Thursday was, to put it mildly, a bad day for investors in wearable computer-maker Xybernaut (NASDAQ:XYBR). Shareholders had anticipated seeing the company's already delayed earnings report published that day; instead, they saw a press release describing corporate Armageddon. (Read it here.)

To summarize the highlights, Xybernaut announced that:

  • Two months ago, it received an SEC subpoena for documents.
  • One month ago, Xybernaut's Audit Committee began investigating its accounting controls, allegedly improper acts by management, and the "propriety of certain major transactions."

In response to that news, and the footnote observation that revenues declined both year-on-year and sequentially since last quarter, the company's stock price jumped off a proverbial cliff, plunging 43% in a single day.

Today, I want to review just a few of the clues foretelling that disaster. Why? Because a lot of individual investors got burned by Xybernaut last week, and they may be tempted to just sell out now and forget Xybernaut ever existed. That would be a mistake. Individual investors paid dearly for investing in this company. They should consider that payment tuition paid for a course in Investing 101. Note, I'm not talking about the day traders and stock pumpers here -- they knew they were playing with fire and they'll do it again. This column is dedicated to the real investors, the true believers who were, in my opinion, so badly abused by their company.

The Motley Fool is all about the individual investor. We're investors ourselves. Not "hedge fund honchos." Not Wall Street bankers. And our mission is to help other investors make sense of the stock market and read between the lines of the corporate PR departments. To wit:

Press releases: Xybernaut put out a lot of them -- 14 in the last Q4 2004, and 19 so far this year. The rate of snow-jobbing was high -- and increasing, suggesting the level of desperation at the company was rising, as well. Contrast that with the two or three press releases put out by Motley Fool Hidden Gems picks Middleby (NASDAQ:MIDD) and Saucony (NASDAQ:SCNYB) over the past three months. Each of those picks has "quietly" gained more than 150% in two years. Moral:

Truly great investments let their numbers speak for themselves, and leave the spin doctoring to companies that are truly sick.

Profitless sales: Say I buy a car for $1000 and sell it to you for $900 today. I've got $1000 in sales and a $100 net loss. Tomorrow, I buy two cars for $2000, and sell them to you for $1800. I've doubled my revenues, but I've doubled my losses, too. Moral: Growing revenues are irrelevant unless they yield growing profits.

Stock dilution: Xybernaut increased its share count by more than 50% per annum over the past five years, starting with just over 21 million shares, and recently passing 170 million. It's therefore no surprise that Xybernaut's stock price has gone down, because each share of Xybernaut for sale today gives you just 12% the ownership interest that a share represented in 1999. The stock sells for less. because the stock's worth less. The moral here is simple: Even if dilution keeps a company alive, for investors, the company might well be better off dead.

In the end, Xybernaut's greatest value may be as a case study for the kind of company investors should avoid. It offers many more lessons than the few I have space for today. But if there's sufficient reader interest, I'll be glad to pen a followup exploring a few of the company's other "issues."

Until then, Fool on!

Fool contributor Rich Smith has no position in any of the companies mentioned in this article.