Restated Results Tarnish Legato's Image

SAN FRANCISCO (04/05/2000) - For the second time in three months, Legato Systems Inc. is restating its quarterly earnings, further damaging its image and stock price while overshadowing its entry into the Linux market.

On Monday, the Mountain View, California-based company said it will delay filing its 10-K, which reports sales and other financial information for last year, because it discovered that "a small number" of its sales force entered into side agreements worth approximately $7 million of Legato's $71.3 million fourth-quarter sales.

Combined with its previous financial restatement in January, the company's stock price collapsed from more than $80 per share to nearly $15 per share, its 52-week low.

"This hurts its credibility significantly," and there's questions about how Legato recognizes its revenue, said Mark Kelleher, an analyst at Boston-based SunTrust Equitable Securities. The departure of Legato's executive vice president for worldwide sales, David Malmstedt, will help restore credibility, Kelleher said.

The scandal provided the subtext for a product introduction here yesterday, where Legato announced its new eCluster high availability product for Linux and its wanCluster offering for site-to-site fail-over.

Carolyn DiCenzo, chief analyst at Dataquest, a San Jose-based division of Gartner Group Inc., said it was ironic that Legato found itself in its current predicament.

"This is a very conservative company that needs to get much more aggressive in promoting its technology and, it seems, less aggressive on its sales reporting side," she said.

Legato's near-bottom stock price and solid products have also made it the target of widespread takeover rumors. Company executives, industry analysts and third-party suppliers at the event here all speculated on possible buyers.

Companies rumored to be eyeing Legato include EMC Corp. in Hopkinton, Massachusetts, BMC Software Inc. in Houston and Veritas Software Corp. in Mountain View, California.

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