EVR

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, for Evercore Partners Inc. (Evercore). The reporting period is significantly impacted by the company's Reorganization, which included a Formation Transaction and an Initial Public Offering (IPO) completed on August 16, 2006. Consequently, financial results are presented as "Predecessor" (historical partnership structure) for periods prior to August 10, 2006, and "Successor" (public corporation) for the period thereafter. The filing also reflects the acquisition of Protego Asesores, a Mexican investment banking boutique, in conjunction with the IPO.

Key Financial Metrics

Revenue and Profitability (Nine Months Ended Sept 30, 2006):

• Total Net Revenues: $130.9 million (Combined Predecessor and Successor). This represents a 57.4% increase compared to $83.1 million in the prior year period.
• Advisory Revenue: $108.7 million (83.1% of total), up 55.5% year-over-year.
• Investment Management Revenue: $21.0 million (16.1% of total), up 60.2% year-over-year.
• Operating Income: $70.3 million (Combined).
• Net Income: $66.2 million (Combined). Note: This figure includes significant pre-IPO distributions to members that are not reflected as compensation expense in the Predecessor period.
• Net Income (Successor Only): $298,000 for the period August 10 through September 30, 2006.
• Earnings Per Share (Successor Only): $0.06 (Basic and Diluted) for the period post-IPO.

Balance Sheet and Liquidity (as of Sept 30, 2006):

• Total Assets: $485.3 million.
• Cash and Cash Equivalents: $58.9 million.
• Total Liabilities: $375.8 million. This includes $349.7 million in "Securities Sold Under Agreements to Repurchase" related to the Protego acquisition's financing activities.
• Stockholders' Equity: $87.2 million.
• Debt: The $30 million line of credit utilized prior to the IPO was repaid in full using IPO proceeds and terminated on August 16, 2006.

Material Changes vs. Prior Period

• Structural Change: The most significant change is the transition from a private partnership to a public C-corporation. This altered the accounting for Senior Managing Directors' compensation, which is now recorded as an expense rather than a distribution of capital.
• Revenue Growth: Advisory revenue grew substantially due to strong M&A activity and the inclusion of Protego's results. Investment Management revenue increased due to higher portfolio company fees and gains on investments.
• Expense Structure: Compensation and benefits expense increased significantly (79.5% for the nine months) due to the inclusion of Senior Managing Directors' pay, increased headcount, and a one-time $4.3 million charge for vested restricted stock units (RSUs) granted at the IPO.
• Pro Forma Adjustments: On a pro forma basis (assuming the reorganization occurred at the start of the year), Net Income for the nine months ended Sept 30, 2006, was $5.5 million, compared to $3.4 million in the prior year period.

Guidance, Outlook, and Risks

Management Commentary and Outlook:

• Compensation Policy: Post-IPO, Evercore intends to set total compensation and benefits expense at a level not to exceed 50% of net revenue (excluding investment gains/losses and expense reimbursements).
• Dividends: The company intends to pay a quarterly cash dividend of $0.07 per share of Class A common stock, commencing with the fourth quarter of 2006.
• Expansion: The acquisition of Protego expands operations into Mexico. The pending acquisition of Braveheart Financial Services Limited (UK) is expected to close in the first half of 2007, expanding European presence.

Risks and Contingencies:

• Internal Control Material Weakness: Management concluded that disclosure controls and procedures were not effective as of September 30, 2006. A material weakness was identified regarding the accounting for repurchase agreements by the Protego subsidiary (PCB). Historical financial statements for Protego included in prior filings should no longer be relied upon.
• Legal Proceedings: Evercore is a defendant in litigation involving In re High Voltage Engineering Corp., where a trustee seeks to undo fee approvals and alleges gross negligence. Evercore believes the claims are meritless.
• Market Risk: Exposure to foreign currency fluctuations (Mexican Peso and British Pound) due to the Protego and Braveheart acquisitions.

Investor Verification Checklist

• Compensation Accounting: Verify the impact of the 50% compensation-to-revenue policy on future profitability, noting that pre-IPO results excluded Senior Managing Director compensation.
• Pro Forma vs. GAAP: Distinguish between historical GAAP results (which include pre-IPO member distributions) and Pro Forma results (which normalize compensation and tax structures) when assessing earnings trends.
• Internal Controls: Monitor remediation efforts regarding the material weakness in accounting for repurchase agreements at the Protego subsidiary.
• Braveheart Acquisition: Track the closing status and integration of the Braveheart acquisition, including the earn-out structure and currency exposure.
• Dividend Sustainability: Assess the company's ability to maintain the $0.07 quarterly dividend given the capital requirements of the private equity funds and potential future commitments.