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Xybernaut Hid Gathering Storm In Bright Forecasts

By Ellen McCarthy
Thursday, April 21, 2005; Page E01

In December, Xybernaut Corp. issued 12 glowing press releases, each one trumpeting its grand successes in "mobile computing" -- the phrase it uses to describe its line of gadgets built into work clothes for soldiers, stock clerks and others.

The month before, there were another dozen. In all, the little Fairfax company put out more than 110 releases last year to tell investors just how well it was doing.

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But the PR machine can't conceal bad news forever.

This week Edward and Steven Newman, the brothers who served as chief executive and president of the company, were pushed out under accusations that they used company funds for personal expenses, employed family members without disclosing it to the SEC, failed to inform the board of directors about the finances of major deals and interfered with a company audit committee investigation.

Their ouster follows the company's receipt in February of a Securities and Exchange Commission subpoena concerning sales of Xybernaut stock.

Xybernaut did have some success selling its technology to customers such as grocery chain Tesco PLC and the Army. But the adoption of wearable computers has been too slow, said Tim Shea, senior analyst at Venture Development Corp. "They've been sowing the seeds pretty well, but part of the problem is that they have this line of products that were a little on the big and bulky side and had battery problems," Shea said. "I know that they spent a lot of money, they were developing new products all the time, but they didn't have enough sales to make any money."

Xybernaut was founded in 1990 by Edward G. Newman, whose brother Steven A. Newman joined the company four years later. The company went public in 1996, and its stock traded as high as $29.97 in 2000. It closed yesterday at 27 cents. The company has disclosed a delisting notice from the Nasdaq Stock Market.

Online message boards were teeming yesterday with comments from Xybernaut stock watchers who railed against the actions of the Newmans and debated the merits of a class-action lawsuit.

Xybernaut has posted 33 consecutive quarterly losses, though its outside auditors have said that results dating to 2002 should not be relied upon.

Sixteen months ago, Ethan D. Leder and Mark P. Clein had a business plan they admit was a little foggy. They also had a $153 million pot of venture capital from investors with high expectations.


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