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)
DAVID A. HOLLANDER, 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, 2005
Date of reporting period: SEPTEMBER 30, 2005
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL SHAREHOLDER REPORT
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
September 30, 2005
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Annual Shareholder Report
September 30, 2005
Contents
Audited Financial Statements
Report of Independent Auditors.................................................2
Statement of Assets and Liabilities............................................3
Statement of Investments in Securities of Unaffiliated Issuers.................4
Statement of Investments in Affiliates.........................................7
Statement of Operations........................................................8
Statements of Changes in Net Assets............................................9
Statement of Cash Flows.......................................................10
Notes to Financial Statements.................................................11
Supplemental Information
Portfolio Asset Allocation (Unaudited)........................................29
Directors and Officers (Unaudited)............................................30
Changes in Persons Primarily Responsible for Portfolio Management (Unaudited).35
Special Value Expansion Fund, LLC (the "Company") files its 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 Company's proxy voting guidelines and information regarding
how the Company voted proxies relating to portfolio securities during the most
recent 12-month period may be obtained without charge on the SEC's website at
http://www.sec.gov or by calling the Company's adviser, Tennenbaum Capital
Partners, LLC, at (310) 566-1000. Collect calls for this purpose are accepted.
Report of Independent Auditors
To the Shareholders and Board of Directors of
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 Company),
including the statements of investments, as of September 30, 2005, and the
related statements of operations and cash flows for the year then ended, the
statements of changes in net assets for the year then ended and for the period
from September 1, 2004 (commencement of operations) to September 30, 2004, and
the financial highlights for the year then ended and 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
Company's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and financial
highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our procedures included confirmation of securities owned as of September 30,
2005, by correspondence with the custodian. We believe that our audits provide 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 (a Delaware Limited Liability Company) at
September 30, 2005, the results of its operations and its cash flows for the
year then ended, the changes in its net assets for the year then ended and for
the period from September 1, 2004 (commencement of operations) to September 30,
2004, and the financial highlights for the year then ended and for the period
from September 1, 2004 (commencement of operations) to September 30, 2004, in
conformity with U.S. generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
November 2, 2005
2
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Assets and Liabilities
September 30, 2005
Cost Fair Value
------------- -------------
Assets
Investments in securities of unaffiliated issuers:
Debt securities $ 136,063,847 $ 140,932,091
Equity securities 262,483 405,518
------------- -------------
Total investments in securities of unaffiliated issuers 136,326,330 141,337,609
Investments in affiliates:
Debt securities 7,792,261 8,515,732
Equity securities 8,466,129 18,398,858
------------- -------------
Total investments in affiliates 16,258,390 26,914,590
------------- -------------
Total investments 152,584,720 168,252,199
Cash and cash equivalents 89,556,522
Subscriptions receivable for common shares 9,000,000
Accrued interest income on securities of unaffiliated issuers 2,558,662
Accrued interest income on securities of affiliated issuers 2,888
Prepaid expenses and other assets 20,870
Deferred debt issuance costs 2,116,530
-------------
Total assets 271,507,671
-------------
Liabilities
Credit facility payable 75,000,000
Payable for investment securities purchased 13,368,639
Performance fees payable 4,427,886
Dividends payable 3,500,000
Management fees payable 300,000
Open option contracts written 173,625
Accrued expenses and other liabilities 732,007
-------------
Total liabilities 97,502,157
-------------
Preferred Stock
Auction rate money market preferred stock; liquidation preference $50,000/share;
unlimited shares authorized, 700 shares issued and outstanding 35,000,000
Accumulated dividends on auction rate money market preferred stock 15,089
Series S, liquidation preference $1,000/share; 1 share authorized, no shares issued
and outstanding --
Series Z, liquidation preference $500/share; 500 shares authorized, 312 shares
issued and outstanding 156,000
Accumulated dividends on Series Z preferred stock 13,694
-------------
Total preferred stock 35,184,783
-------------
Net assets applicable to common shareholders $ 138,820,731
=============
Composition of net assets applicable to common shareholders:
Common stock, $0.001 par value; unlimited shares authorized; 235,627.363 shares
issued and outstanding; 16,335.192 shares subscribed and pending issuance $ 252
Paid-in capital in excess of par 127,261,787
Distributions in excess of net investment income (3,906,379)
Accumulated net realized gain on investments --
Accumulated net unrealized gain on investments 15,493,854
Accumulated dividends to preferred shareholders (28,783)
-------------
Net assets applicable to common shareholders $ 138,820,731
=============
Common stock, NAV per share $ 550.96
See accompanying notes.
3
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Investments in Securities of Unaffiliated Issuers
September 30, 2005
Showing Percentage of Total Cash and Investments of the Company
Percent of
Principal Fair Cash and
Security Amount Value Investments
- --------------------------------------------------------------------------------------------------------------------------------
Debt Securities (54.66%)
- ------------------------
Bank Debt (34.25%) (1)
Personal Transportation (18.4%)
Delta Airlines, Inc. DIP Term Loan C, Prime + 8.25%, due 3/16/08
(Acquired 9/23/05, Amortized Cost $23,382,789) $ 23,738,872 $ 24,272,997 9.41%
Northwest Airlines, Inc. 1st Preferred Mortgage, 12.19%, due 10/12/16
(Acquired 10/12/04, Amortized Cost $12,803,299)(2) $ 12,920,976 12,856,371 4.98%
Northwest Airlines, Inc. 1st Preferred Mortgage, 12.19%, due 11/19/17
(Acquired 11/19/04, Amortized Cost $7,383,145)(2) $ 7,471,999 7,434,639 2.88%
(Acquired 2/28/05, Amortized Cost $1,118,709)(2) $ 1,132,173 1,126,511 0.44%
(Acquired 6/22/05, Amortized Cost $1,345,166)(2) $ 1,361,354 1,354,548 0.53%
(Acquired 8/5/05, Amortized Cost $419,135)(2) $ 424,179 422,058 0.16%
------------
Total Personal Transportation 47,467,124
Printing/Publishing (5.15%)
Weekly Reader Corp. Tranche B Term Loan, LIBOR + 8.5% + 1% PIK,
due 7/22/09
(Acquired 7/22/05, Amortized Cost $13,353,116) $ 13,353,116 13,286,350 5.15%
Telecommunications (4.86%)
Integra Telecom, Inc. 1st Lien Senior Secured Term Loan,
LIBOR + 7% Cash + 2% PIK, due 9/14/09
(Acquired 9/20/04, Amortized Cost $12,441,251) $ 12,596,059 12,533,079 4.86%
Utilities (5.84%)
La Paloma Generating Co. Residual Bank Debt
(Acquired 2/2/05, 3/18/05, and 5/6/05, Cost $10,761,819)(2) $ 13,201,294 11,910,012 4.62%
Mach Gen, LLC Bank Debt
(Acquired 8/17/05, Cost $2,929,296) $ 2,477,206 3,133,666 1.22%
------------
Total Utilities 15,043,678
4
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Investments in Securities of Unaffiliated Issuers (continued)
September 30, 2005
Showing Percentage of Total Cash and Investments of the Company
Principal Percent of
Amount Fair Cash and
Security or Shares Value Investments
- --------------------------------------------------------------------------------------------------------------------------------
Debt Securities (continued)
- ---------------------------
Corporate Fixed Income Securities (20.41%)
Automobiles (3.33%)
Eagle Picher Holdings, Inc. Senior Notes, 9.75%, due 9/1/13(2) $ 11,627,000 $ 8,574,913 3.33%
Diversified/Conglomerate Service (1.25%)
Mastec, Inc. Senior Sub. Notes, 7.75%, due 2/1/08 $ 3,230,000 3,217,888 1.25%
Leisure, Amusement, Motion Pictures and Entertainment (4.68%)
Bally Total Fitness Holdings, Inc. Senior Sub. Notes, 9.875%, due 10/15/07 $ 13,104,000 12,055,680 4.68%
Printing/Publishing (0.23%)
Phoenix Color Corp. Senior Subordinated Notes, 10.375%, due 2/1/09 $ 634,000 586,450 0.23%
Utilities (7.62%)
Calpine Generating Co.
Secured Notes, 11.50%, due 4/1/11 $ 4,764,000 4,382,880 1.70%
Secured Floating Rate Notes, LIBOR + 9%, due 4/1/11 $ 16,173,000 15,283,485 5.92%
-------------
Total Utilities 19,666,365
Miscellaneous Securities (3.30%)
Miscellaneous Securities(3) $ 9,915,000 8,500,564 3.30%
-------------
Total Debt Securities of Unaffiliated Issuers (cost $136,063,847) 140,932,091
-------------
Equity and Equity Related Securities (0.16%)
- --------------------------------------------
Diversified/Conglomerate Manufacturing (0%)
Put Option for 345,049 Intentia International AB Series A Common Shares,
expires 3/31/06 (Acquired 2/12/05, Cost $0) - (Sweden)(2),(4),(5) 1 -- 0.00%
Leisure, Amusement, Motion Pictures and Entertainment (0.16%)
Bally Total Fitness Holdings, Inc. Restricted Common Stock(6)
(Acquired 8/24/05, Amortized Cost $262,483) 120,960 405,516 0.16%
Utilities (0%)
Mach Gen Common Units(7)
(Acquired 8/17/05, Amortized Cost $0) 201 1 0.00%
Mach Gen Preferred Units(7)
(Acquired 8/17/05, Amortized Cost $0) 760 1 0.00%
-------------
Total Utilities 2
-------------
Total Equity Securities of Unaffiliated Issuers (cost $262,483) 405,518
-------------
5
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Investments in Securities of Unaffiliated Issuers (continued)
September 30, 2005
Showing Percentage of Total Cash and Investments of the Company
Principal Percent of
Amount Fair Cash and
Security or Shares Value Investments
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents (34.74%)
- ----------------------------------
Abbey National Commercial Paper, 3.78%, due 10/7/05 $ 12,000,000 $ 11,989,920 4.65%
American Express Commercial Paper, 3.73%, due 10/6/05 $ 12,000,000 11,991,297 4.65%
ChevronTexaco Commercial Paper, 3.63%, due 10/5/05 $ 10,000,000 9,994,958 3.88%
Citigroup Funding Commercial Paper, 3.82%, due 10/5/05 $ 12,000,000 11,993,633 4.65%
GECC Commercial Paper, 3.7%, due 10/6/05 $ 3,000,000 2,997,842 1.16%
GECC Commercial Paper, 3.65%, due 10/4/05 $ 9,000,000 8,995,438 3.49%
Toyota Motor Credit Corp. Commercial Paper, 3.73%, due 10/17/05 $ 12,000,000 11,977,620 4.65%
UBS Finance Commercial Paper, 3.8%, due 10/6/05 $ 4,000,000 3,997,044 1.55%
UBS Finance Commercial Paper, 3.65%, due 10/24/05 $ 8,000,000 7,965,933 3.09%
Wells Fargo Certificate of Deposit, 3.65%, due 10/12/05 $ 6,000,000 6,000,000 2.33%
Wells Fargo Bank Overnight Repo, due 10/3/05 $ 1,310,833 1,310,833 0.51%
Cash Held on Account at Various Institutions $ 342,004 342,004 0.13%
------------
Total Cash and Cash Equivalents 89,556,522
------------
Total Cash and Investments in Securities of Unaffiliated Issuers $230,894,131 89.56%
============
Notes to Statement of Investments in Securities of Unaffiliated Issuers:
(1) 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 investors and often require approval of
the agent or borrower.
(2) Non-income producing security.
(3) Miscellaneous Securities is comprised of two unrestricted positions.
(4) Denominated in Swedish Kronor, and converted to US Dollars.
(5) Acquired in connection with an open call option written by the Company, as
discussed in Note 2 to the financial statements.
(6) Registration of this issue of restricted stock may be forced by a majority
of the eligible holders of the issue by written notice to the issuer once
the issuer becomes eligible to use a short form registration statement on
Form S-3. On the date of acquisition, the Company owned $13,104,000 par of
unrestricted Bally Total Fitness Holdings, Inc. 9.875% Senior Subordinated
Notes, due 10/15/07, with a carrying value of $11,531,520.
(7) The Mach Gen common and preferred units are nondetachable from the Mach
Gen bank debt listed above, and therefore may be considered to be subject
to the same contractual restrictions.
Aggregate purchases and aggregate sales of securities of unaffiliated issuers,
other than Government securities, totaled $157,275,228 and $39,861,443,
respectively. Aggregate purchases includes securities received as payment in
kind. Aggregate sales includes principal paydowns on debt securities.
The total value of restricted securities of unaffiliated issuers as of September
30, 2005 was $88,735,749, or 34.41% of total cash and investments of the
Company.
See accompanying notes.
6
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Investments in Affiliates (1)
September 30, 2005
Showing Percentage of Total Cash and Investments of the Company
Principal Percent of
Amount Fair Cash and
Security or Shares Value Investments
- --------------------------------------------------------------------------------------------------------------------
Debt Securities (3.3%)
- ----------------------
Bank Debt (3.3%) (2)
Diversified/Conglomerate Manufacturing (3.3%)
Intentia International AB Secured Notes, LIBOR + 9%, due 9/14/09
(Acquired 9/13/04, Amortized Cost $7,792,261) - (Sweden) $ 7,958,628 $ 8,515,732 3.30%
-----------
Total Debt Securities of Affiliates (cost $7,792,261) 8,515,732
-----------
Equity and Equity Related Securities (7.14%)
- --------------------------------------------
Diversified/Conglomerate Manufacturing (7.14%)
Intentia International AB Series A Common
(Acquired 9/13/04, Cost $1,757,708) - (Sweden)(3),(4),(5),(6) 691,087 2,258,668 0.88%
Intentia International AB Series B Common
(Acquired 9/13/04, Cost $6,708,421) - (Sweden)(3),(4),(5),(6) 5,531,086 16,140,190 6.26%
-----------
Total Equity and Equity Related Securities of Affiliates (cost $8,466,129) 18,398,858
-----------
Total Investments in Securities of Affiliated Issuers (cost $16,258,390) $26,914,590 10.44%
===========
Notes to Statement of Investments in Affiliates:
(1) The issuers of the securities listed on this schedule are considered
affiliates under the Investment Company Act of 1940 due to the ownership
by the Company of 5% or more of the issuer's voting securities.
(2) 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 investors and often require approval of
the agent or borrower.
(3) Investment is not a controlling position.
(4) 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.
(5) Denominated in Swedish Kronor, and converted to US Dollars.
(6) Non-income producing security.
Aggregate purchases and aggregate sales of securities of affiliated issuers,
other than Government securities, totaled $1,573,272 and zero, respectively.
Aggregate purchases includes securities received as payment in kind. Aggregate
sales includes principal paydowns on debt securities.
The total value of restricted securities of affiliated issuers as of September
30, 2005 was $26,914,590, or 10.44% of total cash and investments of the
Company.
See accompanying notes.
7
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Operations
For the Year Ended September 30, 2005
Investment income:
Interest income from investments in securities of unaffiliated issuers $ 10,508,074
Interest income from investments in affiliates 952,396
Income from original issue discount 82,107
Other income 433,976
------------
Total interest and related investment income 11,976,553
------------
Operating expenses:
Performance fees 4,427,886
Management fees 3,600,000
Legal fees, professional fees and due diligence expenses 447,442
Credit enhancement fees 344,186
Commitment fees 334,111
Interest expense 330,932
Amortization of deferred debt issuance costs 258,470
Insurance expense 257,023
Directors fees 112,250
Custody fees 46,500
Other operating expenses 327,553
------------
Total expenses 10,486,353
------------
Net investment income 1,490,200
Net realized and unrealized gain on investments:
Net realized gain on investments:
Proceeds from sales, maturities and paydowns 42,339,867
Cost of investments sold, paid down, or matured 39,861,443
------------
Net realized gain on investments 2,478,424
Change in net unrealized gain:
Net unrealized gain, beginning of period 1,422,669
Net unrealized gain, end of period 15,493,854
------------
Net change in unrealized gain on investments 14,071,185
------------
Net realized and unrealized gain on investments 16,549,609
------------
Distributions to preferred shareholders (910,623)
Net change in reserve for potential dividends to preferred shareholders 195,414
------------
Net increase in net assets applicable to common shareholders
resulting from operations $ 17,324,600
============
See accompanying notes
8
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statements of Changes in Net Assets
Period from
Year Ended September 1, 2004 to
September 30, 2005 September 30, 2004
------------- -------------
Total common shareholder committed capital $ 300,000,000 $ 300,000,000
============= =============
Net assets applicable to common shareholders, beginning of period $ 90,820,626 $ --
Common shareholder contributions 39,000,000 90,000,000
Equity placement and offering costs charged to paid-in capital (1,324,495) (68,000)
------------- -------------
Common shareholder contributions, net 37,675,505 89,932,000
Net investment income (loss) 1,490,200 (317,721)
Net realized gain on investments 2,478,424 6,875
Net change in unrealized gain on investments 14,071,185 1,422,669
Distributions to preferred shareholders from net investment income (624,530) --
Distributions to preferred shareholders from net realized gains (286,093) --
Net change in reserve for potential dividends to preferred shareholders 195,414 (223,197)
------------- -------------
Net increase in net assets applicable to common shareholders resulting
from operations 17,324,600 888,626
Distributions to common shareholders from net investment income (4,800,794) --
Distributions to common shareholders from net realized gains (2,199,206) --
------------- -------------
Net assets applicable to common shareholders, end of period (including
distributions in excess of net investment income of $4,252,845 at
September 30, 2005) $ 138,820,731 $ 90,820,626
============= =============
See accompanying notes
9
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Statement of Cash Flows
For the Year Ended September 30, 2005
Operating activities:
Net increase in net assets applicable to common shareholders
resulting from operations $ 17,324,600
Adjustments to reconcile net increase in net assets resulting from
operations to net cash used in operating activities:
Net realized gain on investments (2,478,424)
Net change in unrealized gain on investments (14,071,185)
Dividends paid to auction rate money market preferred shareholders 910,623
Income from original issue discount (82,107)
Income from paid in-kind and other capitalized income (1,065,096)
Amortization of deferred debt issuance costs 258,470
Decrease in reserve for potential dividends to preferred shareholders (195,414)
Changes in assets and liabilities:
Purchases of investment securities (158,848,500)
Proceeds from sales, maturities and paydowns of investment securities 42,339,867
Decrease in prepaid expenses and other assets 217,250
Increase in accrued interest income (2,319,615)
Decrease in receivable for investment securities sold 218,533
Increase in payable for securities purchased 13,368,639
Increase in performance fee payable 4,427,886
Decrease in directors fees payable (19,157)
Increase in accrued expenses and other liabilities 540,348
-------------
Net cash used in operating activities (99,473,282)
-------------
Financing activities:
Proceeds from issuance of common shares 60,000,000
Dividends to common shareholders (3,500,000)
Payments for equity placement and offering costs (1,324,495)
Payments for debt issuance costs (2,375,000)
Proceeds from draws on credit facility 227,000,000
Paydowns on credit facility (152,000,000)
Proceeds from issuance of auction rate money market preferred shares 35,000,000
Dividends paid to auction rate money market preferred shareholders (910,623)
-------------
Net cash provided by financing activities 161,889,882
-------------
Net increase in cash and cash equivalents 62,416,600
Cash and cash equivalents at beginning of period 27,139,922
-------------
Cash and cash equivalents at end of period $ 89,556,522
=============
See accompanying notes
10
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
September 30, 2005
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 "1940 Act"). 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 and
initial funding was received on September 1, 2004. The Company 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., and 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, which 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,
as it currently does, 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, $100 million of Auction Rate Money Market Preferred
Shares ("APS"), $200 million under a Senior Secured Revolving Credit Facility
(the "Senior Facility"), $156,000 of Series Z Preferred Stock and $1,000 of
Series S Preferred Stock (see Note 7). The contributed investor capital, APS and
the amount drawn under the Senior Facility
11
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
1. Organization and Nature of Operations (continued)
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 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, 2005, there was $75 million outstanding under
the Senior Facility.
Credit enhancement with respect to the APS and Senior Facility is provided by a
AAA/Aaa rated monoline insurer (the "Insurer") through surety policies issued
pursuant to an insurance and indemnity agreement between the Company and the
Insurer. Under the surety policies, the Insurer will guarantee payment of the
liquidation preference and unpaid dividends on the APS and amounts drawn under
the Senior Facility. The cost of the surety polices is 0.11% for unutilized
portions of the Money Market preferred shares and the Senior Facility and 0.24%
for the outstanding portions of those sources of capital.
The Company will liquidate and distribute its assets and will be dissolved at
September 1, 2014, subject to up to two one-year extensions if requested by the
Investment Manager and approved by a majority of the Company's equity interests.
However, the Operating Agreement will prohibit the liquidation of the Company
prior to September 1, 2014 if the APS are not redeemed in full prior to such
liquidation.
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, and an additional 10% of the common share commitment was received by the
Company by November 1, 2004. The Company called an additional 3.33% of the
common share commitment on March 18, 2005. On April 18, 2005, this call was
amended and increased to 10% of the common share commitment, and the full amount
was received on or about May 2, 2005. The Company called an additional 3% of the
common share commitment on September 30, 2005, which it expects to receive on or
about November 1, 2005. The Company expects to call and receive the remaining
57% of the common share commitments by September 1, 2006. At September 30, 2005,
the ratio of contributed to committed capital is 0.43:1.
Auction Rate Money Market Preferred Capital
At September 30, 2005, the Company had 700 shares of APS issued and outstanding
with a liquidation preference of $50,000 per share (plus an amount equal to
accumulated but unpaid dividends upon liquidation). The APS are redeemable at
the option of the Company, subject to certain limitations. Additionally, under
certain conditions, the
12
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
1. Organization and Nature of Operations (continued)
Company may be required to either redeem certain of the APS or repay
indebtedness, at the Company's option. Such conditions would include a failure
by the Company to maintain adequate collateral as required by its credit
facility agreement or by the Statement of Preferences of the APS, or a failure
by the Company to maintain sufficient asset coverage as required by the 1940
Act. As of September 30, 2005, the Company was in full compliance with such
requirements.
The auction agent receives a fee from the Company for its services in connection
with auctions of APS and compensates broker-dealers at an annual rate of 0.25%
of the purchase price of the shares of the APS that are issued and outstanding.
The Company has entered into an agreement with a major broker-dealer to
underwrite initial issuances of the APS for a two-year period based on an
agreed-upon drawdown schedule and subject to certain criteria.
The issuances of the APS are expected to total $100 million of the Company's
total capitalization. On November 17, 2004, the Company received $35.0 million
upon issuance of 700 shares of APS.
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, 2005, and the results of its operations, changes in net assets and
cash flows for the year then ended. 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 and in conformity with the Senior Facility and Statement of
Preferences for the APS.
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.
13
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
2. Summary of Significant Accounting Policies (continued)
Liquid investments not listed on a recognized exchange are valued by an approved
nationally recognized security pricing service or by using either the average of
the bid prices on the date of valuation, as supplied by three approved
broker-dealers, or the lower of two quotes from approved broker-dealers. At
September 30, 2005, all investments were valued based on prices from a
nationally recognized exchange or nationally recognized third-party pricing
service.
Investments not listed on a recognized exchange nor priced by an approved source
("Unquoted Investments") are valued as follows for purposes of inclusion as
permitted collateral in the borrowing base of the Senior Facility:
a) for semi-liquid investment positions with a value of $15 million or
greater but less than $30 million, the most recent quote provided by an
approved investment banking firm;
b) for semi-liquid investment positions with a value greater than $30
million, the most recent valuation provided by an approved third-party
appraisal; and
c) for illiquid investment positions with a value of $15 million or greater,
the most recent valuation provided by an approved third-party appraisal.
However, notwithstanding items (a) through (c), above, the Investment Manager
may determine the market value of Unquoted Investments without obtaining a
third-party quote or appraisal, up to an aggregate of 5% of the total
capitalization of the Company.
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. Fair value is generally defined as the amount for which
an investment could be sold 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:
14
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
2. Summary of Significant Accounting Policies (continued)
(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, except for
private transactions that have conditions to closing, which are recorded on the
closing date. The cost of investments 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.
Cash and Cash Equivalents
Cash consists of amounts held in accounts with brokerage firms and the custodian
bank. 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 the custodian bank, and cash
equivalents maturing within 90 days.
Repurchase Agreements
In connection with transactions in repurchase agreements, it is the Company's
policy that
15
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
2. Summary of Significant Accounting Policies (continued)
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 Restricted Securities
The Company may invest in securities that are subject to legal or contractual
restrictions on resale. These securities generally may be resold to
institutional investors in transactions exempt from registration or to the
public if the securities are registered. Disposal of these securities may
involve time-consuming negotiations and additional expense, and prompt sale at
an acceptable price may be difficult. Information regarding restricted
securities is included at the end of both the Statement of Investments in
Securities of Unaffiliated Issuers and the Statement of Investments in
Affiliates. Restricted securities, including any restricted investments in
affiliates, are valued in accordance with the investment valuation policies
discussed above.
Investments in Foreign Securities
The Company invests in securities traded in foreign countries and denominated in
foreign currencies. At September 30, 2005, investments denominated in foreign
currencies totaled approximately 7.2% of the Company's total cash and
investments. All such open positions are converted at the closing rate in effect
on September 30, 2005 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. Such fluctuations are
included in the net realized and unrealized gain or loss from investments. Net
unrealized foreign currency losses of $463,751 were included in unrealized gains
on investments at September 30, 2005.
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.
16
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
2. Summary of Significant Accounting Policies (continued)
Open Option Contracts Written
During the year ended September 30, 2005, the Company entered into a put/call
agreement with an unaffiliated counterparty with respect to certain shares held
by the Company. Under the terms of the agreement, either the counterparty or the
Company may cause a sale to the counterparty of 345,049 Series A common shares
of Intentia International AB held by the Company at a variable strike price that
increases at a rate of 12% per year, subject to certain conditions. The current
agreement expires on March 31, 2006. At September 30, 2005, the strike price was
equivalent to $2.77 per share, resulting in a liability of $173,625 with respect
to the call option written, as reflected in the Statement of Assets and
Liabilities. Accordingly, the put option had no value at September 30, 2005, and
the written call option effectively reduced the unrealized gain on the Intentia
Series A common shares by $173,625. While the written call option is not
reflected in the Statements of Investments, the resulting liability reduces the
Fund's overall unrealized gain on investments.
Debt Issuance Costs
Costs of $2.4 million were incurred in connection with placing the Company's
Senior Facility. These costs are being deferred and are 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 expected to be material to the Company's
operations.
Equity Placement and Offering Costs
Placement costs for the Company's APS capital were $1.0 million. Offering costs
totaled $0.4 million. These costs were charged to paid-in capital.
Organization Costs
Organization costs of $0.3 million were incurred in connection with the
formation of the Company and expensed to operations at the inception of the
fund.
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
17
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
2. Summary of Significant Accounting Policies (continued)
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 record 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 for which,
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
ex-dividend 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. On December 30, 2004, the Board of Directors declared a dividend to
common shareholders in the amount of $2.5 million, which was paid on January 31,
2005. The Company paid a second dividend to common shareholders in the amount of
$1.0 million on June 30, 2005. On September 30, 2005, the Board of Directors
declared a dividend to common shareholders in the amount of $3.5 million, which
was paid on October 13, 2005.
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. Accordingly, no provision for
income taxes is required in the financial statements.
Income and capital gain distributions are determined in accordance with income
tax regulations, which may differ from accounting principles generally accepted
in the
18
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
2. Summary of Significant Accounting Policies (continued)
United States of America. Capital accounts within the financial statements are
adjusted for permanent book and tax differences. These adjustments have no
impact on net assets or the results of operations.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions, the timing of the deductibility of certain expenses, and the
recognition of dividends declared but not paid, and will reverse in subsequent
periods.
Permanent book and tax basis differences may result in reclassifications among
undistributed (or distributions in excess of) net investment income, accumulated
net realized gain, and paid-in capital. These differences are primarily due to
nondeductible expenses and differing book and tax treatments for short-term
realized gains.
Cost and unrealized appreciation (depreciation) for U.S. federal income tax
purposes of the investments of the Company at September 30, 2005 were as
follows:
Unrealized appreciation $ 15,911,271
Unrealized depreciation (417,417)
-------------
Net unrealized appreciation 15,493,854
-------------
Cost $ 151,587,939
During the year ended September 30, 2005, the Company declared distributions to
APS holders and common shareholders of $910,623 and $7,000,000, respectively, of
which $910,623 and $3,500,000, respectively, was paid during the year and
treated as distributions of ordinary income for federal income tax purposes. The
remaining $3,500,000 in distributions to common shareholders was paid on October
13, 2005. The Company made no distributions during the period from September 1,
2004 (commencement of operations) through September 30, 2004. Tax-basis
undistributed ordinary income at September 30, 2005 was $4,021,507.
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.
19
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
3. Allocations and Distributions
On May 9, 2005, the Series S preferred share (see Note 7) was retired and the
Investment Management Agreement was amended such that all amounts formerly
distributable to the Series S preferred shareholder as set forth in such
agreement became payable to the Investment Manager as a performance fee.
Accordingly, distributions made to common shareholders and performance fees
distributable to the Investment Manager 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 Investment Manager as a performance fee until the
cumulative amount of such fees 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 Investment Manager as performance fee.
The timing of distributions is determined by the Board of Directors. If the
Company had liquidated all assets at September 30, 2005, performance fees
payable to the Investment Manager would have been $4,427,886. A liability for
this amount is reflected in the accompanying financial statements.
The retirement of the Series S share and corresponding amendment to the
Investment Management Agreement as discussed above had no impact on any
shareholder other than the Series S preferred shareholder.
The APS dividend rate is determined by auction at periodic intervals and was
3.9% per annum as of September 30, 2005.
The Series Z share dividend rate is fixed at 8% per annum.
20
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
4. Management Fees and Other Expenses
Pursuant to the advisory agreement, the Investment Manager is entitled to
receive an annual management and advisory fee, payable monthly in arrears, equal
to 0.60% of the sum of the total common commitments, APS and debt potentially
issuable in respect of such common commitments, subject to reduction by the
amount of the debt when no facility is outstanding and the amount of APS when
less than $1 million in liquidation value of preferred stock is outstanding. 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 APS and $200 million of debt. In
addition, the Investment Manager is entitled to a performance fee as discussed
in Note 3, above.
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 has entered into a credit agreement with certain lenders, which
provides for a senior secured revolving credit facility ("Senior Facility"). The
Senior Facility is a revolving extendible credit facility pursuant to which
amounts may be drawn up to $200 million ("Total Maximum 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. The Senior Facility matures November 17, 2012,
subject to extension by the lenders at the request of the Company for one
12-month period. Amounts outstanding under the Senior Facility at September 30,
2005 totaled $75 million, consisting of a $60 million revolving loan due on
October 31, 2005 and $15 million borrowed on the swingline facility which was
due to be repaid or converted to a revolving loan by the Company no later than
October 20, 2005. As of September 30, 2005, interest payable on amounts
outstanding under the Senior Facility was $17,803. For the year ended September
30, 2005, daily weighted-average debt outstanding was $9,479,452. The
weighted-average interest rate on debt outstanding during the period was 3.44%.
Advances under the Senior Facility bear interest, at the issuer's option, at
either (i) the Eurodollar Rate or Commercial Paper Rate for interest periods of
one, two, three, or six months plus 0.43% per annum; or (ii) the higher of (x)
the "Prime Rate" plus 0.43% per annum and (y) the "Federal Funds Effective
Rate," plus 0.50% per annum. Additionally, advances under the swingline facility
will bear interest at either the Eurodollar Rate or
21
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
5. Senior Secured Revolving Credit Facility (continued)
Commercial Paper Rate plus 0.43% per annum. Interest payments vary from monthly
to quarterly based on the nature of the advance.
In addition to amounts due on outstanding debt, the Senior Facility accrues fees
of 0.20% per annum for the first 550 days following the inception of the credit
agreement, and 0.30% thereafter, on the difference between the Total Maximum
Commitment and the outstanding balance on the Senior Facility, provided that
certain minimum borrowing amounts are achieved based on the table below. In the
event the minimum borrowing amounts are not met or exceeded during the
respective fee periods, the fees will accrue at 0.43% per annum on the Minimum
Borrowing Amount as defined in the table below, in addition to 0.20% per annum
for the first 550 days following the inception of the credit agreement, and
0.30% thereafter on the difference between the Total Maximum Commitment and the
Minimum Borrowing Amount.
Period Minimum Borrowing Amount
- --------------------------------------- --------------------------------
From Closing Date to End of Month 10
following the Closing Date 0% of Total Maximum Commitment
From Beginning of Month 11 to End of
Month 15 following the Closing Date 15% of Total Maximum Commitment
From Beginning of Month 16 to End of
Month 20 following the Closing Date 30% of Total Maximum Commitment
From Beginning of Month 21 to End of
Month 24 following the Closing Date 40% of Total Maximum Commitment
From Beginning of Month 25 to Maturity 75% of Total Maximum Commitment
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
securities 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, dealers, and the Company's
custodian. These activities may
22
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
6. Commitments, Concentration of Credit Risk and Off-Balance Sheet Risk
(continued)
expose the Company to risk in the event such parties are unable to fulfill
contractual obligations. Management does not anticipate any losses from
counterparties with whom it conducts business.
7. Preferred Capital
In addition to the APS capital described in Note 1, the Company had one Series S
preferred share authorized but unissued and 312 Series Z preferred shares
authorized, issued and outstanding as of September 30, 2005.
Series S Preferred Share
The Company had issued one share of its Series S preferred shares to SVOF/MM,
LLC, having a liquidation preference of $1,000 plus accumulated but unpaid
dividends. SVOF/MM, LLC is controlled by the Investment Manager and owned
substantially entirely by the Investment Manager and certain affiliates. On May
9, 2005, the Series S preferred share was retired and assumed the status of an
authorized but unissued share. Prior to retirement, the Series S preferred
shareholder was entitled to receive, as dividends, the amount of the performance
fee currently payable to the Investment Manager pursuant to Note 3, above. The
Series S preferred share ranked on par with the APS and Series Z preferred
shares and voted with them as a single class. The Series S preferred share was
redeemable at liquidation preference at any time if the investment advisory
agreement with TCP was terminated for any reason. The retirement of the Series S
preferred share had no impact on any shareholder other than the Series S
preferred shareholder.
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 the APS and the Series S
preferred share with respect to the payment of dividends and distribution of
amounts on liquidation, and vote with the APS and Series S preferred share as a
single class. 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.
23
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
8. Shareholder's Capital
Issuances of common stock to and subscriptions of common stock by the Company's
investors for the periods ending September 30, 2005 and 2004 were as follows:
- --------------------------------------------------------------------------------------------------------------
Period from
September 1, 2004
(commencement of
Year Ended operations) to
September 30, 2005 September 30, 2004
- --------------------------------------------------------------------------------------------------------------
Number of common shares issued 115,627 120,000
Number of common shares subscribed and pending issuance 16,335 58,275
Less: number of common shares subscribed in prior period (58,275) --
- --------------------------------------------------------------------------------------------------------------
Net increase 73,687 178,275
- --------------------------------------------------------------------------------------------------------------
Gross proceeds from share issuance $ 60,000,000 $ 60,000,000
Subscription receivable for common shares 9,000,000 30,000,000
Less: proceeds from shares subscribed in prior period (30,000,000) --
Offering costs (392,495) --
APS placement costs (932,000) (68,000)
- --------------------------------------------------------------------------------------------------------------
Net proceeds $ 37,675,505 $ 89,932,000
==============================================================================================================
24
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
9. Financial Highlights
Period from
September 1, 2004
Year Ended to
September 30, 2005 September 30, 2004
------------- -------------
Net assets applicable to common shareholders, beginning
of period $ 90,820,626 $ --
Contributions from common shareholders:
Gross contributions 39,000,000 90,000,000
Decrease in net assets from equity placement and offering
costs charged to paid-in capital (1,324,495) (68,000)
------------- -------------
Net common shareholder contributions 37,675,505 89,932,000
Investment operations:
Net investment income (loss) 1,490,200 (317,721)
Net realized and unrealized gain 16,549,609 1,429,544
Distributions to preferred shareholders from net
investment income (624,530) --
Distributions to preferred shareholders from net
realized gains (286,093) --
Net change in reserve for potential dividends to preferred
shareholders 195,414 (223,197)
------------- -------------
Net increase in net assets applicable to common
shareholders capital resulting from operations 17,324,600 888,626
Distributions to common shareholders:
Distributions from net investment income (4,800,794) --
Distributions from net realized gains (2,199,206) --
------------- -------------
Total distributions to common shareholders (7,000,000) --
------------- -------------
Net assets applicable to common shareholders, end of period $ 138,820,731 $ 90,820,626
============= =============
25
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
9. Financial Highlights (continued)
Period from
September 1, 2004
Year Ended to
September 30, 2005 September 30, 2004
--------------- ---------------
Per Common Share: (1)
Net asset value, beginning of period $ 509.44 $ 499.43
Investment operations:
Net investment income (loss) 8.43 (2.65)
Net realized and unrealized gain 79.06 14.52
Distributions to preferred shareholders from net
investment income (2.92) --
Distributions to preferred shareholders from net
realized gains (1.34) --
Net change in reserve for potential dividends to
preferred shareholders (1.16) (1.86)
--------------- ---------------
Total from investment operations 82.07 10.01
Distributions to common shareholders:
Distributions from net investment income (22.71) --
Distributions from net realized gains (10.41) --
--------------- ---------------
Total distributions to common shareholders (33.12) --
Decrease in net assets from equity placement and offering
costs charged to paid-in capital (7.43) --
--------------- ---------------
Net asset value, end of period $ 550.96 $ 509.44
=============== ===============
Period return to common shareholders(2), (3) 16.41% 1.48%
Period return on invested assets(3), (4) 28.35% 9.14%
Ratios and Supplemental Data:
Ending net assets attributable to common shareholders $ 138,820,731 $ 90,820,626
Total expenses / average common equity(5) 9.57% 13.49%
Net investment income (loss) / average common equity(5) 1.36% (8.08%)
Portfolio turnover rate(3) 13.73% 1.22%
Weighted-average debt outstanding $ 9,479,452 $ --
Weighted-average number of shares 202,102 120,000
Average debt per share $ 46.90 $ --
26
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
9. Financial Highlights (continued)
Annualized Inception to Date Performance Data as of September 30, 2005:
Internal rate of return (6) 13.10%
Return on common equity (2) 16.63%
Return on invested assets (4) 36.49%
Asset Coverage:
September 30,
------------------------------
2005 2004
----------- -----------
Series A Preferred Stock:
Shares outstanding 700 --
Involuntary liquidation value per share $ 50,022 n/a
Asset coverage per share $ 113,025 n/a
Series S Preferred Stock:
Shares outstanding -- 1
Involuntary liquidation value per share n/a $ 223,157
Asset coverage per share n/a $53,530,412
Series Z Preferred Stock:
Shares outstanding 312 312
Involuntary liquidation value per share $ 544 $ 503
Asset coverage per share $ 1,229 $ 120,739
Senior Secured Revolving Credit Facility:
Debt outstanding $75,000,000 --
Asset coverage per $1,000 of debt outstanding $ 3,319 n/a
27
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements (continued)
September 30, 2005
9. Financial Highlights (continued)
Notes to Financial Highlights:
(1) Per share changes in net asset value are computed based on the actual
number of shares outstanding during the time in which such activity
occurred.
(2) Returns (net of dividends to preferred shareholders and fund expenses,
including financing costs and management and performance fees) calculated
on a monthly geometrically linked, time-weighted basis as described in
Chapter 2 of the AIMR Performance Presentation Standards Handbook (1997).
(3) Not annualized for periods of less than one year.
(4) Return on invested assets is a time-weighted, geometrically linked rate of
return and excludes cash and cash equivalents.
(5) Annualized for periods of less than one year. These ratios included
interest expense but do not reflect the effect of dividend payments to
preferred shareholders. The ratio of expenses to average net assets is
higher in earlier periods, and net investment income to average net assets
is reduced, due to the Company's relatively smaller capital base while the
Company is ramping up.
(6) Net of dividends to preferred shareholders and fund expenses, including
financing costs and management and performance fees. Internal rate of
return ("IRR") is the imputed annual return over an investment period and,
mathematically, is the rate of return at which the discounted cash flows
equal the initial cash outlays. The internal rate of return presented
assumes liquidation of the fund at net asset value as of the balance sheet
date, and is reduced in earlier periods due to the equity placement and
offering costs that were charged to paid-in capital and the organizational
costs that were expensed at the inception of the fund. IRR is lower than
return on equity as the equity placement and offering costs did not have a
P&L impact on the return on equity calculation.
28
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Portfolio Asset Allocation (% of Cash and Investments)
(unaudited)
September 30, 2005
[PIE CHART]
Portfolio Holdings by Investment Type
Cash and Cash Equivalents 34.74%
Bank Debt 37.57%
Corporate Fixed Income Securities 20.40%
Equity and Equity Related Securities 7.29%
[PIE CHART]
Portfolio Holdings by Industry
Cash and Cash Equivalents 34.74%
Diversified/Conglomerate Manufacturing 10.44%
Telecommunications 4.86%
Diversified/Conglomerate Service 1.25%
Leisure, Amusement, Motion Pictures and Entertainment 4.83%
Personal Transportation 18.41%
Utilities 13.46%
Automobiles 3.33%
Printing/Publishing 5.38%
Miscellaneous 3.30%
29
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 Form N-2 includes more information about the Directors.
Shareholders may request a free copy by calling (310) 566-1000. Collect calls
for this purpose are accepted.
1. Independent Directors
Name (Age)
Principal Occupation(s)
Richard P. Bermingham (66)
- - Year of Election or Appointment: 2004
- - Director and Chairman of the Audit Committee of the Company. Mr. Bermingham
retired in 1994 as CEO and 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.
During the past several years, Mr. Bermingham has been engaged in real estate
development and investing activities as a private investor. He currently serves
as a Director and Audit Committee Chairman of Herbalife International of America
and Interactive Health, Inc., as well as a Director on the Boards of Encanto
Restaurants and Jordano's. Mr. Bermingham has previously served as Vice Chairman
of the Board of Directors of American Golf Corporation and as a Director and
Audit Committee Chairman of Farr Company, National Golf Properties, American
Coin Merchandising, and Genius Products. He has also served as a Director of
Sanwa Bank, 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 (70)
- - 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
30
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Directors and Officers (continued)
(Unaudited)
engineering from the Georgia Institute of Technology and an M.B.A. 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.
L.R. Jalenak, Jr. (75)
- - 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, First Funds, and
Memphis Light, Gas & Water (where he was Chairman). He currently 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 as well as many civic and religious boards. He has a business
degree from Tulane University and an M.B.A. from the Wharton School of the
University of Pennsylvania. Mr. Jalenak oversees one portfolio in the fund
complex.
2. Interested Directors and Officers
Name (Age)
Principal Occupation(s)
Michael E. Tennenbaum (70)
- - Year of Election or Appointment: 2004
- - Director of the Company. Mr. Tennenbaum also serves as Senior Managing Partner
and a voting member of the Investment Committee of TCP. Before forming TCP and
its predecessor, Special Value Investment Management, LLC, he served for 32
years in various capacities at Bear Stearns including Vice Chairman, Investment
Banking. His responsibilities at Bear Stearns included managing the firm's Risk
Arbitrage Department, Investment Research Department, Options Department, and
its Los Angeles Corporate Finance Department. While at Bear Stearns, Mr.
Tennenbaum completed approximately 200 transactions in a variety of industries,
including manufacturing, healthcare, gaming, energy, media, transportation and
retailing. Mr. Tennenbaum's activities have included providing financial
advisory services, advising on mergers, recapitalizations and private and public
financings (both equity and debt), advising with respect to management buyouts,
providing expert testimony and fairness opinions, and advising in respect of
restructurings and insolvencies.
Mr. Tennenbaum has served on the boards of many public and private
companies including Bear Stearns Companies, Inc., Tosco Corporation, and Jenny
Craig, Inc. He
31
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Directors and Officers (continued)
(Unaudited)
currently serves as the Chairman of Pemco Aviation Group, Inc. and as a Vice
Chairman of Party City Corporation and Chairman of Anacomp, Inc. While at Bear
Stearns, Mr. Tennenbaum's clients included MGM Grand, for whom he helped raise
financing for its $1 billion project in Las Vegas; the State of California, whom
Mr. Tennenbaum advised on its lengthy privatization of Blue Cross of California;
PSA, which was taken public and then was sold to U.S. Air; and Tosco
Corporation, for whom he negotiated a significant recapitalization and
refinancing. In addition, Mr. Tennenbaum structured and negotiated the sale of
Wickes Companies, Inc. and the recapitalization of Jenny Craig, Inc.
Mr. Tennenbaum is a Trustee Emeritus of the Georgia Tech Foundation and
was Chairman of its Investment Committee. He is a Vice-Chairman of the Board of
Governors of the Boys & Girls Clubs of America and Chairman of its investment
group. He is a Member of the UCLA School of Medicine Board of Visitors, and was
a member of the Harvard Business School Board of Associates. Mr. Tennenbaum was
a Commissioner on the Intercity High-Speed Rail Commission for California and
was Chairman of the California High-Speed Rail Authority. Further, he served as
Chairman of the Special Financial Advisory Committee to the Mayor of Los
Angeles.
A graduate of the Georgia Institute of Technology with a degree in
Industrial Engineering, Mr. Tennenbaum received an M.B.A. with honors from
Harvard Business School. Mr. Tennenbaum oversees one portfolio in the fund
complex as a director.
Mark K. Holdsworth (40)
- - Year of Election or Appointment: 2004
- - Authorized Person of the Company. Mr. Holdsworth is also a Founding Partner
and Managing Partner TCP, and is a voting member of its Investment Committee. He
also serves as a Director of Pemco Aviation Group, Inc. and as Chairman of its
Finance Committee, as a Director of Anacomp, Inc., and as Chairman of the Board
of Directors of International Wire Group, Inc. Prior to joining TCP in 1996, he
was a Vice President, Corporate Finance, of US Bancorp Libra, a high-yield debt
securities investment banking firm. Before employment with US Bancorp Libra, he
worked as a generalist in Corporate Finance at Salomon Brothers, Inc., and
earlier as an Associate at a Los Angeles real estate advisory firm. He received
a B.A. in Physics from Pomona College, a B.S. with honors in Engineering and
Applied Science (concentration in Mechanical Engineering) from the California
Institute of Technology, and an M.B.A. from Harvard Business School.
Howard M. Levkowitz (38)
- - Year of Election or Appointment: 2004
- - Director and President of the Company. Mr. Levkowitz is also a Founding
Partner and Managing Partner of TCP, and is a voting member of its Investment
Committee. He also serves as a Director of Party City Corporation and as
Chairman of its Nominating Committee. Prior to joining TCP in the beginning of
1997, he was an attorney at Dewey
32
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Directors and Officers (continued)
(Unaudited)
Ballantine. Mr. Levkowitz also serves as a Director of several non-profit
organizations. Mr. Levkowitz has been the leader of and an active member of a
number of restructuring committees. He received a B.A. in History with high
honors from the University of Pennsylvania, a B.S. in Economics (concentration
in finance) with high honors from the Wharton School, and a J.D. from the
University of Southern California. Mr. Levkowitz oversees one portfolio in the
fund complex as a director.
Hugh Steven Wilson (57)
- - Year of Election or Appointment: 2005
- - Chief Executive Officer of the Company. Mr. Wilson also serves as a Managing
Partner and member of the Investment Committee of TCP. He retired from the
international law firm of Latham & Watkins on January 1, 2005, where, as a
senior partner, he had focused on mergers and acquisitions. He is the former
Global Co-Chair of Latham & Watkins' Mergers and Acquisitions Practice Group and
the former Chairman of both the national Litigation Department and the national
Mergers and Acquisitions Litigation Practice Group. Mr. Wilson has served as
Tennenbaum Capital Partners' primary outside counsel since its inception. He
received a J.D. degree from the University of Chicago Law School in 1971, where
he was a member of the law review and Order of the Coif. Mr. Wilson received a
Master of Laws degree from Harvard Law School in 1972 and a B.A. from Indiana
University in 1968.
Paul L. Davis (31)
- - 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. He received a B.A. (Magna Cum
Laude) in Business-Economics from the University of California at Los Angeles,
and is a Certified Public Accountant in the State of California.
Robert G. DiPaolo (38)
- - Year of Election or Appointment: 2004
- - Chief Financial Officer of the Company. Mr. DiPaolo is also Chief Financial
Officer of TCP and a member of its Investment Committee. Prior to joining TCP in
1999, he was a Vice President of TCW. Previously, Mr. DiPaolo was employed as an
audit and business consulting manager at the Los Angeles office of Arthur
Andersen & Co., where he conducted financial audits, due diligence reviews, and
systems and controls assessments, and served as an instructor at the company's
worldwide training center for the audit and consulting divisions. He graduated
with a B.S. in Business Administration from the University of California at
Riverside and is a Certified Public Accountant in the State of California.
33
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Directors and Officers (continued)
(Unaudited)
David A. Hollander (44)
- - Year of Election or Appointment: 2004
- - Secretary of the Company. Mr. Hollander also serves as a Director and as
General Counsel of TCP, and is a member of its Investment Committee. Prior to
joining TCP in 2002, he worked for 16 years as an attorney for O'Melveny & Myers
LLP. He specialized in leveraged finance, insolvency, and mergers and
acquisitions. He has advised creditors, debtors, and boards of directors. He
played a major role in the Phar-Mor and the Excite@Home bankruptcy cases, the
leveraged purchases of the Illinois Central Railroad and of Ralphs Grocery
Company, and in the sale of MiniMed to Medtronic. He received a B.S. in
Economics (concentration in Accounting) with highest honors from the Wharton
School of the University of Pennsylvania and a J.D. from Stanford Law School,
where he was associate editor of the Stanford Law Review.
34
Special Value Expansion Fund, LLC
(A Delaware Limited Liability Company)
Changes in Persons Primarily Responsible for Portfolio Management
(Unaudited)
As disclosed in the Company's Registration Statement on Form N-2,
investments of the Company are managed by TCP acting through the voting members
of TCP's Investment Committee with respect to all assets (other than high
quality fixed income instruments maturing in less than 367 days from purchase
and other than hedging transactions) and utilizing the same macroeconomic and
industry analysis together with an intensive bottom-up investment strategy which
TCP employs on behalf of its other accounts and which TCP (and prior to its
formation, TCO and Michael E. Tennenbaum) has employed since 1987. During the
year ended September 30, 2005, Steven C. Chang and Jose E. Feliciano became
voting members of TCP's Investment Committee. Their background and experience
are as follows:
Steven C. Chang is a Partner of TCP. Prior to joining TCP in 2002, he was
a Principal at Barnard & Co., a private equity investment group managing
approximately $2 billion focused on growth financings for information
technology, business services, and communications companies. Prior to that, he
was an analyst at Goldman, Sachs & Co. in Special Situations, a principal
investment group focused on distressed strategies and capital structure
arbitrage, and an investment banker in the Mergers & Acquisitions and Healthcare
groups. Mr. Chang currently serves as a representative for TCP to the boards of
Celerity Group, Inc., Information Resources, Inc., Intentia International AB,
and ITC Deltacom, Inc.
Mr. Chang is a graduate of Stanford University where he received both a
B.S. and an M.S. in Biological Sciences, and an A.B. with Distinction in
Quantitative Economics.
Jose E. Feliciano is a Partner of TCP. Prior to joining TCP in 2001, he
served as Chief Financial Officer for an Internet/software company, where he
managed the finance, corporate development and human resource functions.
Previously, he spent several years at Goldman, Sachs & Co. in the Mergers &
Acquisitions and Corporate Finance departments and worked as an Associate at an
international private equity firm that focused on providing growth capital for
manufacturing, distribution, financial services and media companies. He is also
a member of the Board of Trustees of the Neighborhood Youth Association, a Los
Angeles-based non-profit organization.
He received a B.S. in Mechanical & Aerospace Engineering (Magna Cum Laude)
from Princeton University and an M.B.A. from the Graduate School of Business at
Stanford University.
35
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the Registrant has adopted a
Code of Ethics that applies to its Chief Executive Officer and Chief Financial
Officer. A copy of the Code of Ethics is filed as an exhibit 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: $46,000 for fiscal year 2004
and $25,000 for fiscal year 2004.
(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: $17,884.29 for fiscal year 2005
and $10,741.84 for fiscal year 2004. The services comprising such fees included
tax return preparation, related tax advice and planning, and miscellaneous tax
advice and consulting including 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: $17,884.29 for fiscal year 2005 and
$10,741.84 for fiscal year 2004.
(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 t
6 12 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 Client's 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/ Hugh Steven Wilson
------------------------------------------
Name: Hugh Steven Wilson
Title: Chief Executive Officer
Date: December 8, 2005
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/ Hugh Steven Wilson
------------------------------------------
Name: Hugh Steven Wilson
Title: Chief Executive Officer
Date: December 8, 2005
By: /s/ Robert G. DiPaolo
------------------------------------------
Name: Robert G. DiPaolo
Title: Chief Financial Officer
Date: December 8, 2005