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Management's Discussion and Analysis of Financial Condition and Results Item 2. of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with Evercore Partners Inc.'s unaudited condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q. Forward-Looking Statements This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, which reflect our current views with respect to, among other things, our operations and financial performance. In some cases, you can identify these forward-looking statements by the use of words such as "outlook", "believes", "expects", "potential", "continues", "may", "should", "seeks", "approximately", "predicts", "intends", "plans", "estimates", "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these forward-looking statements. All statements other than statements of historical fact are forward-looking statements and are based on various underlying assumptions and expectations and are subject to known and unknown risks, uncertainties and assumptions, and may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. We believe these factors include, but are not limited to, those described under "Risk Factors" discussed in the Annual Report on Form 10-K for the year ended December 31, 2013. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included or incorporated by reference in this report. We undertake no obligation to publicly update or review any forward-looking statement. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Key Financial Measures Revenue Total revenues reflect revenues from our Investment Banking and Investment Management business segments that include fees for services, transaction-related client reimbursements plus other revenue. Net revenues reflect total revenues less interest expense related to repurchase agreements and the Senior Notes. Investment Banking. Our Investment Banking business earns fees from our clients for providing advice on mergers, acquisitions, divestitures, leveraged buyouts, restructurings and similar corporate finance matters, and from underwriting and private placement activities, as well as commissions from our sales and trading activities. The amount and timing of the fees paid vary by the type of engagement. In general, advisory fees are paid at the time we sign an engagement letter, during the course of the engagement or when an engagement is completed. The majority of our investment banking revenue consists of advisory fees that are dependent on the successful completion of a transaction. A transaction can fail to be completed for many reasons, including failure of parties to agree upon final terms with the counterparty, to secure necessary board or shareholder approvals, to secure necessary financing or to achieve necessary regulatory approvals. In the case of bankruptcy engagements, fees are subject to approval of the court. Underwriting revenues are recognized when the offering has been deemed to be completed, placement fees are generally recognized at the time of the client's acceptance of capital or capital commitments and commissions are recorded on a trade-date basis or, in the case of payments under commission sharing arrangements, on the date earned. Revenue trends in our advisory business generally are correlated to the volume of merger and acquisition ("M&A") activity and/or restructuring activity, which tends to be counter-cyclical to M&A. However, deviations from this trend can occur in any given year or quarter for a number of reasons. For example, changes in our market share or the ability of our clients to close certain large transactions can cause our revenue results to diverge from the level of overall M&A or restructuring activity. Investment Management. Our Investment Management business includes operations related to the management of the Institutional Asset Management, Wealth Management and Private Equity businesses. Revenue sources primarily include management fees, which include fees earned from portfolio companies, fiduciary and consulting fees, performance fees (including carried interest) and gains (or losses) on our investments. 30-------------------------------------------------------------------------------- Table of Contents Management fees for third party clients generally represent a percentage of assets under management ("AUM"). Fiduciary and consulting fees, which are generally a function of the size and complexity of each engagement, are individually negotiated. Management fees from private equity operations are generally a percentage of committed capital or invested capital at rates agreed with the investment funds we manage or with the individual client. Performance fees, or carried interest, from private equity funds are earned when specified benchmarks are exceeded. In certain circumstances, such fees are subject to "claw-back" provisions. During the second quarter of 2014, the Company changed its method of recording performance fees such that the Company records performance fees upon the earlier of the termination of the investment fund or when the likelihood of clawback is mathematically improbable. Portfolio company fees include monitoring, director and transaction fees associated with services provided to the portfolio companies of the private equity funds we manage. Gains and losses include both realized and unrealized gains and losses on principal investments, including those arising from our equity interest in investment partnerships. Transaction-Related Client Reimbursements. In both our Investment Banking and Investment Management segments, we make various transaction-related expenditures, such as travel and professional fees, on behalf of our clients. Pursuant to the engagement letters with our advisory clients or the contracts with the limited partners in the private equity funds we manage, these expenditures may be reimbursable. We define these expenses as transaction-related expenses and record such expenditures as incurred and record revenue when it is determined that clients have an obligation to reimburse us for such transaction-related expenses. Client expense reimbursements are recorded as revenue on the Unaudited Condensed Consolidated Statements of Operations on the later of the date an engagement letter is executed or the date we pay or accrue the expense. Other Revenue and Interest Expense. Other Revenue and Interest Expense is derived primarily from investing customer funds in financing transactions. These transactions are principally repurchases and resales of Mexican government and government agency securities. Revenue and expenses associated with these transactions are recognized over the term of the repurchase or resale transaction. Other Revenue includes income earned on marketable securities, cash and cash equivalents and assets segregated for regulatory purposes, as well as adjustments to amounts due pursuant to our tax receivable agreements, subsequent to its initial establishment, related to changes in state and local tax rates. Interest Expense includes interest expense associated with the Senior Notes and other financing arrangements. Operating Expenses Employee Compensation and Benefits Expense. We include all payments for services rendered by our employees, as well as profits interests in our businesses that have been accounted for as compensation, in employee compensation and benefits expense. We maintain compensation programs, including base salary, cash, deferred cash and equity bonus awards and benefits programs and manage compensation to estimates of competitive levels based on market conditions and performance. Our level of compensation reflects our plan to maintain competitive compensation levels to retain key personnel, and it reflects the impact of newly-hired senior professionals, including related grants of equity awards which are generally valued at their grant date. Increasing the number of high-caliber, experienced senior level employees is critical to our growth efforts. In our advisory businesses, these hires generally do not begin to generate significant revenue in the year they are hired. Our annual compensation program includes share-based compensation awards and deferred cash awards as a component of the annual bonus awards for certain employees. These awards are generally subject to annual vesting requirements over a four-year period beginning at the date of grant, which occurs in the first quarter of each year; accordingly, the expense is generally amortized over the stated vesting period. With respect to the annual awards granted in February 2012 and thereafter, the Company adopted new retirement eligibility criteria, which stipulates that if an employee has at least five years of continuous service, is at least 55 years of age and has a combined age and years of service of at least 65 years, the employee is eligible for retirement (prior year's awards required combined years of service and age of at least 70 years). Retirement eligibility allows for continued vesting of awards after employees depart from the Company, provided they give the minimum advance notice, which is generally one year. As a consequence of these changes, a greater number of employees will become retirement eligible and the related requisite service period over which we will expense these awards will be shorter than the stated vesting period. Non-Compensation Expenses. The balance of our operating expenses includes costs for occupancy and equipment rental, professional fees, travel and related expenses, communications and information technology services, depreciation and 31-------------------------------------------------------------------------------- Table of Contents amortization, acquisition and transition costs and other operating expenses. We refer to all of these expenses as non-compensation expenses. Other Expenses Other Expenses include: a) amortization costs associated with the modification and vesting of LP Units and certain other awards, b) the amortization of intangible assets associated with certain acquisitions, c) compensation charges associated with deferred consideration, retention awards and related compensation for Lexicon employees, d) professional fees for the expense associated with share based awards resulting from increases in the share price, which is required upon change in employment status, e) special charges incurred related to termination benefits, primarily consisting of cash severance and the acceleration of the vesting of restricted stock units, as well as the write-off of leasehold improvements in the Institutional Equities business and f) acquisition and transition costs primarily for professional fees for legal and other services incurred related to the Company's agreement to acquire all of the outstanding equity interests of the operating businesses of ISI. Income from Equity Method Investments Our share of the income (loss) from our equity interests in G5 ? Evercore, ABS and Pan (consolidated on March 15, 2013 and sold on December 3, 2013) are included within Income from Equity Method Investments, as a component of Income Before Income Taxes, on the Unaudited Condensed Consolidated Statements of Operations. Provision for Income Taxes We account for income taxes in accordance with ASC 740, "Income Taxes" ("ASC 740"), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax basis of our assets and liabilities. Discontinued Operations We completed the sale of Pan in December 2013. Accordingly, the historical results of Pan have been included within Discontinued Operations on the Unaudited Condensed Consolidated Statements of Operations. Noncontrolling Interest We record noncontrolling interest relating to the ownership interests of our current and former Senior Managing Directors, their estate planning vehicles and Trilantic (through October 2013) in Evercore LP, as well as the portions of our operating subsidiaries not owned by Evercore. As described in Note 12 to our unaudited condensed consolidated financial statements herein, Evercore Partners Inc. is the sole general partner of Evercore LP and has a majority economic interest in Evercore LP. As a result, Evercore Partners Inc. consolidates Evercore LP and records a noncontrolling interest for the economic interest in Evercore LP held by the limited partners. We generally allocate net income or loss to noncontrolling interests held at Evercore LP and at the operating entity level, where required, by multiplying the vested equity ownership percentage of the noncontrolling interest holders for the period by the net income or loss of the entity to which the noncontrolling interest relates. In circumstances where the governing documents of the entity to which the noncontrolling interest relates require special allocations of profits or losses to the controlling and noncontrolling interest holders, then the net income or loss of these entities will be allocated based on these special allocations. Results of Operations The following is a discussion of our results from continuing operations for the three and nine months ended September 30, 2014 and 2013. For a more detailed discussion of the factors that affected the revenue and operating expenses of our Investment Banking and Investment Management business segments in these periods, see the discussion in "Business Segments" below. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 32 -------------------------------------------------------------------------------- For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (dollars in thousands, except per share data) Revenues Investment Banking Revenue $ 202,178 $ 163,975 23 % $ 522,933 $ 478,812 9 % Investment Management Revenue 24,777 24,238 2 % 73,493 70,764 4 % Other Revenue 4,170 2,934 42 % 8,861 7,466 19 % Total Revenues 231,125 191,147 21 % 605,287 557,042 9 % Interest Expense 3,964 3,819 4 % 11,317 10,286 10 % Net Revenues 227,161 187,328 21 % 593,970 546,756 9 % Expenses Operating Expenses 178,905 147,440 21 % 474,350 431,780 10 % Other Expenses 8,910 8,020 11 % 16,525 28,677 (42 %) Total Expenses 187,815 155,460 21 % 490,875 460,457 7 % Income Before Income from Equity Method Investments and Income Taxes 39,346 31,868 23 % 103,095 86,299 19 % Income from Equity Method Investments 1,102 562 96 % 3,381 2,333 45 % Income Before Income Taxes 40,448 32,430 25 % 106,476 88,632 20 % Provision for Income Taxes 15,264 12,350 24 % 38,214 37,215 3 % Net Income from Continuing Operations 25,184 20,080 25 % 68,262 51,417 33 % Discontinued Operations Income (Loss) from Discontinued Operations - (2,811 ) NM - (4,236 ) NM Provision (Benefit) for Income Taxes - (985 ) NM - (1,462 ) NM Net Income (Loss) from Discontinued Operations - (1,826 ) NM - (2,774 ) NM Net Income 25,184 18,254 38 % 68,262 48,643 40 % Net Income Attributable to Noncontrolling Interest 875 4,292 (80 %) 9,120 12,286 (26 %) Net Income Attributable to Evercore Partners Inc. $ 24,309 $ 13,962 74 % $ 59,142 $ 36,357 63 % Diluted Net Income (Loss) Per Share Attributable to Evercore Partners Inc. Common Shareholders From Continuing Operations $ 0.58 $ 0.39 49 % $ 1.41 $ 1.00 41 % From Discontinued Operations - (0.03 ) NM - (0.04 ) NM Net Income Per Share Attributable to Evercore Partners Inc. Common Shareholders $ 0.58 $ 0.36 61 % $ 1.41 $ 0.96 47 % As of September 30, 2014 and 2013 we employed approximately 1,050 and 1,000 people, respectively, worldwide. Three Months Ended September 30, 2014 versus September 30, 2013 Net Revenues were $227.2 million for the three months ended September 30, 2014, an increase of $39.8 million, or 21%, versus Net Revenues of $187.3 million for the three months ended September 30, 2013. Investment Banking Revenue increased 23% and Investment Management Revenue increased 2% compared to the three months ended September 30, 2013. See the segment discussion below for further information. Other Revenue for the three months ended September 30, 2014 was higher than for the three months ended September 30, 2013 primarily as a result of an expense reimbursement during the third quarter of 2014. Net Revenues include interest expense on our Senior Notes. Total Operating Expenses were $178.9 million for the three months ended September 30, 2014, as compared to $147.4 million for the three months ended September 30, 2013, an increase of $31.5 million, or 21%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $136.0 million for the three months ended September 30, 2014, 33 -------------------------------------------------------------------------------- an increase of $25.6 million, or 23%, versus expense of $110.4 million for the three months ended September 30, 2013. The increase was primarily due to increased compensation costs resulting from the expansion of our businesses and higher costs from share-based and other deferred compensation arrangements. Non-compensation expenses as a component of Operating Expenses were $42.9 million for the three months ended September 30, 2014, an increase of $5.8 million, or 16%, over non-compensation operating expenses of $37.1 million for the three months ended September 30, 2013. Non-compensation operating expenses increased compared to the three months ended September 30, 2013 primarily as a result of the addition of personnel, increased new business costs associated with higher levels of global transaction activity and higher professional fees associated with a limited number of investment bankers serving under consulting contracts. Total Other Expenses of $8.9 million for the three months ended September 30, 2014 included acquisition related compensation costs of $0.6 million, special charges of $3.7 million, acquisition and transition costs of $4.1 million and amortization of intangibles of $0.5 million. Total Other Expenses of $8.0 million for the three months ended September 30, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $4.8 million, acquisition related compensation costs of $3.1 million and amortization of intangibles of $0.1 million. As a result of the factors noted above, Employee Compensation and Benefits Expense as a percentage of Net Revenues was 60% for the three months ended September 30, 2014, compared to 63% for the three months ended September 30, 2013. Income from Equity Method Investments was $1.1 million for the three months ended September 30, 2014, as compared to $0.6 million for the three months ended September 30, 2013. The increase was primarily a result of an increase in earnings from ABS and G5 ? Evercore. The provision for income taxes for the three months ended September 30, 2014 was $15.3 million, which reflected an effective tax rate of 38%. The provision was impacted by the noncontrolling interest associated with LP Units, state, local and foreign taxes and other adjustments. The provision for income taxes for the three months ended September 30, 2013 was $12.4 million, which reflected an effective tax rate of 38%. The provision was impacted by the vesting of LP Units, which were fully vested as of December 31, 2013, as well as the noncontrolling interest associated with LP Units. Noncontrolling Interest was $0.9 million for the three months ended September 30, 2014 compared to $4.3 million for the three months ended September 30, 2013 (which includes noncontrolling interest related to discontinued operations of ($0.8) million). The decrease reflects losses in the Institutional Equities business and a decrease in the percentage of Evercore LP not owned by the Company. Nine Months Ended September 30, 2014 versus September 30, 2013 Net Revenues were $594.0 million for the nine months ended September 30, 2014, an increase of $47.2 million, or 9%, versus Net Revenues of $546.8 million for the nine months ended September 30, 2013. Investment Banking Revenue increased 9% and Investment Management Revenue increased 4% compared to the nine months ended September 30, 2013. See the segment discussion below for further information. Other Revenue for the nine months ended September 30, 2014 was 19% higher than for the nine months ended September 30, 2013 primarily as a result of an expense reimbursement during the third quarter of 2014. Net Revenues include interest expense on our Senior Notes. Total Operating Expenses were $474.4 million for the nine months ended September 30, 2014, as compared to $431.8 million for the nine months ended September 30, 2013, an increase of $42.6 million, or 10%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $350.9 million for the nine months ended September 30, 2014, an increase of $27.6 million, or 9%, versus expense of $323.3 million for the nine months ended September 30, 2013. The increase was primarily due to increased compensation costs resulting from the expansion of our businesses and higher costs from share-based and other deferred compensation arrangements. Non-compensation expenses as a component of Operating Expenses were $123.4 million for the nine months ended September 30, 2014, an increase of $14.9 million, or 14%, over non-compensation operating expenses of $108.5 million for the nine months ended September 30, 2013. Non-compensation operating expenses increased compared to the nine months ended September 30, 2013 primarily as a result of the addition of personnel, increased new business costs associated with higher levels of global transaction activity and higher professional fees associated with a limited number of investment bankers serving under consulting contracts. Total Other Expenses of $16.5 million for the nine months ended September 30, 2014 included acquisition related compensation costs of $6.4 million, special charges of $3.7 million, professional fees of $1.7 million, acquisition and transition costs of $4.1 million and amortization of intangibles of $0.6 million. Total Other Expenses of $28.7 million for the nine months ended September 30, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $15.2 million, acquisition related compensation costs of $13.2 million and amortization of intangibles of $0.2 million. 34 --------------------------------------------------------------------------------As a result of the factors noted above, Employee Compensation and Benefits Expense as a percentage of Net Revenues was 60% for the nine months ended September 30, 2014, compared to 64% for the nine months ended September 30, 2013. Income from Equity Method Investments was $3.4 million for the nine months ended September 30, 2014, as compared to $2.3 million for the nine months ended September 30, 2013. The increase was primarily a result of an increase in earnings from ABS. The provision for income taxes for the nine months ended September 30, 2014 was $38.2 million, which reflected an effective tax rate of 36%. The provision was impacted by the noncontrolling interest associated with LP Units, state, local and foreign taxes and other adjustments. The provision for income taxes for the nine months ended September 30, 2013 was $37.2 million, which reflected an effective tax rate of 42%. The provision was impacted by the vesting of LP Units, which were fully vested as of December 31, 2013, as well as the noncontrolling interest associated with LP Units and the release of valuation allowances for certain deferred tax assets. Noncontrolling Interest was $9.1 million for the nine months ended September 30, 2014 compared to $12.3 million for the nine months ended September 30, 2013 (which includes noncontrolling interest related to discontinued operations of ($1.2) million). The decrease reflects losses in the Institutional Equities business and a decrease in the percentage of Evercore LP not owned by the Company. Impairment of Assets During the third quarter of 2014, there were no material changes in the facts and assumptions related to the November 30, 2013 impairment assessment that would have caused the Company to reach a different conclusion. As such, the Company considered the criteria required by ASC 350, "Intangibles - Goodwill and Other", and ASC 360, "Property, Plant, and Equipment", and concluded that there were no triggering events during the third quarter of 2014 that would have required a Step 1 impairment assessment. 35-------------------------------------------------------------------------------- Business Segments The following data presents revenue, expenses and contributions from our equity method investments included within continuing operations, by business segment. Investment Banking The following table summarizes the operating results of the Investment Banking segment. For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (dollars in thousands) Revenues Investment Banking Revenue: Advisory Revenue $ 190,863 $ 151,154 26 % $ 482,553 $ 433,371 11 % Commission Revenue 5,874 6,818 (14 %) 21,643 21,406 1 % Underwriting Revenue 5,441 6,003 (9 %) 18,737 24,035 (22 %) Total Investment Banking Revenue (1) 202,178 163,975 23 % 522,933 478,812 9 % Other Revenue, net (2) 850 (330 ) NM (731 ) (966 ) 24 % Net Revenues 203,028 163,645 24 % 522,202 477,846 9 % Expenses Operating Expenses 156,549 126,472 24 % 410,832 369,927 11 % Other Expenses 8,828 7,427 19 % 16,279 26,738 (39 %) Total Expenses 165,377 133,899 24 % 427,111 396,665 8 % Operating Income (3) 37,651 29,746 27 % 95,091 81,181 17 % Income (Loss) from Equity Method Investments (48 ) - NM 455 460 (1 %) Pre-Tax Income from Continuing Operations $ 37,603 $ 29,746 26 % $ 95,546 $ 81,641 17 % (1) Includes client related expenses of $5.6 million and $12.6 million for the three and nine months ended September 30, 2014, respectively, and $3.4 million and $9.6 million for the three and nine months ended September 30, 2013, respectively. (2) Includes interest expense on the Senior Notes of $1.1 million and $3.3 million for the three and nine months ended September 30, 2014, respectively, and $1.1 million and $3.3 million for the three and nine months ended September 30, 2013, respectively. (3) Includes Noncontrolling Interest of ($2.7) million and ($4.2) million for the three and nine months ended September 30, 2014, respectively, and $0.1 million and $0.7 million for the three and nine months ended September 30, 2013, respectively. 36-------------------------------------------------------------------------------- For the three months ended September 30, 2014, the dollar value of North American announced and completed M&A activity increased 48% and 38%, respectively, compared to the three months ended September 30, 2013, while the dollar value of Global announced and completed M&A activity for the three months ended September 30, 2014 increased 32% and 39%, respectively, compared to the three months ended September 30, 2013. For the nine months ended September 30, 2014, the dollar value of North American announced and completed M&A activity increased 61% and 20%, respectively, compared to the nine months ended September 30, 2013, while the dollar value of Global announced and completed M&A activity for the nine months ended September 30, 2014 increased 59% and 6%, respectively, compared to the nine months ended September 30, 2013: For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 ChangeIndustry Statistics ($ in billions) * Value of North American M&A Deals Announced $ 504 $ 340 48 % $ 1,306 $ 812 61 % Value of North American M&A Deals Completed $ 231 $ 168 38 % $ 809 $ 673 20 % Value of Global M&A Deals Announced $ 878 $ 665 32 % $ 2,648 $ 1,663 59 % Value of Global M&A Deals Completed $ 538 $ 388 39 % $ 1,605 $ 1,515 6 % Evercore Statistics ** Total Number of Fee Paying Advisory Clients 162 136 19 % 310 269 15 % Investment Banking Fees of at Least $1 million from Advisory Clients 50 31 61 % 117 95 23 % * Source: Thomson Reuters October 1, 2014 ** Includes revenue generating clients only Investment Banking Results of Operations Three Months Ended September 30, 2014 versus September 30, 2013 Net Investment Banking Revenues were $203.0 million for the three months ended September 30, 2014 compared to $163.6 million for the three months ended September 30, 2013, which represented an increase of 24%. We earned advisory fees from 162 clients for the three months ended September 30, 2014 compared to 136 for the three months ended September 30, 2013, representing a 19% increase. We had 50 fees in excess of $1.0 million for the three months ended September 30, 2014, compared to 31 for the three months ended September 30, 2013, representing a 61% increase. The increase in revenues from the three months ended September 30, 2013 primarily reflects an increase in Advisory revenue during the three months ended September 30, 2014 from our U.S. and U.K. businesses. Underwriting Revenue decreased 9% from the three months ended September 30, 2013 primarily due to a decrease in underwriting deals in our Mexico business. Operating Expenses were $156.5 million for the three months ended September 30, 2014 compared to $126.5 million for the three months ended September 30, 2013, which represented an increase of $30.1 million, or 24%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $121.5 million for the three months ended September 30, 2014, as compared to $96.7 million for the three months ended September 30, 2013, an increase of $24.8 million, or 26%. The increase was primarily due to increased compensation costs resulting from the expansion of our businesses and higher costs from share-based and other deferred compensation arrangements. Non-compensation expenses, as a component of Operating Expenses, were $35.1 million for the three months ended September 30, 2014, as compared to $29.8 million for the three months ended September 30, 2013, an increase of $5.3 million, or 18%. Non-compensation operating expenses increased from the prior year primarily driven by the addition of personnel within the business, increased new business costs associated with high levels of global transaction activity and higher professional fees associated with a limited number of investment bankers serving under consulting contracts. Other Expenses of $8.8 million for the three months ended September 30, 2014 included acquisition related compensation costs of $0.6 million, special charges of $3.7 million, amortization of intangibles of $0.4 million and acquisition and transition costs of $4.1 million. Other Expenses of $7.4 million for the three months ended September 30, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $4.3 million and acquisition related compensation costs of $3.1 million. 37 -------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 versus September 30, 2013 Net Investment Banking Revenues were $522.2 million for the nine months ended September 30, 2014 compared to $477.8 million for the nine months ended September 30, 2013, which represented an increase of 9%. We earned advisory fees from 310 clients for the nine months ended September 30, 2014 compared to 269 for the nine months ended September 30, 2013, representing a 15% increase. We had 117 fees in excess of $1.0 million for the nine months ended September 30, 2014, compared to 95 for the nine months ended September 30, 2013, representing a 23% increase. The increase in revenues from the nine months ended September 30, 2013 primarily reflects an increase in Advisory revenue during the nine months ended September 30, 2014 in our U.S. and U.K. businesses. Underwriting Revenue decreased 22% from the nine months ended September 30, 2013 primarily due to a decrease in underwriting deals in our Mexico business. Operating Expenses were $410.8 million for the nine months ended September 30, 2014 compared to $369.9 million for the nine months ended September 30, 2013, an increase of $40.9 million, or 11%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $309.1 million for the nine months ended September 30, 2014, as compared to $282.7 million for the nine months ended September 30, 2013, an increase of $26.4 million, or 9%. The increase was primarily due to increased compensation costs resulting from the expansion of our businesses and higher costs from share-based and other deferred compensation arrangements. Non-compensation expenses, as a component of Operating Expenses, were $101.8 million for the nine months ended September 30, 2014, as compared to $87.2 million for the nine months ended September 30, 2013, an increase of $14.6 million, or 17%. Non-compensation operating expenses increased from the prior year primarily driven by the addition of personnel within the business, increased new business costs associated with high levels of global transaction activity and higher professional fees associated with a limited number of investment bankers serving under consulting contracts. Other Expenses of $16.3 million for the nine months ended September 30, 2014 included acquisition related compensation costs of $6.4 million, special charges of $3.7 million, amortization of intangibles of $0.4 million, professional fees of $1.7 million and acquisition and transition costs of $4.1 million. Other Expenses of $26.7 million for the nine months ended September 30, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $13.5 million and acquisition related compensation costs of $13.2 million. 38--------------------------------------------------------------------------------Investment Management The following table summarizes the operating results of the Investment Management segment. For the Three Months Ended For the Nine Months Ended September 30, September 30, 2014 2013 Change 2014 2013 Change (dollars in thousands) Revenues Investment Advisory and Management Fees: Wealth Management $ 7,906 $ 7,006 13 % $ 22,592 $ 20,120 12 % Institutional Asset Management 11,778 10,700 10 % 34,422 32,289 7 % Private Equity 2,055 2,351 (13 %) 6,104 8,275 (26 %) Total Investment Advisory and Management Fees 21,739 20,057 8 % 63,118 60,684 4 % Realized and Unrealized Gains: Institutional Asset Management 1,367 1,518 (10 %) 4,742 4,867 (3 %) Private Equity 1,671 2,663 (37 %) 5,633 5,213 8 % Total Realized and Unrealized Gains 3,038 4,181 (27 %) 10,375 10,080 3 % Investment Management Revenue (1) 24,777 24,238 2 % 73,493 70,764 4 % Other Revenue, net (2) (644 ) (555 ) (16 %) (1,725 ) (1,854 ) 7 % Net Investment Management Revenues 24,133 23,683 2 % 71,768 68,910 4 % Expenses Operating Expenses 22,356 20,968 7 % 63,518 61,853 3 % Other Expenses 82 593 (86 %) 246 1,939 (87 %) Total Expenses 22,438 21,561 4 % 63,764 63,792 - % Operating Income (3) 1,695 2,122 (20 %) 8,004 5,118 56 % Income from Equity Method Investments (4) 1,150 562 105 % 2,926 1,873 56 % Pre-Tax Income from Continuing Operations $ 2,845 $ 2,684 6 % $ 10,930 $ 6,991 56 % (1) Includes transaction-related client reimbursements of $0.1 million for the nine months ended September 30, 2014 and 2013. (2) Includes interest expense on the Senior Notes of $1.0 million and $2.8 million for the three and nine months ended September 30, 2014, respectively, and $0.9 million and $2.8 million for the three and nine months ended September 30, 2013, respectively. (3) Includes Noncontrolling Interest of $0.3 million and $3.1 million for the three and nine months ended September 30, 2014, respectively, and $0.6 million and $1.5 million for the three and nine months ended September 30, 2013, respectively. (4) Equity in G5 ? Evercore, ABS and Pan is classified as Income from Equity Method Investments. The Company's investment in Pan was consolidated during the first quarter of 2013. Investment Management Results of Operations Our Wealth Management business includes the results of EWM. Our Institutional Asset Management business includes the results of ETC, ECB and Atalanta Sosnoff. Fee-based revenues from EWM, Atalanta Sosnoff and ECB are primarily earned on a percentage of AUM, while ETC primarily earns fees from negotiated trust services and fiduciary consulting arrangements. In 2013, the Company held a fourth and final closing on EMCP III, a private equity fund focused on middle market investments in Mexico. See Note 8 of our unaudited condensed consolidated financial statements for further information. ECP II earned management fees of 1% of invested capital through December 21, 2013, the technical termination of the fund. No management fees were earned by the Company in 2013. We earn management fees on EMCP II and EMCP III of 2.0% per annum of committed capital during its investment period, and 2.0% per annum on net funded capital thereafter. In addition, the general partner of the private equity funds earns carried interest of 20% based on the fund's performance, provided it exceeds preferred return hurdles to its limited partners. We own 8%-9% of the carried interest earned by the general partner of 39 -------------------------------------------------------------------------------- ECP II. A significant portion of any gains recognized related to ECP II, EMCP II and EMCP III, and any carried interest recognized by them, are distributed to certain of our private equity professionals. In the event the funds perform below certain thresholds we may be obligated to repay certain carried interest previously distributed. As of September 30, 2014, we had $2.7 million of previously received carried interest that may be subject to repayment. We made investments accounted for under the equity method of accounting in G5 ? Evercore and ABS during the fourth quarters of 2010 and 2011, respectively, the results of which are included within Income from Equity Method Investments. Assets Under Management AUM for our Investment Management business of $14.5 billion at September 30, 2014 increased from $13.6 billion at December 31, 2013. The amounts of AUM presented in the table below reflect the assets for which we charge a management fee. These assets reflect the fair value of assets managed on behalf of Institutional Asset Management and Wealth Management clients, and the amount of either the invested or committed capital of the Private Equity funds. As defined in ASC 820, valuations performed for Level I investments are based on quoted prices obtained from active markets generated by third parties and Level II investments are valued through the use of models based on either direct or indirect observable inputs in the use of models or other valuation methodologies performed by third parties to determine fair value. For both the Level I and Level II investments, we obtain both active quotes from nationally recognized exchanges and third-party pricing services to determine market or fair value quotes, respectively. Wealth Management maintained 65% and 63% of Level I investments and 35% and 37% of Level II investments as of September 30, 2014 and December 31, 2013, respectively, and Institutional Asset Management maintained 88% and 91% of Level I investments and 12% and 9% of Level II investments as of September 30, 2014 and December 31, 2013, respectively. As noted above, Private Equity AUM is not presented at fair value, but reported at either invested or committed capital in line with fee arrangements. The fees that we receive for providing investment advisory and management services are primarily driven by the level and composition of AUM. Accordingly, client flows, market movements, foreign currency fluctuations and changes in our product mix will impact the level of management fees we receive from our investment management businesses. Fees vary with the type of assets managed and the channel in which they are managed, with higher fees earned on equity assets, alternative investment funds, such as hedge funds and private equity funds, and lower fees earned on fixed income and cash management products. Clients will increase or reduce the aggregate amount of AUM that we manage for a number of reasons, including changes in the level of assets that they have available for investment purposes, their overall asset allocation strategy, our relative performance versus competitors offering similar investment products and the quality of our service. The fees we earn are also impacted by our investment performance, as the appreciation or depreciation in the value of the assets that we manage directly impacts our fees. The following table summarizes AUM activity for the nine months ended September 30, 2014: Institutional Wealth Asset Private Management Management Equity Total (dollars in millions) Balance at December 31, 2013 $ 4,874 $ 8,374 $ 385 $ 13,633 Inflows 703 2,202 - 2,905 Outflows (393 ) (2,235 ) (11 ) (2,639 ) Market Appreciation 273 310 - 583Balance at September 30, 2014 $ 5,457 $ 8,651 $ 374 $ 14,482 Unconsolidated Affiliates - Balance at September 30, 2014: G5 ? Evercore $ 2,217 $ - $ - $ 2,217 ABS $ - $ 4,533 $ - $ 4,533 40--------------------------------------------------------------------------------The following table represents the composition of our AUM for Wealth Management and Institutional Asset Management as of September 30, 2014: Wealth Management Institutional Asset Management Equities 60 % 60 % Fixed Income 33 % 36 % Liquidity (1) 6 % 3 % Alternatives 1 % 1 % Total 100 % 100 % (1) Includes cash and cash equivalents and U.S. Treasury securities. Our Wealth Management business serves individuals, families and related institutions delivering customized investment management, financial planning, and trust and custody services. Investment portfolios are tailored to meet the investment objectives of individual clients and reflect a blend of equity, fixed income and other products. Fees charged to clients reflect the composition of the assets managed and the services provided. Investment performance in the Wealth Management businesses is measured against appropriate indices based on the AUM, most frequently the S&P 500 and a composite fixed income index principally reflecting BarCap and MSCI indices. For the nine months ended September 30, 2014, AUM for Wealth Management increased 12%, reflecting a 6% increase due to flows and a 6% increase due to market appreciation. Wealth Management outperformed the S&P 500 on a 1 and 3 year basis by 2% and 1%, respectively, during the period and tracked the fixed income composite. For the period, the S&P 500 was up 8%, while the fixed income composite increased by 4%. Our Institutional Asset Management business reflects assets managed by Atalanta Sosnoff and ECB. Atalanta Sosnoff manages large-capitalization U.S. equity and balanced products, while, ECB primarily manages Mexican Government and Corporate fixed income securities. ECB also manages equity products. Atalanta Sosnoff principally utilizes the S&P 500 Index as a benchmark in reviewing their performance and managing their investment decisions, while ECB utilizes the IPC Index, which is a capitalization weighted index of leading equities traded on the Mexican Stock Exchange and the Cetes 28 Index, which is an index of Treasury Bills issued by the Mexican Government. For the nine months ended September 30, 2014, AUM for Institutional Asset Management increased 3%, reflecting a 1% decrease due to flows and a 4% increase due to market appreciation. This principally reflects an increase in AUM for ECB. ECB's AUM increase reflects strong investment performance and the continued marketing efforts to expand the market share of the business. AUM for Atalanta Sosnoff decreased, as their three year performance lagged benchmarks. Our Private Equity business includes the assets of funds which our Private Equity professionals manage. These funds include ECP II, the Discovery Fund, EMCP II and EMCP III. AUM for Private Equity decreased 3% for the nine months ended September 30, 2014 from outflows related to the continued wind-down of the U.S. Private Equity business. AUM from our unconsolidated affiliates increased from December 31, 2013 primarily related to positive performance in ABS. Three Months Ended September 30, 2014 versus September 30, 2013 Net Investment Management Revenues were $24.1 million for the three months ended September 30, 2014, compared to $23.7 million for the three months ended September 30, 2013. Investment Advisory and Management Fees earned from the management of client portfolios and other investment advisory services increased 8% from the three months ended September 30, 2013, primarily reflecting an increase in AUM in Wealth Management and in Institutional Asset Management, partially offset by a decrease in Private Equity fees. Fee-based revenues included minimal revenues from performance fees during the three months ended September 30, 2014 and $0.02 million during the three months ended September 30, 2013. Realized and Unrealized Gains decreased from the prior year primarily resulting from lower gains in our private equity funds. Income from Equity Method Investments increased from the three months ended September 30, 2013 primarily as a result of an increase in earnings from our investments in ABS and G5 ? Evercore. 41 -------------------------------------------------------------------------------- Operating Expenses were $22.4 million for the three months ended September 30, 2014, as compared to $21.0 million for the three months ended September 30, 2013, an increase of $1.4 million, or 7%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $14.5 million for the three months ended September 30, 2014, as compared to $13.7 million for the three months ended September 30, 2013, an increase of $0.8 million, or 6%. The increase was due primarily to higher discretionary incentive compensation. Non-compensation expenses, as a component of Operating Expenses, were $7.9 million for the three months ended September 30, 2014, as compared to $7.3 million for the three months ended September 30, 2013, an increase of $0.6 million, or 8%. Other Expenses of $0.1 million for the three months ended September 30, 2014 were related to amortization of intangibles. Other Expenses of $0.6 million for the three months ended September 30, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $0.5 million and amortization of intangibles of $0.1 million. Nine Months Ended September 30, 2014 versus September 30, 2013 Net Investment Management Revenues were $71.8 million for the nine months ended September 30, 2014, compared to $68.9 million for the nine months ended September 30, 2013. Investment Advisory and Management Fees earned from the management of client portfolios and other investment advisory services increased 4% from the nine months ended September 30, 2013, primarily reflecting an increase in AUM in Wealth Management and in Institutional Asset Management, partially offset by a decrease in Private Equity fees. Fee-based revenues included $0.2 million of revenues from performance fees during the nine months ended September 30, 2014 compared to $0.4 million during the nine months ended September 30, 2013. Realized and Unrealized Gains increased from the prior year primarily resulting from gains in our private equity funds, which were principally driven by unrealized gains on portfolio companies in the U.S. and Mexico. Income from Equity Method Investments increased from the nine months ended September 30, 2013 primarily as a result of an increase in earnings from our investments in ABS. Operating Expenses were $63.5 million for the nine months ended September 30, 2014, as compared to $61.9 million for the nine months ended September 30, 2013, an increase of $1.7 million, or 3%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $41.9 million for the nine months ended September 30, 2014, as compared to $40.6 million for the nine months ended September 30, 2013, an increase of $1.3 million, or 3%. The increase was due primarily to higher costs from share-based and other deferred compensation arrangements. Non-compensation expenses, as a component of Operating Expenses, were $21.7 million for the nine months ended September 30, 2014, as compared to $21.3 million for the nine months ended September 30, 2013, an increase of $0.4 million, or 2%. Other Expenses of $0.2 million for the nine months ended September 30, 2014 were related to amortization of intangibles. Other Expenses of $1.9 million for the nine months ended September 30, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $1.7 million and amortization of intangibles of $0.2 million. Cash Flows Our operating cash flows are primarily influenced by the timing and receipt of investment banking and investment management fees, and the payment of operating expenses, including bonuses to our employees and interest expense on our Senior Notes. Investment Banking advisory fees are generally collected within 90 days of billing. However, placement fees may be collected within 180 days of billing, with certain fees being collected in a period exceeding one year. Management fees from our private equity investment management activities are generally billed in advance but collected at the end of a half year period from billing. Fees from our Wealth Management and Institutional Asset Management businesses are generally billed and collected within 90 days. We traditionally pay a substantial portion of incentive compensation to personnel in the Investment Banking business and to executive officers during the first three months of each calendar year with respect to the prior year's results. Our investing and financing cash flows are primarily influenced by activities to deploy capital to fund investments and acquisitions, raise capital through the issuance of stock or debt, repurchase of outstanding Class A shares, and/or noncontrolling interest in Evercore LP, as well as our other subsidiaries, payment of dividends and other periodic distributions to our stakeholders. We generally make dividend payments and other distributions on a quarterly basis. A summary of our operating, investing and financing cash flows is as follows: 42 -------------------------------------------------------------------------------- For the Nine Months Ended September 30, 2014 2013 (dollars in thousands) Cash Provided By (Used In) Operating activities: Net income $ 68,262 $ 48,643 Non-cash charges 117,855 107,826 Other operating activities (96,866 ) (37,667 ) Operating activities 89,251 118,802 Investing activities (5,340 ) (5,476 ) Financing activities (140,982 ) (127,376 ) Effect of exchange rate changes (2,313 ) (1,583 ) Net Increase (Decrease) in Cash and Cash Equivalents (59,384 ) (15,633 ) Cash and Cash Equivalents Beginning of Period 298,453 259,431 End of Period $ 239,069 $ 243,798 Nine Months Ended September 30, 2014. Cash and Cash Equivalents were $239.1 million at September 30, 2014, a decrease of $59.4 million versus Cash and Cash Equivalents of $298.5 million at December 31, 2013. Operating activities resulted in a net inflow of $89.3 million, primarily related to earnings, offset by a decrease in accrued compensation and benefits and an increase in other assets. Cash of $5.3 million was used in investing activities primarily related to investments purchased and purchases of furniture, equipment and leasehold improvements, partially offset by net proceeds from maturities and sales of our marketable securities. Financing activities during the period used cash of $141.0 million, primarily for the payment of dividends and distributions to noncontrolling interest holders, as well as treasury stock and noncontrolling interest purchases. Nine Months Ended September 30, 2013. Cash and Cash Equivalents were $243.8 million at September 30, 2013, a decrease of $15.6 million versus Cash and Cash Equivalents of $259.4 million at December 31, 2012. Operating activities resulted in a net inflow of $118.8 million, primarily related to earnings, offset by a decrease in accrued compensation and benefits and taxes payable and an increase in other assets. Cash of $5.5 million was used in investing activities primarily related to net purchases of marketable securities and investments and purchases of furniture, equipment and leasehold improvements. Financing activities during the period used cash of $127.4 million, primarily for the payment of dividends, distributions to noncontrolling interest holders and treasury stock and noncontrolling interest purchases. Liquidity and Capital Resources General Our current assets include Cash and Cash Equivalents, Marketable Securities and Accounts Receivable relating to Investment Banking and Investment Management revenues. Our current liabilities include accrued expenses and accrued employee compensation. We traditionally have made payments for employee bonus awards and year-end distributions to partners in the first quarter of the year with respect to the prior year's results. Cash distributions related to partnership tax allocations are made to the partners of Evercore LP in accordance with our corporate estimated payment calendar; these payments are made prior to the end of each calendar quarter. In addition, dividends on Class A Shares are paid when and if declared by the Board of Directors, which is generally quarterly. We regularly monitor our liquidity position, including cash, other significant working capital, current assets and liabilities, long-term liabilities, lease commitments and related fixed assets, principal investment commitments related to our Investment Management business, dividends on Class A Shares, partnership distributions and other capital transactions, as well as other matters relating to liquidity and compliance with regulatory requirements. Our liquidity is highly dependent on our revenue stream from our operations, principally from our Investment Banking business, which is a function of closing transactions and earning success fees, the timing and realization of which is irregular and dependent upon factors that are not subject to our control. Our revenue stream funds the payment of our expenses, including annual bonus payments, a portion of which are guaranteed, interest expense on our Senior Notes and income taxes. Payments made for income taxes may be reduced by deductions taken for the increase in tax basis of our investment in Evercore LP. These tax deductions, when realized, require payment under our long-term liability, Amounts Due Pursuant to Tax Receivable Agreements. We intend to fund these 43-------------------------------------------------------------------------------- Table of Contents payments from cash and cash equivalents on hand, principally derived from cash flows from operations. These tax deductions, when realized, will result in cash otherwise required to satisfy tax obligations becoming available for other purposes. Our Management Committee meets regularly to monitor our liquidity and cash positions against our short and long-term obligations, as well as our capital requirements and commitments. The result of this review contributes to management's recommendation to the Board of Directors as to the level of quarterly dividend payments, if any. As a financial services firm, our businesses are materially affected by conditions in the global financial markets and economic conditions throughout the world. Revenue generated by our advisory activities is related to the number and value of the transactions in which we are involved. During periods of unfavorable market or economic conditions, the number and value of M&A transactions generally decrease, and they generally increase during periods of favorable market or economic conditions. Restructuring activity generally is counter-cyclical to M&A activity. In addition, during periods of unfavorable market conditions our Investment Management business may be impacted by reduced equity valuations and generate relatively lower revenue because fees we receive typically are in part based on the market value of underlying publicly-traded securities. Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame and in an amount sufficient to match any decreases in revenue relating to changes in market and economic conditions. Reduced equity valuations resulting from future adverse economic events and/or market conditions may impact our performance and may result in future net redemptions of AUM from our clients, which would generally result in lower revenues and cash flows. These adverse conditions could also have an impact on our goodwill impairment assessment, which is done annually, as of November 30th, or more frequently if circumstances indicate impairment may have occurred. For a further discussion of risks related to our business, refer to "Risk Factors" in our Form 10-K for the year ended December 31, 2013. We periodically repurchase Class A Shares and/or LP Units into Treasury in order to reduce the dilutive effect of equity awards granted. In addition, we may from time to time, purchase noncontrolling interests in subsidiaries. In October 2013 our Board of Directors authorized the repurchase of additional Class A Shares and/or LP Units so that going forward Evercore will be able to repurchase an aggregate of 5 million Class A Shares and/or LP Units for up to $250.0 million. On October 20, 2014 our Board of Directors authorized the repurchase of additional Class A Shares and/or LP Units so that going forward Evercore will be able to repurchase an aggregate of 7 million Class A Shares and/or LP Units for up to $350.0 million. Under this share repurchase program, shares may be repurchased from time to time in open market transactions, in privately-negotiated transactions or otherwise. The timing and the actual amount of shares repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. This program may be suspended or discontinued at any time and does not have a specified expiration date. During the nine months ended September 30, 2014, we repurchased 952,928 shares for $48.5 million pursuant to our repurchase program. In addition, periodically, we buy shares into treasury from our employees in order to allow them to satisfy their minimum tax requirements for share deliveries under our share equity plan. During the nine months ended September 30, 2014, we repurchased 1,612,037 shares for $86.7 million primarily related to minimum tax withholding requirements of share deliveries. On August 21, 2008, we entered into a Purchase Agreement with Mizuho pursuant to which Mizuho purchased from us $120.0 million principal amount of Senior Notes and Warrants to purchase 5,454,545 Class A Shares at $22.00 per share expiring in 2020. The holder of the Senior Notes may require us to purchase, for cash, all or any portion of the holder's Senior Notes upon a change of control of the Company for a price equal to the Accreted Amount, plus accrued and unpaid interest. Senior Notes held by Mizuho will be redeemable at the Accreted Amount at our option at any time within 90 days following the date on which Mizuho notifies us that it is terminating their Strategic Alliance Agreement. Senior Notes held by any holder other than Mizuho will be redeemable at the Accreted Amount (plus accrued and unpaid interest) at our option at any time. In the event of a default under the indenture, the trustee or holders of 33 1/3% of the Senior Notes may declare that the Accreted Amount is immediately due and payable. Pursuant to the agreement, Mizuho may transfer (A) the Senior Notes (i) with the Company's consent, (ii) to a permitted transferee, or (iii) to the extent that such transfer does not result in any holder or group of affiliated holders directly or indirectly owning more than 15% of the aggregate principal amount of the Senior Notes, and (B) the Warrants (i) with the Company's consent, (ii) to a permitted transferee, (iii) pursuant to a tender or exchange offer, or a merger or sale transaction involving the Company that has been recommended by the Company's Board of Directors, or (iv) to the extent that such transfer is made pursuant to a widely distributed public offering or does not result in any holder or group of affiliated holders directly or indirectly owning more than 2% of the Company's voting securities and the total shares of Class A common stock transferred, 44-------------------------------------------------------------------------------- Table of Contents together with any shares of Class A common stock (on an as-converted basis) transferred during the preceding 12 months, is less than 25% of the Company's outstanding Class A common stock. The Company has a right of first offer on any proposed transfer by Mizuho of the Warrants, Common Stock purchased in the open market or acquired by exercise of the Warrants and associated Common Stock issued as dividends. The exercise price for the Warrants is payable, at the option of the holder of the Warrants, either in cash or by tender of Senior Notes at the Accreted Amount, at any point in time. Pursuant to the Purchase Agreement with Mizuho, Evercore is subject to certain nonfinancial covenants. As of September 30, 2014, we were in compliance with all of these covenants. We have made certain capital commitments, with respect to our investment activities, as well as commitments related to redeemable noncontrolling interest and contingent consideration from our acquisitions, which are included in the Contractual Obligations section below. In 2013, we established a $25.0 million line of credit with First Republic Bank for funding working capital and other corporate activities. This facility is secured with certain of our Accounts Receivable outstanding from the date of the agreement and/or restricted cash included in Other Assets on the Unaudited Condensed Consolidated Statements of Financial Condition. The interest rate on this facility is the U.S. prime rate. The facility was renewed on June 24, 2014, and the maturity date was extended to June 27, 2015. On August 4, 2014, the Company drew down $25.0 million on this facility, which was repaid on September 29, 2014. ECB maintains a line of credit with BBVA Bancomer to fund its trading activities on an intra-day and overnight basis. The intra-day facility is approximately $11.1 million and is secured with trading securities when used on an overnight basis. No interest is charged on the intra-day facility. The overnight facility is charged the Inter-Bank Balance Interest Rate plus 10 basis points and is secured with trading securities. There have been no significant monies drawn on ECB's line of credit since August 10, 2006. The line of credit is renewable annually. Pursuant to deferred compensation and deferred consideration arrangements, we are obligated to make cash payments in future periods. For further information see Note 14 to our unaudited condensed consolidated financial statements. Certain of our subsidiaries are regulated entities and are subject to capital requirements. For further information see Note 16 to our unaudited condensed consolidated financial statements. Collateralized Financing Activity at ECB ECB enters into repurchase agreements with clients seeking overnight money market returns whereby ECB transfers to the clients Mexican government securities in exchange for cash and concurrently agrees to repurchase the securities at a future date for an amount equal to the cash exchanged plus a stipulated premium or interest factor. ECB deploys the cash received from, and acquires the securities deliverable to, clients under these repurchase arrangements by purchasing securities in the open market or by entering into reverse repurchase agreements with unrelated third parties. We account for these repurchase and reverse repurchase agreements as collateralized financing transactions. We record a liability on our Unaudited Condensed Consolidated Statements of Financial Condition in relation to repurchase transactions executed with clients as Securities Sold Under Agreements to Repurchase. We record as assets on our Unaudited Condensed Consolidated Statements of Financial Condition, Financial Instruments Owned and Pledged as Collateral at Fair Value (where we have acquired the securities deliverable to clients under these repurchase arrangements by purchasing securities in the open market) and Securities Purchased Under Agreements to Resell (where we have acquired the securities deliverable to clients under these repurchase agreements by entering into reverse repurchase agreements with unrelated third parties). These Mexican government securities included in Financial Instruments Owned and Pledged as Collateral at Fair Value on the Unaudited Condensed Consolidated Statements of Financial Condition have an estimated average time to maturity of approximately 1.6 years, as of September 30, 2014, and are pledged as collateral against repurchase agreements, which are collateralized financing agreements. Generally, collateral is posted equal to the contract value at inception and is subject to market changes. These repurchase agreements are primarily with institutional customer accounts managed by ECB, generally mature within one business day and permit the counterparty to pledge the securities. Increases and decreases in asset and liability levels related to these transactions are a function of growth in ECB's AUM, as well as clients' investment allocations requiring positioning in repurchase transactions. ECB has procedures in place to monitor the daily risk limits for positions taken, as well as the credit risk based on the collateral pledged under these agreements against their contract value from inception to maturity date. The daily risk measure is 45-------------------------------------------------------------------------------- Table of Contents Value at Risk ("VaR"), which is a statistical measure, at a 98% confidence level, of the potential daily losses from adverse market movements in an ordinary market environment based on a historical simulation using the prior year's historical data. ECB's Risk Management Committee (the "Committee") has established a policy to maintain VaR at levels below 0.1% of the value of the portfolio. If at any point in time the threshold is exceeded, ECB personnel are alerted by an automated interface with ECB's trading systems and begin to make adjustments in the portfolio in order to mitigate the risk and bring the portfolio in compliance. Concurrently, ECB personnel must notify the Committee of the variance and the actions taken to reduce the exposure to loss. In addition to monitoring VaR, ECB periodically performs discrete stress tests ("Stress Tests") to assure that the level of potential losses that would arise from extreme market movements that may not be anticipated by VaR measures are within acceptable levels. The table below includes a key stress test monitored by the Committee, noted as the sensitivity to a 100 basis point change in interest rates. This analysis assists ECB in understanding the impact of an extreme move in rates, assuring the Collateralized Financing portfolio is structured to maintain risk at an acceptable level, even in extreme circumstances. The Committee meets monthly to analyze the overall market risk exposure based on positions taken, as well as the credit risk, based on the collateral pledged under these agreements against the contract value from inception to maturity date. In these meetings the Committee evaluates risk from an operating perspective, VaR, and an exceptional perspective, Stress Tests, to determine the appropriate level of risk limits in the current environment. We periodically assess the collectability or credit quality related to securities purchased under agreements to resell. As of September 30, 2014 and December 31, 2013, a summary of ECB's assets, liabilities and risk measures related to its collateralized financing activities is as follows: September 30, 2014 December 31, 2013 Market Value of Market Value of Amount Collateral Received or (Pledged) Amount Collateral Received or (Pledged) (dollars in thousands) Assets Financial Instruments Owned and Pledged as Collateral at Fair Value $ 94,254 $ 56,311 Securities Purchased Under Agreements to Resell 5,115 $ 5,137 19,134 $ 19,112 Total Assets 99,369 75,445 Liabilities Securities Sold Under Agreements to Repurchase (99,484 ) $ (99,573 ) (75,563 ) $ (75,708 ) Net Liabilities $ (115 ) $ (118 ) Risk Measures VaR $ 7 $ 7 Stress Test: Portfolio sensitivity to a 100 basis point increase in the interest rate $ (93 ) $ (35 ) Portfolio sensitivity to a 100 basis point decrease in the interest rate $ 93 $ 35 Contractual Obligations For a complete discussion of our contractual obligations, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2013. As of September 30, 2014, we were unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority per ASC 740, hence, unrecognized tax benefits have been excluded from this disclosure. 46-------------------------------------------------------------------------------- Table of Contents We had total commitments (not reflected on our Unaudited Condensed Consolidated Statements of Financial Condition) relating to future capital contributions to private equity funds of $9.2 million and $9.9 million as of September 30, 2014 and December 31, 2013, respectively. We expect to fund these commitments with cash flows from operations. We may be required to fund these commitments at any time through June 2022, depending on the timing and level of investments by our private equity funds. We also have commitments related to our redeemable noncontrolling interests. The value of our redeemable noncontrolling interests, which principally includes noncontrolling interests held by the principals of EWM and Atalanta Sosnoff, decreased from $36.8 million as of December 31, 2013 to $15.4 million as of September 30, 2014, as recorded on our Unaudited Condensed Consolidated Statements of Financial Condition. The decrease resulted from a $34.6 million decrease related to noncontrolling interests held by the principals of EWM. In April 2014, the Company entered into a commitment to purchase 3,332 units, or 22%, of the aggregate amount of the outstanding EWM Class A units held by members of EWM for Class A Shares and LP Units of the Company, for a fair value of $7.1 million. This transaction settled on May 22, 2014 and increased the Company's ownership in EWM to 62%. In conjunction with this purchase, the Company amended the Amended and Restated Limited Liability Company Agreement of EWM. Per the amended agreement, the holders of certain EWM interests no longer have the option to redeem these capital interests for cash upon the event of the death or disability of the holder. Accordingly, the value of these interests has been reclassified from Redeemable Noncontrolling Interest to Noncontrolling Interest on the Unaudited Condensed Consolidated Statement of Financial Condition as of June 30, 2014. See Note 12 to our unaudited condensed consolidated financial statements for further information. The decrease was partially offset by an increase of $11.1 million to Redeemable Noncontrolling Interest on the Unaudited Condensed Consolidated Statement of Financial Condition as of September 30, 2014 as a result of cash committed to purchase noncontrolling interests from certain exiting employees in the Institutional Equities business. This purchase is contingent on the closing of the acquisition of ISI. See Note 15 to our unaudited condensed consolidated financial statements for further information. On August 3, 2014, the Company entered into definitive contribution and exchange agreements to acquire all of the outstanding equity interests of the operating businesses of ISI, a leading independent research-driven equity sales and agency trading firm, and to acquire the approximately 40% interest in the Company's Institutional Equities business that it does not currently own. The sellers of ISI and the Company's Institutional Equities business will receive consideration of up to an aggregate 2.6 million vested and unvested Class E Units and up to an aggregate 5.4 million vested and unvested Class G and H Interests in Evercore LP, as well as a currently estimated $11.1 million in cash for certain sellers of the Institutional Equities business who are not receiving LP Units or Interests. The sellers of ISI will receive vested and unvested Class E Units that are exchangeable on a one-for-one basis into Class A common stock of the Company subject to timing and other limitations, and vested and unvested Class G and H Interests in Evercore LP, which, when vested, will convert into a number of Class E Units and become exchangeable on a one-for-one basis into Class A common stock of the Company dependent on the financial performance of the combined business over the five years following closing. These units and interests will be allocated between purchase price and future compensation based on their underlying terms. The sellers of the Institutional Equities business, who are not receiving cash, will receive vested Class E Units that are exchangeable on a one-for-one basis into Class A common stock of the Company subject to timing and other limitations, and vested Class G and H Interests in Evercore LP, which will convert into a number of Class E Units and become exchangeable on a one-for-one basis into Class A common stock of the Company dependent on the financial performance of the combined business over the five years following closing. On October 31, 2014, the Company closed on its acquisition of ISI. Following the closing of the transactions, the Company will combine ISI's business with the Company's existing Institutional Equities business within the Investment Banking segment. Off-Balance Sheet Arrangements We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any leasing activities that expose us to any liability that is not reflected in our unaudited condensed consolidated financial statements. 47-------------------------------------------------------------------------------- Table of Contents Market Risk and Credit Risk We, in general, are not a capital-intensive organization and as such, are not subject to significant market or credit risks. Nevertheless, we have established procedures to assess both the market and credit risk, as well as specific investment risk, exchange rate risk and credit risk related to receivables. Market and Investment Risk Institutional Asset Management We invest in funds managed by EWM. These funds principally hold readily-marketable investment securities. As of September 30, 2014, the fair value of our investments with these products, based on closing prices, was $6.3 million. We estimate that a hypothetical 10% adverse change in the market value of the investments would have resulted in a decrease in pre-tax income of approximately $0.6 million for the three months ended September 30, 2014. See "-Liquidity and Capital Resources" above for a discussion of collateralized financing transactions at ECB. Private Equity Funds Through our principal investments in our private equity funds and our ability to earn carried interest from these funds, we face exposure to changes in the estimated fair value of the companies in which these funds invest. Our professionals devote considerable time and resources to work closely with the portfolio company's management to assist in designing a business strategy, allocating capital and other resources and evaluating expansion or acquisition opportunities. On a quarterly basis, we perform a comprehensive analysis and valuation of all of the portfolio companies. Our analysis includes reviewing the current market conditions and valuations of each portfolio company. Valuations and analysis regarding our investments in CSI Capital and Trilantic are performed by their respective professionals, and thus we are not involved in determining the fair value for the portfolio companies of such funds. We estimate that a hypothetical 10% adverse change in the value of the private equity funds would have resulted in a decrease in pre-tax income of approximately $2.3 million for the three months ended September 30, 2014. Exchange Rate Risk We have foreign operations, through our subsidiaries and affiliates, primarily in Mexico and the United Kingdom, as well as provide services to clients in other jurisdictions, which creates foreign exchange rate risk. We have not entered into any transactions to hedge our exposure to these foreign exchange fluctuations through the use of derivative instruments or otherwise. An appreciation or depreciation of any of these currencies relative to the U.S. dollar would result in an adverse or beneficial impact to our financial results. A significant portion of our Latin American revenues have been, and will continue to be, derived from contracts denominated in Mexican pesos and Evercore Partners Limited's revenue and expenses are denominated primarily in British pounds sterling and euro. Historically, the value of these foreign currencies has fluctuated relative to the U.S. dollar. For the nine months ended September 30, 2014, the net impact of the fluctuation of foreign currencies recorded in Other Comprehensive Income within the Unaudited Condensed Consolidated Statement of Comprehensive Income was ($3.1) million. It is currently not our intention to hedge our foreign currency exposure, and we will reevaluate this policy from time to time. Credit Risks We maintain cash and cash equivalents with financial institutions with high credit ratings. At times, we may maintain deposits in federally insured financial institutions in excess of federally insured ("FDIC") limits. However, we believe that we are not exposed to significant credit risk due to the financial position of the depository institution in which those deposits are held. Accounts Receivable consists primarily of advisory fees and expense reimbursements billed to our clients. Receivables are reported net of any allowance for doubtful accounts. We maintain an allowance for bad debts to provide coverage for probable losses from our customer receivables and derive the estimate through specific identification for the allowance for doubtful accounts and an assessment of the client's creditworthiness. As of September 30, 2014 and December 31, 2013, total receivables amounted to $103.4 million and $83.3 million, respectively, net of an allowance. The Investment Banking and Investment Management receivables collection periods generally are within 90 days of invoice, with the exception of placement fees, which are generally collected within 180 days of invoice. The collection period for restructuring transactions and private 48-------------------------------------------------------------------------------- Table of Contents equity fee receivables may exceed 90 days. We recorded minimal bad debt expense for each of the nine months ended September 30, 2014 and 2013. With respect to our Marketable Securities portfolio, which is comprised primarily of highly-rated corporate and municipal bonds, mutual funds and securities investments, we manage our credit risk exposure by limiting concentration risk and maintaining investment grade credit quality. As of September 30, 2014, we had Marketable Securities of $30.8 million, of which 67% were corporate and municipal securities, primarily with S&P ratings ranging from AAA to BB+. Critical Accounting Policies and Estimates The unaudited condensed consolidated financial statements included in this report are prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions regarding future events that affect the amounts reported in our unaudited condensed consolidated financial statements and their notes, including reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base these estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. For a complete discussion of our critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the year ended December 31, 2013. Performance Fees - Performance fees, or carried interest, are computed in accordance with the underlying private equity funds' partnership agreements and are based on investment performance over the life of each investment partnership. Historically, the Company recorded performance fee revenue from its managed private equity funds when the private equity funds' investment values exceeded certain threshold minimums. During the second quarter of 2014, the Company changed its method of recording performance fees such that the Company records performance fees upon the earlier of the termination of the investment fund or when the likelihood of clawback is mathematically improbable. This method is considered the more preferable of the two methods accepted under ASC 605-20-S99-1. This change in accounting policy had no effect on the prior period information included on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Financial Condition in this Form 10-Q, or the Consolidated Statements of Operations and Consolidated Statements of Financial Condition in the Company's most recent Annual Report on Form 10-K. Recently Issued Accounting Standards For a discussion of recently issued accounting standards and their impact or potential impact on the Company's consolidated financial statements, see Note 3 to our unaudited condensed consolidated financial statements. 49-------------------------------------------------------------------------------- Table of Contents |