One of the most interesting new companies to join the Washington Business 100 this year is VM Software Inc. of Vienna, Va.
Only five years old, VM Software is one of those companies that has found a profitable, almost competition-free niche in the otherwise turbulent computer industry.
VM has all the earmarks of the young, start-up, high-tech company.
Seventy- and 80-hour work weeks are common. The average age of the 155 employes is 28. Women comprise more than half the staff. There are occasional parties on the roof in good weather to help people get to know each other. There's a rented beach house in Dewey Beach, Del., for staff use and stock options for everyone down to the mail clerk.
VM Software, as its name implies, develops and markets software for IBM's widely used VM operating system. The marketplace for the VM system is growing at an estimated 35 to 50 percent a year, and VM Software is growing right along with it.
VM Software is the brainchild of Robert E. Cook, 44, who turned $186,000 in savings and 20 years of computer experience into a company that took in $18 million in 1985. That was 10 times the $1.8 million VM took in three years earlier.
VM, which went public at $16 a share a year ago, closed Friday at $25, an increase of 56 percent. The stock is selling at 31.25 times 1985 earnings and at about 24 times estimated 1986 earnings.
One of the surprising things about VM Software is that the firm only sells over the telephone. VM salespeople do not call on customers. "We sold $18 million worth of software over the telephone," Cook said.
Selling by telephone was part of Cook's plan when he designed his company. He looked at other companies, he said, and found that they were spending 50 percent to 60 percent of their revenue on marketing. "That's crazy," he decided.
So he went to telephone-selling as a way to lower distribution costs. It has worked, he said, because the VM products are well-known and because VM Software doesn't have much competition -- at least for the foreseeable future.
One of quirks of the software business is that it can cost a zillion dollars to develop a sophisticated program. But once you've got it, you can make as many copies of the tape as you want for almost nothing.
In the case of VM Software, Cook says, it only costs them $75 to copy a tape and send it off to a client. The client pays $40,000 for the program.
But, Cook notes, it's not as easy as it sounds.
"The trick is, if you don't stay in touch with your customer and if you build the wrong product, the first one costs you $500,000 to ship out because that's how much you have in it. Then, you don't sell the second one. And there's big trouble."
Why did Cook decide to go into the VM software business?
"There wasn't anybody in it," he says. "It wasn't a real hard decision. The hardest thing was finding the right people to be able to expand the company." There were not many people with VM experience, Cook found.
Cook, who earned an MBA from George Washington University at night, had been looking for a business opportunity. When he decided to open his company for VM products, he was working at STSC in Bethesda.
Cook insists that the secret of success in business is finding the right people to carry out a company's mission.
One of the ways Cook finds good people is to offer his employes a $1,000 bonus for every person they recommend who is hired. As a result, 60 percent of VM's hires come from referrals.
In the new Washington Business 100 list, VM Software makes its entry at 70th place. The intriguing question is: Where will VM Software be on the list next year or the year after?
If the securities analysts who follow the fortunes of VM software are correct, VM will move up the list rapidly. James C. Mendelson of Morgan Stanley believes the firm will see revenue gains of 40 percent and earnings increases of 35 percent a year during the next several years.
Analyst Kenneth J. Burke of Alex. Brown & Sons also is optimistic. He looks for revenue to grow by more than 50 percent this year, and for earnings to move up from 80 cents a share last year to $1.10 a share this year, a boost of 38 percent. In 1987, he expects VM to earn $1.40 a share, up 27 percent over 1986.
Analysts Osman Eralp and David M. Thomas of Hambrecht & Quist look for earnings of $1.05 per share in 1986 on revenue of $26 million.
Since its inception, VM Software has been on a very fast track. A few numbers will show just how fast. In 1982, VM Software's revenue was a meager $1.8 million. It rocketed to $5 million in 1983. Then it more than doubled to $11 million in 1984. Finally, it leaped to $18 million in 1985.
Profits, too, moved with lightning speed. In 1982, they were only $375,000 (14 cents a share). They rose to $911,000 (29 cents) in 1983. Then, they moved up to $1.8 million (52 cents) in 1984. They rose again to $3.1 million (80 cents) in 1985.
The IBM VM operating system, Cook said, is popularly used for office automation. It can be used to collect large amounts of data and allows users to "access, manipulate and analyze" that data. Electronic mail is another area in which the VM system is playing a key role.
The competitive threat to VM Software is real but somewhat remote, says analyst Mendelson. He expects VM competition to "heat up significantly" in the next few years but says VM Software has "an important edge" because of the small number of experienced VM programmers and the difficulty of writing VM software.
Cook guesses that VM Software could grow to a $100 million company in the next few years. One of his ambitions, he says, is to hang onto the family atmosphere that sparks companies when they are young and is so difficult to maintain when companies are overtaken by bigness.
"One of the secrets is you don't get too arrogant about the business. We're going to work real hard at keeping it a fun place to work."
Cook, who has worked for large companies, says he has seen a lot of office politics. He never liked it and wants to leave it out of his company.
That's where the beach house comes in.
"You can get these barriers built up between departments and people start to fight," Cook says. "Well, you throw 20 kids into a beach house, sleeping on the floor for a week end, and although they're from different departments, the barriers all start to come down."
For the past several months, Hotel Investors of Chevy Chase, a jointly owned real estate investment trust and corporation, has been fighting efforts to take over its company. First, it was the Eastover Group, a collection of Mississippi real estate firms. A short time later, Hotel Properties of California, which also invests in hotels, made a bid. It was turned down. Then, last week, Hotel Properties apparently improved the offer and Hotel Investors accepted.
The deal is a bit complicated because the merger will take place under the name and structure of Hotel Investors but control will pass to the California group, headed by John F. Rothman. The stock of Hotel Investors Trust and Hotel Investors Corp., called "paired shares," trade as a single unit.
The shares of the California and Chevy Chase companies will be swapped on a one-for-one basis. Hotel Investors shareholders also will get special 10-year stock warrants allowing them to buy Hotel Investors "paired shares" at $5.75 below the average market price before the warrants expire. Thus, a stockholder with 100 Hotel Investors "paired shares" would get 50 warrants to buy 50 more "paired shares" at a discount.
One more word on the 100 most popular stocks held by investment clubs belonging to the National Association of Investors Corp. The stocks were listed in the recent issue of "Better Investing," the NAIC magazine. We neglected to mention that MCI Communications Corp. is listed in 34th place, with 270 clubs holding 227,000 shares of MCI.