<PAGE>
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
 
                                   Form 10-K
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
                                      1934
 
                      For the Year Ended December 31, 1998
                         Commission file number 0-24415
 
                             JPS Packaging Company
             (Exact name of registrant as specified in its charter)
 
                         4200 Somerset Drive, Suite 208
                         Prairie Village, Kansas 66208
                        Telephone number (913) 381-0008
 
                     Incorporated in the State of Delaware
 
                                   31-1311495
                       (IRS Employer Identification No.)
 
          Securities Registered Pursuant to Section 12(g) of the Act:
 
                              Title of each class
                          Common stock, $.01 par value
 
   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 (of 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.
                      (1) Yes [X] No [_](2) Yes [X] No [_]
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, [X]
 
   As of February 26, 1999 there were 5,552,705 shares of Common Stock, $.01
par value, outstanding. On February 26, 1999, the aggregate market value of
such shares held by non-affiliates of the Registrant was approximately $13.8
million.
 
--------------------------------------------------------------------------------
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
   JPS Packaging Company, the Registrant, together with its subsidiary, is
referred to herein as the "Company". The Company was originally incorporated
in Ohio on November 1, 1990 and known as Sealright Manufacturing-East, Inc. On
March 24, 1998, Sealright Manufacturing-East, Inc. was reincorporated in
Delaware and thereafter changed its name to "JPS Packaging Company." Prior to
July 1, 1998, the Company was a subsidiary of Sealright Co., Inc.
("Sealright"). The Company is a manufacturer and converter of flexible
packaging and labeling products for use by customers in the food and beverage
industry and other niche markets. Additionally, the Company manufactures
sleeve labeling machinery under the StyrotechTM trade name. The Company
operates in the packaging industry.
 
   At December 31, 1998, the Company operated two domestic manufacturing
facilities located in Akron, Ohio, and San Leandro, California. Additionally,
the Company maintains an equipment assembly facility in Raleigh, North
Carolina and a corporate office in Prairie Village, Kansas.
 
   The Company manufactures and sells a broad variety of flexible packaging
products, most of which are printed by the Company. The Company's labeling
products for carbonated beverages, dairy beverages and juices are principally
manufactured at its Akron, Ohio facility. The Company also manufactures and
sells liquid novelty packaging, peelable lidding for single servings of
pudding, gelatin and cultured dairy products, and pouch packaging for dried
fruit and nut products, which are produced primarily at its San Leandro,
California facility. These products collectively accounted for approximately
70% of the Company's fiscal 1998 sales. The Company also produces and sells a
variety of other products, including packaging for single-serve condiments,
film-based products for the medical and construction industries and equipment
for the application of sleeve labels.
 
Sources of Raw Materials
 
   The Company purchases raw materials from a variety of suppliers at
competitive prices and aligns its operations with suppliers who lead the
market in product innovation of packaging materials technology. The principal
raw materials used by the Company are plastic, resin, film, paper, foil and
ink. The Company has experienced little or no difficulty obtaining adequate
supplies of raw materials.
 
Trademarks and Patents
 
   The Company's products are manufactured using machinery and processes
covered by patents owned or controlled by the Company. The Company has
domestic and foreign registered trademarks which are used in connection with
both product names and distinctive designs. However, the Company views its
business as one which is not primarily dependent on patent or trademark
protection.
 
Seasonal Operations
 
   Due to the soft drink beverage market, the Company has historically
experienced revenue increases in the second and third quarters.
 
Customers
 
   The Company has relationships with numerous customers in each of its
product categories. The Company has two customers (Constar International and
Portion Pac Inc.) which combined for 24% of sales in 1998. The loss of these
customers, while not anticipated, could have a material adverse effect on the
Company's financial condition, results of operations and cash flows.
 
                                       2
<PAGE>
 
Sales and Backlog
 
   The Company does not have an accurate methodology to track backlog, and
does not believe recorded sales backlog to be a significant factor in its
business. Customers generally place annual orders in quantities covering
demand for one to three months with shipments scheduled during that period.
 
Competition
 
   The flexible packaging industry includes several hundred competitors.
Currently available trade and industry information indicates that the 10
largest flexible packaging companies account for approximately 35% of total
industry sales in 1998. Competitors in this industry include American National
Can, Bemis, Bryce, Cryovac, Huntsman Packaging, Printpack, Reynolds Metals,
and Sonoco Products, many of which are well capitalized and maintain a strong
market presence in the various markets in which the Company competes. All of
these competitors are substantially larger, more diversified and have greater
financial, personnel and marketing resources than the Company, and therefore
may have significant competitive advantages versus the Company.
 
Research and Development
 
   The Company is engaged in designing and developing new products and
adapting existing products for new uses. Approximately $423,000, $547,000 and
$830,000 were expended for research and development in 1998, 1997 and 1996,
respectively.
 
Environmental and Governmental Regulations
 
   Since most of the Company's packaging products are used in the food
industry, the Company is subject to the manufacturing standards of and
inspection by the U.S. Food and Drug Administration. Historically, compliance
with the standards of the food industry has not had a material effect on the
Company's operations, capital expenditures or competitive position.
 
   The manufacturing operations of the Company are subject to Federal, state
and local regulations governing the environment and the discharge of materials
into air, land and water, as well as the handling and disposal of solid and
hazardous wastes. The Company believes it is in substantial compliance with
applicable environmental regulations and does not believe that costs of
compliance will have a material adverse effect on its operations, capital
expenditures, or competitive position.
 
Employees
 
   The Company's average number of employees for 1998 was 400. Of these, 9 are
employed at the Company's headquarters in Prairie Village, Kansas and 11 are
employed at the Raleigh, North Carolina sales office. At the Akron, Ohio
facility, which employs approximately 230 people, the hourly employees are
covered under a collective bargaining agreement that expires in 2000. At the
San Leandro, California facility, which employs approximately 150 people, the
hourly employees are covered under a collective bargaining agreement that
expires in 2001. Overall, the Company believes its relations with its
employees, including union employees, are good.
 
Forward-Looking Statements
 
   Certain written and oral statements in this document and elsewhere made by
management that are neither reported financial results nor other historical
information are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
not guarantees of future performance and are subject to known and unknown
risks, uncertainties and other factors which may cause or contribute to actual
results of the Company differing materially from those expressed in or implied
by the forward-looking statements. In addition to any such risks expressly
stated otherwise in this or other documents, other risks and uncertainties
include, but are not limited to, competitive pricing for the Company's
products, changes in raw material prices, fluctuations in customer demand,
changes in production capacities, and changes in exchange rates.
 
                                       3
<PAGE>
 
ITEM 2. PROPERTIES
 
   The following tables set forth the location, approximate square footage,
and principal use of each of the Company's facilities. The Company believes
that its facilities are well maintained and suitable for their respective
uses.
 
                               Owned Facilities
 
<TABLE>
<CAPTION>
Location                                 Square Feet        Principal Use
--------                                 -----------        -------------
<S>                                      <C>         <C>
San Leandro, California.................   129,000   Manufacturing and Warehouse
Akron, Ohio.............................   125,000   Manufacturing and Warehouse
</TABLE>
 
                               Leased Facilities
 
<TABLE>
<CAPTION>
Location                       Square Feet Lease Expiration    Principal Use
--------                       ----------- ----------------    -------------
<S>                            <C>         <C>              <C>
San Leandro, California.......   12,000          2002       Warehouse
Raleigh, North Carolina.......   11,000          1999       Office and Warehouse
Prairie Village, Kansas.......    1,600          1999       Corporate Office
</TABLE>
 
ITEM 3. LEGAL PROCEEDINGS
 
   In the ordinary course of business, the Company and its subsidiary are
subject to various pending claims, lawsuits, and contingent liabilities. The
Company maintains appropriate insurance policies to protect against various
claims and lawsuits. The Company does not believe that the disposition of
these matters will have a material adverse effect on the Company's
consolidated financial statements.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
   Since September 30, 1998, there have been no matters submitted to a vote of
security holders.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
       MATTERS
 
<TABLE>
<CAPTION>
                                                                       Dividend
                                                  Quarter High   Low   per Share
                                                  ------- ----- ------ ---------
<S>                                               <C>     <C>   <C>    <C>
1998............................................. First     N/A    N/A    N/A
                                                  Second    N/A    N/A    N/A
                                                  Third   5 1/8 2 7/16    N/A
                                                  Fourth  4 3/8  3 1/2    N/A
 
1997............................................. First     N/A    N/A    N/A
                                                  Second    N/A    N/A    N/A
                                                  Third     N/A    N/A    N/A
                                                  Fourth    N/A    N/A    N/A
</TABLE>
 
   The Common Stock, which has a par value of $.01 per share, is traded in the
over-the-counter market. It is included in the NASDAQ National Market System
("NMS") under the symbol JPSP. The trading of JPS stock commenced on July 1,
1998. The table above sets forth the high and low sale prices, as quoted by
NMS, and dividends paid for each quarter of the last two calendar years. These
quotations reflect inter-dealer prices, without markup, markdown or
commissions.
 
   As of December 31, 1998, there were 272 shareholders of record. Since many
shareholders hold their certificates in street name, management estimates the
number of individual stockholders is approximately 1,500.
 
                                       4
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
                          Statement of Operations Data
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                    1998     1997     1996      1995      1994
Years Ended December 31,           -------  -------  -------  --------  --------
<S>                                <C>      <C>      <C>      <C>       <C>
Net Sales........................  $78,869  $91,520  $94,895  $103,469  $102,442
Cost of Goods Sold...............   72,502   85,761   84,327    92,198    84,967
                                   -------  -------  -------  --------  --------
Gross Profit.....................    6,367    5,759   10,568    11,271    17,475
SG&A Expense (1).................   11,613   11,805   13,936    14,340    12,722
Transaction Expense and Net
 Restructuring (Gain) Expense....      689     (988)   1,893     6,866       --
                                   -------  -------  -------  --------  --------
Operating Income (Loss) from
 Continuing Operations...........   (5,935)  (5,058)  (5,261)   (9,935)    4,753
Interest (Income) Expense, Net...      (54)     --       --        --         34
                                   -------  -------  -------  --------  --------
Income (Loss) from Continuing
 Operations Before Income Taxes..   (5,881)  (5,058)  (5,261)   (9,935)    4,719
Income Taxes.....................   (1,337)  (1,737)  (1,780)   (3,407)    1,966
                                   -------  -------  -------  --------  --------
Income (Loss) from Continuing
 Operations......................   (4,544)  (3,321)  (3,481)   (6,528)    2,753
Discontinued Operation, Net of
 Tax:
  Income (Loss) from Operations..     (436)      98      462       354       896
  Estimated Loss on Disposal.....   (1,209)     --       --        --        --
                                   -------  -------  -------  --------  --------
Income (Loss) from Discontinued
 Operation.......................   (1,645)      98      462       354       896
                                   -------  -------  -------  --------  --------
Net Income (Loss)................  $(6,189) $(3,223) $(3,019) $ (6,174) $  3,649
                                   =======  =======  =======  ========  ========
Net Income (Loss) Per Share from
 Continuing Operations Basic and
 Diluted (2).....................  $ (0.82) $ (0.60) $ (0.63) $  (1.18) $   0.50
Net Income (Loss) Per Share Basic
 and Diluted (2).................  $ (1.12) $ (0.58) $ (0.55) $  (1.12) $   0.66
 
                               Balance Sheet Data
                         (In thousands, except ratios)
 
<CAPTION>
                                    1998     1997     1996      1995      1994
December 31,                       -------  -------  -------  --------  --------
<S>                                <C>      <C>      <C>      <C>       <C>
Net Working Capital..............  $14,231  $16,624  $15,520  $ 19,729  $ 22,223
Net Property, Plant & Equipment..   28,354   31,806   34,592    41,116    45,240
Total Assets.....................   54,176   62,094   63,183    75,163    82,638
Long-Term Debt...................      --       --       --        --        --
Total Liabilities................   12,274   12,216    9,951    11,733    14,050
Stockholder's Equity.............   41,902   49,878   53,232    63,430    68,588
Current Ratio....................   2.71:1   2.98:1   3.02:1    3.15:1    3.26:1
 
                                   Other Data
                                 (In thousands)
 
<CAPTION>
                                    1998     1997     1996      1995      1994
                                   -------  -------  -------  --------  --------
<S>                                <C>      <C>      <C>      <C>       <C>
Operating Income (Loss) from
 Continuing Operations, Excluding
 Restructuring and Transaction
 Items...........................  $(5,246) $(6,046) $(3,368) $ (3,069) $  4,753
Depreciation and Amortization
 Expense.........................    5,458    5,782    6,593     6,519     5,824
EBITDA (3).......................     (477)     724    1,332    (3,416)   10,577
EBITDA Excluding Restructuring
 and Transaction Items...........      212     (264)   3,225     3,450    10,577
Capital Expenditures.............    2,017    5,432    1,363     6,849     6,560
</TABLE>
 
                                       5
<PAGE>
 
--------
(1) Selling, general and administrative expenses from 1994 to 1997 are based
    on management's estimate of an equitable allocation of shared corporate
    services. These expenses approximate what the Company would have incurred
    had it operated on a stand-alone basis for periods prior to separation
    from Sealright.
(2) Earnings (loss) per share for all periods has been computed under
    Statement of Financial Accounting Standards No. 128. The number of shares
    used in the computation prior to July 1, 1998 is the number of outstanding
    common shares of Sealright adjusted for the exchange ratio of one-half
    share of JPS Common Stock for each share of Sealright Common Stock. The
    weighted average number of common shares used in the computation were
    5,553,000 in 1998, 5,536,000 in 1997 and 1996, 5,534,000 in 1995, and
    5,536,000 in 1994. There were no dilutive securities.
(3) EBITDA is defined as operating income (loss) from continuing operations
    before interest, depreciation and amortization. EBITDA does not represent
    cash flows as defined by generally accepted accounting principles (GAAP)
    and does not necessarily indicate that cash flows are sufficient to fund
    all of a company's cash needs. EBITDA is presented because the Company
    believes it is a widely accepted financial indicator of a company's
    ability to incur and service debt. However, EBITDA should not be
    considered in isolation or as a substitute for net income (loss) or cash
    flow data prepared in accordance with GAAP or as a measure of a company's
    profitability or liquidity.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
1998 Compared to 1997
 
   Net sales for the year ended December 31, 1998 were $78.9 million versus
$91.5 million in 1997, a decline of approximately $12.6 million, or 13.8%. The
decline in revenue from the prior year is primarily due to a decline in the
end-market demand of six key customers of the San Leandro, California facility
resulting in approximately $7.0 million of reduced revenue. In addition,
approximately $2.8 million of the decline in revenue was from lost customers
associated with the closure of the Charlotte, North Carolina facility in 1996
and the transfer of production to the Akron, Ohio facility.
 
   Consolidated gross profit was $6.4 million in 1998 as compared to $5.8
million in 1997. The resulting gross profit percent was 8.1% in 1998, an
increase from 6.3% in 1997. The increase was a result of improved margins at
the Akron, Ohio facility. In 1997, Akron was adversely affected by production
inefficiencies and capacity constraints associated with the closure of the
Charlotte, North Carolina facility, and resulting transfer of production.
Gross profit at the San Leandro, California facility decreased approximately
$1.5 million as a result of reduced sales volume.
 
   Selling, general and administrative expenses were $11.6 million in 1998 as
compared to $11.8 million in 1997. Included in selling, general and
administrative expenses in 1998 is approximately $862 thousand of non-
recurring severance and $464 thousand of non-recurring retention costs
associated with the merger. Adjusting for these non-recurring items, SG&A
expense was down approximately 13% as a result of cost savings initiatives.
 
1997 Compared to 1996
 
   Consolidated net sales were $91.5 million in 1997, a decrease of $3.4
million, or 3.6%, from 1996. The decline in revenue resulted primarily from
lost customers associated with the closure of the Charlotte, North Carolina
facility and resulting transfer of production to the Company's Akron, Ohio
facility as part of the restructuring program. The Company subsequently
experienced capacity constraints during the first half of the year in Akron,
thus further constraining revenues. In addition, the Company experienced a
reduction in average selling prices for various food packaging products due to
competitive pressures, further reducing revenues.
 
   Consolidated gross profit was $5.8 million in 1997 as compared to $10.6
million in 1996. The resulting gross profit percent was 6.3% in 1997, a
decline from 11.1% in 1996. Due to production inefficiencies at the Akron,
Ohio facility early in the year, and reduced sales volume during the latter
half of the year, the Company
 
                                       6
<PAGE>
 
suffered a reduction in gross profit of approximately $5 million. Gross profit
at the Company's San Leandro, California facility increased $1.5 million
during the year as a result of improved manufacturing efficiencies from the
previous year and a reduction in material costs.
 
Liquidity and Capital Resources
 
   JPS Packaging has historically relied on internally generated cash from
operations as well as funding from its former parent, Sealright Co., Inc. For
the year ended December 31, 1998, JPS's net loss was $6.2 million compared to
a net loss of $3.2 million in 1997. Cash generated from operations was $5.7
million in 1998 and $1.7 million in 1997. The primary change year over year
resulted from a reduction of accounts receivable and inventory.
 
   During 1998, JPS Packaging invested $2 million in property, plant and
equipment. There were no individually significant capital investments made in
1998. During 1997, JPS Packaging invested $5.4 million in property, plant and
equipment. Major capital investments included building additions and
improvements of approximately $4 million in Akron, Ohio to accommodate the
consolidation from the Charlotte, North Carolina facility as well as additions
of various production related equipment and other cost savings initiatives.
JPS Packaging sold one idle facility during 1997, generating $3.2 million. The
proceeds from this sales were used to fund working capital needs.
 
   JPS Packaging's operations require significant amount of working capital
particularly during the spring and summer of each year. Sales are generally on
terms of 30 days to 60 days, resulting in substantial accounts receivable
balances. The Company also builds substantial inventory levels during the
spring and summer of each year due to the demand of the soft drink label
business. Historically, inventory levels peak in July. JPS Packaging relies on
a revolving credit facility to finance these working capital requirements.
 
   As of December 31, 1998, JPS Packaging had no borrowings under its $15
million revolving credit facility. The facility is secured by accounts
receivable, inventory, and property, plant and equipment. The borrowings under
the facility are limited to a percentage of accounts receivable and inventory.
As of December 31, 1998, $11.9 million was available under the revolving
credit facility. The revolving credit facility currently bears interest at a
floating rate of LIBOR plus 275 basis points or prime. In addition, JPS
Packaging is required to pay a fee of 25 basis points on the unused portion of
the commitment. The revolving credit facility includes financial covenants
regarding minimum tangible net worth, capital expenditures and cash flow. The
Company was in compliance with these covenants at December 31, 1998.
 
   Management believes that cash generated from operations, together with the
revolving credit facility will be sufficient to meet its cash requirements in
1999.
 
Effects of Inflation
 
   During the last three years, inflation has not had a material effect on the
Company. Increases in raw material costs to the Company typically lag
movements in the markets for such materials. Thus, in a period of rising
prices, the effects of such increases are delayed several months. The
Company's ability to pass these price increases to its customers also is
subject to similar lags.
 
New Accounting Pronouncements
 
   In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. The 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. The Company
will adopt the provisions of SFAS No. 133 effective July 1, 1999. The Company
does not expect implementation to have any effect on its financial statements.
 
                                       7
<PAGE>
 
Year 2000 Compliance
 
   The Company's information systems are not currently year 2000 compliant.
Management currently estimates that it will cost approximately $350,000 to
modify the information systems to become year 2000 compliant. The Company has
expended approximately $225,000 in 1998 which has been charged to operations.
The Company is currently implementing the necessary changes, and management
believes the information systems will be year 2000 compliant by August 31,
1999. However, there can be no assurance that the information systems will be
compliant prior to the beginning of year 2000 and could therefore have an
adverse effect on the future financial results of the Company. The Company
does not currently have a formal contingency plan in place should the
information systems not be compliant prior to the beginning of year 2000, and
will develop a contingency plan by September 30, 1999.
 
   The Company is currently in the process of determining whether its major
suppliers are year 2000 compliant and will have a plan for those who are not
compliant by September 30, 1999. The Company doesn't anticipate any problems
in securing the necessary inventory for production as there are multiple
vendors which can supply the necessary products.
 
Item 7a. MARKET RISK
 
   The Company has no material market risk as of December 31, 1998.
 
                                       8
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Independent Auditors' Report
 
To The Board of Directors of JPS Packaging Company:
 
   We have audited the accompanying consolidated balance sheets of JPS
Packaging Company as of December 31, 1998 and December 31, 1997, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the years in the three year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JPS
Packaging Company as of December 31, 1998 and 1997, and as the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
 
KPMG LLP
Kansas City, Missouri
 
                                       9
<PAGE>
 
                          CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                               At December 31,
                                                               ----------------
                            ASSETS                              1998     1997
                            ------                             -------  -------
<S>                                                            <C>      <C>
CURRENT ASSETS
  Cash........................................................ $ 2,414  $   333
  Accounts receivable, less allowance for doubtful accounts of
   $214 in 1998 and $254 in 1997..............................   9,803   12,874
  Inventories (Note 1)........................................   9,535   10,780
  Other current assets........................................     424      504
  Current deferred income taxes (Note 2)......................     369      529
                                                               -------  -------
    Total current assets......................................  22,545   25,020
Property, plant and equipment, at cost (Note 1)
  Land........................................................   1,490    1,490
  Buildings and improvements..................................  11,069   11,710
  Machinery and equipment.....................................  50,837   49,848
  Furniture and fixtures......................................   4,068    3,876
                                                               -------  -------
                                                                67,464   66,924
  Less accumulated depreciation...............................  39,110   35,118
                                                               -------  -------
  Property, plant and equipment, net..........................  28,354   31,806
OTHER ASSETS
  Goodwill, net (Note 1)......................................   2,350    2,644
  Prepaid pension (Note 4)....................................     471      478
  Other (Note 8)..............................................     456    2,146
                                                               -------  -------
    Total other assets........................................   3,277    5,268
                                                               -------  -------
    Total assets.............................................. $54,176  $62,094
                                                               =======  =======
<CAPTION>
             LIABILITIES AND STOCKHOLDERS' EQUITY
             ------------------------------------
<S>                                                            <C>      <C>
CURRENT LIABILITIES
  Accounts payable............................................ $ 3,986  $ 3,681
  Accrued customer rebates....................................   1,476    1,477
  Accrued vacation............................................     681      565
  Other accrued liabilities...................................   2,171    2,673
                                                               -------  -------
    Total current liabilities.................................   8,314    8,396
Deferred income taxes (Note 2)................................   3,960    3,820
Commitments and contingencies (Note 3)........................
                                                               -------  -------
    Total liabilities.........................................  12,274   12,216
STOCKHOLDERS' EQUITY (Note 1 and 6)
  Common stock, par value $0.01, 15,000,000 shares authorized;
   5,552,705 shares issued and outstanding at December 31,
   1998 and none in 1997......................................      56        *
  Preferred stock, par value $0.01, 1,000,000 shares
   authorized; none outstanding...............................     --       --
  Additional paid-in capital (Note 6).........................  47,744   49,587
  Retained earnings (deficit).................................  (5,898)     291
                                                               -------  -------
    Total stockholders' equity................................  41,902   49,878
                                                               -------  -------
    Total Liabilities and Stockholders' Equity................ $54,176  $62,094
                                                               =======  =======
</TABLE>
* Less than $1,000
 
        The accompanying notes are an integral part of these statements.
 
                                       10
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                            For the Years Ended December 31,
                                            ----------------------------------
                                               1998        1997        1996
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
Net Sales.................................. $   78,869  $   91,520  $   94,895
Cost of Goods Sold.........................     72,502      85,761      84,327
                                            ----------  ----------  ----------
    Gross Profit...........................      6,367       5,759      10,568
Selling, General and Administrative
 Expenses..................................     11,613      11,805      13,936
Transaction Expense and Net Restructuring
 (Gain) Expense (Note 5)...................        689        (988)      1,893
                                            ----------  ----------  ----------
Operating Loss from Continuing Operations..     (5,935)     (5,058)     (5,261)
Interest (Income) Expense, Net.............        (54)        --          --
                                            ----------  ----------  ----------
Loss from Continuing Operations Before
 Income Taxes..............................     (5,881)     (5,058)     (5,261)
Income Taxes (Note 2)......................     (1,337)     (1,737)     (1,780)
                                            ----------  ----------  ----------
    Loss from Continuing Operations........     (4,544)     (3,321)     (3,481)
Discontinued Operation, Net of Tax (Note
 8):
  Income (Loss) from Operations............       (436)         98         462
  Estimated Loss on Disposal...............     (1,209)        --          --
                                            ----------  ----------  ----------
Income (Loss) from Discontinued Operation..     (1,645)         98         462
                                            ----------  ----------  ----------
    Net Loss............................... $   (6,189) $   (3,223) $   (3,019)
                                            ==========  ==========  ==========
Net Loss Per Share From Continuing
 Operations Basic and Diluted..............      (0.82)      (0.60)      (0.63)
Net Loss Per Share (Note 1) Basic and
 Diluted...................................      (1.12)      (0.58) $    (0.55)
                                            ==========  ==========  ==========
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                       11
<PAGE>
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                                       Total
                                         Common Paid In  Retained  Stockholder's
                                         Stock  Capital  Earnings     Equity
                                         ------ -------  --------  -------------
<S>                                      <C>    <C>      <C>       <C>
Balance at December 31, 1995............   *    $56,897  $ 6,533      $63,430
Net Loss................................   --       --    (3,019)      (3,019)
Distributions to Parent.................   --    (7,179)     --        (7,179)
                                          ---   -------  -------      -------
Balance at December 31, 1996............   *     49,718    3,514       53,232
Net Loss................................   --       --    (3,223)      (3,223)
Distributions to Parent.................   --      (131)     --          (131)
                                          ---   -------  -------      -------
Balance at December 31, 1997............   *     49,587      291       49,878
Net Loss................................   --       --    (6,189)      (6,189)
Issuance of Stock.......................   56       (56)     --           --
Distributions to Parent.................   --    (1,787)     --        (1,787)
                                          ---   -------  -------      -------
Balance at December 31, 1998............   56   $47,744  $(5,898)     $41,902
                                          ===   =======  =======      =======
</TABLE>
* Less than $1,000.
 
 
        The accompanying notes are an integral part of these statements.
 
                                       12
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)
 
<TABLE>
<CAPTION>
                                            For the Years Ended December 31,
                                            --------------------------------
                                               1998        1997        1996
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Loss................................. $   (6,189) $   (3,223) $   (3,019)
  Adjustments To Reconcile Net Loss to Net
   Cash Provided by Operating Activities...
  Loss (Income) from Discontinued
   Operations..............................        436         (98)       (462)
  Estimated Loss on Disposal of
   Discontinued Operations.................      1,209         --          --
  Depreciation and Amortization............      5,458       5,782       6,593
  Deferred Income Taxes....................        300       1,032        (118)
  Gain from Disposal of Assets.............        135         (53)        --
  Restructuring Expense (Gain).............        --         (988)      1,893
  Changes in Assets and Liabilities:
    Accounts Receivable, Net...............      3,071      (2,235)      1,935
    Inventories............................      1,245         925       2,992
    Accounts Payable.......................        305        (518)     (1,873)
    Net Restructuring......................        --         (729)     (1,839)
    Other..................................       (492)      1,825         947
                                            ----------  ----------  ----------
  Net Cash Provided by Continuing
   Operations..............................      5,478       1,720       7,049
  Net Cash Provided (Used) by Discontinued
   Operations..............................        236         (15)          7
                                            ----------  ----------  ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..      5,714       1,705       7,056
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital Expenditures.....................     (2,017)     (5,432)     (1,363)
  Proceeds from Disposal of Assets.........        171       3,566         193
                                            ----------  ----------  ----------
NET CASH USED IN INVESTING ACTIVITIES......     (1,846)     (1,866)     (1,170)
CASH FLOWS FROM FINANCING ACTIVITIES
  Contributions from (Distributions To)
   Parent, Net.............................     (1,787)        321      (5,916)
                                            ----------  ----------  ----------
NET CASH PROVIDED (USED) BY FINANCING
 ACTIVITIES                                     (1,787)        321      (5,916)
                                            ----------  ----------  ----------
  Net Increase (Decrease) In Cash..........      2,081         160         (30)
Cash, Beginning of Year....................        333         173         203
                                            ----------  ----------  ----------
Cash, End of Year.......................... $    2,414  $      333  $      173
                                            ==========  ==========  ==========
  Supplemental Cash Flow Information:
  Cash Paid During the Year for
    Interest............................... $       22         --          --
    Income Taxes...........................        --          --          --
</TABLE>
 
       The accompanying notes are an integral part of these statements.
 
                                      13
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Summary of Significant Accounting Policies
 
   a. Principles of Consolidation--The accompanying financial statements
include the accounts of two former wholly owned subsidiaries of Sealright Co.,
Inc. (Sealright) and the accounts of a portion of Sealright and another
subsidiary. The resulting entity operates the San Leandro, California,
Raleigh, North Carolina, and Akron, Ohio, facilities and is collectively
referred to as JPS Packaging Company (the Company).
 
   On March 24, 1998, the Company was reorganized and incorporated as a
Delaware corporation (the reorganization). Prior to July 1, 1998 the Company
was a subsidiary of Sealright. In connection with the merger of Sealright with
Huhtamaki Oy, JPS Packaging Company was formed from a partial distribution of
Sealright stock. The transaction closed on June 30, 1998 and Sealright
shareholders received $11 per share of cash and 1/2 share of stock (Exchange
Ratio) of JPS Packaging Company stock for each share of Sealright stock. The
Company was authorized to issue 15,000,000 shares of common stock, $0.01 par
value, and 1,000,000 shares of preferred stock, $0.01 par value. The Company
has one wholly owned subsidiary, incorporated in North Carolina.
 
   A portion of selling, general and administrative expenses have been
included in the statements of operations based on management's estimate of an
equitable allocation of shared corporate services. These expenses approximate
what the Company would have incurred had it operated on a stand-alone basis
for periods prior to the Company's separation from Sealright, but may not be
indicative of the Company's cost structure in the future. The estimated
expense was approximately $2,500,000 in 1998, $5,700,000 in 1997 and
$3,200,000 in 1996.
 
   b. Description of Business--The Company manufactures flexible packaging
material and label application machinery primarily for the food and beverage
industries. The Company has two customers which each had more than 10% of 1998
sales.
 
   c. Inventories--Inventories are stated at the lower of cost or market.
Finished products, work in process and raw material inventories are carried at
last-in, first-out (LIFO) cost. Inventories include the cost of material,
labor and factory overhead required in the production of the Company's
products as follows:
 
<TABLE>
<CAPTION>
                                                                 As of December
                                                                      31,
                                                                 --------------
                                                                  1998   1997
                                                                 ------ -------
                                                                 (In thousands)
      <S>                                                        <C>    <C>
      Inventories carried on LIFO basis
        Raw materials........................................... $3,666 $ 3,639
        Work in process.........................................  2,211   1,418
        Finished goods..........................................  3,189   5,492
                                                                 ------ -------
          Total FIFO basis......................................  9,066  10,549
        LIFO basis in excess of FIFO basis......................    469     231
                                                                 ------ -------
          Total LIFO basis...................................... $9,535 $10,780
                                                                 ====== =======
</TABLE>
 
   d. Property, Plant and Equipment--Property, plant and equipment has been
recorded at cost and such assets are being depreciated over their estimated
useful lives using the straight-line method. The estimated useful lives are as
follows:
 
<TABLE>
      <S>                                                          <C>
      Buildings and improvements.................................. 5 to 45 years
      Machinery and equipment..................................... 3 to 15 years
      Furniture and fixtures...................................... 3 to 8 years
</TABLE>
 
   Maintenance and repairs are charged to expense as incurred. The cost and
accumulated depreciation of assets retired are removed from the accounts, and
any resulting gains or losses are reflected in current income.
 
   e. Goodwill--The excess of purchase price over fair value of net assets
acquired is being amortized on a straight-line basis over 20 years.
Accumulated amortization was $3,525,000 and $3,231,000, as of December 31,
 
                                      14
<PAGE>
 
1998 and 1997, respectively. The related amortization expense charged to
operations was $294,000 during each of the years ended December 31, 1998,
1997, and 1996, respectively.
 
   The Company assesses the recoverability of long-lived assets by determining
whether the amortization of the balance over its remaining life can be
recovered through non-discounted future operating cash flows. The amount of
impairment, if any, is measured based on expected discounted future operating
cash flows. The assessment of the recoverability of long-lived assets will be
impacted if estimated future operating cash flows are not achieved.
 
   f. Income Taxes--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.
 
   g. Research and Development--Research and development costs are charged to
expense as incurred, and were $423,000, $547,000, and $830,000 in 1998, 1997,
and 1996 respectively. Research and development costs are classified as part
of Selling, General and Administrative expense.
 
   h. Earnings Per Share--The number of shares used in the computation of
earnings per share prior to the reorganization is the number of outstanding
common shares of Sealright adjusted for the Exchange Ratio of one-half share
of the Company for each share of Sealright. The weighted average number of
common shares used in the computation were 5,553,000 in 1998, and 5,536,000 in
1997 and 1996. There were no dilutive securities.
 
   i. Revenue Recognition--Revenue from the sale of packaging and packaging
equipment is recognized at the time of shipment to the customer.
 
   j. Fair Value of Financial Instruments--The Company has various financial
instruments comprised of cash, trade and notes receivable and trade and other
payables. The carrying amounts of short-term assets and liabilities,
approximate fair value due to the short duration of these instruments.
 
   k. Use of Estimates--Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results may differ from those estimates.
 
   l. New Accounting Pronouncements--In June, 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. The 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. The Company will adopt the provisions
of SFAS No. 133 effective July 1, 1999. The Company does not expect
implementation to have any effect on its consolidated financial statements.
 
2. Income Taxes
 
   Total income taxes are allocated as follows:
 
<TABLE>
<CAPTION>
                                                        For the Years Ended
                                                            December 31
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
                                                          (In thousands)
      <S>                                             <C>      <C>      <C>
      Continuing operations.......................... $(1,337) $(1,737) $(1,780)
      Discontinued operations........................    (149)      51      238
                                                      -------  -------  -------
          Total tax benefit.......................... $(1,486) $(1,686) $(1,542)
                                                      =======  =======  =======
</TABLE>
 
 
                                      15
<PAGE>
 
   Taxes from continuing operations were as follows:
 
<TABLE>
<CAPTION>
                                            For the Years Ended December 31,
                                            ----------------------------------
                                               1998        1997        1996
                                            ----------  ----------  ----------
                                                     (In thousands)
      <S>                                   <C>         <C>         <C>
      Current
        Federal............................ $   (1,220) $   (2,463) $   (1,528)
        State and Local....................       (417)       (306)       (134)
                                            ----------  ----------  ----------
          Total Current Tax Benefit........     (1,637)     (2,769)     (1,662)
      Deferred
        Federal............................        233         898        (104)
        State and Local....................         67         134         (14)
                                            ----------  ----------  ----------
          Total Deferred Tax Provision
           (Benefit).......................        300       1,032        (118)
                                            ----------  ----------  ----------
          Total Tax Benefit................ $   (1,337) $   (1,737) $   (1,780)
                                            ==========  ==========  ==========
</TABLE>
 
   A reconciliation of the income tax provision (benefit) from continuing
operations to the statutory Federal rate is 34% as follows:
 
<TABLE>
<CAPTION>
                                            For the Years Ended December 31,
                                            ----------------------------------
                                               1998        1997        1996
                                            ----------  ----------  ----------
      <S>                                   <C>         <C>         <C>
      Statutory Federal Tax Rate........... $   (1,999) $   (1,720) $   (1,789)
      Increase in Valuation Allowance......      2,748         --          --
      Nondeductible Expenses...............        --           97         107
      State Income and Franchise Taxes.....       (231)       (114)        (98)
      Other................................        (35)        --          --
      Tax Benefit Allocation from
       Sealright...........................     (1,820)        --          --
                                            ----------  ----------  ----------
          Total............................ $   (1,337) $   (1,737) $   (1,780)
                                            ==========  ==========  ==========
</TABLE>
 
   The operations of the Company were historically included in the
consolidated Federal income tax returns of Sealright. The policy of Sealright
was to allocate consolidated Federal income tax expense to members of the
affiliated group, including the Company, on a stand-alone basis. The Agreement
and Plan of Merger, dated March 2, 1998, provides for the reimbursement of
1998 tax benefits to the Company provided that Huhtamaki Oy is able to realize
the benefit. In the event that Huhtamaki Oy is able to utilize benefits
associated with the Company's tax losses from January 1, 1998 to June 30, 1998
in excess of the consolidated tax attributes which will be allocated directly
to the Company upon its departure from the consolidated group at June 30,
1998, the Company will receive a commensurate cash payment from Huhtamaki Oy.
Due to the uncertainty of realization of this payment from Huhtamaki Oy, such
payment has not been reflected as a receivable from Huhtamaki Oy in the
accompanying financial statements, but has been reflected as capital
distributed to Sealright Co., Inc.
 
                                      16
<PAGE>
 
   The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                 As of December
                                                                      31,
                                                                 --------------
                                                                  1998    1997
                                                                 ------- ------
                                                                 (In thousands)
      <S>                                                        <C>     <C>
      Deferred Tax Assets:
        Federal AMT Credit Carry Forward........................ $   500 $  --
        Federal Net Operating Loss..............................   2,036    --
        State Net Operating Loss................................     360    --
        Accrued Restructuring Liability.........................     --     --
        Accrued Vacation and Other Compensation.................     405    289
        Accrued Workers' Compensation Reserve...................      47     98
        Other Reserves..........................................     629    613
                                                                 ------- ------
          Total Gross Deferred Tax Assets.......................   3,977  1,000
                                                                 ------- ------
          Valuation Allowance...................................   2,548    --
                                                                 ------- ------
                                                                 $ 1,429 $1,000
                                                                 ======= ======
      Deferred Tax Liabilities:
        Property, Plant and Equipment........................... $ 4,181 $3,741
      Inventories...............................................     324    373
      Prepaid Pension, Net......................................     174    177
      Other.....................................................     341    --
                                                                 ------- ------
          Total Gross Deferred Tax Liabilities..................   5,020  4,291
                                                                 ------- ------
          Net Deferred Tax Liability............................ $ 3,591 $3,291
                                                                 ======= ======
</TABLE>
 
   The Company has recorded a valuation allowance for deferred tax assets as
of December 31, 1998 of $2,548,000. No valuation allowance was provided at
December 31, 1997. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which the temporary differences become
deductible. Management believes more likely than not the Company will realize
the benefits of these deductible differences net of the existing valuation
allowance at December 31, 1998.
 
   At December 31, 1998, the Company had net operating loss carryforwards for
Federal income tax purposes of $5,988,000 which were available to offset
future federal taxable income, if any, through 2018. In addition, the Company
had alternative minimum tax credit carryforwards of approximately $500,000,
which were available to reduce federal regular income taxes, if any, over an
indefinite period.
 
3. Commitments and Contingencies
 
   Future minimum rental payments required under the terms of operating leases
that have initial or remaining non-cancelable lease terms in excess of one
year from December 31, 1998, are as follows:
 
<TABLE>
<CAPTION>
      Years Ended December 31,                                  (In thousands)
      <S>                                                       <C>
      1999.....................................................     $296
      2000.....................................................      286
      2001.....................................................      181
      2002.....................................................       72
      2003.....................................................        4
</TABLE>
 
   Principal operating leases are for equipment, warehouse facilities and
office space. Rent expense related to continuing operations for all operating
leases was $301,000, $182,000, and $244,000 in 1998, 1997, and 1996,
respectively. It is anticipated that leases will be renewed or replaced as
they expire.
 
   The Company is a party to various legal matters incidental to its business.
In the opinion of management, these matters will not have a material impact on
the Company's financial statements. Liabilities for loss
 
                                      17
<PAGE>
 
contingencies are recorded when it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
 
Credit Facility
 
   In 1998 the Company entered into a $15 million secured revolving line of
credit with a bank. Borrowings under the revolving credit facility bear
interest at floating rates as determined at the Company's option to be LIBOR
plus 275 basis points or prime. In addition, the Company is required to pay a
fee of 25 basis points per annum on the unused portion of the commitment. The
amount of borrowing allowed under the facility is limited to an amount based
on certain percentages of accounts receivable and inventory. As of December
31, 1998, there were no borrowings under the facility and the amount available
was $11,893,830. In addition, the facility includes covenants regarding
minimum tangible net worth, capital expenditures and cash flow. As of December
31, 1998, the Company was in compliance with these covenants.
 
   At December 31, 1998, the Company had a stand-by letter of credit
outstanding totaling $240,000 securing leased machinery.
 
4. Employee Benefit Plans
 
   The Company sponsors a defined benefit pension plan covering the hourly
employees at its Akron, Ohio location. Benefits are based on a flat rate per
year of service.
 
   The funded status of the plan was as follows:
 
<TABLE>
<CAPTION>
                                                         Year Ending
                                             -----------------------------------
                                             December 31, 1998 December 31, 1997
                                             ----------------- -----------------
<S>                                          <C>               <C>
Change in benefit obligation
Benefit obligation at beginning of year....     $  958,532        $  749,783
Service cost...............................         74,439            62,394
Interest cost..............................         73,575            61,378
Actuarial loss.............................        164,019           121,100
Benefits and expenses paid.................        (40,000)          (36,123)
                                                ----------        ----------
Benefit obligation at end of year..........     $1,230,565        $  958,532
                                                ==========        ==========
Change in plan assets
Fair value of plan assets at beginning of
 year......................................     $1,565,157        $1,274,986
Actual return on plan assets...............        106,711           326,294
Employer contribution......................            -0-               -0-
Benefits paid..............................        (20,000)          (18,858)
Expenses paid..............................        (20,000)          (17,265)
                                                ----------        ----------
Fair value of plan assets at end of year...     $1,631,868        $1,565,157
                                                ==========        ==========
Funded status..............................     $  401,303        $  606,625
Unrecognized net actuarial gain (loss).....         10,847          (191,428)
Unrecognized prior service cost............         59,269            62,484
                                                ----------        ----------
Prepaid benefit cost.......................     $  471,419        $  477,681
                                                ==========        ==========
Weighted-average assumptions as of December
 31
Discount rate..............................           7.00%             7.25%
Expected return on plan assets.............           9.25%             9.25%
Components of net periodic benefit cost
Service cost...............................     $   74,439        $   62,394
Interest cost..............................         73,575            61,378
Expected return on plan assets.............       (143,099)         (116,073)
Amortization of prior service cost.........          3,215             3,215
Recognized net actuarial loss..............         (1,868)              -0-
                                                ----------        ----------
Net periodic benefit cost..................     $    6,262        $   10,914
                                                ==========        ==========
</TABLE>
 
 
                                      18
<PAGE>
 
   The Company makes contributions to a defined benefit multi-employer pension
plan for certain union employees at its San Leandro, California, manufacturing
facility. Amounts contributed to the plan totaled $246,000, $239,000 and
$350,000 in 1998, 1997, and 1996, respectively.
 
   At July 1, 1998, the Company established a long-term savings plan available
to substantially all non-union employees. The total expense to the Company for
the plan was approximately $42,000 for the year ended December 31, 1998.
 
5. Transaction and Restructuring Expense
 
   Transaction expense relating to the formation of the Company was $689,000
in 1998. These costs included investment banking fees, professional fees,
printer fees, bank fees and other transaction related costs.
 
   During 1996, the Company moved the machine manufacturing operations
formerly conducted in Raleigh, North Carolina, to its DeSoto, Kansas facility
and consolidated the manufacturing operations conducted at Charlotte, North
Carolina into the Akron, Ohio facility. The costs associated with moving these
manufacturing operations and personnel were $1,893,000. At December 31, 1996,
$728,000 remained on the balance sheet as accrued restructuring liability. Of
this amount, $174,000 related to severance, and $14,000 related to legal
expenses. These amounts were paid during 1997.
 
   During the second quarter of 1997, the Company sold the Charlotte, North
Carolina facility for a gain of $1,235,000, offsetting expenses of $247,000
related to completing the consolidation of the Charlotte facility.
 
6. Stock Option Plan
 
   Stock options are granted under the 1998 Stock Option Plan. The purpose of
the Stock Option Plan is to align executive compensation and stockholder
return. The selection of the participants, allotment of shares, exercise
price, determination of the vesting schedule and other conditions are
established by the Compensation Committee. There is no explicit formula for
determining specific stock option grants. In awarding options the Committee
evaluates the recipient's ability to influence the Company's long-term growth
and profitability. The Committee also considers the number of options
previously granted to the recipient and, in certain cases, the number of
shares of common stock held by the recipient.
 
   The Stock Option Plan has 550,000 shares of the Company's common stock
reserved for key employees, officers, and directors. Options issued under the
1998 plan are qualified and non-qualified. During the year 25,000 shares were
issued to directors of the Company under a non-qualified plan. Stock options
are granted at a price equal to the fair market value of JPS Packaging Company
Common Stock at the date of grant for terms of up to ten years. The options
vest over 5 years at a rate of 20% each year.
 
   Information regarding the Company's stock options is summarized below:
 
<TABLE>
<CAPTION>
                                                             1998
                                               ---------------------------------
                                                                Weighted-Average
                                               Number of Shares  Exercise Price
                                               ---------------- ----------------
<S>                                            <C>              <C>
Outstanding at Beginning of Year..............         --              --
  Granted.....................................     365,000           $4.03
  Canceled....................................         --              --
  Exercised...................................         --              --
                                                   -------           -----
Outstanding at End of Year....................     365,000           $4.03
                                                   -------           -----
Exercisable at End of Year....................         --              --
                                                   =======           =====
</TABLE>
 
<TABLE>
<CAPTION>
              Options Outstanding                     Options Exercisable
--------------------------------------------------   ------------------------
                            Weighted-
                             Average     Weighted-     Number      Weighted-
 Range of       Number      Contracted    Average    Exercisable    Average
 Exercise     Outstanding    Life in     Exercise        at        Exercise
   Price      at 12/31/98     Years        Price      12/31/98       Price
-----------   -----------   ----------   ---------   -----------   ---------
<S>           <C>           <C>          <C>         <C>           <C>
$4.00-$4.06     365,000        9.69        $4.03          --           --
</TABLE>
 
 
                                      19
<PAGE>
 
   JPS Packaging Company applied APB Opinion No. 25 in accounting for stock
option grants and, accordingly, no compensation cost has been recognized. Had
the Company recognized a compensation expense in accordance with SFAS No. 123,
the Company's net income (loss) would have been as follows:
 
<TABLE>
<CAPTION>
                                                                      1998
                                                                 --------------
                                                                 (In thousands)
                                                                   except per
                                                                   share data
      <S>                                            <C>         <C>
      Net Loss...................................... As Reported    $(6,189)
                                                     Pro Forma       (6,260)
      Net Loss from Continuing Operations........... As Reported     (4,544)
                                                     Pro Forma       (4,615)
      Basic and Diluted Earnings (Loss) Per Share... As Reported      (1.12)
                                                     Pro Forma        (1.13)
      Basic and Diluted Earnings (Loss) Per Share    As Reported      (0.82)
       from Continuing Operations................... Pro Forma        (0.83)
</TABLE>
 
   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The following assumptions were used.
 
<TABLE>
<CAPTION>
      Year of Grant                                                       1998
      -------------                                                       -----
      <S>                                                                 <C>
      Expected Dividend Yield............................................     0%
      Expected Volatility................................................ 25.20%
      Risk Free Interest Rate............................................  4.75%
      Expected Remaining Life............................................     8
      Option Value....................................................... $1.48
</TABLE>
 
7. Summarized Quarterly Data (unaudited)
 
   The following presents selected quarterly data for the two most recent
fiscal years (in thousands, except per share data). Sales and gross profit
have been restated to reflect the discontinued operation.
 
<TABLE>
<CAPTION>
                                                           Basic and
                                                          Diluted Net Basic and
                                                            Income     Diluted
                                       Income             (Loss) From    Net
                                     (Loss) From   Net    Continuing   Income
                        Net   Gross  Continuing   Income  Operations   (Loss)
                       Sales  Profit Operations   (Loss)   Per Share  Per Share
                      ------- ------ ----------- -------  ----------- ---------
<S>                   <C>     <C>    <C>         <C>      <C>         <C>
1998
First quarter........ $20,012 $1,590   $  (984)  $(1,152)   $(0.18)    $(0.21)
Second quarter.......  22,246  2,199    (1,590)   (1,712)    (0.29)     (0.31)
Third quarter........  18,034  1,163      (910)   (1,065)    (0.16)     (0.19)
Fourth quarter.......  18,577  1,415    (1,060)   (2,260)    (0.19)     (0.41)
1997
First quarter........  24,216  2,238      (685)     (643)    (0.12)     (0.12)
Second quarter.......  24,814  2,259       323       363      0.06       0.07
Third quarter........  21,627    477    (1,279)   (1,213)    (0.24)     (0.23)
Fourth quarter....... $20,863 $  785   $(1,680)  $(1,730)   $(0.30)    $(0.30)
</TABLE>
 
8. Discontinued Operation and Subsequent Event
 
   During the fourth quarter of 1998, the Company decided to exit its
Styrotech machine manufacturing business which builds equipment that is used
to apply polyester sleeve labels. The operations of the Styrotech business
have been presented as a discontinued operation and, accordingly, the
consolidated financial statements have been reclassified for all periods
presented. The estimated loss on disposal of $1,209,000 includes $150,000
operating losses during the 1999 phase-out period. The Company is actively
marketing the sale of Styrotech.
 
                                      20
<PAGE>
 
   The operating results of the discontinued operation are summarized below:
 
<TABLE>
<CAPTION>
                                                           1998    1997   1996
                                                          ------  ------ ------
      <S>                                                 <C>     <C>    <C>
      Revenues........................................... $1,909  $3,971 $5,404
      Income (loss) from operations......................   (585)    149    700
      Income taxes (benefit).............................   (149)     51    238
      Net income (loss).................................. $ (436) $   98 $  462
</TABLE>
 
   Net assets of the discontinued operation, which are included in other
assets, are summarized below:
 
<TABLE>
<CAPTION>
                                                                 1998     1997
                                                                -------  ------
      <S>                                                       <C>      <C>
      Accounts Receivable...................................... $   273  $  234
      Inventories..............................................   1,134   2,015
      Other Assets.............................................      11     --
      Property, Plant & Equipment..............................      48      78
      Other Liabilities........................................    (149)   (338)
      Estimated loss on disposal...............................  (1,209)    --
                                                                -------  ------
      Net assets............................................... $   108  $1,989
                                                                =======  ======
</TABLE>
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
<TABLE>
<CAPTION>
                      Director      Principal Occupation for Last Five Years
   Name of Director    Since   Age              and Directorships
   ----------------   -------- --- ------------------------------------------
 <C>                  <C>      <C> <S>
 G. Kenneth Baum (1).   1998    68 Chairman of the Board of George K. Baum
                                   Group, Inc., an investment company in
                                   Kansas City, Missouri, since May 1994.
                                   Chairman of the Board of George K. Baum &
                                   Company, an investment banking firm, from
                                   April 1982 until May 1994. Mr. Baum is
                                   also a Director of H&R Block, Inc., Unitog
                                   Company and Interstate Bakeries
                                   Corporation.
 
 Leo Benatar (1).....   1998    69 Chairman of the Board of the Company since
                                   August 1998. Associated consultant for A.
                                   T. Kearney, Inc. and Principal of Benatar
                                   & Associates from June 1996 to present.
                                   Chairman of the Board of Engraph, Inc. (a
                                   subsidiary of Sonoco Products Company) and
                                   Senior Vice President of Sonoco Products
                                   Company from October 1993 until May 1996.
                                   Chairman and Chief Executive Officer of
                                   Engraph, Inc. from 1981 until October
                                   1993. Mr. Benatar is a Director of
                                   Interstate Bakeries Corporation, Johns
                                   Manville Corporation, Mohawk Industries,
                                   Inc., PAXAR Corporation, and Aaron Rents,
                                   Inc. and was the Chairman and a Director
                                   of the Federal Reserve Bank of Atlanta
                                   until January 1996.
 
 John T. Carper......   1998    47 President of the Company since March 1998
                                   and Chief Financial Officer since November
                                   1998. Senior Vice President of Finance and
                                   Chief Financial Officer of Sealright Co.,
                                   Inc. from May 1996 to June 1998. From May
                                   1994 to June 1996, Mr. Carper was Vice
                                   President-Finance and Chief Financial
                                   Officer of Sealright Co., Inc. From July
                                   1989 to May 1994, he was a partner with
                                   KPMG LLP, independent public accountants.
 
</TABLE>
 
                                       21
<PAGE>
 
<TABLE>
<CAPTION>
                          Director       Principal Occupation for Last Five
     Name of Director      Since   Age         Years and Directorships
     ----------------     -------- --- --------------------------------------
 <C>                      <C>      <C> <S>
 D. Patrick Curran (2)...   1998    54 Chairman of the Board and President of
                                       Curran Companies, a manufacturer and
                                       supplier of specialty chemicals, since
                                       August 1979. Mr. Curran is also a
                                       Director of Unitog Company, Applebee's
                                       International, Inc. and American
                                       Safety Razor Co.
 
 N. Brian Stevenson......   1998    54 Chief Executive Officer of the Company
                                       since September 1998. Executive Vice
                                       President and Chief Operating Officer
                                       of Huntsman Packaging Corporation from
                                       January 1992 to September 1998.
 
 Charles A. Sullivan.....   1998    63 Chairman of the Board of Interstate
                                       Bakeries Corporation since May 1991.
                                       President and Chief Executive Officer
                                       of Interstate Business Corporation
                                       since March 1989. Mr. Sullivan is a
                                       Director of UMB Bank, n.a. and The
                                       Andersons, Inc.
 
 William D. Thomas (1)(2)   1998    55 Sr. Managing Director of George K.
                                       Baum Merchant Banc LLC since May 1996,
                                       President of George K. Baum Group,
                                       Inc. since May 1994. Vice Chairman of
                                       George K. Baum & Company from June
                                       1991 until May 1994. Mr. Thomas is
                                       also a Director of Unitog Company.
</TABLE>
--------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
 
Board Committees and Director Meetings
 
   The Board of Directors of the Company held seven meetings during 1998. No
Director standing for election at the Annual Meeting attended fewer than 75% of
the total number of meetings of the Board of Directors and the committees of
the Board on which he served during 1998.
 
   The Compensation Committee held two meetings during 1998. The primary
function performed by the Compensation Committee was the recruitment of and
negotiation of the compensation plans for the new Chief Executive Officer and
Chairman of the Board, the administration of the JPS Packaging 1998 Long-Term
Compensation Plan (the "Long-Term Plan") and the overall administration of the
Company's compensation program.
 
   The Audit Committee held one meeting during 1998. The functions performed by
the Audit Committee are the review of significant financial information of the
Company, ascertainment of the existence of an effective accounting and internal
control system, oversight of the audit function and recommendation of the
appointment of the independent public accountants of the Company.
 
   The Company does not have a standing Nominating Committee.
 
Compensation of Directors
 
   Each non-officer Director is paid $5,000 annually, plus $500 for each
meeting of the Board of Directors and $500 for each meeting of its committees
which he attends. During the fiscal year 1998, the Company paid a total of
$10,500 in Directors' fees. Mr. Benatar, Mr. Stevenson, and Mr. Carper do not
receive any fees for attendance at the meetings.
 
   The Long-Term Plan provides that the Compensation Committee is authorized
(i) to grant stock options that qualify as "Incentive Stock Options" under
Section 422 of the Internal Revenue Code of 1986, as amended, and (ii) to grant
stock options that do not so qualify. The option price for any stock options
shall not be less than 100% of the fair market value of the Company's common
stock on the date of grant. No stock options may be exercised more than ten
years after its date of grant. In the case of Incentive Stock Options, the
aggregate fair market value of the shares with respect to which options are
exercisable for the first time by any recipient during any calendar year
cannot, under present tax rules, exceed $100,000. During the fiscal year 1998,
each of the non-employee Directors was granted options for 6,250 shares of the
Company's common stock.
 
                                       22
<PAGE>
 
Compensation Committee Interlocks
 
   The Compensation Committee consists of G. Kenneth Baum, Leo Benatar and
William D. Thomas. There are no Compensation Committee interlocks with other
companies.
 
                              EXECUTIVE OFFICERS
 
   In addition to those executive officers listed in the foregoing table of
directors, the Company's other executive officers as of March 20, 1999 are as
follows:
 
<TABLE>
<CAPTION>
 Executive Officers  Age        Principal Occupation for Last Five Years
 ------------------  --- ------------------------------------------------------
 <C>                 <C> <S>
 Edwin W. Stranberg.  48 Senior Vice President of Operations of the Company
                         since November 1998. From January 1992 to November
                         1998, Mr. Stranberg was Vice President of Huntsman
                         Packaging Corporation.
 
 A. Lawrence Walton.  54 Senior Vice President of Business Development and
                         Marketing of the Company since September 1998. From
                         July 1998 to September 1998, Mr. Walton was Vice
                         President of Sales of the Company. From September 1996
                         to June 1998, he was Vice President of Food and
                         Beverage Sales, Sealright Co., Inc. From February 1996
                         to August 1996, he was Vice President of Research and
                         Development of Sealright Co., Inc. Mr. Walton was Vice
                         President of Marketing and Technical Services of the
                         San Leandro facility of the Company from June 1994 to
                         February 1996. From July 1991 to June 1994, he was
                         Vice President of Marketing and Sales of Glenroy,
                         Inc., a flexible packaging company.
</TABLE>
 
ITEM 11. EXECUTIVE COMPENSATION
 
Summary Compensation Table
 
   The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer. The Company had no other executive officer whose
salary and bonus exceeded $100,000 determined as of 1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
           Annual Compensation                 Long-Term Compensation
           --------------------         -------------------------------------
                                               Awards             Payouts
                                        --------------------- ---------------
                                 Other                                  All
                                Annual  Restricted Securities          Other
Name and                        Compen-   Stock    Underlying  LTIP   Compen-
Principal       Salary   Bonus  sation   Award(s)   Options   Payouts sation
Position   Year   ($)     ($)     ($)      ($)        (#)       ($)     ($)
---------  ---- ------   -----  ------- ---------- ---------- ------- -------
<S>        <C>  <C>     <C>     <C>     <C>        <C>        <C>     <C>
N. Brian   1998 $75,592 $70,000 $1,563     none     200,000    none    none
Stevenson  1997   n/a     n/a     n/a      n/a        n/a       n/a     n/a
CEO        1996   n/a     n/a     n/a      n/a        n/a       n/a     n/a
</TABLE>
 
Option Grants in Last Fiscal Year
 
   The following table summarizes options granted during 1998 pursuant to the
Long-Term Plan:
 
<TABLE>
<CAPTION>
                                                                              Potential
                                                                         realizable value at
                                                                           assumed annual
                                                                           rates of stock
                                                                         price appreciation
                          Individual Grants                                for option term
                    -----------------------------                        -------------------
                       Number of     Percent of
                      securities    total options
                      underlying     granted to   Exercise or                                 Grant date
                    options granted employees in  base price  Expiration                     present value
       Name               (#)        fiscal year    ($/Sh)       date     5% ($)   10% ($)        ($)
       ----         --------------- ------------- ----------- ---------- -------- ---------- -------------
<S>                 <C>             <C>           <C>         <C>        <C>      <C>        <C>
N. Brian Stevenson      200,000          55%         4.06      9-14-08   $432,000 $1,100,000     none
CEO
</TABLE>
 
                                      23
<PAGE>
 
All options were granted with an exercise price equal to the greater of the
closing price for the Company's common stock on the date of grant, as reported
on the NASDAQ National Market System or $4.00. Except in the event of death,
disability or retirement, if any of the named executive officers ceases to be
employed by the Company, his options shall terminate immediately. Upon a
merger or consolidation in which the Company is not the surviving corporation,
all options outstanding shall become vested and exercisable immediately prior
to such merger or consolidation.
 
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
 
   The following table summarizes the net value realized on the exercise of
options in 1998, and the value of the outstanding options at December 31,
1998, for the Chief Executive Officer.
 
<TABLE>
<CAPTION>
                                              Number of securities      Value of unexercised
                           Shares            underlying unexercised     in-the-money options
                          acquired           options at fiscal year-     at fiscal year end
                             on     Value            end (#)                     ($)
                          exercise Realized ------------------------- -------------------------
        Name                (#)      ($)    Exercisable Unexercisable Exercisable Unexercisable
        ----              -------- -------- ----------- ------------- ----------- -------------
<S>                       <C>      <C>      <C>         <C>           <C>         <C>
N. Brian Stevenson, CEO.    -0-      -0-        -0-        200,000       $-0-         $-0-
</TABLE>
 
JPS Packaging Company Savings Plan
 
   The JPS Packaging Savings Plan (the "JPS Savings Plan") is a defined
contribution plan which is intended to be a 401(k) plan. All employees of the
Company not covered by a collective bargaining agreement are eligible for
participation in the JPS Savings Plan.
 
   Participants in the JPS Savings Plan may elect to have up to fifteen
percent of their pre-tax compensation (up to a maximum of $10,000 per year)
and seven percent of their after-tax compensation contributed to the JPS
Savings Plan. For employees who have completed one year of service, the
Company will match fifty percent of each participant's pre-tax contribution,
but only to the extent that the participant's contribution does not exceed
five percent of compensation. Total contributions for a participant are
currently limited by Federal law to the lesser of twenty-five percent of such
participant's compensation or $30,000 per year. A participant's election
deferrals will be vested from the time made. The Company's matching
contributions will vest at the rate of twenty percent for each of the
participant's first five years of service and will be fully vested after five
years of employment or upon retirement, disability or death.
 
   In addition to the Company's matching contributions, the Company may
contribute additional amounts determined by the Compensation Committee in its
sole discretion, which amounts will be allocated to each participant's account
in the proportion that such participant's compensation bears to the total
compensation of all participants for that plan year. These additional Company
contributions vest in the same manner as the Company matching contributions.
 
JPS Packaging 1998 Long-Term Compensation Plan
 
   The Long-Term Plan, administered by the Compensation Committee, provides
for granting of stock options, restricted stock, performance shares and
performance units payable to employees of the Company, including the Company's
Directors and executive officers. Under the Long-Term Plan, the Compensation
Committee has sole discretion to determine those employees eligible to receive
awards and the amount and type of awards. Grants of awards to Directors of the
Company must be authorized by the Board of Directors.
 
   The maximum number of shares of the Company's common stock subject to award
will be 550,000. No more than 55,000 shares may be issued pursuant to
restricted stock awards under the Long-Term Plan. Terms and conditions will be
set forth in written agreements, the terms of which will be consistent with
the Long-Term Plan.
 
   Under the Long-Term Plan, the Compensation Committee is authorized (i) to
grant stock options that qualify as "Incentive Stock Options" under Section
422 of the Internal Revenue Code of 1986, as amended,
 
                                      24
<PAGE>
 
and (ii) to grant stock options that do not so qualify. The option price for
any stock options shall not be less than 100% of the fair market value of the
Company's common stock on the date of grant. No stock options may be exercised
more than ten years after its date of grant. In the case of Incentive Stock
Options, the aggregate fair market value of the shares with respect to which
options are exercisable for the first time by any recipient during any
calendar year cannot, under present tax rules, exceed $100,000. The
Compensation Committee has discretion to determine the treatment of awards
under the Long-Term Plan in the event of a change in ownership or a change in
control of the Company.
 
Employment Agreement
 
   Mr. Stevenson entered into an employment agreement with the Company
effective September 14, 1998. Under the agreement, Mr. Stevenson is entitled
to an annual base salary of $250,000, subject to annual adjustment by the
Compensation Committee. Mr. Stevenson is also entitled to receive an annual
incentive compensation bonus in an amount up to his annual base salary as
determined by the Compensation Committee. Upon commencement of his employment
Mr. Stevenson received a bonus of $75,000. Mr. Stevenson was also granted
options to purchase 200,000 shares of the Company's common stock which vests
over a period of five years from September 14, 1998 (the "Date of Grant"), ten
percent of which must be exercised or lost each year over a ten year period,
subject to certain restrictions, at an exercise price equal to $4.0625 per
share. In addition, Mr. Stevenson will be granted options to purchase 25,000
shares of the Company's common stock in each of the calendar years ending 1999
and 2000, if certain financial targets are met. If Mr. Stevenson's employment
is terminated without cause or if he resigns for good reason, he is entitled
to receive one year's current base salary in twelve equal payments. All stock
options awarded to Mr. Stevenson will vest immediately upon a termination of
his employment without cause, due to his disability, his resignation for good
reason or upon a change of control (as defined in his employment agreement).
 
COMPENSATION COMMITTEE REPORT
 
   The Compensation Committee consists of the Chairman of the Board of
Directors and two non-employee Directors. It recommends to the full Board of
Directors the compensation of the Chief Executive Officer. The Compensation
Committee also approves and monitors the Executive Incentive Plan ("EIP"), Key
Management Incentive Plan, Sales Management Incentive Plan and Sales Account
Managers Incentive Plan, and it administers the Long-Term Plan. The
Compensation Committee's report for fiscal 1998 is set forth below.
 
Compensation Philosophy
 
   The Compensation Committee believes that it is in the best interest of the
stockholders of the Company to attract, retain and motivate dedicated and
talented management personnel by offering a competitive compensation package
that maintains an appropriate relationship between compensation and the
creation of stockholder value. The general philosophy of the Compensation
Committee is to integrate (i) reasonable levels of annual base salary, (ii)
annual incentive bonus awards based upon achievement of short-term corporate
and individual performance goals such that management compensation levels will
be higher in years in which performance goals are achieved or exceeded, and
(iii) equity-based grants to ensure that management has a continuing stake in
the long-term success of the Company in return of value to its stockholders.
 
Base Salary
 
   Base salary ranges are established each year for each executive position
based primarily on a review of salaries offered by other manufacturing
companies with revenues comparable to the Company for positions with
comparable responsibilities. The Compensation Committee may utilize external
salary surveys to establish base salaries in reference to comparable
manufacturing companies but has not yet undertaken or commissioned such a
survey. The Compensation Committee expects executive salaries each year to be
based upon job performance and results achieved, potential for future
responsibilities, and the overall financial performance of the Company.
 
                                      25
<PAGE>
 
Annual Incentive Compensation
 
   Incentive compensation is based on Company and individual performance, with
overall Company financial performance as the team measurement, and
quantitative goals as the measurement for individual performance. EBITDA is
currently used to measure the Company's financial performance. The EIP adopted
for 1998 set EBITDA targets which were not achieved, and thus executive
bonuses were not paid for 1998.
 
Equity-Based Grants
 
   Individual stock options have been granted under the Long-Term Plan to the
Chairman of the Board and each of the other executive officers. The selection
of the participants, allotment of shares, exercise price, determination of the
vesting schedule and other conditions are established by the Compensation
Committee. While there is no explicit formula for deciding specific stock
option grants, the Chief Executive Officer and two other executive officers
have been advised that they may receive additional option grants based upon
the Company's performance in 1999 and 2000. In awarding options, the Committee
also evaluates the recipient's ability to influence the Company's long-term
growth and profitability as well as the number of options previously granted
to the recipient.
 
CEO Compensation
 
   Mr. Stevenson was employed by the Company effective September 14, 1998, and
the terms of his employment agreement were negotiated by the Compensation
Committee. Under the terms of his employment agreement, his annual base salary
will be reviewed annually and he will participate in the EIP approved by the
Compensation Committee. The number of options granted upon commencement of his
employment and for the years 1999 and 2000 were set in his employment
agreement.
 
Deductibility of Compensation Expenses
 
   Under the Omnibus Budget Reconciliation Act of 1993 the Company is not
allowed a tax deduction for compensation paid in excess of $1 million to any
officer listed in the Summary Compensation Table, subject to certain
exceptions. The Committee did not consider this restriction in setting
executive compensation because in no case does compensation subject to the
limitation paid to any executive approach the $1 million limit.
 
Summary
 
   The Compensation Committee believes that the executive officers of the
Company are dedicated to achieving significant improvements in long-term
financial performance and that the compensation policies and programs
contribute to achieving this focus.
 
   The Compensation Committee Report is submitted by:
 
                                G. Kenneth Baum
                                  Leo Benatar
                               William D. Thomas
 
                                      26
<PAGE>
 
COMPANY PERFORMANCE
 
   The following graph shows a comparison of cumulative total returns for the
Company as of December 31, 1998, the NASDAQ Composite and an index of peer
companies selected by the Company.
 
 Comparison of Cumulative Total Return for Fiscal Year Ended December 31, 1998
           (JPS Packaging Company, NASDAQ Composite, and Peer Group)
                                  in Dollars
 
                                    [GRAPH]
 
<TABLE>
<CAPTION>
                                                  July 1, 1998 December 31, 1998
                                                  ------------ -----------------
      <S>                                         <C>          <C>
      The Company................................    100.00          83.33
      NASDAQ.....................................    100.00          92.76
      Peer Group.................................    100.00         117.16
</TABLE>
 
   The total cumulative return on investment (change in the year-end stock
price plus dividends reinvested at the ex-dividend date) for the fiscal year
ended December 31, 1998 for the Company, the peer group and the NASDAQ
Composite is based on the stock prices at the end of the fiscal year 1998,
assuming a $100 investment. The graph, prepared by the Media General Financial
Services, Inc., compares the performance of the Company with that of the
NASDAQ Composite and peer companies selected by the Company with the
investment weighted at the beginning of the period based on market
capitalization.
 
   The peer group consists of the following companies: Bemis Company, Inc.,
Sonoco Products Company, Liqui-Box, Inc. and ACX Technologies, Inc. The peer
group was approved by the Compensation Committee.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF JPS PACKAGING
       COMMON STOCK
 
Amount and Nature of Beneficial Ownership
 
   The following table sets forth with respect to the Company's common stock
as of December 31, 1998: (i) the only persons known to be beneficial owners of
more than five percent of the Company's voting common
 
                                      27
<PAGE>
 
stock; (ii) the number of shares beneficially owned by each current Director
and nominee; (iii) the number of shares beneficially owned by the executive
officer named on the "Summary Compensation Table" set forth herein; (iv) the
number of shares beneficially owned by all directors and executive officers as
a group.
 
<TABLE>
<CAPTION>
Name and Address                                 Amount and Nature of   Percent
of Beneficial Owner                             Beneficial Ownership(1) of Class
-------------------                             ----------------------- --------
<S>                                             <C>                     <C>
G. Kenneth Baum...............................         1,866,137(2)(3)    33.6%
120 West 12th Street
Kansas City, MO 64105
William D. Thomas.............................         1,694,930(3)(4)    30.5%
120 West 12th Street
Kansas City, MO 64105
George K. Baum Group, Inc. ...................         1,488,100(5)       26.9%
120 West 12th Street
Kansas City, MO 64105
Leo Benatar...................................            45,500(6)          *
N. Brian Stevenson............................            22,000             *
John T. Carper................................            27,762(7)          *
Charles A. Sullivan...........................            11,230(8)          *
D. Patrick Curran.............................             7,230(9)          *
Edwin W. Stranberg............................             5,000             *
A. Lawrence Walton............................             1,628             *
Directors and Executive Officers as a Group (9         2,193,317          39.5%*
Persons)......................................
</TABLE>
--------
*   Percentages do not exceed 1% of the issued and outstanding shares of
    common stock. Calculated in accordance with Rule 13d-3 under the
    Securities Exchange Act of 1934, as amended. Nature of beneficial
    ownership of securities is direct unless indicated otherwise by footnote.
    Beneficial ownership as shown in the table arises from sole voting power
    and sole investment power unless otherwise indicated by footnote.
(1) Includes 371,787 shares held indirectly by Mr. Baum, as trustee of a
    revocable trust established by him, and 6,250 shares issuable pursuant to
    options which are currently exercisable by Mr. Baum.
(2) Includes 1,488,100 shares owned by George K. Baum Group, Inc. ("Group").
    Mr. Baum and Mr. Thomas are each officers and directors and have shared
    voting and investment power over these shares. Mr. Baum is also a
    shareholder of Group.
(3) Includes 150,480 shares held by Mr. Thomas as trustee of a revocable trust
    established by him, 50,000 shares held by his spouse as trustee of a
    revocable trust established by her, 100 shares held by his spouse as
    custodian for their children, in which he disclaims beneficial ownership
    and 6,250 shares issuable pursuant to options which are currently
    exercisable by Mr. Thomas.
(4) Excludes shares owned by officers and employees of Group and its
    subsidiaries.
(5) Includes 5,500 shares held directly by Mr. Benatar and, 40,000 shares
    issuable pursuant to options which are currently exercisable by him.
(6) Includes 24,962 shares held directly by Mr. Carper and 2,800 shares held
    indirectly by Mr. Carper as trustee of an irrevocable trust.
(7) Includes 6,250 shares issuable pursuant to options which are currently
    exercisable by Mr. Sullivan.
(8) Includes 6,250 shares issuable pursuant to options which are currently
    exercisable by Mr. Curran.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
   Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Directors and executive officers to file with the Securities Exchange
Commission ("SEC") and The NASDAQ Stock Market initial reports of ownership
and reports of changes in ownership of the Company's common stock and other
equity securities. Directors and executive officers are required by SEC
regulations to furnish the Company with copies of all Section 16(a) reports
they file.
 
 
                                      28
<PAGE>
 
   To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during 1998 all Section 16(a) filing requirements
applicable to its Directors and executive officers were complied with.
 
   Section 16(a) of the Securities Exchange Act of 1934 requires directors and
certain officers of the Company, as well as persons who own more than 10% of
the Company's outstanding common stock ("Reporting Persons"), to file reports
of ownership and changes in ownership on Form 3, 4, and 5 with the Securities
and Exchange Commission. The Company believes that during the preceding year
all Reporting Persons timely complied with all filing requirements applicable
to them.
 
ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
 
   The Company's Directors, G. Kenneth Baum and William D. Thomas, have
certain affiliations with George K. Baum & Company ("GKB"), one of the
Company's financial advisors. Mr. Baum is an employee and Mr. Thomas is a Vice
President of GKB, and both Mr. Baum and Mr. Thomas are affiliated with George
K. Baum Group, Inc., which holds 1,488,100 shares of the Company's common
stock.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
 
   (a) The following documents are filed as part of this report:
 
       (1) Financial Statements
 
   The Company's financial statement, prepared in accordance with Regulation
S-X, including statements of operations, cash flow, and stockholders' equity,
for the three fiscal periods ended December 31, 1997, 1996, and 1995, and
balance sheets as of December 31, 1997 and 1996, and related notes and the
independent auditors' opinion thereon are included under Item 8.
 
       (2) Financial Statement Schedules
 
   No financial statement schedules are required to be included in this Annual
Report by the Securities and Exchange Commission's current regulations.
 
       (3) Exhibits
 
<TABLE>
<CAPTION>
     Exhibit
     Number  Description
     ------- -----------
     <C>     <S>
      3 (a)  Amendment to Certificate of Incorporation, as amended, of the
             Registrant (Incorporated by reference from Exhibit 3.1(c) to Form
             S-4 dated June 9, 1998)
 
      3 (b)  Amended and Restated Bylaws dated April 22, 1998 (Incorporated by
             reference from Exhibit 3.2 to Form S-4 dated June 9, 1998)
      4 (a)  Specimen Common Stock Certificate (Incorporated by reference from
             Exhibit 4.1 to Form S-4 dated June 9, 1998)
      4 (b)  Credit Agreement with Harris Trust and Savings Bank, dated June
             30, 1998, for a $15 million line of credit, filed herewith
     10 (a)  Long-Term Compensation Plan of JPS Packaging Company, effective
             May 4, 1998 (Incorporated by reference from Exhibit 10.2 to Form
             S-4 dated June 9, 1998)
     10 (b)  JPS Packaging Company Savings Plan, effective July 1, 1998, filed
             herewith
     10 (c)  Employment Agreement with N. Brian Stevenson, effective September
             14, 1998, filed herewith
     10 (b)  JPS Packaging Company Savings Plan, effective July 1, 1998, filed
             herewith.
     21      Subsidiaries of the registrant (Incorporated by reference from
             Exhibit 21.1 to Form S-4 dated June 9, 1998)
     27      Financial Data Schedule
</TABLE>
 
 
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