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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 28, 2003

Commission File Number 1-11512

SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, $0.01 Par Value,
19,164,458 shares outstanding as of August 8, 2003.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

3

SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the nine months ended June 29, 2002

(Unaudited)

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

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

For the nine months ended June 28, 2003

(Unaudited)

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

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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SATCON TECHNOLOGY CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A. Basis of Presentation

        The accompanying unaudited consolidated financial statements include the accounts of SatCon Technology Corporation and its wholly-owned subsidiaries (collectively, the "Company") as of June 28, 2003 and have been prepared by the Company in accordance with generally accepted accounting principles for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All intercompany accounts and transactions have been eliminated. These consolidated financial statements, which in the opinion of management reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2002. Operating results for the three and nine months ended June 28, 2003 are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.

Note B. Realization of Assets and Liquidity

        The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than provided, cash in its operations.

        In February 2003, the Company raised approximately $3 million through a private offering of preferred stock. In June 2003, the Company sold 4 million shares of its Beacon Power Corporation common stock for net proceeds of $1.5 million. Despite these events, the Company needs an immediate infusion of capital in order to continue operations. The Company is actively engaged in raising capital from the following sources:

•

Proceeds from the sale of assets unrelated to its engineering and manufacturing expertise in electromechanical systems. The Company has engaged a financial advisor, Alliant Capital Partners (an affiliate of Silicon Valley Bank), to assist it in disposing of assets. The assets and businesses the Company would consider selling include its Ling test and measurement vibration system ("Shaker") product line, its patented smart predictive line control technology utilized by the electric arc steel manufacturing industry and patents acquired from Northrop Grumman related to hybrid electric vehicles. The Company continues to discuss the sale of its Shaker product line with several potential interested buyers and is working with Alliant Capital Partners to consider other asset sales as well.



•

The sale of approximately $0.7 million of secured convertible subordinated debentures. In February of 2003, the Company received approximately $3 million in proceeds from a private offering of preferred stock and warrants. The terms of this financing also provided that the investors will purchase these debentures from the Company, subject to the satisfaction of two material conditions. The Company needed to obtain stockholder approval of the common stock issuable upon conversion of the convertible instruments and have an effective registration statement with the Securities and Exchange Commission ("SEC") registering all of the equity securities underlying this transaction. The Company's stockholders approved the proposed debenture offering at its annual meeting on April 24, 2003. In addition, the Company filed the required registration statement with the SEC on March 20, 2003 and expects that this

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registration statement will be declared effective in August 2003. The Company expects to receive the $0.7 million of funds shortly thereafter. However, because the Company failed to have this registration become effective on or before June 18, 2003 it may have to pay liquidated damages to each of the investors in the private offering of 3% of the investor's investment in cash for the first month of delay and 1.5% of the investor's investment for each additional month of delay in cash or shares of our common stock, at its option.

•

A new third-party investor. This investment may take the form of a guarantee which will allow the Company to access more funds from its bank, Silicon Valley Bank (the "Bank"), than it could otherwise borrow under its financing agreement, new equity or some other capital infusion. Although the Company has engaged in discussions regarding the above described transactions with a number of third parties, no commitments have been made by any third-party to date and there can be no assurance that the above described transactions will occur.

        On April 4, 2003, the Company entered into an Amended and Restated Accounts Receivable Financing Agreement (the "Agreement") with the Bank. In the Agreement, the Bank has agreed to provide the Company with a line of credit of up to $5 million. Advances under the line of credit are limited to 80% of eligible accounts receivables. Based on current business levels, the Company believes that it will be able to borrow approximately $1.5 million from the Bank during its fiscal fourth quarter, of which $0.9 million is outstanding as of June 28, 2003. Loans under this line of credit bear interest at the prime rate plus 4.0% per annum. Other customary banking fees are also charged. In connection with this financing, the Company issued to an affiliate of the Bank a warrant to purchase 210,000 shares of its common stock at an exercise price of $1.05 per share. The terms of the line of credit provided that the Company would be in default under the line of credit if it was unable to consummate the debenture offering described above on or before July 31, 2003. The Bank has agreed to forbear from exercising its rights or remedies from such default until August 31, 2003. The Company is also required to maintain a tangible net worth in excess of $9 million at all times. As of June 28, 2003, due in large part to non-cash valuation adjustments, the Company's adjusted tangible net worth was $6.4 million, below the minimum covenant level. In August 2003, the Bank waived this requirement until August 31, 2003. Before that date, the Company expects to obtain an amendment to the Bank Agreement. This credit expires on April 3, 2004 and carries a $0.1 million early termination fee.

        In June 2003, the Company sold 4.0 million shares of its 4.7 million shares of its investment in Beacon Power Corporation common stock for $1,514,650, net of commissions. Under the Agreement with the Bank, virtually all of our assets are pledged as collateral. Accordingly, the Company needs to obtain the approval of the Bank in order to use this cash for its operational needs. As of June 28, 2003, $764,650 of the $1,514,650 has been released by the Bank for the Company's use and the remaining $750,000 was restricted in a cash collateral account, unavailable for its use. In July 2003, the Company completed the sale of its remaining investment in Beacon Power Corporation common stock for $231,066. Since June 28, 2003, the Company has requested and the Bank has granted the right for it to use an additional $606,066 of these proceeds to fund operations. As of August 8, 2003, $375,000 remained in the cash collateral account which the Company intends to request the use of for operational needs during the fiscal quarter ending September 30, 2003.

        At June 28, 2003, the Company had an unrestricted cash balance of $1.1 million. In order to sustain current business operations, the Company believes that it will require, beyond the unrestricted cash on hand, approximately an additional $4 million during the quarter ended September 30, 2003. This amount is expected to come from:

•

$0.7 million of restricted cash,



•

$0.2 million from the sale of the remaining investment in Beacon Power Corporation common stock,

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•

$0.7 million from the sale of debentures, and



•

$0.6 million from unused borrowing capacity under our loan agreement with Silicon Valley Bank.

        The balance is expected to be to come from a combination of asset sales, a third-party guarantee or loan and an equity investment in the Company. However, there can be no assurance that any of these potential sources of funds will materialize.

        The Company has incurred significant costs to develop its technologies and products which has contributed to its need to raise capital. These developments and other operating costs have exceeded total revenue. As a result, the Company has incurred losses in each of the past five years and for the nine months ended June 28, 2003. As of June 28, 2003, the Company had an accumulated deficit of $109.4 million. During the nine months ended June 28, 2003, the Company incurred a net loss attributable to common stockholders of $24.3 million and a reduction in its unrestricted cash, net of borrowings, from $2.1 million to $0.2 million.

        Management of the Company is addressing additional cash needs through a combination of seeking equity infusions, sales of assets, selective workforce reductions, outsourcing some manufacturing and seeking to form joint ventures. The Company has embarked on a major restructuring of the Power Systems Division is order to address its cost structure. This initiative has already resulted in significant reductions in its work force from 167 employees at December 2002 to 74 employees at the end of June 2003, which will be reflected as lower operating expenses in the near future. The Company is working aggressively on its goal to reduce its future cash flow burn rate to zero by fiscal year end. However, the Company does not expect to be profitable for its fourth quarter of fiscal 2003.

        In view of the matters described in the preceding paragraphs, there is substantial doubt about the Company's ability to continue as a going concern. Recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon the continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, including raising permanent capital, to maintain present financing, and to succeed in its future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

Note C. Significant Accounting Policies

Revenue Recognition

        The Company recognizes revenue from product sales in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. Title to the product generally passes upon shipment of the product as the products are shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. The Company provides for a warranty reserve at the time the product revenue is recognized.

        The Company performs funded research and development and product development for commercial companies and government agencies under cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or

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decreases in the fee depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each type of contract, the Company receives periodic progress payments or payment upon reaching interim milestones and retains the rights to the intellectual property developed in government contracts. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue and contract costs for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. Any losses incurred in performing funded research and development projects are recognized as funded research and development expenses as incurred. As of June 28, 2003 and September 30, 2002, the Company has accrued approximately $85,000 and $150,000, respectively, for anticipated contract losses on commercial contracts.

        Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in funded research and development and other revenue expenses.

        Deferred revenue consists of payments received from customers in advance of services performed, product shipped or installation completed.

        Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not yet been recognized as revenue or billed to the customer.

Investment in Beacon Power Corporation

        On September 28, 2001, the Company distributed 5,000,000 shares of Beacon Power common stock to its stockholders. Upon the distribution of the 5,000,000 shares, the Company recorded the distribution of the 5,000,000 shares as a reduction of additional paid-in-capital based on the book value per share prior to the distribution, or $0.59 per share. After the distribution, the Company owned approximately 11.0% of Beacon Power's outstanding voting stock. Additionally, the Company has determined that it does not have the ability to exercise significant influence over the operating and financial policies of Beacon Power and, therefore, accounts for its investment in Beacon Power using the fair value method as set forth in Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Debt and Equity Securities. The investment is carried at fair value and designated as available for sale and any unrealized holding gains or losses are to be included in stockholders' equity as a component of accumulated other comprehensive income/(loss) so long as any unrealized losses are deemed temporary in nature. If the decline in fair value is judged to be other than temporary, the cost basis shall be written down to fair value as a new cost basis and the amount of the write-down shall be included in the statement of operations. The new cost basis shall not be changed for subsequent recoveries in fair value. Subsequent increases in the fair value shall be included in stockholders' equity as a component of accumulated other comprehensive income/(loss). Subsequent decreases in fair value, if not an other-than-temporary impairment, also shall be included in stockholders' equity as a component of accumulated other comprehensive income/(loss).

        As of September 30, 2002, the quoted fair market value of Beacon Power's common stock held by the Company was $0.17 per share, or $800,005. The Company's historical cost basis in its investment in Beacon Power's common stock was approximately $0.59 per share, or $2,788,949, resulting in an unrealized loss of $1,988,944 as of September 30, 2002. The Company determined that of this $1,988,044, $1,400,000 represented an other than temporary decline based on the extent and length of the time the stock price has been below its cost as well as its assessment of the financial condition and near term prospects of Beacon Power. The Company recorded a charge of $1,400,000 in the statement

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of operations to realize this portion of the loss. This charge was measured based on the trading value of Beacon Power's common stock during the month of November and early December and was less than the gross unrealized loss due to subsequent recovery of Beacon Power's stock price, as well as the Company's ability and intent to hold the stock for a long enough period of time for it to recover to the new cost basis. After this write-down, the new cost basis of the Beacon Power common stock held by the Company is approximately $0.30 per share and the unrealized loss of the Beacon Power common stock held by the Company was $588,944 as of September 30, 2002.

        As of March 29, 2003, the quoted fair market value of Beacon Power's common stock held by the Company was $0.18 per share, or $847,064. The Company's cost basis in its investment in Beacon Power's common stock was approximately $0.30 per share, or $1,388,949, resulting in an unrealized loss of $541,885 as of March 29, 2003. As of March 29, 2003, the Company believed the difference in the current fair market value and the cost basis of its investment represents an other than temporary decline based upon the Company's ability and intent to hold the stock for a long enough period of time for it to recover. The Company recorded a charge of $541,885 in the statement of operations to realize this loss. After the write-down, the new cost basis of the Beacon Power stock held by the Company is $0.18 per share.

        During June 2003, the Company commenced the sale of the 4,705,910 shares of its Beacon Power Corporation common stock. Through June 28, 2003, the Company had sold 3,996,626 of those shares for proceeds of $1,514,650, net of fees and commissions. As a consequence of the sale of these shares, the Company realized a gain of $795,258 which is included in its results for the fiscal quarter ending June 28, 2003.

        As of June 28, 2003, the Company owned 709,284 shares of Beacon Power Corporation common stock. As of June 28, 2003, the quoted fair market value of Beacon Power's common stock held by the Company was $0.29 per share, or $205,692. The Company's cost basis in its investment in Beacon Power's common stock was approximately $0.18 per share, or $127,671, resulting in an unrealized gain of $78,021 as of June 28, 2003 and is included in stockholders' equity as a component of accumulated other comprehensive loss.

        During July 2003, the Company sold its remaining shares of Beacon Power Corporation common stock for proceeds of $231,066, net of fees and commissions. As a consequence of the sale of these shares, the Company realized a gain of $103,395 which will be included in its results for the fiscal quarter ending September 30, 2003.

        The following summarizes the Company's investment in Beacon Power Corporation:

        Additionally, as of June 28, 2003 and September 30, 2002, the Company has a warrant to purchase 173,704 shares of Beacon Power's common stock that has an exercise price of $1.25 per share and expires in 2005. The Company accounts for this warrant in accordance with SFAS No. 133 and, therefore, records the warrant at its fair value. As of June 28, 2003 and September 30, 2002, the warrant to purchase Beacon Power common stock had a fair value of $22,033 and $14,365, respectively, and is included in warrants to purchase common stock on the accompanying balance sheet. During the

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three and nine months ended June 28, 2003, the Company recorded an unrealized gain of $10,279 and $7,668, respectively, and is included in unrealized loss on warrants to purchase common stock in the accompanying statement of operations.

Accounting for Derivative Instruments

        On October 1, 2000, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes a new model for accounting for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value.

        As of June 28, 2003 and September 30, 2002, the Company has warrants to purchase 300,000 shares of Mechanical Technology Incorporated's common stock that have an exercise price of $12.56 per share and expire in fiscal year 2004. The Company accounts for these warrant in accordance with SFAS No. 133 and, therefore, records the warrants at their fair value. As of June 28, 2003 and September 30, 2002, the warrants to purchase Mechanical Technology Incorporated common stock had a fair value of $6,440 and $1,623, respectively, and are included in warrants to purchase common stock on the accompanying balance sheet. During the three and nine months ended June 28, 2003, the Company recorded an unrealized loss of $5,615 and $4,817 and is included in unrealized loss on warrants to purchase common stock in the accompanying statement of operations.

Goodwill and Intangible Assets

        Effective October 1, 2001, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. This statement affects the Company's treatment of goodwill and other intangible assets. This statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible assets with indeterminable lives will cease.

        The Company completed the first step of the transitional goodwill impairment test during the three months ended March 30, 2002 based on the amount of goodwill as of the beginning of fiscal year 2002, as required by SFAS No. 142. The Company determined the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach indicates the fair value of a business enterprise based on the discounted value of the cash flows that the business can be expected to generate in the future. This analysis is based upon projections prepared by the Company and data from sources of publicly available information available at the time of preparation. These projections were based on a strategic plan conducted by each business unit using financial projections for a 3 to 5 year time horizon and represented managements best estimate of future results. In making these projections, the Company considered the markets it was addressing, the competitive environment and its advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, the Company performed a macro assessment of the overall likelihood that it would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows. Based on the results of the first step of the transitional goodwill impairment test, the Company determined that the fair value of each of the reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of October 1, 2001. As a result, the second step of the transitional goodwill impairment test was not required to be completed. The Company performed its annual goodwill impairment test as of the beginning of its fiscal fourth quarter 2002, as required by SFAS No. 142. The Company again determined the fair value of each of the reporting units based on a discounted cash flow income approach consistent with the initial test. Based on the results of the first step of the annual goodwill impairment test, the Company determined that the fair value of each of the

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reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of the beginning of its fiscal fourth quarter 2002. As a result, the second step of the annual goodwill impairment test was not required to be completed.

        During the three months ended March 29, 2003, the Company experienced a significant adverse change in the business climate, in particular, significant reductions in revenue and cash flows. This coupled with its current liquidity issues, required the Company to consider selling assets unrelated to its engineering and manufacturing expertise in electromechanical systems. The assets and businesses the Company is considering selling include its Ling Shaker product line, its patented smart predictive line control technology utilized by the electric arc steel manufacturing industry and patents acquired from Northrop Grumman related to the hybrid electric vehicles. Based on these conditions, the Company performed an impairment test on an interim basis. The Company determined the fair value of each of the reporting units based on a discounted cash flow income approach. This analysis was largely based upon historical data. Based on the results of the first step of the goodwill impairment test, the Company determined that the fair value of the Applied Technology and Electronics reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of March 29, 2003. As a result, the second step of the goodwill impairment test was not required to be completed. The Company will continue to perform a goodwill impairment test for these reporting units on an annual basis and on an interim basis, if certain conditions exist. Based on the results of the first step of the annual goodwill impairment test, the Company determined that the fair value of the Power Systems reporting unit does not exceed its carrying amount. The fair value was determined to approximate the fair value of the net tangible assets. The second step of the impairment test required the Company to write off the unamortized balance of the goodwill and intangible assets of the Power Systems reporting unit as of March 29, 2003 of $5,751,082.

Long-Lived Assets

        As of October 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.

        During the three months ended June 28, 2003, the Company decided to streamline its operations. The Company has decided to greatly reduce its UPS sales, marketing and development effort and plans to form a strategic alliance with a major company. The Company is also seriously exploring the possibility of selling its Shaker product line and is actively engaged in discussions with a few potential buyers. It is likely that this Shaker product line will be sold within the next few months. In this scenario, the Company's Worcester facility will have the Magnetics (Servo Motors and its Maglev products), EPT and StarSine as its remaining business. Based on a cash flow forecast of these products over the remaining 7 years—representing the current lease and the Company's 5 year option to extend—the Company does not expect to recoup the value of its long-lived assets. These assets, before write-down, approximate $3.2 million and are comprised primarily of leasehold improvements made within the last few years. Given this situation, the Company performed a fair market analysis of these assets and determined that a $700,000 charge was required in this quarter representing an impairment of this long-lived asset.

Restructuring Costs

        During April 2002, the Company commenced a restructuring plan designed to streamline its production base, improve efficiency and enhance its competitiveness and recorded a restructuring charge of $1.5 million. The restructuring charge included approximately $655,000 for severance costs associated with the reduction of approximately 60 employees. As of September 30, 2002, 56 employees

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had been terminated and $507,504 of the severance had been paid. As of June 28, 2003, all 60 employees had been terminated and $565,647 of the severance had been paid. The balance of the restructuring charge relates to the closing of the Anaheim, CA facility. These costs include approximately $270,000 of cash charges primarily related to rent, real estate taxes and operating costs to be paid from October 1, 2002 through June 30, 2003, the remainder of the lease, and an estimated $350,000 of other cash charges for restoration and clean-up. As of September 30, 2002, no amounts have been paid nor charged against these amounts. As of June 28, 2003, the Company has paid $270,000 of the $270,000 of charges primarily related to rent, real estate taxes and operating. As of June 28, 2003, $39,310 has been paid against the $350,000 of other cash charges for restoration and clean-up. In addition, approximately $225,000 of the restructuring charge relates to non-cash charges on assets to be disposed of. As of September 30, 2002, no assets have been disposed of nor have any amounts been charged against this amount. As of June 28, 2003, $125,062 net book value of assets have been identified and written off against this amount.

        The following is a status of the Company's accrued restructuring costs and the changes for the periods then ended:

Stock Based Compensation

        During the fiscal quarter ended March 29, 2003, the Company adopted Statement of Financial Accounting Statement ("SFAS") No. 148, Accounting for Stock Based Compensation—Transition and Disclosure, an amendment to FASB Statement No. 123. This Statement amends SFAS No.123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No. 148 amends Accounting Principles Board ("APB") Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial reporting.

        The Company accounts for stock-based compensation of employees under the intrinsic value method of APB Opinion No. 28 and has elected the disclosure-only alternative under SFAS No. 123. The Company records the fair value as determined using the Black-Scholes option-pricing model of stock options and warrants to non-employees in exchange for services in accordance with Emerging Issues Task Force ("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and is amortized ratably over the period the service is performed.

        No stock based employee compensation costs are included in the determination of net loss for all periods presented.

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        Had compensation cost for the Company's stock based compensation been determined based on fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company's net loss attributable to common stockholders and loss per share for the three and nine months ended June 28, 2003 and June 29, 2002, respectively, would have been increased to the pro forma amounts indicated below:

Recent Accounting Pronouncements

        In August 2001, the FASB issued Statement of Financial Accounting Statement ("SFAS") No. 143, Accounting for Asset Retirement Obligation. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, an entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the Company's financial position or results of operations.

        In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The adoption of SFAS No. 144 did not have a material effect on the Company's financial position or results of operations.

        In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64, Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements. This statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions and is effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 did not have a material effect on the Company's financial position or results of operations.

        In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition

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for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement is effective for exit and disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material impact on the Company's financial position or results of operations.

        In October 2002, FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS 147 addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. SFAS 147 also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets, including those acquired in transactions between two or more mutual enterprises. The provisions of the statement will be effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The adoption of this statement did not have a material impact on the Company's financial position or results of operations.

        In November 2002, FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 3 ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 covers guarantee contracts that have any of the following four characteristics: (a) contracts that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party (e.g., financial and market value guarantees), (b) contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement (performance guarantees), (c) indemnification agreements that contingently require the indemnifying party (guarantor) to make payments to the indemnified party (guaranteed party) based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party, such as an adverse judgment in a lawsuit or the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, and (d) indirect guarantees of the indebtedness of others. FIN 45 specifically excludes certain guarantee contracts from its scope. Additionally, certain guarantees are not subject to FIN 45's provisions for initial recognition and measurement but are subject to its disclosure requirements. The initial recognition and measurement provisions are effective for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has made no guarantees, including indirect guarantees of the indebtedness of others.

        In November 2002, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, effective for arrangements entered into after June 15, 2003. This issue defines units of accounting for arrangements with multiple deliverables resulting in revenue being allocated over the units of accounting for revenue recognition purposes. The adoption of this statement did not have a material effect on the Company's financial position or results of operations.

        In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure

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requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is currently evaluating the impact of FIN 46 on its financial statements and related disclosures but does not expect that there will be any material impact.

        In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, to provide clarification on the meaning of an underlying, the characteristics of a derivative that contains financing components and the meaning of an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. SFAS No. 149 will be applied prospectively and is effective for contracts entered into or modified after June 30, 2003. This statement will be applicable to existing contracts and new contracts entered into after June 30, 2003 if those contracts relate to forward purchases or sales of when-issued securities or other securities that do not yet exist. The Company does not expect the adoption of SFAS No. 149 to have a material effect on the Company's results of operations or financial condition.

        In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company is currently evaluating the impact of SFAS No. 150 on its financial statements but does not expect the adoption to have a material effect on its results of operations or financial condition.

Note D. Financing Transaction

        On February 18, 2003, the Company entered into a financing transaction that totals approximately $4 million. As part of this transaction, the Company raised approximately $3.2 million of equity capital through the issuance of 253.8 shares of its Series A Convertible Preferred Stock, $0.01 par value per share, and warrants to purchase up to 2,538,000 shares of its common stock, $0.01 par value per share, from 21 accredited investors. The terms of the transaction also contemplate that an additional $832,500 will be raised through the sale of secured convertible subordinated debentures once a registration statement filed with the Securities and Exchange Commission registering all of the underlying equity securities in the financing is declared effective, stockholder approval of the transaction is obtained and certain typical closing documents are provided.

        In connection with the equity portion of the financing, the Company issued shares of Series A Preferred Stock for $12,500 per share. The Series A Preferred Stock is convertible into a number of shares of Common Stock equal to $12,500 divided by the conversion price of the Series A Preferred Stock, which is initially $1.25. The total number of shares of Common Stock initially issuable upon conversion of the shares of Series A Preferred Stock issued and sold is 2,538,000. The Series A Preferred Stock accrues dividends of 10% per annum, increasing to 12% per annum on January 1, 2004. The dividend for the first year was paid at closing by issuing 362,168 shares of Common Stock, valued based on the average of the closing bid and ask price of the Common Stock on the NASDAQ National Market for the five trading days preceding February 18, 2003. All further dividends will be paid on a quarterly basis. The Company may opt to pay these dividends in cash or in shares of its Common Stock.

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        As part of the equity portion of the financing, the Company also issued warrants to purchase up to 2,538,000 shares of Common Stock. Warrants to purchase up to 1,269,000 shares of Common Stock are exercisable for a five-year term and have an initial exercise price of $1.50 per share, and warrants to purchase up to 1,269,000 shares of Common Stock were exercisable for one business day after the date of their issuance and had an exercise price of $0.01 per share.

        If closed, the secured convertible subordinated debentures will initially be convertible at a conversion price per share of $1.25 into 666,000 shares of Common Stock. As part of the debt portion of the financing, the Company will be obligated to issue warrants to purchase up to 666,000 shares of Common Stock. Warrants to purchase up to 333,000 shares of Common Stock will be exercisable for a five-year term and will have an initial exercise price of $1.50 per share, and warrants to purchase up to 333,000 shares of Common Stock will be exercisable for one business day after the date of their issuance and will have an exercise price of $0.01 per share.

        H.C. Wainwright & Co., Inc. ("H.C. Wainwright") served as placement agent for the Series A financing transaction and on February 18, 2003 received as part of its commission a warrant to purchase an aggregate of 163,145 shares of Common Stock at an exercise price of $0.01 per share. This warrant is immediately exercisable and expires on February 18, 2008.

        In connection with the closing of the transactions contemplated by the Note and Warrant Purchase Agreement, H.C. Wainwright received an additional warrant from us to purchase an aggregate of 42,920 shares of Common Stock at an exercise price of $0.01. This warrant is exercisable from the closing of the transactions contemplated by the Note and Warrant Purchase Agreement and expires on February 18, 2008

        In addition, H.C. Wainwright agreed to receive a warrant from the Company to purchase an aggregate of 100,148 shares of Common Stock at an exercise price of $0.01 per share in lieu of the cash placement fee due to it by us in connection with the closing of the transactions contemplated by the Note and Warrant Purchase Agreement. This warrant was issued on February 18, 2003 but is exercisable only upon the closing of the transactions contemplated by the Note and Warrant Purchase Agreement and will expire on February 18, 2008.

        The stock purchase agreement contains several contingencies which are outside the Company's control. These include the approval of third parties and the registration statement underlying the common stock being declared effective by the Securities and Exchange Commission. Failure to satisfy these contingencies might result in a portion or all of the proceeds being returned to the investors. Consequently, the Company has accounted for the proceeds received on February 18, 2003 as a deposit (liability) on the transaction. In addition, the Company has recorded the costs paid through June 28, 2003 of $411,672 in connection with this transaction as an other current asset. After the resolution of these items outside the Company's control, the Company will account for the transaction in accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, allocating the net proceeds received based on the relative fair value of the redeemable convertible preferred stock and the warrants issued, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities.

        The Company's stockholders approved the proposed debenture offering at its annual meeting on April 24, 2003. In addition, the Company filed the required registration statement with the SEC on March 20, 2003. The Company expects that this registration statement will be declared effective in August 2003. However, because the Company failed to have this registration become effective on or before June 18, 2003 it may have to pay liquidated damages to each of the investors in the private offering of 3% of the investor's investment in cash for the first month of delay and 1.5% of the investor's investment for each additional month of delay in cash or shares of our common stock, at its option. As of June 28, 2003, the Company has accrued $135,000 for these potential penalties.

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Note E. Loss per Share

        The following is the reconciliation of the numerators and denominators of the basic and diluted per share computations:

        As of June 28, 2003 and June 29, 2002, 5,649,092 and 4,094,973 shares of common stock issuable upon the exercise of options and warrants, respectively, were excluded from the diluted weighted average common shares outstanding as their effect would be antidilutive. In addition, as of June 28, 2003, 2,538,000 shares of common stock issuable upon the conversion of Series A Convertible Preferred Stock were excluded from the diluted weighted average common shares outstanding as their effect would be antidilutive.

        On April 4, 2003, the Company issued to Silicon Valley Bank, in connection with the Amended and Restated Accounts Receivable Financing Agreement with Silicon Valley Bank, a warrant exercisable for 210,000 shares of our common stock, at an exercise price of $1.05 per share. The warrant expires on April 3, 2010.

Note F. Inventory

        Inventory consists of the following:

        At the end of June 2003, the Company was actively engaged in selling its Shaker product line, and is pursuing a strategy which it hoped would lead to a strategic alliance with a larger company in the power business. During the process of considering various options, the Company concluded that both its Shaker and UPS system inventory was overvalued. The Company analyzed the situation and recorded an increase to its valuation reserve of $1,962,058 as of June 28, 2003. In addition, the Company has accrued a $737,942 loss for purchase commitments associated with these products.

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Note G. Segment Disclosures

        The Company's organizational structure is based on strategic business units that perform services and offer various products to the principal markets in which the Company's products are sold. These business units equate to three reportable segments: Applied Technology, Power Systems and Electronics.

        SatCon Applied Technology, Inc. performs research and development services in collaboration with third parties. SatCon Power Systems, Inc. specializes in the engineering and manufacturing of power systems. SatCon Electronics, Inc. designs and manufactures electronic products. The Company's principal operations and markets are located in the United States.

        The accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenue and profit and loss from operations, including amortization of intangibles. Common costs not directly attributable to a particular segment are included in the Applied Technology segment. These costs include corporate costs such as executive officer compensation, facility costs, legal, audit and tax and other professional fees and totaled $1,102,093 and $941,770 for the three months ended June 28, 2003 and June 29, 2002, respectively, and $3,568,929 and $3,111,913 for the nine months ended June 28, 2003 and June 29, 2002, respectively. In addition, for the three and nine months ended June 29, 2002, these costs include $1,500,000 for restructuring costs.

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        The following is a summary of the Company's operations by operating segment:

        Common assets not directly attributable to a particular segment are included in the Applied Technology segment. These assets include cash and cash equivalents, prepaid and other corporate assets

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and amounted to $2,943,324 and $3,009,770 at June 28, 2003 and September 30, 2002, respectively. The following is a summary of the Company's operations by operating segment:

        The Company operates and markets its services and products on a worldwide basis with its principal markets as follows: