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41 Madison Ave., 31st FL New York, NY 10010 T: 646.202.2618 F: 646.349.3530 info@khromcapital.


May 31, 2012 Dear Partners: In the first quarter of 2012, our Partnership returned 11.0% net of fees and expenses. On average, we held 22% of our assets in cash throughout this period.

S&P 500 2 2008 2009 2010 2011 2012 YTD Annualized Return

K.I.F., gross (32.6%) 91.9% 23.8% 22.8% 13.8% 21.8%

K.I.F., net 3 (32.6%) 82.9% 18.6% 18.0% 11.0% 17.3%

(31.1%) 26.5% 15.1% 2.1% 12.6% 3.6%

Please refer to information contained in the disclosures at the end of the letter.

New Investment During the quarter, we invested in Patient Safety Technologies (PSTX). This company has solved a common medical problem: the retained surgical sponge. Throughout an operation, surgeons place small sponges inside a patient to absorb fluids. Unfortunately, the sponges ability to soak up fluids also causes them to blend in with their backgrounds. They become hard to spot and remove at the end of a surgery. The result is a forgotten sponge left inside 11 patients everyday. These incidents lead to legal and medical bills that cost the healthcare industry $1.7 billion per year. PSTX solves this problem with a simple, patented solution: attach a barcode to each sponge so they can be scanned in and out. Then: if PSTXs scanner records 15 sponges scanned in at the start of a surgery but only reports 14 scanned out, the surgical staff knows it must locate a missing sponge before closing the patient.
Khrom Capital Management LLC

This solution has solved the forgotten sponge problem. Over 3.6 million procedures have been done using PSTXs system and zero sponges were left unaccounted for. Compare that to the industry average of 1 retained sponge occurrence for every 8,000 procedures. PSTXs product was quickly adopted by 7 of the 10 top tier hospitals in the U.S. (including the Mayo Clinic). Once a hospital signs up for this barcoded system, PSTX essentially receives a royalty-like recurring annuity stream. After PSTXs system is implemented, its patented sponges are a) automatically reordered by the hospital, and b) manufactured and delivered by a third party. Added customers require virtually no additional operating expenses. Despite this attractive operating model, PSTXs current income statement portrays an unprofitable company, due to the costs of growth being front-loaded (thanks to the investment required for installation of its system at each new hospital) while revenues accrue over time (as bar-coded sponges are used in procedures). What caught our interest was an 8-K filing that disclosed PSTX has just signed up the second largest hospital operator in the country. This single win increased PSTXs total customer base by a factor of nearly three, from 70 hospitals to over 200. With the business model properly understood, it became clear to us that this is no longer an unprofitable venture. At our purchase price of around $1.20/share, we purchased the company for less than nine times the annual earnings power of its current customer base. But there is a plethora of evidence PSTX will continue to sign-up additional hospitals. There is regulatory pressure: Medicare has ceased reimbursement for procedures to extract a retained sponge, and most states have begun to fine hospitals for each incident. There is financial pressure: Between legal costs and the expenses of reopening patients to remove sponges, each retention incident costs hospitals over $400,000. And there is peer pressure: Once one hospital eradicates retained sponge incidents with PSTXs system, no excuse remains for fellow hospitals to waste money and harm patients. PSTX is one of just three companies pursuing this market, and thanks to what we believe is superior cost and technology, its installed-base dominates the competitions. If PSTX ultimately penetrates just 20% of its marketin other words, if four out of five hospitals decide not to sign upthen we stand to make several multiples on our investment. (We have a 30-slide presentation that provides greater detail on our thesis. For those who have not received a copy, feel free to contact us.) Exited Investments Also in Q1, we established and exited positions in two large companiesSears Holdings (SHLD) and Bank of America (BAC) with a twist. We began purchasing SHLD at around $33/share. The prognostications of the retailers demise ignored the safeguards of its holding structure. Though the value of Sears real estate and brands is well-known, rarely discussed is how these assets are held. Disclosed in the 10-K notes, Sears assets are divided among guarantor and non-guarantor subsidiaries. Most of the liabilities reside in the former, while the value is held in the latter. The ability for Sears Holdings to spin-off and monetize the non-guarantor subsidiaries (those that hold Kenmore, Craftsman, DieHard, Sears Canada, and large amounts of real estate) is what provided us downside protection.

Khrom Capital Management LLC

Our upside was also a seldom discussed perspective: the price short sellers paid to borrow SHLD shares. With tremendous demand to short SHLD but only a tiny float available, we were able to lend our shares to short sellers at over a 100% annualized rate. (We would double our money in one year even if the stock did not move. And the only realistic way borrow costs could decrease is if short sellers covered, i.e., the stock would go up.) Soon after our purchase, a short squeeze occurred, catapulting the stock price to above $60/sharearound the price we exited. We also allocated a microscopic 0.3% of our fund to options on Bank of America (BAC). The structure of these options offered a return of ~1,100% if BAC traded to just 0.56x of tangible book value in the first quarter. We made the investment not because we are experts on timing, but due to the asymmetry of the opportunity. Shortly after our allocation, BAC traded above the required threshold and our Partnership made 10x its money on this investment. Work in Progress Our 2011 Q3 letter discussed why we found AutoInfo (AUTO) an attractive investment. Though its share price has risen ~35% since our purchase, we think there is more value to be maximized for shareholders through the path we previously wrote about: the current acquisitive nature of the freight broker industry. In that regard, we filed our first 13D with the SEC. As disclosed in our filing, we strongly believe that management...should expeditiously explore all strategic alternatives available to the Issuer [AutoInfo], including a sale of the Issuer. The Reporting Persons are concerned that the Issuer continues to trade at prices that fail to reflect either its standalone intrinsic value or its significant strategic value to potential acquirers. The Reporting Persons believe that this is an opportune time for the Board and management to fully commit to realizing shareholder value in order to take advantage of a consolidation trend in the industry. We will update you on our progress. *** As always, my entire net worth continues to be invested in the Partnership and my interests are aligned with yours. The fund is currently open for new subscriptions. Please feel free to contact us at (646) 202-2618 or with any questions.

Yours truly, Eric E. Khrom Managing Partner

Khrom Capital Management LLC

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2008 performance only includes 3/01/08 to 12/31/08, due to fund inception date of March 1, 2008.

Performance data of the S&P 500 Index is included to facilitate comparisons between the Partnerships returns and overall market performance. Due to the differences among the Partnerships investment strategies and the securities that compose the S&P 500 Index, the General Partner cautions potential investors that no such index is directly comparable to the Partnerships investment strategy. S&P 500 index performance results include the reinvestment of dividends.

The results portrayed above are intended to show the investment performance that would have been experienced by a single limited partner of the Partnership who remained invested throughout each annual or partial year period shown, after the reinvestment of interest, dividends, and other earnings, and the deduction of costs and the profit allocation that the General Partner would have accrued as of the end of each year. Results are based on the Partnerships internal books and are subject to adjustment following the audit of its financial statements. Future investments may be made under different economic conditions and in different securities and using different investment strategies than were used during the time discussed herein. It should not be assumed that future investors will experience returns, if any, comparable to those of the Partnership discussed herein. The information given above is historic and should not be taken as any indication of future performance.

This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation to invest in Khrom Investments Fund LP (the Fund) may only be made by means of delivery of an approved confidential offering memorandum. Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. All investments involve risk including the loss of principal. Performance results in separately managed accounts will be different from the performance results of Khrom Investments Fund LP. Khrom Capital Management, LLC or affiliated entities (Khrom Capital) is not responsible for any liabilities resulting from errors contained in this communication. Khrom will not notify you of any errors that it identifies at a later date. An investment in any product managed or offered by Khrom Capital may be deemed speculative and is not intended as a complete investment program. It is designed only for sophisticated persons who are able to bear the risk of the substantial impairment or loss of their investment in the Fund. Products managed or offered by Khrom Capital are designed for investors who do not require regular current income and who can accept a certain degree of risk in their investments.

Khrom Capital Management LLC