<PAGE>

Aerovox 1999 Annual Report                                          Exhibit 13.1

                            Markets & Applications

Aerovox CAPACITORS are components in:

MOTORS

Compressors, air conditioners, refrigerators, laundry equipment, pumps, garage
door openers, hospital beds

LIGHTING

Electromagnetic and electronic ballasts for fluorescent and HID fixtures and
strobe lights

POWER ELECTRONICS

Variable speed drives, uninterruptible power systems (UPS), telecommunication
equipment, audio/visual equipment, battery chargers

SPECIALTY MARKETS

Medical equipment (defibrillators, X-ray equipment), lasers and industrial
equipment

Power Factor Correction equipment and systems

Power supplies, computer and telecommunication equipment and appliances

Aerovox EMI FILTERS are components in:

Telecommunication equipment, medical equipment, industrial equipment, encryption
equipment and white goods appliances.

                                                                             152
<PAGE>

                          Aerovox Worldwide Locations

                          NEW BEDFORD, MASSACHUSETTS
               Corporate Headquarters and Manufacturing Facility

                              HUNTSVILLE, ALABAMA
                                Foil Operations

                                JUAREZ, MEXICO
                               Aerovox de Mexico

                              MEXICO CITY, MEXICO
                               Aerovox de Mexico

                               WEYMOUTH, ENGLAND
                               BHC Aerovox Ltd.
                                                                             153
<PAGE>

                             Corporate Information

Directors and Executive Officers

Directors

Sherel D. Horsley 1
Chairman, Aerovox Inc.
Senior Vice President and Manager of Marketing, the Digital Imaging Group of
Texas Instruments Incorporated

Robert D. Elliott 1, 4
President and Chief Executive Officer

John F. Brennan 1, 2
Dean, Sawyer School of Management, Suffolk University

Dennis J. Horowitz 1, 3
President and Chief Executive Officer, Wolverine Tube, Inc.

William G. Little 3, 4
President and Chief Executive Officer, Quam Nichols Company, Inc.

Benedict P. Rosen 3
Chairman and Chief Executive Officer, AVX Corporation

John L. Sprague 2, 4
President, John L. Sprague Associates

Enrique Sanchez Aldunate
Senior Vice President, Aerovox Inc.
President, Aerovox de Mexico

Executive Officers

Robert D. Elliott
President and Chief Executive Officer

Timothy J. Brown
Senior Vice President, Marketing and Sales

Martin Hudis
Senior Vice President, Technology Development

F. Randal Hunt
Vice President, Finance and Corporate Controller

Ted M. Miller
Senior Vice President, Engineering and Operations

Enrique Sanchez Aldunate
Senior Vice President, Aerovox Inc.
President, Aerovox de Mexico

Graham Yates
Sr. Vice President, Aerovox Inc.
Managing Director, BHC Aerovox Ltd.

                                                                             154
<PAGE>

Committee Member
/1/ Executive
/2/ Audit
/3/ Compensation
/4/ Nominating

Corporate Office

Aerovox Inc.
740 Belleville Avenue
New Bedford, MA  02745-6194

Form 10K/Investor Contact

Copies of the Company's annual and quarterly reports filed with the Securities
and Exchange Commission on Form 10-K and Form 10-Q are available on request from
the Company. Requests and other investor contacts should be directed to F.
Randal Hunt, Vice President, Finance and Corporate Controller.

Internet Access

Corporate news releases, Forms 10-K and 10-Q, parts of the annual report and
other information about the Company are available through Aerovox's web site on
the Internet. The address is http://www.aerovox.com.
                             ----------------------
Annual Meeting

The Annual Meeting of Shareholders of Aerovox Incorporated will be held on
Tuesday, May 2, 2000 at 11:00 a.m., at the offices of Ropes & Gray, One
International Place, Room 36/1, Boston, Massachusetts 02110.

Common Stock and Dividend Information

The Company's common stock trades on The Nasdaq Stock Market(R), under the
symbol ARVX. As of February 28, 2000, Aerovox had approximately 8,500
shareholders. Of that total, 5,946 were shareholders of record.

The Company currently intends to retain all earnings for use in its business and
does not expect to pay dividends for the forseeable future.

The following table sets forth the high and low sales price information as
reported by Nasdaq:

<TABLE>
<CAPTION>
Common Stock Price
                   1999                 1998
              High      Low        High      Low
------------------------------------------------
<S>          <C>      <C>         <C>      <C>
First        $3.00    $2.06       $4.75    $3.13
Quarter
Second       $3.00    $2.06       $3.69    $2.75
Quarter
Third        $3.23    $2.28       $4.00    $2.75
Quarter
Fourth       $3.25    $2.25       $3.13    $1.38
Quarter
</TABLE>

                                                                             155
<PAGE>

Transfer Agent and Registrar
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005 Phone: (800) 937-5449

                                     156
<PAGE>

Aerovox is a leading manufacturer of film, paper and aluminum electrolytic
capacitors. The Company sells its products worldwide, principally to original
equipment manufacturers ("OEMs") of electrical and electronic products.
Applications include air conditioners, fluorescent and high-intensity discharge
lighting fixtures, a variety of appliances, motors, power supplies,
photocopiers, telecommunication, computer and medical equipment and industrial
electrical equipment and systems.

The Company's manufacturing facilities are located in New Bedford,
Massachusetts; Huntsville, Alabama; Weymouth, England; and Juarez and Mexico
City, Mexico.

Financial Highlights

(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                        For Fiscal Years
                                               1999         1998        1997
                                               -----------------------------
<S>                                         <C>          <C>         <C>
Operating Results
Net sales                                   $ 110,438    $ 116,194   $ 119,658
Income (loss) from operations                  (2,273)       2,648     (12,574)
Net income (loss)                              (3,471)       1,786     (11,499)
Net income (loss) per share                     (0.64)        0.33       (2.15)

Cash Flow
Net cash provided by operating activities   $   5,938    $   1,731   $   9,361

Financial Position
Total assets                                $  70,520    $  70,571   $  71,559
Long-term obligations                          21,344       17,888      23,808
Redeemable common stock                         2,546           --          --
Stockholders' equity                           22,206       25,289      23,766

1999 Sales by Market                                 (millions U.S.$  $110.5)
</TABLE>

                                                                             157
<PAGE>

                             [GRAPH APPEARS HERE]

Motors: 39% Power Electronics: 31% Lighting: 24% Specialty: 4% EMI Filters: 4%

                                                                             158
<PAGE>

                            Letter to Shareholders


Dear Fellow Shareholders,

Persistence, determination and strategic thinking....all qualities needed to put
together a jigsaw puzzle. Deciding how those small pieces interlock to produce a
complete picture can be challenging, at times frustrating, but when successful,
always rewarding.

The revitalization of Aerovox over the last three years has been much like
working on a jigsaw puzzle. We laid out every part of the business, evaluated
how each contributes to the company, determined where each belongs, and in some
cases, located a few missing pieces. 1999 was a year in which the final pieces
of the puzzle were identified and positioned for final placement.

We have repeatedly stressed the importance of utilizing key metrics such as
on-time deliveries and end-to-end lead times to measure our responsiveness to
customers. I am proud to report that in 1999, company-wide on-time deliveries
averaged over 95% with continually shortening lead times. As a result, customer
satisfaction is much improved and Aerovox was awarded supplier performance
awards from several major customers during the year.

                                                                             159
<PAGE>

The use of modern flow manufacturing techniques and internal pull systems are
now widely used throughout all of our plants. The new methods have been largely
successful due to the commitment and drive of our dedicated people. In addition,
the collaboration between our company and our key customers and suppliers to
adopt these techniques has been effective. Overall, these new systems are
working, as they have helped to improve our responsiveness to customers while
reducing company-wide inventory levels.

A three-year re-capitalization project at BHC Aerovox Ltd., our subsidiary in
the United Kingdom, is now nearing completion. Since 1996, we have invested
several million dollars in the future of BHC by purchasing new,
flexible-automation production equipment to improve manufacturing consistency,
customer response times and to lower costs. Although our European subsidiary
faced weak market conditions and therefore, did not perform as well financially
as expected in 1999, the new investments have demonstrated positive results.
When the European market rebounds, BHC Aerovox will be well positioned to lead
the industry.

Construction is well underway on our new plant in New Bedford, Massachusetts.
The facility, which will also house our corporate headquarters, is slated to be
completed during the third quarter. A phased move will follow, with
manufacturing areas shifting production at staggered times throughout the fourth
quarter. The transition is scheduled to be complete by the end of 2000.

                                                                             160
<PAGE>

The new building will allow us to further improve operational efficiencies and
to retain our highly-skilled and experienced workforce, a crucial piece to the
success of our company.

In April 1999, we completed the purchase of Compania General de Electronica of
Mexico City. The acquisition represented an integral piece of the puzzle for
which we had been searching. This lean, efficient operation made Aerovox the
largest supplier of motor start capacitors in the world and opened up key
markets in Latin America. The integration of CGE into Aerovox sales, marketing
and manufacturing efforts has been a smooth combination, with both of our teams
welcoming the opportunity to work together.

As importantly, the addition of CGE, now known as Aerovox de Mexico, has allowed
us to re-align our North American operations. As we announced last summer, we
are currently undergoing a restructuring effort in which our two plants in
Juarez are being consolidated into one. In addition, all North American
production of motor start capacitors has been shifted from Juarez to Mexico
City.

By the end of 2000, Aerovox will operate five streamlined and more fully
utilized plants, ranging in size from 90,000 to 140,000 square feet. Each
location has room for

                                                                             161
<PAGE>

expansion, so while we have improved efficiencies, we have not hindered our
ability to grow.

There is a changing culture present within our company. Not only do we have a
solid management team and experienced Board of Directors guiding Aerovox into
the 21st century, but our adoption of a "shared leadership" philosophy
throughout the company has also taken hold. Our organization is more dynamic,
more fluid and quicker to react to the changing needs of the markets we serve.

Our people are more involved than ever before in making decisions which affect
how we operate the business. They are being challenged at higher levels, sharing
their ideas and contributing to their full potential. Cooperation between teams
has resulted in significant improvements being made in the entire supply chain -
from customers to suppliers. With this team spirit and commitment as our
foundation, I am excited about what lies ahead for Aerovox.

As we look to the future, we realize that the "fix it" phase in the recent
history of Aerovox is nearing completion. We must now remain focused on what
will lead to financial growth.

                                                                             162
<PAGE>

We are currently as good as our best competitors, but that is not enough. We
need to be, and will be, much better than the others in our industry. We will
continue to focus on expanding our strong customer base. As a customer-driven
supplier, with customer satisfaction as our paramount priority, we will continue
to earn higher share in our markets.

We also realize that in as competitive an industry as this, significant growth
of our company will come through strategic partnerships and acquisitions. We
will continue to search for sound investment opportunities and economically
worthwhile ventures that will benefit the business and increase shareholder
value.

We have great people at Aerovox, committed to doing what our customers want
better than anyone else knows how. Through their enthusiasm, innovation,
persistence and determination, we will prevail as the preeminent supplier in our
selected markets.

Thank you for your continued support.

Sincerely,
Robert D. Elliott
President and Chief Executive Officer

                                                                            163
<PAGE>

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


Statements concerning the Company's anticipated performance including future
revenues, costs and profits, or about the development of the Company's markets,
made through this Annual Report, may be deemed forward-looking statements. Such
statements are based on the current assumptions of Aerovox management, which are
believed to be reasonable. However, they are subject to significant risks and
uncertainties, including, but not limited to the important factors described
under "Certain Factors That May Affect Future Results" that could cause actual
results to differ materially from those described in the forward-looking
statements.

Results of Operations

The table below depicts significant components from the statements of operations
as percentages of net sales.

<TABLE>
<CAPTION>
                                                                        For Fiscal Years
                                                            1999              1998             1997
<S>                                                        <C>               <C>              <C>
Net sales                                                  100.0%            100.0%           100.0%
Cost of sales                                               82.1%             82.7%            85.9%
Gross profit                                                17.9%             17.3%            14.1%
Research and development                                     2.0%              2.1%             2.3%
Selling, general and administrative expenses                13.2%             12.9%            11.5%
Provision for environmental charges                           --                --             10.9%
Provision for restructuring costs                            4.8%               --               --
Income (loss) from operations                               (2.1)%             2.3%            (10.5)%
</TABLE>

Fiscal years 1999 and 1997 included 52 weeks. Fiscal year 1998 included 53
weeks. The additional week in 1998 was required to comply with Company policy
that the fiscal year end on the Saturday nearest to December 31. Because the
additional week included in 1998 was the week between the Christmas and New Year
holiday, during which shipping activity is historically slow and included only
three shipping days, the Company believes the effect on sales and income from
operations was immaterial.

1999 versus 1998

Sales
Consolidated net sales for 1999 were $110.4 million versus $116.2 million in
1998, a decline of 5.0%. Net sales at BHC Aerovox Ltd. ("BHC"), a wholly owned
subsidiary in the United

                                                                             164
<PAGE>

Kingdom, decreased 18.9% to $21.5 million in 1999 from $26.5 million in 1998 due
principally to weak demand in Europe. Management believes that the Company has
maintained its market share in Europe and that the Company and its competitors
experienced a broad decline within the markets into which we sell our
capacitors.

Sales of products manufactured in North America decreased by 0.9%, to $88.9
million in 1999 from $89.7 million in 1998. An increase in net sales
attributable to the newly acquired Mexico City business in April was essentially
offset by the Company's exit from several unprofitable product lines and
customers, as well as by declining prices in the electrical equipment and
appliance markets. Additionally, the sale of the Power Factor Correction Systems
("PFC") business in the third quarter of 1998 contributed to decreased sales in
this year-to-year comparison.

In general, the Company's sales are seasonal, with the first two quarters having
higher shipping rates due mainly to seasonal production schedules among OEM
manufacturers of air conditioning equipment. The strength and variation of these
seasonal patterns vary from year to year depending upon weather and other
conditions.

Gross Profit
Excluding inventory write-offs relating to restructuring activities of $0.3
million, gross profit on sales increased to $20.2 million (18.3% of net sales)
in 1999 from $20.1 million (17.3% of net sales) in 1998 as a result of a
significant cost reduction effort which began in the fourth quarter of 1997 and
continued throughout 1999.

During 2000 the Company will close one of its three manufacturing facilities in
Mexico and relocate its New Bedford operation from a turn-of-the-century textile
mill building into a state-of-the-art, single-floor manufacturing facility, also
in New Bedford. These moves are expected to reduce overall manufacturing space
by approximately 350,000 square feet and result in further reductions in
operating expense while maintaining ample floor space for current and projected
manufacturing demand.

Research and Development
Expenditures for research, product development and engineering totaled $2.2
million and $2.5 million for 1999 and 1998, respectively. The decrease resulted
from the aforementioned cost reduction efforts.

Selling, General and Administrative
Selling, general and administrative expenses decreased to $16.8 million in 1999
from $17.5 million in 1998, primarily due to lower spending on Year 2000
projects and the impact of the cost reduction programs mentioned above. This was
accomplished simultaneously with the integration of the newly acquired business
in Mexico City.

                                                                            165
<PAGE>

Provision for Restructuring Costs
During the fourth quarter of 1999 the Company recorded pre-tax restructuring
charges totaling $5.7 million related to the consolidation of three plants in
Mexico to two, closure of foil processing operations in England, exit from a
capacitor product line in North America and write-down of manufacturing
equipment in New Bedford, which has been abandoned and will not be moved to the
new facility. The provision for restructuring costs reflects the initiation of
the final phase of our three-year cost reduction program and we anticipate that
the restructuring activities will be completed during 2000.

The components of the costs related to these restructuring activities are as
follows:

<TABLE>
<CAPTION>
                                                                Cash           Non-Cash           Total
                                                           --------------- ----------------- ----------------
<S>                                                        <C>             <C>               <C>
Impairment of fixed assets                                        $    --  $          4,723  $         4,723
Employee terminations                                                 609                --              609
Inventory write-down                                                   --               344              344
                                                           --------------- ----------------- ----------------
   Pre-tax provision for restructuring costs               $          609  $          5,067          $ 5,676
                                                           =============== ================= ================
</TABLE>

Interest Expense
Interest expense for 1999 of $1.7 million was higher by $0.2 million compared to
1998 as a result of borrowings related to the acquisition of the capacitor
business of Compania General de Electronica S.A. de C.V. ("CGE") in April 1999.

Other Income
The $1.2 million decrease in other income to $0.3 million in 1999 from $1.5
million in 1998 principally reflects the gain recorded in 1998 of $0.9 million
on the sale of the PFC business.

Provision for Income Taxes
The provision for income taxes included debits against deferred tax accounts of
$0.4 million and taxes currently payable of $0.1 million. Due to the uncertainty
surrounding the realization of favorable tax attributes in future tax returns
related to the write-down of impaired assets and other restructuring costs in
the United States, the increase in deferred tax assets has been fully offset by
a valuation allowance.

1998 versus 1997

Sales
Consolidated net sales for 1998 were $116.2 million versus $119.7 million in
1997, a decline of 2.9%. Sales of products manufactured by the Company's North
American business units declined 5.3%, to $89.7 million in 1998 from $95.0
million in 1997; whereas, net sales at BHC increased 6.0% to $26.5 million in
1998 from $25.0 million in 1997. The decline in net sales was due to declining
prices in the electrical equipment and appliances markets served by both the
North American and European operations of the Company, the loss of

                                                                             166
<PAGE>

several key customers for the Company's line of microwave and motor run
capacitors, as well as the elimination of the PFC business in the second half of
the year. Price erosion experienced by BHC was overcome by increases in sales of
certain electrolytic capacitors used in power electronics applications.

In general, the Company's sales are seasonal, with the first two quarters having
higher shipping rates due mainly to seasonal production schedules among OEM
manufacturers of air conditioning equipment. The strength and variation of these
seasonal patterns vary from year to year depending upon weather and other
conditions. During 1998 the Company experienced sharply lower demand in the
first two quarters as compared to 1997 and year-to-date sales at June 28, 1998
were lower by $5.0 million than sales for the same period of the prior year.
During the second half of the 1998 sales increased by $1.6 million over those of
the last six months of 1997, due mainly to weather-related demand for air
conditioning equipment in the United States.

Gross Profit
Gross profit on sales increased to $20.1 million in 1998 from $16.9 million in
1997 as a result of a significant cost reduction effort, which began in the
fourth quarter of 1997 and continued throughout 1998. Declining prices noted
above offset the positive impact of the cost reductions by approximately $3.0
million.

Research and Development
Expenditures for research, product development and engineering aggregated $2.5
million and $2.7 million for 1998 and 1997, respectively. In 1997 these costs
were included with cost of sales on the statement of operations, and
presentation of that year's results has been restated to provide comparability.

Selling, General and Administrative
Selling, general and administrative expenses increased to $17.5 million in 1998
from $16.5 million in 1997, primarily due to $0.8 million of expenses related to
the implementation of new information systems throughout the Company, which
address improvement of the planning and control systems of the Company as well
as compliance with Year 2000 computing.

Interest Expense
Interest expense for 1998 of $1.5 million was lower by $0.2 million compared to
1997 as a result of more favorable interest rates and a lower average
outstanding balance on the Company's lines of credit and outstanding term loans.

Other Income
The $1.2 million increase in other income to $1.5 million in 1998 from $0.3
million in 1997 resulted primarily from the sale of the Company's PFC business
to a unit of General Electric Company. This business entailed the assembly of
capacitor and other component into

                                                                            165

                                                                             167
<PAGE>

systems sold to large industrial consumers of electrical power. The Company
remains in the business of manufacturing capacitors used in power factor
systems. A gain on the sale of $0.9 million was recorded in the third quarter of
1998. An increase in royalty income from licensees and foreign currency exchange
losses account for the remaining $0.2 million increase in other income.

Provision for Income Taxes
The provision for income taxes included credits against deferred tax accounts of
$0.8 million and taxes currently payable of $37,000.

Liquidity and Capital Resources

Working capital, calculated as total current assets less total current
liabilities at January 1, 2000 was $15.0 million compared to $13.5 million at
the end of fiscal 1998. The increase was due to recoverable value-added taxes in
Mexico, shown as other current assets. Other changes in current assets and
current liabilities essentially offset each other. Working capital increased
during 1999 to $15.0 million from $13.5 million. Current ratio was 1.74 at
year-end 1999 and 1.60 at year-end 1998. Net accounts receivable and days sales
outstanding in accounts receivable were $14.9 million (49 days) compared with
$14.2 million (45 days) in fiscal 1998. Inventories decreased by $2.4 million
during 1999 primarily due to efficiency gains in supply chain management and
reduced scrap rates on production lines. Net cash provided by operating
activities in 1999 totaled $5.9 million compared to $1.7 million in 1998 and
$9.4 million in 1997.

The Company invested approximately $4.3 million in capital assets in 1999
compared to $2.8 million in 1998 and $2.7 million in 1997. Of these totals,
investment in capital assets at BHC was $0.7 million, $1.6 million and $0.6
million, respectively. The increase in overall investment in 1999 is
attributable to construction in progress on the new manufacturing facility in
New Bedford.

The Company's Revolving Credit Agreement, as amended on June 30, 1999, provides
for a credit line of $15.0 million to the Company. The agreement, which extends
to May 31, 2002, also includes various interest rate options which, for fiscal
1999, have varied from 6.88% to 8.50% on an annualized basis. The collateral for
this line of credit is accounts receivable and inventories. The outstanding
balance of loans at fiscal years ended January 1, 2000 and January 2, 1999 was
$3.6 million and $14.5 million, respectively. Net availability under this line
at January 1, 2000 was $10.7 million.

BHC has an agreement with a bank which provides for (i) a ten-year mortgage on
real property in the amount of 0.5 million British pounds ($0.8 million at
year-end exchange rates) with an outstanding balance at January 1, 2000 of $0.8
million, (ii) a five-year loan collateralized by machinery and equipment in the
amount of 0.5 million British pounds with an outstanding balance at January 1,
2000 of $0.7 million and (iii) an "Overdraft" credit line

                                                                             166

                                                                             168
<PAGE>

allowing borrowings in British pounds, euros or U.S. dollars up to the
equivalent of 2.5 million British pounds ($4.0 million at year-end exchange
rates) with an outstanding balance at January 1, 2000 of $2.4 million.

With the exception of the five-year loan collateralized by plant and machinery
which has an interest rate of 5.73%,interest is charged at variable rates based
upon the bank base rate. The ten-year mortgage agreement includes certain
financial covenants. At January 1, 2000 BHC was in violation of two covenants
regarding interest coverage and net worth. On February 24, 2000 the lender
waived its right to accelerate payments on this loan in respect of the violation
through January 1, 2001.

BHC has an agreement with another bank which provides for a five-year loan at
8.12% per annum collateralized by machinery and equipment in the amount of 0.8
million British pounds ($1.2 million at year-end exchange rates) with an
outstanding balance at January 1, 2000 of $1.0 million.

The Company also has a term line of credit with an equipment financing company
with an outstanding balance at the end of 1999 of $7.8 million compared to an
outstanding balance at the end of 1998 of $2.3 million. On February 26, 1999 the
Company amended its agreement with the equipment financing company. Under this
amendment, the balances outstanding at that date were repaid and additional
funds borrowed under a new promissory note and security agreement in the amount
of $9.0 million. Principal payments due under that note in 1999 were $1.3
million, and $1.5 million per year thereafter. This loan, collateralized by
equipment at the Company's New Bedford and Huntsville facilities, matures in the
year 2005, and carries an annual interest rate of 7.8%. The Company was in
violation of the minimum tangible net worth covenant on January 1, 2000. On
March 2, 2000 the lender waived its right to accelerate payment of this debt for
violation of this financial covenant. The waiver of this covenant does not
extend beyond January 1, 2000 and all covenants contained in the agreement
remain in effect for all subsequent periods.

Other long-term debt of the Company consists of an Industrial Revenue Bond
maturing on July 1, 2002, with an annual interest rate of 7.42% and quarterly
payments on the principal. The outstanding balance at fiscal year-end 1999 was
$1.3 million versus a balance at year-end 1998 of $1.8 million.

The Company also has two notes payable to the original shareholders of
Capacitores Unidos, S.A. de C.V ("Capacitores") in the amounts of $1.1 million
and $0.4 million, accruing interest at rates of 5.22% and 5.32% per annum,
respectively, and due April 4, 2001 and April 5, 2002, respectively.

Capacitores has two notes payable to CGE in the amounts of $1.5 million and $0.2
million which bear interest at 5.10% and 5.22% per annum, respectively, and
mature at April 1, 2000 and April 1, 2001, respectively. Capacitores also has a
bank loan with an outstanding

                                                                             169
<PAGE>

balance at January 1, 2000 of $1.0 million bearing interest at 9.67% of which
$0.8 million is due June 5, 2000 and $0.3 million is due June 9, 2000.

Cash at January 1, 2000, totaled $0.7 million compared to $1.1 million at
January 2, 1999.

Acquisition and Related Party Transactions

On April 5, 1999 the Company purchased all of the outstanding capital stock of
Capacitores, a corporation organized under the laws of Mexico. In a prior
transaction, Capacitores had previously acquired the assets of the capacitor
business of CGE, a Mexican corporation. These assets consisted primarily of
inventory and machinery and equipment related to the capacitor business of CGE,
along with an assignment of employees, and all technical know-how, customer
lists and other intangible assets related to the business. During 1998 the
capacitor business accounted for $11.5 million of the sales of CGE, and
approximately $1.4 million of earnings before interest and taxes. CGE purchased
approximately $1.5 million of high-purity aluminum capacitor foil from the
Company during 1998 for use in AC-rated motor start capacitors.

The aggregate consideration of $7.8 million paid for the capital stock of
Capacitores consisted of (i) the assumption of obligations of Capacitores
arising from its purchase of assets from CGE, principally three notes totaling
$3.5 million, one of which, in the amount of $1.8 million, was paid by the
Company on April 6, 1999; the remaining two notes are in the amounts of $1.5
million and $0.2 million, and bear interest at 5.10% and 5.22% per annum
respectively, and mature at April 1, 2000 and April 1, 2001 respectively, (ii)
notes of the Company aggregating $1.1 million, accruing interest at a rate of
5.22% per annum and payable in full on April 4, 2001, (iii) notes of the Company
aggregating $0.4 million, accruing interest at a rate of 5.32% per annum and
payable in full on April 5, 2002 and (iv) 700,000 shares of common stock of the
Company (the "Registrant Stock"). Each of the Sellers executed a stockholders
agreement, dated as of April 5, 1999, with the Company which provides for
certain restrictions on the transfer of the Registrant Stock and provides that,
in certain circumstances and at a date not earlier than April 5, 2003, nor later
than May 5, 2003, the holders of such Registrant Stock may require the Company
to purchase the Registrant Stock at the then current book value of the Company.
A total of $2.9 million was ascribed to the Registrant Stock which was composed
of the fair market value of the stock on the date of the transaction and the
amount ascribed to the right of the Sellers to require the Company to repurchase
the stock at a future date at the then current book value. As of January 1, 2000
the fair value of the right of the Sellers to require the Company to repurchase
the stock was approximately $0.5 million.

The acquisition has been accounted for under the purchase method of accounting;
the operating results of Capacitores have been included in the Company's
consolidated statement of operations from April 5, 1999. Excess of cost over the
fair value of net assets acquired,

                                                                             170
<PAGE>

$4.3 million, is being amortized on a straight-line basis over ten years.

The Company leases production space in Mexico City, Mexico from CGE. Payments
under this lease agreement totaled $74,000 in 1999. Certain services related to
the security, maintenance and insurance of the buildings are contracted through
CGE, payments for which were $0.2 million in 1999.

Certain of the Company's supervisory and managerial personnel, as well as
certain support departments, such as accounting and human resources, provide
services to CGE. The Company charged CGE for all such services rendered, which
totaled $0.3 million in 1999.

None of these related party transactions existed prior to the acquisition.

Other Matters

Patent Infringement Suit

On September 28, 1999 the Company announced that it filed a patent infringement
suit in Los Angeles, CA against several Korean manufacturers and their U.S.
affiliates. The lawsuit names Korean manufacturers Samwha Capacitor Company
Ltd., Kuk Kwang Electric Company Ltd. and Dae Yeong Company Ltd. Also named are
the companies' American associates, Samwha U.S.A. and Pacific Rim Components
Corporation.

The suit alleges the named parties have, and continue to, infringe its patent
for the impregnation and encapsulation of motor run capacitors. The Company is
seeking a permanent injunction against all of the defendants and unspecified
damages.

Recently Issued Accounting Pronouncements

In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). In June 1999 SFAS 137 "Deferral of the
Effective Date of SFAS 133" was issued to amend the effective date of SFAS 133
to fiscal years beginning after June 15, 2000. The Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. Under the new Statement, the accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. The Company will adopt SFAS 133 for
its fiscal year beginning December 31, 2000. Management estimates that the
effect of adopting SFAS 133 would not be material to the consolidated financial
statements.

                                                                             171
<PAGE>

Certain Factors That May Affect Future Results

Environmental Status

In June 1997 the United States Environmental Protection Agency ("EPA") conducted
tests that revealed the presence of polychlorinated biphenyls ("PCBs") on
surfaces within the Company's New Bedford plant. While the Company and its
expert advisors consider the PCBs to represent no threat to the health of the
employees of the Company or the surrounding community, subsequent engineering
studies indicated that the cost to remove PCBs within the building to the levels
proscribed by the EPA and the Toxic Substances Control Act would be prohibitive.
Therefore, the Company decided, and informed the EPA, that it intends to vacate
the building, to demolish it, and to dispose of all contaminated building
materials in a legally compliant manner. Accordingly, the Company wrote-off, as
of December 27, 1997, the undepreciated value of that building, all improvements
thereto, and certain machinery and equipment, and a reserve was established and
charged to income as of December 27, 1997, in the amount of $7.2 million, which
the Company believes is adequate to dismantle and dispose of the building, clean
equipment located within it, and to pay for related engineering, legal and
professional services. Additionally, the Company wrote-off, as of December 27,
1997 the depreciated value of that building, all improvements thereto and
certain machinery and equipment which the Company believes will become surplus,
abandoned or otherwise unusable upon disposal of the building. The amount of
this write-off was $5.8 million. Of this amount, $0.1 million and $0.4 million
were expended during 1999 and 1998, respectively for such legal and professional
services. During 1998 the EPA approved the Company's plan to dismantle and
dispose of the building. In December 1999 the Company reached a final agreement
with the EPA regarding the timing of the planned dismantling and disposal
activity. Under the settlement, the Company has agreed to relocate its New
Bedford operations within 16 months of the agreement and to demolish the
existing building and cap the site no later than November 2011.

Year 2000 Issue

Prior to January 1, 2000 the Company completed implementation of a
state-of-the-art and Year 2000 ("Y2K")-compliant enterprise resource planning
("ERP") system at all locations. The ERP system includes the principal
accounting, manufacturing, and customer service information processing systems
for the Company. All such identified equipment and software were in compliance
with Y2K standards by September 30, 1999.

Historical costs to implement the ERP system totaled approximately $1.0 million,
which management believes to be the final aggregate expenditure for the Y2K
project.

Management is unaware of any problems that have arisen with respect to Y2K
issues in the Company's current software products, internal information systems
or in the information

                                                                             172
<PAGE>

system of its customers or vendors. As a result, management does not anticipate
any material problems related to the Y2K issue in the future.

                                                                             173
<PAGE>

<TABLE>
<CAPTION>
                     Consolidated Statements of Operations
                                                                                For The Years Ended
(Amounts in thousands, except per share data)                Jan. 1, 2000           Jan. 2, 1999          Dec. 27, 1997
----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                       <C>
Net sales                                                         $    110,438           $    116,194           $   119,658
Cost of sales                                                           90,623                 96,062               102,731
                                                        --------------------------------------------------------------------
Gross profit                                                            19,815                 20,132                16,927
Research and development                                                 2,237                  2,492                 2,708
Selling, general and administrative expenses                            14,519                 14,992                13,793
Provision for environmental charges                                         --                     --                13,000
Provision for restructuring costs                                        5,332                     --                    --
                                                        --------------------------------------------------------------------
Income (loss) from operations                                           (2,273)                 2,648               (12,574)

Other income (expense):
     Interest expense                                                   (1,735)                (1,530)               (1,741)
     Other income                                                          311                  1,520                   323
                                                        --------------------------------------------------------------------
Income (loss) before income taxes                                       (3,697)                 2,638               (13,992)
Provision for (benefit from) income taxes                                 (226)                   852                (2,493)
                                                        --------------------------------------------------------------------
Net income (loss)                                                $      (3,471)            $    1,786          $    (11,499)
                                                        ====================================================================
Earnings (loss) per share - basic and diluted                    $       (0.64)            $     0.33          $      (2.15)
                                                        ====================================================================
Weighted average number of shares outstanding                            5,398                  5,390                 5,348
                                                        ====================================================================
</TABLE>

<TABLE>
<CAPTION>
                                          Consolidated Statements of Stockholders' Equity
                                                                                    Accumulated
                                                          Additional                   Other              Total
                                             Common         Paid-In    Retained     Comprehensive      Stockholders'   Comprehensive
(Amounts in thousands)                       Stock          Capital    Earnings     Profit (Loss)         Equity       Income (Loss)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>          <C>          <C>                <C>             <C>
Balances at December 28, 1996               $  5,315         $  842     $ 28,781         $   135         $  35,073
     Net loss                                     --             --      (11,499)             --           (11,499)       $ (11,499)
     Proceeds from employee stock                 69            195           --              --               264
purchase plan and exercise of stock
options (69,384 shares)
     Foreign currency translation                 --             --           --             (72)              (72)             (72)
                                                                                                                    ----------------
           Comprehensive loss                                                                                             $ (11,571)
                                        ----------------------------------------------------------------------------================
Balances at December 27, 1997                  5,384          1,037       17,282              63            23,766
                                        ---------------------------------------------------------------------------
       Net income                                 --             --        1,786              --             1,786        $   1,786
</TABLE>

                                                                             174
<PAGE>

<TABLE>
<S>                                         <C>           <C>          <C>          <C>                <C>             <C>
        Proceeds from employee stock               9             22           --              --                31
purchase plan and exercise of stock
options (8,842 shares)
     Foreign currency translation                 --             --           --            (294)             (294)            (294)
                                                                                                                    ----------------
           Comprehensive income                                                                                           $   1,492
                                        ----------------------------------------------------------------------------================
Balances at January 2, 1999                    5,393          1,059       19,068            (231)           25,289
                                        ---------------------------------------------------------------------------
       Net loss                                   --             --       (3,471)             --            (3,471)       $  (3,471)
        Proceeds  from  employee   stock          11             19           --              --                30
purchase  plan  and  exercise  of  stock
options (11,645 shares)
     Revaluation of redeemable                    --             --          372              --               372
     common stock
     Foreign currency translation                 --             --           --             (14)              (14)             (14)
                                                                                                                    ----------------
           Comprehensive income                                                                                           $  (3,485)
                                        ----------------------------------------------------------------------------================
Balances at January 1, 2000                 $  5,404        $ 1,078     $ 15,969        $   (245)        $  22,206
                                        ===========================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                    Consolidated Balance Sheets
     (Amounts in thousands)                                                              Jan. 1, 2000        Jan. 2, 1999
     =====================================================================================================================
     <S>                                                                                 <C>                 <C>
     Assets
     Current assets:
          Cash                                                                              $     742           $   1,149
          Accounts receivable, net of allowance for doubtful
             accounts of $511 in 1999 and $606 in 1998                                         14,881              14,220
          Inventories                                                                          17,511              19,906
          Prepaid expenses and other current assets                                             2,214                 566
                                                                                   ---------------------------------------
              Total current assets                                                             35,348              35,841
     Property, plant and equipment, at cost:
          Land                                                                                    290                 290
          Buildings and improvements                                                            3,312               3,197
          Machinery and equipment                                                              46,367              63,351
                                                                                   ---------------------------------------
                                                                                               49,969              66,838
              Less accumulated depreciation and amortization                                  (22,448)            (36,338)
                                                                                   ---------------------------------------
                                                                                               27,521              30,500
     Goodwill, net of accumulated amortization of $323 in 1999                                  3,989                  --
     Deferred income taxes                                                                      3,592               4,146
     Other assets                                                                                  70                  84
                                                                                   ---------------------------------------
              Total assets                                                                 $   70,520          $   70,571
                                                                                   =======================================
</TABLE>

                                                                             175
<PAGE>

<TABLE>
<S>                                                                                    <C>                 <C>
Liabilities, Redeemable Common Stock and Stockholders' Equity
Current liabilities:
     Accounts payable                                                                  $   8,285           $   9,490
     Accrued compensation and related expenses                                             2,540               3,048
     Other accrued expenses                                                                2,090               2,374
     Current maturities of long-term debt                                                  7,362               7,376
     Income taxes                                                                             47                  84
                                                                              ---------------------------------------
         Total current liabilities                                                        20,324              22,372
Deferred income taxes                                                                      4,100               5,022
Industrial revenue bond                                                                      800               1,292
Long-term debt less current maturities                                                    13,571               9,916
Reserve for environmental costs and plant remediation                                      6,470               6,033
Deferred compensation                                                                        503                 647

Commitments and contingencies

Redeemable common stock                                                                    2,546                  --

Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares
        authorized; none issued                                                               --                  --
     Common stock; $1.00 par value; 20,000,000 shares authorized;
        5,404,866 and 5,393,221  shares issued and outstanding                             5,404               5,393
     Additional paid-in capital                                                            1,078               1,059
     Retained earnings                                                                    15,969              19,068
     Accumulated other comprehensive loss                                                   (245)               (231)
                                                                              ---------------------------------------
         Total stockholders' equity                                                       22,206              25,289
                                                                              ---------------------------------------
         Total liabilities, redeemable common stock and
         stockholders' equity                                                         $   70,520          $   70,571
                                                                              =======================================
</TABLE>

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

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                           For The Years Ended
(Amounts in thousands)                                                    Jan. 1, 2000         Jan. 2, 1999       Dec. 27, 1997
================================================================================================================================
<S>                                                                       <C>                  <C>                <C>
Cash flows from operating activities:
Net income (loss)                                                           $  (3,471)           $    1,786         $  (11,499)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
     Depreciation and amortization                                               4,741                4,366               4,602
     Environmental costs and plant remediation                                      --                   --              13,000
</TABLE>

                                                                             176
<PAGE>

<TABLE>
<S>                                                                         <C>                  <C>                <C>
     Write-down of impaired assets and other restructuring                       5,676                   --                  --
     costs
     Gain on sale of business unit                                                  --                 (949)                 --
     Gain (loss) on disposal of assets                                              (3)                  --                 349
     Deferred income taxes                                                        (349)                 833              (2,801)
Changes in operating assets and liabilities, net of effect of acquisition:
     Accounts receivable                                                          (488)                (371)              1,819
     Inventories                                                                 3,694               (1,912)              2,682
     Prepaid expenses                                                           (1,135)                  82                 408
     Other assets                                                                   15                   --                  --
     Accounts payable                                                             (939)                (790)              2,045
          Accrued compensation and related expenses                               (741)                  55                (244)
     Other accrued expenses                                                       (706)              (1,097)             (1,131)
     Income taxes payable                                                         (356)                (272)                131
                                                                    ------------------------------------------------------------
Net cash provided by operating activities                                        5,938                1,731               9,361
                                                                    ------------------------------------------------------------

Cash flows from investing activities:
     Cash paid for acquisition, net of cash                                     (1,721)                  --                  --
     acquired
     Proceeds from sale of business unit                                            --                2,000                  --
     Acquisition of property and equipment                                      (4,388)              (2,785)             (2,661)
     Other                                                                         304                 (400)                147
                                                                    ------------------------------------------------------------
Net cash used in investing activities                                           (5,805)              (1,185)             (2,514)
                                                                    ------------------------------------------------------------

Cash flows from financing activities:
     Proceeds from employee stock purchase plan and
        exercise of stock options                                                   30                   30                 264
     Net borrowings (repayments) under line of credit                           (3,332)               1,855              (4,616)
     Proceeds from issuance of long-term debt                                   12,851                   --                 946
     Repayments of long-term debt                                              (10,018)              (1,861)             (3,646)
                                                                    ------------------------------------------------------------
Net cash provided by (used in) financing activities                               (529)                  24              (7,052)
                                                                    ------------------------------------------------------------

Effects of exchange rates on cash                                                  (71)                (114)                 34
                                                                    ------------------------------------------------------------
Increase (decrease) in cash                                                       (407)                 456                (171)
Cash at beginning of year                                                        1,149                  693                 864
                                                                    ------------------------------------------------------------
Cash at end of year                                                         $      742           $    1,149         $       693
                                                                    =================== ==================== ===================
Supplemental disclosure of cash flow information:
     Cash paid during the year for interest                                 $    1,465           $    1,530         $     1,733
                                                                    =================== ==================== ===================
     Cash paid during the year for income taxes                             $      395           $      398         $       461
                                                                    =================== ==================== ===================
</TABLE>

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

                                                                             177
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Note 1 - Summary of Significant Accounting Policies:

     Basis of Presentation

     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiaries. All intercompany transactions have been
     eliminated. Certain reclassifications have been made to prior years'
     financial statements to conform to the presentation.

     Fiscal Year

     The Company uses a fiscal calendar, which normally includes 52 weeks, and
     ends on the Saturday nearest to December 31. Fiscal years 1999 and 1997
     ended on January 1 and December 27, respectively and included 52 weeks.
     Fiscal year 1998 ended on January 2 and included 53 weeks.

     Translation of Foreign Currencies

     Assets and liabilities of all foreign subsidiaries are translated at
     period-end rates of exchange and income statement accounts are translated
     at average rates of exchange. Resulting translation adjustments are
     recorded as a separate component of stockholders' equity, "Accumulated
     other comprehensive loss." Foreign currency transaction gains and losses
     are included in other income and expense.

     Cash

     Cash consists of cash on hand.

     Concentrations of Credit Risks

     Financial instruments which potentially subject the Company to
     concentrations of credit risk consist primarily of trade receivables. The
     Company's customer base consists of a large number of geographically
     dispersed customers. The Company maintains reserves for potential credit
     losses on trade receivables and such losses, in aggregate, have not
     exceeded management's expectations.

     Financial Instruments

     Derivative financial instruments are used by the Company in the management
     of foreign currency exposures to reduce commodity and financial market risk
     and are accounted for on an accrual basis. Gains and losses resulting from
     effective hedges of existing assets, liabilities or firm commitments are
     deferred and recognized when the offsetting gains and losses are recognized
     on the related hedged items (see Note 8). The Company does not enter into
     derivative transactions for speculative purposes.

     Inventories

     Inventories are stated at the lower of cost or market. Cost is determined
     by the first-in, first-out ("FIFO") method.

                                                                             178
<PAGE>

     Property, Plant and Equipment

     Property, plant and equipment are stated at cost. Provisions for
     depreciation of plant and equipment are computed using the straight-line
     method over the estimated useful lives of the assets (buildings and
     improvements, 5-40 years; leasehold improvements, over the life of the
     lease or the useful life of the asset, whichever is shorter; machinery and
     equipment, 3-15 years). Expenditures for repairs and maintenance are
     charged to expense when incurred. Improvements which materially extend the
     life of the related assets are capitalized and depreciated. Upon retirement
     or other disposition of property and equipment, the cost and related
     depreciation are removed from the accounts and the resulting gain or loss
     is reflected in earnings.

     Depreciation and amortization expense was approximately $4,418,000,
     $4,366,000 and $4,602,000 for 1999, 1998 and 1997, respectively.

     Impairment of Long-Lived Assets

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
     121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
     Assets to be Disposed Of," the Company records impairment losses on long-
     lived assets used in operations when indicators of impairment are present
     and the undiscounted cash flows estimated to be generated by those assets
     are less than the assets' carrying amount.

     Use of Estimates

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     Revenue Recognition

     Revenues from product sales are recorded when the product is shipped.
     Provisions for product returns and allowances are recorded in the same
     period as the related revenue.

     Research and Development

     Expenditures for research and product development and engineering are
     expensed as incurred.

     Advertising Costs

     The Company expenses the cost of advertising as incurred, or as
     appropriate, the first time the advertising takes place. Advertising
     expense was approximately $147,000, $109,000 and $309,000 for 1999, 1998
     and 1997, respectively.

     Software Development Costs

                                                                             179
<PAGE>

     The Company has implemented Statement of Position ("SOP") No. 98-1,
     "Accounting for the Cost of Computer Software Developed or Obtained for
     Internal Use." Under SOP 98-1, costs associated with developing or
     obtaining internal use software should be capitalized upon meeting certain
     criteria. As of January 1, 2000 these capitalized costs and the related
     amortization have not been material to the Company's consolidated financial
     statements, and all such costs and amortization have been included in
     property, plant and equipment.

     Environmental Remediation Costs
     The Company accrues for costs associated with environmental remediation
     obligations when such expenditures are probable and reasonably estimable.
     Accruals for estimated costs of environmental remediation obligations
     generally are recognized no later than completion of the remedial
     feasibility study. Such accruals are adjusted as further information
     develops or circumstances change. Costs of future expenditures for
     environmental remediation obligations are not discounted to their present
     value.

     Income Taxes

     Deferred tax liabilities and assets are determined based on the differences
     between the financial statement basis and tax basis of assets and
     liabilities, using enacted tax rates in effect for the year in which the
     differences are expected to reverse. FAS 109 requires a valuation allowance
     against net deferred tax assets, if based upon the available evidence, it
     is more likely than not that some or all of the deferred tax assets will
     not be realized.

     Net Income (Loss) Per Share (Basic and Diluted)

     Net income (loss) per share is computed based on the weighted average
     number of common and common equivalent shares outstanding during the year,
     calculated under the treasury stock method.

     Options to purchase 627,875 shares of common stock at prices ranging from
     $2.8125 to $9.625 per share were outstanding at January 1, 2000 but were
     not included in the computation of diluted earnings per share because the
     exercise price of the options was greater than the average market price of
     common shares.

     Options to purchase 743,375 shares of common stock at prices ranging from
     $3.00 to $9.625 per share were outstanding at January 2, 1999 but were not
     included in the computation of diluted earnings per share because the
     exercise price of the options was greater than the average market price of
     common shares.

     Options to purchase 313,250 shares of common stock at prices ranging from
     $6.125 to $9.625 per share were outstanding at December 27, 1997 but were
     not included in the computation of diluted earnings per share because the
     exercise price of the options was greater than the average market price of
     common shares. Options to purchase 251,625 shares of common stock at prices
     ranging from $3.00 to $5.00 per share were outstanding at December 27, 1997
     but were not included because the options were anti-dilutive.

                                                                             180
<PAGE>

     New Pronouncements

     In June 1998 the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 133 "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS 133"). In June 1999 SFAS 137
     "Deferral of the Effective Date of SFAS 133" was issued to amend the
     effective date of SFAS 133 to fiscal years beginning after June 15, 2000.
     The Statement establishes accounting and reporting standards for derivative
     instruments and for hedging activities. It requires that an entity
     recognize all derivatives as either assets or liabilities in the balance
     sheet and measure those instruments at fair value. Under the new Statement,
     the accounting for changes in the fair value of a derivative (that is,
     gains and losses) depends on the intended use of the derivative and the
     resulting designation. The Company will adopt SFAS 133 for its fiscal year
     beginning December 31, 2000. Management estimates that the effect of
     adopting SFAS 133 would not be material to the consolidated financial
     statements.

     Note 2 - Acquisition and Related Party Transactions:

     On April 5, 1999 the Company purchased all of the outstanding capital stock
     of Capacitores Unidos, S.A. de C.V. ("Capacitores"), a corporation
     organized under the laws of Mexico. In a prior transaction, Capacitores had
     previously acquired the assets of the capacitor business of CGE, a Mexican
     corporation. These assets consisted primarily of inventory and machinery
     and equipment related to the capacitor business of CGE, along with an
     assignment of employees, and all technical know-how, customer lists and
     other intangible assets related to the business. During 1998 the capacitor
     business accounted for $11,500,000 of the sales of CGE and approximately
     $1,400,000 of earnings before interest and taxes. CGE purchased
     approximately $1,500,000 of high-purity aluminum capacitor foil from the
     Company during 1998 for use in AC-rated motor start capacitors.

     The aggregate consideration of $7,826,643 paid for the capital stock of
     Capacitores consisted of (i) the assumption of obligations of Capacitores
     arising from its purchase of assets from CGE, principally three notes
     totaling $3,470,000, one of which, in the amount of $1,750,000, was paid by
     the Company on April 6, 1999; the remaining two notes are in the amounts of
     $1,509,000 and $211,000, and bear interest at 5.10% and 5.22% per annum
     respectively, and mature at April 1, 2000 and April 1, 2001 respectively,
     (ii) notes of the Company aggregating $1,089,000, accruing interest at a
     rate of 5.22% per annum and payable in full on April 4, 2001, (iii) notes
     of the Company aggregating $350,000, accruing interest at a rate of 5.32%
     per annum and payable in full on April 5, 2002 and (iv) 700,000 shares of
     common stock of the Company (the "Registrant Stock"). Each of the Sellers
     executed a stockholders agreement, dated as of April 5, 1999, with the
     Company which provides for certain restrictions on the transfer of the
     Registrant Stock and provides that, in certain circumstances and at a date
     not earlier than April 5, 2003, nor later than May 5, 2003, the holders of
     such Registrant Stock may require the Company to purchase the Registrant
     Stock at the then current book value of the Company. A total of $2,917,643
     was ascribed to the Registrant Stock which was composed of the fair market
     value of the stock on the date of the transaction and the amount ascribed
     to the right of the Sellers to require the Company to repurchase the

                                                                             181
<PAGE>

     stock at a future date at the then current book value. As of January 1,
     2000 the fair value of the right of the Sellers to require the Company to
     repurchase the stock was approximately $468,000.

     The acquisition has been accounted for under the purchase method of
     accounting; the operating results of Capacitores have been included in the
     Company's consolidated statement of operations from April 5, 1999. Excess
     of cost over the fair value of net assets acquired, $4,312,000, is being
     amortized on a straight-line basis over ten years.

     The Company leases production space in Mexico City, Mexico from CGE.
     Payments under this lease agreement totaled $74,000 in 1999. Certain
     services related to the security, maintenance and insurance of the
     buildings are contracted through CGE, payments for which were $191,000 in
     1999.

     Certain of the Company's supervisory and managerial personnel, as well as
     certain support departments, such as accounting and human resources,
     provide services to CGE. The Company charged CGE for all such services
     rendered, which totaled $332,000 in 1999.

     None of these related party transactions existed prior to the acquisition.

     Note 3 - Inventories:

     Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                          January 1, 2000                         January 2, 1999
                                Domestic      Foreign        Total      Domestic      Foreign      Total
                                --------------------------------------------------------------------------
          <S>                   <C>           <C>           <C>         <C>           <C>          <C>
          Raw materials         $  5,948      $  3,429      $ 9,377      $ 7,309      $ 2,528      $ 9,837
          Work in process          1,949           359        2,308        1,935          276        2,211
          Finished goods           4,838           988        5,826        7,021          837        7,858
                                --------------------------------------------------------------------------
                                $ 12,735      $  4,776      $17,511      $16,265      $ 3,641      $19,906
                                ==========================================================================
</TABLE>

     Note 4 - Debt:

     The Company maintains a Revolving Credit Agreement (the "Agreement") with a
     bank, which, as amended, provides a credit line of $14,360,000 to the
     Company. This debt is collateralized by inventory and accounts receivable.

     Interest on the credit line is at the bank's prime rate payable in arrears
     on the outstanding loan balance. The Company has the option to convert from
     a bank base rate loan into a eurodollar loan at the then eurodollar (LIBOR)
     rate plus 2%. The Company also has the option to convert up to $4,000,000
     of loans to a bankers' acceptance facility at interest rates equal to the
     per annum average discount rate quoted to the bank on the date of request
     for such facility plus 2% per annum. The agreement matures on May 31, 2002.
     A commitment fee, equal to one-quarter percent per annum will be charged on
     the unused portion of the total commitment. At January 1, 2000 borrowings
     outstanding under this agreement were $3,630,000 and at January 2, 1999 the
     amount was $14,506,000, including 3,194,000 British pounds ($5,284,000 at
     year-end exchange rates), owed by BHC Aerovox Ltd. ("BHC"), a

                                                                             182
<PAGE>

     wholly owned subsidiary in the United Kingdom. Net availability under this
     line at January 1, 2000 was approximately $10,730,000.

     BHC has an agreement with a bank which provides for (i) a ten-year mortgage
     on real property in the amount of 500,000 British pounds ($808,000 at year-
     end exchange rates) with an outstanding balance at January 1, 2000 of
     $774,000, (ii) a five-year loan collateralized by machinery and equipment
     in the amount of 500,000 British pounds with an outstanding balance at
     January 1, 2000 of $1,719,000, and (iii) an "Overdraft" credit line
     allowing borrowings in British pounds, euros or U.S. dollars up to the
     equivalent of 2,500,000 British pounds ($4,038,000 at year-end exchange
     rates) with an outstanding balance at January 1, 2000 of $2,410,000.

     With the exception of the five-year loan collateralized by plant and
     machinery which has an interest rate of 5.73%, interest is charged at
     variable rates based upon the bank base rate. The ten-year mortgage
     agreement includes certain financial covenants. At January 1, 2000 BHC was
     in violation of two covenants regarding interest coverage and net worth. On
     February 24, 2000, the lender waived its right to accelerate payments on
     this loan in respect of the violation through January 1, 2001.

     BHC has an agreement with another bank which provides for a five-year loan
     at 8.12% per annum collateralized by machinery and equipment in the amount
     of 765,000 British pounds ($1,239,000 at year-end exchange rates) with an
     outstanding balance at January 1, 2000 of $992,000.

     A ten-year Industrial Revenue Bond was issued by the Massachusetts
     Industrial Finance Agency in July 1982 to finance the acquisition of
     equipment. The bond was transferred to another purchaser in June 1992.
     Interest at the rate of 12.5% per annum through June 1992 and 7.42% per
     annum thereafter and principal are payable monthly commencing July 1, 1992
     to July 1, 2002. The amount of each installment is calculated on an assumed
     ten-year amortization schedule. Principal in the amount of $458,000 was
     payable in 1999. On January 1, 2000 and January 2, 1999 the bond balance
     outstanding under this agreement was $1,292,000 and $1,750,000,
     respectively.

     Other long-term debt of the Company consists of a term line of credit
     agreement with an equipment financing company in the amount of $10,000,000,
     collateralized by certain equipment. Payments of principal and interest are
     due monthly. On February 26, 1999 the Company amended its agreement with
     the equipment financing company. Under this amendment, the balances
     outstanding at that date were repaid and additional funds borrowed under a
     new promissory note and security agreement in the amount of $9,000,000.
     Principal payments due under that note in 1999 were $1,250,000, and
     $1,500,000 per year thereafter.

     At January 1, 2000 borrowings outstanding under this agreement were
     $7,750,000 at an annualized interest rate of 7.80%, and maturing in the
     year 2005; and at January 2, 1999, $2,328,000 at annualized interest rates
     ranging from 7.16% to 8.13%. The agreement

                                                                             183
<PAGE>

     contains several financial covenants requiring the Company to maintain
     certain ratios regarding debt, equity, and interest costs. The Company was
     in violation of the minimum tangible net worth covenant on January 1, 2000.
     On March 2, 2000 the lender waived its right to accelerate payment of this
     debt for violation of this financial covenant. The waiver of this covenant
     does not extend beyond January 1, 2000 and all covenants contained in the
     agreement remain in effect for all subsequent periods.

     The Company also has two notes payable to the original shareholders of
     Capacitores in the amounts of $1,089,000 and $350,000, accruing interest at
     rates of 5.22% and 5.32% per annum, respectively, and due April 4, 2001 and
     April 5, 2002, respectively.

     Capacitores has two notes payable to CGE in the amounts of $1,509,000 and
     $211,000 which bear interest at 5.10% and 5.22% per annum, respectively,
     and mature at April 1, 2000 and April 1, 2001, respectively. Capacitores
     also has a bank loan with an outstanding balance at January 1, 2000 of
     $1,000,000 bearing interest at 9.67% of which $750,000 is due June 5, 2000
     and $250,000 is due June 9, 2000.

     Total maturities of long-term debt over the next five years are:


                  Year                                     (in thousands)
                  -------------------------------------------------------
                  2000                                   $          5,622
                  2001                                              3,230
                  2002                                              2,178
                  2003                                              1,500
                  2004                                              1,500
                  Thereafter                                          250
                  -------------------------------------------------------
                                                         $         14,280
                  =======================================================


     Note 5 - Sale of Business Unit:

     On July 29, 1998 the Company sold its Power Factor Correction ("PFC")
     Systems business. The PFC unit manufactured and sold equipment used to
     enhance the efficient use of power by large industrial plants. Proceeds
     from the sale were $2,000,000 resulting in a gain of $949,000.

     Note 6 - Other Accrued Expenses:

     Other accrued expenses consist of the following at January 1, 2000 and
     January 2, 1999 (in thousands):

                                               1999            1998
                                            -------------------------
          Warranty                          $     498        $    654
          Duty                                    579             550
          Environmental cost and
            plant remediation                     150             730
          Other                                   863             440

                                                                             184
<PAGE>

                                            -------------------------
                                            $   2,090        $  2,374
                                            =========================

     Note 7 - Commitments and Contingencies:

     The Company leases manufacturing space, equipment and software under
     various non-cancelable operating leases. Rental expense amounted to
     $1,480,000 in 1999, $1,717,000 in 1998 and $1,721,000 in 1997. On January
     1, 2000 future minimum annual rental payments under all leases are as
     follows (in thousands):

                  Year
                  -----------------------------------------------
                  2000                                $     1,221
                  2001                                        957
                  2002                                        872
                  2003                                        757
                  2004                                        196
                  Thereafter                                  320

     The Company leases, and in turn sublets, office space in North Dartmouth,
     Massachusetts. Since rental income from the sublease substantially offsets
     rental expense under the lease, the future minimum annual rental payments
     above exclude payments related to those offices.

     The Company is self insured for workers' compensation benefits for some of
     its employees. The amounts charged to expense for workers' compensation
     were $373,000 in 1999, $359,000 in 1998 and $352,000 in 1997, based upon
     reported claims and estimates of claims incurred but not reported.

     The Company is also self insured for a portion of health care costs not
     covered by insurance for some of its U.S. employees. The Company is liable
     for claims up to $150,000 per employee and aggregate claims up to a maximum
     of $1,875,000 (based on average monthly enrollment) for 1999. Costs accrued
     are based upon reported claims and estimates of claims incurred but not
     reported. The amount charged to expense for health care costs, which
     includes paid claims, individual and aggregate stop/loss coverage and
     administrative fees, less employee contributions, was $1,603,000 in 1999,
     $1,816,000 in 1998 and $1,867,000 in 1997.

     Note 8 - Financial Instruments:

     The Company operates internationally with manufacturing facilities,
     customers, and vendors in several countries outside of the United States.
     The Company may reduce its exposure to fluctuations in foreign exchange
     rates by creating offsetting positions through the use of foreign currency
     forward contracts, a type of derivative financial instrument. The Company
     does not use derivative financial instruments for trading or speculative
     purposes, nor is the Company a party to leveraged derivatives.

     At January 2, 1999 the Company held foreign currency forward contracts with
     costs totaling approximately $1,509,000 (910,000 British pounds sterling).
     These contracts matured on

                                                                             185
<PAGE>

     various dates through February 1999. The fair value of these contracts at
     January 2, 1999 was $1,523,000.

     The Company held no foreign currency forward contracts as of January 1,
     2000.

     Note 9 - Incentive and Other Plans:

     1989 and 1999 Stock Incentive Plan
     The 1989 and 1999 Stock Incentive Plans ("Plans") permit the granting of a
     variety of stock and stock-based awards, including stock options, rights to
     receive cash or shares for increases in the value of the Company's common
     stock, the award of restricted and unrestricted shares, rights to receive
     cash or shares on a deferred basis or based on performance, cash payments
     sufficient to offset the Federal ordinary income taxes under the Plans,
     loans to participants in connection with awards and other common stock-
     based awards, including the sale or award of convertible securities that
     meet the requirements of the Plans. The Plans also provide that option
     holders may surrender outstanding options in exchange for a cash payment
     during the sixty-day period following a change in control as defined in the
     Plans.

     The 1989 Stock Incentive Plan expired in April 1999. The 1999 Stock
     Incentive Plan ("1999 Plan") was approved by the Company's shareholders in
     May 1999. A total of 500,000 shares of common stock have been reserved and
     may be issued under the 1999 Plan to full or part-time officers and other
     key employees of the Company and its subsidiaries. The Plans limit the
     terms of awards to ten years and prohibit the granting of awards more than
     ten years after the effective date of the Plans. The Plans permit the
     granting of non-transferable stock options that qualify as incentive stock
     options ("ISOs") for United States Federal income tax purposes and options
     that do not so qualify. The exercise price of each option may not be less
     than 100% of the fair market value, or 110% in the case of a person holding
     10% or more of the outstanding voting power of all classes of stock of the
     Company, on the date of grant in the case of ISOs and not less than 50% of
     the fair market value in the case of non-qualified options. The term of
     each option is fixed by the board of directors but may not exceed ten years
     from the date of grant (five years in the case of a 10% shareholder) with
     respect to ISOs and ten years and a day with respect to non-qualified
     options.

     In the event of termination of employment by reason of retirement,
     disability or death, an option may be exercised (to the extent it was then
     exercisable) for a period of three years. In the event of termination for
     other reasons, an option may be exercised (to the extent it was then
     exercisable) for three months.

     Each option becomes exercisable at the rate of 20% per year beginning on
     the first anniversary of the date of grant and expires ten years from the
     date of grant. Information for fiscal years 1999, 1998, and 1997, with
     respect to the Plans, is as follows:

                                         1999          1998          1997
Stock Incentive Plans

                                                                             186
<PAGE>

<TABLE>
<CAPTION>
                                                        Weighted                         Weighted                       Weighted
                                                        Average                           Average                        Average
                                                        Exercise                          Exercise                       Exercise
                                       Shares            Price             Shares          Price          Shares          Price
<S>                                  <C>                <C>               <C>            <C>             <C>            <C>
Outstanding at beginning of year       643,500            $4.92            471,000         $5.59          500,000         $5.59
Granted                                113,500            $2.79            239,000         $3.48           67,000         $4.50
Exercised                                   --               --                 --            --          (61,500)        $3.00
Canceled                              (216,500)           $4.62            (66,500)        $4.55          (34,500)        $8.01
                                     -------------------------------------------------------------------------------------------
Outstanding at end of year             540,500            $4.59            643,500         $4.91          471,000         $5.59
                                     ===========================================================================================
Options exercisable at end of year     243,000            $5.65            265,300         $5.50          257,300         $4.95
                                     ===========================================================================================
Options available for future grant     495,000                             117,000                        289,500
                                     ===========================================================================================
</TABLE>

The following table summarizes information about stock options outstanding at
January 1, 2000:

<TABLE>
<CAPTION>
  Stock Incentive
     Plans                                       Options Outstanding                                Options Exercisable

                                                      Weighted
                                 Number                Average             Weighted              Number             Weighted
Exercise Price               Outstanding at           Remaining             Average          Exercisable at         Average
   Range                    January 1, 2000       Contractual Life       Exercise Price     January 1, 2000     Exercise Price
<S>                         <C>                   <C>                    <C>                <C>                 <C>
$2.00 - $2.50                     5,000                   9.9                  $2.44                  --                --
$2.51 - $3.00                    97,000                   8.3                  $2.83              10,000             $3.00
$3.01 - $4.50                   272,000                   7.0                  $3.67              99,700             $3.73
$4.51 - $6.75                    87,500                   4.9                  $6.05              64,500             $5.99
$6.76 - $9.00                    79,000                   4.8                  $8.40              68,800             $8.50
                            --------------------------------------------------------------------------------------------------
$2.00 - $9.00                   540,500                   6.6                  $4.59             243,000             $5.65
                            ==================================================================================================
</TABLE>

     Non-Statutory Stock Option Award Agreement
     On September 1, 1996 an officer of the Company was awarded options to
     purchase 50,000 shares of Aerovox common stock, bearing an exercise price
     of $6.00 per share. The option are exercisable at the rate of 20% per year
     and expire ten years from the date of grant. On January 1, 2000 options for
     30,000 shares were exercisable under this agreement.
<PAGE>

     1989 and 1999 Stock Option Plan for Directors
     The 1989 Stock Option Plan for Directors expired in April 1999. The 1999
     Stock Option Plan for Directors (the "1999 Directors Plan") was approved by
     the Company's shareholders in May 1999. The 1999 Directors Plan reserved
     25,000 shares of common stock for the granting of options to purchase stock
     at 100% of the fair market value on the date of grant. Directors who are
     not employees of the Company are eligible under the Directors Plan. Each
     newly elected director will be awarded options to purchase 2,500 shares of
     common stock on the date of election. Following the initial grant, each
     person who is an eligible director on the day of each annual meeting of
     shareholders of the Company will receive options to purchase 1,000 shares
     or 250 for each quarter of service if less than one year elapses between
     the initial grant and an annual grant.

     Options expire ten years from the grant date and become exercisable on the
     first anniversary of the grant date. No options may be awarded under the
     1999 Directors Plan after April 2009. In the event of termination by
     retirement, an option may be exercised for a period of three years, or
     until expiration, if earlier; or for one year after death in the event an
     optionee dies during the final year of such exercise period or until the
     expiration of the stated term of the option. In the event of termination by
     reason of death, an option may be exercised (to the extent it was then
     exercisable) for a period of three years. In the event of termination for
     other reasons, an option may be exercised (to the extent it was then
     exercisable) for three months.


     Information for fiscal years 1999, 1998, and 1997, with respect to the
     Directors Plans, is as follows:

<TABLE>
<CAPTION>
                                               1999                             1998                            1997
    Stock Option Plans
      for Directors
                                                      Weighted                         Weighted                       Weighted
                                                      Average                          Average                        Average
                                                      Exercise                         Exercise                       Exercise
                                     Shares            Price           Shares           Price           Shares         Price
<S>                              <C>                  <C>              <C>             <C>              <C>           <C>
Outstanding at                       49,875            $5.70           43,875           $6.00           34,375         $6.41
  beginning of year
Granted                               6,000            $2.50            6,000           $3.50            9,500         $4.50
Exercised                                --               --               --              --               --            --
Canceled                             (7,500)           $3.00               --              --               --            --
                                 ------------------------------------------------------------------------------------------------
Outstanding at end of year           48,375            $5.72           49,875           $5.70           43,875         $6.00
                                 ================================================================================================
Options exercisable at
  year-end                           42,375            $6.18           43,875           $6.00           34,375         $6.42
                                 ================================================================================================
Options available for
  future grant                       19,000                            18,292                           24,292
                                 ================================================================================================
</TABLE>
<PAGE>

     The following table summarizes information about stock options outstanding
     at January 1, 2000:

<TABLE>
<CAPTION>
  Stock Option                                    Options Outstanding                                 Options Exercisable
    Plans for
    Directors
                                 Number               Weighted              Weighted              Number             Weighted
                             Outstanding at           Average               Average           Exercisable at         Average
  Exercise Price                January 1,           Remaining              Exercise            January 1,           Exercise
     Range                        2000            Contractual Life            Price                2000               Price
<S>                          <C>                  <C>                       <C>               <C>                    <C>
$2.50 - $2.99                     6,000                 9.3                   $2.50                   --                 --
$3.00 - $4.50                    16,625                 7.2                   $4.14               16,625              $4.14
$4.51 - $6.75                    11,500                 4.9                   $6.54               11,500              $6.54
$6.76 - $9.63                    14,250                 4.9                   $8.27               14,250              $8.27
                             -------------------------------------------------------------------------------------------------
$2.50 - $9.63                    48,375                 6.2                   $5.72               42,375              $6.18
                             =================================================================================================
</TABLE>

     Accounting for Stock Options

     Statement of Financial Accounting Standards No. 123, Accounting for Stock-
     Based Compensation ("SFAS 123") describes a "fair value" method for
     calculating the effect of options granted on the reported earnings of the
     Company. This method uses certain historical data regarding outstanding
     options and the price history of a company's shares in a mathematical model
     to determine the hypothetical value of the option had it been sold in the
     open securities market rather than granted to the plan participant. This is
     in contrast to the valuation method prescribed by Accounting Principles
     Board Opinion No. 25 ("APB 25"), which calculates the value at the date of
     grant as the difference, if any, between the exercise price and the market
     price of the shares on that date.

     Calculated in accordance with SFAS 123, the weighted average fair value at
     date of grant for options granted in 1999, 1998 and 1997 was $1.14, $2.09
     and $2.83 per option, respectively. The fair value of these options at the
     date of grant was estimated using the Black-Scholes model with the
     following weighted average assumptions for 1999, 1998 and 1997: risk-free
     interest rates as of the grant dates from 4.42% to 5.59%; no dividend
     yields; a volatility factor of the expected market price of the Company's
     common stock of 42.38%, 38.28% and 33.82%, respectively; and a weighted
     average expected life of the options of 9.34, 9.79 and 9.81 years,
     respectively.

     As allowed by SFAS 123, the Company elected the disclosure-only
     alternative, and continues to calculate and report net income and net
     income per share according to APB 25 for employee and director stock-based
     compensation. Had compensation cost for the Company's 1999, 1998, and 1997
     grants for stock-based employee and director compensation plans been
     determined using the fair value method as prescribed by SFAS 123,
<PAGE>

     the Company's net income, and net income per share for those years would
     approximate the pro forma amounts below (in thousands except for per share
     data).

<TABLE>
<CAPTION>
                                          January 1, 2000              January 2, 1999           December 27, 1997

                                       As             Pro           As           Pro           As              Pro
                                     Reported        Forma       Reported       Forma        Reported         Forma
<S>                                  <C>           <C>           <C>            <C>          <C>             <C>
Net income (loss)                    $(3,471)      $(3,547)       $1,786        $1,673       $(11,499)      $(11,784)
Basic earnings (loss) per share      $ (0.64)      $ (0.66)       $ 0.33        $ 0.31       $  (2.15)      $  (2.20)
Diluted earnings (loss) per share    $ (0.64)      $ (0.66)       $ 0.33        $ 0.31       $  (2.15)      $  (2.20)
</TABLE>

     Employee Stock Purchase Plan

     In 1989 the Company established the Employee Stock Purchase Plan (the
     "ESPP") under which 100,000 shares of common stock were reserved for
     purchase by employees. The ESPP was amended in August 1999 to expand the
     common stock reserved to 200,000 shares. The ESPP provides for the sale of
     common stock at the average of the reported high and low sales prices of
     the stock on the last business day of the accounting period each month.
     Common stock purchases are paid through regular payroll deductions of up to
     15% of eligible compensation plus Company payments equal to 10% of the
     participant's payment plus an additional 0.75% for each full year of
     continuous employment with the Company since January 1, 1973, up to a
     maximum of 25% of the participant's payment. In 1999, 1998 and 1997,
     11,645, 8,842 and 7,884 shares, respectively, were sold under the ESPP.
     There were 88,733 shares qualified for future sale on January 1, 2000.

     Change of Control Severance Benefits

     The Company has severance agreements with certain key employees which
     provide that if, within 24 months following a change in control (as defined
     in the severance agreements), the Company were to terminate the employee's
     employment other than for cause or the employee were to terminate his
     employment for reasons specified in the agreements, the employee would
     receive amounts of up to three times that person's annual base salary plus
     target bonus for such year without deduction for any amounts previously
     paid under the bonus plan. The agreements also provide for the immediate
     vesting of bonus awards, stock options and similar awards, the immediate
     payment of deferred compensation amounts and the continuation of certain
     benefits. The maximum contingent liability under these agreements on
     January 1, 2000 was approximately $2,285,000.

     Profit-Sharing Savings Plan

     The Company maintains a Profit-Sharing Savings Plan ("PSSP") which covers
     substantially all domestic employees with at least six months of service.
     Under the PSSP, each employee can elect to make a pre-tax contribution to
     the PSSP of not less than 3% and not more than 15% of qualified
     compensation, of which up to the first 8% is eligible for a Company match.
<PAGE>

     The Company makes regular contributions to the PSSP on behalf of each
     participating employee in an amount which, together with any forfeitures
     during the PSSP year, is equal to each employee's voluntary contribution up
     to a maximum aggregate contribution of 6% of the pre-tax income of the
     Company, as defined, or 50% of the aggregate pre-tax contributions of the
     participating employees or 50% of the first 8% of the aggregate pre-tax
     contribution of the participating employees. The Company's subsidiary in
     the United Kingdom maintains a plan covering its eligible employees wherein
     Company contributions are made on the basis of the individual's age and
     amount of contribution. Expense under these plans amounted to $648,000 in
     1999 $639,000 in 1998 and $506,000 in 1997.

     Deferred Supplemental Savings Plan
     The Company has a Deferred Supplemental Savings Plan under which certain
     key employees may defer a percentage of their compensation equal to the
     difference between pre-tax amounts of compensation eligible to be
     contributed to the PSSP and amounts actually eligible for contributing to
     the PSSP under Section 401k of the Revenue Code of the United States. Under
     the Deferred Supplemental Savings Plan, the Company will make a matching
     contribution in an amount equal to the matching contribution which would
     have been made if such contribution had been made under the PSSP. Expense
     related to the Deferred Supplemental Savings Plan amounted to $52,000 in
     1999, $85,000 in 1998 and $85,000 in 1997.

     Consulting Agreements
     The Company has Consulting, Non-Competition and Confidentiality Agreements
     with two former executives. Under the Agreements, which expire on December
     28, 2006, the executives are paid an aggregate of $160,000 per year.

     Note 10 - Preferred Stock:
     The Company is authorized to issue up to 5,000,000 shares of preferred
     stock without further stockholder approval in such series and with such
     preferences, terms and other provisions as may be designated by the board
     of directors.

     On August 16, 1989 the board of directors voted to create a series of
     55,000 shares of preferred stock, par value $0.01 per share, designated as
     Series A Junior Participating Preferred Stock ("Series A Preferred"). Each
     Series A Preferred share is entitled to receive a minimum preferential
     quarterly dividend of $1.00 per share and an aggregate dividend of 100
     times any dividend declared per share of common stock. Each share of Series
     A Preferred is entitled to one hundred votes and votes together as one
     class with the common stock. Upon liquidation or dissolution of the
     Company, the holder of each share of Series A Preferred is entitled to a
     liquidation payment of $100 per share plus an aggregate payment of 100
     times the payment made per share on the common stock. The Series A
     Preferred shares are not redeemable and rank junior to all other series of
     preferred stock of the Company.

                                                                             191
<PAGE>

     In the event of any merger, consolidation or other transaction in which
     shares of the Company's common stock are exchanged, each Series A Preferred
     share will be entitled to receive 100 times the amount received per share
     of common stock.

     On January 1, 2000 55,000 shares of Series A Preferred were reserved for
     issuance for stock purchase rights (see Note 11). No such rights have
     become exercisable and no shares of Series A Preferred have been issued.

     Note 11 - Preferred Share Purchase Rights:
     On August 16, 1989 the board of directors approved a preferred share rights
     plan (the "Rights Plan") pursuant to which one preferred share purchase
     right (a "Right") was distributed for each share of outstanding common
     stock. Each Right entitles the holder to purchase from the Company one one-
     hundredth of a share of Series A Junior Participating Preferred Stock,
     $0.01 par value per share, at a price of $16.00 per one one-hundredth of a
     Series A Preferred Share, subject to adjustment. On September 22, 1999 the
     board of directors approved a ten-year extension of the Rights Plan. The
     Rights, which do not have voting rights, expire on December 1, 2009, unless
     redeemed earlier by the Company.

     As amended by the board of directors on September 22, 1999, the Rights Plan
     will become effective and Rights will become exercisable on the date (the
     "Shares Acquisition Date") that a person or group of affiliated or
     associated persons (an "Acquiring Person") acquires beneficial ownership of
     20% or more of the outstanding shares of the Company's common stock or
     following the commencement of, or announcement of, an intention to make a
     tender offer or exchange offer which would result in the beneficial
     ownership by a person or group of 20% or more of the outstanding shares of
     the Company's common stock.

     At any time on or prior to the Shares Acquisition Date, the Company may
     redeem the Rights in whole, but not in part, at a price of $0.01 per Right.

     In the event that the Company is acquired in a merger or other business
     combination transaction or 30% or more of its consolidated assets or
     earnings power are sold, the Rights Plan requires that proper provision be
     made so that each holder of a Right will thereafter have the right to
     receive, upon the exercise thereof at the then current exercise price of
     the Right, that number of shares of common stock of the acquiring company
     which at the time of such transaction will have a market value of two times
     the exercise price of the Right. In the event that any person becomes an
     Acquiring Person, the holder of a Right, other than Rights beneficially
     owned by the Acquiring Person (which would thereafter be void), will have
     the right to receive upon exercise that number of shares of common stock
     having a net value of two times the exercise price of the Right.

     At any time after the Shares Acquisition Date and prior to the acquisition
     by an Acquiring Person of 50% or more of the outstanding shares of the
     Company's common stock, the Company may exchange the Rights (other than
     Rights owned by Acquiring Persons which have become void), in whole or in
     part, at an exchange ratio of one share of common stock,
                                                                             192
<PAGE>

     or one one-hundredth of a Series A Preferred Share (or of a share of a
     class or series of the Preferred Stock of the Company having equivalent
     rights, preferences and privileges), per Right (subject to adjustment).

     Note 12 - Segment Information:
     The Company is engaged in one operating segment, the manufacture of
     capacitors and EMI filters. The Company adopted SFAS No. 131 "Disclosures
     about Segments of an Enterprise and Related Information" during the fourth
     quarter of 1998. Statement No. 131 establishes standards for reporting
     information about operating segments in annual financial statements and
     requires selected information about operating segments in interim financial
     reports issued to stockholders. It also established standards for related
     disclosures about products, services and geographic areas.

     Information about the Company's operations by geographic area is as follows
     (in thousands):

Operations by Geographic Area:

<TABLE>
<CAPTION>
                                                United          United
                                                States          Kingdom         Mexico       Eliminations     Consolidated
--------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>             <C>            <C>              <C>
Year Ended January 1, 2000
Sales to unaffiliated customers          $        73,238  $     21,493   $       12,707 $             -  $       110,438
Transfer between geographic areas                  3,270             -            2,610          (5,880)               -
                                         ---------------------------------------------------------------------------------
Total sales                              $        79,508   $    21,493   $       15,317          (5,880) $       110,438
                                         =================================================================================
Operating profit (loss)                  $        (1,101)  $    (1,366)  $              $          (106) $        (2,273)
                                                                                    300
Interest expense                                                                                                  (1,735)
Interest income                                                                                                      311
                                         ---------------------------------------------------------------------------------
Loss before income taxes                                                                                          (3,697)
                                         =================================================================================
Identifiable assets                      $        45,321   $    13,133   $       12,071 $            (5) $        70,520
                                         =================================================================================
Year Ended January 2, 1999
Sales to unaffiliated customers          $        89,348   $    26,465   $          381 $             -  $       116,194
Transfer between geographic areas                  3,981             -            7,073         (11,054)               -
                                         ---------------------------------------------------------------------------------
Total sales                              $        93,329   $    26,465   $        7,454 $       (11,054) $       116,194
                                         =================================================================================
Operating profit                         $           872   $     1,474   $          302 $             -  $         2,648
Interest expense                                                                                                  (1,530)
Interest income                                                                                                    1,520
                                         ---------------------------------------------------------------------------------
Income before income taxes                                                                               $         2,638
                                         =================================================================================
Identifiable assets                      $        60,166   $    16,569   $        1,806 $        (7,970) $        70,571
                                         =================================================================================
Year Ended December 27, 1997
Sales to unaffiliated customers          $        93,778   $    24,966   $          914 $             -  $       119,658
</TABLE>

                                                                             193
<PAGE>

<TABLE>
<S>                                      <C>               <C>           <C>            <C>              <C>
Transfer between geographic areas                  3,870             -            7,325         (11,195)               -
                                         ---------------------------------------------------------------------------------
Total sales                              $        97,648   $    24,966   $        8,239         (11,195) $       119,658
                                         =================================================================================
Operating profit (loss)                  $       (13,824)  $     1,244   $          281 $             -  $       (12,299)
Interest expense                                                                                                  (1,741)
Interest income                                                                                                       48
                                         ---------------------------------------------------------------------------------
Loss before income taxes                                                                                 $       (13,992)
                                         =================================================================================
Identifiable assets                      $        63,103   $    15,362   $        1,030 $        (7,936) $        71,559
                                         =================================================================================
</TABLE>

     Transfers between geographic areas are accounted for at cost plus 15% in
     1999, 1998, and 1997, except for transfers of etched and formed foil in all
     years which were accounted for at prices intended to approximate sales to
     unrelated third parties. Operating profit (loss) is total sales less
     operating expenses which in 1999 included a special provision for
     restructuring costs, in 1998 included a special gain on the sale of certain
     assets related to a product line, and in 1997 included a special provision
     for environmental costs and asset write-down. Identifiable assets are those
     assets of the Company that are identified with the operations in each
     geographic area.

     Note 13 - Provision for Income Taxes:
     The provision for income taxes consists of (in thousands):

<TABLE>
<CAPTION>
                                                                        Jan. 1, 2000       Jan. 2, 1999       Dec. 27, 1997
      ---------------------------------------------------------------------------------------------------------------------
   <S>                                                                  <C>                <C>              <C>
      Current:
      Federal                                                            $            259   $         (315)  $          -
      State                                                                            25               -               -
      Foreign                                                                        (141)             352            338
                                                                     ------------------------------------------------------
      Total Current                                                                   143               37            338
      Deferred:
      Federal                                                                           -              691         (1,974)
      State                                                                             -              124           (950)
      Foreign                                                                        (369)               -             93
                                                                     ------------------------------------------------------
      Total deferred taxes                                                           (369)             815         (2,831)
                                                                     ------------------------------------------------------
      Provision for (benefit from) income taxes                      $               (226)  $          852  $      (2,493)
                                                                     ======================================================
      Deferred income taxes arise from (in thousands):
           Environmental reserve                                     $               (114)  $          350  $      (2,901)
           Accelerated depreciation                                                (1,028)            (355)        (2,477)
           Net operating losses                                                       951               42           (633)
           Inventory valuation                                                       (459)             (25)          (363)
           Allowance for doubtful accounts                                              1                4             26
           Compensation related costs                                                  82              162            286
           Warranty reserve                                                            47               74            210
           Restructuring reserve                                                   (1,774)               -              -
           Other                                                                       60              509            (95)
           Tax credits                                                                615              133            (22)
           Valuation allowance                                                      1,619              (79)         3,138
</TABLE>

                                                                             194
<PAGE>

<TABLE>
<S>                                                                  <C>                    <C>             <C>
                                                                     ------------------------------------------------------
                                                                     $                  -   $          815  $      (2,831)
                                                                     ======================================================
   Income taxes are reconciled to the United States
   statutory corporate tax rate as follows (in thousands):
        United States corporate tax at statutory rate                $             (1,256)  $          897  $      (4,756)
        Increase (decrease) arising from:
        State taxes                                                                  (220)             124           (934)
        Foreign taxes                                                                (509)            (193)            50
        Other                                                                         140              103              9
        Change in valuation allowance                                               1,619              (79)         3,138
                                                                     ------------------------------------------------------
                                                                     $               (226)  $          852  $      (2,493)
                                                                     ======================================================
</TABLE>

     Deferred U.S. income taxes have not been provided on basis differences
     related to investments in certain foreign subsidiaries and affiliates.
     These basis differences consist primarily of undistributed earnings
     considered permanently invested in the businesses. Determination of the
     deferred income tax liability on these unremitted earnings is not
     practicable since such liability, if any, is dependent on circumstances
     existing if and when remittance occurs.

     The components of the Company's deferred tax assets and liabilities as of
     January 1, 2000 and January 2, 1999 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                               January 1, 2000                    January 2, 1999
      Deferred Taxes:                                      Assets        Liabilities        Assets          Liabilities
      --------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>                <C>            <C>
      Net operating loss carryforwards                        2,020                -        $   3,025             $     -
      Compensation related cost                                 472                -              261                   -
      Allowance for doubtful accounts                           172                -              173                   -
      Depreciation                                                -            4,099                -               5,091
      Environmental reserve                                   2,665                -            2,551                   -
      Restructuring reserve                                   1,775                -                -                   -
      Inventory reserves                                        739                -              160                   -
      Warranty reserves                                         160                -              208                   -
      Tax credit carryforwards                                  483                -            1,043                   -
      Valuation allowance                                    (4,894)               -           (3,275)                  -
      Other                                                       -                -                -                 (69)
                                                     ---------------------------------------------------------------------
      Total                                               $   3,592        $   4,099        $   4,146           $   5,022
                                                     =====================================================================
</TABLE>

     Due to the uncertainty surrounding the realization of favorable tax
     attributes in future tax returns related to the write-down of impaired
     assets and other restructuring costs in the United States, the increase in
     deferred tax assets has been fully offset by a valuation allowance. The
     change in valuation allowance is due to the addition of the restructuring
     reserve. At January 1, 2000 the Company had a net operating loss
     carryforward of approximately $5,038,000 for tax purposes, which begin to
     expire in 2012. At January 1, 2000 the Company also had $483,000 of foreign
     and other tax credits which expire from 2000 to 2012.

     Note 14 - Environmental Matters:
                                                                             195
<PAGE>

     The Company manufactures film capacitors and maintains its corporate
     offices in a building located in New Bedford, Massachusetts which has been
     occupied by the Company and predecessor organizations also engaged in the
     manufacture of capacitors since 1938. In June 1997 the United States
     Environmental Protection Agency ("EPA") conducted preliminary tests within
     the building that revealed the presence of polychlorinated biphenyls
     ("PCBs") on surfaces within the plant. Subsequent engineering tests by
     independent consultants retained by the Company confirmed the presence of
     residual PCBs throughout the plant, which resulted from their use prior to
     1978. While the Company and its expert advisors consider the PCBs to
     represent no threat to the health of the employees of the Company or the
     surrounding community, subsequent engineering studies indicated that the
     cost to remove PCBs within the building to the levels proscribed by the EPA
     and the Toxic Substances Control Act would be prohibitive. Therefore, the
     Company has decided, and has so informed the EPA, that it intends to vacate
     the building, to demolish it, and to dispose of all contaminated building
     materials in a legally compliant manner. Accordingly, a reserve was
     established and charged to income as of December 27, 1997 in the amount of
     $7,233,000, which the Company believes is adequate to dismantle and dispose
     of the building, clean equipment located within it, and to pay for related
     engineering, legal and professional services. Of this amount, $6,470,000
     has been classified as a long-term liability. Additionally, the Company
     wrote-off, as of December 27, 1997 the depreciated value of that building,
     all improvements thereto, and certain machinery and equipment which the
     Company believes will become surplus, abandoned, or otherwise unusable upon
     disposal of the building. The amount of this write-off was $5,767,000.
     During 1998 the EPA approved the Company's plan to dismantle and dispose of
     the building. In December 1999 the Company reached a final agreement with
     the EPA regarding the timing of the planned dismantling and disposal
     activity. Under the settlement, the Company has agreed to relocate its New
     Bedford operations within 16 months of the agreement, and to demolish the
     existing building and cap the site no later than November 2011.

     On February 9, 1990 the Company entered into a settlement agreement (the
     "Settlement Agreement") with the United States and The Commonwealth of
     Massachusetts (the "governments") resolving litigation commenced by the
     governments in the U.S. District Court for the District of Massachusetts,
     on December 10, 1983 under the Comprehensive Environmental Response,
     Compensation and Liability Act of 1980, commonly known as the "Superfund"
     legislation. The litigation concerned the alleged disposal by various
     defendants of PCBs in the Acushnet River and New Bedford Harbor. The
     Settlement Agreement resolved all of the governments' claims against the
     Company and Aerovox Industries, Inc. (a predecessor of the Company) arising
     out of the contamination of the Acushnet River and New Bedford Harbor with
     PCBs, including cleanup costs, study costs and damages to natural
     resources, now or hereafter incurred, except that the Settlement Agreement
     provides that the governments may seek damages from the Company and Aerovox
     Industries, Inc. for future liability in the event that such future
     liability arises out of unknown conditions at the site. The Company, based
     on information presently available, does not believe that this matter will
     have any further material adverse effect on the Company's financial
     condition.

                                                                             196
<PAGE>

     Note 15 - Restructuring Costs:

     In December 1999 the Company recorded charges of $5,676,000 related to the
     exit costs from certain activities and asset impairments arising from the
     consolidation and relocation of certain facilities. The components of these
     charges were as follows (in thousands):

           Impairment of property, plant and equipment                 $4,723
           Write-off of certain inventory                                 344
           Involuntary employee terminations                              609
                                                                       ------
                                                                       $5,676

     The impairments of property, plant and equipment were a result of the
     closure and consolidation of plants in Mexico, the closure of foil
     processing operations in the United Kingdom, the cessation of a North
     American product line and the abandonment of manufacturing equipment
     resulting from the relocation of the Company's corporate headquarters and
     manufacturing plant in New Bedford, Massachusetts to a new facility. These
     costs have been recorded as provisions for restructuring costs in the
     Company's Consolidated Statements of Operations.

     The write-off of certain inventory was a result of the Company's decision
     to exit a capacitor product line in North America and the closure of foil
     processing operations in the United Kingdom. These costs have been recorded
     as charges to cost of sales.

     The involuntary employee terminations were a result of the closure and
     consolidation of plants in Mexico and the closure of foil processing
     operations in the United Kingdom. As a result of these actions, 54
     employees were terminated, primarily from production, supervisory and
     manufacturing support functions. The termination benefits related to these
     employees have been accrued and charged to the provision for restructuring
     costs.

     Note 16 - Foreign Operations:
     Summarized financial information for the Company's foreign operations is as
     follows (in thousands):

<TABLE>
<CAPTION>
                                                        January 1,            January 2,           December 27,
                                                           2000                  1999                  1997
---------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                      <C>                  <C>
Current assets                                     $             13,639           $    10,122            $     9,045
Non-current assets                                               13,353                 7,826                  7,470
                                                   ------------------------------------------------------------------
                                                   $             26,992           $    17,948            $    16,515
                                                   ==================================================================
Current liabilities                                $              8,488           $     5,808            $     3,138
Due to parent                                                     1,788                   428                    238
Deferred income taxes                                               456                   824                    835
Long-term debt                                                    2,253                 2,465                  4,097
Stockholders' equity                                             14,007                 8,423                  8,207
</TABLE>

                                                                             197
<PAGE>

<TABLE>
<S>                                                <C>                      <C>                  <C>
                                                   ------------------------------------------------------------------
                                                   $             26,992           $    17,948            $    16,515
                                                   ==================================================================
Net sales                                          $             34,200           $    26,846            $    25,880
                                                   ==================================================================
Net income                                         $             (1,188)          $     1,005            $       720
                                                   ==================================================================
</TABLE>

                                                                             198
<PAGE>

Selected Consolidated Financial Data

<TABLE>
<CAPTION>
                                                             Jan. 1,        Jan. 2,        Dec. 27,       Dec. 28,       Dec. 30,
(Amounts in thousands, except per share data)                 2000           1999            1997           1996           1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>          <C>           <C>            <C>
Income statement data:
     Net sales                                                $ 110,438     $ 116,194      $ 119,658       $125,975      $129,311
     Income (loss) from operations                              (2,273)         2,648       (12,574)            143         4,666
     Net income (loss)                                          (3,471)         1,786       (11,499)        (1,347)         1,601
     Basic earning (loss) per share                              (0.64)          0.33         (2.15)         (0.25)          0.31
     Diluted earnings (loss) per share                           (0.64)          0.33         (2.15)         (0.25)          0.30
      Weighted average shares outstanding;
           Basic                                                  5,398         5,390          5,348          5,388         5,164
           Diluted                                                5,398         5,390          5,348          5,388         5,336
Balance sheet data:
      Total assets                                             $ 70,520      $ 70,571       $ 71,559       $ 84,976      $ 89,331
      Redeemable common stock                                     2,546             -              -              -             -
     Long-term obligations                                       21,344        17,888         23,808         23,806        28,777
     Total stockholders' equity                                  24,752        25,289         23,766         35,073        35,505
</TABLE>

Summary of Quarterly Results of Operations

<TABLE>
<CAPTION>
(Unaudited)                                                                             Quarter
(Amounts in thousands, except per share data)                     First           Second          Third          Fourth
----------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>           <C>            <C>
Year Ended January 1, 2000
     Net sales                                                       $ 28,375    $    30,637  $     26,718   $       24,708
     Gross profit                                                       4,973          6,111          4,777           3,954
     Net income                                                           330            801            104          (4,706)
     Earnings (loss) per share - basic and diluted                   $   0.06    $      0.15  $        0.02  $        (0.87)
Year Ended January 2, 1999
     Net sales                                                       $ 29,528    $    32,228  $      27,384  $       27,054
     Gross profit                                                       5,227          6,168          4,538           4,199
     Net income                                                           325            748            550             163
     Earnings per share - basic and diluted                          $   0.06    $      0.14  $        0.10  $         0.03
</TABLE>

                                                                             199
<PAGE>

Report of Independent Accountants

To the Board of Directors and Stockholders of Aerovox Incorporated:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Aerovox
Incorporated (the "Company") at January 1, 2000 and January 2, 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended January 1, 2000 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP (signed)

Boston, Massachusetts
February 14, 2000
<PAGE>

(Aerovox Logo)

740 Belleville Avenue
New Bedford, Massachusetts 02745-6194
www.aerovox.com