Remember when sell-side analysts advised investors to look for buying opportunities among companies hit by financial inquiries?

Well, Enterasys ( ETS) must be getting nostalgic for the good old days.

Like those jittery antelope you see drinking from crocodile-infested waters on Discovery Channel documentaries, at least six analysts covering the networker high-tailed it at the first sign of danger Monday morning. They downgraded the company's stock on the basis of two accounting inquiries disclosed Friday night, one of which has caused the company to delay reporting results for the fourth quarter ended Dec. 29.

The investing public at large, no doubt inspired by the carnage inflicted on herds of Enron holders, raced for safe ground, too. New Hampshire-based Enterasys, a networking-systems maker that until recently was known as Cabletron, saw its shares fall $6.05, or 56%, to $4.75.

Mud Slide

Much like 3Com ( COMS), Cabletron once enjoyed a healthy slice of the computer networking-equipment market -- until Cisco ( CSCO) crashed the party. Riding the Internet protocol wave of the mid-1990s, Cisco quickly became the industry's primary Net gear supplier, sending outfits such as Cabletron and 3Com into fits of restructuring that resulted in spinoffs like Enterasys, Riverstone Networks ( RSTN) and Palm ( PALM).

In a conference call Monday morning, Enterasys -- whose executives can't be happy about the resemblance of their company's name to "Enteron," Ken Lay's original name for Enron -- provided details in an apparently unsuccessful effort to calm the market's fears.

Problem No. 1, which the company says came to its attention Thursday night, stems from a revenue recognition problem at its Asia Pacific operations. In the course of checking financial results for the fourth quarter, a company executive took a close look at a contract representing $4 million of receivables recognized in that region.

Upon close inspection, says Enterasys, the terms and conditions of that contract "did not support recognition of revenue," though the $4 million was recognized as revenue in August. Furthermore, says Enterasys, the company's auditor, KMPG, was previously supplied with a different version of the contract, one that, in contrast, did support revenue recognition.

Asia Pacific, says the manufacturer of Ethernet switches and other networking gear, accounts for 13% of the company's revenue, or $25 million to $30 million on a quarterly basis. Pro forma revenue for the third quarter ended Sept. 29 amounted to $217 million, says Enterasys.

Forensic Accounting

The company, which had already announced dissatisfaction with the performance of its Asia Pacific region, as well as an expansion of its financial staff to better oversee international operations, says it has taken several measures in response to the discovery. On Friday it hired a law firm to investigate contracts and revenue recognition, and the law firm has engaged a forensic accounting team at Deloitte & Touche's Singapore office. Enterasys has placed three Asia Pacific employees on administrative leave.

The company says it isn't aware of any evidence that the revenue recognition problem alleged in Asia Pacific exists in the other regions in which it operates, including North America, Europe and Latin America. The company says it doesn't know yet what the impact of the issue will be on revenue for the fourth quarter or other time periods.

If all that wasn't sufficient to create a lousy day at the office, Enterasys says that within an hour after the executive suite found out about the Asia Pacific problem, the company was informed by the Securities and Exchange Commission that it had initiated an investigation of the company and certain of its affiliates. CEO Henry Fiallo said the company had little information about the investigation, but it appears to include its Aprisma Management Technologies subsidiary. It may possibly include Riverstone, another Cabletron descendant, though Riverstone said in a press release that it hasn't been contacted by the SEC.

Enterasys, which Fiallo called the "No. 2 enterprise networking solutions provider" (evidently behind Cisco), says the Asia Pacific problem and the SEC investigation are "apparently unrelated."

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