After two years of steadily dwindling cash reserves, retail software solutions vendor Pacsoft (ASX:PAC) has decided to quit the software business and sell the intellectual property to the founding CEO Andrew Darbyshire.

In a letter to shareholders, recently appointed PAC chairman, Chris Golis, conceded that the company was unable to turn the software business around and make it cash flow positive.

PAC reported negative cash flow of $109,000 for the quarter ending 30 September 2004 and now has just $317,000 left in the bank. The enterprise software company has had only two quarters of positive cash flows since June 2002 and Golis admitted that the trend going forward was not favourable.

Golis said the board had come to the conclusion that the application software business was not a suitable vehicle to create shareholder value, as it was not able to grow either organically or through acquisition.

"The board has come to the reluctant conclusion that the application software is not a suitable industry to adopt a growth by acquisition strategy," said Golis in the letter to shareholders. "The reality is that software systems are not fungible. Clients find it very hard to move from one application platform to another and if forced generally take the opportunity to completely review their needs, and commonly switch to another supplier. Employees also find it difficult to changeover and history shows that most widespread result is fierce internal battles between the two cultures of merged software companies."

Golis said PAC had tried very hard in the last financial year to grow organically by hiring a US sales force and new Australian sales people. However, the costs outweighed the benefits and the company had to make a "strategic retreat".

"The reality is that IT expenditure for enterprise software is only showing limited growth," said Golis. "The market has matured and the rate of technical innovation in the IT industry has noticeably declined. Except for Google there has been no widespread IT innovation for the past five years."

The PAC board has decided to attempt a reverse merger to take over "a more suitable business for a listed entity" and has commenced discussions with what it considers are suitable candidates. However, the board wants to first sell the Pacsoft business and remove all liabilities from the company. CEO, Andrew Darbyshire, who founded the company in 1984, has made an offer the PAC board considers reasonable.

"As soon as practicable, the plan is execute the sale of the Pacsoft business and conclude the purchase of a new business," said Golis.

To sum things up: A perfectly good Australian technology company, with clients in the US, UK, Asia and central America has bitten the dust because of its inability to evolve with the changing needs of its potential client base. Meanwhile, our annual ICT deficit is moving toward the $16 billion mark.