Spyglass Blames Loss On Microsoft -- Firm Hasn't Received Browser Royalty Fees

The company that created the basic software used in Microsoft's Internet Explorer browser said it will have a $4 million first-quarter loss, largely because it has not received royalty fees from Microsoft.

Spyglass said it will audit Microsoft's distribution of Explorer in the quarter that ended Tuesday.

The news pushed Spyglass shares down as much as 14 percent today before they rebounded a bit to trade at $11.375, down $1.125, or 9 percent, near the close.

Microsoft agreed to pay Illinois-based Spyglass a minimum quarterly payment, plus royalties based on distribution of Internet Explorer, according to Spyglass. For the past three months, Spyglass said, it does not expect to receive anything more than the minimum payment.

Microsoft spokesman Mark Murray downplayed the Spyglass comments, saying audit provisions are common in royalty agreements.

"We believe that the review will show that we are actually ahead on our payments to Spyglass, because we've prepaid several million dollars in royalties," Murray said.

Spyglass spokesman Randy Pitzer said he would not discuss details until the company posts its financial results Jan. 22.

He said the lack of royalties is "a very large part" of the projected loss, expected to total 10 cents to 13 cents a share.

Reuters reported that analysts had anticipated $1 million to $2 million in royalties for Spyglass but that the company received only a $400,000 minimum payment.

Spyglass sent a letter to Microsoft last month, saying it intended to conduct an audit, but that audit has not begun, Pitzer said.

Spyglass "is not able to determine the amount of royalties due from Microsoft in excess of the minimum payment because it has not received a royalty report with respect to the number of copies of Internet Explorer distributed by Microsoft," the company said.

Pitzer said the licensing agreement covers all computer platforms, including Windows 95, Windows 3.1, Macintosh and Unix. But the deal varies by platform.

The Windows 95 agreement, for example, includes only a flat fee and no per-license royalty. Microsoft began distributing Explorer for the Macintosh in April and for Windows 3.1 just last month.

Microsoft paid Spyglass $2 million in December 1994 to buy some of the company's basic browser programming code outright, Spyglass spokeswoman Andrea Stokes said. A year later, Microsoft agreed to license more Spyglass code, on a per-user basis, to extend the browser to platforms other than Windows 95.

Spyglass was in on the earliest development of browsers for the Internet's World Wide Web, licensing the technology from the University of Illinois, where the first browser, known as Mosaic, was developed. Mosaic also became the basis for market-leader Netscape Navigator.