Xybernaut (NASDAQ:XYBR)
trading at $1.03 as of 10/26/04

Every other day of the year, business writers write stories about vibrant, profitable companies that are making tons of profits for their shareholders -- companies such as eBay (NASDAQ:EBAY), Starbucks (NASDAQ:SBUX), and Amazon.com (NASDAQ:AMZN). Or they do postmortems on companies that have failed and died: Enron, Andersen, Pets.com. Today, in honor of Halloween, I'm going to tell the tale of a company that should have died long ago but that against all logic still walks among the living. What its purpose in life is, however, I'm at a loss to say.

The company is wearable computer maker Xybernaut (NASDAQ:XYBR). Since it first set up shop in 1990, the high school class of 2008 has been born, potty trained, learned its alphabet and times tables, and started its first year of high school -- but Xybernaut still hasn't earned a penny of profit. On the contrary, over the course of its existence, Xybernaut has destroyed about $160 million of shareholder wealth.

That's tragic, because the company markets a product that should sell itself on the "coolness" factor alone: tiny computers with the power of desktop PCs that you can carry around on your belt and operate by voice control or a wrist-mounted keypad. It's the kind of product that you'd expect to hail from a tech consumer-savvy company such as Apple (NASDAQ:AAPL), seller of the similarly innovative iMac, iBook, and iPod.

But that's the key difference between Apple and Xybernaut -- Apple actually manages to sell its products. The scary thing about Xybernaut is that it doesn't even seem interested in selling its computers. Hard to believe? Visit the company's website sometime and see whether you can figure out how to buy an Atigo tablet PC or MA-V wearable. It's almost as though the company wants to scare "walk-in" buyers away, preferring to sell only to other companies.

That would be fine if the company were succeeding at selling to companies. But that's not the case. Xybernaut is already more than one year overdue on its last promise of imminent profitability. And over the past five years, or as long as this Fool has followed the company, Xybernaut has grown sales at an annualized rate of just 7%. A Rule Breaker this ain't.

But the same can't be said for the company's sales of its own stock. Through private placements and sales of warrants, Xybernaut has grown its share count from 30 million shares at the end of 1999 to its current total of 179 million, i.e., fivefold. If common stock were Xybernaut's official product, instead of just the thing the company sells to raise cash when it cannot move its stock in trade, you'd be able to say the company "grew stock sales" -- also known as "diluting outside shareholders" -- at an annual rate of 43%!

Over the seven months since I last took a good hard look at Xybernaut and concluded that "the company still looks overvalued at [$1.15]," that price has hardly budged. On the other hand, the company did manage to sell a minimum of 5.5 million more shares through private placements and warrant exercises -- at an average price of $0.64 per share. Shareholder returns may stagnate and decompose, but the company still walks among the living (dead).

Investors beware -- in this stock, there be dragons.

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Fool contributor Rich Smith has no position, short or long, in any of the stocks mentioned in this article .

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