-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TepjcfuEzwFVBbIqnQoZeX/7qtxoOU0I+PZGzffmTm+JCbdgcNoZSEAezQI5CyYH S6WUS18KRP2882j4dCQB/w== 0000950137-07-018317.txt : 20071207 0000950137-07-018317.hdr.sgml : 20071207 20071207164016 ACCESSION NUMBER: 0000950137-07-018317 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071207 DATE AS OF CHANGE: 20071207 EFFECTIVENESS DATE: 20071207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Hatteras Multi-Strategy TEI Fund, L.P. CENTRAL INDEX KEY: 0001307688 IRS NUMBER: 201820062 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-21665 FILM NUMBER: 071293049 BUSINESS ADDRESS: STREET 1: 8816 SIX FORKS ROAD, SUITE 107 CITY: RALEIGH STATE: NC ZIP: 27615 BUSINESS PHONE: (919) 846-2324 MAIL ADDRESS: STREET 1: 8816 SIX FORKS ROAD, SUITE 107 CITY: RALEIGH STATE: NC ZIP: 27615 FORMER COMPANY: FORMER CONFORMED NAME: Hatteras Multi-Strategy Fund II, L.P. DATE OF NAME CHANGE: 20050105 FORMER COMPANY: FORMER CONFORMED NAME: Hatteras Multi-Strategy Fund, L.P. DATE OF NAME CHANGE: 20041102 N-CSRS 1 c21994nvcsrs.txt FORM N-CSRS 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: SEPTEMBER 30, 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, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM APRIL 1, 2007 TO SEPTEMBER 30, 2007 UNAUDITED HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC FOR THE PERIOD OF APRIL 1, 2007 TO SEPTEMBER 30, 2007 TABLE OF CONTENTS Consolidated Statement of Assets, Liabilities and Partners' Capital ....... 1 Consolidated Statement of Operations ...................................... 2 Consolidated Statement of Changes in Partners' Capital .................... 3 Consolidated Statement of Cash Flows ...................................... 4 Notes to Consolidated Financial Statements ................................ 5 Board of Directors' ....................................................... 14 Fund Management ........................................................... 15 Other Information ......................................................... 16 Financial Statements of Hatteras Master Fund, L.P. ........................ I
HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL SEPTEMBER 30, 2007 (UNAUDITED) ASSETS Investment in Hatteras Master Fund, L.P., at fair value (cost $177,351,422) $198,024,633 Cash and cash equivalents 300,460 Investment in Hatteras Master Fund, L.P. paid in advance 12,533,435 Interest receivable 15,473 Prepaid assets 7,866 ------------ TOTAL ASSETS $210,881,867 ============ LIABILITIES AND PARTNERS' CAPITAL Contributions received in advance $ 12,660,990 Withholding tax payable 335,157 Servicing fee payable 123,668 Due to Investment Manager 33,465 Accounting and administration fees payable 26,845 Professional fees payable 26,676 Custodian fees payable 1,858 Printing fees payable 458 Other accrued expenses 7,899 ------------ TOTAL LIABILITIES 13,217,016 ------------ PARTNERS' CAPITAL 197,664,851 ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $210,881,867 ============
See Notes to Consolidated Financial Statements 1 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF OPERATIONS APRIL 1, 2007 TO SEPTEMBER 30, 2007 (UNAUDITED) NET INVESTMENT LOSS ALLOCATED FROM HATTERAS MASTER FUND, L.P. Dividends $ 413,511 Interest 126,008 Expenses (1,054,544) ----------- NET INVESTMENT LOSS ALLOCATED FROM HATTERAS MASTER FUND, L.P. (515,025) ----------- FUND INVESTMENT INCOME Interest 41,392 ----------- OPERATING EXPENSES Servicing fee 627,496 Withholding tax expense 256,658 Accounting and administration fees 86,447 Professional fees 22,833 Registration fees 21,499 Printing fees 10,608 Insurance fees 602 Other expenses 3,181 ----------- TOTAL OPERATING EXPENSES 1,029,324 Reimbursement to Investment Manager 134,174 ----------- NET OPERATING EXPENSES 1,163,498 ----------- NET INVESTMENT LOSS (1,637,131) ----------- NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS ALLOCATED FROM HATTERAS MASTER FUND, L.P. Net realized gain on investments 3,576,144 Net increase in unrealized appreciation on investments 5,112,335 ----------- NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS ALLOCATED FROM HATTERAS MASTER FUND, L.P. 8,688,479 ----------- NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM OPERATIONS $ 7,051,348 ===========
See Notes to Consolidated Financial Statements 2 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
GENERAL LIMITED TOTAL PARTNER'S PARTNERS' PARTNERS' CAPITAL CAPITAL CAPITAL --------- ------------ ------------ 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 ========= ============ ============ Capital contributions -- 61,076,094 61,076,094 Capital withdrawals -- (711,449) (711,449) Net investment loss -- (1,637,131) (1,637,131) Net realized gain on investments -- 3,576,144 3,576,144 Net increase in unrealized appreciation on investments -- 5,112,335 5,112,335 Accrued Performance Allocation from April 1, 2007 to September 30, 2007 340,168 (340,168) -- --------- ------------ ------------ PARTNERS' CAPITAL, AT SEPTEMBER 30, 2007 $ 609,150 $197,055,701 $197,664,851 ========= ============ ============
See Notes to Consolidated Financial Statements 3 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC CONSOLIDATED STATEMENT OF CASH FLOWS APRIL 1, 2007 TO SEPTEMBER 30, 2007 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in partners' capital resulting from operations $ 7,051,348 Adjustments to reconcile net increase in partners' capital resulting from operations to net cash used in operating activities: Net Purchases of interests in Hatteras Master Fund, L.P. (58,811,515) Net investment gain allocated from Hatteras Master Fund, L.P. (8,172,523) Increase in investment in Hatteras Master Fund, L.P. paid in advance (7,158,179) Decrease in receivable for redemption from Hatteras Master Fund, L.P. 1,880,000 Increase interest receivable (12,571) Increase in prepaid assets (6,899) Decrease in due from Investment Manager 13,725 Increase in witholding tax payable 243,157 Increase in servicing fee payable 37,782 Increase in due to Investment Manager 33,465 Increase in accounting and administration fees payable 2,712 Decrease in professional fees payable (1,700) Decrease in custodian fees payable (3,315) Increase in printing fees payable 458 Decrease in other accrued expenses (6,697) ------------ NET CASH USED IN OPERATING ACTIVITIES (64,910,752) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions (including increase in contributions received in advance) 67,553,083 Capital withdrawals (including increase in redemptions payable) (3,316,408) ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 64,236,675 ------------ Net change in cash and cash equivalents (674,077) Cash and cash equivalents at beginning of period 974,537 ------------ Cash and cash equivalents at end of period $ 300,460 ============
See Notes to Consolidated Financial Statements 4 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) 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 (collectively, "Tax-Exempt Partners"). 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 serves 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. Neither the Offshore Fund nor the Fund will make independent investment decisions and neither investment or other discretion over the investable assets. At September 30, 2007, the Fund owns 100% of the beneficial interests of the Offshore Fund, and the Offshore Fund owns 27.69% 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. 5 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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. 6 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 September 30, 2007, the Funds held $300,460 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. 7 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 September 30, 2007, the Funds have carried forward expenses of $3,222 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. 8 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 Fund Services, Inc. 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. 9 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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. The facility was increased for a ninety day period on October 1, 2007 to $65,000,000 and will be reduced to $30,000,000 on November 26, 2007. 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 period, rather the Master Fund paid all expenses related to the Facility for the period ended September 30, 2007 and allocated to the Fund it's proportional share of the expenses. At September 30, 2007 the Master Fund had $20,000,000 in borrowings outstanding under the Facility and $19,430 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 September 30, 2007 was 7.50%, $677,596, and $20,000,000, 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 on the Limited Partner group taken as a whole. 10 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 SIX MONTH MARCH 31, PERIOD ENDED ------------------- SEPTEMBER 30, 2007 2007 2006 ------------------ -------- ------- Total return amortizing organizational expenses and before Performance Allocation* --** --** 11.50% Organizational expense -- -- (0.35)% -------- -------- ------- Total return before Performance Allocation 4.79% 8.01% 11.15% Performance Allocation (0.32)% (0.55)% (1.15)% -------- -------- ------- Total return after expensing organizational expenses and Performance Allocation 4.47% 7.46% 10.00% ======== ======== ======= Limited Partners' capital, end of year (000) $197,056 $129,980 $32,175 Portfolio Turnover Rate (Master Fund) 3.45% 14.03% 19.35% Net investment loss before Performance Allocation (1.01)% (2.24)% (3.49)% Operating expenses, excluding reimbursement from Investment Manager and Performance Allocation 1.29% 2.87% 4.72% Performance Allocation 0.33% 0.62% 1.21% -------- -------- ------- Total expenses and Performance Allocation before reimbursement from Investment Manager 1.62% 3.49% 5.93% Reimbursement from Investment Manager 0.08% (0.08)% (0.87)% -------- -------- ------- Net expenses 1.70% 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. 11 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONTINUED) 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 determined the Interpretation has no significant impact, if any, on the 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 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 October 1, 2007 and November 1, 2007, there were additional capital contributions of $40,906,226 and $10,220,009, respectively. Effective October 1, 2007 there were redemptions of $602,552. There were additional contributions effective as of October 1, 2007 of $88,340,142 resulting from the Agreement and Plan of Reorganization described in the note below. Effective October 1, 2007 according to an Agreement and Plan of Reorganization (the "Master Fund Agreement") approved by the Board and the Topiary Fund Board by and between the Master Fund and Topiary Master Fund For Benefit Plan Investors (BPI) LLC (the "Topiary Master Fund"), the Topiary Master Fund transferred to the Master fund substantially all of the Topiary Master Fund's assets and liabilities in exchange for limited partnership interests in the Master Fund. Effective October 1, 2007 According to The Agreement and Plan of Reorganization (the "TEI Agreement" and, together with the Master Fund Agreement, the "Agreements") by and between the Hatteras Multi-Strategy TEI Fund, L.P. (the "TEI Fund" and, together with the Master Fund, the "Hatteras Funds")) and Topiary Benefit Plan Investor Fund LLC (the "Topiary Feeder Fund"), the Topiary Feeder Fund transferred substantially all of the assets and liabilities of to the TEI Fund in exchange for limited partnership interests in the TEI Fund, and distributed such limited partnership interests in the Master Fund to the members of the Topiary Feeder Fund in accordance with their respective interests. 12 HATTERAS MULTI-STRATEGY TEI FUND, L.P. AND HATTERAS MULTI-STRATEGY OFFSHORE FUND, LDC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONCLUDED) 12. SUBSEQUENT EVENTS (CONTINUED) Effective October 1, 2007 According to The Agreement and Plan of Reorganization (the "Offshore Fund Agreement" and, together with the Master Fund Agreement and the TEI agreement, the "Agreements") by and between the Hatteras Multi-Strategy Offshore Fund, LDC (the "Offshore Fund" and, together with the Master Fund and the TEI Fund, the "Hatteras Funds") and the Topiary Offshore Fund for Benefit Plan Investors LDC (the "Topiary Cayman Fund"), the Topiary Cayman Fund transferred substantially all of the assets and liabilities of to the Topiary Cayman Fund in exchange for ownership interests in the Offshore Fund, and distributed such ownership interests in the Offshore Fund to the holders of ownership interest in the Topiary Cayman Fund. 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.
Term of Office; Position(s) Length Principal Occupation(s) During Past 5 Number of Portfolios in Fund Held with of Time years and Other Directorships Held by Complex' Overseen by Name, Address & Age the Fund Served Director Director or Officer - ------------------- ------------ --------------- ------------------------------------- ---------------------------- INTERESTED DIRECTORS David B. Perkins, 45 Chief 3 year term; Mr. Perkins has been Chairman and CEO 5 1000 Watermeet Lane Executive Since Inception since inception of the Funds. Mr. Raleigh, NC 27614 Officer and Perkins became the President and Chairman of Managing Principal of the Investment the Board of Manager in September 2003 and became Directors 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, 54 Director: 3 year term; Mr. Moss has been a member of HMKCT 5 918 Meadow Lane Chairman of Since December Properties, LLC since January 1996. Henderson, NC 27536 the Audit 2004 Committee H. Alexander Holmes, 65 Director: 3 year term; Mr. Holmes founded Holmes Advisory 5 3408 Landor Road Audit Since December Services, LLC, a financial Raleigh, NC 27609 Committee 2004 consultation firm, in 1993. Member Gregory S. Sellers, 48 Director: 3 year term; Mr. Sellers became the Chief 5 2643 Steeplechase Road Audit Since December Financial Officer and a director of Gastonia, NC 28056 Committee 2004 Kings Plush, Inc., a fabric Member manufacturer, in April 2003. Prior to that, he was the Vice President of Finance at Parksdale Mills, Inc., a cotton and cotton blend yarns producer, from January 1991 to April 2003. Art Lottes, 54 Director: 3 year term; Mr. Lottes was the President of 5 4813 Wynneford Way Audit Since November CARQUEST Corporation, an automotive Raleigh, NC 27615 Committee 2006 aftermarket company until December Member 2005. Mr. Lottes was a Board member of CARQUEST and General Partner 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.
Term of Office; Position(s) Length Principal Occupation(s) During Past 5 Number of Portfolios in Fund Held with of Time years and Other Directorships Held by Complex' Overseen by Name, Address & Age the Fund Served Director Director or Officer - ------------------- ------------ --------------- ------------------------------------- ---------------------------- OFFICERS J. Michael Fields, 34 Chief Since Mr. Fields has been the CFO since N/A 8540 Colonnade Center Financial Inception inception of the Funds. Mr. Fields Drive, Officer became a Director of the Investment Suite 401 Manager in September 2003. Prior to Raleigh, NC 27615 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, 45 Chief Since Ms. Buchanan has been the CCO since N/A 8540 Colonnade Center Compliance Inception inception of the Funds. Ms. Buchanan Drive, Officer became the Compliance Officer with Suite 401 CapFinancial Partners, LLC Raleigh, NC 27615 ("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, 41 Secretary Since Ms. Collins has been the Secretary of N/A 8540 Colonnade Drive, Inception the Funds since inception. She became Suite 401 the Operations Manager for the Raleigh, NC 27615 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. 17 HATTERAS MASTER FUND, L.P. FINANCIAL STATEMENTS FOR THE PERIOD FROM APRIL 1, 2007 TO SEPTEMBER 30, 2007 UNAUDITED HATTERAS MASTER FUND, L.P. FOR THE PERIOD FROM APRIL 1, 2007 TO SEPTEMBER 30, 2007 UNAUDITED TABLE OF CONTENTS Schedule of Investments ................................................... 1 Statement of Assets, Liabilities and Partners' Capital .................... 5 Statement of Operations ................................................... 6 Statements of Changes in Partners' Capital ................................ 7 Statement of Cash Flows ................................................... 8 Notes to Financial Statements ............................................. 9 Board of Directors ........................................................ 17 Fund Management ........................................................... 18 Other Information ......................................................... 19
HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 2007 (UNAUDITED) INVESTMENT OBJECTIVE AS A PERCENTAGE OF TOTAL PARTNERS' CAPITAL Percentages are as follows: (PIE CHART) Real Estate Composite (7.06%) Other assets less liabilities (0.76%) Absolute Return (21.68%) Energy and Natural Resources (14.19%) Enhanced Fixed Income (18.00%) Opportunistic Equity (30.21%) Private Equity Composite (8.10%)
COST FAIR VALUE ------------ ------------ INVESTMENTS IN UNDERLYING FUNDS (99.21%) ABSOLUTE RETURN (21.68%) Black River Commodity Multi Strategy Fund, L.P. (a, b) $ 7,000,000 $ 7,798,805 Black River Global Multi-Strategy Leveraged Fund, LLC (a, b) 6,000,000 6,882,135 Broad Peak Fund, LP (a,b) 12,000,000 11,963,719 Courage Special Situations Fund, L.P. (a,b) 4,827,675 5,724,157 DE Shaw Composite Fund, LLC (a, b) 16,000,000 17,406,063 Montrica Global Opportunities Fund, L.P. (a, b) 16,000,000 17,050,637 OZ Asia Domestic Partners, L.P. (a, b) 15,000,000 16,296,769 Paulson Partners Enhanced, L.P. (a, b) 7,000,000 9,720,788 PSAM WorldArb Partners, LP (a, b) 6,000,000 5,831,338 Smith Breeden Mortgage Partners, L.P. (a, b) 4,413,258 5,390,035 Stark Investments, L.P. (a, b) 12,000,000 13,525,391 Waterstone Market Neutral Fund, L.P. (a, b) 11,000,000 11,648,786 Wellington Partners, LLC (a,b) 12,785,759 16,604,440 Whitebox Diversified Convertible Arbitrage Fund, L.P. (a, b) 9,000,000 9,146,068 ------------ 154,989,131 ------------
See Notes to Financial Statements 1 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONTINUED)
COST FAIR VALUE ------------ ------------ ENERGY AND NATURAL RESOURCES (14.19%) Arclight Energy Partners Fund III, LP (a, b) $ 2,771,871 $ 2,793,068 Cambridge Energy, L.P. (a, b) 2,566,534 4,668,365 CamCap Resources, L.P. (a, b) 11,000,000 11,480,055 Centennial Energy Partners, L.P. (a, b) 11,000,000 11,868,239 Chilton Global Natural Resources Partners, LP (a,b) 12,000,000 12,797,874 EnerVest Energy Institutional Fund X-A, L.P. (a, b) 2,806,717 3,011,775 EnerVest Energy Institutional Fund XI-A, L.P. (a, b) 2,099,621 1,984,231 Merit Energy Partners F-II, L.P. (a, b) 342,071 342,307 Natural Gas Partners Energy Tech, L.P. (a, b) 477,857 433,334 Natural Gas Partners VIII, L.P. (a, b) 2,710,276 3,174,699 Ospraie Special Opportunities Fund, L.P. (a, b) 5,000,000 5,506,190 Quantum Energy Partners IV, LP (a,b) 1,207,766 1,028,237 Southport Energy Plus Partners, L.P. (a, b) 7,083,819 12,208,434 State Street Research Energy and Natural Resources Hedge Fund, LLC (a, b) 11,700,000 11,534,361 Touradji Deeprock Partners, L.P. (a, b) 4,000,000 4,498,559 Treaty Oak Partners, L.P. (a, b) 11,000,000 14,171,025 ----------- 101,500,753 ------------ ENHANCED FIXED INCOME (18.00%) Anchorage Short Credit Fund II, L.P. (a,b) 13,000,000 12,584,557 ARX Global High Yield Securities Fund I, L.P. (a,b) 14,000,000 14,444,909 BDCM Partners I, L.P. (a,b) 13,500,000 13,744,030 Contrarian Capital Fund I, L.P. (a,b) 10,880,064 13,560,768 D.B. Zwirn Special Opportunities Fund, L.P. (a,b) 6,500,000 8,187,613 Drawbridge Special Opportunities Fund, L.P. (a,b) 12,300,000 13,439,732 Greylock Global Opportunity Fund, L.P. (a,b) 4,922,405 5,714,412 Halcyon Europe L.P. (a,b) 12,000,000 12,299,524 Lazard Emerging Income, L.P. (a,b) 3,000,000 3,712,728 Ore Hill Fund, L.P. (a,b) 7,221,928 8,666,982 The Rohatyn Group Local Currency Opportunity Partners, L.P. (a,b) 6,000,000 6,102,066 Z Capital Partners I, L.P. (a,b) 17,000,000 16,232,254 ----------- 128,689,575 ------------ OPPORTUNISTIC EQUITY (30.18%) Algebris Global Financials Fund, LP (a, b) 6,000,000 7,891,612 Artis Technology Qualified 2X, L.P. (a, b) 7,000,000 9,273,982 Asian Century Quest Fund (QP) L.P. (a, b) 7,000,000 8,143,307 CCM Small Cap Value Qualified Fund, L.P. (a, b) 2,500,000 3,213,773 Criterion Horizons Fund, LP (a, b) 14,000,000 15,798,176 CRM Windridge Partners, L.P. (a, b) 4,522,017 5,228,940
See Notes to Financial Statements 2 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONTINUED)
COST FAIR VALUE ------------ ------------ OPPORTUNISTIC EQUITY (30.18%) (CONTINUED) DE Shaw Oculus Fund LLC (a, b) $ 13,000,000 $ 14,125,838 Ellerston Global Equity Managers Fund (U.S.) L.P. (a,b) 13,000,000 14,858,147 GMO Mean Reversion Fund A (a, b) 5,770,065 6,963,656 Gradient Europe Fund, L.P. (a, b) 8,500,000 13,011,545 Healthcor, L.P. (a, b) 11,000,000 14,481,056 Liberty Square Strategic Partners IV (Asia), L.P. (a, b) 13,000,000 13,502,625 Samlyn Onshore Fund, L.P. (a, b) 8,000,000 9,452,824 Sansar Capital, L.P. (a, b) 10,000,000 12,887,365 SCP Ocean Fund, L.P. (a, b) 4,002,947 6,806,630 SR Global Fund, L.P. (Class C) International (a, b) 3,457,674 7,141,305 SR Global Fund, L.P. (Class F) Europe (a, b) 6,959,403 6,884,930 SR Global Fund, L.P. (Class G) Emerging (a, b) 5,281,970 10,293,020 Standard Pacific Japan Fund, L.P. (a, b) 6,500,000 7,157,622 The Platinum Fund Ltd. (Class A) (a, b) 2,535,461 3,409,539 The Raptor Global Fund, L.P. (a, b) 8,000,000 8,006,182 Visium Long Bias Fund, L.P. (a, b) 15,964,983 17,287,044 ------------ 215,819,118 ------------ PRIVATE EQUITY COMPOSITE (8.10%) Actis Umbrella Fund, L.P. (a, b) 1,835,886 1,983,911 BDCM Opportunity Fund II, L.P. (a, b) 1,601,449 1,461,863 Brazos Equity Fund II, L.P. (a, b) 1,981,957 1,802,457 Carlyle Japan Partners II, L.P. (a, b) 233,036 193,591 CJIP II Co-Invest, L.P. (a, b) 49,224 46,171 Carlyle Partners V, L.P. (a, b) 684,065 645,540 Claremont Creek Ventures, L.P. (a, b) 565,000 489,700 Crosslink Crossover Fund IV, L.P. (a, b) 4,403,262 6,034,721 Crosslink Crossover Fund V, L.P. (a, b) 4,000,000 4,585,404 Dace Ventures I, L.P. (a, b) 303,402 274,665 Darwin Private Equity I, L.P. (a, b) 117,168 82 Encore Consumer Capital Fund, L.P. (a, b) 1,784,957 2,397,912 Gavea Investment Fund II A, L.P. (a, b) 2,500,000 2,543,710 Great Point Partners VII, L.P. (a, b) 645,000 970,919 Halifax Fund II, L.P. (a, b) 515,263 397,203 Hancock Park Capital III, L.P. (a, b) 1,800,000 2,113,805 HealthCor Partners Fund, L.P. (a, b) 167,566 95,386 Integral Capital Partners VII, L.P. (a, b) 6,000,000 8,175,517 Lighthouse Capital Partners VI, L.P. (a, b) 500,000 500,000 OCM European Principal Opportunties Fund, L.P. (a, b) 3,440,307 4,266,141 OCM Mezzanine Fund II, L.P. (a, b) 2,975,316 3,050,258
See Notes to Financial Statements 3 HATTERAS MASTER FUND, L.P. SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONTINUED)
COST FAIR VALUE ------------ ------------ PRIVATE EQUITY COMPOSITE (8.10%) (CONTINUED) Pipe Equity Partners, LLC (a, b) $ 3,824,693 $ 4,746,099 Private Equity Investment Fund IV, L.P. (a, b) 1,256,349 1,294,249 Roundtable Healthcare Partners II, L.P. (a, b) 1,091,981 1,037,590 Sanderling Venture Partners VI Co-Investment Fund, L.P. (a,b) 500,000 444,047 Sanderling Venture Partners VI, L.P. (a, b) 600,000 536,285 Sterling Capital Partners II, L.P. (a, b) 1,260,668 1,483,182 Sterling Capital Partners III, L.P. (a, b) 620,073 592,471 Strategic Value Global Opportunities Fund I-A, LP (a,b) 3,997,239 3,896,837 The Column Group, L.P. (a, b) 138,577 121,575 VCFA Private Equity Partners IV, L.P. (a, b) 741,858 834,681 VCFA Venture Partners V, L.P. (a, b) 800,000 746,537 Voyager Capital Fund III, L.P. (a, b) 243,622 182,511 ------------ 57,945,020 ------------ REAL ESTATE COMPOSITE (7.06%) Benson Elliot Real Estate Partners II, L.P. (a, b) 1,528,076 1,422,414 Colony Investors VII, L.P. (a, b) 3,001,697 3,359,368 Colony Investors VIII, L.P. (a, b) 921,651 949,151 ING Clarion CRA Hedge Fund, L.P. (a, b) 2,356,915 3,447,724 ING Clarion Global, L.P. (a, b) 3,000,000 3,547,758 Oak Hill Plus, L.P. (a, b) 7,000,000 7,659,586 ORBIS Real Estate Fund I, L.P. (a, b) 979,079 854,952 Patron Capital III, L.P. (a, b) 8,515 465 Phoenix Asia Real Estate Investment II, L.P. (a, b) 1,157,388 1,157,387 Rockwood Capital Real Estate Partners Fund VII, LP (a, b) 3,353,603 3,293,557 Security Capital Preferred Growth, Inc. b 1,714,043 1,508,488 Third Avenue Real Estate Opportunities Fund, LLC (a,b) 9,000,000 9,320,261 Transwestern Mezzanine Realty Partner II, LLC (b) 1,843,736 1,860,253 WCP Real Estate Fund I, LP (a, b) 4,113,515 3,943,257 Wells Street Global Partners, LP (a, b) 6,686,675 8,190,087 ------------ 50,514,708 ------------ 709,458,305 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS (COST $620,954,952) INVESTMENTS IN OPTIONS (0.03%) OPPORTUNISTIC EQUITY (0.03%) EEP Option Straddle 680,800 192,601 ------------ TOTAL INVESTMENTS IN UNDERLYING FUNDS AND OPTIONS (COST $ 621,635,752) 709,650,906 OTHER ASSETS LESS LIABILITIES (0.76%) 5,405,732 ------------ PARTNERS' CAPITAL - 100.00% $715,056,638 ============
a- Non-income producing b-Underlying Funds are issued in private placement transactions and as such are restricted as to resale. Total cost and value of restricted securities as of September 30, 2007 was $620,954,952 and $709,458,305 respectively. See Notes to Financial Statements 4 HATTERAS MASTER FUND, L.P. STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL - SEPTEMBER 30, 2007 (UNAUDITED) ASSETS Investments in Underlying Funds, at fair value (cost $620,954,952) $709,458,305 Investments in Underlying Funds paid in advance 65,626,846 Cash and cash equivalents 830,438 Receivable from redemption of Underlying Funds 323,599 Investment in Options (cost $680,800) 192,601 Prepaid assets 62,545 Withholding tax refund receivable 26,478 Dividends and interest receivable 896 ------------ TOTAL ASSETS $776,521,708 ============ LIABILITIES AND PARTNERS' CAPITAL Contributions received in advance $ 40,656,225 Line of credit loan payable 20,000,000 Management fee payable 596,097 Accounting and administration fees payable 85,331 Professional fees payable 68,630 Line of credit fees payable 19,430 Custodian fees payable 18,952 Risk management expense payable 16,287 Other accrued expenses 4,118 ------------ TOTAL LIABILITIES 61,465,070 ------------ PARTNERS' CAPITAL 715,056,638 ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL $776,521,708 ============
See Notes to Financial Statements 5 HATTERAS MASTER FUND, L.P. STATEMENT OF OPERATIONS - APRIL 1, 2007 TO SEPTEMBER 30, 2007 (UNAUDITED) INVESTMENT INCOME Dividends $ 1,464,159 Interest 451,557 ------------ TOTAL INVESTMENT INCOME 1,915,716 ------------ OPERATING EXPENSES Management fee 2,971,280 Accounting and administration fees 232,889 Risk management expense 208,398 Professional fees 113,905 Insurance expense 53,170 Line of credit fees 36,667 Custodian fees 32,147 Board of directors' fees 30,000 Interest expense 25,833 Compliance consulting fees 7,500 Printing expense 4,659 Other expenses 20,355 ------------ TOTAL OPERATING EXPENSES 3,736,803 ------------ NET INVESTMENT LOSS (1,821,087) ------------ NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS IN UNDERLYING FUNDS Net realized gain on investments in Underlying Funds 2,076,293 Net increase in unrealized appreciation on investments in Underlying Funds 28,316,832 ------------ NET REALIZED GAIN AND CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS IN UNDERLYING FUNDS 30,393,125 ------------ NET INCREASE IN PARTNERS' CAPITAL RESULTING FROM OPERATIONS $ 28,572,038 ============
See Notes to Financial Statements 6 HATTERAS MASTER FUND, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
LIMITED PARTNERS' CAPITAL* ------------ 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 Capital contributions 259,825,457 Capital withdrawals (5,460,596) Net investment loss (1,821,087) Net realized gain on investments in Underlying Funds 2,076,293 Net increase in unrealized appreciation on investments in Underlying Funds 28,316,832 ------------ PARTNERS' CAPITAL, AT SEPTEMBER 30, 2007 $715,056,638 ============
See Notes to Financial Statements 7 HATTERAS MASTER FUND, L.P. STATEMENT OF CASH FLOWS - APRIL 1, 2007 TO SEPTEMBER 30, 2007 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in partners' capital resulting from operations $ 28,572,038 Adjustments to reconcile net increase in partners' capital resulting from investment operations to net cash used in operating activities: Purchases of Underlying Funds (259,482,116) Proceeds from redemptions of Underlying Funds 19,572,519 Net realized gain on investments in Underlying Funds (2,076,293) Net increase in unrealized appreciation on investments in Underlying Funds (28,316,832) Increase in investments in Underlying Funds paid in advance (48,310,299) Decrease in receivable from redemption of Underlying Funds 5,580,665 Decrease in prepaid assets 63,266 Decrease in dividends and interest receivable 26,120 Increase in management fee payable 225,363 Increase in accounting and administration fees payable 26,461 Decrease in professional fees payable (28,145) Increase in line of credit fees payable 15,297 Increase in custodian fees payable 8,282 Increase in risk management expense payable 12,678 Decrease in interest expense payable (16,250) Increase in other accrued expenses 4,118 ------------- Net cash used in operating activities (284,123,128) ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions (including contributions received in advance) 271,112,305 Capital withdrawals (net of redemptions payable) (18,140,596) Line of credit borrowings 17,000,000 ------------- Net cash used in financing activities 269,971,709 ------------- Net change in cash and cash equivalents (14,151,419) Cash and cash equivalents at beginning of period 14,981,857 ------------- Cash and cash equivalents at end of period $ 830,438 ============= Supplemental Disclosure of Interest Paid $ 9,583 =============
See Notes to Financial Statements 8 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) 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. 9 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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. 10 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 September 30, 2007, the Master Fund held $830,438 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). 11 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 Fund Services, Inc. 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 period ended September 30, 2007 amounted to $259,482,116. Total proceeds from redemptions of Underlying Funds for the period ended September 30, 2007 amounted to $17,496,226. 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. 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. 12 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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. The facility was increased for a ninety day period on October 1, 2007 to $65,000,000 and will be reduced to $30,000,000 on November 26, 2007. 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 September 30, 2007 the Master Fund had $20,000,000 in borrowings outstanding under the Facility and $19,430 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 September 30, 2007 was 7.50%, $677,596, and $20,000,000, 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 September 30, 2007, the Master Fund had outstanding investment commitments to Underlying Funds totaling $ 109,958,424. 13 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (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 SIX FOR THE PERIOD FROM MONTH PERIOD JANUARY 1, 2005 ENDED (COMMENCEMENT OF SEPTEMBER 30, FOR THE YEARS ENDED MARCH 31, OPERATIONS) THROUGH 2007 2007 2006 MARCH 31, 2005 ------------- ------------- ------------- ------------------- Total return amortizing organizational expenses* --** --** --** 0.23% Total return 5.49% 9.31% 13.79% 0.17% Partners' capital, end of period (000) $715,057 $432,120 $213,521 $116,827 Portfolio Turnover 3.45% 14.03% 19.35% 3.72% ANNUALIZED RATIOS: Net Investment loss (0.32)% (0.96)% (1.23)% (1.43)% Total Expenses 0.65% 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. 14 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONTINUED) 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 October 1, 2007 and November 1, 2007, there were additional capital contributions of $40,906,226 and $52,066,408 respectively. Effective October 1, 2007 there were redemptions of $6,650,000. There were additional contributions effective as of October 1, 2007 of $89,738,623 resulting from the Agreement and Plan of Reorganization described in the note below. Effective October 1, 2007 according to a reorganization plan (the "Master Fund Agreement") approved by the Board and the Topiary Fund Board by and between the Master Fund and Topiary Master Fund For Benefit Plan Investors (BPI) LLC (the "Topiary Master Fund"), the Topiary Master Fund transferred to the Master fund substantially all of the Topiary Master Fund's assets and liabilities in exchange for limited partnership interests in the Master Fund. Effective October 1, 2007 According to The Agreement and Plan of Reorganization (the "TEI Agreement" and, together with the Master Fund Agreement, the "Agreements") by and between the Hatteras Multi-Strategy TEI Fund, L.P. (the "TEI Fund" and, together with the Master Fund, the "Hatteras Funds")) and Topiary Benefit Plan Investor Fund LLC (the "Topiary Feeder Fund"), the Topiary Feeder Fund transferred substantially all of the assets and liabilities of to the TEI Fund in exchange for limited partnership interests in the TEI Fund, 15 HATTERAS MASTER FUND, L.P. NOTES TO FINANCIAL STATEMENTS - SEPTEMBER 30, 2007 (UNAUDITED) (CONCLUDED) 13. SUBSEQUENT EVENTS (CONTINUED) and distributed such limited partnership interests in the Master Fund to the members of the Topiary Feeder Fund in accordance with their respective interests (such transaction referred to as the "Feeder Fund Reorganization" and, together with Master Fund Reorganization, the "Reorganizations"). 16 HATTERAS MASTER FUND, L.P. BOARD OF DIRECTORS (UNAUDITED) The identity of the Board Members and brief biographical information is set forth below.
Term of Office; Position(s) Length Principal Occupation(s) During Past 5 Number of Portfolios in Fund Held with of Time years and Other Directorships Held by Complex' Overseen by Name, Address & Age the Fund Served Director Director or Officer - ------------------- ------------ --------------- ------------------------------------- ---------------------------- INTERESTED DIRECTORS David B. Perkins, 45 Chief 3 year term; Mr. Perkins has been Chairman and CEO 5 1000 Watermeet Lane Executive Since Inception since inception of the Funds. Mr. Raleigh, NC 27614 Officer and Perkins became the President and Chairman of Managing Principal of the Investment the Board of Manager in September 2003 and became Directors 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, 54 Director: 3 year term; Mr. Moss has been a member of HMKCT 5 918 Meadow Lane Chairman of Since December Properties, LLC since January 1996. Henderson, NC 27536 the Audit 2004 Committee H. Alexander Holmes, 65 Director: 3 year term; Mr. Holmes founded Holmes Advisory 5 3408 Landor Road Audit Since December Services, LLC, a financial Raleigh, NC 27609 Committee 2004 consultation firm, in 1993. Member Gregory S. Sellers, 48 Director: 3 year term; Mr. Sellers became the Chief 5 2643 Steeplechase Road Audit Since December Financial Officer and a director of Gastonia, NC 28056 Committee 2004 Kings Plush, Inc., a fabric Member manufacturer, in April 2003. Prior to that, he was the Vice President of Finance at Parksdale Mills, Inc., a cotton and cotton blend yarns producer, from January 1991 to April 2003. Art Lottes, 54 Director: 3 year term; Mr. Lottes was the President of 5 4813 Wynneford Way Audit Since November CARQUEST Corporation, an automotive Raleigh, NC 27615 Committee 2006 aftermarket company until December Member 2005. Mr. Lottes was a Board member of CARQUEST and General Partner 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.
Position(s) Length Principal Occupation(s) During Past 5 Number of Portfolios in Fund Held with of Time years and Other Directorships Held by Complex' Overseen by Name, Address & Age the Fund Served Director Director or Officer - ------------------- ------------ --------------- ------------------------------------- ---------------------------- OFFICERS J. Michael Fields, 34 Chief Since Mr. Fields has been the CFO since N/A 8540 Colonnade Center Financial Inception inception of the Funds. Mr. Fields Drive, Officer became a Director of the Investment Suite 401 Manager in September 2003. Prior to Raleigh, NC 27615 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, 45 Chief Since Ms. Buchanan has been the CCO since N/A 8540 Colonnade Center Compliance Inception inception of the Funds. Ms. Buchanan Drive, Officer became the Compliance Officer with Suite 401 CapFinancial Partners, LLC Raleigh, NC 27615 ("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, 41 Secretary Since Ms. Collins has been the Secretary of N/A 8540 Colonnade Drive, Inception the Funds since inception. She became Suite 401 the Operations Manager for the Raleigh, NC 27615 Investment Manager in September 2004. Prior to joining the Investment Manager, she was 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. 20 ITEM 2. CODE OF ETHICS. Not applicable to semi-annual reports. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to semi-annual reports. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to semi-annual reports. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to semi-annual reports. 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. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to semi-annual reports. 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 407(c)(2)(iv) of Regulation S-K, 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 Rules13a-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) Not applicable. (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 DECEMBER 3, 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 DECEMBER 3, 2007 By (Signature and Title)* /s/ J. MICHAEL FIELDS ----------------------------------------------------- J. Michael Fields, Chief Financial Officer (principal financial officer) Date DECEMBER 3, 2007 * Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 c21994exv99wcert.txt CERTIFICATIONS CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, David B. Perkins, certify that: 1. I have reviewed this report on Form N-CSR of Hatteras Multi-Strategy TEI Fund, L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: DECEMBER 3, 2007 /s/ DAVID B. PERKINS ---------------------------------------- David B. Perkins, President & Chief Executive Officer (principal executive officer) CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, J. Michael Fields, certify that: 1. I have reviewed this report on Form N-CSR of Hatteras Multi-Strategy TEI Fund, L.P.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the 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; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: DECEMBER 3, 2007 /s/ J. MICHAEL FIELDS ---------------------------------------- J. Michael Fields, Chief Financial Officer (principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----