UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21629
SPECIAL VALUE EXPANSION FUND, LLC
(Exact Name of Registrant as Specified in Charter)
2951 28TH STREET, SUITE 1000
SANTA MONICA, CALIFORNIA 90405
(Address of Principal Executive Offices) (Zip Code)
HOWARD M. LEVKOWITZ, PRESIDENT AND SECRETARY
SPECIAL VALUE EXPANSION FUND, LLC
2951 28TH STREET, SUITE 1000
SANTA MONICA, CALIFORNIA 90405
(Name and Address of Agent for Service)
Registrant's telephone number, including area code: (310) 566-1000
Copies to:
RICHARD T. PRINS, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
FOUR TIMES SQUARE
NEW YORK, NEW YORK 10036
Date of fiscal year end: SEPTEMBER 30, 2004
Date of reporting period: SEPTEMBER 30, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL SHAREHOLDER REPORT
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
September 30, 2004
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Annual Shareholder Report
September 30, 2004
CONTENTS
Audited Financial Statements
Report of Independent Auditors................................................1
Statement of Assets and Liabilities...........................................2
Statement of Investments......................................................3
Statement of Operations.......................................................4
Statement of Changes in Net Assets............................................5
Statement of Cash Flows.......................................................6
Notes to Financial Statements.................................................7
Supplemental Information
Portfolio Asset Allocation...................................................17
Directors and Officers.......................................................18
Special Value Expansion Fund, LLC (the "Company") files the complete schedule of
portfolio holdings with the Securities and Exchange Commission ("SEC") for the
first and third quarters of each fiscal year on Form N-Q. The Company's Forms
N-Q are available on the SEC's website at http://www.sec.gov. The Company's
Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling 1-800-SEC-0330.
A free copy of the fund's proxy voting guidelines may be obtained on the SEC's
website at www.sec.gov, or by calling the Company's adviser, Tennenbaum Capital
Partners, at (310) 566-1000. Collect calls for this purpose are accepted.
Report of Independent Auditors
The Shareholders and Board of Directors
Special Value Expansion Fund, LLC
We have audited the accompanying statement of assets and liabilities of Special
Value Expansion Fund, LLC (a Delaware limited liability company) (the Fund),
including the statement of investments, as of September 30, 2004, and the
related statements of operations, changes in net assets and cash flows, and the
financial highlights for the period from September 1, 2004 (commencement of
operations) to September 30, 2004. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 2004,
by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Special Value Expansion Fund, LLC as of September 30, 2004, and the results of
its operations, changes in net assets, cash flows and the financial highlights
for the period from September 1, 2004 (commencement of operations) to September
30, 2004, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young, LLP
November 1, 2004
1
SPECIAL VALUE EXPANSION FUND, LLC
(A Delaware Limited Liability Company)
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2004
COST FAIR VALUE
--------------------------------
ASSETS
Investments in securities
Debt securities $ 25,557,603 $ 26,017,100
Equity securities 6,892,857 7,856,029
--------------------------------
Total investments in securities 32,450,460 33,873,129
Cash and cash equivalents 27,139,922
Receivable for investment securities sold 218,533
Subscriptions receivable for common shares 30,000,000
Accrued interest income 241,935
Prepaid expenses and other assets 238,120
------------
Total assets 91,711,639
------------
LIABILITIES
Management and advisory fees payable 300,000
Directors fees payable 19,157
Accrued expenses and other liabilities 191,659
------------
Total liabilities 510,816
------------
PREFERRED STOCK
Series S; 1 share authorized, issued, and outstanding,
$1,000/share liquidation value 1,000
Series Z; 500 shares authorized, 312 shares issued and
outstanding, $500/share liquidation value 156,000
Accumulated dividends and reserve for potential
distributions to preferred 223,197
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Composition of Net Assets:
Unlimited shares authorized, $0.001 par value, 120,000 shares
issued and outstanding, 58,275.432 shares subscribed &
pending issuance 178
Paid-in capital in excess of par 89,931,822
Accumulated undistributed net investment loss (317,721)
Accumulated net realized gain on investments 6,875
Accumulated net unrealized gain on investments 1,422,669
Reserve for dividends to Series Z preferred (1,040)
Reserve for potential distributions to Series S preferred (222,157)
------------
Net assets applicable to common shareholders 90,820,626
------------
Total net assets $ 91,200,823
============
Common Stock, NAV per share $ 509.44
See accompanying notes.
2
SPECIAL VALUE EXPANSION FUND, LLC
(A Delaware Limited Liability Company)
STATEMENT OF INVESTMENTS
September 30, 2004
PRINCIPAL PERCENT OF
AMOUNT FAIR CASH AND
SECURITY OR SHARES VALUE INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------
DEBT SECURITIES (42.64%)
- ------------------------
BANK DEBT (33.34%)
DIVERSIFIED/CONGLOMERATE MANUFACTURING (13.17%)
Intentia International AB Secured Notes, LIBOR + 9%, due 9/14/09
(Acquired 9/13/04, Cost $7,761,045) (Sweden)(D) $ 7,958,628 $ 8,038,214 13.17%
TELECOMMUNICATIONS (20.17%)
Integra Telecom, Inc. 1st Lien Senior Secured Term Loan,
LIBOR + 7% Cash + 2% PIK, due 9/14/09
(Acquired 9/20/04, Cost $12,150,139)(D) $12,334,277 12,303,441 20.17%
CORPORATE FIXED INCOME SECURITIES (9.30%)
DIVERSIFIED/CONGLOMERATE SERVICE (4.79%)
Mastec, Inc. Senior Sub. Notes, 7.75%, due 2/1/08 $ 3,230,000 2,923,150 4.79%
LEISURE, AMUSEMENT, MOTION PICTURES AND ENTERTAINMENT (4.51%)
Miscellaneous Securities(C) $ 3,419,000 2,752,295 4.51%
-----------
TOTAL DEBT SECURITIES (COST $25,557,603) 26,017,100
COMMON STOCK (12.87%)
- ---------------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING (12.87%)
Intentia International AB Series A Common
(Acquired 9/13/04, Cost $184,436) (Sweden)(A)(E) 152,067 210,208 0.34%
Intentia International AB Series B Common
(Acquired 9/13/04, Cost $6,708,421) (Sweden)(A)(E) 5,531,086 7,645,821 12.53%
-----------
TOTAL COMMON STOCK (COST $6,892,857) 7,856,029
-----------
TOTAL INVESTMENTS IN SECURITIES (COST $32,450,460) 33,873,129
-----------
CASH AND CASH EQUIVALENTS (44.49%)
- ----------------------------------
United States Government Treasury Bill, due 10/7/04 $25,007,000 24,999,998 40.98%
Wells Fargo Bank Overnight REPO $ 2,139,000 2,139,000 3.51%
Wells Fargo Bank Cash Account $ 924 924 0.00%
-----------
TOTAL CASH AND CASH EQUIVALENTS(B) 27,139,922
-----------
TOTAL INVESTMENTS AND CASH $61,013,051 100.00%
===========
Notes to Statement of Investments:
(A) Denominated in Swedish Kroner, and converted to US Dollars.
(B) Amount does not include $30 million of subscriptions receivable that was
received by November 1, 2004.
(C) Miscellaneous securities are a position under accumulation.
(D) Certain investments in bank debt may be considered to be subject to
contractual restrictions, and such investments are bought and sold among
institutional investors in transactions not subject to registration under
the Securities Act of 1933. Such transactions are generally limited to
commercial lenders or accredited institutional investors and often require
approval of the agent or borrower.
(E) Foreign securities regulations temporarily restrict the sale of this
security due to membership on the Board of Directors of the issuer by an
affiliate of the Company.
Aggregate purchases and aggregate sales of investment securities, other than
Government securities, totaled $32,648,300 and $206,875, respectively.
Aggregate unrealized gains and aggregate unrealized losses on portfolio
investments totaled $1,428,846 and $6,177, respectively.
The total value of restricted securities as of September 30, 2004 was
$28,197,684, or 46.22% of total cash and investments.
See accompanying notes.
3
SPECIAL VALUE EXPANSION FUND, LLC
(A Delaware Limited Liability Company)
STATEMENT OF OPERATIONS
Period from September 1, 2004 (commencement of operations) to September 30, 2004
INVESTMENT INCOME:
Interest income $ 159,354
Income from original issue discount 2,160
-----------
Total interest and related investment income 161,514
-----------
OPERATING EXPENSES:
Management and advisory fees 300,000
Legal fees, professional fees and due diligence expenses 113,311
Custody fees 25,136
Insurance expense 21,556
Directors fees 19,157
Other operating expenses 75
-----------
Total expenses 479,235
-----------
NET INVESTMENT LOSS (317,721)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments:
Proceeds from sales and maturities 206,875
Cost on investments sold, matured or exercised 200,000
-----------
Net realized gain on investments 6,875
Change in net unrealized gain:
Net unrealized gain, beginning of period --
Net unrealized gain, end of period 1,422,669
-----------
Net change in unrealized gain on invstments 1,422,669
-----------
Net realized and unrealized gain on investments 1,429,544
-----------
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,111,823
===========
See accompanying notes.
4
SPECIAL VALUE EXPANSION FUND, LLC
(A Delaware Limited Liability Company)
STATEMENT OF CHANGES IN NET ASSETS
Period from September 1, 2004 (commencement of operations) to September 30, 2004
Total common shareholder committed capital $ 300,000,000
=============
Net assets applicable to common shareholders, September 1, 2004 $ --
Common shareholder contributions 90,000,000
Offering costs charged to paid-in capital (68,000)
-------------
Common shareholder contributions, net 89,932,000
Net investment loss (317,721)
Net realized gain on investments 6,875
Net change in unrealized gain on investments 1,422,669
-------------
Net increase in net assets resulting from operations 1,111,823
Reserve for potential distributions to Series S Preferred Stock (222,157)
Accumulated dividends on Series Z Preferred Stock (1,040)
-------------
Net increase in common shareholders' capital resulting from operations 888,626
-------------
Net assets applicable to common shareholders, September 30, 2004 $ 90,820,626
=============
See accompanying notes.
5
SPECIAL VALUE EXPANSION FUND, LLC
(A Delaware Limited Liability Company)
STATEMENT OF CASH FLOWS
Period from September 1, 2004 (commencement of operations) to September 30, 2004
OPERATING ACTIVITIES
Net increase in net assets resulting from operations $ 1,111,823
Adjustments to reconcile net increase in net assets resulting from
operations to net cash used in operating activities:
Net realized gain on investments (6,875)
Net change in unrealized gain on investments (1,422,669)
Income from original issue discount (2,160)
Changes in assets and liabilities:
Purchases of investment securities (32,648,300)
Proceeds from sales, maturities and paydowns of investment securities 206,875
Increase in prepaid expenses and other assets (238,120)
Increase in accrued interest income (241,935)
Increase in receivable for investment securities sold (218,533)
Increase in management and advisory fees payable 300,000
Increase in directors fees payable 19,157
Increase in accrued expenses and other liabilities 191,659
------------
Net cash used in operating activities (32,949,078)
------------
FINANCING ACTIVITIES
Proceeds from issuance of common shares, net 59,932,000
Proceeds from issuance of preferred shares (Series S & Series Z) 157,000
------------
Net cash provided by financing activities 60,089,000
------------
Net increase in cash and cash equivalents 27,139,922
Cash and cash equivalents at beginning of period --
------------
Cash and cash equivalents at end of period $ 27,139,922
============
See accompanying notes.
6
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
September 30, 2004
1. ORGANIZATION AND NATURE OF OPERATIONS
Special Value Expansion Fund, LLC (the "Company"), a Delaware limited liability
company, is registered as a nondiversified, closed-end management investment
company under the Investment Company Act of 1940. The Company has elected to be
treated as a regulated investment company ("RIC") for U.S. federal income tax
purposes. The Company will not be taxed on its income to the extent that it
distributes such income each year and satisfies other applicable income tax
requirements.
The Certificate of Formation of the Company was filed with the Delaware
Secretary of State on August 12, 2004. Investment operations commenced on
September 1, 2004. The Company received initial funding on September 1, 2004 and
was formed to acquire a portfolio of investments consisting primarily of bank
loans, distressed debt, stressed high yield debt, mezzanine investments and
public equities. The stated objective of the Company is to generate current
income as well as long-term capital appreciation using a leveraged capital
structure. GMAM Investment Funds Trust II ("GMAM") owns 99.5% of the Company's
common shares.
Tennenbaum Capital Partners, LLC ("TCP") serves as the Investment Manager of the
Company. TCP is controlled and managed by Tennenbaum & Co., LLC (Tennenbaum &
Co.) and certain affiliates. The Company, TCP, Tennenbaum & Co., their members
and affiliates may be considered related parties.
Company management consists of the Investment Manager and the Board of
Directors. The Investment Manager directs and executes the day-to-day operations
of the Company, subject to oversight from the Board of Directors, who sets the
broad policies for the Company. The Board of Directors consists of four persons,
three of whom are independent. If the Company has preferred shares outstanding,
the holders of the preferred shares voting separately as a class will be
entitled to elect two of the Company's Directors. The remaining Directors of the
Company will be subject to election by holders of common shares and preferred
shares voting together as a single class.
COMPANY STRUCTURE
Total maximum capitalization of the Company is targeted at $600 million,
consisting of $300 million of capital committed by investors to purchase the
Company's common shares, approximately $100 million of Money Market preferred
shares, approximately $200 million under a Senior Secured Revolving Credit
Facility (the "Senior Facility"), and $156,000 of Series Z Preferred Stock and
$1,000 of Series S Preferred Stock (see Note 7). The contributed investor
capital, Money Market preferred shares and the amount drawn under the
anticipated Senior Facility are to be used to purchase Company investments and
to pay certain fees and expenses of the Company. Substantially all of these
investments will be included in the collateral for the anticipated Senior
Facility and are available to pay certain fees and expenses of the Company
incurred in connection with its organization and capitalization. At September
30, 2004, the terms of the Senior Facility were being negotiated.
7
INVESTOR CAPITAL
Investors have committed to purchase $300 million of the Company's common shares
over a two year period on dates specified by the Company. On September 1, 2004,
each investor contributed 20% of its capital commitment to purchase common
shares. The Company called an additional 10% of the common share commitment
which was received by the Company by November 1, 2004. The Company expects to
call and receive the remaining 70% of the common share commitments by September
1, 2006.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying audited financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). In the opinion of the Investment Manager, the audited
financial results of the Company included herein contain all adjustments
necessary to present fairly the financial position of the Company as of
September 30, 2004, and the results of its operations, changes in net assets and
cash flows for the period ended September 30, 2004. The results of operations
for the period ended September 30, 2004, are not necessarily indicative of the
operating results to be expected for a full year. The following is a summary of
the significant accounting policies of the Company.
INVESTMENT VALUATION
Management values investments held by the Company based upon the principles and
methods of valuation set forth in policies adopted by the Company's Board of
Directors.
Investments listed on a recognized exchange, whether U.S. or foreign, are valued
for financial reporting purposes as of the last business day of the reporting
period using the closing price on the date of valuation. Investments not listed
on a recognized exchange are valued by an approved nationally recognized
security pricing service, or by using the average of the bid prices on the date
of valuation as supplied by three approved broker-dealers. At September 30,
2004, all investments were valued based on prices from a nationally recognized
exchange or nationally recognized third-party pricing service.
Investments for which market quotations are not readily available or are
determined to be unreliable are valued at fair value under guidelines adopted by
the Board of Directors. As part of adhering to these guidelines the Company
normally reviews the following information:
8
a) for semi-liquid investment positions with a value of $15,000,000 or
greater but less than $30,000,000, the most recent quote provided by an
approved investment banking firm;
b) for semi-liquid investment positions with a value greater than
$30,000,000, the most recent valuation provided by an approved third-party
appraisal; and
c) for illiquid investment positions with a value of $15,000,000 or greater,
the most recent valuation provided by an approved third-party appraisal.
Fair value is generally defined as the amount that an investment could be sold
for in an orderly disposition over a reasonable time. Generally, to increase
objectivity in valuing the Company's assets, the Investment Manager will utilize
external measures of value, such as public markets or third-party transactions,
whenever possible. The Investment Manager's valuation is not based on long-term
work-out value, immediate liquidation value, nor incremental value for potential
changes that may take place in the future. The values assigned to investments
that are valued by the Investment Manager are based on available information and
do not necessarily represent amounts that might ultimately be realized, as these
amounts depend on future circumstances and cannot reasonably be determined until
the individual investments are actually liquidated. The Investment Manager
generally uses three methods to fair value securities:
(i) Cost Method. The cost method is based on the original cost of the securities
to the Company. This method is generally used in the early stages of a portfolio
company's development until significant positive or negative events occur
subsequent to the date of the original investment by the Company in such company
that dictate a change to another valuation method.
(ii) Private Market Method. The private market method uses actual, executed,
historical transactions in a portfolio company's securities by responsible third
parties as a basis for valuation. In connection with utilizing the private
market method, the Investment Manager may also use, where applicable,
unconditional firm offers by responsible third parties as a basis for valuation.
(iii) Analytic Method. The analytical method is generally used by the Investment
Manager to value an investment position when there is no established public or
private market in the portfolio company's securities or when the factual
information available to the Investment Manager dictates that an investment
should no longer be valued under either the cost or private market method. This
valuation method is based on the judgment of the Investment Manager, using data
available for the applicable portfolio securities.
INVESTMENT TRANSACTIONS
The Company records investment transactions on the trade date for public
securities transactions or closing date for private securities transactions. The
cost of investment purchased is based upon the purchase price plus those
professional fees which are specifically identifiable to the investment
transaction. Realized gains and losses on investments are recorded based on the
specific identification method, which typically allocates the highest cost
inventory to the basis of the securities sold.
9
CASH AND CASH EQUIVALENTS
Cash consists of amounts held in accounts with brokerage firms. Cash equivalents
consist of highly liquid investments with an original maturity of three months
or less. For purposes of reporting cash flows, cash consists of the cash held
with brokerage firms and cash equivalents maturing within 90 days.
REPURCHASE AGREEMENTS
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian takes possession of the underlying collateral
securities, for which the fair value exceeds the principal amount of the
repurchase transaction, including accrued interest, at all times. If the seller
defaults, and the fair value of the collateral declines, realization of the
collateral by the Company may be delayed or limited.
INVESTMENTS IN FOREIGN SECURITIES
The Company invests in securities traded in foreign countries and denominated in
foreign currencies. At September 30, 2004 investments denominated in foreign
currencies totaled approximately 8.61% of the Company's net assets. All such
open positions are converted at the closing rate in effect on September 30, 2004
and reported in U.S. dollars. Purchases and sales of investment securities and
income and expense items denominated in foreign currencies are translated into
U.S dollars on the respective dates of such transactions. As such, foreign
security positions and transactions are susceptible to foreign currency as well
as overall market risk. Accordingly, potential unrealized gains and losses from
foreign security transactions may be affected by fluctuations in foreign
exchange rates. The Company does not isolate that portion of the results of
operations resulting from changes in currency exchange rates, from the
fluctuations arising from changes in the market prices of investments held. Such
fluctuations are included in the net realized and unrealized gain or loss from
investments.
Securities of foreign companies and foreign governments may involve special
risks and considerations not typically associated with investing in U.S.
companies and securities of the U.S. government. These risks include, among
other things, revaluation of currencies, less reliable information about
issuers, different securities transactions clearance and settlement practices,
and potential future adverse political and economic developments. Moreover,
securities of some foreign companies and foreign governments and their markets
may be less liquid and their prices more volatile than those of securities of
comparable U.S. companies and the U.S. government.
DEBT ISSUANCE COSTS
Costs incurred in connection with placing the Company's contemplated Senior
Facility will be deferred and amortized on a straight-line basis over eight
years, the estimated life of the Senior Facility. The impact of utilizing the
straight-line amortization method versus the effective-interest method is not
material to the Company's operations. For the period ended September 30, 2004,
the Company had not yet incurred any costs associated with placing the senior
facility.
10
EQUITY PLACEMENT AND OFFERING COSTS
Offering costs totaling $68,000 were incurred in connection with the offering of
common shares of the Company and charged to paid-in capital.
ORGANIZATION COSTS
Organization costs totaling $75,537 were incurred in connection with the
formation of the Company and expensed to operations.
PURCHASE DISCOUNTS
The majority of the Fund's high yield and distressed debt securities are
purchased at a considerable discount to par as a result of the underlying credit
risks and financial results of the issuer and by general market factors that
influence the financial markets as a whole. GAAP requires that discounts on
corporate (investment grade) bonds, municipal bonds and treasury bonds be
amortized using the effective-interest or constant-yield method. The process of
accreting the purchase discount of a debt security to par over the holding
period results in accounting entries that increase the cost basis of the
investment and records a noncash income accrual to the statement of operations.
The Company considers it prudent to follow GAAP guidance that requires the
Investment Manager to consider the collectibility of interest when making
accruals. Statement of Position 93-1 discusses financial accounting and
reporting for high yield debt securities and notes that because of the credit
risks associated with high yield and distressed debt securities, income
recognition must be carefully considered and constantly evaluated for
collectibility.
Accordingly, when accounting for purchase discounts, management recognizes
discount accretion income when it is probable that such amounts will be
collected and when such amounts can be estimated. A reclassification entry is
recorded at year-end to reflect purchase discounts on all realized investments.
For income tax purposes, the economic gain resulting from the sale of debt
securities purchased at a discount is allocated between interest income and
realized gains.
DIVIDENDS TO COMMON SHAREHOLDERS
Dividends and distributions to common shareholders are recorded on the record
date. The amount to be paid out as a dividend is determined by the Board of
Directors and is generally based upon the taxable earnings estimated by the
Investment Manager. Net realized capital gains are distributed at least
annually.
INCOME TAXES
The Company intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes. In accordance with Statement
of Position 93-2 Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies, book and tax basis differences relating to shareholder distributions
and other permanent book and tax differences are reclassified to paid-in
capital. In addition, the character of income and gains to be distributed is
determined in accordance with income tax regulations that may differ from
accounting principles generally accepted in the United States of America.
11
USE OF ESTIMATES
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Although management believes these estimates and
assumptions to be reasonable and accurate, actual results could differ from
those estimates.
3. ALLOCATIONS AND DISTRIBUTIONS
SVOF/MM, LLC (the "Special Member") holds the Series S preferred stock (see Note
7 below) and is entitled to distributions declared thereon in the amounts and at
the times described below. As set forth in the Operating Agreement,
distributions made to common and Series S preferred shareholders with respect to
any accounting period are determined as follows:
a) First, 100% to the common shareholders based on their respective
proportionate capital contributions as of the end of such accounting
period until the amount distributed to each common shareholder, together
with amounts previously distributed to such shareholder, equals a 12%
annual weighted average return on undistributed capital attributable to
the common shares.
b) Then, 100% to the Special Member as the holder of the Series S preferred
stock until the amount distributed to the Special Member equals 25% of all
amounts previously distributed to the common shareholders pursuant to
clause (a) above; and
c) All remaining amounts: (i) 80% to the common shareholders based on their
proportionate capital contributions as of the end of such accounting
period and (ii) 20% to the Special Member as the holder of the Series S
preferred stock.
The timing of distributions is determined by the Board of Directors. If the
Company liquidated all assets at September 30, 2004, distributions to the Series
S shareholder would be $222,157. A reserve for this amount is reflected in the
accompanying financial statements.
4. MANAGEMENT FEES AND OTHER EXPENSES
Pursuant to the advisory agreement, the Investment Manager is entitled to
receive an annual management and advisory fee equal to 0.60% of the sum of the
total common commitments and money market preferred stock and debt potentially
issuable in respect of such common commitments, payable monthly in arrears. For
purposes of computing the management fee, total committed capital is $600
million consisting of $300 million of capital committed by investors to purchase
the Company's common shares, $100 million of preferred shares and $200 million
of debt.
12
The Company pays all expenses incurred in connection with the business of the
Company, including fees and expenses of outside contracted services, such as
custodian, trustee, administrative, legal, audit and tax preparation fees, costs
of valuing investments, insurance costs, brokers' and finders' fees relating to
investments, and any other transaction costs associated with the purchase and
sale of investments of the Company.
5. SENIOR SECURED REVOLVING CREDIT FACILITY
The Company is structuring a credit agreement with certain lenders, which is
contemplated to provide for a senior secured revolving credit facility ("Senior
Facility"). The Senior Facility is expected to be a revolving extendible credit
facility pursuant to which amounts may be drawn up to $200 million, the maximum
available commitment, subject to certain draw down criteria. Amounts drawn under
the Senior Facility may be repaid, in whole or in part, at the election of the
Company, and redrawn subject to the draw down criteria.
6. COMMITMENTS, CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Company conducts business with brokers and dealers that are primarily
headquartered in New York and Los Angeles and are members of the major security
exchanges. Banking activities are conducted with a firm headquartered in the New
York area.
In the normal course of business, the Company's securities activities involve
execution, settlement and financing of various securities transactions resulting
in receivables from, and payables to, brokers and the Company's custodian. These
activities may expose the Company to risk in the event brokers and dealers are
unable to fulfill contractual obligations. Management does not anticipate any
losses from counterparties with whom it conducts business.
7. PREFERRED CAPITAL
SERIES S PREFERRED SHARE
The Company issued one share of its Series S preferred shares to the Special
Member, having a liquidation preference of $1,000 plus accumulated but unpaid
dividends. The Special Member is controlled by the Investment Manager and owned
substantially entirely by the Investment Manager and certain affiliates. The
Series S preferred share pays dividends as described in Note 3 above. The Series
S preferred share ranks on par with any Money Market preferred shares and Series
Z preferred shares and votes with them as a single class. The Series S preferred
share is redeemable at liquidation preference at any time if the investment
advisory agreement with TCP is terminated for any reason.
13
SERIES Z PREFERRED SHARES
The Company issued 312 shares of its Series Z preferred shares, having a
liquidation preference of $500 per share plus accumulated but unpaid dividends
and paying dividends at an annual rate equal to 8% of liquidation preference.
The Series Z preferred shares rank on par with any Money Market preferred shares
and the Series S preferred share with respect to the payment of dividends and
distribution of amounts on liquidation, and will vote with any Money Market
preferred shares and the Series S preferred share on matters submitted to a vote
of holders of preferred shares of the Company. The Series Z preferred shares are
redeemable at any time at the option of the Company and may only be transferred
with the consent of the Company.
14
8. SHAREHOLDER'S CAPITAL
Sales and subscriptions of common stock to the Company's investors for the
period ended September 30, 2004 were as follows:
-------------------------------------------------------------------------
Period from September 1,
2004 (commencement of
operations) to
September 30, 2004
-------------------------------------------------------------------------
Number of Common Shares issued & subscribed 178,275
Gross Proceeds Received $60,000,000
Offering Costs ($68,000)
Net Proceeds $59,932,000
Subscription Proceeds Receivable $30,000,000
-------------------------------------------------------------------------
Contributions Received & Receivable $89,932,000
-------------------------------------------------------------------------
A common stock subscription receivable of $30 million was recorded at September
30, 2004. The common stock subscription receivable represented 10% of the common
share commitment. The common stock subscription receivable at September 30, 2004
was received by the Company on October 22, 2004 (6.68%) and November 1, 2004
(3.32%).
15
9. FINANCIAL HIGHLIGHTS
PERIOD FROM
SEPTEMBER 1, 2004
(COMMENCEMENT OF
OPERATIONS) TO
SEPTEMBER 30, 2004
------------------
Net asset value, beginning of period --
Net investment loss $ (317,721)
Net realized gains $ 6,875
Net change in unrealized appreciation $ 1,422,669
--------------
Net increase in net assets resulting from operations $ 1,111,823
Net increase in net assets from capital share transactions $ 90,089,000
--------------
Net asset value, end of period $ 91,200,823
==============
PER COMMON SHARE:
Net asset value, beginning of period $ 499.43
Net investment loss $ (2.13)
Net realized gains $ 0.05
Net change in unrealized appreciation $ 12.09
--------------
Net increase in net assets resulting from operations $ 10.01
--------------
Net asset value, end of period $ 509.44
==============
Period return before reserve for preferred distributions 1.85%
Period return to common shareholders 1.48%
RATIOS AND SUPPLEMENTAL DATA:
Ending net assets $ 91,200,823
Ending net assets attributable to common shareholders $ 90,820,626
Common shares outstanding at end of period 120,000
Common shares subscribed 58,275
Total expenses/average net assets 0.78%
Net investment income/average net assets (0.52)%
Portfolio turnover rate 1.22%
16
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Portfolio Asset Allocation (% of Cash and Investments)
(Unaudited)
September 30, 2004
Portfolio Holdings by Investment Type
[THE FOLLOWING DATA WAS REPRESENTED AS A PIE CHART IN THE ORIGINAL MATERIAL]
Cash and Cash Equivalents 44.5%
Bank Debt 33.3%
Corporate Fixed
Income Securities 9.3%
Common Stock 12.9%
Portfolio Holdings by Industry
[THE FOLLOWING DATA WAS REPRESENTED AS A PIE CHART IN THE ORIGINAL MATERIAL]
Cash and Cash Equivalents 44.5%
Diversified/Conglomerate
Manufacturing 26.0%
Telecommunications 20.2%
Diversified/Conglomerate
Service 4.8%
Leisure, Amusement,
Motion Pictures and
Entertainment 4.5%
17
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Directors and Officers
(Unaudited)
The Directors and executive officers of the Company are listed below. The
Board of Directors governs the Company and is responsible for protecting the
interests of shareholders. The Directors are experienced executives who meet
periodically throughout the year to oversee the Company's activities, review
contractual arrangements with service providers to the Company, and review the
Company's performance. Each Director and executive officer serves for an
indefinite term. Correspondence for each Director or officer may be sent to: c/o
Tennenbaum Capital Partners, LLC, 2951 28th Street, Suite 1000, Santa Monica,
California 90405.
The Company's Statement of Additional Information (SAI) includes more
information about the Directors. Shareholders may request a free copy by calling
(310) 566-1000. Collect calls are accepted.
1. INDEPENDENT DIRECTORS
NAME (AGE)
PRINCIPAL OCCUPATION(S)
Richard P. Bermingham (65)
- - Year of Election or Appointment: 2004
- - Director and Chairman of the Audit Committee of the Company. Mr. Bermingham
retired in 1994 as President of Sizzler International, which was a $1 billion
fast food enterprise. His career started at Sizzler as Vice President of
Finance, having joined them after five years as an auditor with Arthur Andersen.
At Arthur Andersen, his clients included Getty Trust, Teledyne, Taco Bell, and
Winchell's Donuts. He currently serves on the boards of several private
companies and is a Trustee of Marymount College. He previously served as a
Director of Farr Company, National Gulf Properties (where he was Vice-Chairman),
Sanwa Bank, American Coin Merchandising, Genius Products, University of Colorado
Foundation and Business School, Chief Executives Organization, and the Boy
Scouts of America. He is a graduate of the University of Colorado. Mr.
Bermingham oversees one portfolio in the fund complex.
Harold T. Bowling (69)
- - Year of Election or Appointment: 2004
- - Director and Audit Committee Member of the Company. Mr. Bowling retired in
1997 as President of Lockheed Martin Aeronautics International, previously
serving as Director of Strategic Planning and Vice President, Corporate
Development, where he was responsible for all merger and acquisition activity.
He has a degree in aeronautical engineering from the Georgia Institute of
Technology and an MBA from Georgia State University. He is a Director of Pemco
Aviation Group, as well as its Vice-Chairman and is Chairman of both its
Compensation and its Strategic Planning Committees. Also, he is a member of the
Foundation Board of St. Joseph Hospital. Mr. Bowling oversees one portfolio in
the fund complex.
18
L.R. Jalenak, Jr. (74)
- - Year of Election or Appointment: 2004
- - Director and Audit Committee Member of the Company. Mr. Jalenak retired in
1993 as Chairman of a subsidiary of Gibson Greetings Company. His background was
in both sales and in general management. He previously served as a Director of
Lufkin Industries, Perrigo Company, Dyersburg Corporation and First Funds. He
serves as a Director of Memphis Light, Gas & Water and is Chairman of its
Pension Committee. He also serves as a Director of Party City Corporation, as a
Member of its Audit Committee, and as Chairman of its Compensation Committee.
Mr. Jalenak also serves on other corporate boards. He has a business degree from
Tulane University and an MBA from Wharton. Mr. Jalenak oversees one portfolio in
the fund complex.
2. INTERESTED DIRECTORS AND OFFICERS
NAME (AGE)
PRINCIPAL OCCUPATION(S)
Michael E. Tennenbaum (69)
- - Year of Election or Appointment: 2004
- - Director and Chief Executive Officer of the Company. Mr. Tennenbaum also
serves as Senior Managing Partner and a voting member of the Investment
Committee of Tennenbaum Capital Partners, LLC ("TCP"). He formerly served for 32
years in various capacities at Bear Stearns including as Vice Chairman,
Investment Banking. Mr. Tennenbaum oversees one portfolio in the fund complex as
a Director, and is an officer of two portfolios in the fund complex.
Howard M. Levkowitz (37)
- - Year of Election or Appointment: 2004
- - President and Secretary of the Company. Mr. Levkowitz also serves as a
Managing Partner and voting member of the Investment Committee of TCP and is a
Director of Party City Corporation and Chairman of its Nominating Committee. He
was formerly employed as an attorney at Dewey Ballantine. Mr. Levkowitz oversees
one portfolio in the fund complex as a Director and is an officer of two
portfolios in the fund complex.
Robert G. DiPaolo (37)
- - Year of Election or Appointment: 2004
- - Chief Financial Officer of the Company. Mr. DiPaolo is also Chief Financial
Officer of TCP. He was formerly employed as Vice President of TCW, and earlier
was an audit and business consulting manager at the Los Angeles office of Arthur
Andersen & Co. Mr. DiPaolo is an officer of two portfolios in the fund complex.
19
Mark K. Holdsworth (39)
- - Year of Election or Appointment: 2004
- - Authorized Person of the Company. Mr. Holdsworth is also a Managing Partner
and voting member of the Investment Committee of TCP. He also serves as a
Director of Pemco Aviation Group, Inc. and Chairman of its Finance Committee, as
well as Director of International Wire Group, Inc. He was formerly employed as
Vice President, Corporate Finance, of US Bancorp Libra, a high-yield debt
securities investment banking firm, and earlier as a generalist in Corporate
Finance at Salomon Brothers, Inc. Prior to that, Mr. Holdsworth worked as an
Associate at a Los Angeles real estate advisory firm. He is an officer of two
portfolios in the fund complex.
David A Hollander (43)
- - Year of Election or Appointment: 2004
- - Authorized Person of the Company. Mr. Hollander also serves as a Director and
as General Counsel of TCP. Formerly, he worked as an attorney for O'Melveny &
Myers LLP. Mr. Hollander is an officer of two portfolios in the fund complex.
Paul Davis (30)
- - Year of Election or Appointment: 2004
- - Chief Compliance Officer of the Company. Mr. Davis also serves as Chief
Compliance Officer and Vice President, Finance of TCP. He was formerly employed
as Corporate Controller of a publicly traded stock brokerage firm, following
employment at Arthur Andersen, LLP as an auditor. Mr. Davis is an officer of two
portfolios in the fund complex.
20
ITEM 2. CODE OF ETHICS.
(a) As of the end of the period covered by this report, the Registrant has
adopted a code of ethics (the "Code of Ethics") that applies to the Registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the Registrant or a third party.
(b) Not applicable.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the Registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the Registrant or a third party, and
that relates to any element of the code of ethics description.
(d) The Registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the Registrant's
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless of
whether these individuals are employed by the Registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of this item's
instructions.
(e) Not applicable.
(f) A copy of the Code of Ethics is filed as Exhibit EX-99.CODE ETH to
this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
directors has determined that Richard P. Bermingham is qualified to serve as an
audit committee financial expert serving on its audit committee and that he is
"independent" pursuant to the general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by the principal accountant for the
audit of the Registrant's annual financial statements or services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements for those fiscal years were: $25,000 for fiscal year 2004
and $0 for fiscal year 2003.
(b) Audit-Related Fees. Not applicable.
(c) Tax Fees. The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning were: $10,741.84 for fiscal year 2004
and $0 for fiscal year 2003. The services comprising such fees related to tax
advice concerning various regulated investment company organizational and
compliance issues.
(d) All Other Fees. Not applicable.
(e) (1) Audit Committee's pre-approval policies and procedures, pursuant
to Item 4 of N-CSR:
The Audit Committee pre-approves all audit, review and attest engagements
required under the securities laws and regulations provided by Ernst & Young,
the Registrant's independent auditors. The Audit Committee also approves all
non-audit services, including tax services, provided to the Registrant by Ernst
& Young and verifies, at the time of pre-approval, that such pre-approved
non-audit services would not be prohibited services under securities
regulations. The Audit Committee pre-approves all non-audit services provided by
Ernst & Young to the Registrant's investment adviser and to affiliates of the
investment adviser that provide ongoing services to the Registrant, but only if
the non-audit services have a direct impact on the operations or financial
reporting of the Registrant.
(e) (2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the Registrant's accountant for
services rendered to the Registrant, and rendered to the Registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the Registrant for each of the last
two fiscal years of the Registrant were: $10,741.84 for fiscal year 2004 and $0
for fiscal year 2003.
(h) The Registrant's independent auditors did not provide non-audit
services to the Registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), nor any entity controlling, controlled
by, or under common control with the investment adviser that provides ongoing
services to the Registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X. Accordingly, the audit committee of
the board of directors has not considered whether any such services are
compatible with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Included in Annual Shareholder Report in Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
TENNENBAUM CAPITAL PARTNERS, LLC
PROXY VOTING POLICY
This policy has been adopted by Tennenbaum Capital Partners, LLC to
facilitate the voting of proxies relating to portfolio securities of clients
with respect to which Tennenbaum Capital Partners, LLC or any of its affiliates
that are subject to the Investment Advisers Act of 1940 (collectively
"Tennenbaum") provide investment advisory services. In connection with these
investment advisory services, Tennenbaum exercises voting responsibilities for
its clients through its corporate proxy voting process.
Special Value Opportunities Fund, LLC and Special Value Expansion Fund,
LLC have delegated to Tennenbaum the authority to vote proxies relating to their
respective portfolio securities in accordance with this policy.
This policy is intended by Tennenbaum (i) to constitute "written policies
and procedures" as described in Rule 206(4)-6 under the Investment Advisers Act
of 1940 (the "Advisers Act") and (ii) to constitute proxy voting policies and
procedures referred to in Item 18 of Form N-2 adopted under the Investment
Company Act of 1940 (the "1940 Act").
DEFINITIONS
"Client" means any person with whom Tennenbaum has a contract to perform
discretionary investment management services and for whom Tennenbaum is
authorized by the contract or required by applicable law to vote or consider
voting securities held in the Client's account.
"Compliance Officer" means the Chief Compliance Officer, Tennenbaum
Capital Partners, LLC.
"Conflict of Interest" means, as to any Client, any conflict between a
pecuniary interest of Tennenbaum or any of its affiliates (other than such
Client, if deemed an affiliate) and the duties of Tennenbaum to the Client.
"Investment Committee" means the Investment Committee of Tennenbaum or
such committee to which it shall have delegated the functions of the Investment
Committee hereunder.
"Portfolio Manager" means, with respect to a Client, the particular
Tennenbaum entity providing investment advisory services to such Client and the
senior personnel responsible for such entity's investment decisions.
"Proxy Voting Coordinator" means the individual appointed from time to
time by Investment Committee to perform the proxy voting coordination functions
described in this policy.
"Registered Fund" means any Client registered as an investment company
under the 1940 Act.
"Social Issues" means any issue presented for a vote of holders of any
security which is held in an account on behalf of a Client which may reasonably
be interpreted as (i) unrelated in any substantial respect to the voting
objective of this policy and (ii) intended to promote directly or indirectly the
interests of persons who are not holders of the relevant security.
"Tennenbaum" means Tennenbaum Capital Partners, LLC and each of its
affiliates that is subject to registration under the Advisers Act or is
otherwise subject to the rules and regulations thereunder generally, including,
specifically, Rule 206(4)-6.
"Voting Results" means the specific information described under the
caption "Accumulating Voting Results."
OBJECTIVES
This policy defines procedures for voting securities held on behalf of
each Client in respect of which Tennenbaum has the discretionary authority to
vote, to ensure that such securities are voted for the benefit of and in the
best interest of the Client. The primary objective of voting a security in each
case under this policy is to seek to enhance the value of the investment which
the security represents or to reduce the potential for a decline in the value of
the investment which the security represents. In appropriate cases a related
objective will be to obtain or maintain influence or control over management of
a company.
This policy does not prescribe specific voting requirements. Instead, this
policy provides procedures for (i) assembling voting information and applying
the informed expertise and judgment of Tennenbaum's personnel on a timely basis
in pursuit of the above stated voting objectives and (ii) addressing conflicts
of interest.
A further element of this policy is that while voting on all issues
presented should be considered, voting on all issues is not required. Some
issues presented for a vote of security holders are not relevant to this
policy's voting objectives, or it is not reasonably possible to ascertain what
effect, if any, a vote on a given issue may have on the value of an investment.
Accordingly, Tennenbaum may abstain from voting or decline a vote in those cases
where, in Tennenbaum's judgment (i) there is no relationship between the issue
and the enhancement or preservation of an investment's value or (ii) the
achievement of the Client's investment objectives are not reasonably likely to
be a function of the outcome of decisions or issues presented by the vote.
RESOLUTIONS OF CONFLICTS OF INTEREST
It is unlikely that conflicts of interest will arise in the context of
Tennenbaum's proxy voting, because Tennenbaum does not engage in investment
banking, the advising of public companies or, except in cases where it exercises
control, the managing of public companies.
In addition, insofar as Tennenbaum refers discretionary votes to its
portfolio managers, Tennenbaum's Compliance Department monitors all
relationships between portfolio managers and their immediate families, on the
one hand, and issuers soliciting proxies from Tennenbaum's Clients, on the other
hand. If a portfolio manager conflict is identified with respect to a given
proxy vote, the Investment Committee will remove such vote from the conflicted
portfolio manager and will instead consider and cast the vote, refer the vote to
an independent third party or abstain from voting.
In the event a privately-placed security as to which Tennenbaum or its
affiliated adviser entities negotiated more than price related terms is held by
a Registered Fund and is the subject of a proxy solicitation or other voting or
consent solicitation, and any unregistered fund or separate account managed by
Tennenbaum or its affiliated adviser entities also owns securities of the same
class as the security held by the Registered Fund that is the subject of the
proxy, vote or consent, then Tennenbaum will vote such security in the same
manner, at the same time and in amounts proportionate to each such entity's or
account's investment in such security; provided that if Tennenbaum or its
affiliated adviser entities believes that the foregoing policy is not in the
best interests of a particular Client in a particular situation, Tennenbaum or
its affiliated adviser entities shall be permitted to deviate from the foregoing
policy only if it has (i) submitted a proposal to the boards of directors of
each applicable Registered Fund explaining the basis for such deviation and (ii)
received the approval of a majority of those directors of the Registered Fund
who (a) during the previous two years have had no material business or
professional relationship with any of the Registered Fund or any other entity or
separate account managed by Tennenbaum or its affiliated adviser entities (other
than as a director of the Registered Fund) and (b) have no direct or indirect
financial interest in the proxy solicitation, vote or consent other than through
an investment in one or more of the Registered Fund or any other entity or
separate account managed by Tennenbaum or its affiliated adviser entities.
In the event that a potential material conflict of interest does arise and
is not addressed by the foregoing procedures, the primary means by which
Tennenbaum avoids a material conflict of interest in the voting of proxies for
its clients is by casting such votes solely in the interests of its Clients and
in the interests of maximizing the value of their portfolio holdings.
PROXY VOTING COORDINATOR
The Investment Committee shall appoint a Proxy Voting Coordinator. The
Proxy Voting Coordinator shall discharge the following functions in effectuating
this policy:
(i) Collecting and assembling proxy statement and other communication
pertaining to proxy voting, together with proxies or other means of
voting or giving voting instructions, and providing those materials
to the appropriate portfolio managers to permit timely voting of
proxies;
(ii) Collecting recommendations, analysis, commentary and other
information respecting subjects of proxy votes, from service
providers engaged by Tennenbaum and other services specified by
portfolio managers, and providing this information to the
appropriate portfolio managers to permit evaluation of proxy voting
issues;
(iii) Providing to appropriate portfolio managers any specific voting
instructions from Clients that are entitled to provide such
instructions under the applicable investment advisory agreement;
(iv) Collecting proxy votes or instructions from portfolio managers, and
transmitting the votes or instructions to the appropriate
custodians, brokers, nominees or other persons (which may include
proxy voting services or agents engaged by Tennenbaum);
(v) Accumulating Voting Results as set forth below in this policy and
transmitting that information to the Compliance Officer in a timely
manner; and
(vi) Participating in the annual review of the policy function as set
forth in this policy.
THE PROXY VOTING COORDINATOR MAY, WITH THE INVESTMENT COMMITTEE'S
APPROVAL, DELEGATE ANY PORTION OR ALL OF ANY ONE OR MORE OF THESE FUNCTIONS TO
ONE OR MORE OTHER INDIVIDUALS EMPLOYED BY TENNENBAUM. ANY PORTION OR ALL OF ANY
ONE OR MORE OF THESE FUNCTIONS MAY BE PERFORMED BY SERVICE PROVIDERS ENGAGED BY
TENNENBAUM.
ASSEMBLING VOTING INFORMATION
The Proxy Voting Coordinator shall obtain proxy statements and other
communications pertaining to proxy voting, together with proxies or other means
of voting or giving voting instructions to custodians, brokers, nominees,
tabulators or others in a manner to permit voting on relevant issues in a timely
manner. Tennenbaum may engage service provides and other third parties to
assemble this information, digest, abstract the information where necessary or
desirable, and deliver it to the individuals assigned by Tennenbaum to evaluate
proxy voting issues.
PORTFOLIO MANAGERS
The Portfolio Manager responsible for a particular Client is responsible
for the timely voting (or determining not to vote in the appropriate cases) of
proxies relating to the securities held on behalf of such Client in accordance
with this policy. The Portfolio Manager may, to the extent not prohibited by
agreement(s) setting forth its contractual obligations to such Client, and
consistent with its fiduciary duties, delegate voting responsibilities to one or
more other Portfolio Managers or other individuals. Portfolio managers are
authorized to consider voting recommendations and other information and analysis
provided by service providers (including proxy voting services) engaged by
Tennenbaum.
ACCUMULATING VOTING RESULTS
The Proxy Voting Coordinator is responsible for reporting the following
information respecting the voting of each proxy to the Compliance Officer, as to
each matter relating to a portfolio security held for a Client, considered at a
shareholder meeting, and with respect to which the Client was entitled to vote:
(i) The name of the issuer of the portfolio security;
(ii) The exchange ticker symbol of the portfolio security;
(iii) The CUSIP number for the portfolio security;
(iv) The shareholder meeting date;
(v) A brief identification of the matter voted on;
(vi) Whether a vote was cast on the matter;
(vii) How the vote was cast on the matter (e.g., for or against the
proposal, or abstain, etc.);
(viii) Whether a vote was cast for or against management.
The foregoing information must be delivered to the Compliance Officer no
later than July 31, for each 12 month period ending on the preceding June 30
commencing July 31, 2004 with respect to the period ending June 30, 2004.
Tennenbaum may use third party service providers to record, accumulate and
deliver the foregoing information to the Compliance Officer. The Proxy Voting
Coordinator may, with the Investment Committee's approval, delegate any portion
or all of this function to one or more other individuals employed by Tennenbaum.
COMMUNICATING VOTES
The Proxy Voting Coordinator shall communicate decisions on proxy votes to
the custodian or to other persons who transmit or record votes on portfolio
securities held by or for each Client in a timely manner. The Proxy Voting
Coordinator may, with the Investment Committee's approval, delegate any portion
or all of this function to one or more individuals employed by Tennenbaum.
Tennenbaum may engage one or more service providers to facilitate timely
communication of proxy votes. Tennenbaum is not responsible for voting proxies
that are not forwarded on a timely basis. Tennenbaum does not control the
setting of record dates, shareholder meeting dates or the timing of distribution
of proxy materials and ballots relating to shareholder votes as a general
matter.
RECORD OF VOTING DELEGATION
The Compliance Officer shall maintain a list of all Clients with a
specification as to each Client whether or not Tennenbaum is authorized to vote
proxies respecting the Client's portfolio securities.
ANNUAL REVIEW OF POLICY FUNCTION
The Compliance Officer shall conduct a periodic review, no less often than
annually, which shall comprise the following elements:
(i) Review samples of the record of voting delegation maintained by the
Compliance Officer against Voting Results to determine if Tennenbaum
is exercising its authority to vote proxies on portfolio securities
held on behalf of the selected Clients;
(ii) Request and review voting data to determine if timely communication
of proxy votes is reasonably accomplished during the relevant
period;
(iii) Meet with the Proxy Voting Coordinator to review the voting of
proxies, communication of proxy votes, accumulation of Voting
Results and the general functioning of this policy; and
(iv) Prepare a written report to the Investment Committee respecting the
foregoing items and, if requested to do so by the Investment
Committee, prepare a written report to the board of any Registered
Fund.
DISCLOSURE AND COMMENTS ON VOTING
Tennenbaum will provide a copy of these policies and procedures to Clients
upon request. Clients may also obtain information on how portfolio securities
held on their behalf were voted by written request and addressed to Tennenbaum,
Proxy Voting Coordinator. It is the policy of Tennenbaum not to comment on
specific proxy votes with respect to securities held for a Client in response to
inquiries from persons who are not specifically or authorized representative of
such Client. The Investment Committee may authorize comments in specific cases,
in its discretion.
JOINING INSURGENT OR VOTING COMMITTEES
It is the policy of Tennenbaum, for itself and its Clients, not to join
any insurgent or voting committee or similar group unless doing so is consistent
with the Client's investment objective. The Investment Committee may, in other
circumstances, approve participation in any such committee or group in its
discretion, and shall advise the authorized representative of the Client of any
such action.
SOCIAL ISSUES
It is the presumption of this policy that proxies shall not be voted on
Social Issues, unless the advisory agreement with the Client provides otherwise.
The Investment Committee may approve voting of any security held on behalf of a
Client on any Social Issue.
RECORDKEEPING
The Compliance Officer shall maintain the following records:
(i) Copies of this policy as from time to time revised or supplemented;
(ii) A copy of each proxy statement that Tennenbaum receives regarding
Client securities;
(iii) Voting Results for each Client;
(iv) A copy of any document created by Tennenbaum that was material to
making a decision on how to vote proxies on behalf of a Client;
(v) A copy of each written Clients request for information on how
Tennenbaum voted proxies on behalf of the Client and Tennenbaum's
response thereto;
(vi) Communications to Client respecting Conflicts of Interest; and
(vii) All written reports arising from annual reviews of policy function.
The Compliance Officer shall maintain and preserve in his office the
foregoing records for a period of not less than five years from the end of
Tennenbaum' fiscal year during which the last entry was made on the record the
first two years in an appropriate office of Tennenbaum. The Compliance Officer
may use the Securities and Exchange Commission's EDGAR database for the items
referred to in item (ii) above, and the Investment Committee may authorize the
Compliance Officer to engage one or more service providers to perform any
portion of this recordkeeping function provided (1) the function is performed in
compliance with applicable governmental regulations and (2) each service
provider provides a written undertaking to furnish the records to Tennenbaum
promptly upon request.
Adopted August 19, 2004
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT COMPANIES.
Not applicable at this time.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's Chief Executive Officer and Chief Financial Officer
have evaluated the Registrant's disclosure controls and procedures within 90
days of this filing and have concluded that the Registrant's disclosure controls
and procedures were effective, as of that date, in ensuring that information
required to be disclosed by the Registrant in this Form N-CSR was recorded,
processed, summarized, and reported in a timely manner.
(b) None.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics referred to in Item 2 of Form N-CSR is filed and
attached hereto as EX-99.CODE ETH.
(a) (2) Certification pursuant to Rule 30a-2(a) under the Investment
Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as
Exhibit 99.CERT.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(b)) is furnished and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Special Value Expansion Fund, LLC
By: /s/ Michael E. Tennenbaum
---------------------------------
Name: Michael E. Tennenbaum
Title: Chief Executive Officer
Date: December 8, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Michael E. Tennenbaum
---------------------------------
Name: Michael E. Tennenbaum
Title: Chief Executive Officer
Date: December 8, 2004
By: /s/ Robert G. DiPaolo
---------------------------------
Name: Robert G. DiPaolo
Title: Chief Financial Officer
Date: December 8, 2004