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UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended June 30, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-31344 PLUMTREE SOFTWARE, INC. (Exact name of registrant as specified in its charter) Delaware
    
    52-2303761(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    identification no.)
 500 Sansome Street, San Francisco, CA 94111
(Address of principal executive offices and zip code) Registrants telephone number, including area code: (415) 263-8900 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 þ o No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes þ o No The number of shares outstanding of the issuers common stock as of June 30,
2004 was 32,209,364 shares.




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PLUMTREE SOFTWARE, INC. FORM 10-QJune 30, 2004 INDEX PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statementsa. Condensed Consolidated Balance Sheets  June 30, 2004 and December 31, 2003
    
    
    3b. Condensed Consolidated Statements of Operations  Three and six months
ended June 30, 2004 and June 30, 2003
    
    
    4c. Condensed Consolidated Statements of Cash Flows Six months ended June 30,
2004 and June 30, 2003
    
    
    5d. Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 2. Changes in Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    38Item 6. Exhibits and Reports on Form 8-K
    
    
    39Signatures
    
    
    40CertificationsEXHIBIT 10.18EXHIBIT 10.19EXHIBIT 10.20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS PLUMTREE SOFTWARE, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except
per share data)(Unaudited)
 As of
    
    As ofJune 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,768
    
    
    $
    20,434Short-term investments
    
    
    39,012
    
    
    
    47,255Accounts receivable (net of allowance for doubtful
accounts of $690 and $522, respectively)
    
    
    19,587
    
    
    
    17,171Prepaid expenses and other current assets
    
    
    2,405
    
    
    
    2,079Total current assets
    
    
    84,772
    
    
    
    86,939Property and equipment, net
    
    
    1,981
    
    
    
    1,798Other assets
    
    
    1,233
    
    
    
    2,025Total assets
    
    $
    87,986
    
    
    $
    90,762LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,845
    
    
    $
    1,312Accrued and other current liabilities
    
    
    12,585
    
    
    
    12,084Deferred revenue
    
    
    20,984
    
    
    
    19,027Total current liabilities
    
    
    35,414
    
    
    
    32,423Long-term liabilities
    
    
    416
    
    
    
    448Total liabilities
    
    
    35,830
    
    
    
    32,871Commitments and contingenciesStockholders equity:Common stock, $0.001 par value:Authorized  100,000 sharesOutstanding  32,209 and 31,265 shares, respectively
    
    
    32
    
    
    
    31Additional paid-in capital
    
    
    100,814
    
    
    
    99,747Deferred stock-based compensation
    
    
    (387
    )
    
    
    (868
    )Accumulated comprehensive loss
    
    
    (313
    )
    
    
    (92
    )Accumulated deficit
    
    
    (47,990
    )
    
    
    (40,927
    )Total stockholders equity
    
    
    52,156
    
    
    
    57,891Total liabilities and stockholders equity
    
    $
    87,986
    
    
    $
    90,762
 See accompanying notes to the condensed consolidated financial statements 3




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PLUMTREE SOFTWARE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (Unaudited)
 For the Three Months
    
    For the Six MonthsEnded June 30,
    
    Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Licenses
    
    $
    7,911
    
    
    $
    7,691
    
    
    $
    14,782
    
    
    $
    16,142Services and maintenance
    
    
    11,557
    
    
    
    9,340
    
    
    
    22,408
    
    
    
    18,058Total revenue
    
    
    19,468
    
    
    
    17,031
    
    
    
    37,190
    
    
    
    34,200Cost of revenue:Licenses
    
    
    422
    
    
    
    251
    
    
    
    850
    
    
    
    628Services and maintenance
    
    
    4,638
    
    
    
    2,804
    
    
    
    8,756
    
    
    
    4,990Amortization of stock-based compensation and acquired
technology
    
    
    425
    
    
    
    449
    
    
    
    872
    
    
    
    945Total cost of revenue
    
    
    5,485
    
    
    
    3,504
    
    
    
    10,478
    
    
    
    6,563Gross margin
    
    
    13,983
    
    
    
    13,527
    
    
    
    26,712
    
    
    
    27,637Operating expenses:Research and development
    
    
    5,886
    
    
    
    5,342
    
    
    
    11,395
    
    
    
    10,091Sales and marketing
    
    
    8,623
    
    
    
    7,405
    
    
    
    16,635
    
    
    
    14,333General and administrative
    
    
    2,752
    
    
    
    1,547
    
    
    
    5,139
    
    
    
    3,170Restructuring charges
    
    
    307
    
    
    
    
    
    
    
    307
    
    
    
    Amortization of stock-based compensation
    
    
    103
    
    
    
    257
    
    
    
    287
    
    
    
    746Total operating expenses
    
    
    17,671
    
    
    
    14,551
    
    
    
    33,763
    
    
    
    28,340Loss from operations
    
    
    (3,688
    )
    
    
    (1,024
    )
    
    
    (7,051
    )
    
    
    (703
    )Other income (expense), net:Interest income, net
    
    
    241
    
    
    
    137
    
    
    
    516
    
    
    
    348Other income (expense), net
    
    
    (101
    )
    
    
    74
    
    
    
    (227
    )
    
    
    189Loss before income taxes
    
    
    (3,548
    )
    
    
    (813
    )
    
    
    (6,762
    )
    
    
    (166
    )Provision for income taxes
    
    
    139
    
    
    
    258
    
    
    
    301
    
    
    
    376Net loss
    
    $
    (3,687
    )
    
    $
    (1,071
    )
    
    $
    (7,063
    )
    
    $
    (542
    )Basic and
diluted net loss per common share:
    
    $
    (0.12
    )
    
    $
    (0.04
    )
    
    $
    (0.22
    )
    
    $
    (0.02
    )Shares used to compute basic and diluted net loss per common share:
    
    
    31,882
    
    
    
    30,419
    
    
    
    31,680
    
    
    
    30,044
 See accompanying notes to the condensed consolidated financial statements 4




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PLUMTREE SOFTWARE, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 For the Six Months Ended June 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (7,063
    )
    
    $
    (542
    )Adjustments to reconcile net loss to net cash provided by operating activities:Provision for doubtful accounts
    
    
    168
    
    
    
    (260
    )Amortization of premium on short-term investments
    
    
    465
    
    
    
    256Depreciation and amortization
    
    
    632
    
    
    
    903Issuance of stock options granted to non-employees
    
    
    30
    
    
    
    Amortization of stock-based compensation
    
    
    371
    
    
    
    903Amortization of acquired technology
    
    
    788
    
    
    
    788Amortization of warrants issued for services
    
    
    18
    
    
    
    24Changes in assets and liabilities:Accounts receivable
    
    
    (2,584
    )
    
    
    3,608Prepaid expenses and other current assets
    
    
    (344
    )
    
    
    (106
    )Other assets
    
    
    4
    
    
    
    176Accounts payable
    
    
    533
    
    
    
    (334
    )Accrued and other current liabilities
    
    
    499
    
    
    
    (3,563
    )Deferred revenue
    
    
    1,957
    
    
    
    (637
    )Long-term liabilities
    
    
    (32
    )
    
    
    9Net cash provided by (used in) operating activities
    
    
    (4,558
    )
    
    
    1,225Cash flows from investing activities:Purchases of property and equipment
    
    
    (815
    )
    
    
    (573
    )Purchases of short-term investments
    
    
    (16,835
    )
    
    
    (15,618
    )Proceeds from sale of short-term investments
    
    
    24,186
    
    
    
    14,800Net cash provided by (used in) investing activities
    
    
    6,536
    
    
    
    (1,391
    )Cash flows from financing activities:Payments on capital lease obligations
    
    
    
    
    
    
    (74
    )Repayments of employee notes receivable
    
    
    
    
    
    
    534Proceeds from issuance of common stock
    
    
    1,146
    
    
    
    928Repurchases of common stock
    
    
    
    
    
    
    (12
    )Net cash provided by financing activities
    
    
    1,146
    
    
    
    1,376Effect of change in exchange rates on cash and cash equivalents
    
    
    210
    
    
    
    (222
    )Net increase in cash and cash equivalents
    
    
    3,334
    
    
    
    988Cash and cash equivalents at beginning of period
    
    
    20,434
    
    
    
    20,655Cash and cash equivalents at end of period
    
    $
    23,768
    
    
    $
    21,643Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    54
    
    
    $
    407Cash paid for interest
    
    $
    15
    
    
    $
    126
 See accompanying notes to the condensed consolidated financial statements 5




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PLUMTREE SOFTWARE, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (information as of June 30, 2004
and for the three months and six months ended June 30, 2004 and 2003 is unaudited)
  Note 1.
    BACKGROUND AND BASIS OF PRESENTATION The Company Plumtree Software, Inc., (the Company) develops and distributes
infrastructure software, maintenance and consulting, training and installation
services that enable businesses to deploy corporate portals, information
applications and Internet-based services. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not contain all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of the Companys management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Companys financial position as of June 30, 2004, the
results of operations for the three months and six months ended June 30, 2004
and 2003, and cash flows for the six months ended June 30, 2004 and 2003. The
following information should be read in conjunction with the audited
consolidated financial statements and accompanying notes thereto included in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003 filed on March 12, 2004. The results of operations for the interim periods presented are not
necessarily indicative of the operating results to be expected for any
subsequent interim period or for the full fiscal year ending December 31, 2004. Revenue Recognition License revenue consists principally of revenue from the licensing of the
Companys software and is generally recognized when a contract is executed, all
delivery obligations have been met, the fee is fixed or determinable, and
collectibility is probable. When licenses are sold together with services, in
accordance with the provisions of the American Institute of Certified Public
Accountants Statement of Position 97-2, Software Revenue Recognition (SOP
97-2), license fees are recognized upon delivery, provided that (1) the above
criteria have been met, (2) payment of the license fees is not dependent upon
the performance of the services, (3) the services do not include significant
modifications to the features and functionality of the software, and (4) the
services are not essential to the functionality of the software. The Company has not established vendor specific objective evidence of fair
value (VSOE) for license sales and recognizes revenue from arrangements with
multiple elements involving software licenses under the residual method as
outlined in SOP 97-2, as amended by SOP 98-9 Sofware Revenue
Recognition with Respect to Certain Arrangements. To the extent that a discount exists on any of the
elements, the Company follows the residual method and attributes that discount
entirely to the delivered elements. The Company recognizes revenue from arrangements involving the resale of
third party software based on the criteria of gross versus net revenue
reporting outlined in EITF 99-19. Service revenue consists of consulting, training and installation services
that the Company provides to its customers. Revenue from such services is
generally recognized as the service is performed. If services are included with
a license agreement, and services are not essential to the
functionality of the software, amounts related to services are unbundled from the license
fee based on VSOE as established by transactions where such services have been
sold separately. Maintenance revenue relates to the technical support and software updates
the Company provides to its customers. Revenue on maintenance contracts is
recognized ratably over the term of the contract. If maintenance is bundled
with a license agreement, amounts related to maintenance are unbundled from the
license fee based on VSOE as established by the renewals the Company charges in
accordance with its contracts and its established pricing. 6




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Stock-Based Compensation In accordance with Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, the Company applies the intrinsic
value method in accounting for employee stock options. Accordingly, the Company
recognizes no compensation expense with respect to stock-based awards to
employees for which the exercise price equals the fair market value of the
stock on the date of grant. The Company has determined pro forma information
regarding net loss and net loss per common share as if the Company had
accounted for employee stock options under the fair value method as required by
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation, and Statement of Financial Accounting Standards
No. 148 (SFAS 148), Accounting for Stock-Based Compensation Transition and
Disclosure. The fair value of these stock-based awards to employees was
estimated using the Black-Scholes option pricing model, using the following
weighted average assumptions: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.35
    %
    
    
    2.29
    %
    
    
    2.97
    %
    
    
    2.52
    %Expected life of the option
    
    4 years
    
    4 years
    
    4 years
    
    4 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    80
    %
    
    
    102
    %
    
    
    80
    %
    
    
    102
    %
 The fair value of rights under the Employee Stock Purchase Plan (ESPP)
for the three months and six months ended June 30, 2004 and 2003 was estimated
using the Black-Scholes option pricing model, using the following weighted
average assumptions: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    2.12
    %
    
    
    2.29
    %
    
    
    1.79
    %
    
    
    2.52
    %Expected life of the option
    
    1.25 years
    
    1.25 years
    
    1.25 years
    
    1.25 yearsDividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    85
    %
    
    
    102
    %
    
    
    85
    %
    
    
    102
    %
 For pro forma purposes, the estimated fair value of the Companys
stock-based awards to employees is amortized over the options vesting period
(generally four years) and the ESPPs look back period of up to two years. The
weighted-average estimated fair value of stock options issued for the three
months ended June 30, 2004 and 2003 was $2.57 and $2.32 per share,
respectively. The weighted-average estimated fair value of share purchase
rights under the ESPP for the three months ended June 30, 2004 and 2003 was
$1.41 and $1.35 per share, respectively. The weighted-average estimated fair
value of stock options issued for the six months ended June 30, 2004 and 2003
was $1.41 and $2.30 per share, respectively. The weighted-average estimated
fair value of share purchase rights under the ESPP for the six months ended
June 30, 2004 and 2003 was $1.41 and $1.35 per share, respectively. The
Companys pro forma net loss and pro forma net loss per common share data under
SFAS No. 123 is as follows (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss as reported
    
    $
    (3,687
    )
    
    $
    (1,071
    )
    
    $
    (7,063
    )
    
    $
    (542
    )Add: Stock-based employee compensation
expense included in net loss
    
    
    134
    
    
    
    312
    
    
    
    371
    
    
    
    903Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards
    
    
    (1,506
    )
    
    
    (2,412
    )
    
    
    (3,341
    )
    
    
    (4,653
    )Pro forma net loss under SFAS 123
    
    $
    (5,059
    )
    
    $
    (3,171
    )
    
    $
    (10,033
    )
    
    $
    (4,292
    )Net loss per common share  basic and diluted:As reported under APB 25
    
    $
    (0.12
    )
    
    $
    (0.04
    )
    
    $
    (0.22
    )
    
    $
    (0.02
    )Pro forma under SFAS 123
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.32
    )
    
    $
    (0.14
    )
 7




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Amortization of stock-based compensation expense is as follows (in
thousands): For the Three
    
    For the SixMonths Ended
    
    Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Amortization of stock-based compensation included in cost of
revenue
    
    $
    31
    
    
    $
    55
    
    
    $
    84
    
    
    $
    157Amortization of stock-based compensation included in
operating expenses:Research and development
    
    
    47
    
    
    
    117
    
    
    
    130
    
    
    
    341Sales and marketing
    
    
    46
    
    
    
    113
    
    
    
    130
    
    
    
    329General and administrative
    
    
    10
    
    
    
    27
    
    
    
    27
    
    
    
    76Total stock-based compensation included in operating expenses
    
    
    103
    
    
    
    257
    
    
    
    287
    
    
    
    746Total stock-based compensation
    
    $
    134
    
    
    $
    312
    
    
    $
    371
    
    
    $
    903
 Cash Equivalents and Short-term Investments Cash equivalents consist of highly liquid investments including corporate
debt securities and money market funds with maturities of 90 days or less from
the date of purchase. The following is a chart of the principal amounts of short-term
investments by expected maturity (in thousands): As ofExpected Maturity Date for the Year Ending December 31,
    
    June 30, 20042004
    
    2005
    
    2006
    
    Total Cost Value
    
    Total Fair ValueTaxable auction rate securities
    
    $
    12,300
    
    
    $
    1,000
    
    
    $
    
    
    
    $
    13,300
    
    
    $
    13,300US Government agencies
    
    
    1,011
    
    
    
    10,900
    
    
    
    8,500
    
    
    
    20,411
    
    
    
    20,219Corporate notes
    
    
    6,504
    
    
    
    8,741
    
    
    
    2,660
    
    
    
    17,905
    
    
    
    17,794Total
    
    $
    19,815
    
    
    $
    20,641
    
    
    $
    11,160
    
    
    $
    51,616
    
    
    $
    51,312
 With respect to the above investments the Company is exposed to market
risks for changes in interest rates. The Company places its investments with
high quality credit issuers that have a rating by either Moodys of A-1 or
higher, Fitchs of F-1 or higher or Standard & Poors of P-1 or higher. The Companys general policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting market and credit risk. The
Company considers all investments to be short-term investments, which are
classified in the balance sheet as current assets, because (1) the investments
can be readily converted at any time into cash or into securities with a
shorter remaining time to maturity and (2) the investments are selected for
yield management purposes only and the Company is not committed to holding the
investments until maturity. The Company determines the appropriate
classification of its investments at the time of purchase and re-evaluates such
designations as of each balance sheet date. All short-term investments and cash
equivalents in the Companys portfolio are classified as available-for-sale
and are stated at fair market value, with the unrealized gains and losses
reported as a component of accumulated other comprehensive income (loss). The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of unrealized discounts to maturity. Such amortization and accretion
is included in interest income, net. The cost of securities sold is based on
the specific identification method. Intangible Assets In November 2001, the Company acquired certain technology for $85,000 and
60,000 shares of common stock. In November 2001, the Company also acquired a
company (the Acquired Company) for 297,594 shares of common stock. The
acquisition of the Acquired Company was accounted for under the purchase method
with the results of the Acquired Company included in the consolidated
statements of operations for the year ended December 31, 2001, subsequent to
the November 2001 acquisition date. In connection with these acquisitions, the
Company incurred approximately $70,000 of transaction related costs. The common
stock issued in connection with these transactions was recorded at its
estimated fair value for accounting purposes of $12.60 per share on the date of
issuance. The purchase 8




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price was allocated to acquired technology and is being amortized over its
estimated useful life of three years. Amortization is being recorded as cost of
revenue and was $394,000 for each of the three months ended June 30, 2004 and
2003 and $788,000 for each of the six months ended June 30, 2004
and 2003. The Company expects the current net book value of
intangible assets of $696,000 as of June 30, 2004 to be fully
amortized as of December 31, 2004. Accrued Liabilities Accrued liabilities consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Commissions and bonus
    
    $
    1,851
    
    
    $
    1,808Sales taxes
    
    
    1,453
    
    
    
    1,328Vacation
    
    
    1,656
    
    
    
    1,559Royalties
    
    
    291
    
    
    
    134Third party software
    
    
    331
    
    
    
    787ESPP
    
    
    734
    
    
    
    623Other
    
    
    6,269
    
    
    
    5,845$
    12,585
    
    
    $
    12,084
 Litigation and Contingencies On May 17, 2002, Datamize, LLC filed a lawsuit against the Company in the
United States District Court for the District of Montana (Civil Action No.
02-86-M-LBE). In its complaint, Datamize alleged that it is the owner of U.S.
Patent Number 6,014,137 (the 137 patent), and that the Company infringed one
or more claims of the 137 patent. Datamize was seeking, among other things,
injunctive relief and unspecified damages. The Company moved the Court
(Motion) to dismiss the action for lack of personal jurisdiction or, in the
alternative, have the action transferred to the Northern District of
California. In early July 2003, the Court granted the Motion and entered
judgment in favor of the Company on July 7, 2003 in accordance with that order. In December 2002, the Company filed a complaint for declaratory relief
against Datamize in United States District Court for the Northern District of
California (Civil Action No. 02-5693 VRW). The Company sought a declaratory
judgment that it does not infringe any valid claim of the 137 patent, which
Datamize claims to own. Datamize filed its answer and a counterclaim alleging
that the Company infringes the 137 patent. In response to a
procedural motion, the Court realigned the parties so that the Company was the
defendant, and Datamize was the plaintiff. The parties engaged in discovery,
and began the process of construction of the patent claims. On March 31, 2004,
the Company filed a motion for summary judgment, seeking to have the 137
patent held invalid on the grounds of indefiniteness. On July 9, 2004, the
Court granted the Companys motion, holding the 137 patent invalid, and
entered a judgment in favor of the Company. The Company has filed a motion to
recover its attorneys fees. Datamize may appeal the Courts entry of summary
judgment of invalidity. In 2002 and 2003, Datamize was issued two new patents based on
continuation applications to the 137 patent, U.S. Patent Nos. 6,460,040
(the040 patent) and 6,658,418 (the 418 patent). Datamize accused the
Company of infringing one or more claims of one or more of these patents. On
July 12, 2004, the Company filed a new complaint for declaratory relief against
Datamize in the United States District Court for the Northern District of
California (Civil Action No. 5:2004-CV-0277), seeking a declaration that the
Company does not infringe any valid claims of the 040 patent or the 418
patent. The Company anticipates that Datamize will counterclaim for
infringement on these patents. The Company intends to vigorously defend
against Datamizes allegations of infringement and vigorously pursue its claim
for declaratory relief. On November 13, 2001, the Company commenced an action in the District
Court in The Hague against an individual, Werner Linssen, to cancel his Benelux
trademark registration for Plumtree. The Company asked the Hague District
Court to (i) annul Mr. Linssens Benelux trademark registration for Plumtree
and (ii) bar Mr. Linssen, pending the proceedings, from contacting the
Companys customers in a threatening or unfair manner. On September 24, 2003,
the Hague District Court granted the Companys request for a preliminary
injunction barring Mr. Linssen, 9




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pending the proceedings, from contacting the Companys customers in a
threatening or unfair manner. On October 15, 2003, Mr. Linssen filed answering
papers denying the Companys allegations and asserting a counterclaim for
infringement of his registered trademark. On January 21, 2004, the Company
filed reply papers in further support of its claim and in response to Mr.
Linssens counterclaim. On November 25, 2001, the Company also commenced a proceeding before the
Swiss Federal Institute of Intellectual Property in opposition to Mr. Linssens
trademark registration for Plumtree. The Swiss Patent Office has dismissed
the proceeding; however, the Company has appealed the dismissal. On December
18, 2003, Mr. Linssen commenced a proceeding before the Swiss Federal Institute
of Intellectual Property in opposition to the Companys trademark registration
for Plumtree Software; this proceeding has been suspended pending disposition
of the Companys prior appeal. On May 2, 2003, the Company initiated a civil lawsuit against Mr. Linssen
in the Commercial Court of the Canton of Zurich, Switzerland, seeking (i) an
injunction barring Mr. Linssens use of the Plumtree trademark, and (ii) the
transfer of Mr. Linssens Swiss trademark registration for Plumtree, or in
the alternative, the cancellation of Mr. Linssens Swiss registration. On
October 6, 2003, Mr. Linssen filed answering papers denying the Companys
allegations and asserting a counterclaim for infringement of his registered
trademark. The Company is reviewing the counterclaim and will file a timely
reply. The Company and Mr. Linssen have each also commenced proceedings before
the E.U.s Office of Harmonisation of the Internal Market in opposition to each
others Community Trade Mark applications. Those proceedings have been
suspended pending disposition of the action in The Hague. On June 17, 2004, the Commercial Court of the Canton of Zurich,
Switzerland approved a global trademark settlement between the parties,
directing, among other things, that Mr. Linssens trademark and associated
applications and registrations be transferred to Plumtree. Pursuant to the
settlement agreement, the parties are taking steps to record transfer of
ownership of Mr. Linssens trademark to Plumtree and to terminate the various
proceedings described above. In connection with the Companys operating lease agreement for their
corporate headquarters in San Francisco, California, the Company is contractually
obligated to complete certain leasehold improvements during the lease term,
which expires in 2006. The Company is currently unable to determine the
Companys potential liability related to this matter. Management does not
believe that the outcome of this matter will have a material impact on the
Companys financial position, liquidity or results of operations. The results of the above issues and proceedings cannot be predicted with
certainty and potential exposure is not estimable; however, in the opinion of management, the potential liabilities
associated with these complaints are not expected to have a material adverse
effect on the Companys financial position, liquidity or results of operations. Cost of License Revenue The Company has entered into various license arrangements with other
software providers to incorporate the software providers software in the
Companys product. In return for these licenses, the Company is required to pay
certain fees upon signing of the arrangements plus a certain percentage of the
Companys net revenue, as defined in these agreements, generated from the sales
of its product. Royalty expense is recognized in the period in which liability
is incurred. Up-front fees are amortized over the period benefited or as the
incorporated software is sublicensed, as applicable. For the three months and
six months ended June 30, 2004 the Company incurred royalty expense of
approximately $160,000 and $351,000, respectively, related to these
arrangements. For the three months and six months ended June 30, 2003 the
Company incurred royalty expense of approximately $251,000 and $629,000,
respectively, related to these arrangements. The Company classifies all
royalty expenses as cost of revenues. For the three months and six months ended June 30, 2004, the Company also
included in cost of license revenue $232,000 and $445,000 related to two
separate agreements with third party software providers in which the Company
resold their software along with the Companys software to the customer. 10




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##### Table of Contents



Net Loss Per Share Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, Earnings Per Share, for all periods presented. In
accordance with SFAS No. 128, basic net loss per share is calculated by
dividing net loss by the weighted average common shares outstanding during the
period, less shares subject to repurchase. Diluted net loss per share is
calculated by dividing net loss by the weighted average common shares
outstanding adjusted for all potential dilutive common shares, which includes
shares issuable upon the exercise of outstanding common stock options,
warrants, and common stock subject to repurchase, using the treasury stock
method. The Company excludes all potentially dilutive securities from its
diluted net loss per share computation when the affect would be anti-dilutive. The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (3,687
    )
    
    $
    (1,071
    )
    
    $
    (7,063
    )
    
    $
    (542
    )Basic and diluted:Weighted average shares of common stock
    
    
    31,886
    
    
    
    30,485
    
    
    
    31,688
    
    
    
    30,132Less: Weighted average shares subject to repurchase
    
    
    (4
    )
    
    
    (66
    )
    
    
    (8
    )
    
    
    (88
    )Weighted
average shares used in computing basic and diluted net
loss per common share
    
    
    31,882
    
    
    
    30,419
    
    
    
    31,680
    
    
    
    30,044Basic and diluted net loss per common share
    
    $
    (0.12
    )
    
    $
    (0.04
    )
    
    $
    (0.22
    )
    
    $
    (0.02
    )
 The weighted average exercise price of options to purchase common stock
excluded from the diluted net loss calculation above was $4.27 for the three
months ended June 30, 2004. The following potential shares of common stock have been excluded from the
computation of diluted net loss per share because the effect of including these
shares would have been anti-dilutive (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Options to purchase common stock
    
    
    11,435
    
    
    
    9,171
    
    
    
    11,435
    
    
    
    9,171Common stock subject to repurchase
    
    
    4
    
    
    
    66
    
    
    
    8
    
    
    
    81Employee stock purchase plan
    
    
    264
    
    
    
    214
    
    
    
    264
    
    
    
    214Warrants
    
    
    41
    
    
    
    41
    
    
    
    41
    
    
    
    41Weighted average potential shares of common stock excluded
    
    
    11,744
    
    
    
    9,492
    
    
    
    11,748
    
    
    
    9,507
 Recent Accounting Pronouncements In March 2004, the FASB issued EITF Issue No. 03-1 (EITF 03-1), The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity instruments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting guidance provided in EITF 03-1 is effective for fiscal years
beginning after June 15, 2004, while the disclosure requirements
for debt and equity securities accounted for under FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity
Securities, are effective
for annual periods ending after December 15, 2003. The Company does not expect the
adoption of EITF 03-1 will have a material impact on its financial position,
results of operations, or cash flows. However, upon adoption, the
Company may be required to present certain of its available for
sale investments worth stated maturities greater than twelve
months within long-term assets.  Note 2.
    Segment Reporting SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, established standards for reporting information about operating
segments. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. 11




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The Company has organized its operations based on a single operating
segment: the development and delivery of corporate portal, collaboration,
content management and search software as well as related maintenance and
consulting, training and installation services for enterprises. The disaggregated information reviewed on a product basis by the CEO (our
Chief Operating Decision Maker) is as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:License
    
    $
    7,911
    
    
    $
    7,691
    
    
    $
    14,782
    
    
    $
    16,142Maintenance
    
    
    6,093
    
    
    
    5,603
    
    
    
    11,972
    
    
    
    11,059Consulting, training and installation services
    
    
    5,464
    
    
    
    3,737
    
    
    
    10,436
    
    
    
    6,999Total revenues
    
    $
    19,468
    
    
    $
    17,031
    
    
    $
    37,190
    
    
    $
    34,200
 The Company markets its products primarily from its operations in the
United States. International sales are made primarily to customers in Canada,
Europe, Japan and Asia Pacific. Substantially all of the Companys assets are
located within the Americas. Information regarding the Companys revenues in
different geographic regions is as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:United States of America
    
    $
    13,104
    
    
    $
    14,068
    
    
    $
    27,024
    
    
    $
    27,430Other
    
    
    6,364
    
    
    
    2,963
    
    
    
    10,166
    
    
    
    6,770Total revenues
    
    $
    19,468
    
    
    $
    17,031
    
    
    $
    37,190
    
    
    $
    34,200
 For the three months and six months ended June 30, 2004 and 2003, no
customer represented more than 10% of the Companys total revenues. As of June
30, 2004 and 2003, no customer accounted for greater than 10% of accounts
receivable.  Note 3.
    Comprehensive Loss Comprehensive loss includes net loss, unrealized gains on
available-for-sale securities and foreign currency translation adjustments. Comprehensive loss is comprised of the following (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (3,687
    )
    
    $
    (1,071
    )
    
    $
    (7,063
    )
    
    $
    (542
    )Other comprehensive loss:Change in accumulated foreign currency translation adjustments
    
    
    40
    
    
    
    (100
    )
    
    
    208
    
    
    
    (221
    )Change in accumulated unrealized gain (loss) on
available-for-sale securities
    
    
    (459
    )
    
    
    2
    
    
    
    (429
    )
    
    
    82Total comprehensive loss
    
    $
    (4,106
    )
    
    $
    (1,169
    )
    
    $
    (7,284
    )
    
    $
    (681
    )
 
 12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
condensed consolidated financial statements and notes included in this report. This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 that involve risks and
uncertainties identified in our Annual Report on Form 10K filed with the
Securities and Exchange Commission on March 12, 2004, as well as other reports
that we will file from time to time with the Securities and Exchange
Commission. Any statements contained in this report that are not statements of
historical fact may be deemed to be forward-looking statements. In many cases,
you can identify forward-looking statements by terms such as may, will,
should, expect, plan, anticipate, believe, estimate, predict,
potential, intend or continue, the negative of these terms or other
comparable terminology. These statements are only predictions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of a variety of factors, including, but not limited to,
those presented in Risk Factors that May Affect Our Future Results and the
Market Price of Our Stock and elsewhere in this report. We undertake no
obligation to update publicly any forward-looking statements for any reason,
except as required by law, even if new information becomes available or other
events occur in the future. Overview and Executive Summary Plumtree Software, Inc. (we, Plumtree or the Company), was
incorporated in California on July 18, 1996 and reincorporated in Delaware on
May 31, 2002. Our initial public offering of 5,000,000 shares of common stock
was on June 4, 2002. Plumtree develops, markets and sells corporate portal, collaboration,
content management and search software as well as related services for
enterprises. These technologies work together in an online work environment
that we call the Enterprise Web. The Enterprise Web offers customers a
foundation designed to build Web applications more quickly, at lower cost. Our
Enterprise Web solution allows an enterprises employees, customers and
partners to interact with different types of information and applications in
one Web site and empowers users to create new information and services. Our
software also supports a wide range of online business processes, so users can
complete tasks more efficiently. We derive our revenue and generate cash from customers from primarily two
sources: (i) product license revenue, and (ii) software maintenance,
professional services and training revenue. For the three months ended June 30,
2004 and 2003, our total revenue was $19.5 million and $17.0 million,
respectively, and our net loss was $(3.7) million and $(1.1) million,
respectively. For the six months ended June 30, 2004 and 2003, our total
revenue was $37.2 million and $34.2 million, respectively, and our net loss was
$(7.1) million and $(542,000), respectively. The limited technology budgets of
our potential corporate and government customers as well as increased
competition have impacted our revenue and net income. During the past two
years, we have experienced weakness in corporate technology spending, with many
of our customers delaying new or expanded technology solution implementations. In addition to total revenue and net income, in evaluating our business,
management considers, among many other factors, the following:  
    
    Revenue by category (license, maintenance and professional services
and training):  
    
    License. Our license revenue for the three months ended
June 30, 2004 was $7.9 million, a 3% increase over the three
months ended June 30, 2003, resulting primarily from increased
international sales, primarily in Japan and the United Kingdom.
Our license revenue for the six months ended June 30, 2004 was
$14.8 million, an 8% decrease over the six months ended June 30,
2003, resulting primarily from customers delaying purchasing
decisions.
    
    Professional services and maintenance. We offer
professional services to deploy, configure and customize the
Plumtree Corporate Portal and other Plumtree products at customer
sites, and to train alliance members, including technology vendors
and systems integrators; provide maintenance and customer care
through technical support and assigned account managers; and a
series of training classes designed to provide our customers and
alliance members with the knowledge and tools necessary to deploy,
administer and expand the portal within the enterprise. Revenue
for maintenance and technical support for the three months and six
months ended June 30, 2004 were $6.1 million and $12.0 million,
respectively, representing an increase of $490,000 or 9% and
$913,000 or 8% over the comparable periods in 2003, which results
from an increase in maintenance revenue from new customers as well
as from renewals of maintenance contracts by our installed base of
customers. 13




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Revenue attributable to professional services increased 49% during the
three months and six months ended June 30, 2004 to $5.5 million and
$10.4 million, respectively, as compared to $3.7 million and $7.0
million for the comparable periods in 2003. The increase in revenue
is primarily related to increased headcount within the professional
services department, increasing to 69 consultants at June 30, 2004
from 62 consultants at June 30, 2003 as the increased headcount was
utilized on new and existing professional service contracts. We
expect our maintenance, professional services and training revenue
in general to increase during 2004, primarily due to increased
maintenance revenue from both new customers as well as renewals from
our installed customer base and increased demand for professional
services.  
    
    Deferred revenue balances:  
    
    Our deferred revenue balance at June 30, 2004 was $21.0
million, of which approximately $1.3 million relates to deferred
license revenue, approximately $18.7 million relates to deferred
maintenance revenue and $1.0 million relates to deferred
professional services and training revenue. During the six months
ended June 30, 2004, our total deferred revenue balance increased
$2.0 million over the balance at December 31, 2003. The increase
in total deferred revenue from December 31, 2003 to June 30, 2004
is comprised of increases in deferred maintenance revenue and
deferred license revenue offset by a decrease in deferred
professional services and training revenue.
    
    Deferred license revenue increased by $102,000 at June
30, 2004 to $1.3 million as compared to $1.2 million at December
31, 2003.
    
    Deferred maintenance revenue increased $2.1 million
during the six months ended June 30, 2004 as compared to the
balance at December 31, 2003 primarily related to an increase in
deferred maintenance revenue from new customers as well as
renewals of maintenance contracts by our installed base of
customers.
    
    Deferred professional services and training revenue
decreased $206,000 during the six months ended June 30, 2004 as
compared to the balance at December 31, 2003 as fewer of our
customers at June 30, 2004 prepaid for services and training as
compared to December 31, 2003. During 2004 we expect our deferred
revenue balances to remain consistent with the breakdown of
deferred revenue continuing to shift from deferred license revenue
into deferred maintenance revenue as more of our customers renew
their maintenance contracts.  
    
    Number of license revenue transactions and breakdown of new customers
versus repeat customers. During the three months ended June 30, 2004,
we completed 78 license transactions, which includes 36 new customers or
46% of total license transactions and 42 repeat orders or 54% of total
license transactions bringing our total number of customers licensed
since inception to over 625. During the three months ended June 30,
2003, we completed 70 license transactions, which include 37 new
customers or 53% of total license transactions and 33 repeat orders or
47% of total license transactions. During the six months ended June 30,
2004, we completed 143 license transactions, which includes 63 new
customers or 44% of total license transactions and 80 repeat orders or
56% of total license transactions as compared to the six months ended
June 30, 2003, in which we completed 142 license transactions, which
include 67 new customers or 47% of total license transactions and 75
repeat orders or 53% of total license transactions.
    
    Revenue by geographic region. We operate our business in 2
geographic regions: United States and International, which consists of
Europe, Middle East and Africa (EMEA), Japan and Asia-Pacific
(APAC), and Canada. In the three months and six months ended June 30,
2004, 67% and 73% of our revenue was generated within the United States,
respectively, with International revenue collectively accounting for 33%
and 27% of our total revenue, respectively. Our United States and
International operations have experienced many of the same economic
trends set forth above.
    
    Cash and cash equivalents and short-term investments:  
    
    At June 30, 2004, our cash, cash equivalents and
short-term investments were $62.8 million, a decrease of $5.8
million from March 31, 2004. Historically, we have managed to increase our overall
cash position or remain in a relatively cash neutral position on a
quarterly basis. In recent quarters, we have made significant
investments to improve sales force execution, expand our product
line, make key management additions and improve our product
support efforts. We expect that our primary
utilization of cash in 2004 will 14




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continue to be salaries, commissions, bonuses and other payroll
related costs. Critical Accounting Policies Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America or
GAAP. These accounting principles require us to make certain estimates,
judgments and assumptions. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon information available
to us at the time that these estimates, judgments and assumptions are made.
These estimates, judgments and assumptions can affect the reported amounts of
assets and liabilities as of the date of the financial statements, as well as
the reported amounts of revenues and expenses during the periods presented. To
the extent there are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be affected. The
significant accounting policies that we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:  
    
    software revenue recognition;
    
    allowance for doubtful accounts;
    
    valuation allowance against deferred tax assets;
    
    assessing the realizability of capitalized acquired technology; and
    
    determination of the fair value of options granted to employees. Software Revenue Recognition Our software arrangements typically include: (i) an end user license that
provides for an initial fee in exchange for a customers use of our products in
perpetuity based on a specified number of users; (ii) a maintenance arrangement
that provides for technical support and product updates over a period of 12
months; and (iii) a professional service arrangement on a time and materials
basis. We recognize software revenue using the residual method pursuant to
the requirements of Statement of Position No. 97-2 Software Revenue
Recognition, as amended by Statement of Position No. 98-9, Software Revenue
Recognition with Respect to Certain Arrangements. Under the residual method,
revenue is recognized when Plumtree-specific objective evidence of fair value
exists for all of the undelivered elements in the arrangement (i.e.,
professional services and maintenance), but does not exist for one or more of
the delivered elements in the arrangement (i.e., the software product). We
allocate revenue to each undelivered element based on its respective fair
value, with the fair value determined by the price charged when that element is
sold separately. We determine the fair value of the maintenance portion of the
arrangement based on consistent pricing of maintenance and maintenance renewals
as a percentage of net license fees. If evidence of fair value cannot be
established for the undelivered elements of a license agreement, the entire
amount of revenue from the arrangement is deferred and recognized over the
period that these elements are delivered. For substantially all of our
software arrangements, we defer revenue for the fair value of the maintenance
and professional services to be provided to the customer and recognize revenue
for the software license when persuasive evidence of an arrangement exists and
delivery has occurred, provided the fee is fixed or determinable, and
collection is deemed probable. We evaluate each of these criteria as follows:  
    
    Evidence of an arrangement: We consider a non-cancelable agreement
signed by us and the customer to be evidence of an arrangement.
    
    Delivery: Delivery is considered to occur when media containing the
licensed programs is provided to a common carrier or, in the case of
electronic delivery, the customer is given access to the licensed
programs.
    
    Acceptance: Our typical end user license agreement does not include
customer acceptance provisions. If the arrangement specifies acceptance
provisions, we defer the revenue until the earlier of written acceptance
by the customer or the customers acceptance rights
expire. 15




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##### Table of Contents




    
    Fixed or determinable fee: We consider the fee to be fixed or
determinable if the fee is not subject to refund or adjustment and is on
standard payment terms. If the arrangement fee is not fixed or
determinable, we recognize the revenue as amounts become due and
payable.
    
    Collection is deemed probable: We conduct credit reviews for all
significant transactions at the time of the arrangement to determine the
credit worthiness of the customer. Collection is deemed probable if we
expect that the customer will be able to pay amounts under the
arrangement as payments become due. If we determine that collection is
not probable, we defer the revenue and recognize the revenue upon cash
collection. We recognize revenue from arrangements involving the resale of third party
software based on the criteria of gross versus net revenue reporting
outlined in EITF 99-19. Allowance for Doubtful Accounts We have provided an allowance for doubtful accounts of $690,000 as of June
30, 2004 for estimated losses resulting from the inability of our customers to
make their required payments. The total allowance for doubtful accounts is comprised of a specific
reserve and a general reserve. We regularly review the adequacy of our
allowance for doubtful accounts after considering the size of the accounts
receivable aging, the age of each invoice, each customers expected ability to
pay and our collection history with each customer. Unless specific indications
arise earlier, we review any invoice greater than 120 days past due to
determine if an allowance is appropriate based on the risk category. In
addition, we maintain a general reserve for all invoices billed, and not
included in the specific reserve, by applying a percentage based on each 30-day
age category. For unbilled invoices we generally apply a percentage to the
entire balance. In determining these percentages, we analyze our historical
collection experience and current economic trends. In calculating the specific reserve, we identify specific high-risk
accounts where collection is deemed unlikely. In calculating the general
reserve, we reduce the gross accounts receivable balance by any specific
reserves. The remaining balance is segregated into 30-day aged categories and a
reserve percentage is applied to each category. If the historical data we use
to calculate the allowance provided for doubtful accounts does not reflect the
future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected. However, historically the reserve has proven to be
adequate. Valuation Allowance Against Deferred Tax Assets We provided a valuation allowance of $7.3 million against the entire net
deferred tax asset as of December 31, 2003. The valuation allowance was
recorded given the accumulated losses we have incurred and uncertainties
regarding our future operating profitability and taxable income. Assessing the Realizability of Capitalized Acquired Technology We capitalized the costs of certain purchased technology. We
periodically review these costs to ensure they are being recorded at the lower
of unamortized cost or net realizable value. Net realizable value is determined
using assumed future cash flows related to sales of the underlying technology.
Had different assumed cash flows been used, materially different amounts of the
carrying amount of these costs could have been reported. At June 30, 2004, the
unamortized costs related to the purchased software were approximately $696,000
and are included within other assets in the accompanying consolidated balance
sheets. Determination of Fair Value of Options Granted to Employees In connection with the granting of certain stock options, we recorded
deferred stock-based compensation charges in the periods before our initial
public offering representing the difference between the deemed fair value of
our common stock for accounting purposes and the option exercise price. We
determined the deemed fair value based upon several factors including our
operating performance, issuances of our convertible preferred stock and
valuations of comparable publicly traded software companies. For the three
months ended June 30, 2004 and 2003 we recognized $134,000 and $312,000 of
stock-based compensation expense, respectively. For the six months ended June
30, 2004 and 2003 we recognized $371,000 and $903,000 of stock-based
compensation expense, respectively. We apply the intrinsic value method in
accounting for employee stock options apply in accordance with Accounting
Principles Board Opinion 16




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No. 25 (APB 25), Accounting for Stock Issued to Employees. Accordingly,
we recognize no compensation expense with respect to stock-based awards to
employees with exercise prices equal to the fair market value of the award on
the date of grant. Had different assumptions or criteria been used to
determine the deemed fair value of the stock, materially different amounts of
stock-based compensation could have been reported. Had we applied fair value
accounting for our stock options as outlined in Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation, our
operating results would have been affected as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss as reported
    
    $
    (3,687
    )
    
    $
    (1,071
    )
    
    $
    (7,063
    )
    
    $
    (542
    )Add: Stock-based employee compensation
expense included in net loss
    
    
    134
    
    
    
    312
    
    
    
    371
    
    
    
    903Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards
    
    
    (1,506
    )
    
    
    (2,412
    )
    
    
    (3,341
    )
    
    
    (4,653
    )Pro forma net loss under SFAS 123
    
    $
    (5,059
    )
    
    $
    (3,171
    )
    
    $
    (10,033
    )
    
    $
    (4,292
    )Net loss per common share  basic and diluted:As reported under APB 25
    
    $
    (0.12
    )
    
    $
    (0.04
    )
    
    $
    (0.22
    )
    
    $
    (0.02
    )Pro forma under SFAS 123
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.32
    )
    
    $
    (0.14
    )
 Results of Operations Three Months Ended June 30, 2004 and 2003 Revenue Revenue increased to $19.5 million in the three months ended June 30, 2004
from $17.0 million in the three months ended June 30, 2003. Between these
periods, license revenue increased 3% and services and maintenance revenue
increased 24%. Licenses. License revenue increased to $7.9 million in the three months
ended June 30, 2004 from $7.7 million in the three months ended June 30, 2003.
The increase in license revenue for the three months ended June 30, 2004 over
results for the comparable period in 2003 was due primarily to increased
international sales, especially in Japan and the United Kingdom. Services and Maintenance. Services and maintenance revenue increased to
$11.6 million in the three months ended June 30, 2004 from $9.3 million in the
three months ended June 30, 2003, primarily due to increased headcount and
increased utilization within our professional services organization and an
increase in maintenance we provided to our new customers and maintenance
renewals from our larger installed customer base. Services revenue increased to
$5.5 million for the three months ended June 30, 2004 as compared to $3.7
million for the three months ended June 30, 2003 primarily due to increased
headcount and an increased use of third party contractors in our professional
services organization as a result of an increasing number of services contracts
ongoing during the period. Maintenance revenue increased to $6.1 million in
the three months ended June 30, 2004 from $5.6 million in the three months
ended June 30, 2003. Cost of Revenue Licenses. Our cost of licenses consists primarily of royalty expenses and
fees paid to third-party technology vendors. Cost of licenses increased to
$422,000 in the three months ended June 30, 2004 from $251,000 in the three
months ended June 30, 2003 primarily related to two separate agreements with
third party software providers in which we resold their software along with our
software to the customer totaling $232,000 offset by decreased royalty expense. Services and Maintenance. Our cost of services and maintenance includes
salaries and related expenses for our professional services and technical
support organization and third-party consultants. Cost of services and
maintenance increased to $4.6 million in the three months ended June 30, 2004
from $2.8 million in the three months ended June 30, 2003. This was
attributable primarily to the increase in headcount in our professional
services and technical support departments and increased use of third party
consultants due to an increased number of service 17




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contracts. As of June 30, 2004, we had 69 professional services and technical
support personnel as compared to 62 at June 30, 2003. We currently plan to
increase hiring in these organizations and expect costs of services and
maintenance to rise in future periods. Amortization of Stock-Based Compensation and Acquired Technology. In
connection with options granted to employees in 2001 and 2000, we recorded
deferred stock-based compensation related to our cost of services and
maintenance representing the difference between the exercise price of options
granted and the deemed fair market value of our common stock at the date of
grant. Compensation expense is decreased in the period of forfeiture for any
accrued but unvested compensation arising from the surrender of unvested
options upon the termination of an option holder. Amortization of stock-based
compensation related to cost of services for the three months ended June 30,
2004 and 2003 was $31,000 and $55,000, respectively. In connection with the
acquisitions of certain technology in 2001, amortization of acquired technology
related to cost of license revenue for the three months ended June 30, 2004 and
2003 was $394,000 for both periods. Operating Expenses Research and Development. Research and development expenses consist of
costs associated with new software development and enhancement of our existing
software products, including our in-house engineering staff and third-party
contractors. The costs associated with our in-house development staff consist
primarily of salaries and benefit costs. From time to time our in-house
development staff is supported by outside developers, primarily located
internationally, on an independent contractor basis. Research and development
expenses increased to $5.9 million in the three months ended June 30, 2004 from
$5.3 million in the three months ended June 30, 2003, due primarily to an
increase in the number of our research and development staff resulting from our
efforts to enhance our core portal product offering and to expand our product
line. As of June 30, 2004, we had 141 employees in research and development as
compared to 114 employees as of June 30, 2003. We currently plan to increase
hiring in this organization and expect costs to rise in 2004 as compared to the
comparable period in 2003. Sales and Marketing. Sales and marketing expenses consist of payroll
expenses, including salaries and commissions and related costs for sales and
marketing personnel and promotion expenditures, including public relations,
advertising and trade shows. Sales and marketing expenses increased to $8.6
million in the three months ended June 30, 2004 from $7.4 million in the three
months ended June 30, 2003. Sales expenses increased to $7.1 million in the
three months ended June 30, 2004 from $6.4 million in the three months ended
June 30, 2003, primarily as a result of increased headcount within our sales
department and increased sales commissions. Sales commissions increased by
$407,000 for the three months ended June 30, 2004 when compared to the
corresponding period in 2003. Marketing expenses increased to $1.5 million in
the three months ended June 30, 2004 from $1.0 million in the three months
ended June 30, 2003 due to increased marketing efforts. As of June 30, 2004,
we had 129 employees in sales and marketing as compared to 115 employees as of
June 30, 2003. We currently plan to increase hiring in this organization and
expect costs to rise in future periods. General and Administrative. General and administrative costs consist
primarily of salaries and related expenses for our administrative, executive
and finance personnel, information technology and services costs and costs
associated with being a publicly traded company. General and administrative
expenses increased to $2.7 million in the three months ended June 30, 2004 as
compared to $1.5 million for the three months ended June 30, 2003 primarily as
a result of increased consultant and audit fees associated with the
Sarbanes-Oxley Act compliance efforts as well as increased headcount and
increased bad debt expense as a result of our increased gross accounts
receivable balance. As of June 30, 2004, we had 30 general and administrative
personnel as compared to 26 as of June 30, 2003. We expect this expense to
increase in future periods as we incur additional costs associated with being a
public company, including compliance with the Sarbanes-Oxley Act, recent
changes to the Nasdaq listing rules and other related rules and regulations.
Our compliance obligations will likely require us to hire additional full time
employees or hire third party consultants. Amortization of Stock-Based Compensation. Amortization of stock-based
compensation related to operating expenses for the three months ended June 30,
2004 and 2003 was $103,000 and $257,000, respectively. Certain of our expense items are subject to estimates. From time to time
these estimates are changed and refined and these changes and refinements can
cause increases or decreases in our expenses for any particular period. See
Critical Accounting Policies. 18




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Other Income (Loss), Net Other income (loss), net primarily consists of foreign currency gains and
losses on transactions denominated in foreign currencies, interest income
earned on cash and cash equivalents and interest expense incurred on our
financing obligations. Total other income, net decreased to $140,000 in the
three months ended June 30, 2004 as compared to other income, net, of $211,000
in the three months ended June 30, 2003. The decrease was primarily the result
of an increase in the loss on foreign currency transactions offset by increased
interest income. The effect of foreign currency transactions was a loss of
$101,000 for the three months ended June 30, 2004 as compared to a gain of
$74,000 for the comparable period in 2003. Interest income, net, increased to
$241,000 for the three months ended June 30, 2004 from $137,000 for the
comparable period in 2003 primarily from an increased return on our short-term
investments and the expiration of our capital lease obligations in the third
quarter of 2003. Provision for Income Taxes We recorded an income tax provision of $139,000 and $258,000 for the three
months ended June 30, 2004 and 2003, respectively, primarily related to income
and withholding taxes currently payable on sales and income generated in
non-U.S. and domestic state tax jurisdictions for which no U.S. benefit is
currently recognizable. Six Months Ended June 30, 2004 and 2003 Revenue Revenue increased to $37.2 million in the six months ended June 30, 2004
from $34.2 million in the six months ended June 30, 2003. Between these
periods, license revenue decreased 8% and services and maintenance revenue
increased 24%. Licenses. License revenue decreased to $14.8 million in the six months
ended June 30, 2004 from $16.1 million in the six months ended June 30, 2003.
The decrease in license revenue for the six months ended June 30, 2004 over
results for the comparable period in 2003 was due primarily to customers
delaying purchasing decisions, offset by the addition of 63 new license
customers during the six months ended June 30, 2004. Services and Maintenance. Services and maintenance revenue increased to
$22.4 million in the six months ended June 30, 2004 from $18.1 million in the
six months ended June 30, 2003, primarily due to increased headcount within our
professional services organization and an increase in maintenance we provided
to our new customers and maintenance renewals from our larger installed
customer base. Services revenue increased to $10.4 million for the six months
ended June 30, 2004 as compared to $7.0 million for the six months ended June
30, 2003 primarily due to increased headcount and an increased use of third
party contractors in our professional services organization as a result of an
increasing number of services contracts ongoing during the period. Maintenance
revenue increased to $12.0 million in the six months ended June 30, 2004 from
$11.1 million in the six months ended June 30, 2003. Cost of Revenue Licenses. Cost of licenses increased to $850,000 in the six months ended
June 30, 2004 from $628,000 in the six months ended June 30, 2003 primarily
related to two agreements with third party software providers in which we
resold their software to the customer totaling $445,000 during the six months
ended June 30, 2004, offset by decreased royalty expense. Services and Maintenance. Cost of services and maintenance increased to
$8.8 million in the six months ended June 30, 2004 from $5.0 million in the six
months ended June 30, 2003. This was attributable primarily to the increase in
headcount in our professional services and technical support departments and
increased use of third party consultants due to an increased number of service
contracts. We currently plan to increase hiring in these organizations and
expect costs of services and maintenance to rise in future periods. Amortization of Stock-Based Compensation and Acquired Technology.
Amortization of stock-based compensation related to cost of services for the
six months ended June 30, 2004 and 2003 was $84,000 and $156,000, respectively.
Amortization of acquired technology related to cost
of license revenue for the six months ended June 30, 2004 and 2003 was $788,000
for both periods. 19




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Operating Expenses Research and Development. Research and development expenses increased to
$11.4 million in the six months ended June 30, 2004 from $10.1 million in the
six months ended June 30, 2003, due primarily to an increase in the number of
our research and development staff resulting from our efforts to enhance our
core portal product offering and to expand our product line. We currently plan
to increase hiring in this organization and expect costs to rise in 2004 as
compared to the comparable period in 2003. Sales and Marketing. Sales and marketing expenses increased to $16.6
million in the six months ended June 30, 2004 from $14.3 million in the six
months ended June 30, 2003. Sales expenses increased to $13.9 million in the
six months ended June 30, 2004 from $12.3 million in the six months ended June
30, 2003, primarily as a result of increased headcount and sales commissions
for the first six months of 2004 as compared to the first six months of 2003.
Sales commissions increased by $592,000 for the six months ended June 30, 2004
when compared to the corresponding period in 2003. Marketing expenses
increased to $2.7 million in the six months ended June 30, 2004 from $2.0
million in the six months ended June 30, 2003 due to increased marketing
efforts. General and Administrative. General and administrative expenses increased
to $5.1 million in the six months ended June 30, 2004 as compared to $3.2
million for the six months ended June 30, 2003 primarily as a result of
increased consultant and audit fees associated with the Sarbanes-Oxley Act as
well as increased headcount. Amortization of Stock-Based Compensation. Amortization of stock-based
compensation related to operating expenses for the six months ended June 30,
2004 and 2003 was $287,000 and $746,000, respectively. Other Income (Loss), Net Total other income, net decreased to $289,000 in the six months ended June
30, 2004 as compared to other income, net, of $537,000 in the six months ended
June 30, 2003. The decrease was primarily the result of an increase in the
loss on foreign currency transactions offset by increased interest income, net
of interest expense. Interest income, net, increased to $516,000 for the six
months ended June 30, 2004 from $348,000 for the comparable period in 2003
primarily from a decrease in interest expense related to our capital lease
liability which was repaid in full during 2003 and increased return on our
investments. The effect of foreign currency transactions was a loss of
$236,000 for the six months ended June 30, 2004 as compared to a gain of
$189,000 for the comparable period in 2003. Provision for Income Taxes We recorded an income tax provision of $301,000 and $376,000 for the six
months ended June 30, 2004 and 2003, respectively, primarily related to income
and withholding taxes currently payable on sales and income generated in
non-U.S. and domestic state tax jurisdictions for which no U.S. benefit is
currently recognizable. Liquidity and Capital Resources As of June 30, 2004, we had $62.8 million of cash and cash equivalents and
short-term investments and $49.4 million in working capital. Our net cash provided by (used in) operating activities decreased to $(4.6
million) for the six months ended June 30, 2004, from $1.2 million for the six
months ended June 30, 2003. The decrease is primarily attributable to the $6.5
million increase in net loss for the six months ended June 30, 2004 as compared
to the six months ended June 30, 2003, offset by increases in our deferred
revenue and decreases in accounts receivable. Capital expenditures were $815,000 and $573,000 for the six months ended
June 30, 2004 and 2003, respectively. Our capital expenditures in the first six
months of 2004 consisted of purchases of items to manage our operations,
including computer hardware and software, office furniture and equipment and
leasehold improvements. We have a $3.1 million revolving line of credit with Silicon Valley Bank
with a maturity date of August 2004. We expect to extend the maturity date on
this facility prior to its expiration. To secure any outstanding loans, we have
granted Silicon Valley Bank a security interest in our assets, including our
accounts receivable. Interest on the loans is payable monthly and accrues at
one percentage point above the prime rate as announced by Silicon Valley Bank.
As of June 30, 2004, no amounts were outstanding under this facility. We have
issued a letter of credit for $2.5 million to the landlord of our corporate
headquarters, which is enforceable against the facility. We have limitations on
declaring and 20




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paying dividends, incurring any non-permitted indebtedness and acquiring
the capital stock of any other company under our loan agreements with Silicon
Valley Bank. We are also required to maintain a minimum cash balance with
Silicon Valley Bank in the United States bank accounts. Due to the timing of
transferring funds from certain foreign subsidiary accounts, we were not in
compliance with the minimum cash balance requirement as of June 30, 2004.
However, we received a waiver from the bank on such requirement through
September 30, 2004. Upon maturity of the revolving line of credit in August
2004, we expect to renegotiate covenants under the agreement. We expect to maintain our current level of operating expenses for the
foreseeable future in order to execute our business plan. As a result, these
operating expenses, as well as planned capital expenditures, may constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions of complementary businesses, technologies or product
lines. We believe that our cash and cash equivalents and short-term investments
on hand will be sufficient to meet our cash requirements for at least the next
18 months, including working capital requirements and planned capital
expenditures. Recent Accounting Pronouncements In March 2004, the FASB issued EITF Issue No. 03-1 (EITF 03-1), The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity instruments, as well as new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting guidance provided in EITF 03-1 is effective for fiscal years
beginning after June 15, 2004, while the disclosure requirements
for debt and equity securities accounted for under FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity
Securities, are effective
for annual periods ending after December 15, 2003. The Company does not expect the
adoption of EITF 03-1 will have a material impact on its financial position,
results of operations, or cash flows. However, upon adoption, the
Company may be required to present certain of its available for
sale investments worth stated maturities greater than twelve
months within long-term assets. Risk Factors that May Affect Our Future Results and the Market Price of Our Stock Risks Relating to Our Business Our efforts to establish and maintain the Enterprise Web Suite and related
products as an enterprise-wide platform may fail and, as a result, our revenue
may decrease and our ability to compete successfully may be impaired. We have expended, and plan to continue to expend, significant resources to
establish our Enterprise Web Suite as an enterprise-wide platform for
integrating an organizations diverse systems and applications and for building
new applications. To succeed, we must develop and market both enhancements to
our Plumtree Corporate Portal and new products and services that expand its
functionality. Plumtree Collaboration Server, Plumtree Studio Server and
Content Server are our most significant new product developments since the
initial introduction of the Plumtree Corporate Portal. These and other new
products and subsequent major version releases of our products may not achieve
widespread market acceptance. Even if we are successful in establishing our products as an
enterprise-wide platform, we face, among others, the following risks:  
    
    We will likely face new and in many cases larger competitors, and some
of our current system integrators and technology partners with whom we
work closely may come to view our new products and services as
competitive with their own products and services.
    
    Our Enterprise Web Suite is designed to be open and integrate existing
data and processes from enterprises systems. To remain competitive,
we must increase the number of systems and applications that can be
integrated into and built with our portal platform as Web services.
These activities have strained and will increasingly strain our
development and support infrastructure and may require us to add
significant additional personnel.
    
    The industry may develop and adopt technology standards different from
the standards presently incorporated in our products resulting in our
products becoming less competitive. 21




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We have a relatively short operating history, which limits your ability to
evaluate our business and operating results and may increase the risk of your
investment. Our relatively short operating history makes the evaluation of our
business operations and our prospects difficult. We were founded in 1996 and
began offering version 1.0 of our corporate portal product in March 1998. The
latest version of our portal product, version 5.0, was released in June 2003,
and we are currently developing a Java version of many of our products, which
are currently being beta tested and expected to be generally available shortly.
These versions of our software may not succeed. We have derived a vast majority
of our revenue from licensing our Enterprise Web Suite and related products and
services. You should consider the risks and difficulties frequently encountered
by early stage companies such as ours in new and rapidly evolving markets,
particularly those companies whose businesses depend on the Internet. These
risks and difficulties include:  
    
    potential fluctuations in operating results and uncertain growth rates;
    
    limited market acceptance of our products;
    
    concentration of our revenue on a small range of products;
    
    our need to expand our direct sales forces and indirect sales
channels, particularly for international markets; and
    
    our need to attract, train and retain qualified personnel. We have a history of losses, and given expected increases in operating
expenditures, we may never sustain profitability on a quarterly or annual
basis, which would have a harmful effect on our business and the value of our
common stock. Other than brief profitability in 2002, we incurred substantial net losses
in each year since inception in 1996. For the year ended December 31, 2003 and
the six months ended June 30, 2004, we had a net loss of $1.5 million and
$7.1 million, respectively. As of June 30, 2004, we had an accumulated deficit
of approximately $48.0 million. Given the increase of our planned operating and capital expenditures, for
the foreseeable future we expect our results of operations to fluctuate, and
during this period we are likely to incur losses and negative cash flows. If
our revenue does not increase or if our expenses increase at a greater pace
than our revenue, we will not be able to achieve or sustain operating
profitability on a consistent basis, if at all. Our ability to increase revenue
and achieve and sustain operating profitability also will be affected by other
risks and uncertainties described in this section and in Managements
Discussion and Analysis of Financial Condition and Results of Operations. Our
failure to operate profitably or control negative cash flows on a quarterly or
annual basis could harm our business and the value of our common stock. Because our quarterly operating results are volatile and difficult to predict,
our operating results in one or more future periods are likely to fluctuate
significantly, and if we fail to meet the expectations of securities analysts
or investors, our stock price could decline significantly. As a result of our limited operating history and the emerging and evolving
nature of the market in which we compete, our quarterly operating results have
varied significantly in the past and are likely to continue to vary
significantly in the future. Our success depends upon our ability to increase
sales of our products and services to our new and existing customers. Our
license revenue is comprised substantially of one-time license fees. As a
result, we will be required to regularly and increasingly attract and contract
with additional customers for substantial license fees on a timely basis to
realize comparable or increased license revenue. Our services and maintenance
revenue historically has been comprised almost entirely of consulting fees and
technical support and maintenance fees. Our services revenue has a
substantially lower gross margin than our license revenue. To the extent the
percentage of our services revenue increases compared to the percentage of
license revenue, our profitability would be impaired. Our maintenance contracts
are generally renewable for 12-month periods. If our customers elect not to
renew their maintenance contracts or seek to renegotiate price each year, our
revenue could decline. We expect to continue to experience significant fluctuations in our
results of operations due to a variety of factors, some of which are outside of
our control, including:  
    
    introduction of products and services and enhancements by us and our competitors; 22




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
    
    competitive factors that affect our pricing;
    
    the timing and magnitude of our capital expenditures, including costs relating
to the management and expansion of our operations within the United States and
internationally;
    
    increase in the amount of third party products and services that we use in our
products or resell with royalties attached;
    
    the size and timing of customer orders and deployments, particularly large orders and deployments, some of which may represent more than 10% of total
revenue during a particular quarter; and
    
    costs associated with litigation, regulatory compliance and other corporate
events such as operational reorganizations. As a result of these factors, we believe that quarter-to-quarter
comparisons of our revenue and operating results are not necessarily
meaningful, and that these comparisons are not accurate indicators of future
performance. Because our staffing and operating expenses are based on
anticipated revenue levels, and because a high percentage of our costs are
fixed, small variations in the timing of the recognition of specific revenue
could cause significant variations in operating results from quarter to
quarter. If we are unable to adjust spending in a timely manner to compensate
for any revenue shortfall, any significant revenue shortfall would likely have
an immediate negative effect on our operating results. If our operating results
in one or more future quarters fail to meet the expectations of securities
analysts or investors, we would expect to experience an immediate and
significant decline in the trading price of our stock. If we do not expand our customer base, we may be unable to increase our revenue
and our stock price will likely decline. The market for our software is newly emerging and additional customers may
not adopt our products. Accordingly, we cannot accurately estimate the
potential demand for our products and services. We believe that market
acceptance of our products and services depend principally on our ability to:  
    
    withstand downturns in general economic conditions or conditions that slow corporate spending on
software products, such as the downturn we are currently experiencing in the overall software
market;
    
    enhance our products to meet changing customer demand;
    
    effectively market the Enterprise Web Suite and related products and services;
    
    hire, train and retain a sufficient number of qualified, engineering, sales and marketing personnel;
    
    provide high-quality and reliable customer support for our products;
    
    distribute and price our products and services to be more appealing to customers than those of our
competitors or of our customers internally-developed solutions; and
    
    develop and maintain a favorable reputation among our customers, potential customers and
participants in the software industry who can serve as reference accounts for our products and
services. Some of these factors are beyond our control. If our customer base does
not expand, we may never become consistently profitable. Because our quarterly results often depend on a small number of large orders,
if we were unable to complete one or more of these orders during any future
period, our quarterly operating results and the trading price of our stock
could be harmed. We derive a significant portion of our software license revenue in each
quarter from a small number of relatively large orders. For example, in the
quarter ended June 30, 2004, our top 10 customers accounted for approximately
29% of our total revenue. Our operating results and stock price would be harmed
if we were unable to complete one or more substantial license sales during any
future quarterly period. We typically do substantial business with the United States government and
other domestic and international public entities, and our ability to sell to
governments is susceptible to unpredictable budgetary and policy changes and
involves specific risks that could harm our business. We derive a significant portion of our software license and service
revenue from governmental entities. Sales to government entities can be
adversely affected by budgetary cycles, changes in policy and other political
events outside of 23




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our control. Governments often retain the ability to cancel contracts at their
convenience in times of emergency or under other circumstances. Additionally,
the government may require special intellectual property rights and other
license terms generally more favorable those typical in private commercial
contracts, these requirements involve more licensing cost and increased
contract risk for us. The government procurement process in general can be
long and complex and being a government vendor subjects us to additional
regulations. The government often retains the right to audit its vendors for
compliance. We could from time to time become subject to costly and
distracting audits. Should we fail to properly comply with applicable
regulations, we may face fines or other enforcement actions and we could be
suspended or disbarred would further government sales which would harm our
business. Our business currently depends on revenue related to our flagship product
suite, the Enterprise Web Suite, and if the market does not increasingly accept
this product and related products and services, our revenue may decline. We generate our revenue from licenses of the Enterprise Web Suite and
related products and services, including Plumtree Portlets (formerly known as
gadget web services), the building blocks from which users assemble a
personalized Web page as well as our Server Products, which provide significant
ancillary functionality to our Portal Platform of the Enterprise Web Suite. We
also resell third party products and services that offer complementary
functionality to the Enterprise Web Suite. We expect that our Enterprise Web
Suite products, and future upgraded versions of these products will continue to
account for a large portion of our revenue in the foreseeable future. Our
future financial performance will depend on increasing acceptance of our
current product and on the successful development, introduction and customer
acceptance of new and enhanced versions of our products. For example, in June
2003 we released version 5.0 of our portal product and later this year we
expect to have generally available version 5.0J for Java platforms. If new and
future versions and updates of our products and services, including our new
versions or updates to our Plumtree Corporate Portal and our Collaboration
Server and Content Server, do not gain market acceptance when released
commercially, or if we fail to deliver the product enhancements and
complementary third party products that customers want, demand for our products
and services, and our revenue, may decline. Our sales and implementation cycles are long, unpredictable and subject to
seasonal fluctuations, making it difficult to accurately forecast our revenue
and causing it to fluctuate, which could harm our operating results. As a result of our limited operating history, the nature of our products,
and the emerging and rapidly evolving nature of the market in which we compete,
the typical sales cycle of our portal product is long and unpredictable. A
successful sales cycle may last six to nine months or longer and typically
includes presentations to both business and technical decision makers, often
requiring us to expend substantial resources educating prospective customers
about the benefits of our software to their business. The implementation of our
product can be time-consuming and often involves a significant commitment of
resources by prospective customers. Our sales cycle is also affected by a
number of other factors, some of which we have little or no control over,
including the volatility of the overall software market, the business
conditions of each prospective customer, seasonal fluctuations as a result of
customers fiscal year budgeting and purchasing cycles and the selection and
performance of our technology and of our technology partners, systems
integrators and resellers, any of which could harm our operating results.
Actions being taken to improve our sales execution could also result in a
lengthening of our sales cycle. Actions being taken to improve our sales focus and shorten our sales cycle, may
not be effective and the expected benefits may not be realized when expected or
at all. To improve our sales focus and shorten our sales cycle, we have, among
other things, recently reorganized our sales force; focused training efforts
for some sales personnel around selling our products into specific industries
such as pharmaceuticals and consumer retail; taken action to improve our
customer lead generation; and hired a new Chief Operating Officer, Vice
President of World Wide Sales and several other sales managers who are
implementing changes in our sales methodology. While these initiatives are
intended to improve our sales focus and reduce our typical sales cycle, we may
fail in the long term. The new additions to management may not be as effective
as anticipated. The implementation of new sales methodologies and the
retraining process involved in developing industry focused sales teams may
result in longer sales cycles during the period of transition. Our efforts to develop in conjunction with our customers and third parties
service-oriented Web applications may fail, and we may not receive the
anticipated benefits from our efforts on a timely basis or at all. We recently launched our Enterprise Web Applications program for third
parties and customers, Plumtree Application Incubator. Examples of existing
third party and customer enterprise Web applications, designed to take
advantage of our open architecture and enterprise-wide environment, include an
executive dashboard allowing 24




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executives to survey enterprise-wide performance indicators; an application
allowing courts to access the video, audio, and documentary evidence related to
a case; an application allowing insurance agents to interact with customer
account and policy information from multiple systems; a Sarbanes-Oxley
application allowing finance departments to monitor and manage corporate
governance processes. We plan to invest significant time and money into this
program, which may not succeed. Related risks include:  
    
    We may not attract a sufficient number of application developers to
justify the time and expense expended as these service-oriented
applications may not result in significantly greater sales of our core
products, such as the Plumtree Corporate Portal, or new Plumtree
customers.
    
    These application developers may develop service applications that may
be integrated into a competitors products or otherwise offer products
and services that are competitive to ours or may have relationships
with our competitors.
    
    To support Enterprise Web Applications we must, among other things,
continuously and successfully re-architect our products, develop and
maintain a standard for embedding entire Web applications into our
product framework and develop and maintain new integration points for
various functions such as storage. These activities have strained and
will increasingly strain our development and support infrastructure
and may require us to add significant additional personnel. We depend on technology licensed from third-party software developers to build
and enhance our products, and our ability to develop and sell our products and
services could be delayed or impaired if we fail to maintain these license
arrangements. We incorporate into our products and in certain cases resell third-party
software that enables, enhances or compliments aspects of our products
functionality. This third-party software may not continue to be available on
commercially reasonable terms or with acceptable levels of customer support, or
at all. In many cases use of third party software increases the risk of
warranties and indemnification contained in our customer contracts. Some of
these third-party software developers offer products that compete with the
Enterprise Web Suite and our other products. Our loss of or inability to
maintain these software licenses on current terms could delay or impair the
sale of our products and services until equivalent software, if available, is
identified, licensed or developed, and integrated, which could adversely affect
our business and impair our future growth. We depend on our direct sales force to sell our products, and if we fail to
hire and train new sales personnel, our future growth will be impaired. We sell our products primarily through our direct sales force and,
although we are seeking to expand our indirect sales channels, we expect to
continue to rely on direct sales in the immediate future. Our ability to
achieve revenue growth in the future will depend on our ability to recruit,
train and retain qualified direct sales personnel. We have in the past and may
in the future experience difficulty in recruiting and retaining qualified sales
personnel. The complexity of our product and the length of our sales cycle
typically results in a lead time of six to nine months or more before
newly-hired direct sales people become productive and can generate revenue. In
addition to recently hiring a new Chief Operating Officer and Vice President of
World Wide Sales, we added a number of new sales executives. We are also
reorganizing elements of our sales force around sales targeted towards specific
industries such as pharmaceutical and consumer retail. These management
changes and reorganization efforts have resulted in and in the near-term are
expected to continue to result in attrition in our sales force. Our inability
to rapidly and effectively expand and train our direct sales force could impair
our growth and cause our stock price to fall. If we are unable to establish and maintain relationships with systems
integrators and resellers, our ability to market, sell and deploy our products
and services will be harmed. We have relationships with a number of systems integrators and resellers,
such as Exceptional Software, HandySoft, Bantu, Logicon, Booz Allen, Computer
Sciences Corporation, Lexis Nexis, Lockheed Martin, Project Performance
Corporation, SAIC and SRA International. Our relationships with these parties
who market, sell and deploy our products have been a key factor in our overall
business strategy. We are currently seeking to expand our indirect 25




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sales channels and recently
hired a new head of channel sales. Our efforts to
expand our relationships with integrators and resellers may not succeed and
these relationships involve a number of risks, including:  
    
    Systems integrators and resellers may not view their relationships with us as valuable or
significant to their own businesses. The related arrangements typically may be terminated
by either party with limited notice and in some cases are not covered by a formal
agreement.
    
    Under our co-deployment model, we often rely on our system integrators and resellers
employees to perform implementations. If we fail to work together effectively, or if these
parties perform poorly, our reputation may be harmed and deployment of our products may be
delayed or inadequate.
    
    Systems integrators may attempt to market their own products and services rather than ours.
    
    Our competitors may have stronger relationships with these parties and, as a result, these
systems integrators and resellers may recommend a competitors products and services over
ours.
    
    If we lose our relationships with our systems integrators and resellers, we will not have
the personnel necessary to deploy our products effectively, and we will need to commit
significant additional sales and marketing resources in an effort to reach the markets and
customers served by these parties. If our alliances with technology and content providers are discontinued, our
future growth will be impaired. We have relationships with technology providers, such as Sun Microsystems,
Cognos, MediaEdge, SEEC, Project Performance Corporation, Stellent, Inxight,
Oblix, BEA, Handysoft, Pivia, Thomson Publishing, Yahoo! and Documentum, to
provide our customers with support of many applications and services. Although
these relationships are a key factor in our overall business strategy, our
alliance members may not view their relationships with us as significant to
their own businesses. A number of our competitors may have stronger
relationships with these or other technology and content vendors and, as a
result, these alliance members may be more likely to support our competitors
products and services over ours. In addition, our technology providers may
offer products and services that are competitive to ours. Our arrangements
generally do not establish minimum performance requirements but instead rely on
voluntary efforts. In addition, most of our agreements with these entities may
be terminated by either party with limited notice. In some cases these
arrangements are not covered by a formal agreement. We currently invest
significant resources to develop these alliances and plan to continue to do so.
If we are unable to maintain our existing relationships or fail to enter into
additional relationships, our ability to increase our sales could be harmed,
and we could also lose anticipated customer introductions and co-marketing
benefits. Even if we succeed in establishing and maintaining these
relationships, they may not result in additional customers or revenue. If our software or software we furnish contains errors, our ability to develop
and market our products and services will be harmed and we may lose customers
or experience reduced market acceptance of our products. Our software products are inherently complex and may contain defects and
errors that are detected only when the product is in use. We periodically
release updated versions of our products, which increases the risk of
undetected defects or errors. It is also possible that our products including
version 5.0 of our portal product (released in June 2003), and upcoming portal
product version releases (such as 5.0J based on Java) and our server products,
may contain undetected defects or errors that are discovered after release. In
addition, third-party software that we bundle with, resell or incorporate into
our products, or with which we integrate to build or deploy our products, has
contained, and may in the future contain, defects or errors for which we may
become liable. Further, we often render implementation, consulting and other
technical services, the performance of which typically involves working with
sophisticated software, computing and networking systems. As a result of
product defects or our failure to meet project milestones for services, we may
not be paid for work performed subject to acceptance rights or fixed price
bidding, we may lose customers, customers may not implement our products more
broadly within their organization, we may experience reduced market acceptance
of our products, and we may be subject to warranty and product liability claims
by our customers. Such errors or defects may produce a number of risks, including:  
    
    Some of our customers may require enhanced modifications or fixes of our
software for their specific needs which will divert the attention of our
engineering team away from new product development and upgrades of existing
products. 26




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
    
    Some of our customers may make increasingly frequent and disproportionate
demands on our support personnel, which could result in impaired technical
support response times to all of our installed base.
    
    Our professional services consultants may be required to assist in the
implementation of software modifications and corrections of errors or
defects, thereby reducing their ability to perform revenue-generating
services.
    
    Frequent modifications intended to correct errors may increase the
likelihood of undetected defects or errors and may further drain our
engineering, customer care and consulting services resources.
    
    We may lose customers, customers may not implement our products more
broadly within their organization, customers may choose not to renew their
maintenance contracts with us or they may choose to abandon their projects.
    
    We may lose valuable customer references and our reputation in the
industry may diminish, making our sales and marketing efforts more
difficult.
    
    We may experience reduced demand for our products, reduced market
acceptance of our products and loss of overall competitiveness.
    
    We may be subject to product liability or warranty claims by our
customers. If we are unable to develop products that are compatible and can be integrated
with a large variety of hardware, software, database and networking systems,
our ability to attract and retain customers will be harmed. The Enterprise Web Suite is designed to integrate with and support a broad
set of software applications and online services through Plumtree Portlet Web
Services. To gain broad market acceptance, and to execute on our strategy of
radical openness, we believe that we must support an increased number of
technology standards, operating environments, applications and services in the
future. If the underlying applications and services are upgraded or changed,
maintaining this support may be difficult or impossible. If we are unable to
support an increased number of technology standards, applications and services
in the future or if we are unable to maintain compatibility with these systems,
our ability to attract and retain customers will be harmed. Furthermore,
providers of competitive products and services may cease cooperating with our
development efforts to integrate our Enterprise Web Suite with products in
their portfolio. Some of our customers are in the preliminary phase of implementing our products
and this implementation may not proceed on a timely basis or at all. Some of our customers, such as Defense Commissary Agency, Electric Power
Research Institute, Fleishman Hillard, GE ERC, OMSNIC, Technology Information
and Education Systems (TIES), J.M. Smucker, KOS Pharmaceuticals, Novartis,
National Academy of Science, National Association of Realtors, Office of
Secretary of Defense, Kingston Communications, , Toro, UK Medical Research
Council and others are currently in a pre-deployment or preliminary stage of
implementing our products and may encounter delays or other problems in
introducing them. These delays or other problems may result from matters
specific to the customer and unrelated to us or our products. A customers
decision not to implement our product, or a delay in implementation, could
result in a delay or loss in related service revenue or otherwise harm our
business or prospects. We cannot predict when or if any customer currently in a
pilot or preliminary phase will choose to implement broader use of our
products. If we fail to adequately address our customer support demands, our ability to
attract and retain customers will suffer. We expect that our customers increasingly will demand enhancements to the
technical support services we provide. To meet these demands, we must develop
and implement expanded customer support services and programs. In addition, if
we increase our customer base, we expect the demands on our technical support
resources to grow rapidly, and we may experience difficulties in responding to
customer demand for our services and providing technical support in accordance
with our customers expectations. We expect that these demands will require not
only the addition of new management personnel, but also the development of
additional expertise by existing personnel and the establishment of long-term
relationships with third-party service vendors. If we are unable to address
these customer demands, our ability to attract and retain customers will
suffer. Security breaches with our software may lead to unexpected capital expenditures
and cause a loss in revenue and reputation. 27




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The Enterprise Web Suite is designed to facilitate the secure transmission
of sensitive business information to specified parties outside the business
over the Internet. This includes product information, competitive intelligence,
sales and inventory data, sales reports and corporate e-mail. As a result, the
reputation of our software for providing security is vital to its acceptance by
customers. Many of our government customers, and those in highly regulated
industries such as banking, insurance and pharmaceuticals, are highly sensitive
to issues of security and data privacy. Problems caused by security breaches
associated with our products or products furnished by us could result in loss
of or delay in revenue, loss of market share, failure to achieve market
acceptance, diversion of research and development resources, harm to our
reputation, customer claims against us, government regulatory enforcement
against us, increased insurance costs or increased service and warranty costs.
Because the techniques used by computer hackers to access or sabotage networks
change frequently and generally are not recognized until launched against a
target, we may be unable to anticipate these techniques. Moreover, our products
may be even more susceptible to security breaches, since portals and integrated
framework software require the aggregation of many different Web applications
on many different servers, with different security standards and protocols. Capacity restrictions of our software could reduce the demand for and use of
our products, which may limit our ability to generate license revenue. Our products are designed to support enterprise-wide deployments with up
to hundreds of thousands of users. However, the maximum amount of information
and the maximum number of concurrent users that our products can support in any
particular deployment is uncertain. It is also subject to factors outside of
our control such as customer architecture. If the capacity boundaries of our
products are reached, or significant changes or additions to customers
architecture is necessary to support the number and type of intended users, our
customers may be dissatisfied, and we may lose customers or fail to gain new
customers, existing customers may seek products with more use capacity and
overall demand for our products could decline. If we are unable to retain key personnel, our growth will be limited. We are highly dependent on certain members of our management staff,
including, without limitation, our Chief Executive Officer, John Kunze, our
Chief Operating Officer, Paul Ciandrini, hired in March of 2004, and our Vice
President of Engineering, Eric Zocher. Our ability to continue to deliver
products and services that are responsive to customer needs, which is critical
to our success, also depends on our ability to retain several members of our
sales & marketing, management and engineering teams. The loss of one or more of
these officers, sales or marketing managers, or key engineers may impede the
achievement of our business objectives. None of our officers or key employees
is bound by an employment agreement for any specific term, and no one is
constrained from terminating his or her employment relationship with us at any
time. Recent additions to the management team and reorganization in sales and
operations have resulted and may continue to result in increased employee
attrition. In addition, since a number of our long-standing employees have
most of their stock options vested, their economic incentive to remain in our
employ may be diminished. If we are unable to recruit and train new personnel, our operations will be
disrupted and our growth impaired. Recruiting and retaining qualified sales, management and technical
personnel is critical to our success. If our business grows, we will also need
to recruit a significant number of management, technical and other personnel
for our business. Competition for specialized employees in our industry can be
intense. If we are not able to continue to attract and retain skilled and
experienced personnel on acceptable terms, our growth may be limited due to our
limited capacity to develop and market our product. We are currently recruiting
for skilled technical personnel for our engineering, professional services
group, and customer support staff. It may take an extended period of time to
hire a sufficient number of new technical professionals. With some of our
senior operations executives in place for only a short period our sales force
may lack direction and our sales process and productivity may suffer.
Similarly, we may not be able to meet customer demand for professional services
and technical support. Once hired, new personnel will need time to familiarize
themselves with our products and business practices. The integration of new
personnel, including members of management and key personnel in engineering,
sales and marketing, has resulted and will continue to result in some
unavoidable disruption to our ongoing operations. Our failure to complete this
integration in an efficient manner could harm our business and prospects. 28




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Managing the breadth of our operations will continue to strain managerial,
operational and financial resources, and if we are unable to do so our business
and operating results could be harmed. The planned conduct of our operations, coupled with planned increases and
reallocations in headcount, will place a significant strain on our management,
financial controls, operations systems, personnel and other resources. We
recently experienced several departures in our general and administrative
organizations, both in the U.S. and internationally. Although we have replaced
a number of these individuals this turnover may strain our organization as
these individuals will require time to become more efficient in their job
capacities. Our ability to manage our business and achieve growth depends in large
part upon a number of factors, including our ability to rapidly:  
    
    build and train our sales and marketing staff to create an effective
presence in the evolving corporate portal market, and keep them
sufficiently trained over time regarding the technical features,
issues and key selling points of our product;
    
    attract and retain qualified technical personnel in order to continue
to develop reliable and scalable products and services that address
evolving customer needs;
    
    develop and improve our customer support capacity, especially if sales
of our products increase, so that we can provide customer support
without diverting resources from product development efforts; and
    
    Maintain and expand our internal management, legal and financial
controls significantly, so that we can maintain control over our
operations and provide support to other functional areas within
Plumtree and ensure compliance with increasing government regulation,
and changing accounting standards applied to public companies. Our inability to achieve any of these objectives could harm our business
and operating results. We may be unable to manage or grow our international operations, which could
impair our overall growth. We have invested substantial capital and management resources in expanding
our international operations, and we are seeking to increase the portion of our
revenue that is derived from sources outside the United States. Our revenue
from sales outside the United States constituted approximately 27% and 20% of
our total revenue during the six months ended June 30, 2004 and 2003,
respectively. If we are unable to grow our international operations, we may not
generate sufficient revenue to offset the expenditures required to establish
and maintain the international sales and marketing operations, which could slow
our overall growth and impair operating margins. We have committed substantial resources to modify our products for
selected international markets, including France, Germany, South Korea, Italy,
Spain, Brazil, Portugal, Sweden, China, the Netherlands and Japan. We expect
to continue to commit additional resources to modify our products for other
select international markets and to develop our international sales and support
organization. We are also investing resources in attracting and developing
more distributors and resellers in local markets. However, even if we
successfully expand our international operations and successfully modify our
products, we may be unable to maintain or increase international market demand
for our products. Our international operations are subject to a number of risks, including:  
    
    costs of modifying our products for foreign countries;
    
    compliance with multiple, conflicting and changing foreign
governmental laws and regulations, including taxes, intellectual
property, securities and employment laws;
    
    increased reliance on systems integrators and resellers abroad;
    
    longer sales cycles;
    
    import and export restrictions and tariffs;
    
    fluctuations in foreign currency exchange rates; 29




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
    
    difficulties in staffing and managing international operations;
    
    greater difficulty in enforcing our intellectual property rights; and
    
    greater difficulty or delay in accounts receivable collection. We have historically structured our
operations so that certain international license contracts between certain
foreign customers and our Swiss subsidiary, Plumtree Software GmbH, are not
subject to tax at source. There is a risk that local jurisdictions may
challenge the characterization of these transactions. In the event these
transactions are challenged by local tax authorities, the review process would
divert management attention and resources and we may incur substantial costs.
If we fail to comply with complex and changing tax requirements some tax
authorities may seek to collect applicable taxes from our customers and we may
in turn become subject to claims by our customers seeking reimbursement for any
tax assessed. We have recently changed our method of licensing in
international markets, choosing to license our products through Plumtree
Software, Inc. (Delaware). We may incur substantial advisory fees and other
costs associated with this transition. In addition some tax and accounting
consequences resulting from the change in our international contracting
structure are uncertain and may result in future costs or charges. Product liability claims could divert managements attention and be costly to defend. Our license agreements with customers and arrangements with our systems
integrators and technology vendors typically contain provisions designed to
limit our exposure to potential product liability claims. Not all domestic and
international jurisdictions may enforce these limitations. Although we have not
experienced any significant product liability claims to date, we may encounter
this type of claim in the future. Product liability claims brought against us,
whether or not successful, could divert the attention and resources of our
management and key personnel, could be costly to defend and could require us to
pay significant monetary damages or impair our ability to market our products. If we are unable to effectively protect our proprietary rights, our competitors
may be able to copy important aspects of our products or product presentations,
which would undermine the relative appeal of our products to customers and
reduce our sales. We believe that proprietary rights are important to our business. We have
no issued patents. We have thirteen non-provisional patent applications pending
with the U.S. Patent and Trademark Office, one international patent application
pending with the World Intellectual Property Organization, four patent
applications pending in the European Patent Office, and one patent application
pending in the Japan Patent Office. However, current or future patent
applications may not be granted, and it is possible that any patents issued to
us may be circumvented by our competitors or otherwise may not provide
significant protection or commercial advantage to us. Similarly, our trademark,
service mark and copyright rights may not provide significant protection or
commercial advantage to us, and the measures we take to maintain the
confidentiality of our trade secrets may not be effective. As described in Note 1 to our financial statements and elsewhere in this
report, we are involved in a trademark dispute, which we recently agreed to
settle, primarily to protect the value of our Plumtree trademarks in Europe. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our software product or
technology without authorization. Policing unauthorized use of our products is
difficult and costly, especially matters that require litigation, and we cannot
be certain that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as those in the United States. We generally enter into confidentiality or license agreements with our
employees, consultants and alliance members, control access to our source code
and other proprietary technology and limit distribution of our software,
documentation and other proprietary information. These measures afford only
limited protection and may be inadequate. Others may develop noninfringing
technologies that are similar or superior to our own. If our products employ technology that infringes the proprietary rights of
others, we may be subject to infringement claims, forced to pay high prices to
license technology or required to stop selling our products. 30




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We expect that software products, including ours, may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segment grows and the functionality of products in different industry
segments expands and overlaps. Third parties have claimed and others may claim
in the future that our products infringe their intellectual property rights.
Regardless of whether these claims have any merit, they could:  
    
    be time-consuming to defend;
    
    result in costly litigation;
    
    divert our managements attention and resources;
    
    require us to indemnify technology vendors, system integrators or customers;
    
    require us to refund license fees;
    
    cause product shipment delays;
    
    require us to enter into royalty or licensing agreements, which may not be
available on terms acceptable to us, if at all; or
    
    result in court orders limiting our ability to license our products. As
described in Note 1 to our consolidated financial statements and elsewhere in this
report, we are currently involved in a patent suit where the plaintiff,
Datamize, has alleged we were infringing one of its patents. The court in this
matter recently granted our motion on summary judgment, holding that the patent
which was the subject of the litigation was invalid. However, Datamize may
appeal entry of summary judgment of invalidity. Also, based on prior
communications, we believe that Datamize might bring an action alleging
infringement of two other patents issued to Datamize. We have filed an action
for a declaratory judgment seeking a determination that we are not infringing
these other patents. We intend to vigorously defend against Datamizes
allegations of infringement and vigorously pursue its claim for declaratory
relief. During 2004, our defense costs related to this litigation have increased
substantially, and may continue to increase based on related events. The
tactical direction and pace of litigation, especially in complex patent
matters, are inherently difficult to predict. Therefore our legal costs may
fluctuate substantially with little notice which could affect our financial
results. A successful claim of infringement against us or our failure or inability
to license the infringed or similar technology could damage our business to the
extent that we are required to pay substantial monetary damages or if, as
result of a successful claim, we became unable to sell our products without
redeveloping them or otherwise were forced to incur significant additional
expenses. We may be subject to misappropriation and other claims by former employers of
our personnel, which could be costly and disruptive to our business. From time to time, we hire or retain employees or consultants who have
worked for independent software vendors or other companies developing products
similar to those offered by us. Those prior employers may claim that our
products are based on their products and that we have misappropriated their
intellectual property. Any claims of that variety, with or without merit, could
cause a significant diversion of management attention, result in costly and
protracted litigation, cause product shipment delays, require us to indemnify
our alliance members and customers, require us to refund license fees or
require us to enter into royalty or licensing agreements. Those royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, which could harm our business. We have and are likely in the
future to hire employees subject to agreements containing non-competition
clauses and non-solicitation covenants which purport to limit their ability to
work for us, interact with some or all of our customers or prospective
customers, or to solicit former colleagues or others for employment at
Plumtree. Although these types of restrictions are often difficult to enforce,
especially in California, we may still be subject to claims that we violated
these restrictions. Such claims against the Company or our employees, with or
without merit, could cause a significant diversion of management attention or
the employees attention, and result in costly and protracted litigation. 31




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Acquisitions of companies or technologies may result in disruptions to our
business and management due to difficulties in assimilating personnel, acquired
products and technology and operations and may dilute stockholder value. We have made, and in the future may make acquisitions or investments in
other companies or technologies. We may not realize the anticipated benefits of
any acquisitions or investments we undertake. Acquisitions such as these
require us to assimilate the operations, products, technology and personnel of
the acquired businesses and train, retain and motivate key personnel from the
acquired businesses. We may be unable to maintain uniform standards, controls,
procedures and policies if we fail in these efforts. Similarly, acquisitions
may cause disruptions in our operations and divert managements attention from
day-to-day operations, which could impair our relationships with our current
employees, customers and strategic partners. If we consummate acquisitions
through an exchange of our securities, our existing stockholders could suffer
significant dilution. In addition, our profitability may suffer because of
acquisition-related costs or impairment costs for acquired goodwill and other
intangible assets, or undisclosed liabilities of the acquired business.
Finally, the terms of our existing contractual obligations may restrict or
prohibit acquisitions that we may seek to consummate. If we are required to raise additional funds, we may be unable to obtain these
funds on terms acceptable to us or at all. The development and expansion of our business will require significant
capital to fund our operating expenses, working capital needs and capital
expenditures. During the next 18 months, we expect to meet our cash
requirements with existing cash and cash equivalents and short-term
investments, cash flow from sales of our products and services and proceeds
from existing and future working capital lines of credit and other borrowings.
Our failure to generate sufficient cash flows from sales of products and
services or to raise sufficient funds may require us to delay or abandon some
or all of our development and expansion plans or otherwise forego market
opportunities. Future equity or debt financing may not be available to us on favorable
terms or at all. The terms of our existing loan agreement with Silicon Valley
Bank limit our ability, among other things, to incur additional indebtedness.
Future borrowing instruments, such as credit facilities and lease agreements,
are also likely to contain restrictive covenants and will likely require us to
pledge assets as security for borrowings under those future arrangements. If we
raise additional funds through the issuance of equity securities, the issuance
could result in substantial dilution to existing stockholders. Our inability to
obtain additional capital on satisfactory terms may result in a delay or
failure to develop and enhance our products, acquire new technologies or
businesses, expand operations and hire and train employees. Risks Relating to Our Industry Intense competition and consolidation in our industry could limit our ability
to attract and retain customers. The market for our products is intensely competitive and highly
fragmented, characterized by rapid technological change, evolving industry
standards, changes in customer needs, and new product introductions and
improvements. Our current competitors include established software vendors that
are Web-enabling their applications or are building infrastructure software,
emerging companies offering competitive products and companies choosing to
build their own solutions. Some of our large competitors may expand their
competitive product offerings through acquisitions. For example, Vignette
acquired Epicentric, Inc. in December 2002; Open Text Corporation acquired
Corechange, Inc. in February 2003; WebMethods acquired certain assets of Data
Channel in October 2003; and Vignette acquired Intraspect in December 2003.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition,
a broader range of products and a larger installed customer base, any of which
could provide them with a significant competitive advantage. In addition, new
competitors, or alliances among existing and future competitors, may emerge and
rapidly gain significant market share. Some of our competitors, particularly
established software vendors, may also be able to provide customers with
products and services comparable to ours at lower or at aggressively reduced
prices in an effort to increase market share or as part of a broader software
package they are selling to a customer. We may be unable to match competitors
prices or price reductions, and we may fail to win customers that choose to
purchase a portal solution as part of a broader software and services package.
If we cannot compete successfully against current and future competitors, we
may be unable to attract and retain customers. Increased competition could also
result in price reductions for our products and lower profit margins and
reduced market share, any of which could harm our business, results of
operations and financial condition. 32




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Downturns in the software market may decrease our revenue and margins. The market for our products is affected by economic conditions of the
broader software market. Downturns in the economy may cause businesses and
governments to delay or cancel corporate portal projects, reduce their overall
information technology budgets or reduce or cancel orders for our products. In
this environment, customers may experience financial difficulty, fail to or
defer the budget for the purchase of our products or cease operations. This, in
turn, may lead to longer sales cycles, delays or failures in payment and
collection, and price pressures, causing us to realize lower revenues and
margins. In particular, capital spending in the information technology sector
generally has been limited in most of the past 36 months, and many of our
customers and potential customers have experienced volatile declines in their
revenues and operations. We believe that, in light of these events, some
businesses and governments may curtail or eliminate capital spending on
information technology. If capital spending in our markets declines, it may be
necessary for us to gain significant market share from our competitors in order
to achieve our financial goals or to sustain annual or quarterly profitability. Our failure to introduce new products and enhancements in a timely manner will
make market acceptance of our products less likely. New products, platforms and language support can require long development
and testing periods. Any delays in developing and releasing new products could
harm our business. New products or enhancements may not be released according
to schedule or may contain defects when released. Version 5.0 of the Plumtree
Corporate Portal, the Plumtree Collaboration Server, Plumtree Studio Server and
Plumtree Content Server were released in the past twelve months and have been
recently updated, increasing the risk of undetected defects or errors. Efforts
to correct any such errors or defects could divert our engineers from or delay
development of new products. Our efforts to develop and release new products,
such as the planned version 5.0J (Java) of the Plumtree Corporate Portal, and
applications, such as dashboard and score carding with Cognos, an Enterprise
Web customer service application for insurers with SEEC and an electronic
courtroom management application with MediaEdge, could be delayed or hindered
by development problems. Product release delays or product defects could
result in adverse publicity, loss of sales, delay in market acceptance of our
products or customer claims against us, any of which could harm our business.
We may be unable to successfully develop and market product enhancements or new
products that respond to technological changes, shifting customer tastes or
evolving industry standards, and may experience difficulties that could delay
or prevent the successful development, introduction and marketing of new or
enhanced products. If we are unable to develop and introduce new products or
enhancements of existing products in a timely manner or if we experience delays
in the commencement of commercial shipments of new products and enhancements,
our ability to attract and retain customers will be harmed. If we fail to manage technological change, demand for our products and services
will drop and our revenue will decline. The market for our products is still in an early stage of development and
is characterized by rapidly changing technology, evolving industry standards,
frequent new service and product introductions and changes in customer demands.
Our future success will depend to a substantial degree on our ability to offer
products and services that incorporate leading technologies and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. You should be aware that:  
    
    our technology or systems may become obsolete upon the introduction of alternative technologies;
    
    the technological life cycles of our products may end abruptly and, in any event, are difficult to estimate;
    
    we may not have sufficient resources to develop or acquire new technologies or to introduce new services
capable of competing with future technologies or service offerings; and
    
    the price of the products and services we provide may decline as rapidly as, or more rapidly than, the
price of any competitive alternatives, particularly if the unique features of our products become widely
adopted through new technologies. We may not be able to effectively respond to the technological
requirements of the changing market for our corporate portal and the other
products comprising the Enterprise Web product suite. To the extent we
determine that new technologies and equipment are required to remain
competitive, the development, acquisition and implementation of those
technologies and equipment are likely to continue to require significant
capital investment by us. We may not have 33




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sufficient capital for these purposes in the future. Even if we successfully
raise capital to develop new technologies, investments in these technologies
may not result in commercially viable technological processes, or there may not
be commercial applications for those technologies. If we do not develop and
introduce new products and services, and achieve market acceptance in a timely
manner, demand for our products and services will drop and our revenue will
decline. Terrorist activities and resulting military and other actions could harm our business The terrorist attacks of September 11th and the war in Iraq, and expanded
military action associated with the war on terror, have disrupted commerce
throughout the world. The continued threat of terrorism, continued military
action and heightened security measures in response to this threat have
diverted public and corporate spending priorities and periodically disrupted
commerce. To the extent that these events result in a general decrease in
corporate spending on information technology, our business and results of
operations could be harmed. We are unable to predict whether these threats or
the responses thereto will result in any long-term commercial disruptions or if
such activities or responses will have a long-term adverse effect on our
business, results of operations or financial condition. Additionally, if any
attacks were to affect the operation of the Internet or key data centers, our
business could be harmed. 34




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 2004, we had cash, cash equivalents and short-term
investments totaling $62.8 million. Our investment portfolio consists of money
market funds, corporate-backed debt obligations, municipal bonds and U.S.
government discount notes, generally due within two years. We place investments
with high quality issuers and limit the amount of credit exposure to any one
issuer. These securities are subject to interest rate risks. Based on our
portfolio content and our ability to hold investments to maturity, we believe
that, if a significant change in interest rates were to occur, it would not
have a material effect on our financial condition, although there can be no
assurance of this. For the three months and six months ended June 30, 2004, we earned
approximately 33% and 27% of our revenue from international markets, most of
which are denominated in various foreign currencies. As a result, our operating
results are and may become subject to more significant fluctuations based upon
changes in the exchange rates of some currencies in relation to the U.S. dollar
and diverging economic conditions in foreign markets. Although we will continue
to monitor our exposure to currency fluctuations, we cannot assure you that
exchange rate fluctuations will not affect adversely our financial results in
the future. 
 ITEM 4. CONTROLS AND PROCEDURES Based on their evaluation as of the end of the period covered by this
quarterly report on Form 10-Q, our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) believe, based on an evaluation performed under the
supervision and with the participation of management, including our CEO and
CFO, that the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) are effective to ensure the information required to be
disclosed by Plumtree in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. There have been no material changes in our internal controls over
financial reporting that occurred during the period covered by the quarterly
report which materially affected, or would be reasonably likely to affect, our
internal control over financial reporting. 35




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PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS On May 17, 2002, Datamize, LLC filed a lawsuit against the Company in the
United States District Court for the District of Montana (Civil Action No.
02-86-M-LBE). In its complaint, Datamize alleged that it is the owner of U.S.
Patent Number 6,014,137 (the 137 patent), and that the Company infringed one
or more claims of the 137 patent. Datamize was seeking, among other things,
injunctive relief and unspecified damages. The Company moved the Court
(Motion) to dismiss the action for lack of personal jurisdiction or, in the
alternative, have the action transferred to the Northern District of
California. In early July 2003, the Court granted the Motion and entered
judgment in favor of the Company on July 7, 2003 in accordance with that order. In December 2002, the Company filed a complaint for declaratory relief
against Datamize in United States District Court for the Northern District of
California (Civil Action No. 02-5693 VRW). The Company sought a declaratory
judgment that it does not infringe any valid claim of the 137 patent, which
Datamize claims to own. Datamize filed its answer and a counterclaim alleging
that the Company infringes the 137 patent. Datamize was seeking, among other
things, injunctive relief and unspecified damages. In response to a
procedural motion, the Court realigned the parties so that the Company was the
defendant, and Datamize was the plaintiff. The parties engaged in discovery,
and began the process of construction of the patent claims. On March 31, 2004,
the Company filed a motion for summary judgment, seeking to have the 137
patent held invalid on the grounds of indefiniteness. On July 9, 2004, the
Court granted the Companys motion, holding the 137 patent invalid, and
entered a judgment in favor of the Company. The Company has filed a motion to
recover its attorneys fees. Datamize may appeal the Courts entry of summary
judgment of invalidity. In 2002 and 2003, Datamize was issued two new patents based on
continuation applications to the 137 patent, U.S. Patent Nos. 6,460,040
(the040 patent) and 6,658,418 (the 418 patent). Datamize accused the
Company of infringing one or more claims of one or more of these patents. On
July 12, 2004, the Company filed a new complaint for declaratory relief against
Datamize in the United States District Court for the Northern District of
California (Civil Action No. 5:2004-CV-0277), seeking a declaration that the
Company does not infringe any valid claims of the 040 patent or the 418
patent. The Company anticipates that Datamize will counterclaim for
infringement on these patents. The Company intends to vigorously defend
against Datamizes allegations of infringement and vigorously pursue its claim
for declaratory relief. On November 13, 2001, the Company commenced an action in the District
Court in The Hague against an individual, Werner Linssen, to cancel his Benelux
trademark registration for Plumtree. The Company asked the Hague District
Court to (i) annul Mr. Linssens Benelux trademark registration for Plumtree
and (ii) bar Mr. Linssen, pending the proceedings, from contacting the
Companys customers in a threatening or unfair manner. On September 24, 2003,
the Hague District Court granted the Companys request for a preliminary
injunction barring Mr. Linssen, pending the proceedings, from contacting the
Companys customers in a threatening or unfair manner. On October 15, 2003,
Mr. Linssen filed answering papers denying the Companys allegations and
asserting a counterclaim for infringement of his registered trademark. On
January 21, 2004, the Company filed reply papers in further support of its
claim and in response to Mr. Linssens counterclaim. Mr. Linssen has until
March 3, 2004 to file papers in further support of his counterclaim. On November 25, 2001, the Company also commenced a proceeding before the
Swiss Federal Institute of Intellectual Property in opposition to Mr. Linssens
trademark registration for Plumtree. The Swiss Patent Office has dismissed
the proceeding; however, the Company has appealed the dismissal. On December
18, 2003, Mr. Linssen commenced a proceeding before the Swiss Federal Institute
of Intellectual Property in opposition to the Companys trademark registration
for Plumtree Software; this proceeding has been suspended pending disposition
of the Companys prior appeal. On May 2, 2003, the Company initiated a civil lawsuit against Mr. Linssen
in the Commercial Court of the Canton of Zurich, Switzerland, seeking (i) an
injunction barring Mr. Linssens use of the Plumtree trademark, and (ii) the
transfer of Mr. Linssens Swiss trademark registration for Plumtree, or in
the alternative, the cancellation of Mr. Linssens Swiss registration. On
October 6, 2003, Mr. Linssen filed answering papers denying the Companys
allegations and asserting a counterclaim for infringement of his registered
trademark. The Company is reviewing the counterclaim and will file a timely
reply. 36




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The Company and Mr. Linssen have each also commenced proceedings before
the E.U.s Office of Harmonisation of the Internal Market in opposition to each
others Community Trade Mark applications. Those proceedings have been
suspended pending disposition of the action in The Hague. On June 17, 2004, the Commercial Court of the Canton of Zurich,
Switzerland approved a global trademark settlement between the parties,
directing, among other things, that Mr. Linssens trademark and associated
applications and registrations be transferred to Plumtree. Pursuant to the
settlement agreement, the parties are taking steps to record transfer of
ownership of Mr. Linssens trademark to Plumtree and to terminate the various
proceedings described above. The results of the above issues and proceedings cannot be predicted with
certainty; however, in the opinion of management, the potential legal
liabilities associated with the final resolution of these complaints are not
currently expected to have a material adverse effect on the Companys financial
position, liquidity or results of operations. Our litigation costs have
recently increased and as pending matters proceed towards trial such costs are
likely to increase further. The tactical direction and pace of litigation,
especially in complex patent matters are inherently difficult to predict.
Therefore our legal costs may fluctuate substantially with little notice and
could affect our financial results. 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  (a)
    
    The Annual Meeting of Stockholders of Plumtree Software, Inc. was held at
8:00 a.m. Pacific Standard Time, on May 20, 2004 at the Omni San Francisco
Hotels Nob Hill Room located at 500 California Street, San Francisco,
California 94104.
Two proposals presented were at the meeting:  1.
    
    To elect three (3) Class I directors for a term of three years.2.
    
    To ratify the appointment of KPMG LLP as the Companys independent
accountants for the 2004 fiscal year. (b) Each of John Dillon, Rupen Dolasia and David Pratt was elected as a Class I
director for a term of three years and received the number of votes set forth
below: Name
    
    For
    
    WithheldJohn Dillon
Rupen Dolasia
David Pratt
    
    25,510,844
25,510,944
25,525,519
    
    454,840
454,740
440,165
 The term of office of John Kunze, James Richardson and Bernard Whitney as
directors continued after the meeting. (c) The appointment of KPMG LLP as the Companys independent accountants for
the 2004 fiscal year was ratified by the votes set forth below: For
    
    Against
    
    Abstained25,954,229
    
    6,365
    
    5,090
 37




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ITEM 5. OTHER INFORMATION Our Insider Trading Policy allows directors, officers and other employees
covered under the policy to establish, under the limited circumstances
contemplated by Rule 10b5-1 of the Securities Exchange Act of 1934, as amended,
written programs that permit automatic trading of the Companys stock or
trading of the Companys stock by an independent person (such as an investment
bank) who is not aware of material inside information at the time of the trade.
Several officers have conducted trades during the fiscal quarter ended June
30, 2004 pursuant to previously adopted Rule 10b5-1 trading plans. 38




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Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. EXHIBIT INDEX Exhibit
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant (1)3.2
    
    Bylaws of the Registrant (1)4.1
    
    Specimen common stock certificate (1)4.2
    
    Warrant to purchase Common Stock, dated May 31, 2000, issued to WXI/SAN Realty, L.L.C. (1)4.3
    
    Warrant to purchase Common Stock, dated Sept. 20, 2000, issued to WXI/SAN Realty, L.L.C. (1)10.1*
    
    Form of Indemnification Agreement between the Registrant and each of its directors, officers and certain other key
employees (1)10.2*
    
    1997 Equity Incentive Plan, as amended, and form of agreements thereunder (1)10.3*
    
    2002 Stock Plan, as amended, and form of agreements thereunder (1)10.4*
    
    2002 Employee Stock Purchase Plan, and form of agreements thereunder (3)10.5*
    
    2002 Director Option Plan, and form of agreements thereunder (1)10.6
    
    Loan and Security Agreement, dated March 14, 2001, between the Registrant and Silicon Valley Bank (1)10.7
    
    Office Lease for 500 Sansome Street, dated April 7, 1999, between the Registrant and BPG Sansome, L.L.C. (1)10.8
    
    First Amendment to Lease for 500 Sansome Street, dated May 3, 2000, between the Registrant and WXI/SAN Realty, L.L.C.
(1)10.9*
    
    Offer letter between the Registrant and John H. Kunze (1)10.10*
    
    Offer letter between the Registrant and Eric Borrmann (1)10.11
    
    Second Amendment to Lease for 500 Sansome Street, dated September 20, 2000, between the Registrant and WXI/SAN Realty,
L.L.C. (1)10.12
    
    Third Amendment to Lease for 500 Sansome Street, dated November 22, 2000, between the Registrant and WXI/SAN Realty,
L.L.C. (1)10.13
    
    Fourth Amendment to Lease for 500 Sansome Street, dated July 31, 2002, between the Registrant and WXI/SAN Realty,
L.L.C. (2)10.14
    
    Fifth Amendment to Lease for 500 Sansome Street, dated July 21, 2003, between the Registrant and WXI/SAN Realty,
L.L.C. (2)10.15*
    
    Offer letter between Registrant and Eric Zocher (2)10.16*
    
    2004 Bonus Plan (3)10.17*
    
    2004 Outside Director Stock in Lieu of Fees Plan (3)10.18*
    
    Employment Agreement between the Registrant and Paul Ciandrini10.19*
    
    Employment Agreement between the Registrant and Ira Pollack10.20*
    
    Offer Letter between the Registrant and Adriana Chiocchi31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (S-O Act)31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the S-O Act32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the S-O Act32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the S-O Act
 * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to Exhibits filed with Registration Statement No.
333-45950, as amended, which became effective on June 3, 2002. 39




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(2) Incorporated by reference to Exhibits filed with the Registrants Form
10-Q for the quarter ended September 30, 2003 and filed with the SEC on
November 3, 2003 (File No. 001-31344). (3) Incorporated by reference to Exhibits filed with the Registrants Form 10-K
for the year ended December 31, 2003 and filed with the SEC on March 12, 2004
(File No. 001-31344). (b) Reports on Form 8-K. On April 15, 2004, we furnished a current report on Form 8-K with respect
to our press release announcing the Companys results for the fiscal quarter
ended March 31, 2004. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PLUMTREE SOFTWARE, INC.
(Registrant) Dated: August 6, 2004
    /s/   John H. KunzeJohn H. KunzePresident, Chief Executive Officer and Director
(Duly Authorized Officer)Dated: August 6, 2004
    /s/   Eric BorrmannEric BorrmannChief Financial Officer
(Principal Financial Officer) 40