05/10/2002 Income Statement

Three Months Ended Nine Months Ended

March 31, March 31, 2002 2001 2002 2001 (Restated) (Restated) Revenue: Royalties $ 4,135 $ 16,106 $ 13,580 $ 34,204 Contract revenue 8,607 12,029 23,635 33,082 Total revenue 12,742 28,135 37,215 67,286

Costs and expenses:

Cost of contract revenue 250 250

Research and development 8,446 9,543 25,315 24,867 Sales and marketing 4,916 4,272 13,270 11,414 General and administrative 1,948 2,557 5,506 6,801 Acquired in-process research and development 1,737

Restructuring 437

Total costs and expenses 15,310 16,372 46,515 43,332

Operating income (loss) (2,568 ) 11,763 (9,300 ) 23,954

Other income, net 510 1,651 2,415 4,883

Income (loss) before income taxes (2,058 ) 13,414 (6,885 ) 28,837 Provision (benefit) for income taxes (380 ) 4,875 (780 ) 11,044

of change in accounting principle

Cumulative effect of change in accounting (741 ) principle, net of tax benefit

Net income (loss) $ (1,678 ) $ 8,539 $ (6,105 ) $ 17,052

Per basic share amounts:

Income (loss) before cumulative effect $ (0.04 ) $ 0.22 $ (0.16 ) $ 0.46 of change in accounting principle

Cumulative effect of change in accounting (0.02 ) principle

Net income (loss) per basic share $ (0.04 ) $ 0.22 $ (0.16 ) $ 0.44

Per diluted share amounts:

Income (loss) before cumulative effect $ (0.04 ) $ 0.21 $ (0.16 ) $ 0.44 of change in accounting principle

Cumulative effect of change in accounting (0.02 ) principle

Net income (loss) per diluted share $ (0.04 ) $ 0.21 $ (0.16 ) $ 0.42

Shares used in computing basic net income 39,014 38,778 38,969 38,659 (loss) per share

Shares used in computing diluted net income 39,014 40,262 38,969 40,585 (loss) per share

They had $98 mm in cash with 40 mil shares outstanding. And if you take cash minus CL or (($78,423 Cash + $19,375 ST Invs). - $$10,370 CL) = $87,428 or approximately 98 mm - $10 mm = $88 mm or $88/40 = $2.20 per share in net cash. The stock at this time coming into Sept 2002—there were lots of bad things going on— Joel and I were talking about this before—we called it the triple witching hour.

Have you discussed tax loss selling? There is a time of the year, usually by October or at least by the end of December investors want to offset gains with losses and not have reportable taxable income. People tend to sell losers to offset their winners. (You want to find motivated or distressed sellers). That was going on in a stock that had a significant decline. Secondly, this stock was being deleted when it was trading at $1.22 from one of the S&P indices, the S&P Mid-Cap index, and I think 10% to 15% of the stock was closely held by the kind of funds (like Dimensional Fund Advisors) that would automatically dispose of it with the deletion. When this stock was being deleted, it traded down to $1.22. So that is a market cap of $49 million dollars.

So what can go wrong? If the company burns cash, the value will decline. They could acquire somebody, but shareholders would not want it. The Enterprise Value (EV) at $1.22 was a negative $30 to $40 million! You had some room in terms of a margin of safety.

Let me show you what the historical income statement looked like back then. The revenues fell from $42 million in 2001 to about $17 million in 2002 due to the decline in Nintendo Game Revenues. As Richard Pzena always says, “You want to find out if the problem is temporary or permanent.

Basically, I found this stock looking at a spin-off and also doing new lows list screens. Looking for EV to revenues. This will always come up. They were losing about $3 million a quarter. There are ways you can lose money in these situations. The business could continue to lose money. You may have to shut parts of the business down, and you could have the termination costs of employees, leasing costs of manufacturing space and other costs. You may have to pay to exit the leases, so you have to look at all these potential liabilities and expenses.

I met this company before the S&P delete. I filed a 13-G because I was not going to try to influence

management or try to control the company. Although I am glad to give them a recommendation, I don’t want to take control. I told that to the CFO after I filed a 13-G, and he wrote back thanking me for my support. I wrote back saying we were not buying the stock for support but because we thought that there was real value here and you guys can do something to create value here. The market is saying there is negative value here. To stay in business, one could say the shut down expenses were not high. If they shut down and went to one employee and collected the royalty checks they collected for all that they created, clearly you will create some positive value.

Getting into it was actually pretty easy for me. Their R&D was too high. Basically, here is how I looked at it. They were like the rich guy—they made all this money on Nintendo—then they got sloppy with their other projects. They had these royalties coming in and as they were making money and the stock was going up, they would continue to take on projects maybe without the strict economic feasibility to work on all of those projects. I am sure seeing me file a 13-G on the company—and I am not a scary guy—but having me talk to them about losing control, they knew they had to do something or face their shareholders.

Between stopping spending on R&D and the royalties that were coming in, you would have a positive stream of cash in the future? So I think they had a discussion with themselves, and they had to re-evaluate some of their programs and look at really using discipline in how they use the cash. The $3 million in quarterly losses is not that big a deal now but that $3 million can turn into $6 million loss which can turn into a $12 million loss, etc and before you know it the margin of safety is gone. They made an announcement that they would focus on only those economic projects which had the long term returns.

Student: Did you want to have a more activist investor with you to rattle the cage and be sure to have

management do the right thing?

BN: You can rattle the cage. I live in CA and getting to San Jose takes about an hour. I have been up there to

visit with them. You have to count on capitalism at work. Capitalism and people acting in their own self- interest would spur change. I think management knew the game had changed. This management had been pretty promotional; look at the market cap this company had been at. What was in their best interests? How should they behave? So I agree that you would think that they would want to do the right thing, but sometimes if they articulate that this is what they are going to do and this is how they are going to do it, the market will immediately react to what they have said and a good part of the opportunity will be gone.

I went out there on speculation thinking that they were going to behave rationally and do what was in their best interests and their shareholders best interests which ultimately would be in their interest. The company was where they were employed. If you lost a job during 2002 in Silicon Valley, the situation would be difficult. It was not like trying to get a job in 1999.

Student: Could management have cashed out a lot of their options near the highs in 1999 – 2000 and then not

care as much?

BN: They could, but then you would want someone that would care. I have seen situations that were cash rich

and where management could lower expenses that did not work out as well as this. Most of those companies did not have a unique product in its class, no royalty stream coming in from other things they control. This was a little bit difference.

The beauty of it was this S&P delete. When indices are rebalanced and stocks are added and subtracted and you will know in 30 to 60 days out that this is a very likely candidate. And we just happen to be there. You dot the i’s and cross the t’s and wait for them to sell the stock. Sometimes you get it, sometimes you don’t.

Sometime you have to pay more. Would have I paid $1.40 or $1.50? I don’t know. Actually, one of the negatives was that I had to file a 13-G based on 5% of the B shares. My position was 1.4 million shares, but that was not 5% of the whole company, that was 5% of the B shares.

Student: Did you buy shares before meeting management?

BN: I probably bought my first shares before I met with management. Obviously, it is a big advantage to

follow something for awhile and then have the price come to you versus waking up tomorrow and seeing a stock have a big hiccup and you are starting this morning and you have to make your decision by this

afternoon. I had tangentially looked at this company for a year. I had asked management when their stock was $3.50 if they would buy back stock at $2? Yes, they would. And it got there very quickly—they had a bad quarter, they were losing $0.08 EPS, there was tax loss selling and under $5 a lot of institutions will not be able to own the stock.

And I want to make a big picture comment about any investing. And that is you want to really focus on

things when other people have to sell. You want an imbalance of sellers vs. buyers. The biggest money was made when the Resolution Trust Corporation (RTC) decided that the Savings & Loans could not own high yield bonds. Can you imagine if you woke up tomorrow and no one with the last name from A – N could own New York real estate what would happen to the value of NY real estate? And if you put it under a small time frame those opportunities are created a few times in your life. So, I hope it is OK to cover this in this class. But the smartest guys that I know focus on situations where everyone is focused on selling, everyone is very negative—negative sentiment is a great thing when you want to make a purchase.

One of the things that the company did in its materials and the IR web site--they would put out a line with royalties and they would put out a line without royalties. So they showed that if you took out the Nintendo 64 revenues, their royalty stream outside of Nintendo 64 was growing.

Basically royalties grew. I think the company had EBIT of $16 million in 2004 and that cash today is approx $120 million, and the stock went as high after the fact as $12. The hard question today, the company is making $16 million in EBIT and you believe the company is growing and it has $120 mm in cash. Does anyone want to think of a range of valuations that the market might put on this? 10x to 14x $16 million of EBIT plus $120 mm = 160 + 120 to $224 + $120 or $280 to $344. Divide by 40 mm outstanding shares = $7 to $9.

10 x EBIT so that is $7 per share. The stock went to $11. One thing I find in technology stocks, the sentiment swings particularly in small caps. The swings can be significantly greater than in large cap stocks. It is funny because the stock is at $6.60 today. I probably sold on average at about $8.00.

One of the great things about being a private investor and managing my own money is that I don’t have to report or write letters to anybody. If I don’t find anything to do that isn’t great, then I wait. And I am very focused. There is a lot you can do if you are not a fiduciary. There is a big difference between how often you do things and when you pull the trigger. If you look at great gamblers, they will tell you to wait for the odds to be stacked in your favor. We could look at a lot of situations, but this is one where I thought the odds were really, really stacked in my favor. I sort of felt like tails I make a little and heads I make a lot. Those are great. And there are periods where you can find a lot of those and periods when you can find very few of those.

Being able to sit on your hands, to me, is an important facet of investing. Student: What do you think about today?

BN: Joel and I may disagree about this but I think–it is interesting…the opportunities…a lot of money has

gone into hedge funds over the last five years and I think that a lot of hedge funds are focused……..I feel like a little kid in the sand box where everyone is kicking all the sand around him. There is not as much to do. I think there is so much money chasing investments that the dislocations that we used to get are not that great, but what can happen? Basically, if hedge funds under perform large cap growth what will happen to the flow of funds? Money will be going to large cap growth. Historically people won’t realize that their strategy isn’t working. And I think that there is opportunity. It is great that there is opportunity in the small stuff because

you can make multiples of your money, but you find an undervalued great company and you put it away. It is not as easy as this money. But I think this is not a great time for small cap value.

Bloomberg is a great tool for those of us who are addicted to it. The worst quarter MIPS had was the FY 2nd Qtr of 2003 they lost $5 mm in negative operating income. I want to look at where cash bottomed out. They have a FY Ending in March. So the third quarter of 2002 cash was $97 million and went down to $94 to $91 million and bottomed at $91 million and went to $102, $110 and…. $116. So they were never bleeding that badly. We didn’t spend much time talking about the business, but in reality I wasn’t that attracted to the business. I was attracted to the valuation and there is one thing that Professor Greenblatt will teach you is that valuation and EV is unbelievably important. The one thing that investors miss which is unbelievably

important is valuation.

The other parts of the business, they were in network printers. They made programmable chips. If you are HP and you are putting out a network printer, you don’t want to develop a chip for that network printer—it is hugely expensive. There is huge demand out there for chips that are programmable. Their chips went into set- top boxes and HTV. In terms of understanding their business I didn’t know every nook of their business, but I did check to see who was signing deals with them. You see where the products are going into to and you use your common sense. Or you consult an expert.

Student: Did you read through all the legal documents? How did you evaluate the legal risks?

BN: It actually is pretty simple. This is a proxy: that is why the B shares are trading at such a discount to the A

shares. It doesn’t make any sense. Sometimes it doesn’t make sense and other times there is a reason for it. The price discrepancy was not that great, less than 10%. There really wasn’t a lot of risk being long and short the same thing plus I got a short rebate. I earn interest on the short. Fed funds minus 25 to 50 bpts. There is a wide range of what you get in rebates depending on the stock—like General Motors. People were hedging the debt against the stock, so you had to pay to borrow the GM stock.

Another War story…..

Joel you wanted me to cover how I screen for things.

The next company is called, Artesyn Technologies (ASTN). I really am not a technologist but I happened to pick busted technology stocks. I can’t say why. The sentiment can really swing in a significant way.

MIPS

In FY 2003 the royalties bottomed out at $16 million and came back in 2004 at $30 million in 2005. The bottom was at $23 and got to $31 mil. They stopped doing projects that didn’t make economic sense. They reduced their head count where they only took on projects where they could make a decent return on capital. Sometimes you have to make a leap of faith. You have to make a leap of faith that the guy (CEO) is actually going to do that. I didn’t think management would want to take my phone calls from people like me.