Even as Mannatech Inc. battles a Texas attorney general lawsuit charging it with fraud, management says it is aggressively growing the company and promoting its nutritional supplements worldwide.

RANDY ELI GROTHE/DMN

Malai Yang, a stability chemist at Mannatech, performs tests on some of the company's supplements.

The Coppell-based firm's new chief executive, Terry Persinger, is the former executive vice president and chief operating officer and has worked at Mannatech for eight years.

He was appointed in August, a month after Attorney General Greg Abbott filed a lawsuit alleging that Mannatech exaggerated the therapeutic benefits of its supplements for people with cancer, Down syndrome, cystic fibrosis and other serious conditions.

Mannatech's directors promoted Mr. Persinger after company founder Samuel Caster stepped down. Mr. Caster remains chairman and a major stockholder. Since Mr. Persinger had plans to retire in June, directors are looking for his replacement, said J. Stanley Fredrick, a member of the board.

Whoever takes over next will inherit a tale of two companies: one that's financially strong, leading its peers and poised for growth, and the other dogged by controversy and a magnet for shareholder lawsuits.

On Jan. 9, Mannatech reached a settlement in a different suit filed by shareholders against Mr. Persinger, Mr. Caster and other executives. That suit accused Mannatech's leaders of "gross mismanagement, waste of corporate assets" and of not monitoring the Web sites of the company's sales staff.

Such problems have come against a backdrop of explosive growth.

Mannatech, founded in 1993, has a goal of pushing into a new country every year. It now has 569,000 sales associates in nine foreign countries, working through a multilevel marketing model similar to the one that Amway uses to sell its household and personal care products. Under this arrangement, sales associates recruit new salespeople and get credit for part of their sales in return.

This allows the company to sell with relatively low overhead. Mannatech needs only 14 people to man an office in a new country.

But the model also gives a great deal of independence to associates operating thousands of miles away from headquarters as they hustle to boost sales. Mannatech cited this when explaining that some of its salespeople might not be following company guidelines.

"I suddenly realized: We don't interview these people," Mr. Persinger said. "We don't screen these people."

Two weeks after being sued, Mannatech released new sales and marketing guidelines for its associates, including an order to immediately stop using questionable materials. The attorney general had said Mannatech's "deceptive practices" pose a health risk to seriously ill consumers. Mannatech also announced a satisfaction-guaranteed refund policy for customers after the suit was filed.

The company has long employed Web crawlers to search the Internet for new Mannatech Web pages set up by its growing league of sales associates; "but we've stepped it up" in light of the lawsuit, Mr. Persinger said.

"Our associates can not make disease claims, but there are a lot of associates out there and laws are different around the world on what you can say on Web sites," he said.

Keeping tabs on new associates has proved challenging. At the company's weekly associate meetings, held on Tuesdays, typically one-third of the 150 associates who gather at the Coppell headquarters are new, Mr. Persinger said.

"It's a tough road to hoe," he said. "We can monitor a hundred people, but if one gets by, it'll be rammed down our throat."

Mannatech also points to a 14-year-old federal law that it says provides companies like itself leeway in marketing their products. With the passage of the Dietary Supplement Health and Education Act of 1994, dietary ingredients used in dietary supplements are no longer subject to the pre-market safety evaluations required of other new food ingredients.

Signed into law by President Clinton on Oct. 25, 1994, the act acknowledged that "millions of consumers believe dietary supplements may help to augment daily diets and provide health benefits," according to the U.S. Food and Drug Administration.

"It's a supplement to a diet," Mr. Persinger said in describing Mannatech's nutritional products. "We're about prevention, maintenance – not treating the disease."

Mr. Persinger, who grew up on a dairy farm in rural Ohio, studied chemical engineering at the University of Cincinnati. In describing Mannatech's products, he effortlessly rattles off names of multisyllable chemical compounds.

"We've been selling these products for 14 years," Mr. Persinger said in defense of his company's supplements. "It's not like we just dreamed them up."

In a tour of Mannatech's corporate headquarters, Dr. Robert A. Sinnott, Mannatech's chief science officer, showed off the company's new $8 million prototyping laboratory where it tests all company products, from Optimal Makeup Remover to GlycoSlim Meal Replacement Drink.

The arrival of Dr. Sinnott two years ago enhanced Mannatech's reputation in the nutritional supplement industry. Dr. Sinnott has a master's degree in natural science and a doctorate in biotechnology.

During graduate school, his primary focus was plant medicinal chemistry and plant biotechnology, and his 1995 doctorate dissertation research focused on the aloe vera plant.

A plaque hanging outside Dr. Sinnott's lab from the Scripps Center for Integrative Medicine's 4th Annual Natural Supplements Conference recognizes the company's contributions to alternative treatments.

The attorney general's suit is hardly Mr. Persinger's first such career challenge. While working as a senior vice president for Goodyear Tire and Rubber Co., overseeing annual sales of $1.3 billion, he routinely faced high-profile lawsuits, some filed by Detroit's automakers.

"Those were as challenging, or more," said Mr. Persinger, who worked 32 years at Goodyear. He joined Mannatech after retiring from the tire manufacturer in 1999, following the suggestion of a brother-in-law who lives in the Dallas area and works for Mannatech.

Mr. Caster, the former CEO, is also an old hand with litigation. Before founding Mannatech, he headed Eagle Shield, a Grand Prairie-based multilevel marketing company, this one selling home insulation. The company reached a settlement and agreed to an injunction in 1988 barring it from making unsubstantiated claims about its Radiant Barrier home insulation, according to court documents.

In 1991, in response to allegations in a lawsuit from the Texas attorney general, Eagle Shield admitted that another of its products – an electronic pest control device – did not work as represented, according to court documents.

Despite the lawsuits, Mannatech has a strong financial base.

The company's long-term debt ratio is in line with industry averages. Its current, or short-term, debt ratio is 1.56, better than the industry as a whole. Current ratios above 1 indicate a company's short-term debt is less than its assets. The higher the ratio, the stronger the finances.

The company's price-to-cash flow ratio was low at 9.17 at the end of the third quarter, Sept. 30. Typically, a low ratio indicates a strong ability to generate cash and suggests the stock price is reasonable. By comparison, the average price-to-cash flow ratio for Mannatech's peers – such as Gaiam Inc., Medifast Inc. and Perrigo Co. – is 35.66.

In addition, the company's operating cash flow has been positive for the last three years; and its return on equity is 22 percent. The average return on equity for companies in the personal care industry is 12 percent.

But Mannatech's legal troubles clearly have influenced Wall Street's perception of the company. On July 3, the last business day before the attorney general's lawsuit was filed, Mannatech's stock traded for $16 a share. It has since dropped 66 percent, closing at $5.38 on Wednesday.

In looking at the company's third-quarter performance, demand for its products has weakened as questions have been raised about them. Sales declined 3 percent, to $96 million from $99.6 million in the quarter a year earlier.

Though Mannatech's stock has underperformed the S&P 500, the stock could turn that around soon, according to Computrade Systems Inc., an equity research firm based in Norcross, Ga. Computrade's Market Edge Research division has a "buy" recommendation on the stock.

The challenge for Mr. Persinger – and whoever succeeds him – will be navigating through the legal and public perception problems before the sickness spreads to the balance sheet.