selling, general and administrative expenses...............  18.5%   19.6%
                                                                 -----   -----
     Operating income...........................................   9.5%    9.7%
     Interest expense, net......................................   8.5%    7.6%
     Other (income) expense, net................................   0.1%   (0.1%)
                                                                 -----   -----
     Income before income taxes.................................   0.9%    2.2%
     Income taxes...............................................   1.0%    1.5%
                                                                 -----   -----
     Net income.................................................  (0.1%)   0.7%
                                                                 =====   =====
</TABLE>
 
   Net Sales for the 1997 period were $281.2 million compared to $247.6
million for the 1996 period, an increase of 13.6%. This increase was due
largely to a $31.1 million increase in entertainment packaging and an $8.0
million increase in other consumer products packaging partially offset by a
$5.5 million decrease in cosmetics packaging. The entertainment packaging
increase was due primarily to strong 1997 special video sales related to the
successful releases of several popular titles by the Company's existing
customers, increased sales of music packaging and strong growth in the sales
of multimedia packaging to the Company's U.K. and European customers. The
increase in other consumer products packaging was due largely to increased
demand for Klearfold's visual packaging, particularly with customers in the
personal care and undergarment markets. Decreased sales in cosmetics packaging
were due primarily to a decision by one of the Company's significant cosmetics
packaging customers to begin to manufacture certain of its packaging
internally.
 
   Gross Profit for the 1997 period was $82.5 million compared to $69.4
million for the 1996 period, an increase of 18.9%. In addition to the effect
of the sales increase referred to above, gross profit was also positively
impacted by the increase in gross margin from 28.0% to 29.3%. The margin
increase was primarily due to the increase in sales of higher value-added
packaging products to the entertainment industry, as discussed above. Gross
margin was also positively impacted by the more favorable absorption of fixed
costs due to the higher overall sales volume.
 
   Selling, General and Administrative Expenses for the 1997 period were $55.2
million compared to $45.8 million for the 1996 period, an increase of 20.4%.
The increase in SG&A as a percentage of sales from 18.5% to 19.6% was due
primarily to increases in anticipated payouts under various compensation
programs tied to sales and profitability.
 
                                      16
<PAGE>
 
   Operating Income for the 1997 period was $27.3 million compared to $23.6
million for the 1996 period, an increase of 15.9% due to the factors discussed
above.
 
   Net Interest Expense for the 1997 period was $21.4 million compared to
$21.3 million for the 1996 period. The increase was due to the issuance of
$4.0 million of industrial revenue bonds in August, 1997.
 
   Income Taxes for the 1997 period were $4.0 million compared to $2.4 million
for the 1996 period. The Company's effective tax rates for the periods
exceeded the U.S. federal statutory rate primarily due to the effect of non-
deductible goodwill amortization of approximately $4.0 million in the 1997
period and $3.8 million in the 1996 period.
 
   Net Income for the 1997 period was $2.1 million compared to a net loss of
$0.2 million for the 1996 period due to the factors discussed above.
 
Historical Results of Operations
 
 Historical Year ended December 31, 1998 Compared to Historical Year Ended
 December 31, 1997
 
   The results of operations for the year ended December 31, 1998 (the "1998
period") include the results of AGI and Tinsley from the dates of
acquisitions. The Company's growth in net sales, gross profit and operating
income during the 1998 period as compared to the year ended December 31, 1997
(the "1997 period") relates primarily to the effect of these acquisitions. Net
interest expense increased from $3.5 million in the 1997 period to $13.5
million in the 1998 period due to the additional borrowings incurred to fund
the acquisitions of AGI and Tinsley. Income taxes for the 1998 period were
$1.9 million compared to $0.8 million for the 1997 period. The Company's
effective tax rates increased from 35.1% in the 1997 period to 47.9% in the
1998 period primarily due to the effect of non-deductible goodwill
amortization of approximately $1.7 million during the 1998 period. Net income
for the 1998 period was $2.0 million compared to $1.4 million during the 1997
period due to the factors discussed above.
 
 Historical Year ended December 31, 1997 Compared to Historical Year Ended
 December 31, 1996
 
   Net Sales for the year ended December 31, 1997 (the "1997 period") were
$52.5 million compared to $54.2 million for the year ended December 31, 1996
(the "1996 period"), a decrease of 3.2%. This decrease was due to a decrease
in sales in the cosmetics market of approximately $4.3 million. This decrease
in cosmetics sales was due primarily to a decision by Klearfold's largest
customer for cosmetics packaging to begin to manufacture certain of its
packaging internally. The decrease in sales to this customer was partially
offset by an approximately $2.6 million increase in sales of windowed
packaging to other cosmetics customers. The increased sales to other consumer
products markets was due largely to increased demand for Klearfold's visual
packaging, particularly with customers in the personal care and undergarment
markets.
 
   Gross Profit for the 1997 period was $13.2 million compared to $14.1
million for the 1996 period, a decrease of 6.7%. The decrease in gross margin
from 26.1% to 25.1% was due primarily to additional expenses experienced in
the fourth quarter of 1997 associated with the installation and start-up of a
new printing press and a less favorable absorption rate of fixed costs at the
lower sales volume. Gross profit in the 1997 period also benefited from a
supply contract termination settlement of $0.8 million and a favorable
insurance adjustment of $0.4 million.
 
   Selling, General Administrative Expenses for both the 1997 period and the
1996 period were $7.6 million. Selling, general and administrative expenses as
a percentage of net sales were 14.5% in 1997 compared to 14.0% in 1996.
 
   PTP Royalty and Commission Income for the 1997 period was $33,000 compared
to $0.7 million for the 1996 period, a decrease of 95.5%. The decrease was due
to PTP closing operations in February 1997.
 
                                      17
<PAGE>
 
   Operating Income for the 1997 period was $5.6 million compared to $7.3
million for the 1996 period, a decrease of 22.7%
 
   Net Interest Expense for the 1997 period was $3.5 million compared to $2.3
million for the 1996 period, an increase of 49.3%. The increase was due to
higher average debt levels in the 1997 period due to the June 1996
recapitalization and the associated debt which includes $58,000 of interest
expense with respect to the Klearfold IRBs.
 
   Income Taxes for the 1997 period were $0.8 million compared to $2.0 million
for the 1996 period reflecting an effective tax rate of approximately 35% and
41%, for 1997 and 1996, respectively, which includes the effect of reduced
state income taxes.
 
   Income from Continuing Operations for the 1997 period was $1.4 million
compared to $2.9 million for the 1996 period.
 
Liquidity and Capital Resources
 
   On March 12, 1998, KFI acquired all of the common stock of AGI for $69.0
million including $54.6 million of cash and $14.4 million of newly issued
common stock, plus acquisition costs. Concurrently, the Company funded the
retirement of $8.3 million of indebtedness outstanding under AGI's credit
facility immediately prior to the transaction. The acquisition was funded by
the proceeds (net of $4.1 million in debt issuance costs) from the issuance of
$100.0 million of 10 1/8% Senior Subordinated Notes and $4.6 million of new
common stock. The balance of the proceeds of the Senior Subordinated Notes
were used to retire all outstanding indebtedness of $29.9 million under KFI's
prior bank credit agreement. At the same time, KFI entered into a new five
year credit agreement which provided for a $40.0 million revolving credit
facility and a $13.0 million letter of credit facility (the "Original Credit
Facility").
 
   On July 7, 1998, the Company entered into the Amended and Restated Credit
Facility, which became effective on the initial funding date of the Tinsley
Acquisition and replaced the Original Credit Facility. The Amended and
Restated Credit Facility provides for up to $53.0 million of revolving credit
borrowings (the "Revolver") with a $20 million letter of credit subfacility
under the Revolver (the "L/C Facility"). The Amended and Restated Credit
Facility also provides for $37.0 million of Term Loan A borrowings and $64.0
million of Term Loan B borrowings. The Amended and Restated Credit Facility
also provides a guarantee to the holders of the Loan Notes. Under the
provisions of the Amended and Restated Credit Facility, the aggregate amount
available of Term Loan A borrowings is limited by the amount outstanding under
the Loan Note guarantee. Up to $8.5 million of drawings under this guarantee
to redeem the Loan Notes will be converted to additional borrowings under Term
Loan A and any drawings which, as a consequence of currency fluctuations,
exceed $8.5 million will be converted to additional borrowings under the
Revolver. The Revolver has a five and one-half year maturity, the Term Loan A
has a five and one-half year maturity and the Term Loan B has a six and one-
half year maturity. As of December 31, 1998, $28.4 million in Term Loan A
borrowings were outstanding, $63.8 million in Term Loan B borrowings were
outstanding, $11.2 million in Revolver borrowings were outstanding and $29.2
million in additional Revolver borrowings were available.
 
   On September 11, 1998, the Company acquired the common stock of Tinsley for
$137.7 million plus acquisition costs. Concurrently, the Company funded the
retirement of $18.5 million of indebtedness outstanding under Tinsley's credit
agreements. The acquisition was funded through borrowings of $93.7 million
under the Amended and Restated Credit Facility described above, $58.6 million
in proceeds from the sale of common stock to the Company's existing
stockholders or their affiliates and the issuance, in the aggregate, of $8.5
million of five year promissory notes ("Loan Notes") to former Tinsley
shareholders.
 
   On November 24, 1998, the Company purchased the outstanding capital stock
of Music Print for approximately $5.3 million plus acquisition costs.
Concurrently, the Company retired approximately $0.2 million of historical
indebtedness of Music Print and purchased the facility in which Music Print
operates for $1.3 million.
 
                                      18
<PAGE>
 
The acquisition was funded through additional revolver borrowings under the
Company's Amended and Restated Credit Facility. Music Print supplies printed
packaging in The Netherlands for the music and multimedia markets.
 
   On January 12, 1999, IMPAC issued 20,000 shares of Preferred Stock with a
face value of $20.0 million together with detachable, ten-year Warrants to
purchase 6,913 shares of Common Stock at an exercise price of $0.01 per share
for net proceeds of $18.9 million. IMPAC used the net proceeds from the sale
of Preferred Stock to acquire 30,087 shares of outstanding Series A Common
Stock. The Preferred Stock accrues dividends on a cumulative basis at 14.0%
per annum for years 1-5, 15.0% per annum for year 6, and either 14.0% or 15.0%
per annum for years 7-10 depending on whether the dividends are paid in cash
or with additional Preferred Stock, respectively. During the first six years
after issuance, dividends on the Preferred Stock are payable solely by issuing
additional shares of Preferred Stock. The Preferred Stock accrues dividends at
24.0% per annum if certain events occur, including an event of non-compliance
as defined and certain significant changes in the ownership of IMPAC. IMPAC is
required to redeem all outstanding shares of Preferred Stock on December 31,
2008 at face value plus all accrued and unpaid dividends. IMPAC may redeem
some or all outstanding shares of Preferred Stock at an earlier date,
provided, however, that a premium of up to 10.0% be paid. The Preferred Stock
is not redeemable at the option of the holders of Preferred Stock. The
Preferred Stock contains covenants, among others, limiting additional
indebtedness, restricted payments, guaranties, advances to affiliates,
mergers, asset sales and dispositions. The Preferred Stock ranks senior to all
classes of Common Stock with respect to dividend distributions and
distributions upon the liquidation or dissolution of IMPAC.
 
   The Company's primary cash requirements historically have related to
capital expenditures, working capital and debt service. The Company has
historically funded these requirements through internally generated cash flow,
borrowings under bank credit arrangements and the issuance of industrial
revenue bonds.
 
   Net cash provided by operating activities for the 1998 period was $13.2
million compared to $6.2 million for the 1997 period. Income from operations
before non-cash charges increased to $14.8 million from $2.6 million due to
the acquisition of AGI and Tinsley. In the 1998 period, income from operations
before non-cash charges of $14.8 million, the issuance of the Senior
Subordinated Notes, a $0.9 million increase in capital leases, the issuance of
common stock and stock options and the issuance of $112.4 million of
borrowings under the Company's Amended and Restated Credit Facility, Loan
Notes and industrial revenue bonds were used to fund the acquisitions of
Tinsley, AGI and Music Print, the repayment of $30.1 million of bank
borrowings, $10.9 million of debt issuance costs, $16.0 million of capital
expenditures and a $1.6 million increase in working capital requirements. In
the 1997 period, income from operations before non-cash charges of $2.6
million, $3.2 million of net proceeds of an industrial revenue bond issuance
and a $3.6 million decrease in working capital requirements were used to fund
a net decrease of $5.1 million in outstanding borrowings under KFI's prior
credit agreement and $4.1 million of capital expenditures. The Company
currently expects to spend $27.5 million on capital expenditures in 1999. The
Company expects to fund its capital expenditures and other working capital
requirements in 1999 through internally generated cash flow and borrowings
under the Amended and Restated Credit Facility.
 
   Net cash provided by operating activities for the 1997 period was $6.2
million compared to $4.2 million for the 1996 period. Income from operations
before non-cash charges decreased to $2.6 million from $5.2 million due to
decreased income from operations. In the 1997 period, income from operations
before non-cash charges of $2.6 million, $3.2 million of net proceeds of an
industrial revenue bond issuance and a $3.6 million decrease in working
capital requirements were used to fund a net decrease of $5.1 million in
outstanding borrowings under KFI's prior credit agreement and $4.1 million of
capital expenditures. In the 1996 period, income from operations before non-
cash charges of $5.2 million, $1.9 million of proceeds from the sale of PTP,
$34.2 million proceeds from bank borrowings and the issuance of common and
preferred stock were used to fund $0.7 million of working capital
requirements, $1.3 million of capital expenditures, $49.7 million to
repurchase common stock, $8.1 million to retire previous bank indebtedness and
$1.2 million of deferred financing costs.
 
   IMPAC is a holding company with no operations of its own. The Company's
ability to make required interest payments on the Senior Subordinated Notes
depends upon its ability to receive funds from its domestic
 
                                      19
<PAGE>
 
and foreign subsidiaries. The Company, at its discretion, controls the receipt
of dividends or other payments from its domestic and foreign subsidiaries,
subject in the case of certain foreign subsidiaries to limitations that may be
imposed under the laws of the applicable jurisdictions of organization. These
limitations are not considered to be material to the Company as a whole. There
are no contractual restrictions, under the Amended and Restated Credit
Facility or otherwise, upon the ability of the Subsidiary Guarantors to make
distributions or pay dividends, directly or indirectly, to IMPAC.
 
   Since its acquisition of Tinsley, the Company is exposed to currency
exchange rate risk with respect to its net assets, transactions and the
related net income denominated in U.K. Pounds Sterling, Dutch Guilders, Irish
Punts, Austrian Shillings and the Euro. Business activities in various
currencies expose the Company to the risk that the eventual net dollar cash
inflows resulting from transactions with foreign customers and suppliers
denominated in foreign currencies may be adversely affected by changes in
currency exchange rates. The Company is evaluating these risks and developing
its hedging program.
 
Adoption of New Accounting Standard
 
   In June, 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Due to the recent release and complexity of this new standard, an assessment
of the impact it will have on the financial position or results of operations
has not been completed.
 
Year 2000 Issues
 
   The information provided below constitutes "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act and is
subject to the terms thereof. The following description of the Company's
remediation process is meant for information purposes and not as a form of
covenant, warranty, representation or guarantee of any kind. In addition, many
of the Company's Year 2000-related efforts are dependent upon third-parties
that are effectively beyond the Company's control.
 
 General
 
   As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
accurately process certain data during or after the year 2000. This is
commonly known as the Year 2000 ("Y2K") issue. The Y2K issue can arise at any
point in an entity's supply, manufacturing, processing, distribution and
financial chains.
 
   IMPAC and its wholly owned domestic subsidiaries, AGI and Klearfold, are
undertaking an initiative entitled IMPAC 2000 (the "Domestic Project"). While
addressing the Y2K issue specifically, the Domestic Project is intended to
change the entire business systems infrastructure and make it Y2K compliant.
 
   The Company believes that Tinsley has substantially addressed the Y2K
issue, with Tinsley's information technology ("IT") systems currently in
compliance with Y2K. With regard to non-IT issues, Tinsley has contacted
vendors who have provided assurances that the relevant systems are in
compliance.
 
 Projects
 
   The Domestic Project is divided into 4 major areas: (i) Infrastructure
Systems, (ii) Applications Software, (iii) Manufacturing Equipment, and (iv)
External Stakeholders. At the present time, the Infrastructure Systems portion
of the project is believed to be complete in so far as it pertains to Y2K.
This includes personal computers, local and wide area networks and telephony.
In addition, desktop environments have been standardized and all such
applications are now believed to be Y2K compliant. At present, the
Applications Software at AGI and Klearfold are different. These systems will
be harmonized with the implementation of the ORACLE Enterprise Resource
Planning ("ERP") systems. The Company has retained an outside consultant to
assist in the integration
 
                                      20
<PAGE>
 
of the business and systems processes into an ORACLE ERP solution. The project
is approximately 60 percent complete, with Y2K compliance being expected by
mid 1999. A Y2K compliant patch of Klearfold's application software is
available and will be installed as a contingency plan in the event of project
delays in the ORACLE environment. A contingency plan for the AGI Applications
Software has been developed but not yet implemented. With respect to the
Manufacturing Equipment portion of the project, a comprehensive review of
Manufacturing Equipment has been completed and the Company believes that
substantially all significant equipment is Y2K compliant. With respect to its
External Stakeholders, the Company is in the process of contacting its
material suppliers and Electronic Data Interfaces with third party customers
and vendors are in the process of review.
 
   Tinsley implemented the SAGE accounting application for its UK subsidiaries
in the second half of 1998. The European subsidiaries operate stand alone
accounting systems which the Company believes are Y2K compliant. In addition,
the Company expects that the IMPRINT management information system, which is
used by Tinsley, will become Y2K compliant during the balance of 1999.
 
 Costs
 
   The total cost associated with required modifications to business systems
is not expected to be material to the financial position of the Company. The
estimated cost of the Domestic Project is $8.1 million, of which $3.3 million
was spent through December 31, 1998. The residual amount of $4.8 million is to
be spent in 1999. The Company will fund the Domestic Project, along with its
other capital expenditures, with internally generated cash flows along with
additional Revolver borrowings, as necessary.
 
 Risks
 
   The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the results of
operations, liquidity and financial condition of the Company. Due to the
general uncertainty inherent with regards to Y2K issues, resulting in part
from the uncertainty of the Y2K readiness of third-party suppliers and
customers, the Company is unable to predict what consequences any Y2K failures
would have on its results of operations, liquidity or financial condition or
on the most reasonably likely worst case scenario. The domestic and foreign
projects will continue to significantly reduce the level of uncertainty about
the Y2K problem and, in particular, about the Y2K compliance and readiness of
its material suppliers. The Company believes that, with the implementation of
the new business systems and completion of the projects listed above as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
 
Euro
 
   The European Community introduced a common European monetary unit, the
Euro, effective January 1, 1999. The UK, where Tinsley is headquartered, has
opted not to adopt the Euro. However, certain subsidiary operations are in
countries such as The Netherlands, the Republic of Ireland and Austria, which
participated in its introduction. The new SAGE system implemented at Tinsley
is capable of handling multicurrency transactions, with the Euro being a
currency in its portfolio. The Company does not believe that the introduction
of the Euro will have a material adverse effect on the results of its
operations. See "Liquidity and Capital Resources" for further discussion of
currency and exchange rate issues.
 
Cautionary Note
 
   This Report may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended, including, but not limited to statements regarding:
the Company's growth strategy to leverage its reputation for product
innovation, high quality and customer service; the Company's ability to create
significant additional revenue opportunities with existing customers by
marketing its expanded array of high-end marketing solutions; the Company's
ability to integrate with its global customers due to the Tinsley Acquisition;
the opportunity to leverage the Klearfold product line as
 
                                      21
<PAGE>
 
the result of the Tinsley Acquisition; the benefit to Tinsley and AGI of each
other's position in the entertainment market; the Company's ability to
increase revenues by expanding into related product lines that serve new
markets; the Company's ability to capture additional customers through its
innovative product line; the Company's ability to utilize the most efficient
practices currently used in each of its facilities to enhance manufacturing
capabilities and improve cost structures; the Company's ability to pursue new
business opportunities through modification of existing packaging and the
development of new applications; opportunities for significant cross-selling
to existing customers; the ability to serve national markets; investment in
equipment; the Company's pursuit of other strategic acquisitions within the
specialty packaging industry; the ability to pass raw material price increases
on to its customers; the potential future costs incurred related to
environmental compliance; the expectation of the Company not to pay dividends
on Common Stock; the redemption by the Company of the Preferred Stock; the
effect on the Company of the limitations and covenants imposed by the terms of
the Preferred Stock; the delay in repurchase of employee stock under the terms
of certain employment agreements; the payments from the Company to certain
employees upon termination in accordance with employment agreements; the
financing of employee stock repurchases; the insurance policies for certain
officers of the Company; the adoption of a cash bonus plan similar to the 1998
bonus plan; the development by Company of a currency hedging program; the
impact of the new FASB statement; the Company's projects with respect to Y2K
issues and the possibility of interruptions caused therefrom; the effect of
the introduction of the Euro; funding of and projected amount of capital
expenditures in 1999; expectations regarding the Company's Y2K compliance; the
Company's ability to incur substantial additional indebtedness; the effects of
an increase in interest rates; and, certain other statements identified or
qualified by words such as "likely", "will", "suggests", "may", "would",
"could", "should", "expects", "anticipates", "estimates", "plans", "projects",
"believes", or similar expressions (and variants of such words or
expressions). Investors are cautioned that forward-looking statements are
inherently uncertain. Actual performance and results of operations may differ
materially from those projected or suggested in the forward-looking statements
due to certain risks and uncertainties, including, without limitation, those
described below:
 
 Leverage
 
  Significant Leverage as a Result of Transactions
 
   In connection with the acquisition of AGI and Tinsley, the Company incurred
a significant amount of indebtedness and, as a result, the Company is highly
leveraged. At December 31, 1998, approximately $240.6 million in total debt
was outstanding, including $140.6 million of senior debt of which
approximately $11.6 million is secured by letters of credit outstanding under
the Amended and Restated Credit Facility, and the Company had stockholders'
equity of approximately $65.6 million. Subject to certain covenants, the
Company is permitted to incur substantial additional indebtedness in the
future.
 
  Liquidity and Capital Resources
 
   The Company's ability to make scheduled payments of principal of, or to pay
the interest or liquidated damages, if any, on, or to refinance, its
indebtedness (including the Senior Subordinated Notes), or to fund planned
capital expenditures and any acquisitions will depend on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control. In addition, the Company may need to refinance all or a
portion of the principal of the Senior Subordinated Notes on or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements will be realized or that future borrowings will be
available under the Amended and Restated Credit Facility in an amount
sufficient to enable the Company to service its indebtedness, including the
Senior Subordinated Notes, or to fund its other liquidity needs. In addition,
there can be no assurance that the Company will be able to effect any such
refinancing on commercially reasonable terms or at all. The Company's ability
to raise additional capital may also be limited by the terms of the Preferred
Stock.
 
  Effects of Leverage
 
   The degree to which the Company is leveraged could have important
consequences to holders of the Senior Subordinated Notes, including, but not
limited to: (i) making it more difficult for the Company to satisfy its
obligations with respect to the Senior Subordinated Notes, (ii) increasing the
Company's vulnerability to general
 
                                      22
<PAGE>
 
adverse economic and industry conditions, (iii) limiting the Company's ability
to obtain additional financing to fund future working capital, capital
expenditures, acquisitions and other general corporate requirements, (iv)
requiring the dedication of a substantial portion of the Company's cash flow
from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other
general corporate purposes, (v) limiting the Company's flexibility in planning
for, or reacting to, changes in its business and the specialty packaging
industry, and (vi) placing the Company at a competitive disadvantage with
respect to less leveraged competitors.
 
 Ranking
 
   The Senior Subordinated Notes and the related subsidiary guarantees (the
"Subsidiary Guarantees") are subordinated in right of payment to all current
and future senior debt of IMPAC and the Subsidiary Guarantors. However, the
Senior Subordinated Notes indenture (the "Indenture") provides that IMPAC will
not, and will not permit Subsidiary Guarantors to, incur or otherwise become
liable for any indebtedness that is subordinate or junior in right of payment
to any senior debt and senior in any respect in right of payment to the Senior
Subordinated Notes or any of the Subsidiary Guarantees. Upon any distribution
to creditors of IMPAC or a Subsidiary Guarantor in a liquidation or
dissolution of IMPAC or a Subsidiary Guarantor or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to
IMPAC or a Subsidiary Guarantor or its property, the holders of senior debt
will be entitled to be paid in full before any payment may be made with
respect to the Senior Subordinated Notes. In addition, the subordination
provisions of the Indenture provide that payments with respect to the Senior
Subordinated Notes will be blocked in the event of a payment default on senior
debt and may be blocked for up to 179 days each year in the event of certain
non-payment defaults on senior debt. In the event of a bankruptcy, liquidation
or reorganization of IMPAC or a Subsidiary Guarantor, holders of the Senior
Subordinated Notes will participate ratably with all holders of subordinated
indebtedness of IMPAC or such Subsidiary Guarantor that is deemed to be of the
same class as the Senior Subordinated Notes, and potentially with all other
general creditors of IMPAC, based upon the respective amounts owed to each
holder or creditor, in the remaining assets of IMPAC. In any of the foregoing
events, there can be no assurance that there would be sufficient assets to pay
amounts due on the Senior Subordinated Notes. As a result, holders of Senior
Subordinated Notes may receive less, ratably, than the holders of senior debt.
The Indenture permits the incurrence of substantial additional indebtedness,
including senior debt, by IMPAC and its subsidiaries in the future. There is
currently no indebtedness outstanding that is subordinated to the Senior
Subordinated Notes.
 
 Ability of Company to Obtain Funds from Subsidiaries
 
   IMPAC has no operations of its own and derives substantially all of its
revenue from its subsidiaries. Holders of indebtedness and trade creditors of
subsidiaries of IMPAC would generally be entitled to payment of their claims
from the assets of the affected subsidiaries before such assets were made
available for distribution to IMPAC. The Indenture permits the incurrence of
substantial additional indebtedness by IMPAC and its subsidiaries and permits
significant investments by IMPAC in its subsidiaries. In the event of a
bankruptcy, liquidation or reorganization of a subsidiary, holders of any of
such subsidiary's indebtedness will have a claim to the assets of such
subsidiary that is prior to IMPAC's interest in those assets.
 
 Guarantees By Foreign Subsidiaries
 
   Several of IMPAC's foreign subsidiaries are not required to deliver a
guarantee with respect to the Senior Subordinated Notes. Additionally, IMPAC
is allowed under the Indenture to acquire or create additional foreign
subsidiaries that may not be required to deliver a guarantee with respect to
the Senior Subordinated Notes. In the event of a bankruptcy, liquidation or
reorganization of such a subsidiary, holders of any of such subsidiary's
indebtedness will have a claim to the assets of such subsidiary that is prior
to IMPAC's interest in those assets.
 
 Effect of Fraudulent Transfer Statutes on Validity of Notes and Guarantees
 
   Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, the Senior Subordinated Notes or
the Subsidiary Guarantees, could be voided, or claims in respect of the
 
                                      23
<PAGE>
 
Senior Subordinated Notes or the Subsidiary Guarantees could be subordinated
to all other debts of IMPAC or any Subsidiary Guarantor. In addition, the
payment of interest and principal by IMPAC or any Subsidiary Guarantor
pursuant to the Senior Subordinated Notes could be voided and required to be
returned to the person making such payment, or to a fund for the benefit of
the creditors of IMPAC or any Subsidiary Guarantor.
 
 Possible Inability to Fund a Change of Control Offer
 
   Upon a change of control, as defined in the Indenture, the Company will be
required to offer to repurchase all outstanding Senior Subordinated Notes at
101% of the principal amount thereof plus accrued and unpaid interest and
liquidated damages, if any, to the date of repurchase. However, there can be
no assurance that sufficient funds will be available at the time of any change
of control to make any required repurchases of Senior Subordinated Notes
tendered or that restrictions in the Amended and Restated Credit Facility will
allow the Company to make such required repurchases. Furthermore, upon certain
ownership changes, the dividend rate on the Preferred Stock will increase to
24.0%.
 
 Failure to Integrate Businesses
 
   Prior to March 1998, the Company had no prior history as a combined entity
and its operations had not previously been managed on a combined basis. Prior
to the combination of AGI and Klearfold in March, 1998 and the acquisition of
Tinsley in September, 1998, Tinsley, AGI and Klearfold were operated as
separate entities. The Company's future operations and earnings are largely
dependent upon management's ability to successfully execute the Company's
strategy of offering the combined product line of Tinsley, AGI and Klearfold
to the Company's customers. This requires substantial attention from the
Company's management team which, prior to the dates of acquisitions, had not
operated on a combined basis. In addition, management is required to apply its
business strategy to an entity which is significantly larger than the entity
it previously managed. Additionally, the need to focus management's attention
on integration of the businesses and implementation of the Company's post-
combination strategy may limit the Company's ability to successfully pursue
other opportunities related to its business for the foreseeable future. The
historical financial statements and unaudited pro forma financial information
presented in this Report may not necessarily be indicative of the results that
would have been attained had the Company operated on a combined basis.
 
 Foreign Operations
 
   A substantial portion of the Company's business is conducted in
international markets. Risks inherent in foreign operations, such as
fluctuations in foreign currency exchange rates and changes in social,
political and economic conditions, could materially adversely affect the
Company's business.
 
 Effects of Technology Changes and Industry Shifts
 
   The Company's packaging products are almost entirely targeted to consumer
products companies. Sales of consumer products are subject to changing tastes
and technologies that cannot be predicted. The adoption by various consumer
products industries of new forms of packaging may in the future have a
material adverse effect on the Company. For example, the Company experienced
significant, although temporary, declines in revenues as the CD displaced the
LP and as the CD industry abandoned the "long-box" packaging for CDs.
 
   In addition to technological and new product changes that could affect
demand for the Company's products in traditional distribution channels, demand
for the Company's products could also be materially affected by change in
retail distribution channels. Almost all of the Company's products are sold to
consumer products manufacturers that seek to differentiate their products in
the consumer marketplace. The anticipated growth in electronic commerce
distribution channels (often referred to as "e-commerce"), in which products
are sold directly to customers over the Internet, could have a material
adverse effect on the demand for the Company's products. For example, new
technology permits consumers to download music releases directly from the
Internet, eliminating the need for the Company's packaging products.
 
                                      24
<PAGE>
 
   The Company's success will depend, in part, upon its continued ability to
manufacture products that meet changing customer needs and industry-wide
shifts, successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis and enhance and
expand its existing product offerings. Current competitors or new market
entrants may develop new products with features that could adversely affect
the competitive position of the Company's products. The Company has invested
and continues to invest resources in the development of new products and
improved manufacturing processes; however, there can be no assurance that the
Company's new product or process development efforts will be successful or
that the emergence of new technologies, industry standards or customer
requirements will not render the Company's technology, equipment or processes
obsolete or uncompetitive. Any failure or delay in accomplishing these goals
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, to the extent that the
Company determines that new manufacturing equipment or processes are required
to remain competitive, the acquisition and implementation of these
technologies, equipment and processes are likely to require significant
capital investment by the Company.
 
 Variability of Quarterly Results
 
   A significant portion of the Company's business is attributable to special
projects relating to particular hit movie or music releases. The existence and
timing of such major releases may cause the Company's quarterly and annual
revenues to vary significantly. These swings in quarterly results could have a
material adverse effect on the Company's ability to comply with the financial
covenants in its financing agreements and could have a material adverse effect
on the market prices for the Senior Subordinated Notes.
 
 Potential Future Acquisitions Could Increase Debt or Disrupt Operations
 
   The Company may in the future pursue selective acquisitions within the
specialty packaging industry. Future acquisitions by the Company could result
in the incurrence of debt and contingent liabilities and an increase in
amortization expenses related to goodwill and other intangible assets, which
could have a material adverse effect upon the Company's business, financial
condition and results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operation,
technologies, services and products of the acquired companies and the
diversion of management's attention from other business concerns. In the event
that such acquisitions were to occur, there can be no assurance that the
Company's business, financial condition and results of operations would not be
materially adversely affected.
 
 Competition
 
   Many of the Company's products are sold in highly competitive markets in
the United States, the U.K. and Europe. The Company competes with a
significant number of companies of varying sizes on the basis of quality,
service and price and the ability to supply products to customers in a timely
manner. The Company believes that its primary competitors are Ivy Hill
Corporation and Shorewood Packaging Corporation in the United States and
Gerhard Kaiser GMBH, St. Ives plc and CMCS Group plc in the U.K. and Europe,
some of which are larger than the Company and may have substantially greater
financial resources. Competitive pressures or other factors could cause the
Company to lose existing business or opportunities to generate new business or
could result in significant price erosion, all of which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
 Failure to Comply with Environmental Matters and Governmental Regulations
 
   The past and present operations of the Company and the past and present
ownership and operations of real property by the Company are subject to
extensive and changing federal, state and local environmental laws and
regulations pertaining to the discharge of materials into the environment, the
handling and disposition of wastes, the recycling, composition and recycled
content of packaging, or otherwise relating to the protection of the
environment. The Company's operations are also governed by laws and
regulations relating to employee health and safety. Governmental authorities
have the power to enforce compliance with their regulations, and violations
may result in the payment of fines or the entry of injunctions or both.
 
                                      25
<PAGE>
 
   As is the case with other companies engaged in similar businesses, the
Company could incur costs relating to environmental compliance, including
remediation costs related to historical hazardous materials handling and
disposal practices at certain facilities. It is possible that future
developments (for example, new regulations or stricter regulatory
requirements) could result in the Company incurring material costs to comply
with applicable environmental laws and regulations.
 
 Effect of Environmental Concerns on Market
 
   In addition to the effects of regulation, the Company's business may also
be affected by environmental concerns of consumers with respect to packaging.
For example, in the early 1990's the music industry voluntarily stopped using
"long-box" packaging for CDs in response to these concerns. Future
environmental concerns could have a material effect on the demand for the
Company's packaging.
 
 Controlling Stockholders
 
   The Company's majority stockholder or its affiliates and certain members of
senior management own substantially all of the outstanding voting stock of
IMPAC, which is the sole stockholder of AGI, Klearfold and Tinsley and, by
virtue of such ownership, have the power to control all matters submitted to
stockholders of IMPAC and to elect all directors of IMPAC and its
subsidiaries, including AGI, Klearfold and Tinsley.
 
 Year 2000 Issues
 
   The Company's ability to successfully address its Y2K issues will depend on
the availability of resources, the Company's ability to discover and correct
those potential Y2K problems which could have a serious impact on specific
Company facilities and the ability of vendors to bring their computer systems
and other equipment into Y2K compliance.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
   The Company has foreign subsidiaries that manufacture and sell products in
the U.K. and Europe. Additionally, the Company incurred a significant amount
of indebtedness in connection with the acquisition of AGI and Tinsley and
accordingly is highly leveraged. As a result, its cash flows and earnings are
exposed to fluctuations in foreign currency exchange rates and interest rates.
 
   The Company's debt obligations are primarily U.S. dollar denominated. The
Company's market risk therefore is the potential loss arising from adverse
changes in interest rates. The debt can be categorized as follows:
 
<TABLE>
<CAPTION>
                                                               December 31, 1998
                                                               -----------------
                                                                (in thousands)
<S>                                                            <C>
Fixed interest rates:
---------------------
Senior Subordinated Debt......................................     $100,000
Industrial revenue bonds......................................        4,000
Covered by interest rate swaps:
-------------------------------
Portion of bank borrowings....................................       64,000
Subject to interest rate fluctuations:
--------------------------------------
Portion of bank borrowings....................................       39,410
Industrial revenue bonds......................................        7,640
Capital leases................................................       17,116
Loan Notes....................................................        8,393
                                                                   --------
Total indebtedness............................................     $240,559
                                                                   ========
</TABLE>
 
 
                                      26
<PAGE>
 
   Market risk is estimated as the potential decrease in pretax earnings
resulting from a hypothetical 71 basis-point increase in interest rates
(representing a 10% increase) on floating-rate debt instruments. If interest
rates increased by such 10%, the Company would incur approximately $0.5
million per annum in additional interest expense based on the long-term debt
outstanding at December 31, 1998.
 
   Apart from the interest rate swaps noted above (which are discussed further
in Note 11 to the Consolidated Financial Statements), the Company does not
currently hold any other derivatives for managing risks or for trading
purposes.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
   IMPAC's Consolidated Financial Statements, together with the auditors'
reports thereon, appear at pages F-2 through F-28 of this Report and are
summarized by the Index to Consolidated Financial Statements at page F-1.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
   Certain changes with respect to the Company's independent public
accountants have previously been reported in the Registrant's Registration
Statement No. 333-48821, on Form S-4, filed by the Registrant with respect to
the Senior Subordinated Notes.
 
 
                                      27
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
   The executive officers and directors of IMPAC are as follows:
 
<TABLE>
<CAPTION>
   Name                      Age Position(s)
   ----                      --- -----------
   <S>                       <C> <C>
   Melvin B. Herrin........  64  Director and Chairman
   Richard H. Block........  58  Director, President and Chief Executive Officer
   M. Shaun Lawson.........  53  Director and Vice Chairman
   H. Scott Herrin.........  42  Director
   Michel Reichert.........  48  Director
   Michael F. Gilligan.....  43  Director
   David C. Underwood......  39  Treasurer, Secretary and Chief Financial Officer
   Lee Newbon..............  55  Director and Chief Operating Officer of IMPAC
                                 Group, Inc.
   James H. Oppenheimer....  56  Executive Vice President--U.S. Sales
   Richard L. Oppenheimer..  50  Chief Operating Officer--U.S. Operations
   Dean J. Henkel..........  46  Executive Vice President--U.S. Operations
   Zenas Block.............  82  Director
   David H. Horowitz.......  70  Director
</TABLE>
 
   Mr. Melvin B. Herrin founded Klearfold and has been Chairman of Klearfold
since its incorporation in 1977 and a Director and Chairman of IMPAC since
1996. Mr. Herrin graduated from Temple University. Mr. Herrin is the father of
H. Scott Herrin.
 
   Mr. Richard H. Block has served as the President and Chief Executive
Officer of AGI since October 1987 and the Chief Executive Officer of IMPAC
since March, 1998. He began his career at AGI in 1970 as a salesman; he was
subsequently promoted to Sales Manager and Executive Vice President. Prior to
1970, he served as a Sales Manager for Westvaco Corporation in New York and
Chicago. Mr. Block graduated from Alfred University. Mr. Block is the son of
Zenas Block.
 
   Mr. M. Shaun Lawson has been a director of IMPAC since March, 1999. Prior
to joining IMPAC, Mr. Lawson spent eight years as a non-executive director of
Tinsley Robor plc, three years of which were served as the Chairman. Mr.
Lawson is also a Managing Director of Priory Investments Limited Group.
 
   Mr. H. Scott Herrin has been a Director of Klearfold since 1981, President
of Klearfold from 1996 to 1998 and a Director of IMPAC since 1996. From March,
1998, until December, 1998, Mr. Herrin was an Executive Vice President of
IMPAC. Mr. Herrin graduated from Amherst College and has a law degree from
Harvard Law School. Mr. Herrin is the son of Melvin Herrin.
 
   Mr. Michel Reichert has been a Director of IMPAC since 1996. Since 1994,
Mr. Reichert has been a Managing General Partner of Heritage Partners, Inc. a
Boston-based private investment company ("Heritage"). Prior to 1994, Mr.
Reichert was a Managing Director of BancBoston Capital Inc., a private equity
investment firm. Mr. Reichert graduated from the University of Bourges,
France.
 
   Mr. Michael F. Gilligan has been a Director of IMPAC since 1996. Since
1994, Mr. Gilligan has been a General Partner of Heritage. Prior to 1994, Mr.
Gilligan was a Director of BancBoston Capital Inc., a private equity
investment firm. Mr. Gilligan graduated from Boston College.
 
   Mr. David C. Underwood has been with AGI since 1990 and IMPAC since March,
1998 and has been responsible for IMPAC's finance, information technologies
and human resources functions. Prior to joining AGI, Mr. Underwood was a
manager in the audit and financial consulting division of Arthur Andersen &
Company's Chicago office. Mr. Underwood graduated from the University of
Wisconsin and is a Certified Public Accountant.
 
                                      28
<PAGE>
 
   Mr. Lee Newbon was appointed Chief Operating Officer of IMPAC and Chief
Executive Officer of IMPAC Group Europe in November, 1998 and has been a
director of IMPAC since March, 1999. Prior to joining IMPAC, Mr. Newbon spent
over twenty years with Tinsley Robor plc, the last four of which he served as
Chief Executive Officer. Mr. Newbon has worked in the printing or music
industries since 1959.
 
   Mr. James H. Oppenheimer is responsible for sales, marketing and
administration for all U.S. markets. Mr. Oppenheimer joined AGI in 1983 as the
East Coast Sales Manager, and subsequently served as Vice President of East
Coast Sales and later as Executive Vice President of Sales for the packaging
and multimedia markets. Prior to joining AGI, he served as Executive Vice
President of Sales for the Walter Frank Organization, a packaging company
specializing in cosmetics. He joined IMPAC in March 1998. Mr. Oppenheimer
graduated from the University of Illinois, Champaign-Urbana. Mr. Oppenheimer
is the brother of Richard Oppenheimer.
 
   Mr. Richard L. Oppenheimer is responsible for managing the operations of
the U.S. businesses. Mr. Oppenheimer joined AGI in 1977 as Chicago Sales
Representative, and subsequently served in positions including California
Sales Representatives for Music, Sales Manager for Packaging, Vice President
of West Coast Sales and Executive Vice President of Sales for the music and
video markets. Prior to joining AGI, he spent six years selling custom
injection molding designs, specializing in the cosmetics industry. Mr.
Oppenheimer graduated from Southern Illinois University. He joined IMPAC in
March, 1998. Mr. Oppenheimer is the brother of James Oppenheimer.
 
   Mr. Dean J. Henkel is responsible for the manufacturing operations at the
Company's U.S. plants. Mr. Henkel has worked at AGI since 1975 in a number of
positions, including as a machine operator, finishing superintendent, plant
superintendent and plant manager in AGI's Melrose Park facility and most
recently as Executive Vice President--U.S. Operations. He joined IMPAC in
March, 1998. Mr. Henkel graduated from Illinois Benedictine College.
 
   Mr. Zenas Block has been a director of AGI since 1988 and a director of
IMPAC since March, 1998. Since 1991, Mr. Block has been an adjunct professor
at the New York University Stern School of Business and was a founder of its
Center for Entrepreneurial Studies. Mr. Block graduated from the City College
of New York. Mr. Block is the father of Richard Block.
 
   Mr. David H. Horowitz has been a director of AGI since 1988 and a director
of IMPAC since March, 1998. Mr. Horowitz is a consultant and investor in the
media and communications industry and is a director of theglobe.com., inc. Mr.
Horowitz graduated from Columbia College and has a law degree from Columbia
Law School.
 
Stockholder Agreement
 
   In January 1999, IMPAC and its stockholders entered into the Second Amended
and Restated Stockholder Agreement, dated as of January 11, 1999 (the
"Stockholder Agreement"). The Stockholder Agreement provides that IMPAC's
board of directors (the "Board") will in most circumstances consist of eleven
members to be elected as follows: (i) four individuals designated by the
holders of a majority of the shares of the Common Stock purchased by
affiliates of Heritage (the "Heritage Holders"); (ii) two individuals
designated by the holders of a majority of the shares of Common Stock
purchased by or on behalf of Melvin Herrin and Scott Herrin (the "Klearfold
Holders"); (iii) two individuals designated by the holders of a majority of
shares of Common Stock to be purchased by Messrs. Lawson and Newbon and other
prior employees and stockholders of Tinsley (the "Tinsley Holders"); and (iv)
three individuals designated as follows: (A) if Richard Block is both chief
executive officer of IMPAC and continues to hold at least 75% of his shares of
Common Stock, Richard Block and two individuals designated by Richard Block;
(B) if Richard Block is both chief executive officer of IMPAC and continues to
hold at least 50% but less than 75% of his shares of Common Stock, Richard
Block, one individual designated by Richard Block, and one individual
designated by the holders of a majority of the shares of the Common Stock held
by the holders of the Common Stock then employed by IMPAC and who had been
employed by AGI prior to the Combination (the "AGI Holders"); (C) if Richard
Block is both chief executive
 
                                      29
<PAGE>
 
officer of IMPAC and continues to hold less than 50% of his shares of Common
Stock held by him after the closing of the Combination, Richard Block and two
individuals designated by the AGI Holders; (D) if Richard Block is not chief
executive officer of IMPAC and continues to hold more than 50% of his shares
of Common Stock, one individual designated by Richard Block and two
individuals designated by the AGI Holders; and (E) if Richard Block is not
chief executive officer of IMPAC and continues to hold less than 50% of his
shares of Common Stock, three individuals designated by the AGI Holders.
 
   At any time the Heritage Holders may provide a written notice to IMPAC,
upon which the Board will then consist of: (A) eight individuals designated by
the Heritage Holders; (B) three individuals designated by the AGI Holders; (C)
two individuals designated by the Klearfold Holders; and (D) two individuals
designated by the Tinsley Holders.
 
   Board vacancies will be filled by a designee of the individual or group who
originally designated the vacating director. Each individual or group entitled
to designate a director will also be entitled to direct the removal of such
director and designate a replacement director.
 
   Executive officers of IMPAC will be appointed by the Board upon the
President's recommendations, subject to the provisions of such officers'
respective employment agreements.
 
   The Stockholder Agreement also contains each of (i) registration rights
provisions, which will provide certain demand registration rights, to become
effective upon the earlier to occur of June 7, 2002 and six months following
the consummation of an initial public offering of IMPAC's Common Stock, and
certain piggyback registration rights, (ii) transfer restrictions, (iii)
piggy-back and co-sale rights, (iv) rights of first refusal with respect to
certain transfers of Common Stock, (v) rights of first refusal with respect to
certain proposed sales of the Company and (vi) certain pre-emptive rights with
respect to certain equity issuances.
 
Section 16(a) Beneficial Ownership Reporting Compliance.
 
   Not applicable.
 
                                      30
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
   The following table sets forth the aggregate compensation paid by IMPAC for
services rendered during fiscal 1998 to its Chief Executive Officer and its
five most highly-compensated executive officers (determined on a historical
combined basis).
 
<TABLE>
<CAPTION>
                                           Annual Compensation
                                        --------------------------
                                                         Other
                                                         Annual     All Other
                                        Salary  Bonus Compensation Compensation
Name and Principal Position               ($)    ($)     ($)(3)       ($)(4)
---------------------------             ------- ----- ------------ ------------
<S>                                     <C>     <C>   <C>          <C>
Richard Block(1)....................... 288,230  --       --          8,668
 President and Chief Executive Officer
 
H. Scott Herrin(2)..................... 323,028  --       --            597
 Executive Vice President
 
James Oppenheimer(1)................... 265,653  --       --          6,392
 Executive Vice President--U.S. Sales
 
Richard L. Oppenheimer(1).............. 265,558  --       --          8,047
 Chief Operating Officer--U.S.
 Operations
 
Dean J. Henkel(1)...................... 184,743  --       --          7,544
 Executive Vice President--U.S.
 Operations
 
David C. Underwood(1).................. 184,743  --       --          7,547
 Treasurer, Secretary and Chief
 Financial Officer
</TABLE>
--------
(1) Commenced employment with IMPAC in March 1998.
(2) In December 1998, H. Scott Herrin terminated his employment with the
    Company.
(3) The value of perquisites and other personal benefits are not shown because
    the aggregate amount of such compensation did not exceed $50,000 or 10% of
    each executive's total annual salary and bonus.
(4) Reflects company contributions to the Company's 401(k) retirement savings
    plans on behalf of the named executive.
 
Option/SAR Grants in Fiscal 1998
 
   Although IMPAC has adopted certain stock option plans, in fiscal 1998 no
options were granted thereunder to any of the executive officers named in the
Summary Compensation Table and such executive officers do not hold any options
for the purchase of IMPAC's Common Stock.
 
Compensation of Directors
 
   Other than Melvin B. Herrin and M. Shaun Lawson, directors of IMPAC do not
receive compensation from IMPAC for their service in such capacities. In
fiscal 1998, Melvin B. Herrin received $323,028 pursuant to an Employment,
Non-Competition and Stock Repurchase Agreement for services provided by him to
IMPAC as Chairman of IMPAC's Board of Directors. See "Employment, Non-
Competition and Stock Repurchase Agreements" below. IMPAC has agreed to
provide M. Shaun Lawson with a base salary of $125,000 for services provided
by him as Vice Chairman of IMPAC's Board of Directors. Mr. Lawson became a
director of IMPAC in March 1999. IMPAC has agreed to provide Lee Newbon with a
base salary of $350,000, and the ability to participate in IMPAC's cash bonus
plan, for services provided by him as Chief Operating Officer of IMPAC and as
Chief Executive Officer of IMPAC Group Europe. Mr. Newbon became IMPAC's Chief
Operating Officer in November 1998 and was elected to IMPAC's Board of
Directors in March 1999.
 
Employment, Non-Competition and Stock Repurchase Agreements
 
   At the closing of the Combination, IMPAC entered into Employment, Non-
Competition and Stock Repurchase Agreements with each of Richard H. Block,
Melvin B. Herrin, H. Scott Herrin, David C.
 
 
                                      31
<PAGE>
 
Underwood, James H. Oppenheimer, Richard L. Oppenheimer and Dean J. Henkel, as
well as with certain other employees who are officers of one or more of its
subsidiaries, but will not be officers of IMPAC.
 
   Each employment agreement with one of the employees named above provides a
term of employment through June 2001, specifies a base salary and a package of
benefits and provides for participation in IMPAC's cash bonus plan. Each such
employment agreement (except as noted below) gives such individual (or his
estate) the right to offer his or her shares back to IMPAC in the event of
death, disability, retirement, upon his termination of his employment for good
reason, or upon termination of his employment by IMPAC without cause, and,
except in the instance of retirement or, if insurance proceeds are not
available to complete the repurchase, death or disability, IMPAC shall be
required to complete such repurchase, in each case at fair market value
calculated in accordance with such employment agreements. Each of Melvin
Herrin's and Scott Herrin's employment agreement give such individual's estate
the right, following the death of both Melvin Herrin and Scott Herrin, to
offer such estate's shares of Common Stock back to IMPAC. In the event that a
repurchase offer following an employee's death, disability or retirement is
rejected by IMPAC, and the offered shares are not repurchased by those of the
employee's fellow managers who may also have rights to repurchase the
employee's shares, then such shares will become freely transferable. Any
repurchase is subject to compliance with the terms of the Amended and Restated
Credit Facility, the Indenture and the terms of IMPAC's Charter, and if IMPAC
is unable to complete a purchase in compliance with such terms, the purchase
may be delayed until compliance is possible.
 
   The employment agreements provided base salaries for the year ending
December 31, 1998, as follows: Richard H. Block--$350,000; Melvin B. Herrin--
$325,000; H. Scott Herrin--$325,000; David C. Underwood--$225,000; James H.
Oppenheimer--$325,000; Richard L. Oppenheimer--$325,000; and Dean J. Henkel--
$225,000. Such base salaries are subject to cost of living adjustments for
each year thereafter.
 
   Each of the employment agreements also provides for severance pay upon
termination by IMPAC without cause or by the employee for good reason. IMPAC
must pay the employee his base salary as in effect prior to any such
termination, together with benefits and a variable compensation element
calculated with reference to IMPAC's payments under IMPAC's cash bonus plan,
until the later of (i) the end of the term of the employment contract, or (ii)
if so elected by IMPAC, the first anniversary of termination or, under certain
circumstances and with respect to certain employees, eighteen months after
termination, provided that the period during which severance pay is payable
may be extended for up to one additional year by notice to the employee from
IMPAC. If the employee is terminated by IMPAC without cause, or the employee
terminates his employment for good reason, at any time after the end of the
term of the employment agreement, IMPAC may by written notice to the employee
elect to pay the employee his base salary as in effect prior to any such
termination, together with benefits and a variable compensation element
calculated with reference to IMPAC's payments under the cash bonus plan, for a
period of one year from the date of termination or, under certain
circumstances and with respect to certain employees, eighteen months after
termination, provided that such period may be extended for up to one
additional year by notice to the employee from IMPAC. No severance is payable
in the event of a termination of employment as a result of death, disability
or retirement, or a termination by the employee without good reason or by
IMPAC with cause.
 
   Each of the employment agreements with the employees named above also
contains non-competition covenants pursuant to which the employee is
prohibited, during the term of his employment and for a "Restricted Period"
thereafter, from competing with the Company in any place where the Company now
or during the employee's employment does business, and, subject to certain
exceptions, from soliciting or encouraging any employee, contractor, customer,
vendor or supplier of the Company to terminate or materially reduce its
relationship with the Company. The applicable "Restricted Period" will, with
certain exceptions, be that period following the employee's termination during
which severance pay is being paid to the employee, and if no severance pay is
payable, the "Restricted Period" shall be the longer of (i) one year from the
date of termination, and (ii) two years from March 12, 1998. In addition, the
"Restricted Period" shall be extended by any period in which the employee is
in breach of his non-competition and non-solicitation obligations.
 
                                      32
<PAGE>
 
   Each of the employment agreements also provides that IMPAC and certain "co-
managers", taken together (in the case of Richard H. Block, David C.
Underwood, James H. Oppenheimer, Richard L. Oppenheimer and Dean J. Henkel,
the "co-managers" include each such person (other than himself), as well as
Dennis L. McGuin, Mary Frances Griffin and Jacqueline M. Barry) have the right
to repurchase the employee's shares of IMPAC's Common Stock following
termination of the employee's employment, as well as providing the rights
described above for the employee to require the repurchase of his stock. The
Company will obtain insurance policies on the life of each of Richard H.
Block, David C. Underwood, James H. Oppenheimer, Richard L. Oppenheimer and
Dean J. Henkel, and on the life of the survivor of Melvin Herrin and Scott
Herrin in order to assist in the financing of its obligations to repurchase
their stock. IMPAC will finance any stock repurchase, first, out of cash if
and to the extent available under the terms of the Amended and Restated Credit
Facility, the Indenture and the Charter and if IMPAC is unable to complete a
purchase at any time because no cash is then available under such terms, the
purchase may be delayed until cash becomes available to permit IMPAC to
complete the purchase in compliance with such terms.
 
   Executives and other employees are also entitled to participate in the
Company's 401(k) retirement savings plans, which provide retirement benefits
to employees and includes both employer and employee contributions.
 
Bonus Plan
 
   For fiscal 1998, the Company adopted a cash bonus plan that provided for
annual cash bonuses based on achievement of Company and individual performance
objectives. Because these performance objectives were not achieved, the
Company did not award any bonuses in fiscal 1998. The Company intends to adopt
a similar cash bonus plan for fiscal 1999.
 
Compensation Committee Interlocks and Insider Participation
 
   The Board of Directors of IMPAC does not maintain a compensation committee.
Executive compensation decisions are considered and decided by all of the
directors of IMPAC. All executive compensation decisions relating to fiscal
1998, including decisions relating to the compensation of persons named on the
Summary Compensation Table, were decided by the Board of Directors of IMPAC.
In fiscal 1998, no officers or employees of IMPAC other than Richard Block,
David Underwood and H. Scott Herrin participated in any discussions with the
Board of Directors of IMPAC regarding executive compensation.
 
                                      33
<PAGE>
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
                             BENEFICIAL OWNERSHIP
 
   The following table sets forth certain information regarding ownership of
the outstanding Common Stock of IMPAC as of March 15, 1999 by (i) each
director of IMPAC, (ii) each of the executive officers of IMPAC named in the
"Summary Compensation Table", (iii) each of the directors and executive
officers of IMPAC as a group and (iv) each person who beneficially owns more
than 5% of the outstanding shares of IMPAC's Common Stock(1).
 
<TABLE>
<CAPTION>
                                            Amount and Nature
                                              of Beneficial
     Name and Address                         Ownership(2)    Percent of Class
     ----------------                       ----------------- ----------------
     <S>                                    <C>               <C>
     Heritage Fund I, L.P.(3)..............       56,431           33.96%
     c/o Heritage Partners, Inc.
     30 Rowes Wharf
     Boston, MA 02110
 
     Heritage Fund II, L.P.(4).............       43,853           26.39%
     c/o Heritage Partners, Inc.
     30 Rowes Wharf
     Boston, MA 02110
 
     Michel Reichert(5)....................      100,284           60.35%
     c/o Heritage Partners, Inc.
     30 Rowes Wharf
     Boston, MA 02110
 
 
     Michael Gilligan(6)...................      100,284           60.35%
     c/o Heritage Partners, Inc.
     30 Rowes Wharf
     Boston, MA 02110
 
     Richard H. Block......................       19,005           11.44%
     c/o IMPAC Group, Inc.
     1950 North Ruby St.
     Melrose Park, IL 60160
 
     H. Scott Herrin, Arthur S. Keyser and
      Matthew H. Kamens....................        9,780            5.89%
     as Trustees under an
     Irrevocable Deed of Trust
     dated August 12, 1992
     f/b/o H. Scott Herrin
     c/o Klearfold, Inc.
     364 Valley Road
     Warrington, PA 18976
 
     H. Scott Herrin(7)....................        9,780            5.89%
     James H. Oppenheimer..................        6,227            3.75%
     Melvin B. Herrin......................        4,964            2.99%
     Richard L. Oppenheimer................        4,440            2.67%
 
     Arthur S. Keyser and Matthew H.
      Kamens...............................        3,916            2.36%
     as Trustees under an Indenture of
     Trust of Melvin B. Herrin
     dated June 4, 1996
     c/o Klearfold, Inc.
     364 Valley Road
     Warrington, PA 18976
 
     Dean J. Henkel........................        3,782            2.28%
     David C. Underwood....................        3,318            2.00%
     Lee Newbon............................          766              (*)
     David Horowitz........................          588              (*)
     Zenas Block...........................          147              (*)
     M. Shaun Lawson.......................            0               0
     All Directors and executive officers
      as a group (13 persons)..............      153,302            91.8%
</TABLE>
 
                                      34
<PAGE>
 
--------
(1) Holders of Series A Common Stock and Series B Common Stock vote together
    as a single class. See "Item 13. Certain Relationships and Related
    Transactions--Amendments to Charter".
(2) As used in this table, beneficial ownership means the sole or shared power
    to vote, or to direct the voting of a security, or the sole or shared
    power to dispose, or direct the disposition of, a security.
(3) HF Partners I, L.P. is the General Partner of Heritage Fund I, L.P. ("Fund
    I") and shares voting and investment control over the shares held by Fund
    I.
(4) Includes 2,775 shares of Series A Common Stock owned of record by Heritage
    Fund II Investment Corporation ("Fund II Investment Corporation"), and
    4,500 shares of Series B Common Stock and 36,578 shares of Series A Common
    Stock owned of record by Heritage Fund II, L.P. ("Fund II" and, together
    with Fund I and Fund II Investment Corporation, the "Heritage Funds").
    Fund II Investment Corporation is a wholly-owned subsidiary of Fund II and
    Fund II shares voting and investment control over the shares held by Fund
    II Investment Corporation. HF Partners II, L.L.C. is the General Partner
    of Fund II and shares voting and investment control over the shares held
    by Fund II.
(5) The shares shown as beneficially owned by Mr. Reichert represent 100,284
    shares owned of record by the Heritage Funds. Mr. Reichert through one or
    more intermediaries may be deemed to control the voting and disposition of
    the securities owned by the Heritage Funds, and accordingly may be deemed
    to have shared voting and investment power with respect to all shares held
    by the Heritage Funds. However, Mr. Reichert disclaims beneficial
    ownership of the securities held by the Heritage Funds.
(6) The shares shown as beneficially owned by Mr. Gilligan represent 100,284
    shares owned of record by the Heritage Funds. Mr. Gilligan through one or
    more intermediaries may be deemed to control the voting and disposition of
    the securities owned by the Heritage Funds, and accordingly may be deemed
    to have shared voting and investment power with respect to all shares held
    by the Heritage Funds. However, Mr. Gilligan disclaims beneficial
    ownership of the securities held by the Heritage Funds.
(7) Includes 7,959 shares that are held by H. Scott Herrin, Arthur S. Keyser
    and Matthew H. Kamens, as Trustees under an Irrevocable Deed of Trust
    dated August 12, 1992 f/b/o H. Scott Herrin (the "1992 Trust"), and over
    which H. Scott Herrin directs investment and voting control and an option
    the 1992 Trust has to purchase 803 shares of Series A Common Stock held of
    record by Arthur S. Keyser and Matthew H. Kamens as Trustees under an
    Indenture of Trust of Melvin B. Herrin dated June 4, 1996 and an option
    the 1992 Trust has to purchase 1,018 shares of Series A Common Stock held
    of record by Melvin B. Herrin.
(*) Represents less than one percent (1%).
 
                                      35
<PAGE>
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
Investment Agreement and Related Transactions
 
 Investment Agreement
 
   In February 1998, KFI, each of Heritage Fund I Investment Corporation (an
affiliate of Heritage, "Fund I Investment Corporation "), Matthew H. Kamens,
as Trustee under Indenture of Trust dated 06/04/96 of Melvin B. Herrin
("Kamens") and Arthur S. Keyser, as Trustee under an Irrevocable Deed of Trust
dated 08/12/92 f/b/o H. Scott Herrin ("Keyser", and, together with Fund I
Investment Corporation and Kamens, each a security holder who owned more than
5% of the outstanding shares of IMPAC's Common Stock, the "Major
Stockholders"), each of Zenas Block and David Horowitz (each a director of
IMPAC and, collectively, the "Outside Directors"), each of Melvin B. Herrin,
H. Scott Herrin, Richard Block, James Oppenheimer, Richard Oppenheimer, David
Underwood and Dean Henkel (each an executive officer of IMPAC and,
collectively, the "Executive Officers") and other IMPAC shareholders entered
into an Investment Agreement (the "Investment Agreement"), pursuant to which
(i) the existing stockholders of KFI (the "Klearfold Contributing Parties")
agreed to contribute to KFI the entire outstanding capital stock of KFI and a
warrant to purchase KFI capital stock and to invest approximately $4.6 million
in cash, and (ii) certain stockholders and holders of stock appreciation
rights of AGI (the "AGI Contributing Parties") agreed to contribute to KFI
shares of common stock and to invest the proceeds of their stock appreciation
rights, totaling an aggregate of $14.4 million. In exchange for these
contributions and cash investments, KFI issued to each contributing or
investing party shares of KFI's common stock.
 
   In addition, immediately prior to completion of the Combination, Melvin B.
Herrin and H. Scott Herrin, and other shareholders of KFI surrendered to KFI
shares of its outstanding capital stock in exchange for the cancellation of
certain promissory notes representing approximately $35,000 in unpaid purchase
price for such shares. Such employees and certain other employees of KFI
received options to purchase shares of IMPAC's Common Stock.
 
   Pursuant to the Investment Agreement, each of the Executive Officers and
other managers of IMPAC entered into Employment, Non-Competition and Stock
Repurchase Agreements and each recipient of stock options as described above
entered into an Agreement relating to Employment and Stock Ownership. See
"Item 11. Executive Compensation--Employment, Non-Competition and Stock
Repurchase Agreements".
 
   Pursuant to the Investment Agreement, each of the contributing or investing
parties made representations and warranties to KFI as to their title to the
shares being contributed and as to their authority to enter into the
Investment Agreement and the related transactions, and KFI made customary
representations and warranties to the contributing or investing parties. From
and after the closing of the Combination, Heritage and Messrs. Herrin and
their affiliates (the "KFI Indemnitors") have indemnified the AGI Contributing
Parties for any breach by the Company of its representations, warranties and
covenants in the Investment Agreement ("Holding Indemnified Claims").
 
   The aggregate amount payable by the KFI Indemnitors with respect to all
claims for indemnification after the closing of the Combination will not
exceed approximately $2.3 million, except with respect to claims arising from
breaches of representations as to KFI's equity capitalization, authority to
consummate the Combination, taxes and brokers, as to which indemnification is
limited to the value to the KFI Indemnitors of their investment in KFI
pursuant to the Investment Agreement, immediately after the Combination (the
"Share Value").
 
   Each of the contributing or investing parties have indemnified KFI for
breach of such party's representations and warranties in the Investment
Agreement, up to such party's Share Value.
 
   Pursuant to the Investment Agreement KFI agreed to comply with a number of
operating covenants that survived the completion of the Combination, including
the maintenance of corporate existence and insurance, compliance with
applicable laws and contracts and the provision of financial information and
similar matters.
 
                                      36
<PAGE>
 
 AGI Dividend
 
   Prior to the consummation of the Combination the AGI stockholders received
a dividend in the form of promissory notes aggregating approximately $22.5
million, which was approximately the amount of AGI's undistributed accumulated
S corporation earnings. These notes were paid in full concurrently with the
consummation of the Combination.
 
 Agreement and Plan of Merger
 
   In February 1998, KFI, its wholly-owned subsidiary AGI Acquisition Corp.,
AGI and Klearfold, and Richard Block, James Oppenheimer, Richard Oppenheimer,
Donald W. Kosterka, James A. Ladwig, Dean Henkel, Gary Mankoff and David
Underwood (the "Principal AGI Stockholders") and Melvin B. Herrin, H. Scott
Herrin and the Major Stockholders entered into an Agreement and Plan of Merger
under which AGI Acquisition Corp. agreed to merge with and into AGI, with AGI
as the surviving corporation. In this merger, the shares of AGI not
contributed to KFI under the Investment Agreement, together with certain
outstanding stock appreciation rights of AGI and an outstanding option for the
purchase of AGI's common stock, were converted into a right to receive cash in
the aggregate amount of $30.5 million, net of fees. Of this amount,
approximately $813,000 was placed in escrow to secure certain indemnification
obligations described below.
 
   The payment of the foregoing cash consideration was funded from the
proceeds of the Offering and the cash investments made pursuant to the
Investment Agreement.
 
   In the Agreement and Plan of Merger, AGI and the Principal AGI Stockholders
made customary representations and warranties to KFI, the existing
stockholders of KFI, and AGI Acquisition Corp., and KFI, Klearfold and AGI
Acquisition Corp. made customary representations and warranties to AGI. From
and after the closing of the Combination, all of the existing stockholders of
AGI (the "AGI Indemnitors") have indemnified the Company for any breach of
certain representations, warranties and covenants in the Agreement and Plan of
Merger. From and after the closing of the Combination, the KFI Indemnitors
have indemnified the former AGI investors for any breaches of certain
representations, warranties and covenants in the Agreement and Plan of Merger.
 
   The aggregate amount payable by the AGI Indemnitors with respect to all
claims for indemnification after the closing of the Combination will not
exceed $3.5 million, except with respect to claims arising from breaches of
representations as to equity capitalization, authority to consummate the
Combination, taxes and brokers, as to which indemnification will be limited to
the combined after-tax value to the indemnifying party of its proceeds from
the merger and related transactions. The aggregate amount payable by the KFI
Indemnitors with respect to all claims for indemnification after the closing
of the Combination will not exceed approximately $2.3 million, except with
respect to claims arising from breaches of representations as to equity
capitalization, authority to consummate the Combination, taxes and brokers,
and certain other specified claims, as to which indemnification will be
limited to the KFI Indemnitors' share value.
 
 Payments to Management Shareholders
 
   In connection with the Combination and certain related transactions,
Richard Block, James Oppenheimer, Richard Oppenheimer and Dean Henkel received
an aggregate of approximately $18.3 million in cash payments for the
repurchase of equity and cancellation of stock appreciation rights, net of
amounts reinvested in the Company, including approximately $16.9 million paid
to Mr. Richard Block, the Chief Executive Officer of the Company.
 
                                      37
<PAGE>
 
Indebtedness of Management
 
   In connection with the Combination, IMPAC made advances to each of Messrs.
Underwood and Henkel, and James Oppenheimer and Richard Oppenheimer (each an
executive officer of IMPAC and collectively referred to as the "Indebted
Officers") with respect to the tax effect incurred by each Indebted Officer in
connection with receiving the proceeds of their stock appreciation rights and
rolling such proceeds into shares of IMPAC capital stock. The largest amount
of these advances that was outstanding during fiscal 1998 and as of March 15,
1999 for each of the Indebted Officers were:
 
<TABLE>
     <S>                                                             <C>
     Dave Underwood................................................. $460,081.10
     Richard Oppenheimer............................................  359,888.28
     James Oppenheimer..............................................  336,941.10
     Dean Henkel....................................................  336,941.10
</TABLE>
 
   In connection with such advances each Indebted Officer is required to pay
cash interest at a fixed rate of 5.85% per annum.
 
Other Transactions
 
   The Company's manufacturing facility in Warrington, Pennsylvania is leased
directly from Melvin B. Herrin for an annual rent of approximately $336,000,
and the Louisa, Virginia facility is also leased directly from Mr. Herrin
through an entity controlled by Mr. Herrin for an annual rent of approximately
$273,000. The leases expired on December 31, 1995 and, pursuant to option
clauses, were renewed effective January 1, 1996. The leases contain escalation
clauses based on the producer price index increase and expire on December 31,
2005 with an option to renew for a further five year period. The Company
believes the terms of these leases to be at fair market value.
 
   The Company's Melrose Park, Illinois facility is leased to the Company by a
partnership which includes the founder of AGI and Richard Block for an annual
rent of approximately $475,000. The term of the lease expires on September 30,
2002. AGI has options to extend the lease for several additional five year
terms. The Company believes that the terms of these leases were at fair market
value at the time entered into by the Company.
 
   For fiscal 1998, the Company paid approximately $110,377 to Freya Block
Design, Inc. for consulting services. Freya Block Design, Inc. is a
corporation wholly-owned by Freya Block, the wife of Richard Block.
 
Tinsley Acquisition and Related Transactions
 
 Tinsley Equity Funding
 
   In September 1998 and in connection with the Tinsley Acquisition, IMPAC,
Fund I, Fund II, Messrs. Block and Underwood, and certain other persons
entered into a Stock Purchase Agreement, pursuant to which Fund I, Fund II,
Messrs. Block and Underwood and such other certain persons party thereto
agreed to invest in IMPAC an aggregate amount of approximately $58,575,000 in
cash. In exchange for such cash investment, IMPAC issued to each investing
party shares of IMPAC's Common Stock.
 
 Heritage Holders Repurchase
 
   In January 1999, in connection with the Preferred Issuance and with part of
the proceeds therefrom, IMPAC repurchased 30,087 shares of its Common Stock
held by the Heritage Holders for an aggregate purchase price of $18,806,000.
 
 Amendments to Charter
 
   In January 1999, IMPAC amended and restated its Certificate of
Incorporation to provide for two classes of common stock, the Series A Common
Stock and the Series B Common Stock, and one class of preferred stock, the
Preferred Stock. The holders of each share of Series A Common Stock and Series
B Common Stock have
 
                                      38
<PAGE>
 
one vote per share and the holders of the Series A Common Stock and the Series
B Common Stock vote together as the holders of a single class. At the option
of IMPAC, upon the closing of an underwritten public offering pursuant to an
effective registration statement under the Securities Act (covering the offer
and sale of shares of any series of Common Stock), all shares of Series B
Common Stock then issued and outstanding will be converted into shares of
Series A Common Stock. Except with respect to certain votes affecting their
rights as holders of Preferred Stock, the holders of Preferred Stock have no
voting rights. The Preferred Stock accrues dividends on a cumulative basis at
14.0% per annum for years 1-5, 15.0% per annum for year 6, and either 14.0% or
15.0% per annum for years 7-10 depending on whether the dividends are paid in
cash or with additional Preferred Stock, respectively. During the first six
years after issuance, dividends on the Preferred Stock are payable solely by
issuing additional shares of Preferred Stock. The Preferred Stock accrues
dividends at 24.0% per annum if certain events occur, including an event of
non-compliance as defined and certain signficant changes in the ownership of
IMPAC. On or after January 12, 2002, IMPAC, at its option, may redeem in whole
or in part, all of the outstanding shares of Preferred Stock, provided,
however, that a premium of up to 10.0% be paid. The Preferred Stock is not
redeemable at the option of the holders of Preferred Stock. IMPAC is required
to redeem all outstanding shares of Preferred Stock on December 31, 2008 at
face value plus all accrued and unpaid dividends. The Preferred Stock contains
covenants, among others, limiting additional indebtedness, restricted
payments, guaranties, advances to affiliates, mergers, asset sales and
dispositions. The Preferred Stock ranks senior to all classes of Common Stock
with respect to dividend distributions and distributions upon the liquidation
or dissolution of IMPAC.
 
                                      39
<PAGE>
 
                                    PART IV.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
   (a)(1) Financial Statements. See "Index to Consolidated Financial
Statements".
 
   (a)(2) All schedules other than Schedule 27.1, the Financial Data Schedule,
have been omitted because either they are not required, they are not applicable
or they have been included in the Consolidated Financial Statements.
 
   (a)(3) Exhibits
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
     2.1   Agreement and Plan of Merger, dated February 19, 1998, between KFI
           Holding Corporation (which subsequently changed its name to "IMPAC
           Group, Inc." and is sometimes referred to below as "Holding" or the
           "Company"), AGI Acquisition Corporation, Heritage, Klearfold, AGI,
           certain stockholders of AGI, and certain stockholders of Holding.*
 
     2.2   Investment Agreement, dated February 19, 1998, between Holding,
           Heritage Fund I Investment Corporation ("Heritage"), certain
           stockholders of Holding, certain stockholders of AGI and certain
           other persons.*
 
     2.3   Stock Purchase Agreement, dated as of September 10, 1998, by and
           among the Company, Heritage Fund I, L.P., Heritage Fund II, L.P.,
           Richard Block and certain other persons.+
 
     2.4   Share Sale and Purchase Agreement, dated as of November 20, 1998,
           between J.L.B. Holding B.V. and James Upton Holding B.V. and Music
           Print B.V. and J.D.H. Lamme.
 
     3.3   Second Amended and Restated By-laws of the Company.
 
     3.5   Fourth Amended and Restated Certificate of Incorporation of the
           Company.
 
     4.1   Indenture, dated as of March 12, 1998, by and among the Company, AGI
           Incorporated ("AGI"), Klearfold, Inc. ("Klearfold"), KF--Delaware,
           Inc. ("KFD"), KF--International, Inc. ("International" and,
           collectively, with AGI, Klearfold, KFD and International, the
           "Guarantors") and State Street Bank and Trust Company, as Trustee.*
 
     4.2   Form of the Company's 10 1/8% Senior Notes due 2008.*
 
     4.3   Registration Rights Agreement, dated as of March 12, 1998, by and
           among the Company, the Guarantors, Goldman, Sachs & Co. ("Goldman")
           and Donaldson, Lufkin, and Jenrette Securities Corporation ("DLJ").*
 
     4.4   First Supplemental Indenture, dated as of July 21, 1998, between the
           Company and the Trustee.*
 
    10.1   Purchase Agreement, dated as of March 5, 1998, by and among the
           Company, Goldman and DLJ.*
 
    10.2   Escrow Agreement, dated March 12, 1998, between AGI, the Company,
           the Escrow Agent and the Escrowed Stockholder Representative.*
 
    10.4   Labor Agreement between Klearfold and United Paperworker's
           International Union Local 286, effective December 1, 1994, as
           extended by amendment through November 30, 2002.*
 
    10.5   Second Amendment to Lease dated September 30, 1994 between Norman
           Levin and Evelyn F. Levin and Klearfold (Warrington, Pennsylvania).*
 
    10.6   Amended and Restated Lease, dated as of June 7, 1996, between Dena
           Corp. and Klearfold (Louisa, Virginia).*
</TABLE>
 
 
                                       40
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
    10.7   Amended and Restated Lease, dated as of June 7, 1996, between Melvin
           B. Herrin and Klearfold (Warrington, Pennsylvania).*
 
    10.8   Lease dated May 29, 1985 by and between Chicago Title and Trust
           Company as Trustee under Trust Agreement dated February 1, 1977, and
           known as Trust No. 1069185 and AGI re 256,629 sq. ft. at 1950 N.
           Ruby Street.*
 
    10.9   Amendment to Lease dated as of October 1, 1987 by and between
           Chicago Title and Trust Company, as Trustee under a Trust Agreement
           dated February 1, 1977, and known as Trust No. 1069185 and AGI re
           256,629 sq. ft. at 1950 Ruby Street.*
 
    10.10  Second Amendment to Lease dated as of April 30, 1992, by and between
           Chicago Title and Trust Company as Trustee under a Trust Agreement
           dated February 1, 1977 and known as Trust No. 1069185 and AGI re
           256,629 sq. ft. at 1950 Ruby Street.*
 
    10.11  Third Amendment to Lease dated July 2, 1997 by and between Chicago
           Title and Trust Company as Trustee under Trust Agreement dated
           February 1, 1997 and known as Trust No. 1069185 and AGI re 256,629
           sq. ft. at 1950 N. Ruby Street.*
 
    10.12  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and David Underwood.*
           /**
 
    10.13  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and James
           Oppenheimer.* /**
 
    10.14  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and Richard
           Oppenheimer.* /**
 
    10.15  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and Dean Henkel.* /**
 
    10.16  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and H. Scott Herrin.*
           /**
 
    10.17  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and Melvin Herrin.*
           /**
 
    10.18  Employment, Non-Competition and Stock Repurchase Agreement, dated as
           of March 12, 1998, by and between the Company and Richard Block.*
           /**
    10.21  Company Security Agreement, dated as of March 12, 1998 between the
           Company and Bank of America NT & SA ("BofA") .*
 
    10.22  Borrowers Security Agreement, dated as of March 12, 1998 between
           AGI, Klearfold and BofA.*
 
    10.23  Klearfold Subsidiaries Security Agreement, dated as of March 12,
           1998 between KFD and International (the "Klearfold Subsidiaries")
           and BofA.*
 
    10.24  Company Pledge Agreement, dated as of March 12, 1998 between the
           Company and BofA.*
 
    10.25  Borrowers Pledge Agreement, dated as of March 12, 1998 between AGI,
           Klearfold and BofA.*
 
    10.26  Klearfold Subsidiaries Pledge Agreement, dated as of March 12, 1998
           between the Klearfold Subsidiaries and BofA.*
 
    10.27  Company Guaranty, dated as of March 12, 1998, between the Company
           and BofA.*
 
    10.28  Borrowers Guaranty, dated as of March 12, 1998 between AGI,
           Klearfold and BofA.*
 
    10.29  Klearfold Subsidiaries Guaranty, dated as of March 12, 1998 between
           the Klearfold Subsidiaries and BofA.*
 
    10.30  Company Patent Assignment dated as of March 12, 1998 between the
           Company and BofA.*
 
    10.31  AGI Patent Assignment, dated as of March 12, 1998 between AGI and
           BofA.*
 
</TABLE>
 
 
                                       41
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
    10.32  Klearfold Patent Assignment, dated as of March 12, 1998 between
           Klearfold and BofA.*
 
    10.33  International Patent Assignment, dated March 12, 1998, between
           International and BofA.*
 
    10.34  KFD Patent Assignment, dated March 12, 1998, between KFD and BofA.*
 
    10.35  Company Trademark Assignment, dated as of March 12, 1998 between the
           Company and BofA.*
 
    10.36  AGI Trademark Assignment, dated as of March 12, 1998 between AGI and
           BofA.*
 
    10.37  Klearfold Trademark Assignment, dated as of March 12, 1998 between
           Klearfold and BofA.*
 
    10.38  International Trademark Assignment, dated March 12, 1998, between
           International and BofA.*
 
    10.39  KFD Trademark Assignment, dated March 12, 1998, between KFD and
           BofA.*
 
    10.40  Company Copyright Assignment, dated as of March 12, 1998 between the
           Company and BofA.*
 
    10.41  AGI Copyright Assignment, dated as of March 12, 1998 between AGI and
           BofA.*
 
    10.42  Klearfold Copyright Assignment, dated as of March 12, 1998 between
           Klearfold and BofA.*
 
    10.43  International Copyright Assignment, dated March 12,, 1998, between
           International and BofA.*
 
    10.44  KFD Copyright Assignment, dated March 12, 1998, between KFD and
           BofA.*
 
    10.45  Promissory Note--L/C Loan Note, dated March 12, 1998, from Klearfold
           to BofA.*
 
    10.46  Promissory Note--L/C Loan Note, dated March 12, 1998, from AGI to
           BofA.*
 
    10.47  AGI Pledge and Security Agreement, dated March 12, 1998, between
           AGI, BofA, Bank One, Illinois, NA and William Blair & Co.*
 
    10.48  Subrogation Agreement, dated March 11, 1998, between Mellon Bank,
           N.A. ("Mellon"), BofA, the Company and Klearfold.*
 
    10.49  Letter of Credit and Reimbursement Agreement, dated August 1, 1997,
           between Klearfold and Mellon.*
 
    10.50  First Amendment to Reimbursement Agreement, dated March 11, 1998,
           between Mellon, and Klearfold.*
 
    10.51  AGI Letter of Credit, dated December 15, 1997.*
 
    10.52  Mellon Bank, N.A. Letter of Credit, dated as of August 21, 1997.*
 
    10.53  Back-Up Klearfold Letter of Credit, dated March 11, 1998.*
 
    10.54  Loan Agreement, dated January 1, 1995, between AGI and City of
           Jacksonville, Illinois.*
 
    10.55  Loan Agreement, dated August 1, 1997, between Bucks County and
           Klearfold.*
 
    10.56  Klearfold Profit Sharing/401(K) Plan.*/**
 
    10.57  Klearfold Flexible Benefits Plan for Salaried Employees.*/**
 
    10.58  Amended and Restated Multicurrency Credit Facility, dated March 12,
           1998 and as amended and restated July 7, 1998 (the "Credit
           Facility"), among BofA, the Company, AGI and Klearfold.*
 
    10.59  Commitment Letter, dated July 7, 1998, from Heritage Fund I, L.P.
           and Heritage Fund II, L.P.*
 
    10.61  Second Amended and Restated Stockholder Agreement, dated as of
           January 11, 1998, between the Company, its stockholders.
 
    10.62  Securities Purchase Agreement, dated January 11, 1999, between the
           Company, BT Capital Investors, L.P. ("BT") and Phoenix Home Life
           Mutual Insurance Company ("Phoenix").
 
    10.63  Warrant, dated January 11, 1999, issued to BT for the purchase of
           the Company's common stock.
 
</TABLE>
 
 
                                       42
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
    10.64  Warrant, dated January 11, 1999, issued to Phoenix for the purchase
           of the Company's common stock.
 
    10.65  First Amendment to the Credit Facility, dated as of September 11,
           1998, among BofA, the Company, AGI and Klearfold.
 
    10.66  Second Amendment to the Credit Facility, dated as of November 13,
           1998, among BofA, the Company, AGI and Klearfold.
 
    10.67  Third Amendment to the Credit Facility, dated as of November 16,
           1998, among BofA, the Company, AGI and Klearfold.
 
    10.68  Fourth Amendment to the Credit Facility, dated as of December 10,
           1998, among BofA, the Company, AGI and Klearfold.
 
    10.69  Fifth Amendment to the Credit Facility, dated as of January 11,
           1999, among BofA, the Company, AGI and Klearfold.
 
    10.70  Lease dated March 11, 1996 between Friends Provident Life Assurance
           Limited and Printing Resource Limited and Tinsley Robor plc.
           ("Tinsley")(Dublin, Ireland).
 
    10.71  Supplement to Lease Agreement dated as of August 14, 1996, among
           Walter Reischl, W.R. Druck Medien Ges.m.b.H & Co. KG, Reischl-Druck
           Ges.m.b.H. (formerly James Upton GmbH), and Tinsley (Salzburg,
           Austria).
 
    10.72  Lease dated January 1, 1996 between Stichting Adminstratiekantoor
           Kinderen van den Nieuwenhuizen en Daandels and Tinsley (Uden, The
           Netherlands).
 
    10.73  Lease dated January 31, 1985, among Pension Funds Securities Limited
           and Minipack Systems Limited and Tinsley (Southhampton, England).
 
    10.74  Lease dated March 19, 1984 among Pension Funds Securities Limited
           and Minipack Systems Limited and Tinsley (Southhampton, England).
 
    10.75  Lease dated June 16, 1993 among Orlinworth Plc, Messrs. T Walker-
           Arnott & I Rackley, Conduit Communications Limited, and Verulam
           Investments Limited (London, England).
 
    10.76  Lease dated June 16, 1995 between M. Webber and R.M. Harris and
           Tinsley (London, England).
 
    10.77  Lease dated June 16, 1995, between M. Webber and R.M. Harris and
           Tinsley (London, England).
 
    10.78  Lease dated August 13, 1998 between Courtaulds CIF Nominees Limited
           and Tinsley (Littlehampton, England).
 
    10.79  Lease dated May 4, 1995 between Sun Alliance and London Assurance
           Company Limited and Tinsley (Swindon, England).
 
    10.80  Lease dated May 4, 1995 between Sun Alliance and London Assurance
           Company Limited and Tinsley (Swindon, England).
 
    10.81  Lease dated June 12, 1996 between Sun Alliance and London Assurance
           Company Limited and Tinsley (Swindon, England).
 
    10.82  Supplemental Lease and License for Alterations dated June 12, 1995
           between Sun Alliance and London Assurance Company Limited and
           Tinsley (Swindon, England).
 
    10.83  First Amendment to Employment, Non-Competition and Stock Repurchase
           Agreement , dated as of January 8, 1999, by and between the Company
           and David C. Underwood.**
 
    10.84  First Amendment to Employment, Non-Competition and Stock Repurchase
           Agreement, dated as of January 8, 1999, by and between the Company
           and Dean Henkel.**
 
    10.85  Letter Agreement, dated as of January 7, 1999, between the Company
           and certain employees.**
 
</TABLE>
 
 
                                       43
<PAGE>
 
<TABLE>
<CAPTION>
   Exhibit
   Number                               Description
   -------                              -----------
   <C>     <S>
   10.86   First Amendment to Employment, Non-Competition and Stock Repurchase
           Agreement, dated as of January 8, 1999, by and between the Company
           and Richard Oppenheimer.**
 
   10.87   Service Agreement, dated as of June 20, 1996, between Tinsley and
           Lee Newbon with Individual Pension Arrangement dated June 29,
           1998.**
   10.89   Support Agreement, dated as of December 15, 1998, between the
           Company, AGI, Klearfold, IMPAC Europe Limited, Levelprompt Limited
           and the companies party thereto.
 
   10.90   Amended and Restated Revolving Loan, dated as of July 7, 1998,
           between the Company and BofA.
 
   10.91   Amended and Restated Loan, dated as of July 7, 1998, between AGI and
           BofA.
 
   10.92   Amended and Restated L/C Loan, dated as of July 7, 1998, between
           Klearfold BofA.
 
   10.93   Promissory Note--Term Loan A, dated as of July 7, 1998, between the
           Company and BofA.
 
   10.94   Promissory Note--Term Loan B, dated as of July 7, 1998, between the
           Company and BofA.
 
   10.95   Swing Line Note, dated as of July 7, 1998, between the Company and
           BofA.
 
   10.96   Global Amendment No. 1 to Collateral documents, dated as of July 6,
           among the Company, AGI, Klearfold, KFD, International and BofA.
 
   10.97   Global Amendment No. 1 to Security documents, dated as of September
           11, 1998, among the Company, AGI, Klearfold, KFD, International and
           BofA.
 
   10.98   Global Amendment No. 1 to Guaranties, dated as of September 11,
           1998, among the Company, AGI, Klearfold, KFD and BofA.
 
   10.99   Amendment No. 1 to AGI Pledge and Security Agreement, dated as of
           September 11, 1998, among AGI, BofA, Bank One Trust Company NA and
           William Blair and Company.
 
   10.100  Letter Agreement, dated as of January 11, 1999, between Heritage
           Fund II Investment Corporation and the Company.
   10.101  Loan Note Instrument dated September 10, 1998 by IMPAC Europe public
           limited company and BofA.
   10.102  Subscription Agreement dated July 7, 1998 between IMPAC Europe plc,
           the Company, Levelprompt Limited and BT Wolfensohn.
   16.1    Letter of Arthur Andersen LLP re: Change in Certifying Accountant.*
 
   16.2    Letter of KPMG Peat Marwick LLP re: Change in Certifying
           Accountant.*
 
   21.1    List of Subsidiaries.
 
   24.1    Power of Attorney (included in signature pages to Form 10-K).
 
   27.1    Financial Data Schedule.
 
</TABLE>
--------
 * Incorporated by reference to the same numbered exhibit to the Registrant's
   Registration Statement No. 333-48821, on Form S-4, filed by the Registrant
   with respect to $100,000,000 aggregate principal amount of the Company's 10
   1/8% Senior Subordinated Notes due 2008.
 + Incorporated by reference to the same numbered exhibit to the Registrant's
   Form 10-Q filed by the Registrant for the quarterly period ending September
   30, 1998.
** This item is a management contract or compensatory plan.
 
                                      44
<PAGE>
 
(b) Reports on Form 8-K.
 
   A report on Form 8-K was filed on October 27, 1998, announcing the
consummation of the Tinsley Acquisition on September 11, 1998.
 
   A report on Form 8K/A was filed on December 14, 1998 supplementing the Form
8-K filed by the Company on October 27, 1998 by filing as an exhibit thereto
the information included under the headings "Unaudited Pro Forma Combined
Financial Data" and "Consolidated Financial Statements" in the Prospectus
included in the Company's Registration Statement on Form S-4 (file no. 333-
48821) filed under the Securities Act of 1933 (incorporated by reference).
 
                                      45
<PAGE>
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................  F-2
 
Independent Auditors' Report.............................................  F-3
 
Consolidated Balance Sheets as of December 31, 1997 and 1998.............  F-4
 
Consolidated Statements of Income for the Years Ended December 31, 1996,
 1997 and 1998...........................................................  F-5
 
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
 Ended December 31, 1996, 1997 and 1998..................................  F-6
 
Consolidated Statements of Cash Flows for the Years Ended December 31,
 1996, 1997 and 1998.....................................................  F-7
 
Notes to Consolidated Financial Statements...............................  F-9
 
Schedule II, Summary of Valuation and Qualifying Accounts................ F-28
</TABLE>
 
                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareholders
of IMPAC Group, Inc.:
 
   In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of IMPAC Group, Inc. and its subsidiaries (the "Company") at December
31, 1998, and the results of their operations and their cash flows for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express and opinion on these financial statements
based on our audit. We conducted our audit of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. The financial statements of the Company as of
December 31, 1997, and for each of the two years in the period then ended were
audited by other independent accountants whose report dated February 6, 1998,
expressed an unqualified opinion on those statements.
 
                                          PricewaterhouseCoopers LLP
 
Chicago, Illinois
March 29, 1999
 
                                      F-2
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Board of Directors
IMPAC Group, Inc.:
 
   We have audited the consolidated balance sheet of IMPAC Group, Inc. and
subsidiaries (formerly KFI Holding Corporation and subsidiaries) as of
December 31, 1997, and the related consolidated statements of income,
shareholders' equity (deficit) and cash flows for each of the years in the
two-year period ended December 31, 1997. In connection with our audits of the
consolidated financial statements, we also have audited the related financial
statement schedule as listed in the accompanying index for each of the years
in the two-year period ended December 31, 1997. These consolidated financial
statements and financial statement schedule are the responsibility of
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
 
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IMPAC
Group, Inc. and subsidiaries (formerly KFI Holding Corporation and
subsidiaries) as of December 31, 1997, and the results of their operations and
their cash flows for each of the years in the two-year period ended December
31, 1997, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedule for each of the two
years in the two-year period ended December 31, 1997, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
 
                                          KPMG LLP
 
Philadelphia, Pennsylvania
February 6, 1998
 
                                      F-3
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                           December 31, 1997 and 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                               1997      1998
                                                             --------  --------
<S>                                                          <C>       <C>
ASSETS
Current assets:
  Cash...................................................... $    194  $  4,239
  Trade accounts receivable, net of allowances of $1,517 in
   1998 and $560 in 1997....................................    5,986    44,361
  Other receivables.........................................      439     4,278
  Inventories...............................................    6,957    23,982
  Deferred income taxes.....................................      661     3,160
  Prepaids and other current assets.........................      666     1,650
                                                             --------  --------
    Total current assets....................................   14,903    81,670
                                                             --------  --------
Long-term assets:
  Property, plant and equipment, net........................   11,100   107,669
  Goodwill, net.............................................        0   163,623
  Deferred financing costs, net.............................    1,024    10,449
  Restricted cash...........................................      625       426
  Other assets..............................................      641     2,498
                                                             --------  --------
    Total assets............................................ $ 28,293  $366,335
                                                             ========  ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Bank overdraft............................................ $      0  $  4,804
  Current maturities of long-term debt......................        0     5,487
  Trade payables............................................    5,098    20,289
  Accrued expenses..........................................    1,925    23,800
                                                             --------  --------
    Total current liabilities...............................    7,023    54,380
                                                             --------  --------
Long-term debt..............................................   33,850   235,072
Deferred income taxes.......................................    1,307    10,477
Other noncurrent liabilities................................        0       823
                                                             --------  --------
    Total liabilities.......................................   42,180   300,752
                                                             --------  --------
Shareholders' equity (deficit):
  Common stock, voting, $.001 par value; authorized 135,813
   shares, 90,500 Shares issued and outstanding at December
   31, 1997.................................................        0       --
  Common stock, nonvoting, $.001 par value; 9,500 shares
   authorized, issued and outstanding at December 31, 1997..        0       --
  Common stock, series A, $.001 par value; 1,000,000 shares
   authorized, 191,746 shares issued and outstanding at
   December 31, 1998........................................      --          0
  Common stock, series B, $.001 par value; 50,000 shares
   authorized, 4,500 shares issued and outstanding at
   December 31, 1998........................................      --          0
  Preferred stock, nonvoting, $.001 par value; 100,000
   shares authorized, issued and outstanding at December 31,
   1997.....................................................        0       --
Paid in capital.............................................   20,000    98,625
Notes receivable............................................      (35)        0
Carryover basis adjustment..................................  (37,143)  (37,143)
Accumulated other comprehensive income......................      --       (681)
Retained earnings...........................................    3,291     4,782
                                                             --------  --------
    Total shareholders' equity (deficit)....................  (13,887)   65,583
                                                             --------  --------
      Total liabilities & shareholders' equity (deficit).... $ 28,293  $366,335
                                                             ========  ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                   statements
 
                                      F-4
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
                  Years ended Decmber 31, 1996, 1997 and 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                     1996     1997      1998
                                                    -------  -------  --------
<S>                                                 <C>      <C>      <C>
Net sales.........................................  $54,218  $52,493  $184,298
Cost of goods sold................................   40,094   39,322   134,643
                                                    -------  -------  --------
Gross profit......................................   14,124   13,171    49,655
Selling, general and administrative expenses......    7,594    7,589    31,762
PTP royalty and commission (income)...............     (731)     (33)      --
                                                    -------  -------  --------
Operating income..................................    7,261    5,615    17,893
Other income (expense):
  Interest income.................................      --       --      1,093
  Interest expense................................   (2,324)  (3,469)  (14,607)
  Other expense...................................      --       --       (192)
  Loss on sale of fixed assets....................      --       --       (265)
                                                    -------  -------  --------
Income from continuing operations before income
 taxes............................................    4,937    2,146     3,922
Income taxes......................................   (2,003)    (754)   (1,879)
                                                    -------  -------  --------
Income from continuing operations.................    2,934    1,392     2,043
Discontinued operations--Gain on disposal of PTP
 Industries, Inc., net of tax benefit of $140.....       35      --        --
Extraordinary charge for early retirement of debt,
 net of tax benefit of $368.......................      --       --       (552)
                                                    -------  -------  --------
Net income........................................  $ 2,969  $ 1,392  $  1,491
                                                    =======  =======  ========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
                                   statements
 
                                      F-5
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 
                  Years ended December 31, 1996, 1997 and 1998
                     (in thousands except number of shares)
 
<TABLE>
<CAPTION>
                                Common Stock      Preferred Stock                                   Accumulated
                    Compre-  -------------------  -----------------                     Carryover      Other
                    hensive   Number of           Number of         Paid-in    Notes      Basis    Comprehensive Retained
                    Income     Shares     Amount   Shares    Amount Capital  Receivable Adjustment    Income     Earnings
                    -------  -----------  ------  ---------  ------ -------  ---------- ---------- ------------- --------
<S>                 <C>      <C>          <C>     <C>        <C>    <C>      <C>        <C>        <C>           <C>
Balance at
 January 1, 1996..            13,500,000  $ 135         --    $--   $ 3,983     $--      $    --       $ --      $ 7,393
Net income from
 January 1, 1996
 to June 7,
 1996...........                     --     --          --     --       --       --           --         --        1,070
Redemption of
 common stock...             (13,500,000)  (135)        --     --    (3,983)     --       (37,143)       --       (8,463)
Sale of common
 stock..........                 100,000    --          --     --     1,000      --           --         --          --
Issuance of
 notes
 Receivable.....                     --     --          --     --       --       (35)         --         --          --
Sale of
 preferred
 stock..........                     --     --      100,000    --    19,000      --           --         --          --
Net income from
 June 8, 1996 to
 December 31,
 1996...........                     --     --          --     --       --       --           --         --        1,899
                             -----------  -----   ---------   ----  -------     ----     --------      -----     -------
Balance at
 December 31,
 1996...........                 100,000    --      100,000    --    20,000      (35)     (37,143)       --        1,899
Net income......                     --     --          --     --       --       --           --         --        1,392
                             -----------  -----   ---------   ----  -------     ----     --------      -----     -------
Balance at
 December 31,
 1997...........                 100,000    --      100,000    --    20,000      (35)     (37,143)       --        3,291
Recapitalization
 in connection
 with the
 acquisition of
 AGI............                     --     --     (100,000)   --    18,965       35          --         --          --
Sale of common
 stock..........                  96,246    --          --     --    58,575      --           --         --          --
Stock options
 granted........                     --     --          --     --     1,085      --           --         --          --
Cumulative
 translation
 adjustment.....    $ (681)          --     --          --     --       --       --           --        (681)        --
Net income......     1,491           --     --          --     --       --       --           --         --        1,491
                    ------
Comprehensive
 income.........    $  810           --     --          --     --       --       --           --         --          --
                    ======   -----------  -----   ---------   ----  -------     ----     --------      -----     -------
Balance at
 December 31,
 1998...........                 196,246  $ --          --    $--   $98,625     $--      $(37,143)     $(681)    $ 4,782
                             ===========  =====   =========   ====  =======     ====     ========      =====     =======
<CAPTION>
                     Total
                    ---------
<S>                 <C>
Balance at
 January 1, 1996..  $ 11,511
Net income from
 January 1, 1996
 to June 7,
 1996...........       1,070
Redemption of
 common stock...     (49,724)
Sale of common
 stock..........       1,000
Issuance of
 notes
 Receivable.....         (35)
Sale of
 preferred
 stock..........      19,000
Net income from
 June 8, 1996 to
 December 31,
 1996...........       1,899
                    ---------
Balance at
 December 31,
 1996...........     (15,279)
Net income......       1,392
                    ---------
Balance at
 December 31,
 1997...........     (13,887)
Recapitalization
 in connection
 with the
 acquisition of
 AGI............      19,000
Sale of common
 stock..........      58,575
Stock options
 granted........       1,085
Cumulative
 translation
 adjustment.....        (681)
Net income......       1,491
Comprehensive
 income.........         --
                    ---------
Balance at
 December 31,
 1998...........    $ 65,583
                    =========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-6
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                  Years ended December 31, 1996, 1997 and 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                    1996     1997      1998
                                                  --------  -------  ---------
<S>                                               <C>       <C>      <C>
Cash flows from operating activities:
 Net income...................................... $  2,969  $ 1,392  $   1,491
 Adjustments to reconcile net income to net cash
  provided by operating activities--
   Extraordinary charge for early retirement of
    debt.........................................      --       --         552
   Depreciation and amortization.................    1,969    1,814      9,772
   Amortization of goodwill......................      --       --       1,692
   Loss on sale of fixed assets..................      --       --         265
   Deferred income taxes.........................      253     (595)       992
   Net cash used in discontinued operations......     (250)     --         --
   Changes in assets and liabilities--
    Trade accounts receivable, net...............     (423)   2,199     (6,930)
    Inventories..................................    1,014       76     (1,943)
    Trade payables and bank overdraft............   (2,079)   1,049      6,644
    Other assets and liabilities.................      754      278        662
                                                  --------  -------  ---------
        Net cash provided by operating
         activities..............................    4,207    6,213     13,197
                                                  --------  -------  ---------
Cash flows from investing activities:
 Capital expenditures............................   (1,271)  (4,144)   (16,016)
 Proceeds from sale of investment in PTP
  Industries, Inc................................    1,860      --         --
 Acquisition of AGI Incorporated, net of cash
  acquired.......................................      --       --     (64,163)
 Acquisition of Tinsley Robor plc, net of cash
  acquired.......................................      --       --    (159,870)
 Acquisition of Music Print B.V., net of cash
  acquired.......................................      --       --      (6,917)
                                                  --------  -------  ---------
        Net cash provided by (used for) investing
         activities..............................      589   (4,144)  (246,966)
                                                  --------  -------  ---------
Cash flows from financing activities:
 Net change in borrowings under revolving credit
  line...........................................      833   (3,996)    11,200
 Repayment of long-term debt.....................   (8,942)  (1,100)   (30,103)
 Proceeds from issuance of long-term debt........   34,200      --     101,033
 Proceeds from senior subordinated notes.........      --       --     100,000
 Proceeds from issuance of bonds.................      --     4,000        --
 Change in capital leases........................      --       --         908
 (Increase) decrease in restricted cash..........      --      (625)       199
 Proceeds from issuance of common stock..........    1,000      --      63,175
 Proceeds from issuance of preferred stock.......   19,000      --         --
 Payments to acquire stock of previous
  shareholders...................................  (49,724)     --         --
 Change in deferred financing costs..............   (1,171)    (160)   (10,881)
                                                  --------  -------  ---------
        Net cash provided by (used for) financing
         activities..............................   (4,804)  (1,881)   235,531
                                                  --------  -------  ---------
Effect of exchange rate differences on cash......      --       --       2,283
                                                  --------  -------  ---------
(Decrease) increase in cash......................       (8)     188      4,045
Cash, beginning of period........................       14        6        194
                                                  --------  -------  ---------
Cash, end of period.............................. $      6  $   194  $   4,239
                                                  ========  =======  =========
</TABLE>
 
    The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-7
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
 
                  Years ended December 31, 1996, 1997 and 1998
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                          1996   1997    1998
                                                         ------ ------ --------
<S>                                                      <C>    <C>    <C>
Supplemental Cash Flow Information:
 Interest paid.......................................... $2,147 $3,474 $  9,316
 Income taxes paid......................................  1,630  1,479    2,953
 Acquisition of AGI Incorporated--
   Fair market value of assets acquired, including
    goodwill of $40.5 million...........................               $103,529
   Fair market value of liabilities assumed.............                 24,945
   Common stock issued..................................                 14,400
                                                                       --------
   Cash paid............................................                 64,184
   Cash acquired........................................                     21
                                                                       --------
 Acquisition of AGI Incorporated, net of cash acquired..               $ 64,163
                                                                       ========
 Acquisition of Tinsley Robor plc--
   Fair market value of assets acquired, including
    goodwill of $122.7 million..........................               $199,747
   Fair market value of liabilities assumed.............                 37,841
   Stock options granted................................                  1,085
                                                                       --------
   Cash paid............................................                160,821
   Cash acquired........................................                    951
                                                                       --------
 Acquisition of Tinsley Robor plc, net of cash
  acquired..............................................               $159,870
                                                                       ========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
                                   statements
 
                                      F-8
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1--Business Description
 
   The Company is an international designer, manufacturer and marketer of
high-end, value-added specialty packaging for various consumer products
markets including entertainment, cosmetics and personal care. Through its
creative design work, specialized manufacturing techniques and diverse
printing capabilities, the Company offers innovative specialty packaging
solutions for customers that seek to differentiate their products in the
consumer marketplace.
 
   On March 12, 1998, KFI Holding Corporation ("KFI"), the parent company of
Klearfold, Inc. ("Klearfold"), completed its acquisition of AGI Incorporated
("AGI") (see Note 3) and the issuance of $100 million of 10 1/8% Senior
Subordinated Notes ("Senior Subordinated Notes") (See Note 11). Upon
consummation of this acquisition, KFI changed its name to "IMPAC Group, Inc."
In September 1998, IMPAC Group, Inc. acquired substantially all of the issued
and outstanding shares of capital stock of Tinsley Robor plc, subsequently
renamed Tinsley Robor Limited ("Tinsley") (see Note 3).
 
   The accompanying consolidated financial statements include the financial
statements of IMPAC Group, Inc. ("IMPAC") and all of its domestic and foreign
wholly-owned subsidiaries (together, the "Company"). All intercompany
transactions have been eliminated in consolidation.
 
   Certain amounts appearing in prior years financial statements have been
reclassified to conform with the current period presentation and changes in
the Company's debt arrangements described below.
 
Note 2--Significant Accounting Policies
 
 Revenue recognition
 
   Revenues are recognized upon shipment to a customer pursuant to specific
purchase orders and are recorded net of allowances and rebates.
 
 Inventories
 
   Inventories are stated at the lower of cost or market and include the
appropriate elements of material, labor and manufacturing overhead costs. Cost
is determined using the first-in, first-out ("FIFO") method for all components
of inventory other than the paper component of inventory for AGI Incorporated
("AGI") which is determined using the last-in, first-out ("LIFO") method.
 
 Property, plant and equipment
 
   Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Leasehold improvements
and capital leased assets are amortized over the shorter of the lease term or
estimated useful life of the related asset. Equipment under construction is
not depreciated until placed in full-time use. When properties are retired or
disposed, the costs and related depreciation reserves are eliminated and the
resulting gain or loss is recognized in income. The useful lives of property,
plant and equipment are summarized as follows:
 
<TABLE>
     <S>                                                              <C>
     Buildings and leasehold improvements............................ 3-50 years
     Machinery and equipment......................................... 3-10 years
     Furniture and fixtures.......................................... 5-10 years
</TABLE>
 
   Depreciation expense included in the statements of income was $1,678,
$1,614 and $8,780 for the years ended December 31, 1996, 1997 and 1998,
respectively.
 
 
                                      F-9
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Goodwill
 
   Goodwill consists of the excess of purchase price over the fair market
value of the net assets acquired and is being amortized over 40 years.
Amortization of goodwill during the year ended December 31, 1998 and
accumulated amortization at December 31, 1998 were $1.7 million. The Company
continually evaluates whether events and circumstances have occurred that
indicate the asset may not be recoverable. When factors indicate that the
asset should be evaluated for possible impairment, the Company uses an
estimate of the related undiscounted future cash flows over the remaining
lives of the asset in measuring whether or not an impairment has occurred.
 
 Deferred financing costs
 
   The Company incurred various financing costs associated with the issuance
of long-term debt. These costs are being amortized over the term of the debt
agreements.
 
 Concentration of credit risk
 
   Sales to two customers accounted for approximately 27% and 23% of the
Company's net sales for the years ended December 31, 1996 and 1997. Sales to
two customers accounted for approximately 21.5% of the Company's net sales for
the year ended December 31, 1998.
 
 Income Taxes
 
   Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
 
 Fair value of financial instruments
 
   Management believes that the fair value of all financial instruments
approximates their carrying value.
 
 Use of estimates
 
   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and related disclosures. Actual
results could differ from these estimates.
 
 Foreign currency transactions
 
   The financial statements of the Company's foreign subsidiaries were
prepared in their respective local currency and translated into U.S. dollars
based on the currency exchange rate at the end of the period for the balance
sheet and a weighted-average rate for the period on the statement of income.
Translation adjustments are reflected as accumulated other comprehensive
income in shareholders' equity (deficit) and accordingly have no effect on net
income.
 
                                     F-10
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Note 3--Acquisitions
 
 Acquisition of AGI Incorporated--
 
   On March 12, 1998, the Company acquired all of the common stock of AGI for
$69.0 million including $54.6 million of cash and $14.4 million of newly
issued common stock, plus acquisition costs. Concurrently, the Company funded
the retirement of $8.3 million of indebtedness outstanding under AGI's credit
facility immediately prior to the transaction. The acquisition was funded by
the proceeds from the issuance of $100.0 million of Senior Subordinated Notes
and $4.6 million of new common stock.
 
   This acquisition was accounted for as a purchase and, accordingly, the
operating results of AGI have been included in the Company's consolidated
financial statements from the date of acquisition. A summary of the Company's
purchase price allocation follows:
 
<TABLE>
   <S>                                                                  <C>
   Receivables......................................................... $11,555
   Inventories.........................................................   6,998
   Deferred incomes taxes..............................................   2,221
   Property, plant and equipment.......................................  40,550
   Other assets........................................................   1,703
   Trade payables and accrued expenses................................. (11,800)
   Long-term debt......................................................  (7,640)
   Deferred income taxes...............................................  (5,505)
                                                                        -------
     Net assets acquired............................................... $38,082
                                                                        =======
</TABLE>
 
 Acquisition of Tinsley Robor plc--
 
   On September 11, 1998, the Company acquired the common stock of Tinsley for
$137.7 million plus acquisition costs. Concurrently, the Company funded the
retirement of $18.5 million of indebtedness outstanding under Tinsley's credit
agreements immediately prior to the transaction. The acquisition was funded
through additional borrowings of $93.7 million under the Company's Amended and
Restated Multicurrency Credit Facility described in Note 11 below, $58.6
million in proceeds from the sale of common stock to the Company's existing
stockholders or their affiliates and the issuance, in aggregate, of $8.5
million of five year promissory notes to former Tinsley shareholders. Tinsley
is a supplier of printed packaging for the music and multimedia market and has
an established presence in the U.K. and Europe.
 
   This acquisition was accounted for as a purchase and, accordingly, the
operating results of Tinsley have been included in the Company's consolidated
financial statements from the date of acquisition. A summary of the Company's
preliminary purchase price allocation follows:
 
<TABLE>
   <S>                                                                 <C>
   Receivables........................................................ $ 19,646
   Inventory..........................................................    7,944
   Property, plant and equipment......................................   46,139
   Other assets.......................................................    2,392
   Trade payables and accrued expenses................................  (20,267)
   Long-term debt.....................................................  (15,179)
   Deferred income taxes..............................................   (2,395)
                                                                       --------
     Net assets acquired.............................................. $ 38,280
                                                                       ========
</TABLE>
 
 
                                     F-11
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Acquisition of Music Print B.V.--
 
   On November 24, 1998, the Company purchased the outstanding capital stock
of Music Print B.V. ("Music Print"), a Netherlands limited liability company,
for approximately $5.3 million plus acquisition costs. Concurrently, the
Company retired approximately $0.2 million of historical indebtedness of Music
Print and purchased the facility in which Music Print operates for $1.3
million. The acquisition was funded through additional revolver borrowings
under the Company's Amended and Restated Multicurrency Credit Facility. Music
Print supplies printed packaging in the Netherlands for the music and
multimedia markets.
 
 Unaudited Pro Forma for Acquisitions--
 
   The following unaudited pro forma information presents certain operating
data calculated to reflect the acquisitions of AGI and Tinsley and the
additional borrowings incurred to fund those acquisitions as if they occurred
as of January 1, 1997.
 
<TABLE>
<CAPTION>
                                                                1997     1998
                                                              -------- --------
   <S>                                                        <C>      <C>
   Net sales................................................. $281,170 $271,049
   Net income (loss)......................................... $  2,080 $ (2,731)
</TABLE>
 
   This pro forma data does not purport to represent what actual operating
results would have been had the acquisitions been consummated on the dates
indicated or what such results will be for any future period.
 
Note 4--Leveraged Recapitalization
 
   On June 7, 1996, a merger between Klearfold and KFI/Heritage Acquisition
Corporation ("Acquisition"), a wholly-owned subsidiary of KFI, was
consummated. KFI and Acquisition were formed for the purpose of acquiring all
the capital stock of Klearfold by certain affiliates of Heritage Partners
Management Company ("Heritage") together with certain existing Klearfold
shareholders and key members of Klearfold management ("Management Investors")
in a leveraged recapitalization transaction.
 
   The Management Investors maintained the majority voting interest in the
Company and no change in control as described in Emerging Issue Task Force
Issue 88-16 occurred as a result of the merger. Therefore, the merger has been
accounted for as a leveraged recapitalization with the accounting basis of
Klearfold's assets and liabilities being carried over after the merger. The
difference between the accounting basis of Klearfold's assets and liabilities
and their fair values was $34,831, which was recorded in shareholders' equity
(deficit) as a carryover basis adjustment. An additional $2,312 was recorded
as carryover basis adjustment related to merger costs incurred to effect the
recapitalization. The funds required to effect the recapitalization were
provided by the issuance of $20,000 of common and preferred stock with the
balance of the funding provided by bank borrowings. The funds were used to
acquire $47,319 of the outstanding stock of Klearfold's previous shareholders,
to repay $7,763 of existing bank loans, and to pay $3,470 in merger and
financing costs.
 
Note 5--Discontinued Operations
 
   On April 19, 1996, the Company sold its 51% interest in its thermoform
packaging operations--PTP Industries, Inc. (PTP). Accordingly, PTP is
accounted for as discontinued operations in the accompanying consolidated
financial statements. Proceeds from the sale of PTP were $1,860 and a gain of
$35 (net of taxes of $140) was recognized in 1996.
 
 
                                     F-12
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
Note 6--Inventories
 
   Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                               1997      1998
                                                              -------  --------
   <S>                                                        <C>      <C>
   Raw materials............................................. $ 3,658  $  9,597
   Work in process and finished goods........................   3,299    14,385
                                                              -------  --------
                                                              $ 6,957  $ 23,982
                                                              =======  ========
 
   Inventories accounted for under the LIFO method at December 31, 1998 were
$3,783. Under the FIFO method of accounting, such inventories would have been
$379 lower than those reported at December 31, 1998. During 1998, LIFO
inventory prices decreased, the effect of which increased net income by $379.
 
Note 7--Property, Plant and Equipment
 
   Property, plant and equipment, net at December 31, 1997 and 1998 consisted
of the following:
 
<CAPTION>
                                                               1997      1998
                                                              -------  --------
   <S>                                                        <C>      <C>
   Land...................................................... $   --   $  1,801
   Building and leasehold improvements.......................   1,916    27,753
   Machinery and equipment...................................  24,244   160,360
   Furniture and fixtures....................................   2,034     3,690
   Construction in progress..................................     176     3,235
                                                              -------  --------
                                                               28,370   196,839
   Less--Accumulated depreciation............................ (17,270)  (89,170)
                                                              -------  --------
   Net property, plant and equipment......................... $11,100  $107,669
                                                              =======  ========
 
   Property, plant and equipment at December 31, 1998 included capital leases
of $7.5 million, net of accumulated amortization of $2.0 million.
 
Note 8--Accrued Expenses
 
   Accrued expenses at December 31, 1997 and 1998 consisted of the following:
 
<CAPTION>
                                                               1997      1998
                                                              -------  --------
   <S>                                                        <C>      <C>
   Employee compensation and withholdings.................... $   951  $  7,488
   Rebates payable...........................................     --      5,179
   Accrued interest..........................................     233     3,478
   Other.....................................................     741     7,655
                                                              -------  --------
                                                              $ 1,925  $ 23,800
                                                              =======  ========
</TABLE>
 
Note 9--Income Taxes
 
   The sources of income from continuing operations before income taxes for
1998 are $425 from U.S. operations and $3,497 from foreign operations. The
components of the provision for income taxes on income from continuing
operations for the years ended December 31, 1996, 1997 and 1998 consisted of
the following:
 
<TABLE>
<CAPTION>
                                                           1996   1997    1998
                                                          ------ ------  ------
   <S>                                                    <C>    <C>     <C>
   Current-
     U.S. federal........................................ $1,616 $1,292  $  580
     U.S. state and local................................    134     57     373
     Foreign.............................................    --     --      (66)
                                                          ------ ------  ------
                                                           1,750  1,349     887
   Deferred..............................................    253   (595)    992
                                                          ------ ------  ------
   Provision for income taxes............................ $2,003 $  754  $1,879
                                                          ====== ======  ======
</TABLE>
 
                                     F-13
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
   The provision for income taxes on income from continuing operations in each
period differs from that which would be computed by applying the statutory
U.S. federal income tax rate to income from continuing operations before
income taxes as a result of the following:
 
<TABLE>
<CAPTION>
                                                               1996  1997  1998
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Tax provision at statutory rate............................ 34.0% 34.0% 34.0%
   State income taxes, net of federal benefit.................  2.3   --    0.9
   Goodwill...................................................  --    --   15.7
   Tax effect resulting from foreign activities...............  --    --   (4.8)
   Other, net.................................................  4.3   1.1   2.1
                                                               ----  ----  ----
   Effective tax rate......................................... 40.6% 35.1% 47.9%
                                                               ====  ====  ====
</TABLE>
 
   The tax effects of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant portions of the net deferred tax liability were as follows at
December 31, 1997 and 1998:
 
<TABLE>
<CAPTION>
                                                              1997      1998
                                                             -------  --------
   <S>                                                       <C>      <C>
   Gross deferred tax assets:
     Accounts receivable.................................... $   212  $    376
     Inventories............................................     362       693
     Accruals not deductible until paid.....................     --      2,108
     Other..................................................      87       158
                                                             -------  --------
   Total gross deferred tax assets..........................     661     3,335
                                                             -------  --------
   Gross deferred tax liabilities:
     Property, plant and equipment..........................  (1,245)  (10,480)
     Other..................................................     (62)     (172)
                                                             -------  --------
   Total gross deferred tax liabilities.....................  (1,307)  (10,652)
                                                             -------  --------
   Net deferred tax liability............................... $  (646) $ (7,317)
                                                             =======  ========
</TABLE>
   The Company has not provided a valuation allowance for deferred tax assets
because, although realization is not assured, the Company believes it is more
likely than not that such tax assets will be recognized through reversals of
taxable timing differences and taxable income in future periods.
 
Note 10--Employee Benefit Plans
 
 Defined Contribution Plans--
 
   Several of the Company's subsidiaries maintain defined contribution plans
in which non-union employees may voluntarily elect to participate. Under
certain plans, the Company matches a portion of the amounts contributed by
employees. Additionally, under certain plans the Company can make additional
discretionary contributions. The cost incurred for these plans was $24, $28
and $791 in 1996, 1997 and 1998, respectively.
 
   One of the Company's subsidiaries is required, on behalf of union-
registered employees, to contribute to a union-managed multi-employer pension
plan. If the Company completely or partially withdraws from the pension plan,
the Company may be required to pay its share of the pension plan's unfunded
vested liability. There was no unfunded vested liability at December 31, 1998.
The cost incurred for the union pension plan was $118, $121 and $121 in 1996,
1997 and 1998, respectively.
 
 
                                     F-14
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 Defined Benefit Plan--
 
   The Company's U.K. subsidiaries maintain a defined benefit pension plan.
Total costs for the plan for the year ended December 31, 1998 were $86. The
funded status of the plan at December 31, 1998 was as follows:
 
<TABLE>
<CAPTION>
                                                                         1998
                                                                        -------
   <S>                                                                  <C>
   Plan assets at fair value........................................... $10,621
   Projected benefit obligation........................................   8,464
                                                                        -------
   Assets over projected benefit obligation............................   2,157
   Unrecognized gain...................................................  (1,279)
                                                                        -------
   Net pension asset................................................... $   878
                                                                        =======
</TABLE>
 
   The key assumptions used in accounting for the defined benefit plan include
a weighted average discount rate of 5.5%, salary increases of 3.0% and a long-
term rate of return on plan assets of 8.0%.
 
Note 11--Long-term Debt
 
   Long-term debt as of December 31, 1997 and 1998, consisted of the
following:
 
<TABLE>
<CAPTION>
                                                                1997     1998
                                                               ------- --------
   <S>                                                         <C>     <C>
   Bank borrowings............................................ $29,850 $103,410
   Senior subordinated notes..................................     --   100,000
   Industrial revenue bonds...................................   4,000   11,640
   Loan notes.................................................     --     8,393
   Capital leases.............................................     --    17,116
                                                               ------- --------
     Total debt...............................................  33,850  240,559
     Less--current maturities.................................     --     5,487
                                                               ------- --------
     Total long-term debt..................................... $33,850 $235,072
                                                               ======= ========
</TABLE>
 
   On March 12, 1998, the Company completed the issuance of $100.0 million in
Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10
1/8% and mature March 15, 2008. The Indenture governing the Senior
Subordinated Notes contains certain covenants that, among other things, limit
the ability of the Company to incur additional indebtedness, pay dividends,
make investments or restricted payments, enter into certain transactions with
affiliates, dispose of certain assets, incur liens securing subordinated
indebtedness and engage in mergers and consolidations. The Senior Subordinated
Notes are general, unsecured obligations of IMPAC and are fully and
unconditionally guaranteed by all domestic and, subsequent to December 31,
1998, certain foreign subsidiaries of the Company (the "Subsidiary
Guarantors") on a joint and several basis (see Note 16). The Senior
Subordinated Notes will be senior to any future subordinated debt of the
Company. At December 31, 1998, the Company had no indebtedness outstanding
that was subordinated to the Senior Subordinated Notes. The proceeds of the
Senior Subordinated Notes were used to fund the acquisition of AGI and to
retire all outstanding indebtedness under the Company's prior credit
agreement. As a result of the refinancing, the Company recorded an
extraordinary charge of $552 (net of tax), reflecting the write-off of
deferred financing costs.
 
   On March 12, 1998, the Company entered into a new five year credit facility
which provided for a $40.0 million revolving credit facility and a $13.0
million letter of credit facility. On July 7, 1998, the Company entered into
an Amended and Restated Multicurrency Credit Facility (the "Facility") which
became effective on the initial funding date of the Tinsley acquisition and
replaced the prior credit agreement. The Facility provides for up to $53.0
million of revolving credit borrowings (the "Revolver") with a $20 million
letter of credit subfacility
 
                                     F-15
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
under the Revolver (the "L/C Facility"). The Facility also provides for $37.0
million of Term Loan A borrowings and $64.0 million of Term Loan B borrowings.
The Facility also provides a guarantee to the holders of the Loan Notes
described below. Under the provisions of the Facility, the aggregate amount of
outstanding Term Loan A borrowings is limited by the amount outstanding under
the Loan Notes guarantee. Up to $8.5 million of drawings under this guarantee
to redeem the Loan Notes will be converted to additional borrowings under Term
Loan A and any drawings which, as a consequence of currency fluctuations,
exceed $8.5 million will be converted to additional borrowings under the
Revolver. Borrowings under the Facility rank senior to the Senior Subordinated
Notes and are guaranteed by the Subsidiary Guarantors on a senior basis and
are secured by substantially all of the assets of IMPAC and the Subsidiary
Guarantors. As of December 31, 1998, there were $11.2 million of borrowings
outstanding under the Revolver, $28.4 million of borrowings outstanding under
Term Loan A and $63.8 million of borrowings outstanding under Term Loan B. The
Company currently has $12.6 million in letters of credit outstanding under the
L/C Facility securing its industrial revenue bond ("IRB") borrowings. The
unused portion of the facility at December 31, 1998 was $29.2 million. The
interest rate on the Facility is based on either the IBOR or Base Rate plus
the applicable margin and at December 31, 1998, the weighted average interest
rate for the facility was 7.73%. The interest rate on the L/C Facility is
based on the applicable IBOR margin which was 2.25% at December 31, 1998. The
Company currently pays a commitment fee of 1/2 of 1% per annum on the amount
of the available credit on the Revolver over the amount outstanding, plus any
outstanding letters of credit available. The Revolver has a five and one-half
year maturity. The Term Loan A and Term Loan B provide for quarterly scheduled
payments maturing in five and one-half years and six and one-half years,
respectively. The Company is required to make mandatory prepayments on the
term loans beginning in March, 2000 if the Company generates excess cash flow,
as defined.
 
   The credit agreement governing the Facility (the "Credit Agreement")
includes covenants requiring the Company to maintain (i) maximum leverage
ratios, (ii) maximum senior leverage ratios, (iii) minimum interest coverage
ratios, and (iv) minimum fixed charge coverage ratios. The Credit Agreement
also contains covenants, among others, limiting additional indebtedness,
liens, dividends, restricted payments, guaranties, advances to affiliates,
investments, mergers, creation of subsidiaries, asset sales and dispositions.
 
   In connection with the Facility, in November 1998, the Company entered into
two interest rate swap agreements effectively fixing its IBOR interest rate at
5.42% by exchanging its variable interest rate on Term Loan B of the Facility
for a fixed interest rate. The interest rate differential relating to these
swaps is reflected as an adjustment to interest expense over the lives of the
swaps. The aggregate notional amount under these agreements is $64.0 million.
Management estimates the carrying value of these interest rate swaps to
approximate fair value.
 
   In connection with the acquisition of Tinsley, the Company issued $8.5
million of five year promissory notes ("Loan Notes") to former Tinsley
shareholders. The Loan Notes rank senior to the Senior Subordinated Notes and
are guaranteed by Bank of America. Drawings under this guarantee will be
converted into borrowings under Term Loan A and the Revolver of the Credit
Facility.
 
   In connection with the acquisition of AGI, the Company assumed $7.6 million
of variable rate IRB borrowings which mature on February 1, 2026 and accrue
interest at 4.25%, as of December 31, 1998. In connection with the acquisition
of Tinsley, the Company assumed $15.2 million of capital leases ($17.1 million
at December 31, 1998) which mature in 1-7 years and accrue interest at a
weighted average interest rate of 6.53%, as of December 31, 1998.
 
   On August 1, 1997, the Company issued $4,000 of IRB borrowings which mature
on August 1, 2007 and accrue interest at a fixed rate of 4.35%. The indenture
agreement requires the Company to use the proceeds for the acquisition of an
offset printing press and related equipment. All proceeds not used immediately
for these costs are to be kept in a restricted cash account. The balance of
restricted cash at December 31, 1998 is $426.
 
 
                                     F-16
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
   The maturities of long-term debt and capital leases at December 31, 1998
are as follows:
 
<TABLE>
   <S>                                                                  <C>
   1999................................................................ $  5,487
   2000................................................................    9,850
   2001................................................................   12,030
   2002................................................................   12,423
   2003................................................................   13,593
   Thereafter..........................................................  187,176
                                                                        --------
     Total long-term debt, including current maturities................ $240,559
                                                                        ========
</TABLE>
 
Note 12--Equity
 
 Issuances of Common Stock--
 
   In connection with the acquisition of AGI on March 12, 1998, the Company
(i) exchanged 44,118 shares of new Common Stock, Series A for all previously
issued and outstanding shares of non-voting Common Stock, voting Common Stock
and Preferred Stock of KFI Holdings, (ii) issued 13,529 shares of new Common
Stock, Series A for $4.6 million, and (iii) issued 42,353 shares of new Common
Stock, Series A as partial consideration to former shareholders of AGI. In
connection with the acquisition of Tinsley on September 11, 1998, the Company
issued 96,246 shares of new Common Stock, Series A and Series B, to certain of
the Company's existing stockholders or their affiliates for $58.6 million.
 
 Stock Options--
 
   In 1998, the Company established a nonqualified stock option plan for key
employees ("Stock Option Plan"). The Company accounts for this plan under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation costs for this plan been determined consistent with FASB
Statement No. 123, the Company's net income would not have been materially
different.
 
   At December 31, 1998, the Company is authorized to grant options to
purchase an additional of 20,000 shares of Series A Common Stock under its
Stock Option Plan. The option price of all grants under this plan will be
equal to the stock's market price on the date of grant and no options may be
exercised after ten years from the date of grant. The following is a summary
of stock option activity for 1998:
 
<TABLE>
<CAPTION>
                                                                   Wtd. Average
                                                         Shares   Exercise Price
                                                         -------  --------------
   <S>                                                   <C>      <C>
   Outstanding at beginning of year.....................     --       $ --
   Granted.............................................. 1,064.0        340
   Exercised............................................     --         --
   Forfeited............................................  (288.8)      (340)
   Outstanding at end of year...........................   775.2        340
   Exercisable at end of year...........................    91.2        340
   Weighted average fair value of options granted.......              $ 124
</TABLE>
 
   During 1998, the Company granted 1,064 shares of options to purchase Series
A Common Stock at an exercise price of $340 per share to certain key
employees. In connection with the acquisition of Tinsley, the Company offered
former Tinsley optionholders the opportunity to either exercise their existing
options in Tinsley for cash or to convert their options into options of the
Company. Pursuant to this agreement, on February 27, 1999, the Company granted
options to purchase 3,456.6 shares of Series B Common Stock of the Company at
a
 
                                     F-17
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
weighted average exercise price of $303. The difference between the exercise
price and the fair market value of these options was recorded as additional
goodwill with a corresponding increase in additional paid-in capital.
 
Note 13--Commitments and Contingencies
 
 Leases--
 
   The Company has several noncancellable operating leases for buildings and
equipment that expire over the next years. Several of these leases are with
related parties as described in Note 14. Minimum future rental commitments
under noncancellable operating leases having initial or remaining terms in
excess of one year as of December 31, 1998, are as follows:
 
<TABLE>
   <S>                                                                  <C>
   1999................................................................ $ 6,743
   2000................................................................   5,493
   2001................................................................   3,903
   2002................................................................   3,413
   2003................................................................   2,405
   Thereafter..........................................................   6,664
                                                                        -------
   Total minimum payments.............................................. $28,621
                                                                        =======
</TABLE>
 
   Rental expense was $1,995, $2,034 and $4,863 for 1996, 1997 and 1998,
respectively.
 
 Employment Agreements--
 
   The Company has entered into employment agreements with certain employee-
shareholders which expire in June 2001. The aggregate commitment for future
salaries, excluding bonuses, under these employment agreements at December 31,
1998 is approximately $5.3 million.
 
Note 14--Related Party Transactions
 
   The Company leases its Melrose Park, Illinois, facility under an operating
lease which expires in September 2002. The Company has the option to renew the
lease for several additional five year terms. The lessor is a partnership that
includes the Chief Executive Officer of the Company. The Company has paid a
deposit to the partnership of approximately $340 which is reflected in the
accompanying balance sheet as part of other assets. Rents under this lease
amounted to approximately $475 in 1998.
 
   The Company leases manufacturing and warehouse premises in Warrington,
Pennsylvania, from the Chairman of the Board for $336 annually and is
adjustable for inflation beginning in 2001. The Company leases manufacturing
and warehouse premises in Louisa, Virginia, from a company wholly-owned by the
same shareholder, for $273 annually and is adjustable for inflation beginning
in 2001. Both leases expire in 2005 and may be extended for an additional five
years at the option of the Company.
 
   In connection with the acquisition of AGI, certain members of management
borrowed $1.6 million in promissory notes from the Company. The notes are
payable on demand, accrue interest at 5.85% and are included in the
accompanying balance sheet as part of other receivables.
 
 
                                     F-18
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Note 15--Segment Information
 
   The Company operates in one business segment, providing specialty packaging
for various consumer products markets. During 1998, the Company expanded its
specialty packaging operations geographically to include the United Kingdom
and Europe. The following table presents sales and other financial information
for each geographic region for 1998:
 
<TABLE>
<CAPTION>
                                                         Geographic Regions
                                                     --------------------------
                                                              U.K. and
                                                       U.S.    Europe   Total
                                                     -------- -------- --------
   <S>                                               <C>      <C>      <C>
   Sales to unaffiliated customers.................. $138,431 $ 45,867 $184,298
   Operating income.................................   11,190    6,703   17,893
   Identifiable assets..............................  149,553  216,782  366,335
   Depreciation and amortization....................    8,064    3,400   11,464
   Capital expenditures.............................   10,724    5,292   16,016
</TABLE>
 
Note 16--Guarantors and Financial Information
 
   The following consolidating financial information is presented for purposes
of complying with the reporting requirements of the Subsidiary Guarantors. The
Subsidiary Guarantors are directly or indirectly wholly-owned subsidiaries of
the Company and have fully and unconditionally guaranteed the Senior
Subordinated Notes on a joint and several basis. Subsequent to December 31,
1998, certain foreign subsidiaries of the Company that were acquired in
connection with the acquisition of Tinsley provided full and unconditional
guarantees on the Senior Subordinated Notes and are included in the condensed
consolidating financial information below as Subsidiary Guarantors. Separate
financial statements and other disclosures with respect to the Subsidiary
Guarantors are not presented because the Company believes that such financial
statements and other information would not provide additional information that
is material to investors. The condensed consolidating financial information
presents condensed consolidating financial statements as of December 31, 1998
and for the year ended December 31, 1998 of:
 
      (a) IMPAC on a parent company only basis ("IMPAC Parent"), carrying its
  investments in subsidiaries under the equity method;
 
      (b) the Subsidiary Guarantors, which include the domestic subsidiaries
  of AGI Incorporated, Klearfold, Inc., KF-International, Inc., and KF-
  Delaware, Inc. and the following foreign subsidiaries of IMPAC: IMPAC
  Europe Limited, Levelprompt Limited, Tinsley Robor Limited, James Upton
  Limited, Tinsley Robor Labels Limited, Tinsley Robor Sales Limited, Sonicon
  Limited, Tophurst Properties Limited and Printing Resources Limited;
 
      (c) the Non-Guarantor Subsidiaries ("Non-Guarantor Subsidiaries"),
  which include Van de Steeg Packaging B.V., James Upton Holding B.V., James
  Upton B.V., James Upton GmbH and Music Print B.V.;
 
      (d) elimination entries necessary to consolidate IMPAC Parent and its
  subsidiaries, and
 
      (e) IMPAC on a consolidated basis ("IMPAC Consolidated").
 
 
                                     F-19
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
                               DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                  Non-
                           IMPAC   Subsidiary  Guarantor                   IMPAC
                           Parent  Guarantors Subsidiaries Eliminations Consolidated
                          -------- ---------- ------------ ------------ ------------
<S>                       <C>      <C>        <C>          <C>          <C>
Current assets:
  Cash..................  $    319  $  1,387    $ 2,533     $     --      $  4,239
  Trade accounts
   receivable, net......       --     36,088      8,273           --        44,361
  Intercompany
   receivables..........    11,106    31,283        --        (42,389)         --
  Inventories...........       --     21,740      2,242           --        23,982
  Other current assets..       197     8,403        488           --         9,088
                          --------  --------    -------     ---------     --------
    Total current
     assets.............    11,622    98,901     13,536       (42,389)      81,670
                          --------  --------    -------     ---------     --------
 
  Property, plant and
   equipment, net.......       --     85,533     22,136           --       107,669
  Goodwill..............       --    142,237     21,386           --       163,623
  Intercompany
   receivables..........   168,128    18,568        --       (186,696)         --
  Investment in
   subsidiaries.........    81,829    55,525        --       (137,354)         --
  Other assets..........    10,012     3,361        --            --        13,373
                          --------  --------    -------     ---------     --------
    Total assets........  $271,591  $404,125    $57,058     $(366,439)    $366,335
                          ========  ========    =======     =========     ========
 
Current liabilities:
  Current maturities of
   long-term debt.......  $  1,010  $  3,324    $ 1,153     $     --      $  5,487
  Trade payables........       --     21,974      3,119           --        25,093
  Intercompany
   payables.............       --     30,181     30,777       (60,958)         --
  Accrued expenses......     2,598    17,767      3,435           --        23,800
                          --------  --------    -------     ---------     --------
    Total current
     liabilities........     3,608    73,246     38,484       (60,958)      54,380
                          --------  --------    -------     ---------     --------
Long-term debt..........   202,400    29,112      3,560           --       235,072
Other long-term
 liabilities............       --     11,154        146           --        11,300
Intercompany debt.......       --    168,128        --       (168,128)         --
                          --------  --------    -------     ---------     --------
  Total liabilities.....   206,008   281,640     42,190      (229,086)     300,752
                          --------  --------    -------     ---------     --------
 
Total shareholders'
 (deficit) equity.......    65,583   122,485     14,868      (137,353)      65,583
                          --------  --------    -------     ---------     --------
Total liabilities and
 shareholders' (deficit)
 equity.................  $271,591  $404,125    $57,058     $(366,439)    $366,335
                          ========  ========    =======     =========     ========
</TABLE>
 
 
 
                                      F-20
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                  CONDENSED CONSOLIDATING STATEMENT OF INCOME
                          YEAR ENDED DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                 Non-
                          IMPAC   Subsidiary  Guarantor                   IMPAC
                          Parent  Guarantors Subsidiaries Eliminations Consolidated
                          ------  ---------- ------------ ------------ ------------
<S>                       <C>     <C>        <C>          <C>          <C>
Net sales...............  $  --    $164,864    $21,832      $(2,398)     $184,298
Cost of goods sold......     --     121,341     15,700       (2,398)      134,643
                          ------   --------    -------      -------      --------
Gross profit............     --      43,523      6,132          --         49,655
Selling, general and ad-
 ministrative expenses..     473     29,376      1,913          --         31,762
                          ------   --------    -------      -------      --------
Operating income........    (473)    14,147      4,219          --         17,893
Equity earnings in sub-
 sidiaries..............   3,036        --         --        (3,036)          --
Other income (expense)..  (1,172)   (12,413)      (386)         --        (13,971)
                          ------   --------    -------      -------      --------
Income before income
 taxes..................   1,391      1,734      3,833       (3,036)        3,922
Income (taxes) benefit..     652     (1,484)    (1,047)         --         (1,879)
                          ------   --------    -------      -------      --------
Income before extraordi-
 nary item..............   2,043        250      2,786       (3,036)        2,043
Extraordinary item......    (552)       --         --           --           (552)
                          ------   --------    -------      -------      --------
Net income..............  $1,491   $   (250)   $ 2,786      $(3,036)     $  1,491
                          ======   ========    =======      =======      ========
</TABLE>
 
                                      F-21
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                         YEAR ENDED DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                   Non-
                           IMPAC    Subsidiary  Guarantor                   IMPAC
                           Parent   Guarantors Subsidiaries Eliminations Consolidated
                          --------  ---------- ------------ ------------ ------------
<S>                       <C>       <C>        <C>          <C>          <C>
Cash flows from
 operating activities:..
  Net cash provided by
   operating
   activities...........  $  2,231   $  6,685    $ 3,769       $  512      $ 13,197
                          --------   --------    -------       ------      --------
Cash flows from
 investing activities:
  Capital expenditures..       --     (12,180)    (6,412)       2,576       (16,016)
  Acquisition of
   subsidiaries.........   (64,184)  (161,047)    (8,109)       2,390      (230,950)
                          --------   --------    -------       ------      --------
Net cash used in
 investing activities...   (64,184)  (173,227)   (14,521)       4,966      (246,966)
                          --------   --------    -------       ------      --------
Cash flows from
 financing activities:
  Proceeds from issuance
   of long-term debt....   203,663      8,570        --           --        212,233
  Repayments of long-
   term debt............   (30,103)       --         --           --        (30,103)
  Proceeds from issuance
   of common stock......    63,175        --         --           --         63,175
  Loans and advances
   (to) from related
   parties..............  (162,096)   156,738     10,926       (5,568)          --
  Other financing
   activities...........   (10,835)      (528)     2,529         (940)       (9,774)
                          --------   --------    -------       ------      --------
Net cash provided by
 financing activities...    63,804    164,780     13,455       (6,508)      235,531
                          --------   --------    -------       ------      --------
  Effect of exchange
   rate differences on
   cash.................    (1,532)     2,955       (170)       1,030         2,283
                          --------   --------    -------       ------      --------
Decrease in cash........       319      1,193      2,533          --          4,045
Cash, beginning of
 period.................       --         194        --           --            194
                          --------   --------    -------       ------      --------
Cash, end of period.....  $    319   $  1,387    $ 2,533       $  --       $  4,239
                          ========   ========    =======       ======      ========
</TABLE>
 
   The following condensed consolidating financial information is that of
Tinsley and its subsidiaries on a stand alone basis as of March 31, 1998 and
for the years ended March 31, 1998 and 1997 of:
 
     (a) Tinsley Robor Limited on a parent company only basis ("Tinsley
  Parent"), carrying its investments in subsidiaries under the equity method;
 
     (b) the Subsidiary Guarantors of Tinsley Parent, which include James
  Upton Limited, Tinsley Robor Labels Limited, Tinsley Robor Sales Limited,
  Sonicon Limited, Tophurst Properties Limited and Printing Resources
  Limited;
 
     (c) the Non-Guarantor Subsidiaries of Tinsley Parent, which include Van
  de Steeg Packaging B.V., James Upton Holding B.V., James Upton B.V. and
  James Upton GmbH;
 
     (d) elimination entries necessary to consolidate the parent Tinsley
  Robor Limited and its subsidiaries, and
 
     (e) Tinsley Robor Limited on a consolidated basis ("Tinsley
  Consolidated").
 
 
                                     F-22
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                     CONDENSED CONSOLIDATING BALANCE SHEET
 
                                 MARCH 31, 1998
 
<TABLE>
<CAPTION>
                                                 Non-
                          Tinsley Subsidiary  guarantor                  Tinsley
                          Parent  Guarantors Subsidiaries Eliminations Consolidated
                          ------- ---------- ------------ ------------ ------------
<S>                       <C>     <C>        <C>          <C>          <C>
Current assets:
  Cash..................  $    29  $   431     $ 1,604      $    --      $  2,064
  Trade accounts
   receivable, net......      --    16,030       5,145           --        21,175
  Inventories...........      --     6,175       1,712           --         7,887
  Intercompany
   receivables..........   33,741    1,255       1,760       (36,756)         --
  Other current assets..      467    1,167         468           --         2,102
                          -------  -------     -------      --------     --------
    Total current
     assets.............   34,237   25,058      10,689       (36,756)      33,228
                          -------  -------     -------      --------     --------
  Property, plant and
   equipment, net.......      329   27,980      14,256           --        42,565
  Goodwill..............      --     6,638      17,318           --        23,956
  Investment in
   subsidiaries.........   12,506      --          --        (12,506)         --
  Other assets..........    2,293      --          --            --         2,293
                          -------  -------     -------      --------     --------
    Total assets........  $49,365  $59,676     $42,263      $(49,262)    $102,042
                          =======  =======     =======      ========     ========
Current liabilities:
  Current maturities of
   long-term debt.......  $    89  $ 5,683     $ 3,262      $    --      $  9,034
  Trade payables........      252    6,730       1,511           --         8,493
  Intercompany
   payables.............    1,255   18,046      17,455       (36,756)         --
  Accrued expenses......    2,288    5,388       3,773           --        11,449
                          -------  -------     -------      --------     --------
    Total current
     liabilities........    3,884   35,847      26,001       (36,756)      28,976
                          -------  -------     -------      --------     --------
Long-term debt..........       32    8,599      13,757           --        22,388
Other long-term
 liabilities............      --     5,229         --            --         5,229
                          -------  -------     -------      --------     --------
    Total liabilities...    3,916   49,675      39,758       (36,756)      56,593
                          -------  -------     -------      --------     --------
Total shareholders'
 (deficit) equity.......   45,449   10,001       2,505       (12,506)      45,449
                          -------  -------     -------      --------     --------
Total liabilities and
 shareholders' (deficit)
 equity.................  $49,365  $59,676     $42,263      $(49,262)    $102,042
                          =======  =======     =======      ========     ========
</TABLE>
 
                                      F-23
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                  CONDENSED CONSOLIDATING STATEMENT OF INCOME
 
                           YEAR ENDED MARCH 31, 1998
 
<TABLE>
<CAPTION>
                                                 Non-
                         Tinsley  Subsidiary  guarantor                  Tinsley
                         Parent   Guarantors Subsidiaries Eliminations Consolidated
                         -------  ---------- ------------ ------------ ------------
<S>                      <C>      <C>        <C>          <C>          <C>
Net sales............... $   --    $ 75,842    $ 34,872     $ (3,644)   $ 107,070
Cost of goods sold......     --      52,679      25,133       (3,644)      74,168
                         -------   --------    --------     --------    ---------
Gross profit............     --      23,163       9,739          --        32,902
Selling, general and
 administrative
 expenses...............    (715)    15,920       4,957          --        20,162
                         -------   --------    --------     --------    ---------
Operating income........     715      7,243       4,782          --        12,740
Interest (expense)
 income, net............   1,073     (1,150)     (1,649)         --        (1,726)
Equity earnings in
 subsidiaries...........   5,897        --          --        (5,897)         --
                         -------   --------    --------     --------    ---------
Income before income
 taxes..................   7,685      6,093       3,133       (5,897)      11,014
Income taxes............    (385)    (1,780)     (1,549)         --        (3,714)
                         -------   --------    --------     --------    ---------
Net income.............. $ 7,300   $  4,313    $  1,584     $ (5,897)   $   7,300
                         =======   ========    ========     ========    =========
</TABLE>
 
 
                                      F-24
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 
                           YEAR ENDED MARCH 31, 1998
 
<TABLE>
<CAPTION>
                                                   Non-
                          Tinsley   Subsidiary  guarantor                  Tinsley
                           Parent   Guarantors Subsidiaries Eliminations Consolidated
                          --------  ---------- ------------ ------------ ------------
<S>                       <C>       <C>        <C>          <C>          <C>
Cash flow from operating
 activities:
  Net cash provided by
   operating
   activities...........  $  1,089   $ 3,717     $  5,949     $ 1,145      $ 11,900
                          --------   -------     --------     -------      --------
Cash flow from investing
 activities:
  Capital expenditures..      (138)   (3,885)      (5,928)      4,443        (5,508)
  Acquisition of
   subsidiaries.........      (546)      --       (21,113)       (507)      (22,166)
                          --------   -------     --------     -------      --------
Net cash used in
 investing activities...      (684)   (3,885)     (27,041)      3,936       (27,674)
                          --------   -------     --------     -------      --------
Cash flow from financing
 activities:
  Net change in long-
   term debt............       (79)      992        9,413      (2,542)        7,784
  Proceeds from issuance
   of common stock......       170        37        2,072      (2,259)           20
  Loans to related
   parties..............    (9,886)     (746)      10,924        (292)          --
  Dividends paid........    (1,834)      --           --          --         (1,834)
                          --------   -------     --------     -------      --------
Net cash provided by
 financing activities...   (11,629)      283       22,409      (5,093)        5,970
                          --------   -------     --------     -------      --------
  Effect of exchange
   rate differences on
   cash.................        54        11           38          12           115
                          --------   -------     --------     -------      --------
(Decrease) increase in
 cash...................   (11,170)      126        1,355         --         (9,689)
Cash, beginning of
 period.................    11,199       305          249         --         11,753
                          --------   -------     --------     -------      --------
Cash, end of period.....  $     29   $   431     $  1,604     $   --       $  2,064
                          ========   =======     ========     =======      ========
</TABLE>
 
                                      F-25
<PAGE>
 
                       IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                  CONDENSED CONSOLIDATING STATEMENT OF INCOME
 
                           YEAR ENDED MARCH 31, 1997
 
<TABLE>
<CAPTION>
                                                 Non-
                         Tinsley  Subsidiary  guarantor                  Tinsley
                         Parent   Guarantors Subsidiaries Eliminations Consolidated
                         -------  ---------- ------------ ------------ ------------
<S>                      <C>      <C>        <C>          <C>          <C>
Net sales............... $   --    $ 72,463    $ 13,806     $ (5,379)    $ 80,890
Cost of goods sold......     --      51,572       9,982       (5,427)      56,127
                         -------   --------    --------     --------     --------
Gross profit............     --      20,891       3,824           48       24,763
Selling, general and
 administrative
 expenses...............    (735)    15,534       1,608          (96)      16,311
                         -------   --------    --------     --------     --------
Operating income........     735      5,357       2,216          144        8,452
Interest (expense)
 income, net............     162       (736)       (208)         --          (782)
Equity earnings in
 subsidiaries...........   4,322        --          --        (4,322)         --
                         -------   --------    --------     --------     --------
Income before income
 taxes..................   5,219      4,621       2,008       (4,178)       7,670
Income taxes............    (231)    (1,513)       (794)         --        (2,538)
                         -------   --------    --------     --------     --------
Net income.............. $ 4,988   $  3,108    $  1,214     $ (4,178)    $  5,132
                         =======   ========    ========     ========     ========
</TABLE>
 
                                      F-26
<PAGE>
 
                      IMPAC GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 
                           YEAR ENDED MARCH 31, 1997
 
<TABLE>
<CAPTION>
                                                 Non-
                         Tinsley  Subsidiary  Guarantor                  Tinsley
                         Parent   Guarantors Subsidiaries Eliminations Consolidated
                         -------  ---------- ------------ ------------ ------------
<S>                      <C>      <C>        <C>          <C>          <C>
Cash flows from
 operating activities:
  Net cash provided by
   operating
   activities........... $ 1,201   $(1,617)     $1,115       $3,413      $ 4,112
                         -------   -------      ------       ------      -------
Cash flows from
 investing activities:
  Capital expenditures..     (50)   (7,438)     (6,101)       3,281      (10,308)
  Acquisition of
   subsidiaries.........     719       --       (1,468)        (958)      (1,707)
                         -------   -------      ------       ------      -------
Net cash used in
 investing activities...     669    (7,438)     (7,569)       2,323      (12,015)
                         -------   -------      ------       ------      -------
Cash flows from
 financing activities:
  Net change in long-
   term debt............  (1,357)    2,771       5,565       (4,679)       2,300
  Proceeds from issuance
   of common stock......  18,359        (6)         36          (30)      18,359
  Loans to related
   parties..............  (6,769)    6,497       1,088         (816)         --
  Dividends paid........  (1,192)      --          --           --        (1,192)
                         -------   -------      ------       ------      -------
Net cash provided by
 financing activities...   9,041     9,262       6,689       (5,525)      19,467
                         -------   -------      ------       ------      -------
  Effect of exchange
   rate differences on
   cash.................     288        12           6         (211)          95
                         -------   -------      ------       ------      -------
(Decrease) increase in
 cash...................  11,199       219         241          --        11,659
Cash, beginning of
 period.................     --         86           8          --            94
                         -------   -------      ------       ------      -------
Cash, end of period..... $11,199   $   305      $  249       $  --       $11,753
                         =======   =======      ======       ======      =======
</TABLE>
 
Note 17--Subsequent Events
 
   On January 12, 1999, the Company issued 20,000 shares of Series A
Mandatorily Redeemable Preferred Stock with a face value of $20,000 together
with detachable, ten-year warrants to purchase 6,913 shares of common stock at
an exercise price of $.01 per share for net proceeds of $18.9 million. The
Company used the net proceeds from the sale of preferred stock to acquire
30,087 shares of outstanding Series A Common Stock. The preferred stock
accrues dividends on a cumulative basis at 14% per annum for years 1-5, 15%
per annum for year 6, and either 14% or 15% per annum for years 7-10 depending
on whether the dividends are paid in cash or with additional preferred stock,
respectively. During the first six years after issuance, dividends on the
preferred stock are payable solely by issuing additional shares of preferred
stock. The preferred stock accrues dividends at 24% per annum if certain
events occur, including an event of non-compliance as defined and certain
significant changes in the ownership of IMPAC. The Company is required to
redeem all outstanding shares of preferred stock on December 31, 2008 at face
value plus all accrued and unpaid dividends. The Company may redeem some or
all outstanding shares of preferred stock at an earlier date, provided,
however, that a premium of up to 10% be paid. The preferred stock is not
redeemable at the option of the holders of preferred stock. The preferred
stock contains covenants, among others, limiting additional indebtedness,
restricted payments, guaranties, advances to affiliates, mergers, asset sales
and dispositions. The preferred stock ranks senior to all classes of common
stock with respect to dividend distributions and distributions upon the
liquidation or dissolution of the Company.
 
   Upon issuance of the preferred stock, the warrants were valued at $4.2
million and the shares of preferred stock were valued at $14.7 million. The
difference between the carrying value and the face value of the preferred
stock, along with dividends accrued, will be accreted using the effective
interest rate method over the period the preferred stock is outstanding.
Accretion on the preferred stock decreases the net income available to common
shareholders in the period incurred and is recorded directly to retained
earnings.
 
                                     F-27
<PAGE>
 
                                  SCHEDULE II
 
   Valuation and Qualifying Accounts and Reserves for the Years Ended December
31, 1996, 1997 and 1998 (in thousands)
 
<TABLE>
<CAPTION>
                          Balance    Balances
                            at       Assumed    Charged              Credit    Foreign    Balance
                         Beginning   Through      to    (Writeoffs)/ Memos     Currency   at End
                          of Year  Acquisitions Expense  Recoveries  Issued  Fluctuations of Year
                         --------- ------------ ------- ------------ ------  ------------ -------
<S>                      <C>       <C>          <C>     <C>          <C>     <C>          <C>
Allowance for Doubtful
 Accounts and Credit
 Memos:
  1996..................   $553        $--       $507      $ (91)    $(703)      $--      $  266
  1997..................   $266        $--       $451      $  43     $(200)      $--      $  560
  1998..................   $560        $773      $999      $(171)    $(634)      $(10)    $1,517
</TABLE>
 
                                      F-28
<PAGE>
 
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized as of March 31,
1999.
 
                                          IMPAC Group, Inc.
 
                                                     /s/ Richard Block
                                          By: _________________________________
                                                      Richard Block,
                                                  Chief Executive Officer
 
                                      S-1
<PAGE>
 
                               POWER OF ATTORNEY
 
     Each person whose signature appears below hereby appoints Richard Block
and David C. Underwood, and each of them severally, acting alone and without
the other, his true and lawful attorney-in-fact with the authority to execute
in the name of each such person, including exhibits thereto and other
documents therewith, any and all amendments to this Annual Report on Form 10-K
necessary or advisable to enable the Report to comply with the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof which amendments may make such other changes in the Report as
the aforesaid attorney-in-fact executing the same deems appropriate.
 
   Pursuant to the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
              Signature                            Title                   Date
              ---------                            -----                   ----
 
<S>                                    <C>                           <C>
           /s/ Richard Block           Chief Executive Officer and    March 31, 1999
______________________________________  Director of IMPAC Group,
            Richard Block               Inc.
 
          /s/ H. Scott Herrin          Director of IMPAC Group,       March 30, 1999
______________________________________  Inc.
           H. Scott Herrin
 
        /s/  David C. Underwood        Chief Financial Officer of     March 31, 1999
______________________________________  IMPAC Group, Inc.
          David C. Underwood            (principal financial and
                                        accounting officer)
 
          /s/ Michel Reichert          Director of IMPAC Group,       March 31, 1999
______________________________________  Inc.
           Michel Reichert
 
         /s/ Michael Gilligan          Director of IMPAC Group,       March 29, 1999
______________________________________  Inc.
           Michael Gilligan
 
         /s/ David H. Horowitz         Director of IMPAC Group,       March 31, 1999
______________________________________  Inc.
            David Horowitz
 
            /s/ Zenas Block            Director of IMPAC Group,       March 31, 1999
______________________________________  Inc.
             Zenas Block
 
          /s/ M. Shaun Lawson          Director of IMPAC Group,       March 31, 1999
______________________________________  Inc.
             Shaun Lawson
 
            /s/ Lee Newbon             Director of IMPAC Group,       March 31, 1999
______________________________________  Inc.
              Lee Newbon
 
         /s/ Melvin B. Herrin          Director of IMPAC Group,       March 31, 1999
______________________________________  Inc.
           Melvin B. Herrin
</TABLE>
 
                                      S-2