N-CSR 1 c15855nvcsr.txt CERTIFIED SHAREHOLDER REPORT 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 811-21665 Hatteras Multi-Strategy TEI Fund, L.P. (Exact name of registrant as specified in charter) 8540 Colonnade Center Drive, Suite 401 Raleigh, North Carolina 27615 (Address of principal executive offices) (Zip code) David B. Perkins 8540 Colonnade Center Drive, Suite 401 Raleigh, North Carolina 27615 (Name and address of agent for service) registrant's telephone number, including area code: (919) 846-2324 Date of fiscal year end: March 31 Date of reporting period: March 31, 2007 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2007 WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC FOR THE YEAR ENDED MARCH 31, 2007 WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm.................... 1 Consolidated Statement of Assets, Liabilities and Partners' Capital........ 2 Consolidated Statement of Operations....................................... 3 Consolidated Statement of Changes in Partners' Capital..................... 4 Consolidated Statement of Cash Flows....................................... 5 Notes to Consolidated Financial Statements................................. 6 Board of Directors (unaudited)............................................. 14 Fund Management (unaudited)................................................ 15 Other Information (unaudited).............................................. 16 Financial Statements of Hatteras Master Fund, L.P.......................... I
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Partners of Hatteras Multi-Strategy TEI Fund, L.P. and Hatteras Multi-Strategy Offshore Fund, LDC: We have audited the accompanying consolidated statement of assets, liabilities and partners' capital of Hatteras Multi-Strategy TEI Fund, L.P. and Hatteras Multi-Strategy Offshore Fund, LDC (the "Funds"), and the related consolidated statement of operations and consolidated statement of cash flows for the year then ended, and the consolidated statement of changes in partners' capital for the two years then ended. These financial statements are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit 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 effectiveness of the Funds' 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Funds as of March 31, 2007, and the results of their operations and their cash flows for the year then ended, and the changes in their partners' capital for the two years then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania May 24, 2007 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL MARCH 31, 2007 ASSETS Investment in Hatteras Master Fund, L.P., at fair value (cost $118,539,907) $131,040,594 Cash and cash equivalents 974,537 Investment in Hatteras Master Fund, L.P. paid in advance 5,375,256 Receivable for redemption from Hatteras Master Fund, L.P. 1,880,000 Due from Investment Manager 13,725 Interest receivable 2,902 Prepaid assets 967 ------------ TOTAL ASSETS $139,287,981 ============ LIABILITIES AND PARTNERS' CAPITAL Contributions received in advance $ 6,184,000 Redemptions payable 2,604,959 Withholding tax payable 92,000 Servicing fee payable 85,886 Professional fees payable 28,376 Accounting and administration fees payable 24,133 Custodian fees payable 5,173 Other accrued expenses 14,596 ------------ TOTAL LIABILITIES 9,039,123 ------------ PARTNERS' CAPITAL 130,248,858 ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $139,287,981 ============
See Notes to Consolidated Financial Statements 2 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 2007 NET INVESTMENT LOSS ALLOCATED FROM HATTERAS MASTER FUND, L.P. Dividends $ 372,291 Interest 30,926 Expenses (1,228,771) ----------- NET INVESTMENT LOSS ALLOCATED FROM HATTERAS MASTER FUND, L.P. (825,554) ----------- FUND INVESTMENT INCOME Interest 68,257 ----------- OPERATING EXPENSES Servicing fee 685,339 Withholding tax expense 278,780 Accounting and administration fees 125,053 Professional fees 54,311 Registration fees 43,000 Custodian fees 10,858 Insurance fees 1,204 Other expenses 42,489 ----------- TOTAL OPERATING EXPENSES 1,241,034 Reimbursement from Investment Manager (67,221) ----------- NET OPERATING EXPENSES 1,173,813 ----------- NET INVESTMENT LOSS (1,931,110) ----------- NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS ALLOCATED FROM HATTERAS MASTER FUND, L.P. Net realized gain on investments 671,027 Net increase in unrealized appreciation on investments 10,516,681 ----------- NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS ALLOCATED FROM HATTERAS MASTER FUND, L.P. 11,187,708 ----------- NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM OPERATIONS $ 9,256,598 ===========
See Notes to Consolidated Financial Statements 3 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
GENERAL LIMITED TOTAL PARTNER'S PARTNERS' PARTNERS' CAPITAL CAPITAL CAPITAL --------- ------------ ------------ PARTNERS' CAPITAL, AT APRIL 1, 2005 $ -- $ -- $ -- Capital contributions -- 30,697,938 30,697,938 Capital withdrawals (61,385) (216,678) (278,063) Net investment loss -- (451,990) (451,990) Net realized loss on investments -- (19,460) (19,460) Net unrealized appreciation on investments -- 2,321,579 2,321,579 Actual Performance Allocation from April 1, 2005 to December 31, 2005 60,617 (60,617) -- Accrued Performance Allocation from January 1, 2006 to March 31, 2006 768 (768) -- Actual Performance Allocation from April 1, 2005 to March 31, 2006 94,627 (94,627) -- --------- ------------ ------------ PARTNERS' CAPITAL, AT MARCH 31, 2006 $ 94,627 $ 32,175,377 $ 32,270,004 Capital contributions -- 93,567,770 93,567,770 Capital withdrawals (363,090) (4,482,424) (4,845,514) Net investment loss -- (1,931,110) (1,931,110) Net realized gain on investments -- 671,027 671,027 Net increase in unrealized appreciation on investments -- 10,516,681 10,516,681 Actual Performance Allocation from January 1, 2006 to December 31, 2006 363,090 (363,090) -- Reverse accrued Performance Allocation from January 1, 2006 to March 31, 2006 (94,627) 94,627 -- Accrued Performance Allocation from January 1, 2007 to March 31, 2007 268,982 (268,982) -- --------- ------------ ------------ PARTNERS' CAPITAL, AT MARCH 31, 2007 $ 268,982 $129,979,876 $130,248,858 ========= ============ ============
See Notes to Consolidated Financial Statements 4 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in partners' capital resulting from operations $ 9,256,598 Adjustments to reconcile net increase in partners' capital resulting from operations to net cash used in operating activities: Purchases of interests in Hatteras Master Fund, L.P. (90,161,091) Proceeds from withdrawals from Hatteras Master Fund, L.P. 1,880,000 Net investment gain allocated from Hatteras Master Fund, L.P. (10,362,154) Decrease in investment in Hatteras Master Fund, L.P. paid in advance 3,821,456 Increase in receivable for redemption from Hatteras Master Fund, L.P. (1,880,000) Increase in due from Investment Manager (708) Increase interest receivable (2,465) Decrease in prepaid registration fees 9,638 Increase in prepaid assets (967) Increase in witholding tax payable 92,000 Increase in servicing fee payable 65,499 Increase in professional fees payable 8,059 Increase in accounting and administration fees payable 16,391 Increase in custodian fees payable 3,685 Decrease in due to affiliates (1,285) Increase in other accrued expenses 7,534 ------------ NET CASH USED IN OPERATING ACTIVITIES (87,247,810) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions (including increase in contributions received in advance) 90,351,410 Capital withdrawals (including increase in redemptions payable) (2,464,063) ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 87,887,347 ------------ Net change in cash and cash equivalents 639,537 Cash and cash equivalents at beginning of year 335,000 ------------ Cash and cash equivalents at end of period $ 974,537 ============
See Notes to Consolidated Financial Statements 5 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 1. ORGANIZATION Hatteras Multi-Strategy TEI Fund, L.P. (the "Fund") was organized as a limited partnership under the laws of the State of Delaware on October 29, 2004 and commenced operations on April 1, 2005. The Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end, non-diversified, management investment company. The Fund is designed for investment primarily by tax-exempt and tax-deferred investors. The Fund's investment objective is to generate consistent long-term appreciation and returns across all market cycles. Investors who acquire interests in the Fund ("Interests") are the Limited Partners (each, a "Limited Partner" and together, the "Limited Partners") of the Fund. To achieve its objective, the Fund will provide its Limited Partners with access to a broad range of investment strategies and asset categories, trading advisors ("Advisors") and overall asset allocation services typically available on a collective basis to larger institutions through an investment of substantially all of its assets in the Hatteras Multi-Strategy Offshore Fund, LDC, (the "Offshore Fund") a Cayman Islands limited duration company with the same investment objective as the Fund. The Offshore Fund will serve solely as an intermediate entity through which the Fund will invest in the Master Fund, and commenced operations on April 1, 2005. The Offshore Fund enables Tax-Exempt Partners to invest without receiving certain income in a form that would otherwise be taxable to such Tax-Exempt Partners regardless of their tax-exempt status. The Offshore Fund will in turn invest substantially all of its assets in the Hatteras Master Fund, L.P., a Delaware limited partnership (the "Master Fund"), which is also registered under the 1940 Act. The Master Fund is managed by Hatteras Investment Partners, LLC (the "Investment Manager"), a Delaware limited liability company registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The Offshore Fund will serve solely as an intermediate entity through which the Fund will invest in the Master Fund. The Offshore Fund will make no independent investment decisions and has no investment or other discretion over the investable assets. At March 31, 2007, the Fund owns 100% of the beneficial interests of the Offshore Fund, and the Offshore Fund owns 30.33% of the beneficial interests in the Master Fund. These financials statements are the consolidation of the Fund and the Offshore Fund (together "the Funds"). Intercompany balances have been eliminated through consolidation. Hatteras Investment Management, LLC, a Delaware limited liability company, serves as the General Partner of the Fund (the "General Partner"). The General Partner has appointed a Board of Directors (the "Board") and, to the fullest extent permitted by applicable law, has irrevocably delegated to the Board its rights and powers to monitor and oversee the business affairs of the Fund, including the complete and exclusive authority to oversee and establish policies regarding the management, conduct and operation of the Fund's business. 6 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and are expressed in United States dollars. The following is a summary of significant accounting and reporting policies used in preparing the consolidated financial statements. A. INVESTMENT VALUATION Valuation of the Offshore Fund's interest in the Master Fund is based on the investment in Underlying Funds held by the Master Fund. The Master Fund will value interests in the Underlying Funds at fair value, which ordinarily will be the value determined by their respective investment managers, in accordance with procedures established by the Board. Investments in Underlying Funds are subject to the terms of the Underlying Funds' offering documents. Valuations of the Underlying Funds may be subject to estimates and are net of management and performance incentive fees or allocations payable to the Underlying Funds' as required by the Underlying Funds' offering documents. If the Investment Manager determines that the most recent value reported by the Underlying Fund does not represent fair value or if the Underlying Fund fails to report a value to the Master Fund, a fair value determination is made under procedures established by and under the general supervision of the Board. Because of the inherent uncertainty in valuation, the estimated values may differ from the values that would have been used had a ready market for the securities existed, and the differences could be material. The accounting policies of the Master Fund, including the valuation of securities held by the Master Fund, will directly affect the Funds and are discussed in the Notes to Financial Statements of the Master Fund which are included elsewhere in this report. B. ALLOCATIONS FROM MASTER FUND As required by accounting principles generally accepted in the United States of America, the Fund records its allocated portion of income, expense, realized gains and losses and unrealized appreciation and depreciation from the Master Fund. C. FUND LEVEL INCOME AND EXPENSES Interest income on any cash or cash equivalents held by the Funds will be recognized on an accrual basis. Expenses that are specifically attributed to the Funds are charged to each Fund. The Funds will also bear, as an investor in the Master Fund, its allocable portion of the fees and expenses of the Master Fund. Because the Funds bear their proportionate share of the management fees of the Master Fund, the Funds pay no direct management fee to the Investment Manager. 7 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) D. TAX BASIS REPORTING Because the Master Fund invests primarily in investment funds that are treated as partnerships for U.S. Federal tax purposes, the tax character of the Fund's allocated earnings is established dependent upon the tax filings of the investor partnerships. Accordingly, the tax basis of these allocated earnings and the related balances are not available as of the reporting date. E. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes amounts held in interest bearing demand deposit accounts. At March 31, 2007, the Funds held $974,537 in interest bearing demand deposit accounts. Such cash, at times, may exceed federally insured limits. The Funds have not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on such bank deposits. F. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 income and expenses during the reported period. Actual results could differ from those estimates. 3. ALLOCATION OF LIMITED PARTNERS' CAPITAL Net profits or net losses of the Funds for each allocation period ("Allocation Period") will be allocated among and credited to or debited against the capital accounts of the Limited Partners. Net profits or net losses will be measured as the net change in the value of the partners' capital of the Fund, including any net change in unrealized appreciation or depreciation of investments and realized income and gains or losses and expenses during an allocation period, adjusted to exclude any items to be allocated among the capital accounts of the Limited Partners other than in accordance with the Limited Partners' respective investment percentages. Allocation Periods begin on the day after the last day of the preceding Allocation Period and end at the close of business on (1) the last day of each month; (2) the last day of each taxable year; (3) the day preceding each day on which interests are purchased; (4) the day on which interests are repurchased; or (5) the day on which any amount is credited to or debited from the capital account of any Limited Partner other than an amount to be credited to or debited from the capital accounts of all Limited Partners in accordance with their respective investment percentages in the Master Fund. The Fund will maintain a separate capital account ("Capital Account") on its books for each Limited Partner. 8 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 3. ALLOCATION OF LIMITED PARTNERS' CAPITAL (CONTINUED) Each Limited Partner's capital account will have an opening balance equal to the Limited Partner's initial contribution to the capital of Fund (i.e., the amount of the investment less any applicable sales load), and thereafter, will be (i) increased by the amount of any additional capital contributions by such Limited Partner; (ii) decreased for any payments upon repurchase or in redemption of such Limited Partner's Interest or any distributions in respect of such Limited Partner; and (iii) increased or decreased as of the close of each Allocation Period by such Limited Partner's allocable share of net profits or net losses of the Fund. 4. RELATED PARTY TRANSACTIONS AND OTHER In consideration for investor services, the Funds will pay Hatteras Investment Partners, LLC (in such capacity, the "Servicing Agent") an investor servicing fee at the annual rate of 0.75% of the net asset value of the interests beneficially owned by customers of the Servicing Agent or any service provider who has entered into a service provider agreement with the Servicing Agent. The investor servicing fees payable to the Servicing Agent will be borne by all Limited Partners of the Fund on a pro-rata basis. The Servicing Agent may waive (to all investors on a pro-rata basis) or pay to third parties all or a portion of any such fees in its sole discretion. The Investment Manager has contractually agreed to reimburse certain expenses for the initial period November 1, 2005 through April 1, 2007, so that the total annual expenses for this period will not exceed 2.35% for the Fund (the "Expense Limitation"). The agreement will automatically renew for one-year terms after the initial period until terminated by the Investment Manager or the Fund. The Fund will carry forward, for a period not to exceed (3) three years from the date on which a reimbursement is made by the Investment Manager, any expenses in excess of the expense limitation and repay the Investment Manager such amounts, provided the Fund is able to effect such reimbursement and remain in compliance with the expense limitation disclosed in the then effective confidential memorandum. As of March 31, 2007, the Funds have carried forward expenses of $137,396 which will begin to expire on November 30, 2008. The General Partner generally receives an annual performance-based allocation (the "Performance Allocation") with respect to the Capital Account of each Limited Partner. The Performance Allocation is calculated generally as of the end of each calendar year. The Performance Allocation with respect to a Limited Partner's Capital Account is equal to 10% of the amount by which the excess, if any, of net profit over net loss allocated to such Limited Partner for the calendar year exceeds (a) any Loss Carryforward Amount (as defined below) for such Limited Partner plus (b) the non-cumulative "hurdle amount" (an annualized return on the Capital Account balance of such Limited Partner as of the last day of the preceding calendar year at a rate equal to the yield to maturity of the 90-day United States Treasury Bill as reported by the Wall Street Journal on the last day of the preceding calendar year). The Performance Allocation with respect to each applicable Limited Partner's Capital Account shall be deducted from such Capital Account and allocated to the Capital Account of the General Partner. 9 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 4. RELATED PARTY TRANSACTIONS AND OTHER (CONTINUED) If at the end of any calendar year, the net losses allocated to a Limited Partner's Capital Account exceed the net profits so allocated, then a Loss Carryforward Amount shall be established for the Limited Partner. No Performance Allocation shall be deducted from the Capital Account of any Limited Partner unless the excess of net profits over net losses subsequently allocated exceeds any Loss Carryforward Amount for that Limited Partner. If a Limited Partner withdraws completely from the Fund other than at the end of a calendar year, a Performance Allocation shall be made with respect to such Limited Partner's Capital Account as of the date of complete withdrawal as if such date were the end of a calendar year and the hurdle amount will be pro-rated. UMB Bank, n.a. serves as custodian of the Funds' assets and provides custodial services for the Funds. UMB Investment Services Group serves as administrator and accounting agent to the Funds and provides certain accounting, record keeping and investor related services. The Funds pay a monthly fee to the administrator based upon average partners' capital, subject to certain minimums. 5. FEDERAL INCOME TAXES For Federal income tax purposes, the Fund is treated as a partnership, and each partner in the Fund is treated as the owner of its proportionate share of the net assets, income, expenses, and the realized and unrealized gains (losses) of the Fund. Accordingly, no federal, state or local income taxes have been provided on profits of the Fund since the partners are individually liable for the taxes on their share of the Fund's income. Under current Cayman Islands legislation, there are no taxes payable by the Offshore Fund. The Offshore Fund has been advised by its United States counsel that it generally should not be subject to United States income tax, except as further detailed in the Fund's confidential offering memorandum. United States withholding taxes as described in the Fund's confidential offering memorandum have been recorded on the statement of operations. 6. RISK FACTORS An investment in the Fund involves significant risks that should be carefully considered prior to investment and should only be considered by persons financially able to maintain their investment and who can afford a loss of a substantial part or all of such investment. The Master Fund intends to invest substantially all of its available capital in securities of private investment companies. These investments will generally be restricted securities that are subject to substantial holding periods or are not traded in public markets at all, so that the Master Fund may not be able to resell some of its securities holdings for extended periods, which may be several years. No guarantee or representation is made that the investment objective will be met. 10 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 7. LINE OF CREDIT On May 1, 2006, the Fund, along with other limited partners of the Master Fund, entered into a $20,000,000 unsecured, uncommitted revolving loan facility ("Facility"), for the purpose to finance short timing differences between the redemption of investments or receipt of partnership capital and the redemption of partnership capital accounts, the investment in new managers, or as general working capital. A fee of 37.5 basis points per annum is payable quarterly in arrears on the unused portion of the Facility. Borrowings are charged an interest rate at a base rate less 75 basis points. The base rate is the greater of (a) the prime commercial rate as announced from time to time, or (b) the Federal Funds rate plus 1/2 of 1%, calculated on a 360-day basis and payable monthly in arrears. The Fund did not directly borrow or pay Facility expenses during the year, rather the Master Fund paid all expenses related to the Facility for the period ended March 31, 2007 and allocated to the Fund it's proportional share of the expenses. At March 31, 2007, the Master Fund had $3,000,000 in borrowings outstanding under the Facility and $20,383 in fees and interest payable. The average interest rate, the average daily balance, and the maximum balance outstanding for borrowings under the Facility for the period ended March 31, 2007 was 7.45%, $284,932, and $7,500,000, respectively. 8. REPURCHASE OF INTERESTS The Board may, from time to time and in its sole discretion, cause the Fund to repurchase interests from Limited Partners pursuant to written tenders by Limited Partners at such times and on such terms and conditions as established by the Board. In determining whether the Fund should offer to repurchase interests, the Board will consider the recommendation of the Investment Manager. The Fund generally expects to offer repurchase interests from Limited Partners on a quarterly basis as of March 31, June 30, September 30 and December 31 of each year. The Fund does not intend to distribute to the partners any of the Fund's income, but generally expects to reinvest substantially all income and gains allocable to the partners. A partner may, therefore, be allocated taxable income and gains and not receive any cash distribution. 9. INDEMNIFICATION In the normal course of business, the Funds enter into contracts that provide general indemnifications. The Funds' maximum exposure under these agreements is dependent on future claims that may be made against the Funds, and therefore cannot be established; however, based on experience, the risk of loss from such claims is considered remote. 10. CONSOLIDATED FINANCIAL HIGHLIGHTS The financial highlights are intended to help you understand the Funds' financial performance for the past period. The total returns in the table represent the rate that a Limited Partner would be expected to have earned or lost on an investment in the Fund. The ratios and total return amounts are calculated based on the Limited Partner group taken as a whole. 11 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 10. CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) The General Partner interest is excluded from the calculations. An individual Limited Partner's ratios or returns may vary from the table below based on incentive arrangements and the timing of capital transactions. The ratios are calculated by dividing total dollars of income or expenses as applicable by the average of total monthly Limited Partner's capital. The ratios include the Funds' proportionate share of the Master Fund's income and expenses. Total return amounts are calculated by geometrically linking returns based on the change in value during each accounting period. The total return amounts have not been annualized. The portfolio turnover rate refers to the turnover rate of the Master Fund, as turnover occurs at the Master Fund level and the Funds are invested 100% in the Master Fund.
FOR THE YEAR ENDED FOR THE YEAR ENDED MARCH 31, 2007 MARCH 31, 2006 ------------------ ------------------ Total return amortizing organizational expenses and before Performance Allocation* --** 11.50% Organization expense -- (0.35)% -------- ------- Total return before Performance Allocation 8.01% 11.15% Performance Allocation (0.55)% (1.15)% -------- ------- Total return after expensing organizational expenses and Performance Allocation 7.46% 10.00% ======== ======= Limited Partners' capital, end of year (000) $129,980 $32,175 Portfolio Turnover Rate (Master Fund) 14.03% 19.35% Net investment loss before Performance Allocation (2.24)% (3.49)% Operating expenses, excluding reimbursement from Investment Manager and Performance Allocation 2.87% 4.72% Performance Allocation 0.62% 1.21% -------- ------- Total expenses and Performance Allocation before reimbursement from Investment Manager 3.49% 5.93% Reimbursement from Investment Manager (0.08)% (0.87)% -------- ------- Net expenses 3.41% 5.06% ======== =======
* Return is indicative of amortizing organizational expenses over 60 months for tax purposes. ** Organizational costs were fully expensed as of 3/31/06. 12 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 2007 (CONCLUDED) 11. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (the "Interpretation"). The Interpretation establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statements recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and required certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006 and is required to be implemented no later than September 30, 2007. Management has recently begun to evaluate the application of the Interpretation to the Funds, and is not in a position at this time to estimate the significance of its impact, if any, on the Funds' financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," (the "Statement"). The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs). The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is to be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied.Management has recently begun to evaluate the application of the Statement to the Funds, and is not in a position at this time to evaluate the significance of its impact, if any, on the Funds' financial statements. 12. SUBSEQUENT EVENTS Effective April 1, 2007 and May 1, 2007, there were additional capital contributions of $6,184,000 and $6,113,850, respectively. 13 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC BOARD OF DIRECTORS (UNAUDITED) The identity of the Board Members and brief biographical information is set forth below.
Number of Position(s) Term of Office; Portfolios in Fund Held with the Length of Time Principal Occupation(s) During Past 5 years and Complex' Overseen by Name, Address & Age Fund Served Other Directorships Held by Director Director or Officer ------------------- ------------- --------------- ----------------------------------------------- -------------------- INTERESTED DIRECTORS David B. Perkins, 44 Mr. Perkins has been Chairman and CEO since 1000 Watermeet Lane inception of the Funds. Mr. Perkins became the Raleigh, NC 27614 President and Managing Principal of the Investment Manager in September 2003 and Chief became the co-founder and Managing Partner of Executive CapFinancial Partners, LLC in April 2003. Prior Officer and 3 year term; to that, he was Managing Partner at Wachovia 5 Chairman of Since Inception Securities Financial Network, Inc. from June the Board of 2002 to September 2003 and Managing Principal Directors of CapTrust Financial Advisors, LLC from October 1997 to June 2002. INDEPENDENT DIRECTORS Steve E. Moss, 53 Director: Mr. Moss has been a member of HMKCT 918 Meadow Lane Chairman of 3 year term; Properties, LLC since January 1996. 5 Henderson, NC 27536 the Audit Since December Committee 2004 H. Alexander Holmes, 64 Director: 3 year term; Mr. Holmes founded Holmes Advisory Services, 3408 Landor Road Audit Since December LLC, a financial consultation firm, in 1993. 5 Raleigh, NC 27609 Committee 2004 Member Gregory S. Sellers, 47 Mr. Sellers became the Chief Financial Officer 2643 Steeplechase Road Director: 3 year term; and a director of Kings Plush, Inc., a fabric Gastonia, NC 28056 Audit Since December manufacturer, in April 2003. Prior to that, he 5 Committee 2004 was the Vice President of Finance at Parksdale Member Mills, Inc., a cotton and cotton blend yarns producer, from January 1991 to April 2003. Art Lottes, 53 Mr. Lottes was the President of CARQUEST 4813 Wynneford Way Director: Corporation, an automotive aftermarket company Raleigh, NC 27615 Audit 3 year term; until December 2005. Mr. Lottes was a Board 5 Committee Since November member of CARQUEST and General Partner Member 2006 until December 2005.
14 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC FUND MANAGEMENT (UNAUDITED) Set forth below is the name, age, position with the Fund, length of term of office, and the principal occupation for the last five years of each of the persons currently serving as Executive Officers of the Fund. Unless otherwise noted, the business address of each officer is 8540 Colonnade Center Drive, Suite 401, Raleigh, NC 27615.
Number of Portfolios Term of in Fund Office; Complex' Position(s) Length of Principal Occupation(s) During Past 5 Overseen Held with Time years and Other Directorships Held by by Director Name, Address & Age the Fund Served Director or Officer ------------------- ----------- ---------- --------------------------------------- ----------- OFFICERS J. Michael Fields, 33 Chief Since Mr. Fields has been the CFO since N/A 8540 Colonnade Center Drive, Financial Inception inception of the Funds. Mr. Fields Suite 401 Raleigh, NC 27615 Officer became a Director of the Investment Manager in September 2003. Prior to joining the Investment Manager, Mr. Fields was employed by CapTrust Financial Advisors from August 2002 to September 2003. Prior to joining CapTrust, Mr. Fields was employed by Morgan Stanley in Atlanta, Georgia from January 2000 to August 2002. Denise Buchanan, 44 Chief Since Ms. Buchanan has been the CCO since N/A 8540 Colonnade Center Drive, Compliance Inception inception of the Funds. Ms. Buchanan Suite 401 Raleigh, NC 27615 Officer became the Compliance Officer with CapFinancial Partners, LLC ("CapTrust") in November 2003. Prior to joining CapTrust, Ms. Buchanan was President of Broker/Dealer Sales & Consulting, Inc. from 2001 to November 2003. Previously, Ms. Buchanan was the Director of Compliance for Atlantic Capital Management, LLC from 1996 to 2001. Vickey Collins, 40 Secretary Since Ms. Collins has been the Secretary of N/A 8540 Colonnade Drive, Inception the Funds since inception. She became Suite 401 Raleigh, NC 27615 the Operations Manager for the Investment Manager in September 2004. Prior to joining the Investment Manager, she was employed with McKinely Capital Management from 1994 to 2004.
15 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC OTHER INFORMATION (UNAUDITED) PROXY VOTING For free information regarding how the Fund voted proxies during the period ended March 31, 2007, or to obtain a free copy of the Fund's complete proxy voting policies and procedures, call 1-800-504-9070 or visit the SEC's website at http://www.sec.gov. AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q is available, without charge and upon request, on the SEC's website at http://www.sec.gov or may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. 16 Tab I HATTERAS MASTER FUND, L.P. FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2007 WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HATTERAS MASTER FUND, L.P. FOR THE YEAR ENDED MARCH 31, 2007 TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm.................... 1 Schedule of Investments.................................................... 2 Statement of Assets, Liabilities and Partners' Capital..................... 6 Statement of Operations.................................................... 7 Statement of Changes in Partners' Capital.................................. 8 Statement of Cash Flows.................................................... 9 Notes to Financial Statements.............................................. 10 Board of Directors (unaudited)............................................. 17 Fund Management (unaudited)................................................ 18 Other Information (unaudited).............................................. 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Partners of Hatteras Master Fund, L.P.: We have audited the accompanying statement of assets, liabilities and partners' capital of Hatteras Master Fund, L.P. (the "Master Fund"), including the schedule of investments, as of March 31, 2007, and the related statements of operations and cash flows for the year then ended, and changes in partners' capital for the two years then ended. These financial statements are the responsibility of the Master Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Master Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 effectiveness of the Master Fund'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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of March 31, 2007, by correspondence with the Underlying Fund managers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Master Fund as of March 31, 2007, and the results of its operations and its cash flows for the year then ended, and the changes in its partners' capital for the two years then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2, the financial statements of the Master Fund include investments in Underlying Funds valued at $439,348,184 (approximately 101.67% of partners' capital), which are stated at fair value based on estimates by the Master Fund's management. The Master Fund's management estimated the fair values relating to certain of the underlying investments of these Underlying Funds in the absence of readily ascertainable market values. These values may differ from the values that would have been used had a ready market for these investments existed, and the differences could be material. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania May 24, 2007 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - MARCH 31, 2007 INVESTMENT OBJECTIVE AS A PERCENTAGE OF TOTAL PARTNERS' CAPITAL Percentages are as follows: GRAPHIC OMITTED EDGAR REPRESENTATION OF DATA AS FOLLOWS: Opportunistic Equity 34.98% Enhanced Fixed Income 19.32% Absolute Return 17.84% Energy and Natural Resources 13.71% Private Equity Composite 8.92% Real Estate Composite 6.90% Liabilities in excess of other assets (1.67)%
COST FAIR VALUE ----------- ----------- INVESTMENTS IN UNDERLYING FUNDS (101.67%) ABSOLUTE RETURN (17.84%) (c) Black River Global Multi-Strategy Leveraged Fund, LLC (a, b) $ 6,000,000 $ 6,762,373 Courage Special Situations Fund, L.P. (a, b) 4,827,675 5,913,748 DE Shaw Composite Fund, LLC (a, b) 10,000,000 11,588,849 Montrica Global Oppurtunities Fund, L.P. (a, b) 9,000,000 9,523,663 OZ Asia Domestic Partners, L.P. (a, b) 12,000,000 12,982,155 Smith Breeden Mortgage Partners, L.P. (a, b) 4,413,258 4,919,962 Stark Investments, L.P. (a, b) 8,000,000 9,001,669 Waterstone Market Neutral Fund, L.P. (a, b) 6,000,000 6,419,434 Wellington Partners, LLC (a, b) 7,785,759 9,970,026 ----------- 77,081,879 -----------
See Notes to Financial Statements 2 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - MARCH 31, 2007 (CONTINUED)
COST FAIR VALUE ----------- ------------ ENERGY AND NATURAL RESOURCES (13.71%) (c) All-Cap Energy Hedge Fund, LLC (a, b) $ 4,234,684 $ 4,095,657 Arclight Energy Partners Fund III, L.P. (a, b) 2,521,815 2,487,895 Black River Commodity Multi Strategy Fund, L.P. (a, b) 7,000,000 7,647,026 Cambridge Energy, L.P. (a, b) 2,566,534 3,971,043 Centennial Energy Partners, L.P. (a, b) 9,000,000 9,061,111 EnerVest Energy Institutional Fund X-A, L.P. (a, b) 2,613,547 2,907,185 Merit Energy Partners F-II, L.P. (a, b) 375,696 369,167 Natural Gas Partners Energy Tech, L.P. (a, b) 306,000 270,724 Natural Gas Partners VIII, L.P. (a, b) 1,163,221 1,620,083 Ospraie Special Opportunities Fund, L.P. (a, b) 3,750,000 3,998,515 Quantum Energy Partners IV, LP (a, b) 579,088 486,271 Southport Energy Plus Partners, L.P. (a, b) 5,083,819 7,964,413 Touradji Deeprock Partners, L.P. (a, b) 4,000,000 4,138,484 Treaty Oak Partners, L.P. (a, b) 9,000,000 10,217,684 ------------ 59,235,258 ------------ ENHANCED FIXED INCOME (19.32%) (c) ARX Global High Yield Securities Fund I, L.P. (a, b) 9,000,000 10,242,728 BDCM Partners I, L.P. (a, b) 11,500,000 13,852,017 Blackrock International Bond Fund (a) 1,408,430 1,397,772 Contrarian Capital Fund I, L.P. (a, b) 10,880,064 13,548,180 D.B. Zwirn Special Opportunities Fund, L.P. (a, b) 6,500,000 7,719,877 Drawbridge Special Opportunities Fund, L.P. (a, b) 8,800,000 9,504,003 Greylock Global Opportunity Fund, L.P. (a, b) 4,922,405 5,599,692 Halcyon Europe L.P. (a, b) 8,000,000 8,096,256 Lazard Emerging Income, L.P. (a, b) 3,000,000 3,463,829 Melody Fund, L.P. (a, b) 3,000,000 3,296,042 Ore Hill Fund, L.P. (a, b) 5,221,928 6,752,896 ------------ 83,473,292 ------------
See Notes to Financial Statements 3 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - MARCH 31, 2007(CONTINUED)
COST FAIR VALUE ----------- ------------ OPPORTUNISTIC EQUITY (34.98%) (c) Algebris Global Financials Fund, LP (a, b) $ 6,000,000 $ 7,002,670 Artis Technology Qualified 2X, L.P. a, b 7,000,000 8,804,958 Asian Century Quest Fund (QP) L.P. (a, b) 3,000,000 3,257,326 CCM Small Cap Value Qualified Fund, L.P. (a, b) 2,500,000 2,852,857 Criterion Horizons Fund, LP (a, b) 5,000,000 5,160,790 CRM Windridge Partners, L.P. (a, b) 4,522,017 5,061,699 DE Shaw Oculus Fund LLC (a, b) 5,000,000 5,935,777 Ellerston GEMS Offshore Fund, L.P. (a, b) 7,000,000 8,508,509 Encore Consumer Capital Fund, LP. (a, b) 1,253,544 1,176,062 GMO Mean Reversion Fund A (a, b) 5,770,065 6,685,726 Gradient Europe Fund, L.P. (a, b) 3,500,000 6,701,209 Healthcor, L.P. (a, b) 11,000,000 13,086,998 Liberty Square Strategic Partners IV (Asia), L.P. (a, b) 10,000,000 11,375,241 Samlyn Onshore Fund, L.P. (a, b) 4,000,000 4,096,000 Sansar Capital, L.P. (a, b) 10,000,000 11,484,906 SCP Domestic Fund, L.P. (a, b) 4,002,947 5,485,351 SR Global Fund, L.P. (Class C) International (a, b) 3,457,674 5,700,541 SR Global Fund, L.P. (Class G) Emerging (a, b) 4,281,970 7,358,784 SR Global Fund, L.P. (Class H) Japan (a, b) 3,665,240 4,341,533 Standard Pacific Japan Fund, L.P. (a, b) 6,500,000 6,537,005 The Platinum Fund Ltd. (a, b) 2,535,461 3,165,942 The Raptor Global Fund, L.P. (a, b) 2,500,000 3,130,738 Visium Long Bias Fund, L.P. (a, b) 10,964,983 11,747,732 Witches Rock Fund, L.P. (a, b) 2,003,000 2,525,998 ------------ 151,184,352 ------------ PRIVATE EQUITY COMPOSITE (8.92%) (c) Actis Umbrella Fund, L.P. (a, b) 1,008,914 967,634 BDCM Opportunity Fund II, L.P. (a, b) 962,673 900,999 Brazos Equity Fund II, L.P. (a, b) 1,321,087 1,134,737 Carlyle Japan Partners II, L.P. (a, b) 218,049 199,744 CJIP II Co-Invest, L.P. (a, b) 48,764 48,163 Claremont Creek Ventures, L.P. (a, b) 370,000 298,710 Crosslink Crossover Fund IV, L.P. (a, b) 4,403,262 5,285,173 Crosslink Crossover Fund IV, L.P. (a, b) 3,000,000 3,050,069 Great Point Partners VII, L.P. (a, b) 450,000 382,880 Halifax Fund II, L.P. (a, b) 501,438 357,874
See Notes to Financial Statements 4 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - MARCH 31, 2007 (CONCLUDED)
COST FAIR VALUE ----------- ------------ PRIVATE EQUITY COMPOSITE (8.92%) (c) (CONTINUED) Hancock Park Capital III, L.P. (a, b) $ 1,500,000 $ 1,942,631 Integral Capital Partners VII, L.P. (a, b) 6,000,000 6,811,122 OCM European Principal Opportunties Fund, L.P. (a, b) 3,080,307 3,716,207 OCM Mezzanine Fund II, L.P. (a, b) 2,575,000 2,670,149 Pipe Equity Partners, LLC (a, b) 3,824,693 4,609,674 Private Equity Investment Fund IV, L.P. (a, b) 1,138,058 1,363,835 Roundtable Healthcare Partners II, L.P. (a, b) 755,563 665,906 Sanderling Venture Partners VI Co-Investment Fund, L.P. (a, b) 350,000 291,795 Sanderling Venture Partners VI, L.P. (a, b) 450,000 390,318 Sterling Capital Partners II, L.P. (a, b) 682,221 786,992 Strategic Value Global Opportunities Fund I-A, LP (a, b) 1,497,239 1,472,239 VCFA Private Equity Partners IV, L.P. (a, b) 586,606 632,914 VCFA Venture Partners V, L.P. (a, b) 560,000 560,000 ------------ 35,283,874 38,539,765 ------------ REAL ESTATE COMPOSITE (6.90%) (c) Benson, Elliot Real Estate Partners II, L.P. (a, b) 1,268,436 1,135,730 Colony Edge, L.P. (a, b) 2,000,000 2,183,068 Colony Investors VII, L.P. (a, b) 1,847,168 2,037,770 ING Clarion CRA Hedge Fund, L.P. (a, b) 2,356,915 3,417,955 ING Clarion Global, L.P. (a, b) 3,000,000 3,489,044 Oak Hill Plus, L.P. (a, b) 4,000,000 3,903,574 ORBIS Real Estate Fund I, L.P. (a, b) 707,967 636,545 Rockwood Capital Real Estate Partners Fund VII, LP (a, b) 748,474 692,159 Security Capital Preferred Growth, Inc. (b) 1,714,042 1,657,795 Transwestern Mezzanine Realty Partner II, LLC (b) 1,375,483 1,392,246 WCP Real Estate Fund I, LP (a, b) 2,750,000 2,750,000 Wells Street Global Partners, LP (a, b) 4,686,679 6,537,752 ------------ 29,833,638 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $379,649,862) 439,348,184 ------------ LIABILITIES IN EXCESS OF OTHER ASSETS (-1.67%) (7,228,445) ------------ PARTNERS' CAPITAL - 100.00% $432,119,739 ============
a- Non-income producing b- Underlying Funds are issued in private placement transactions and as such are restricted as to resale. c- Sectors are unaudited by Deloitte & Touche LLP. Total cost and value of restricted securities as of March 31, 2007 was $378,182,052 and $437,950,412 respectively. See Notes to Financial Statements 5 HATTERAS MASTER FUND, L.P. STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL - MARCH 31, 2007 ASSETS Investments in Underlying Funds, at fair value (cost $379,649,862) $439,348,184 Cash and cash equivalents 14,981,857 Investments in Underlying Funds paid in advance 17,316,547 Receivable from redemption of Underlying Funds 5,904,264 Dividends and interest receivable 27,016 Withholding tax refund receivable 26,478 Prepaid assets 125,811 ------------ TOTAL ASSETS $477,730,157 ============ LIABILITIES AND PARTNERS' CAPITAL Contributions received in advance $ 29,369,377 Redemptions payable 12,680,000 Line of credit loan payable 3,000,000 Management fee payable 370,734 Professional fees payable 96,775 Accounting and administration fees payable 58,870 Interest expense payable 16,250 Custodian fees payable 10,670 Line of credit fees payable 4,133 Risk management expense payable 3,609 ------------ TOTAL LIABILITIES 45,610,418 ------------ PARTNERS' CAPITAL 432,119,739 ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $477,730,157 ============
See Notes to Financial Statements 6 HATTERAS MASTER FUND, L.P. STATEMENT OF OPERATIONS - FOR THE YEAR ENDED MARCH 31, 2007 INVESTMENT INCOME Dividends $ 1,290,949 Interest 118,168 ----------- TOTAL INVESTMENT INCOME 1,409,117 ----------- OPERATING EXPENSES Management fee 3,363,892 Risk management expense 306,789 Accounting and administration fees 294,026 Professional fees 224,070 Insurance expense 106,340 Line of credit fees 77,169 Board of directors' fees 37,500 Custodian fees 31,489 Interest expense 30,646 Compliance consulting fees 11,250 Other expenses 41,903 ----------- TOTAL OPERATING EXPENSES 4,525,074 ----------- NET INVESTMENT LOSS (3,115,957) ----------- NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS IN UNDERLYING FUNDS Net realized gain on investments in Underlying Funds 2,322,022 Net increase in unrealized appreciation on investments in Underlying Funds 35,414,077 ----------- NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS IN UNDERLYING FUNDS 37,736,099 ----------- NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM OPERATIONS $34,620,142 ===========
See Notes to Financial Statements 7 HATTERAS MASTER FUND, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL
LIMITED PARTNERS' CAPITAL* ------------ PARTNERS' CAPITAL, AT MARCH 31, 2005 $116,826,646 Capital contributions 77,428,383 Capital withdrawals (2,250,000) Net investment loss (1,894,577) Net realized loss on investments in Underlying Funds (89,064) Net increase in unrealized appreciation on investments in Underlying Funds 23,499,600 ------------ PARTNERS' CAPITAL, AT MARCH 31, 2006 $213,520,988 Capital contributions 207,108,880 Capital withdrawals (23,130,271) Net investment loss (3,115,957) Net realized gain on investments in Underlying Funds 2,322,022 Net increase in unrealized appreciation on investments in Underlying Funds 35,414,077 ------------ PARTNERS' CAPITAL, AT MARCH 31, 2007 $432,119,739 ============
See Notes to Financial Statements 8 HATTERAS MASTER FUND, L.P. STATEMENT OF CASH FLOWS - FOR THE YEAR ENDED MARCH 31, 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in partners' capital resulting from operations $ 34,620,142 Adjustments to reconcile net increase in partners' capital resulting from investment operations to net cash used in operating activities: Purchases of Underlying Funds (234,324,375) Proceeds from redemptions of Underlying Funds 45,561,151 Net realized gain on investments in Underlying Funds (2,322,022) Net increase in unrealized appreciation on investments in Underlying Funds (35,414,077) Decrease in investments in Underlying Funds paid in advance 2,183,453 Increase in receivable from redemption of Underlying Funds (5,496,725) Increase in dividends and interest receivable (2,695) Increase in withholding tax refund receivable (26,478) Increase in prepaid assets (5,667) Increase in management fee payable 192,679 Increase in professional fees payable 22,150 Increase in accounting and administration fees payable 24,452 Decrease in organizational fees payable (25,393) Increase in interest expense payable 16,250 Increase in custodian fees payable 8,111 Increase in line of credit fees payable 4,133 Decrease in risk management expense payable (12,201) ------------- Net cash used in operating activities (194,997,112) ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions (including contributions received in advance) 213,903,313 Capital withdrawals (net of redemptions payable) (10,450,271) Line of credit borrowings 3,000,000 ------------- Net cash used in financing activities 206,453,042 ------------- Net change in cash and cash equivalents 11,455,930 Cash and cash equivalents at beginning of year 3,525,927 ------------- Cash and cash equivalents at end of year $ 14,981,857 ============= Supplemental Disclosure of Interest Paid $ 14,396 =============
See Notes to Financial Statements 9 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 1. ORGANIZATION Hatteras Master Fund, L.P. (the "Master Fund") was organized as a limited partnership under the laws of the State of Delaware on October 29, 2004. The Master Fund is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end, non-diversified management investment company. The Master Fund is managed by Hatteras Investment Partners, LLC (the "Investment Manager"), a Delaware limited liability company registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The objective of the Master Fund is to generate consistent long-term appreciation and returns across all market cycles. To achieve its objective, the Master Fund will provide its limited partners (each, a "Limited Partner" and together, the "Limited Partners") with access to a broad range of investment strategies and asset categories, trading advisors ("Advisors") and overall asset allocation services typically available on a collective basis to larger institutions. Generally, the Investment Manager intends to select Advisors that collectively employ widely diversified investment strategies and engage in such techniques as opportunistic equity, enhanced fixed income, absolute return, private equity, real estate and energy/natural resources. However, the Investment Manager may also retain Advisors who utilize other strategies. The Master Fund invests with each Advisor either by becoming a participant in an investment vehicle operated by the Advisor (an "Underlying Fund") or by placing assets in an account directly managed by the Advisor. The Master Fund commenced operations on January 1, 2005. Prior to January 1, 2005, the Master Fund engaged in no transactions other than those related to organizational matters and the sale of a $100,000 interest to Hatteras Diversified Strategies Fund, LP. Hatteras Investment Management LLC, a Delaware limited liability company, serves as the General Partner of the Master Fund (the "General Partner"). The General Partner has initially appointed a Board of Directors (the "Board") and, to the fullest extent permitted by applicable law, has irrevocably delegated to the Board its rights and powers to monitor and oversee the business affairs of the Master Fund, including the complete and exclusive authority to oversee and establish policies regarding the management, conduct and operation of the Master Fund's business. On January 3, 2005, the Master Fund received capital contributions totaling $116,269,458, including contributions in the form of transfers-in-kind from Hatteras Diversified Strategies Fund, LP and Hatteras Diversified Strategies Offshore Fund, Ltd. for $72,386,769 and $16,620,182, respectively. In addition, the Hatteras Diversified Strategies Offshore Fund, Ltd. transferred receivables in the amount of $17,242,388 and liquidated $10,020,119 of the Fund's securities at December 31, 2004 and reinvested the proceeds in the Master Fund. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The following is a summary of significant accounting and reporting policies used in preparing the financial statement. 10 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. INVESTMENT VALUATION - INVESTMENTS IN UNDERLYING FUNDS The Master Fund will value interests in the Underlying Funds at fair value, which ordinarily will be the value determined by their respective investment managers, in accordance with procedures established by the Board. Investments in Underlying Funds are subject to the terms of the Underlying Funds' offering documents. Valuations of the Underlying Funds may be subject to estimates and are net of management and performance incentive fees or allocations payable to the Underlying Funds' as required by the Underlying Funds' offering documents. If the Investment Manager determines that the most recent value reported by the Underlying Fund does not represent fair value or if the Underlying Fund fails to report a value to the Master Fund, a fair value determination is made under procedures established by and under the general supervision of the Board. Because of the inherent uncertainty in valuation, the estimated values may differ from the values that would have been used had a ready market for the securities existed, and the differences could be material. B. INVESTMENT INCOME Interest income is recorded on an accrual basis. Dividend income is recorded on the ex-dividend date, except that certain dividends from private equity investments are recorded as soon as the information is available to the Master Fund. The Underlying Funds generally do not make regular cash distributions of income and gains and so are generally considered non-income producing securities, however the Master Fund owns securities that are income producing and disburse regular cash distributions. C. FUND EXPENSES The Master Fund will bear all expenses incurred in the business of the Master Fund, including, but not limited to, the following: all costs and expenses related to portfolio transactions and positions for the Master Fund's account; legal fees; accounting and auditing fees; costs of insurance; registration expenses; certain offering and organization costs; and expenses of meetings of the Board. D. INCOME TAXES The Master Fund is treated as a partnership for federal income tax purposes and therefore not subject to federal income tax. For income tax purposes, the individual partners will be taxed upon their distributive share of each item of the Master Fund's income, gain, loss, deductions and credits. 11 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes amounts held in interest bearing demand deposit accounts. At March 31, 2007, the Master Fund held $14,981,857 in interest bearing demand deposit accounts. Such cash, at times, may exceed federally insured limits. The Master Fund has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on such bank deposits. F. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Master Fund to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from these estimates. 3. ALLOCATION OF PARTNERS' CAPITAL Net profits or net losses of the Master Fund for each Allocation Period (as defined below) will be allocated among and credited to or debited against the capital accounts of the Limited Partners. Allocation Periods begin on the day after the last day of the preceding Allocation Period and end at the close of business on (1) the last day of each month, (2) the last day of each taxable year; (3) the day preceding each day on which interests are purchased, (4) the day on which interests are repurchased, or (5) the day on which any amount is credited to or debited from the capital account of any Limited Partner other than an amount to be credited to or debited from the capital accounts of all Limited Partners in accordance with their respective investment percentages. 4. MANAGEMENT FEE, RELATED PARTY TRANSACTIONS AND OTHER The Investment Manager is responsible for providing day-to-day investment management services to the Master Fund, subject to the ultimate supervision of and subject to any policies established by the Board, pursuant to the terms of an investment management agreement with the Master Fund (the "Investment Management Agreement"). Under the Investment Management Agreement, the Investment Manager is responsible for developing, implementing and supervising the Master Fund's investment program. In consideration for such services, the Master Fund pays the Investment Manager a monthly management fee equal to 1/12th of 1.00% (1.00% on an annualized basis) of the aggregate value of its partners' capital determined as of the last day of the month (before repurchase of interests). 12 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 4. MANAGEMENT FEE, RELATED PARTY TRANSACTIONS AND OTHER (CONTINUED) Each member of the Board who is not an "interested person" of the Master Fund (the "Independent Board"), as defined by the 1940 Act, receives an annual retainer of $15,000. All Board members are reimbursed by the Master Fund for all reasonable out-of-pocket expenses incurred by them in performing their duties. UMB Bank, n.a. serves as custodian of the Master Fund's assets and provides custodial services for the Master Fund. UMB Investment Services Group serves as administrator and accounting agent to the Master Fund and provides certain accounting, record keeping and investor related services. The Master Fund pays a monthly fee to the administrator based upon average partners' capital, subject to certain minimums. 5. INVESTMENT TRANSACTIONS Total purchases of Underlying Funds for the year ended March 31, 2007 amounted to $234,324,375. Total proceeds from redemptions of Underlying Funds for the year ended March 31, 2007 amounted to $45,561,151. The cost of investments in Underlying Funds for federal income tax purposes is adjusted for items of taxable income allocated to the Master Fund from the Underlying Funds. The Master Fund relies upon actual and estimated tax information provided by the underlying funds as to the amounts of taxable income allocated to the Master Fund as of March 31, 2007. 6. RISK FACTORS An investment in the Master Fund involves significant risks that should be carefully considered prior to investing and should only be considered by persons financially able to maintain their investment and who can afford a loss of a substantial part or all of such investment. The Master Fund intends to invest substantially all of its available capital in securities of private investment companies. These investments will generally be restricted securities that are subject to substantial holding periods or are not traded in public markets at all, so that the Master Fund may not be able to resell some of its securities holdings for extended periods, which may be several years. Investments in the Underlying Funds may be restricted from early redemptions or subject to fees for early redemptions as part of contractual obligations agreed to by the Advisor on behalf of the Master Fund. Underlying Funds generally require the Advisor to provide advanced notice of its intent to redeem the Master Fund's total or partial interest and may delay or deny a redemption request depending on the Underlying Funds' governing agreements. No guarantee or representation is made that the investment objective will be met. 13 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 7. LINE OF CREDIT On May 1, 2006, the Master Fund entered into a $20,000,000 unsecured, uncommitted revolving loan facility ("Facility"), for the purpose to finance short timing differences between the redemption of investments or receipt of partnership capital and the redemption of partnership capital accounts; the investment in new managers; or as general working capital. A fee of 37.5 basis points per annum is payable quarterly in arrears on the unused portion of the Facility. Borrowings are charged an interest rate at a base rate less 75 basis points. The base rate is the greater of a) the prime commercial rate as announced from time to time, or b) the Federal Funds rate plus 1/2 of 1%, calculated on a 360-day basis and payable monthly in arrears. At March 31, 2007 the Master Fund had $3,000,000 in borrowings outstanding under the Facility and $20,383 in fees and interest payable. The average interest rate, the average daily balance, and the maximum balance outstanding for borrowings under the Facility for the period ended March 31, 2007 was 7.45%, $284,932, and $7,500,000, respectively. 8. REPURCHASE OF PARTNERS' INTERESTS The Board may, from time to time and in its sole discretion, cause the Master Fund to repurchase interests from Limited Partners pursuant to written tenders by Limited Partners at such times and on such terms and conditions as established by the Board. In determining whether the Master Fund should offer to repurchase interests, the Board will consider the recommendation of the Investment Manager. On March 31, 2006, the Investment Manager recommended to the Board that the Master Fund offer to repurchase interests from Limited Partners on a quarterly basis as of March 31, June 30, September 30 and December 31 of each year. The Master Fund does not intend to distribute to the partners any of the Master Fund's income, but generally expects to reinvest substantially all income and gains allocable to the partners. A partner may, therefore, be allocated taxable income and gains and not receive any cash distribution. 9. INDEMNIFICATION In the normal course of business, the Master Fund enters into contracts that provide general indemnifications. The Master Fund's maximum exposure under these agreements is dependent on future claims that may be made against the Master Fund, and therefore cannot be established; however, based on experience, the risk of loss from such claims is considered remote. 10. COMMITMENTS As of March 31, 2007, the Master Fund had outstanding investment commitments to Underlying Funds totaling $ 93,387,778. 14 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONTINUED) 11. FINANCIAL HIGHLIGHTS The financial highlights are intended to help you understand the Master Fund's financial performance for the past period. The total returns in the table represent the rate that a typical Limited Partner would be expected to have earned or lost on an investment in the Master Fund. The ratios and total return amounts are calculated based on the Limited Partner group taken as a whole. An individual Limited Partner's results may vary from those shown below due to the timing of capital transactions. The ratios are calculated by dividing total dollars of net investment income or expenses, as applicable, by the average of total monthly limited partners' capital. The ratios do not reflect the Master Fund's proportionate share of income and expenses from Underlying Funds. Total return amounts are calculated by geometrically linking returns based on the change in value during each accounting period. The total return amounts have not been annualized for the periods less than a year.
FOR THE PERIOD FROM FOR THE YEARS ENDED JANUARY 1, 2005 MARCH 31, (COMMENCEMENT OF -------------------- OPERATIONS) THROUGH 2007 2006 MARCH 31, 2005 -------- -------- ------------------- Total return amortizing organizational expenses* --** --** 0.23% Total return 9.31% 13.79% 0.17% Partners' capital, end of period (000) $432,120 $213,521 $116,827 Portfolio Turnover 14.03% 19.35% 3.72% ANNUALIZED RATIOS: Net Investment loss (0.96)% (1.23)% (1.43)% Total Expenses 1.39% 1.52% 1.50%
* Return is indicative of amortizing organizational expenses over 60 months for tax purposes. ** Organizational costs were fully expensed as of 3/31/05. 15 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2007 (CONCLUDED) 12. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (the "Interpretation"). The Interpretation establishes for all entities, including pass-through entities such as the Master Fund, a minimum threshold for financial statements recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and required certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006 and is required to be implemented no later than September 30, 2007. Management has recently begun to evaluate the application of the Interpretation to the Master Fund, and is not in a position at this time to estimate the significance of its impact, if any, on the Master Fund's financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," (the "Statement"). The Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs). The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is to be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied. Management has recently begun to evaluate the application of the Statement to the Master Fund, and is not in a position at this time to evaluate the significance of its impact, if any, on the Master Fund's financial statements. 13. SUBSEQUENT EVENTS Effective April 1, 2007 and May 1, 2007, there were additional capital contributions of $29,369,377 and $42,762,643, respectively. 16 HATTERAS MASTER FUND, L.P. BOARD OF DIRECTORS (UNAUDITED) The identity of the Board Members and brief biographical information is set forth below.
Principal Occupation(s) During Number of Position(s) Term of Office; Past 5 years and Portfolios in Fund Name, Address & Held with Length of Time Other Directorships Held by Complex' Overseen by Age the Fund Served Director Director or Officer ------------------ ------------ --------------- -------------------------------- -------------------- INTERESTED DIRECTORS David B. Perkins, Chief 3 year term; Mr. Perkins has been Chairman 5 44 Executive Since Inception and CEO since inception of the 1000 Watermeet Officer and Funds. Mr. Perkins became the Lane Chairman of President and Managing Principal Raleigh, NC 27614 the Board of of the Investment Manager in Directors September 2003 and became the co-founder and Managing Partner of CapFinancial Partners, LLC in April 2003. Prior to that, he was Managing Partner at Wachovia Securities Financial Network, Inc. from June 2002 to September 2003 and Managing Principal of CapTrust Financial Advisors, LLC from October 1997 to June 2002. INDEPENDENT DIRECTORS Steve E. Moss, 53 Director: 3 year term; Mr. Moss is a principal of 5 918 Meadow Lane Chairman of Since December Holden, Moss, Knott, Clark, Henderson, NC the Audit 2004 Copley & Hoyle, P.A. and has 27536 Committee been a member manager of HMKCT Properties, LLC since January 1996. Mr. Moss as been a Director and Member of the Audit Committee of the Fund since December 2004. H. Alexander Director: 3 year term; Mr. Holmes founded Holmes 5 Holmes, 64 Audit Since December Advisory Services, LLC, a 3408 Landor Road Committee 2004 financial consultation firm, in Raleigh, NC 27609 Member 1993. Mr. Holmes has been a Director and Member of the Audit Committee of the Fund since December 2004. Gregory S. Director: 3 year term; Mr. Sellers became the Chief 5 Sellers, 47 Audit Since December Financial Officer and a director 2643 Steeplechase Committee 2004 of Kings Plush, Inc., a fabric Road Member manufacturer, in April 2003. Gastonia, NC Prior to that, he was the Vice 28056 President of Finance at Parksdale Mills, Inc., a cotton and cotton blend yarns producer, from January 1991 to April 2003. Mr. Sellers has been a Director and Member of the Audit Committee for the Fund since December 2004. Art Lottes, 53 Director: 3 year term; Mr. Lottes was the President of 5 4813 Wynneford Way Audit Since November CARQUEST Corporation, an Raleigh, NC 27615 Committee 2006 automotive aftermarket company Member until December 2005. Mr. Lottes was a Board member of CARQUEST and General Parts until December 2005.
17 HATTERAS MASTER FUND, L.P. FUND MANAGEMENT (UNAUDITED) Set forth below is the name, age, position with the Fund, length of term of office, and the principal occupation for the last five years of each of the persons currently serving as Executive Officers of the Fund. Unless otherwise noted, the business address of each officer is 8540 Colonnade Center Drive, Suite 401, Raleigh, NC 27615.
Number of Position(s) Portfolios in Fund Name, Address & Held with Length of Time Principal Occupation(s) During Past 5 years Complex' Overseen by Age the Fund Served and Other Directorships Held by Director Director or Officer ----------------- ----------- -------------- ------------------------------------------- -------------------- OFFICERS J. Michael Chief Since Mr. Fields has been the CFO since N/A Fields, 33 Financial Inception inception of the Funds. Mr. Fields became 8540 Colonnade Officer a Director of the Investment Manager in Center Drive, September 2003. Prior to joining the Suite 401 Investment Manager, Mr. Fields was Raleigh, NC 27615 employed by CapTrust Financial Advisors from August 2002 to September 2003. Prior to joining CapTrust, Mr. Fields was employed by Morgan Stanley in Atlanta, Georgia from January 2000 to August 2002. Denise Chief Since Ms. Buchanan has been the CCO since N/A Buchanan, 44 Compliance Inception inception of the Funds. Ms. Buchanan 8540 Colonnade Officer became the Compliance Officer with Center Drive, CapFinancial Partners, LLC ("CapTrust") Suite 401 in November 2003. Prior to joining Raleigh, NC 27615 CapTrust, Ms. Buchanan was President of Broker/Dealer Sales & Consulting, Inc. from 2001 to November 2003. Previously, Ms. Buchanan was the Director of Compliance for Atlantic Capital Management, LLC from 1996 to 2001. Vickey Secretary Since Ms. Collins has been the Secretary of the N/A Collins, 40 Inception Funds since inception. She became the 8540 Colonnade Operations Manager for the Investment Drive, Manager in September 2004. Prior to Suite 401 joining the Investment Manager, she was Raleigh, NC 27615 employed with McKinely Capital Management from 1994 to 2004.
18 HATTERAS MASTER FUND, L.P. OTHER INFORMATION (UNAUDITED) ANNUAL RENEWAL OF INVESTMENT MANAGEMENT AGREEMENT At a meeting of the Board of the Master Fund held on February 28, 2007, by a unanimous vote, the Board of the Master Fund, including a majority of the Directors who are not "interested persons" within the meaning of Section 2(a)(19) of the 1940 Act, approved the continuation of the Investment Management Agreement (the "Agreement"). In advance of the meeting, the Independent Directors requested and received extensive materials from the Investment Manager to assist them in considering the renewal of the Agreement. The materials provided by the Investment Manager contained information including detailed comparative information relating to the performance, advisory fees and other expenses of the Master Fund and the Limited Partners of the Master Fund managed by the Investment Manager (collectively, the "Funds"). The materials also included comparisons of the performance of each of the Master Fund's investment sectors versus a relevant benchmark. The Board engaged in a detailed discussion of the materials with management of the Investment Manager. The Independent Directors then met separately with independent counsel to the Independent Directors for a full review of the materials. Following this session, the full Board reconvened and after further discussion determined that the information presented provided a sufficient basis upon which to approve the continuation of the Agreement. DISCUSSION OF FACTORS CONSIDERED The Board reviewed various materials relating to the Investment Manager, including materials furnished by the Investment Manager. These materials included information about the Investment Manager's personnel, organizational structure, operations and financial condition. Management discussed with the Independent Directors the Investment Manager's business plans regarding ownership of the Manager, stability and retention of management and improvements in the Funds' distribution and marketing. The Board considered, among other things, various matters relating to the organizational capabilities of the Investment Manager, including: (1) the nature and stability of the ownership of the Investment Manager; (2) the nature of the Investment Manager's portfolio management experience and resources, including the experience of relevant personnel; and (3) the Investment Manager's resources, practices and procedures to address regulatory compliance matters. The Board concluded that the Investment Manager has sufficient resources to fulfill effectively the Investment Manager's duties under the Agreement. The Board also considered other information, including: (1) the terms of the Agreement; (2) the standard of care applicable to the Investment Manager under the Agreement; (3) information regarding the performance of and fees paid by certain similar private funds managed by the Investment Manager; (4) information compiled by the Investment Manager intended to gauge the 19 HATTERAS MASTER FUND, L.P. OTHER INFORMATION (UNAUDITED) (CONCLUDED) ANNUAL RENEWAL OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) behavior of the Investment Manager's portfolio management strategy during periods of historical or hypothetical market stress; (5) the Funds' investment performance and expense ratios and the investment performance and expense ratios of other investment companies with similar investment styles to the Funds; and (6) the structure of, and the method used to determine, the compensation of portfolio managers. The Board gave consideration to the fees payable under the Agreement, including: (1) the fees to be paid to the Investment Manager and the Investment Manager's anticipated expenses in providing its services, and the fact that certain affiliates of the Investment Manager provide other services to the Funds and receive payment for these services; and (2) a comparison of the fees payable under the Agreement to fees paid under investment advisory agreements to investment advisers serving other investment companies with similar investment programs to the Master Fund, which assisted the Board in evaluating the reasonableness of the fees to be paid to the Investment Manager. The Board also considered possible economies of scale that might be recognized in the future at different asset levels. In this regard the Board considered the amount of assets in the Master Fund; the placement agent agreements currently in force to increase the Funds' penetration in various distribution channels; the information provided by the Investment Manager relating to its estimated costs; and information comparing the fee rate to be charged by the Investment Manager (which does not include fee breakpoints) with fee rates charged by other unaffiliated investment managers to their clients. The Board considered all factors and no one factor alone was deemed dispositive. PROXY VOTING A description of the policies and procedures that the Master Fund uses to determine how to vote proxies relating to portfolio securities and shareholders record of actual proxy votes cast is available at www.sec.gov and may be obtained at no additional charge by calling 1-800-504-9070. AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULES The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q is available, without charge and upon request, on the SEC's website at http://www.sec.gov or may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling 1-800-SEC-0330. 20 ITEM 2. CODE OF ETHICS. (a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. (d) The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this item's instructions. 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 Messrs. Steve E. Moss, H. Alexander Holmes and Gregory S. Sellers are each qualified to serve as audit committee financial experts serving on its audit committee and that each is "independent," as defined by Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Audit Fees (a) 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 are $8,500 for 2006 and $9,450 for 2007. Audit-Related Fees (b) The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item are $1,200 for 2006 and $340 for 2007. The fees listed on item 4 (b) are related to out-of-pocket expenses in relation to the annual audit of the registrant. Tax Fees (c) 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 are $0 for 2006 and $0 for 2007. All Other Fees (d) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2006 and $0 for 2007. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. The Registrant's Audit Committee must pre-approve the audit and non-audit services of the Auditors prior to the Auditor's engagement. (e)(2) The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: (b) 0% (c) 0% (d) 0% (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than fifty percent. (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 was $0. (h) The registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were 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 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 is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Proxy Voting Policies are attached herewith. HATTERAS INVESTMENT PARTNERS LLC HATTERAS MASTER FUND, L.P. HATTERAS MULTI-STRATEGY FUND I, L.P. HATTERAS MULTI-STRATEGY TEI FUND, L.P. HATTERAS MULTI-STRATEGY INSTITUTIONAL FUND, L.P. HATTERAS MULTI-STRATEGY TEI INSTITUTIONAL FUND, L.P. PROXY VOTING POLICY This statement sets forth the policy of Hatteras Investment Partners, LLC ("Hatteras") with respect to the exercise of corporate actions and proxy voting authority of client accounts. The Funds and other advisory clients of Hatteras invest, directly or indirectly, substantially all of their assets in securities of pooled investment vehicles or separate accounts, which are private partnerships, limited liability companies or similar entities managed by third-party investment managers (collectively, "Advisor Funds"). These securities do not typically convey traditional voting rights to the holder and the occurrence of corporate governance or other notices for this type of investment is substantially less than that encountered in connection with registered equity securities. To the extent that the we or our clients receive notices or proxies from Advisor Funds (or receive proxy statements or similar notices in connection with any other portfolio securities), Hatteras has proxy voting responsibilities. With respect to proxies issued by Hatteras Master Fund, L.P. (the "Master Fund"), the feeder funds which invest in the Master Fund have delegated proxy voting authority to Hatteras. Hatteras will vote proxies in a manner that it deems to be in the best interests of the Funds. In general, the Investment Manager believes that voting proxies in accordance with the policies described below will be in the best interests of its clients. If an analyst, trader or partner of the Hatteras believes that voting in accordance with stated proxy-voting guidelines would not be in the best interests of a client, the proxy will be referred to Hatteras' Chief Compliance Officer for a determination of how such proxy should be voted. Hatteras will generally vote to support management recommendations relating to routine matters such as the election of directors (where no corporate governance issues are implicated), the selection of independent auditors, an increase in or reclassification of common stock, the addition or amendment of indemnification provisions in the company's charter or by-laws, changes in the board of directors and compensation of outside directors. Hatteras will generally vote in favor of management or shareholder proposals that Hatteras believes will maintain or strengthen the shared interests of shareholders and management, increase shareholder value, maintain or increase shareholder influence over the company's board of directors and management and maintain or increase the rights of shareholders. On non-routine matters, Hatteras will generally vote in favor of management proposals for mergers or reorganizations, reincorporation plans, fair-price proposals and shareholder rights plans so long as such proposals are in the best economic interests of Hatteras' clients. If a proxy includes a matter to which none of the specific policies described above or in Hatteras' stated proxy-voting guidelines is applicable or a matter involving an actual or potential conflict of interest as described below, the proxy will be referred to Hatteras' Chief Compliance Officer for a determination of how such proxy should be voted. In exercising its voting discretion, Hatteras and its employees will seek to avoid any direct or indirect conflict of interest presented by the voting decision. If any substantive aspect or foreseeable result of the matter to be voted on by Hatteras Master Fund, L.P., Hatteras Multi-Strategy Fund I, L.P., Hatteras Multi-Strategy TEI Fund, L.P., Hatteras Multi-Strategy Institutional Fund, L.P. or Hatteras Multi-Strategy TEI Institutional Fund, L.P. (the "Registered Funds") presents an actual or potential conflict of interest involving Hatteras (or an affiliate of Hatteras), any issuer of a security for which Hatteras (or an affiliate of Hatteras) acts as sponsor, advisor, manager, custodian, distributor, underwriter, broker or other similar capacity or any person with whom Hatteras (or an affiliate of Hatteras) has an existing material contract or business relationship not entered into in the ordinary course of business (Hatteras and such other persons having an interest in the matter being called "Interested Persons"), Hatteras will make written disclosure of the conflict to the Independent Directors of the applicable Fund(s) indicating how Hatteras proposes to vote on the matter and its reasons for doing so. If the Investment Manager does not receive timely written instructions as to voting or non-voting on the matter from the applicable Registered Fund's Independent Directors, Hatteras may take any of the following actions which it deems to be in the best interests of the Fund: (1) engage an independent third party to determine whether and how the proxy should be voted and vote or refrain from voting on the matter as determined by the third party; (2) vote on the matter in the manner proposed to the Independent Directors if the vote is against the interests of all Interested Persons; or (3) refrain from voting on the matter. The Registered Fund each are required to file Form N-PX, with its complete proxy voting record for the twelve months ended June 30, no later than August 31 of each year. Each of the Registered Fund's Form N-PX filing is available: (1) without charge, upon request, by calling (800) 504-9070; or (2) by visiting the SEC's website at www.sec.gov. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a)(1) Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members The following table provides biographical information about the members of the Investment Committee of Hatteras Investment Partners LLC (the "Investment Manager"), who are primarily responsible for the day-to-day portfolio management of the Hatteras Master Fund, L.P. (the "Fund") as of March 31, 2007:
ROLE OF NAME OF INVESTMENT LENGTH OF TIME OF BUSINESS EXPERIENCE INVESTMENT COMMITTEE COMMITTEE MEMBER TITLE SERVICE TO THE FUND DURING THE PAST 5 YEARS MEMBER ------------------ ---------------------- ------------------- ---------------------------------------- ------------------------- Mark W. Yusko Principal and Since January 2004 Mr. Yusko became a Principal and Asset allocation; co-founder of the (inception) co-founder of the Investment Manager in underlying manager Investment Manager September 2003 and President and Chief selection; and portfolio Executive Officer of Morgan Creek construction Capital Management, LLC in July, 2004. Previously, Mr. Yusko served as President and Chief Executive Officer for UNC Management Co., LLC from January 1998 through July 2004, where he was responsible for all areas of investment management for the UNC Endowment and Affiliated Foundation Funds. David B. Perkins President and Managing Since January 2004 Mr. Perkins became the President and Systems analyst; and Principal of the (inception) Managing Principal of the Investment strategic recommendations Investment Manager Manager in September 2003 and co-founder and portfolio oversight and Managing Partner of CapFinancial Partners, LLC in April 2003. Previously, Mr. Perkins was Managing Partner at Wachovia Securities Financial Network, Inc. from June 2002 to September 2003 and as Managing Principal of CapTrust Financial Advisors, LLC from October 1997 to June 2002. Joshua E. Parrott Director of Risk Since January 2004 Mr. Parrott joined the Investment Risk management; Management of the (inception) Manager as an Analyst in March 2004 and underlying manager due Investment Manager became the Director of Risk Management diligence; operational in January 2005. Previously, Mr. Parrott due diligence; and was employed as an Analyst by Dialectic performance analysis Capital Management in 2003 and as a Financial Advisor at Morgan Stanley from February 1999 to March 2003.
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest The following table provides information about portfolios and accounts, other than the Fund, for which the members of the Investment Committee of the Investment Manager are primarily responsible for the day-to-day portfolio management as of March 31, 2007:
Number of Accounts Total Managed for Total Assets Name of Number Which for Which Investment of Advisory Fee Advisory Fee Committee Accounts is Based on is Based on Member Type of Accounts Managed Total Assets Performance Performance ---------- -------------------------------- -------- -------------- ------------ -------------- Mark W. Yusko Registered Investment Companies 1 $1,356,000,000 0 $ 0 Other Pooled Investment Vehicles 11 $1,680,000,000 11 $1,280,000,000 Other Accounts 9 $1,040,000,000 9 $1,040,000,000 David B. Perkins Registered Investment Companies 0 $ 0 0 $ 0 Other Pooled Investment Vehicles 0 0 0 0 Other Accounts 0 0 0 0 Joshua E. Parrott Registered Investment Companies 0 $ 0 0 $ 0 Other Pooled Investment Vehicles 0 0 0 0 Other Accounts 0 0 0 0
Potential Conflicts of Interests Mr. Yusko is responsible for managing other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, including unregistered hedge funds and funds of hedge funds. He may manage separate accounts or other pooled investment vehicles which may have materially higher, lower or different fee arrangements than the registrant and may also be subject to performance-based fees. The side-by-side management of these separate accounts and pooled investment vehicles may raise potential conflicts of interest relating to cross trading and the allocation of investment opportunities. The Investment Manager has a fiduciary responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and to allocate investments to client accounts in a fair and timely manner. To this end, the Investment Manager has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. Messrs. Perkins and Parrott do not manage any other accounts and therefore no material conflicts of interest arise out of their management of the registrant. (a)(3) Compensation Structure of Portfolio Manager(s) or Management Team Members The compensation of the members of the Investment Committee of the Investment Manager includes a combination of the following: (i) fixed annual salary; (ii) a variable portion of the management fee paid by the Master Fund to the Investment Manager; and (iii) a variable portion of any incentive compensation paid by the registrant, or any other feeder fund, to the Investment Manager or its affiliates. The portions of the management fee and incentive fee paid to a member of the Investment Committee are based on the pre-tax performance of the Fund as compared to a benchmark. The Investment Manager uses the yield-to-maturity of the 90 day U.S. Treasury Bill as reported by the Wall Street Journal for the last business day of the preceding calendar year as a benchmark for the Fund's pre-tax performance when determining the variable components of the compensation of members of the Investment Committee. (a)(4) Disclosure of Securities Ownership The following table sets forth the dollar range of equity securities beneficially owned by each member of the Investment Committee of the Investment Manager indirectly in the Master Fund as of March 31, 2007:
DOLLAR RANGE OF FUND INVESTMENT SHARES BENEFICIALLY COMMITTEE MEMBER OWNED ---------------- -------------------- Mark W. Yusko $100,001 to $500,000 David B. Perkins $100,001 to $500,000 Joshua E. Parrott $10,001 to $50,000
(b) Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b)or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Not applicable. 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. (registrant) Hatteras Multi-Strategy TEI Fund, L.P. By (Signature and Title)* /s/ David B. Perkins -------------------------------------- David B. Perkins, President & Chief Executive Officer (principal executive officer) Date June 8, 2007 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 (Signature and Title)* /s/ David B. Perkins -------------------------------------- David B. Perkins, President & Chief Executive Officer (principal executive officer) Date June 8, 2007 By (Signature and Title)* /s/ J. Michael Fields -------------------------------------- J. Michael Fields, Chief Financial Officer (principal financial officer) Date June 8, 2007 * Print the name and title of each signing officer under his or her signature.