Integral Systems recovers its orbit

Scandal rocks company, but planning and communication keep satellite firm on track

"If you just look at our fiscal performance in fiscal 2006, we knocked all our financial records out of the park." ? Pete Gaffney, Integral Systems Inc.

Rick Steele

The sudden departure of a company's
founder and chief executive officer can
unsettle or destroy a business, even one
with years of profitability and success
behind it. But companies that have executive
succession plans may be able to weather
such storms and emerge even stronger.

That appears to be the case at Integral
Systems Inc., a Lanham, Md., maker of
satellite ground systems software for government
agencies and commercial customers.
One year ago this month, ISI's
chairman and CEO, Steve Chamberlain,
was arrested and indicted on two felony
charges involving sexual misconduct. He
promptly resigned from the company. Last
May, Chamberlain was sentenced to five
years' probation and mental health counseling
after a plea bargain reduced the charges
to a misdemeanor sexual offense.

ISI officials say it was fortunate that, for
more than a year, Chamberlain had been
grooming his second-in-command, Chief
Operating Officer Pete Gaffney, to replace
him when Chamberlain chose to step down.
Gaffney had worked at the company for more
than 20 years and had run the government
and commercial divisions. Chamberlain's
arrest, however, hastened Gaffney's promotion
to CEO.

"Steve and Pete ... had worked on a transition,"
said Jim Schuetzle, executive vice
president of the government division at
Integral. "Pete was getting more and more
day-to-day responsibilities. ... Steve was taking
a little less of a hands-on approach."

Nevertheless, Chamberlain's arrest "created
a fair amount of speculation and turmoil
as to what was to become of the company,"
said Dick Ryan, an analyst at Feltl
and Company in Minneapolis who follows
Integral Systems. "But I don't think the
news in and of itself dampened the fundamental
outlook" of the company, he added.

Gaffney said the transition has had no
adverse effects. "If you just look at our fiscal
performance in fiscal 2006, we knocked all
our financial records out of the park," he
said. "We had record revenues, record operating
incomes, record net income."

The company recorded $116 million in
revenue in fiscal 2006, up from $97 million
the year before. Moreover, Gaffney said, 80
percent of that revenue came from government
contracts, with the Air Force accounting
for more than half.

"I think it's a very strong company," Ryan
said. "It's been around since the early '80s
and showed its dominance in the commercial
satellite space during the mid to late '90s,
and moved into the government space in the
early 2000s. We've seen them win a couple of
very key government contracts. I think the
relationship with the Air Force is strong. The
commercial space is small but a very important
market for them, and I think fundamentally
the company is doing very well."

Schuetzle said the planned turnover of
command was a great help in the period
immediately following Chamberlain's departure.
He called Chamberlain a capable and
engaged CEO who made Gaffney's transition
virtually seamless. "It was a tremendous
benefit to hit the ground running when
Steve did step down," he said. "Of course, we
didn't expect it to happen the way it did."

WOUNDED PRIDE

When news of Chamberlain's indictment
broke, Schuetzle said, the mood was a mixture
of disappointment and wounded pride.
ISI employees were concerned more about
how clients would react and less about their
own future, he said.

"I was kind of pleasantly surprised as a
manager that there wasn't a lot of discussion
about, 'Gee, Steve is gone so the company is
going to go to heck in a hand basket,'"
Schuetzle said. "It was more, 'How do we
move forward?'"

Gaffney said he and other executives
knew about Chamberlain's legal troubles for
about six months before he resigned, so
Gaffney was mentally prepared to take over
if necessary. As soon as he did, he met with
employees to reassure them of the company's
continuity. Nobody was surprised about
who was going to take over the company,
Gaffney said, "and then when I did take
over, everybody knew me."

"I wanted the employees to focus on the
business and on the financials of the business,
to not have any hiccups there," he said.
"And I wanted us to continue our push into
the classified market."

ISI won its first classified ground systems
development contract for the intelligence
community in October 2006. Gaffney
declined to divulge details.

In the wake of Chamberlain's arrest, the
top managers did something that had never
been done before at ISI. They sat down and
analyzed the company's mission, products
and the strategies that had made the company
successful, Schuetzle said. Then they
communicated that to the employees.

"Having a company focused instills a lot
of pride in people," he said. "Anything that
confronts or assaults that pride and reputation
is really upsetting to employees."

The managers also met promptly with
many of their customers, especially in the
Defense Department. "They were very
aware of the situation, or at least what they
had read in the press," Schuetzle said. "Their
concern was similar to that of the employees:
How are we going to move forward?
What is going to be the effect on the company?
Are people going to leave? Are you
going to change your strategies?"

The briefings helped assuage those concerns.
"It didn't hurt us getting new business
going forward, either," Gaffney said.

In February, ISI announced it won a $4.5
million cost-plus award from the Air Force
for modifications to the Command and
Control System-Consolidated program,
part of the Wideband Global Satellite
Communications system.

Stuart Daughtridge, executive vice president
of ISI's commercial division, said
Chamberlain's departure had little effect on
ISI's commercial sales and marketing
because he was no longer involved much in
that sector's day-to-day operations.

Daughtridge said ISI's executives and
sales force were well-known in the business,
so Chamberlain's personal problems did not
have a negative effect on commercial sales
and marketing efforts. "Those relationships
allowed a lot more open communications
with customers," he added. "They knew
pretty much what we knew."

Daughtridge said he believes Gaffney's
previous experience heading ISI's government
and commercial sectors creates new
opportunities to extend some of its commercial
technologies ? particularly in the
field of satellite signal command and control
? into the government sector.

Associate editor David Hubler can be reached at
dhubler@1105govinfo.com.

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