EVR

Business Context and Reporting Period

Company: Evercore Partners Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Evercore is a leading global investment banking boutique specializing in mergers and acquisitions (M&A), divestitures, and restructuring advisory services. It also operates an investment management segment managing private equity funds and public securities. The company operates through two primary segments: Advisory and Investment Management.

Key Corporate Events in 2006:

• Reorganization & IPO: On August 10, 2006, the company completed a reorganization and an Initial Public Offering (IPO) of Class A common stock on August 16, 2006. This transitioned the firm from a private partnership structure to a public holding company.
• Acquisitions: Combined with Protego Asesores S. de R.L. (Mexico) in August 2006 and acquired Braveheart Financial Services Limited (renamed Evercore Europe) in December 2006.

Key Financial Metrics

The following data represents the aggregated results for the full year 2006 (combining Predecessor and Successor periods) to provide a full-year view, as the IPO occurred mid-year.

Note: The significant increase in expenses and liabilities in 2006 is largely due to the inclusion of Senior Managing Directors' compensation as an expense (previously treated as distributions) and the consolidation of acquired entities (Protego and Braveheart).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 66.9% to $209.7 million in 2006 compared to $125.6 million in 2005. This was driven by a 65.8% increase in advisory revenue and a 59.5% increase in investment management revenue.
• Expense Structure: Employee compensation and benefits expense surged 202.4% to $72.9 million. This increase is primarily attributable to the accounting change post-IPO where Senior Managing Directors' payments are recorded as compensation rather than capital distributions, alongside increased headcount and bonuses.
• Taxation: Prior to the August 2006 IPO, the company was not subject to U.S. federal income tax. Post-IPO, the company became subject to corporate federal, state, and local taxes, resulting in a provision for income taxes of $8.4 million for 2006 (compared to $3.4 million in 2005).
• Headcount: Total employees increased from 113 at year-end 2005 to 247 at year-end 2006, reflecting organic growth and acquisitions.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management expects to continue growth by hiring qualified professionals, expanding geographically, and raising additional private equity funds. The company targets total employee compensation and benefits expense at a level not to exceed 50% of net revenue (excluding investment gains/losses and reimbursable expenses), though this target calculation will change in 2007 to include investment gains/losses.

Material Weaknesses in Internal Controls

Management identified material weaknesses in internal control over financial reporting, specifically:

• Lack of an enterprise-wide, executive-driven internal control environment.
• Deficiencies in the quarterly and annual financial statement close process.
• Protego Accounting Error: Prior to acquisition, Protego improperly accounted for repurchase and reverse repurchase agreements on a net basis. This required a restatement of Protego's historical financial statements and the filing of a Form 10-Q/A in February 2007.

Risks

• Market Volatility: Revenue is highly dependent on M&A transaction volumes, which are sensitive to economic conditions.
• Client Concentration: The top five advisory clients accounted for 40.4% of net revenue in 2006. AT&T and UCB each represented over 10% of net revenue.
• Key Personnel: The business relies heavily on the reputations and relationships of Co-CEOs Roger Altman and Austin Beutner, and other Senior Managing Directors.
• International Operations: Exposure to foreign currency fluctuations (Mexican Peso, Euro, British Pound) and political/economic instability in Mexico.

Unusual Items

The 2006 financial results are not directly comparable to prior years due to the Reorganization and IPO. The company presents "Aggregated" results for 2006 to combine Predecessor (pre-IPO) and Successor (post-IPO) data for a full-year view, but notes these are non-GAAP measures.

Important Facts for Investor Verification

• Compensation Target: Verify the company's ability to maintain the 50% compensation-to-revenue target, especially as the calculation methodology changes in 2007 to include investment gains/losses.
• Internal Control Remediation: Monitor the progress of remediation plans for the identified material weaknesses in internal controls, particularly regarding the Protego accounting error and financial reporting processes.
• Client Concentration: Assess the risk associated with the top five clients representing over 40% of revenue and the potential impact of losing a single major mandate.
• Minority Interest: Understand the significant minority interest ($36.9 million) recorded in 2006, which represents the economic interest of Senior Managing Directors in Evercore LP, and how this impacts net income available to Class A shareholders.
• Pro Forma Adjustments: Review the pro forma financial information to understand the impact of the IPO and acquisitions on a normalized basis, noting the elimination of carried interest from certain funds not contributed to the public entity.