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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q x  QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 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
(State or other jurisdiction of
incorporation or organization)
    
    52-2303761
(I.R.S. Employer
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 x  o No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x  o No The number of shares outstanding of the issuers common stock as of March 31,
2004 was 31,634,318 shares.




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PLUMTREE SOFTWARE, INC. FORM 10-Q March 31, 2004 INDEX PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statementsa. Condensed Consolidated Balance Sheets  March 31, 2004 and December 31, 2003
    
    
    3b. Condensed Consolidated Statements of Operations  Three months ended March
31, 2004 and March 31, 2003
    
    
    4c. Condensed Consolidated Statements of Cash Flows  Three months ended March
31, 2004 and March 31, 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
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    33Item 2. Changes in Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits and Reports on Form 8-K
    
    
    35Signatures
    
    
    36Certifications
    
    
    37EXHIBIT 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)
 As of
    
    As ofMarch 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,447
    
    
    $
    20,434Short-term investments
    
    
    46,082
    
    
    
    47,255Accounts receivable (net of allowance for doubtful
accounts of $519 and $522, respectively)
    
    
    16,508
    
    
    
    17,171Prepaid expenses and other current assets
    
    
    2,452
    
    
    
    2,079Total current assets
    
    
    87,489
    
    
    
    86,939Property and equipment, net
    
    
    1,846
    
    
    
    1,798Other assets
    
    
    1,556
    
    
    
    2,025Total assets
    
    $
    90,891
    
    
    $
    90,762LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,312
    
    
    $
    1,312Accrued and other current liabilities
    
    
    12,652
    
    
    
    12,084Deferred revenue
    
    
    20,652
    
    
    
    19,027Total current liabilities
    
    
    34,616
    
    
    
    32,423Other long-term liabilities
    
    
    432
    
    
    
    448Total liabilities
    
    
    35,048
    
    
    
    32,871Commitments and contingenciesStockholders equity:Common stock, $0.001 par value:Authorized
 100,000 shares

Outstanding  31,634 and 31,265
   shares, respectively
    
    
    32
    
    
    
    31Additional paid-in capital
    
    
    100,621
    
    
    
    99,747Deferred stock-based compensation
    
    
    (613
    )
    
    
    (868
    )Accumulated comprehensive income (loss)
    
    
    105
    
    
    
    (92
    )Accumulated deficit
    
    
    (44,302
    )
    
    
    (40,927
    )Total stockholders equity
    
    
    55,843
    
    
    
    57,891Total liabilities and stockholders equity
    
    $
    90,891
    
    
    $
    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 MonthsEnded March 31,2004
    
    2003Revenue:License
    
    $
    6,871
    
    
    $
    8,451Service and maintenance
    
    
    10,852
    
    
    
    8,718Total revenue
    
    
    17,723
    
    
    
    17,169Cost of revenue:License
    
    
    429
    
    
    
    377Service and maintenance
    
    
    4,119
    
    
    
    2,186Amortization of stock-based compensation and acquired technology
    
    
    446
    
    
    
    496Total cost of revenue
    
    
    4,994
    
    
    
    3,059Gross margin
    
    
    12,729
    
    
    
    14,110Operating expenses:Research and development
    
    
    5,509
    
    
    
    4,749Sales and marketing
    
    
    8,011
    
    
    
    6,928General and administrative
    
    
    2,387
    
    
    
    1,623Amortization of stock-based compensation
    
    
    184
    
    
    
    489Total operating expenses
    
    
    16,091
    
    
    
    13,789Income (loss) from operations
    
    
    (3,362
    )
    
    
    321Other income (loss), net:Interest income, net
    
    
    276
    
    
    
    211Other income (loss), net
    
    
    (127
    )
    
    
    115Income (loss) before income taxes
    
    
    (3,213
    )
    
    
    647Provision for income taxes
    
    
    162
    
    
    
    118Net income (loss)
    
    $
    (3,375
    )
    
    $
    529Net income (loss) per common share:Basic
    
    $
    (0.11
    )
    
    $
    0.02Diluted
    
    $
    (0.11
    )
    
    $
    0.02Weighted average common shares outstanding:Basic
    
    
    31,478
    
    
    
    29,668Diluted
    
    
    31,478
    
    
    
    32,490
 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 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    (3,375
    )
    
    $
    529Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Provision for doubtful accounts
    
    
    (6
    )
    
    
    (118
    )Amortization of premium on short-term investments
    
    
    237
    
    
    
    82Depreciation and amortization
    
    
    353
    
    
    
    443Amortization of stock-based compensation
    
    
    237
    
    
    
    591Amortization of acquired technology
    
    
    394
    
    
    
    394Amortization of warrants issued for services
    
    
    9
    
    
    
    13Changes in assets and liabilities:Accounts receivable
    
    
    669
    
    
    
    4,720Prepaid expenses and other current assets
    
    
    (383
    )
    
    
    (503
    )Other assets
    
    
    75
    
    
    
    90Accounts payable
    
    
    
    
    
    
    (580
    )Accrued and other current liabilities
    
    
    566
    
    
    
    (3,914
    )Deferred revenue
    
    
    1,625
    
    
    
    (917
    )Other long-term liabilities
    
    
    (16
    )
    
    
    4Net cash provided by operating activities
    
    
    385
    
    
    
    834Cash flows from investing activities:Purchases of property and equipment
    
    
    (401
    )
    
    
    (296
    )Purchases of short-term investments
    
    
    (8,385
    )
    
    
    (3,617
    )Proceeds from sale of short-term investments
    
    
    9,352
    
    
    
    3,550Net cash provided by (used in) investing activities
    
    
    566
    
    
    
    (363
    )Cash flows from financing activities:Payments on capital lease obligations
    
    
    
    
    
    
    (48
    )Repayments of employee notes receivable
    
    
    
    
    
    
    342Proceeds from issuance of common stock
    
    
    891
    
    
    
    698Repurchases of common stock
    
    
    
    
    
    
    (12
    )Net cash provided by financing activities
    
    
    891
    
    
    
    980Effect of change in exchange rates on cash and cash equivalents
    
    
    171
    
    
    
    (121
    )Net increase in cash and cash equivalents
    
    
    2,013
    
    
    
    1,330Cash and cash equivalents at beginning of period
    
    
    20,434
    
    
    
    20,655Cash and cash equivalents at end of period
    
    $
    22,447
    
    
    $
    21,985Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    100
    
    
    $
    186Cash paid for interest
    
    $
    
    
    
    $
    87
 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 March 31, 2004
 and for the three months ended March 31, 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 March 31, 2004, the
results of operations for the three months March 31, 2004 and 2003, and cash
flows for the three months ended March 31, 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
with the Securities and Exchange Commission 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. 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 key indicators 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, 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. Stock-Based Compensation 6




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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 March 31,2004
    
    2003Risk-free interest rate
    
    
    2.66
    %
    
    
    2.55
    %Expected life of the option
    
    4 years
    
    4 yearsDividend yield
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    80
    %
    
    
    109
    %
 The fair value of rights under the Employee Stock Purchase Plan (ESPP)
for the three months ended March 31, 2004 and 2003 was estimated using the
Black-Scholes option pricing model, using the following weighted average
assumptions: Three Months Ended March 31,2004
    
    2003Risk-free interest rate
    
    
    1.58
    %
    
    
    1.38
    %Expected life of the option
    
    1.25 yrs
    
    1.25 yrsDividend yield
    
    
    0
    %
    
    
    0
    %Volatility
    
    
    85
    %
    
    
    109
    %
 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 March 31, 2004 and 2003 was $2.57 and $2.29 per share,
respectively. The weighted-average estimated fair value of share purchase
rights under the ESPP for the three months ended March 31, 2004 and 2003 was
$1.41 and $1.65 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 March 31,2004
    
    2003Net income (loss) as reported
    
    $
    (3,375
    )
    
    $
    529Add: Stock-based employee
compensation expense included in
net income (loss), net of
related tax effects
    
    
    237
    
    
    
    591Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects
    
    
    (1,835
    )
    
    
    (2,083
    )Pro forma net loss under SFAS 123
    
    $
    (4,973
    )
    
    $
    (963
    )Net income (loss) per common share  basic:As reported under APB 25
    
    $
    (0.11
    )
    
    $
    0.02As reported under SFAS 123
    
    $
    (0.16
    )
    
    $
    (0.05
    )Net income (loss) per common share  diluted:As reported under APB 25
    
    $
    (0.11
    )
    
    $
    0.02As reported under SFAS 123
    
    $
    (0.16
    )
    
    $
    (0.05
    )
 7




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Amortization of stock-based compensation expense is as follows (in
thousands): Three Months EndedMarch 31,2004
    
    2003Amortization of stock-based compensation included in cost of revenue
    
    $
    53
    
    
    $
    102Amortization of stock-based compensation included in operating expenses:Research and development
    
    
    82
    
    
    
    224Sales and marketing
    
    
    84
    
    
    
    216General and administrative
    
    
    18
    
    
    
    49Total stock-based compensation included in operating expenses
    
    
    184
    
    
    
    489Total stock-based compensation
    
    $
    237
    
    
    $
    591
 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): Expected Maturity Date for the Year Ending
    
    As ofDecember 31,
    
    March 31, 2004Total Cost2004
    
    2005
    
    2006
    
    Value
    
    Total Fair ValueTaxable auction rate securities
    
    $
    4,450
    
    
    $
    
    
    
    $
    
    
    
    $
    $4,450
    
    
    $
    4,450US Government agencies
    
    
    2,518
    
    
    
    10,900
    
    
    
    5,000
    
    
    
    18,418
    
    
    
    18,459Corporate notes
    
    
    15,269
    
    
    
    6,711
    
    
    
    1,078
    
    
    
    23,058
    
    
    
    23,173Total
    
    $
    22,237
    
    
    $
    17,611
    
    
    $
    6,078
    
    
    $
    45,926
    
    
    $
    46,082
 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 price was allocated to acquired technology and is being
amortized over its estimated useful life of three years. 8




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Amortization is being recorded as cost of revenue and was $394,000 for
each of the three months ended March 31, 2004 and 2003. Accrued Liabilities Accrued liabilities consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Commissions and bonus
    
    $
    1,794
    
    
    $
    1,808Sales taxes
    
    
    1,473
    
    
    
    995Vacation
    
    
    1,787
    
    
    
    1,559Royalties
    
    
    341
    
    
    
    134Third party software
    
    
    773
    
    
    
    787ESPP
    
    
    313
    
    
    
    623Other
    
    
    6,171
    
    
    
    6,178$
    12,652
    
    
    $
    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) alleging, in general, that by supplying software and systems for
the personalization and customization of networked kiosk and computer screens,
the Company infringes U.S. Patent Number 6,014,137 (the 137 patent) owned by
Datamize. Datamize, based in Florence, Montana described itself in its
complaint as engaged in the business of designing, creating and commercially
exploiting software useful in the personalization and customization of
networked kiosk and computer screens. Datamize was seeking, among other
things, injunctive relief and unspecified damages. The Company filed a motion
(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.
Datamize had thirty (30) days to appeal this judgment, which period elapsed on
August 6, 2003 without Datamize taking any action with the Court. In December 2002, the Company filed a complaint for declaratory relief
against Datamize in U.S. District Court for the Northern District of California
(Civil Action No. 02-5693 VRW). The Company seeks a declaratory judgment that
it does not infringe any valid claim of the 137 patent, which Datamize claims
to own. Datamize has filed its answer and a counterclaim alleging that the
Company infringes the 137 patent. Datamize is seeking, among other things,
injunctive relief and unspecified damages. In response to a procedural motion,
the Court realigned the parties so that the Company is now the defendant, and
Datamize is now the plaintiff. The parties are engaging in discovery, and
construction of the patent claims. No trial date has been set, although the
final pretrial conference is scheduled for March 29, 2005. Based on other communications by Datamizes counsel, the Company expects
Datamize may take further legal action against the Company with respect to
additional intellectual property that Datamize purportedly owns or will own in
the future. At this time, the Company does not believe it is infringing on any
valid patent claim of Datamize and intends to pursue vigorously its claims and
defenses. On November 13, 2001, the Company commenced an action in the District
Court in The Hague against an individual, Werner Linssen, to cancel the Benelux
trademark registration for Plumtree held by Mr. Linssen. 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. The case on the merits is proceeding, with the parties filing
opposing papers supporting their respective positions. The Companys next
submission to the court is due in June 2004. 9




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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 application 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. The case
is proceeding, with each party filing papers supporting its respective
position. The court has scheduled a hearing on June 17, 2004, at which time the
court will provide a preliminary assessment of the case. In addition, the Company and Mr. Linssen have each commenced proceedings before
the E.U.s Office of Harmonization of the Internal Market in opposition to each
others Community Trade Mark applications. Those proceedings have been
suspended pending disposition of the Benelux action in The Hague. In connection with the Companys operating lease agreement for their
corporate headquarters in San Francisco, CA, 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; 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 ended
March 31, 2004 and 2003 the Company incurred royalty expense of approximately
$191,000 and $375,000, respectively, related to these arrangements. The
Company classifies all royalty expenses as cost of revenues. For the three months ended March 31, 2004, the Company also included in
cost of license revenue $213,000 related to two agreements with third party
software providers in which the Company resold their software to the customers. Net Income (Loss) Per Share Basic and diluted net income (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 income (loss) per share is
calculated by dividing net income (loss) by the weighted average common shares
outstanding during the period, less shares subject to repurchase. Diluted net
income (loss) per share is calculated by dividing net income (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 income (loss) per share computation when there
affect would be anti-dilutive. The following table presents the calculation of basic and diluted net
income (loss) per share (in thousands, except per share amounts): 10




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For the Three Months EndedMarch 31,2004
    
    2003Net income (loss)
    
    $
    (3,375
    )
    
    $
    529Basic:Weighted average shares of common stock
    
    
    31,489
    
    
    
    29,778Less: Weighted average shares subject to repurchase
    
    
    (11
    )
    
    
    (110
    )Weighted average shares used in computing basic net income (loss)per
common share
    
    
    31,478
    
    
    
    29,668Basic net income (loss) per common share
    
    $
    (0.11
    )
    
    $
    0.02Diluted:Weighted average shares used above
    
    
    31,478
    
    
    
    29,668Add: Weighted average shares subject to repurchase
    
    
    
    
    
    
    110Add: Net additional shares related to assumed option and warrant
exercises under the treasury stock method
    
    
    
    
    
    
    2,712Weighted average shares used in computing diluted net income (loss)
per common share
    
    
    31,478
    
    
    
    32,490Diluted net income (loss) per common share
    
    $
    (0.11
    )
    
    $
    0.02
 The weighted average exercise price of options to purchase common stock
excluded from the diluted net income (loss) calculation above was $3.89 for the
three months ended March 31, 2004. The following potential shares of common stock have been excluded from the
computation of diluted net income (loss) per share because the effect of
including these shares would have been anti-dilutive (in thousands): For the Three Months Ended March 31,2004
    
    2003Options to purchase common stock
    
    
    11,849
    
    
    
    5,213Common stock subject to repurchase
    
    
    11
    
    
    
    Employee stock purchase plan
    
    
    112
    
    
    
    Warrants
    
    
    41
    
    
    
    41Total
    
    
    12,013
    
    
    
    5,254
 Recent Accounting Pronouncements In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim or annual period ending after March
15, 2004. FIN 46 was adopted in the three months ended March 31, 2004 and did
not have a material impact on the financial position or results of the
Companys operations. 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): For the Three MonthsEnded March 31,2004
    
    2003Revenues:License
    
    $
    6,871
    
    
    $
    8,451Maintenance
    
    
    5,880
    
    
    
    5,456Professional services and training
    
    
    4,972
    
    
    
    3,262Total
    
    $
    17,723
    
    
    $
    17,169
 The Company markets its products primarily from its operations in the
United States. International sales are made primarily to customers in Canada,
EMEA, Japan and Asia Pacific. Substantially all of the Companys long-term
assets are located within the United States. Information regarding the
Companys revenues in different geographic regions is as follows (in
thousands): For the Three MonthsEnded March 31,2004
    
    2003Revenues:United States
    
    $
    13,920
    
    
    $
    12,274Other
    
    
    3,803
    
    
    
    4,895Total
    
    $
    17,723
    
    
    $
    17,169
 For the three months ended March 31, 2004 and 2003, no customer
represented greater than 10% of the Companys total revenues. As of March 31,
2004, no customer accounted for greater than 10% of accounts receivable. As of
March 31, 2003, one customer accounted for 11% of accounts receivable. Note 3. Comprehensive Income (Loss) Comprehensive income (loss) includes net income (loss), unrealized gains
on available-for-sale securities and foreign currency translation adjustments. Comprehensive income (loss) is comprised of the following (in thousands): For the Three MonthsEnded March 31,2004
    
    2003Net income (loss)
    
    $
    (3,375
    )
    
    $
    529Comprehensive income (loss):Change in accumulated foreign currency translation adjustments
    
    
    169
    
    
    
    (121
    )Change in accumulated unrealized gain on available-for-sale securities
    
    
    30
    
    
    
    80Total comprehensive income (loss)
    
    $
    (3,176
    )
    
    $
    488
 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.
ThisForm 10-Qcontains 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 March
31, 2004 and 2003, our total revenue was $17.7 million and $17.2 million,
respectively, and our net income (loss) was $(3.4) million and $529,000,
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
March 31, 2004 was $6.9 million, a 19% decrease over the three
months ended March 31, 2003, resulting primarily from the downturn
in the overall market for information technology and software as
well as increased competition.
    
    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 ended
March 31, 2004 was $5.9 million, an increase of $424,000 or 8%
over the comparable period in 2003, which results from an increase
in maintenance 13




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revenue from new customers as well as from renewals of maintenance
contracts by our installed base of customers. Revenue attributable
to professional services increased during the three months ended
March 31, 2004 to $5.0 million as compared to $3.3 million for the
comparable period in 2003, primarily related to increased headcount
within the professional services department, increasing to 63
consultants at March 31, 2004 from 41 consultants at March 31, 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 March 31, 2004 was $20.7
million, of which approximately $1.1 million relates to deferred
license revenue, approximately $18.6 million relates to deferred
maintenance revenue and $860,000 relates to deferred professional
services and training revenue. During the three months ended March
31, 2004, our total deferred revenue balance increased $1.6
million over the balance at December 31, 2003. The increase in
total deferred revenue from December 31, 2003 to March 31, 2004 is
comprised of an increase in deferred maintenance revenue offset by
decreases in deferred license revenue and deferred professional
services and training revenue.
    
    Deferred license revenue remained relatively flat as the
balance decreased by $53,000 at March 31, 2004 to $1.1 million as
compared to $1.2 million at December 31, 2003.
    
    Deferred maintenance revenue increased $2.0 million
during the three months ended March 31, 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 $357,000 during the three months ended March 31, 2004 as
compared to the balance at December 31, 2003 as less of our
customers at March 31, 2004 prepaid for services and training than
at 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 March 31, 2004,
we completed 65 license transactions, which includes 27 new customers or
42% and 38 repeat orders or 58% bringing our total number of customers
licensed since inception to over 600. During the three months ended
March 31, 2003, we completed 72 license transactions, which include 30
new customers or 42% and 42 repeat orders or 58%.
    
    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 ended March 31, 2004, 79% of
our revenue was generated within the United States, with International
revenue collectively accounting for 21% of our total revenue. 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 March 31, 2004, our cash, cash equivalents and
short-term investments were $68.5 million, up $840,000 from $67.7
million at December 31, 2003. We expect that our primary
utilization of cash in 2004 will continue to be salaries,
commissions, bonuses and other payroll related costs.
    
    Cash provided by operations in the three months ended
March 31, 2004 was $385,000 compared to $834,000 for the three
months ended March 31, 2003. The decrease in cash flow provided by
operations was driven primarily by the decrease in our net income
(loss) as well as a decrease in our accrued liabilities. 14




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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
is received from the customer or the customers acceptance rights
expire.
    
    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 15




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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 key indicators of gross versus net revenue reporting
outlined in EITF 99-19. Allowance for Doubtful Accounts We have provided an allowance for doubtful accounts of $519,000 as of
March 31, 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 have 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 March 31, 2004,
the unamortized costs related to the purchased software were approximately $1.1
million 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 March 31, 2004 and 2003 we recognized $237,000 and $591,000 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 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: 16




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##### Table of Contents



Three Months Ended
 March 31,2004
    
    2003Net income (loss) as reported
    
    $
    (3,375
    )
    
    $
    529Add: Stock-based employee
compensation expense included in
net income (loss), net of
related tax effects
    
    
    237
    
    
    
    591Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects
    
    
    (1,835
    )
    
    
    (2,083
    )Pro forma net loss under SFAS 123
    
    $
    (4,973
    )
    
    $
    (963
    )Net income (loss) per common share  basic:As reported under APB 25
    
    $
    (0.11
    )
    
    $
    0.02As reported under SFAS 123
    
    $
    (0.16
    )
    
    $
    (0.05
    )Net income (loss) per common share  diluted:As reported under APB 25
    
    $
    (0.11
    )
    
    $
    0.02As reported under SFAS 123
    
    $
    (0.16
    )
    
    $
    (0.05
    )
 Results of Operations Three Months Ended March 31, 2004 and 2003 Revenue Revenue increased to $17.7 million in the three months ended March 31,
2004 from $17.2 million in the three months ended March 31, 2003. Between these
periods, license revenue decreased 19% and services and maintenance revenue
increased 24%. Licenses. License revenue decreased to $6.9 million in the three months
ended March 31, 2004 from $8.5 million in the three months ended March 31,
2003. The decrease in license revenue for the three months ended March 31,
2004 over results for the comparable period in 2003 was due primarily to
customers delaying purchasing decisions, offset by the addition of 27 new
license customers during the three months ended March 31, 2004. Services and Maintenance. Services and maintenance revenue increased to
$10.9 million in the three months ended March 31, 2004 from $8.7 million in the
three months ended March 31, 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 $5.0 million for the
three months ended March 31, 2004 as compared to $3.3 million for the three
months ended March 31, 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 $5.9 million in the three
months ended March 31, 2004 from $5.4 million in the three months ended March
31, 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
$429,000 in the three months ended March 31, 2004 from $377,000 in the three
months ended March 31, 2003 primarily related to two agreements with third
party software providers in which we resold their software to the customer
totaling $213,000 during the three months ended March 31, 2004, 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 $4.1 million in the three months ended March 31, 2004
from $2.2 million in the three months ended March 31, 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. As of March 31,
2004, we had 84 professional services and technical support personnel as
compared to 50 at March 31, 2003. Third party consultant costs related to
services increased to $409,000 for the three months ended March 17




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31, 2004 from $124,000 in the three months ended March 31,2003. 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 March 31,
2004 and 2003 was $53,000 and $102,000, 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 March 31, 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 on an independent
contractor basis. Research and development expenses increased to $5.5 million
in the three months ended March 31, 2004 from $4.7 million in the three months
ended March 31, 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 March 31, 2004,
we had 130 employees in research and development as compared to 113 employees
as of March 31, 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 $8.0
million in the three months ended March 31, 2004 from $6.9 million in the three
months ended March 31, 2003. Sales expenses increased to $6.8 million in the
three months ended March 31, 2004 from $5.9 million in the three months ended
March 31, 2003, primarily as a result of increased headcount and sales
commissions for the first quarter of 2004 as compared to the first quarter of
2003. Sales commissions increased by $414,000 for the three months ended March
31, 2004 when compared to the corresponding period in 2003. Marketing expenses
increased to $1.2 million in the three months ended March 31, 2004 from $1.0
million in the three months ended March 31, 2003. As of March 31, 2004, we had
134 employees in sales and marketing as compared to 106 employees as of March
31, 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 $2.4 million in the three months ended March 31, 2004 as
compared to $1.6 million for the three months ended March 31, 2003. As of
March 31, 2004, we had 27 general and administrative personnel as compared to
25 as of March 31, 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, proposed 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 March 31,
2004 and 2003 was $184,000 and $489,000, 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 $149,000 in the three months ended March 31, 2004 as compared to other income, net, of $326,000
in the three months ended March 31, 2003. The decrease was primarily the result of a increase in the loss on foreign currency
transactions and decreased interest income. Interest income, net, increased to $276,000 for the three months ended March 31, 2004
from $211,000 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. The effect of foreign currency transactions was a loss of $127,000 for the three months ended
March 31, 2004 as compared to a gain of $115,000 for the comparable period in 2003. Provision for Income Taxes We recorded an income tax provision of $162,000 and $118,000 for the three months ended March 31, 2004 and 2003 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 March 31, 2004, we had $68.5 million of cash and cash equivalents and short-term investments and $52.9 million in working
capital. Our net cash provided by operating activities decreased to $385,000 for the three months ended March 31, 2004, from
$834,000 for the three months ended March 31, 2003. The decrease is primarily attributable to the $3.9 million decrease in net
income (loss) for the three months ended March 31, 2004 as compared to the three months ended March 31, 2003 offset by increases in
our deferred revenue and decrease in accounts receivable. Capital expenditures were $401,000 and $296,000 for the three months ended March 31, 2004 and 2003. Our capital
expenditures in the first three 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. 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 March 31, 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 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, which we were in
compliance with at March 31, 2004. 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 January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN
46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after March 15, 2004.
FIN 46 was adopted in the three months ended March 31, 2004 and did not have a material impact on the financial position or results
of our operations. 19




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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 and Plumtree Studio Server, each released commercially in the first quarter of 2002,
and our Content Server released in November 2002, are our most significant new product developments since the 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.
    
    In order 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, which 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. 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 on a Java version of many of our products. We
cannot predict whether these versions of our software will be successful. 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. We incurred substantial net losses in each year from our inception in July 1996 through 2001. For the years ended
December 31, 2000 and 2001, we incurred net losses of approximately $21.7 million and $7.8 million, 20




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respectively. Although we achieved annual profitability of approximately $2.4 million in 2002,
for the year ended December 31, 2003 we had a net loss of $1.5 million and for the three months
ended March 31, 2004 we had a net loss of $3.4 million. As of March 31, 2004,
we had an accumulated deficit of approximately $44.3 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 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 on a quarterly or annual basis would likely have a harmful
effect on 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;
    
    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. 21




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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 depends 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 March 31, 2004, our top 10 customers accounted for approximately
26% 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 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. If new and future versions
of our products and services, including version 5.0 of the Plumtree Corporate
Portal and planned future releases of the Plumtree Corporate Portal, such as
5.0 for Java platforms, and planned future updates to 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. 22




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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. We
have recently reorganized some of our sales force and have focused training
efforts around selling our products into specific industries such as
pharmaceuticals and consumer retail. We have also hired a new Chief Operating
Officer and Vice President of World Wide Sales who are implementing changes in
our sales methodology. While these initiatives are intended to reduce the
typical sales cycle we may not be successful in the long term. The
implementation of new sales methodologies and retraining process involved in
developing industry focused sales teams may result in longer sales cycles
during the period of transition. 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 plan to undertake operational initiatives to expand the role of the
indirect sales channel, 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 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. We recently hired a new Chief Operating Officer and Vice
President of World Wide Sales. 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 may
result in increased 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 large 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. We rely significantly on
these parties to market and sell our products and to provide rapid and
comprehensive deployment of our products. These relationships have been a key
factor in our overall business strategy, and as we look to expand our indirect
sales channel to increase sales the importance of this type pf relationship
will increase. 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 23




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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 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.
    
    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 24




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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 Aflac, American Medical Response, Cypress
Semiconductor, Government of Bermuda, Groupe Casino, Hochtief, ITT, JM Smucker,
Logica, Lombard Odier Darier Hentsch, Mercy Health Services, Ontario Ministry
of Health, 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. 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, 25




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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 are likely 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. 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.
Our 26




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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 21% and 29% of
our total revenue during the three months ended March 31, 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 the United Kingdom, France, Germany,
South Korea, Australia, Italy, Spain, Brazil, Portugal, Sweden, Taiwan, 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;
    
    difficulties in staffing and managing international operations;
    
    greater difficulty in enforcing our intellectual property rights; and
    
    greater difficulty or delay in accounts receivable collection.  In consultation with our advisors, 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 27




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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 filed fourteen non-provisional patent applications
with the U.S. Patent and Trademark Office and two international patent
applications with the World Intellectual Property Organization. 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. 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) alleging, in general, that by supplying software and systems for
the personalization and customization of networked kiosk and computer screens,
the Company infringes U.S. Patent Number 6,014,137 (the 137 patent) owned by
Datamize. Datamize, based in Florence, Montana described itself in its
complaint as engaged in the business of designing, creating and commercially
exploiting software useful in the personalization and customization of
networked kiosk and computer screens. Datamize was seeking, among other
things, injunctive relief and unspecified damages. The Company filed a motion
(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.
Datamize had thirty (30) days to appeal this judgment, which period elapsed on
August 6, 2003 without Datamize taking any action with the Court. In December 2002, the Company filed a complaint for declaratory relief
against Datamize in U.S. District Court for the Northern District of California
(Civil Action No. 02-5693 VRW). The Company seeks a declaratory judgment that
it does not infringe any valid claim of the 137 patent, which Datamize claims
to own. Datamize has filed its answer and a counterclaim alleging that the
Company infringes the 137 patent. Datamize is seeking, among other things,
injunctive relief and unspecified damages. In response to a procedural motion,
the Court realigned the parties so that the Company is now the defendant, and
Datamize is now the plaintiff. The parties are engaging in discovery, and
construction of the patent claims. No trial date has been set, although the
final pretrial conference is scheduled for March 29, 2005. Based on other communications by Datamizes counsel, the Company expects
Datamize may take further legal action against the Company with respect to
additional intellectual property that Datamize purportedly owns or will own in
the future. At this time, the Company does not believe it is infringing on any
valid patent claim of Datamize and intends to pursue vigorously its claims and
defenses. On November 13, 2001, the Company commenced an action in the District
Court in The Hague against an individual, Werner Linssen, to cancel the Benelux
trademark registration for Plumtree held by Mr. Linssen. The Company asked
the Hague District Court to (i) annul Mr. Linssens Benelux trademark
registration for Plumtree and 28




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(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. The case on the merits is proceeding, with the parties filing
opposing papers supporting their respective positions. The Companys next
submission to the court is due in June 2004. 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 application 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. The case
is proceeding, with each party filing papers supporting its respective
position. The court has scheduled a hearing on June 17, 2004, at which time the
court will provide a preliminary assessment of the case. In addition, the Company and Mr. Linssen have each commenced proceedings
before the E.U.s Office of Harmonization of the Internal Market in opposition
to each others Community Trade Mark applications. Those proceedings have been
suspended pending disposition of the Benelux action in The Hague. 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. 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 29




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
    
    result in court orders limiting our ability to license our products. On May 17, 2002 Datamize LLC filed a lawsuit against us in the United
States District Court for the District of Montana (Civil Action No.
02-86-M-LBE) alleging, in general, that by supplying software and systems for
the personalization and customization of networked kiosk and computer screens,
we infringe U.S. Patent Number 6,014,137 (the 137 patent) owned by Datamize.
Datamize, based in Florence, Montana described itself in its complaint as
engaged in the business of designing, creating and commercially exploiting
software useful in the personalization and customization of networked kiosk and
computer screens. Datamize was seeking, among other things, injunctive relief
and unspecified damages. We filed a motion (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 us on July 7, 2003 in
accordance with that order. Datamize had thirty (30) days to appeal this
judgment, which period elapsed on August 6, 2003 without Datamize taking any
action with the Court. In December 2002, we filed a complaint for declaratory relief against
Datamize in U.S. District Court for the Northern District of California (Civil
Action No. 02-5693 VRW). We seek a declaratory judgment that it does not
infringe any valid claim of the 137 patent, which Datamize claims to own.
Datamize has filed its answer and a counterclaim alleging that we infringe the
137 patent. Datamize is seeking, among other things, injunctive relief and
unspecified damages. In response to a procedural motion, the Court realigned
the parties so that we are now the defendant, and Datamize is now the
plaintiff. The parties are engaging in discovery, and construction of the
patent claims. No trial date has been set, although the final pretrial
conference is scheduled for March 29, 2005. Based on other communications by Datamizes counsel, we expect Datamize
may take further legal action against us with respect to additional
intellectual property that Datamize purportedly owns or will own in the future.
At this time, we do not believe we infringe any valid patent claim of Datamize
and intend to continue to vigorously pursue all claims and defenses. Our defense costs have increased substantially, and may continue to
increase as this matter proceeds in litigation and approaches trial, currently
scheduled for early 2005. 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. 30




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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. 31




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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 volitile 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 32




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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. 33




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2004, we had cash, cash equivalents and short-term
investments totaling $68.5 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 ended March 31, 2004, we earned approximately 21% 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, 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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) are effective to ensure that material information relating to Plumtree
is made known to them by others within our company during the period in which
this Report on Form 10-Q was being prepared. 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. 34




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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) alleging, in general, that by supplying software and systems for
the personalization and customization of networked kiosk and computer screens,
the Company infringes U.S. Patent Number 6,014,137 (the 137 patent) owned by
Datamize. Datamize, based in Florence, Montana described itself in its
complaint as engaged in the business of designing, creating and commercially
exploiting software useful in the personalization and customization of
networked kiosk and computer screens. Datamize was seeking, among other
things, injunctive relief and unspecified damages. The Company filed a motion
(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.
Datamize had thirty (30) days to appeal this judgment, which period elapsed on
August 6, 2003 without Datamize taking any action with the Court. In December 2002, the Company filed a complaint for declaratory relief
against Datamize in U.S. District Court for the Northern District of California
(Civil Action No. 02-5693 VRW). The Company seeks a declaratory judgment that
it does not infringe any valid claim of the 137 patent, which Datamize claims
to own. Datamize has filed its answer and a counterclaim alleging that the
Company infringes the 137 patent. Datamize is seeking, among other things,
injunctive relief and unspecified damages. In response to a procedural motion,
the Court realigned the parties so that the Company is now the defendant, and
Datamize is now the plaintiff. The parties are engaging in discovery, and
construction of the patent claims. No trial date has been set, although the
final pretrial conference is scheduled for March 29, 2005. Based on other communications by Datamizes counsel, the Company expects
Datamize may take further legal action against the Company with respect to
additional intellectual property that Datamize purportedly owns or will own in
the future. At this time, the Company does not believe it is infringing on any
valid patent claim of Datamize and intends to pursue vigorously its claims and
defenses. On November 13, 2001, the Company commenced an action in the District
Court in The Hague against an individual, Werner Linssen, to cancel the Benelux
trademark registration for Plumtree held by Mr. Linssen. 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. The case on the merits is proceeding, with the parties filing
opposing papers supporting their respective positions. The Companys next
submission to the court is due in June 2004. 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 application 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. The case
is proceeding, with each party filing papers supporting its respective
position. The court has scheduled a hearing on June 17, 2004, at which time the
court will provide a preliminary assessment of the case. In addition, the Company and Mr. Linssen have each commenced proceedings
before the E.U.s Office of Harmonization of the Internal Market in opposition
to each others Community Trade Mark applications. Those proceedings have been
suspended pending disposition of the Benelux action in The Hague. 35




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In connection with the Companys operating lease agreement for their
corporate headquarters in San Francisco, CA, 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; 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 None. 
 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 March
31, 2004 pursuant to previously adopted Rule 10b5-1 trading plans. 36




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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 Pollack31.1
    
    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. 37




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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. On March 16, 2004, we furnished a current report on Form 8-K announcing
the appointment of Paul Ciandrini as the Companys Chief Operating Officer. On January 20, 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 December 31, 2003. 
 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: May 7, 2004
    
    /s/ John H. KunzeJohn H. KunzePresident, Chief Executive Officer and Director(Duly Authorized Officer)Dated: May 7, 2004
    
    /s/ Eric BorrmannEric Borrmann
Chief Financial Officer(Principal Financial Officer)
 38