UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04750
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Fenimore Asset Management Trust
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(Exact name of registrant as specified in charter)
384 North Grand Street
P.O. Box 399
Cobleskill, New York 12043
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(Address of principal executive offices) (Zip code)
Thomas O. Putnam
Fenimore Asset Management Trust
384 North Grand Street
Cobleskill, New York 12043
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-800-453-4392
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2005
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Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549-0609. The OMB has reviewed this collection of
information under the clearance requirements of 44 U.S.C. ss. 3507.
Item 1. Reports to Stockholders.
The annual report to stockholders is filed herewith.
FAM
VALUE FUND [LOGO] EQUITY-INCOME FUND
Investor Share Class and Advisor Share Class
ANNUAL REPORT
December 31, 2005
Table of Contents
Chairman's Commentary 1
FAM Value Fund 3
Letter to Shareholders 3
Performance Summary 7
Portfolio Data 9
Expense Data 11
Statement of Investments 13
Statement of Assets and Liabilities 18
Statement of Operations 19
Statement of Changes in Net Assets 20
Notes to Financial Statements 21
Report of Independent Registered Public Accounting Firm 27
Investment Advisor Contract Renewal Disclosure 28
FAM Equity-Income Fund 32
Letter to Shareholders 32
Performance Summary 36
Portfolio Data 38
Expense Data 40
Statement of Investments 42
Statement of Assets and Liabilities 46
Statement of Operations 47
Statement of Changes in Net Assets 48
Notes to Financial Statements 49
Report of Independent Registered Public Accounting Firm 55
Investment Advisor Contract Renewal Disclosure 56
Information About Trustees and Officers 60
Definition of Terms 62
Supplemental Information 64
Chairman's Commentary [LOGO]
December 2005
Dear Shareholder,
In January many people make investment predictions about the coming
year. Last year, I boldly stated that 2005 would be a challenging year and
while in the past I have often suggested a similar outcome, 2005 proved me
too accurate! Rising inflation and interest rates, higher energy prices, the
growing trade and budget deficits, and the aftermath of the hurricane
disasters left investors with much to worry about. Just when we thought we
were making investment progress, something would occur to take the wind out
of our sails. As a result, 2005 turned out to be a decent, but not
spectacular, year.
2006
The silver lining of 2005 is that uncertainty creates opportunity. Much to
our delight, during the stock market dips of the year we discovered that
several long-term investment ideas became attractively priced and we were
able to purchase them. We fully believe that these additions will create a
stronger foundation for future returns. Additionally, we are impressed with
the resiliency the economy has demonstrated even in the face of seemingly
strong headwinds. While I am not about to throw caution to the wind, I will,
again, boldly predict that 2006 will be another challenging year!
If the above sounds redundant, it is not meant to be as we believe that
short-term predictions have little impact on long-term investment results.
John Wooden, a former head basketball coach for UCLA, once suggested that the
importance of any endeavor is not in the outcome, but in the preparation for
the task. The wisdom of this notion has even more impact because it comes
from a coach who won ten of twelve NCAA championships and seven in a row -- a
feat that is not likely to be duplicated. As stated in the book Wooden: "The
preparation is where success is truly found." "It was the journey I prized
above all else." Coach Wooden was not exaggerating; he actually found more
satisfaction in the preparation for the game than in the outcome.
True long-term investing is much the same. It requires a disciplined
approach to preparing and executing the investing process in order to have a
successful outcome. What we find interesting is that most "investors"
concentrate more on the outcome than they do on the process of investing. As
a result, people become trend followers and shift their investments to what
has had the best PAST performance. Unfortunately, this often occurs at the
most inopportune time. The most glaring evidence of this behavior occurred
during the tech/growth bubble at the end of 1999 and the beginning of 2000
when many were swayed to shift their investments into this sector.
Anticipation of over exuberant outcomes often creates investment disasters.
Investing is mostly about businesses and not about predictions. It is
about creating economic value that benefits a myriad of people. Thus, the key
to successful investing requires an inquisitive mind that has a passion for
learning about businesses. The process is simple: find understandable
businesses with strong financial foundations, run by capable, honest and
forthright people, and buy them only at a discount from their economic worth.
The difficulty lies in
1
Chairman's Commentary [LOGO]
the execution of the process. That requires hard work, discipline,
patience and a conscious awareness of your limitations. We cannot give you a
prediction on how the investment climate of 2006 will unfold, but we can
offer you our resolution. We resolve to work hard, stay within our circle of
competence, and spend most of our time preparing and executing the process of
investing. We believe that in the long term this will lead to results you
deserve.
People
While part of the success of any business requires an understanding of
people, it may be even more so in an investment management relationship.
After all, since the real assets of our firm are people, you should spend
some time getting to know those who work for your benefit. To that point, I
can share with you that we are truly blessed with good people. They go to
extraordinary lengths trying to provide you with more than you expect. I am
truly indebted to all our associates.
This year, I have the pleasure of introducing to you several new
associates in our firm who have become fast contributors to your success. In
IT, Karen Rhinehart has joined Maribeth Batsford in ensuring that all our
computer operations function smoothly and have adequate redundancy. Charles
Richter also joined our firm as Chief Compliance Officer. His 1940 Investment
Advisor Act experience provides internal professional acumen which has
enhanced our desire to always err on the side of angels. Lastly, Andrew Boord
has been an outstanding addition to our research team. His insight is keen
and his wit is refreshing. He has already enlivened many of our weekly
research meetings.
The above, along with the rest of our associates, are dedicated to the
hard work that is necessary to preserve and increase your capital. Thank you
for your confidence and trust.
Sincerely,
/s/ Thomas O. Putnam
Thomas O. Putnam
Chairman
Fenimore Asset Management, Inc.
P.S. -- It's not too early to mark your calendar for the 20th Annual FAM
Funds Shareholder Informational Meeting scheduled for Tuesday, October 10,
2006. I'd also like to encourage our shareholders, particularly those
purchasing shares indirectly, to take a look at our website at
http://www.famfunds.com to see my "Letter From Cobleskill" and our "Mutual
Advice" newsletter. These are published twice per year and provide a wealth
of information on our investment philosophy and thoughts!
FAM Funds has adopted a Code of Ethics that applies to its principal
executive and principal financial officers. You may obtain a copy of this Code
without charge, upon request by calling FAM Funds at (800) 932-3271.
2
FAM Value Fund [LOGO]
Dear Fellow Value Fund Shareholder:
For the year 2005, the Investor Class of the FAM Value Fund posted a positive
return of 5.6%. By comparison, the S&P 500 Index closed the year up 4.9% and
the Russell 2000 Index was up 4.6%.
2005 in Review
As can be seen from the market index figures above, it was an "OK" year in
the stock market. While single digit appreciation is certainly better than
the declines many investors experienced in 2000-2002, it falls short of the
"double digit" returns that many people expect from the stock market. During
the year there were two declines in the market of 5% or more. These periods
presented some good buying opportunities, but were short lived -- lasting
less than a month in both cases.
In this section last year we discussed two main trends: the Federal
Reserve interest rate increases and increased energy prices. These trends
continue. The Fed has continued to increase in terest rates and is expected
to do so into 2006. Energy prices continue to increase with oil hitting $70 a
barrel in August. Other headlines in the financial press are the rise in home
prices and the possible existence of a housing "bubble." There is also
considerable debate about the financial health of the American consumer.
No review of 2005 is complete without mentioning the story of the year
- -- Hurricane Katrina. This is really a human story, but has financial
implications as well. As discussed below, this extraordinary storm had a
significant impact on our investment performance.
Performance Detail
The initial part of this section is going to read more like a weather report
than an investment letter, but we want to explain the impact on performance
of the 2005 hurricanes.
It is well established among experts who study natural disasters that
the worst catastrophe to hit the United States was the San Francisco
earthquake of 1906. A close study of this disaster shows that most of the
damage done was the result of the fires that followed the initial ground
shaking, not the earthquake itself. Fast forward 99 years later and we have
Hurricane Katrina which hit New Orleans and Mississippi. While the hurricane
was dangerous, the real damage was done by the flooding caused by the break
in the New Orleans levee. As a result of this flooding, Katrina is on record
as the most expensive hurricane in history. Insurance industry-wide losses
are estimated at $50 billion or more. Once again, it was not the event
itself, but the unexpected following the event that caused unanticipated
damage. This is significant to our performance due to our investment in the
insurance industry. Overall, we lost approximately $16 million in our
insurance holdings. We believe we can earn most of this back in future years
through premium increases and better risk management by our companies.
However, in a year where the stock market earns less than 5%, this loss was
significant.
3
FAM Value Fund [LOGO]
Hurricane Katrina, and soon to follow Hurricane Rita, had another
impact on our performance. Since these two storms went through the Gulf of
Mexico they did considerable damage to our country's energy infrastructure.
The damage to production and refining assets forced a spike in energy prices
which boosted energy stocks. At this time we do not own any energy related
companies. This hurt our returns relative to the market indexes.
Below is a discussion of individual stocks that influenced this year's
returns.
Best Performers
Our number one performer was Brown & Brown, up 41% and generating over $16
million in gains. This company is now our largest holding. We owned one other
stock where we made in excess of $10 million -- Scientific Atlanta (SFA). SFA
was a relatively new holding purchased in March and April at an average cost
below $29. In November we learned the company was being acquired by Cisco
Systems for $43 in cash. We were certainly surprised by the quick return.
Our investment in construction materials continues to be very positive.
Our best performer in this industry was Martin Marietta Materials which
appreciated 44% generating a gain in excess of $8 million. Close behind was
Vulcan Materials with a $5 million gain.
Rounding out our top five performers were Barr Pharmaceuticals and
Federated Investors. Barr is a pharmaceutical company that manufacturers
generic drugs. The company is very successful in challenging patents in the
drug industry. The stock was up 37% this year for a gain in excess of $8
million. Federated Investors is an investment management company
headquartered in Pittsburgh. The company is a leader in providing money
market funds. We purchased the stock in anticipation of higher short term
interest rates making money funds more attractive. This is exactly what
happened as the company's money fund business is growing nicely after a few
down years. This success has been reflected in the stock which was up 24%
generating a gain of $7 million.
It's rare in this section to talk about a company that we have sold,
but this year we had a significant sale -- Movie Gallery. We sold our entire
position at a price of $22.64. Today the stock is below $6 a share. Had we not
sold this stock, it would have reduced our performance by more than 1%.
Worst Performers
We discussed above the impact of the hurricane season on our insurance
holdings. Insurance was our worst performing industry. Our largest unrealized
loss was in White Mountains Insurance Group which declined 12%, including
dividends, or approximately $8 million. We had a realized loss of $5 million
in Montpelier RE, which was our second largest lost. Finally, we had an
unrealized loss of $2.8 million in Markel Insurance.
We continue to hold White Mountains and Markel for the long term. Both
companies have excellent managements and track records of exceptional
shareholder returns. Everyone in the insurance industry, including the
management of our holdings, was surprised by the losses from Hurricane
Katrina. We believe there will be
4
FAM Value Fund [LOGO]
significant changes in the way companies underwrite and price insurance
policies. Insurance premium rates are going up in 2006. As a result, our
companies should make higher profits on the insurance that they do write
leading to expected growth in earnings. We did sell all of our investment in
Montpelier RE. This company lost more than 50% of its equity in Hurricane
Katrina. Today, the company is under close scrutiny by the rating agencies
and we can not foresee how they can recover their former profitability.
Outside of the insurance industry we had a number of small losses.
There were approximately 20 names where we experienced a small loss. The two
names with the largest losses were Zebra Technologies and Liz Claiborne. In
each company, the loss was $3.5 million.
Zebra is a technology company that manufactures bar code printers. The
company reported a weak second quarter which dropped the stock down to $35 a
share. Since that quarter, business is improving and the stock has rebounded.
We continue to hold this company which has a strong balance sheet and
excellent product line.
Liz Claiborne is an apparel retailer with many brand names and
locations around the world. While the Liz Claiborne name is well known, the
company also owns many other brand names like Lucky, Mexx, and Sigrid Olsen.
We expect this well-run company to continue to expand by opening new stores
and acquiring new brands.
Our Investment Outlook
Our outlook is the same as it has been the last two years writing this
letter. Most stocks appear fairly valued. We do not see many bargains today.
However, this does not mean that there will not be advantageous times to
purchase stocks in 2006. In 2005, there were two general market declines
which proved to be good times to buy stocks -- April and September. The point
is that even in an apparently flat market, there can be opportunity.
In addition, a fairly valued market will always have individual
companies that are out of favor and may be good values. For example, in the
past year we increased our investment in nineteen existing holdings and
purchased seven new companies. We continue to look for companies that exhibit
four characteristics. First the company must operate an excellent business
that we can understand. Second, the company must be financially strong. This
means growth in sales and earnings, cash profits, low debt, and high returns
on invested capital. Third, the company must be managed by exceptional
leaders who operate with integrity and a talent for allocating the capital.
Finally, if we can find a company that has these attributes, we will purchase
the stock only if we can buy it at a price that provides a sufficient return
and protection on the downside. Not losing money can be as important as
making money. If we can not find a suitable investment opportunity we will
hold your funds in cash until opportunities arise.
5
FAM Value Fund [LOGO]
Long Term Returns
Below is a comparison of the FAM Value Fund's returns to two market indexes
over various time periods.
Average Annual Total Returns as of December 31, 2005
Life of Fund
1-Year 3-Year 5-Year 10-Year (1/2/87)
FAM Value Fund
(Investor Shares) 5.56% 15.51% 10.92% 12.07% 12.54%
(Advisor Shares)* 4.62% N/A N/A N/A 13.40%*
S&P 500 Index 4.91% 14.39% 0.54% 9.07% 11.57%
Russell 2000 Index 4.55% 22.13% 8.22% 9.26% 8.82%
*FAM Value Fund Advisor Shares were launched on July 1, 2003.
Thank you for your partnership with us in FAM Value Fund.
Sincerely,
/s/ John D. Fox
John D. Fox, CFA
Co-Manager
/s/ Thomas O. Putnam
Thomas O. Putnam
Co-Manager
6
FAM Value Fund -- Performance Summary [LOGO]
Annual Total Investment Returns:
JANUARY 2, 1987 TO DECEMBER 31, 2005
FAM VALUE FUND
INVESTOR SHARES ADVISOR SHARES* RUSSELL 2000 INDEX S&P 500 INDEX
FISCAL YEAR TOTAL RETURN TOTAL RETURN TOTAL RETURN
1987 -17.40% -- -8.77% 5.25%
1988 35.50% -- 24.89% 16.61%
1989 20.32% -- 16.24% 31.69%
1990 -5.36% -- -19.50% -3.11%
1991 47.63% -- 46.05% 30.47%
1992 25.08% -- 18.42% 7.60%
1993 0.21% -- 18.90% 10.06%
1994 6.82% -- -1.82% 1.31%
1995 19.71% -- 28.44% 37.53%
1996 11.23% -- 16.54% 22.95%
1997 39.06% -- 22.37% 33.35%
1998 6.19% -- -2.55% 28.58%
1999 -4.84% -- 21.26% 21.04%
2000 19.21% -- -3.03% -9.10%
2001 15.07% -- 2.49% -11.88%
2002 -5.33% -- -20.48% -22.09%
2003 24.98% 12.99% 47.25% 28.67%
2004 16.86% 15.91% 18.33% 10.88%
2005 5.56% 4.62% 4.55% 4.91%
*FAM Value Fund Advisor Shares were launched on July 1, 2003.
7
FAM Value Fund -- Performance Summary [LOGO]
The chart below depicts the change in the value of a $10,000 investment in
Investor Shares of the FAM Value Fund, as compared with the growth of the
Standard & Poor's 500 Index and the Russell 2000 Index during the same
period. The information assumes reinvestment of dividends and capital gain
distributions. The Standard & Poor's 500 Index is an unmanaged index
generally representative of the market for the stocks of large size U.S.
companies. The Russell 2000 Index is an unmanaged index generally
representative of the market for the stocks of smaller size U.S. companies.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FAM VALUE FUND, THE RUSSELL 2000 INDEX, AND THE S&P 500
S&P 500 Russell 2000 FAM Value Fund
1987 10000 10000 10000
1988 12278 11391 11193
1989 16170 13236 13466
1990 15669 10655 12740
1991 20448 15567 18808
1992 22002 18432 23517
1993 24224 21915 23565
1994 24539 21521 25175
1995 33741 27632 30143
1996 41468 32192 33523
1997 55318 39403 46618
1998 71139 38378 49502
1999 86078 46553 47105
2000 78245 45156 56152
2001 68934 46285 64623
2002 53699 36797 61179
2003 69111 54202 76464
2004 76591 64157 89356
2005 80352 67076 94323
This information represents past performance of Investor Shares of the FAM
Value Fund and is not indicative of future results. The investment return and
the principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than the original cost.
An investment of $10,000 in the Advisor Shares of the FAM Value Fund since
the inception date of this share class, July 1, 2003 would have changed in
value to $13,559 by December 31, 2005.
Average Annual Total Returns as of December 31, 2005
Life of Fund
1-Year 3-Year 5-Year 10-Year (1/2/87)
FAM Value Fund
(Investor Shares) 5.56% 15.51% 10.92% 12.07% 12.54%
(Advisor Shares)* 4.62% N/A N/A N/A 13.40%*
S&P 500 Index 4.91% 14.39% 0.54% 9.07% 11.57%
Russell 2000 Index 4.55% 22.13% 8.22% 9.26% 8.82%
*FAM Value Fund Advisor Shares were launched on July 1, 2003.
The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
8
FAM Value Fund -- Portfolio Data [LOGO]
As of December 31, 2005
TOP TEN HOLDINGS
(% of Net Assets)
Brown & Brown, Inc. 5.2%
White Mountains Insurance Group 5.1%
Federated Investors 3.4%
Berkshire Hathaway, Inc. 3.2%
Barr Pharmaceuticals 2.9%
Martin Marietta Materials 2.6%
Scientific-Atlanta, Inc. 2.5%
Ross Stores, Inc. 2.4%
Vulcan Materials Company 2.4%
Kaydon Corporation 2.3%
COMPOSITION OF NET ASSETS
Temporary Investments 14.6%
Property & Casualty Insurance 10.1%
Banking 7.0%
Machinery & Equipment 6.0%
Construction Materials 5.8%
Insurance Agency 5.2%
Pharmaceuticals 4.6%
Home Furnishings 4.1%
Restaurants 4.0%
Investment Management 3.4%
Retail Stores 3.1%
Wholesale Distribution 2.9%
Healthcare Services 2.8%
Telecomm & Cable Equipment 2.5%
Auto Parts & Equipment 2.2%
Recreation & Entertainment 2.2%
Retail Apparel 2.2%
Real Estate Development 2.1%
Electronic Equipment 2.0%
Registered Investment Company 2.0%
Other 11.2%
9
FAM Value Fund -- Portfolio Data [LOGO]
As of December 31, 2005
COMPARATIVE VALUATIONS
FAM Value Russell 2000 S&P 500
Number of Stocks 50 2000 500
Median Market Cap $3.3B $0.6B $11.0B
Price/Earnings Ratio 21.0 19.5 18.7
Price/Book Ratio 3.0 2.3 2.9
Earnings Growth Rate* 24.0%** 15.0% 12.6%
Turnover Rate 14.25% N/A N/A
*5 Years -- S&P 500 as of 11/30/05.
**Source -- Baseline.
Statement Regarding Availability of Quarterly Portfolio Schedule. Please note
that (i) the Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q; (ii) the Fund's Forms N-Q are available on the
Commission's website at http://www.sec.gov; (iii) the Fund's Form N-Q may be
reviewed and copied at the Commission's Public Reference Room in Washington,
DC, and that information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330; and (iv) the Fund makes the information
on Form N-Q available to shareholders upon request, by calling FAM Funds at
1-800-932-3271.
10
FAM Value Fund -- Expense Data [LOGO]
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees on the Advisor Class Shares; and (2) ongoing
costs, including management fees; distribution (and/or service) (12b-1) fees;
and other Fund expenses. This Example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period (6/30/2005 to
12/31/2005).
Actual Expenses
Lines (A) and (B) of the following table provides information about actual
account values and actual expenses for Investor Class Shares and Advisor
Class Shares, respectively. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the line for your share class under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
Lines (C) and (D) of the following table provides information about
hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return for the Investor Class Shares
and Advisor Class Shares, respectively. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder report of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs, such as
redemptions fees. Therefore, lines (C) and (D) of the table are useful in
comparing ongoing costs only, and will not help you determine the relative
costs of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
11
FAM Value Fund -- Expense Data [LOGO]
YEAR ENDED DECEMBER 31, 2005
Beginning Ending Expenses
Account Value Account Value Paid
6/30/2005 12/31/2005 During Period
Ongoing Costs Based on Actual Fund Return
A. Investor Share Class $1,000.00 $1,037.80 $ 6.01*
B. Advisor Share Class $1,000.00 $1,033.40 $11.17**
Ongoing Costs Based on Hypothetical
5% Yearly Return
C. Investor Share Class $1,000.00 $1,019.10 $ 5.95*
D. Advisor Share Class $1,000.00 $1,014.01 $11.07**
*Expenses are equal to the Fund's Investor Class Shares annualized expense
ratio of (1.17%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
**Expenses are equal to the Fund's Advisor Class Shares annualized expense
ratio of (2.18%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
12
FAM Value Fund -- Statement of Investments [LOGO]
December 31, 2005
SHARES VALUE
COMMON STOCKS (85.4%)
Auto Parts & Equipment (2.2%)
Gentex Corp.
o designs, develops, manufactures and markets
electro-optic products, including
automatic-dimming rearview mirrors for the
automotive industry 1,240,000 $ 24,180,000
Automotive (0.8%)
CarMax, Inc.*
o specialty retailer of used cars and
light-trucks in the United States 300,000 8,304,000
Banking (7.0%)
M&T Bank Corporation
o bank holding company located in Buffalo, NY 143,000 15,594,150
North Fork Bancorporation
o bank holding company located on Long Island, NY 856,925 23,445,468
TCF Financial Corp.
o holding company for TCF National Bank,
operating throughout the Midwest 790,000 21,440,600
TD Banknorth Group, Inc.
o multi-bank holding company in Portland, ME 100,000 2,905,000
Westamerica Bancorp
o provides banking services to individual
and corporate customers in California 260,100 13,803,507
77,188,725
Construction Materials (5.8%)
Florida Rock Industries
o basic construction materials company 177,075 8,687,299
Martin Marietta Materials
o produces aggregates for the construction
industry 371,443 28,497,107
Vulcan Materials Company
o produces, distributes and sells construction
materials and industrial and specialty chemicals 387,165 26,230,429
63,414,835
Consumer Products (0.6%)
CSS Industries, Inc.
o giftware, bows, Halloween and Easter
novelty products 222,075 6,824,365
Consumer Services (1.7%)
H&R Block, Inc.
o leader in individual and small business
tax preparation 773,800 18,996,790
See Notes to Financial Statements.
13
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Electronic Components (0.9%)
Littelfuse, Inc.*
o manufactures fuses and circuit protection
devices 360,900 $ 9,834,525
Electronic Equipment (2.0%)
American Power Conversion
o manufactures power protection equipment
for computers 449,055 9,879,210
Cognex Corp.
o develops, manufactures and markets
machine vision systems used to
automate manufacturing processes 39,200 1,179,528
Zebra Technologies Corp.*
o designs, manufactures and supports bar code
label printers 258,502 11,076,811
22,135,549
Health Care Services (2.8%)
Amsurg Corp.*
o develops, acquires and operates practice-based
ambulatory surgery centers in partnership
with physician practice groups in the U.S. 333,550 7,624,953
Lincare Holdings*
o provides respiratory therapy services
to patients in the home 350,000 14,668,500
Pediatrix Medical Group, Inc.*
o healthcare services company focused on
physician services for newborn, maternal-fetal
and other pediatric subspecialty care 100,000 8,857,000
31,150,453
Home Furnishings (4.1%)
Ethan Allen Interiors, Inc.
o manufactures and retails home furnishings 648,175 23,677,833
Mohawk Industries, Inc.*
o produces floor covering products for
residential and commercial applications 240,000 20,875,200
44,553,033
Insurance Agency (5.2%)
Brown & Brown, Inc.
o one of the largest independent general
insurance agencies in the U.S. 1,879,696 57,405,916
Investment Management (3.4%)
Federated Investors, Inc.
o provides investment management products
and services primarily to mutual funds 1,000,000 37,040,000
See Notes to Financial Statements.
14
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Life Insurance (1.9%)
Protective Life Corporation
o individual and group life/health insurance
and guaranteed investment contracts 471,400 $ 20,633,178
Machinery & Equipment (6.0%)
Donaldson Company, Inc.
o designs, manufactures and sells
filtration systems and replacement parts 311,200 9,896,160
Graco
o supplies systems and equipment for the
management of fluids in industrial, commercial
and vehicle lubrication applications 261,550 9,541,344
IDEX Corporation
o manufactures proprietary, highly engineered
industrial products and pumps 514,500 21,151,095
Kaydon Corporation
o custom-engineers products including bearings,
filters, and piston rings 780,750 25,093,305
65,681,904
Media (0.5%)
Meredith Corporation
o magazine publishing and tv broadcasting 110,450 5,780,953
Pharmaceuticals (4.6%)
Barr Pharmaceuticals*
o specialty pharmaceutical company that
develops, manufactures and markets both
generic and pharmaceutical products 509,000 31,705,610
Forest Laboratories, Inc.*
o develops, manufactures and sells prescription
and non-prescription pharmaceutical products 226,000 9,193,680
Watson Pharmaceuticals*
o manufactures proprietary and off-patent
pharmaceutical products 300,000 9,753,000
50,652,290
Property and Casualty Insurance (10.0%)
Berkshire Hathaway Inc.*
o holding company for various insurance
and industrial companies 395 35,004,900
Markel Corporation*
o sells specialty insurance products 61,100 19,371,755
White Mountains Ins. Grp., Ltd.
o personal property and casualty, and
reinsurance 100,275 56,008,601
110,385,256
See Notes to Financial Statements.
15
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Publishing (1.1%)
John Wiley & Sons, Inc.
o publisher of print and electronic products,
specializing in scientific, technical
professional and medical books and journals 301,700 $ 11,778,368
Real Estate Development (2.1%)
Forest City Enterprise
o ownership, development, management and
acquisition of commercial and residential
real estate properties 600,000 22,758,000
Recreation and Entertainment (2.2%)
International Speedway Corporation
o owns and operates auto racing tracks
including Daytona 511,788 24,514,645
Recreation Vehicles (1.7%)
Winnebago Industries
o manufacturer of self-contained recreational
vehicles used primarily in leisure travel 559,000 18,603,520
Registered Investment Company (2.0%)
Allied Capital Corp
o venture capital corporation for entrepreneurs
and management 736,391 21,627,804
Restaurants (4.0%)
Outback Steakhouse
o operates a diversified restaurant system
including Outback Steakhouse, Carrabba's
Italian Grill, Roy's and Bonefish Grill 592,400 24,649,764
YUM! Brands, Inc.
o quick service restaurants including KFC,
Pizza Hut and Taco Bell 416,800 19,539,584
44,189,348
Retail Apparel (2.2%)
Liz Claiborne, Inc.
o designs and markets an extensive range
of branded men's and women's apparel,
accessories and fragrance 680,150 24,362,973
Retail Stores (3.1%)
Ross Stores, Inc.
o chain of off-price retail apparel and
home accessories stores 921,422 26,629,096
See Notes to Financial Statements.
16
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Retail Stores (3.1%) continued
Whole Foods Market, Inc.
o national grocery store selling organic
and natural products 100,000 $ 7,739,000
34,368,096
Telecomm & Cable Equipment (2.5%)
Scientific-Atlanta, Inc.
o manufacturer of electronic test equipment
for antennas and electronics 631,150 27,183,630
Telecommunications Services (0.2%)
Hickory Tech Corp.
o small local telephone company in Minnesota 258,800 2,041,932
Transportation (1.9%)
Heartland Express, Inc.
o short-to-medium-haul truckload carrier
of general commodities 1,000,000 20,290,000
Wholesale Distribution (2.9%)
CDW Corp.
o direct marketing of multibrand computers
and related technology products and services 383,900 22,101,123
SCP Pool Corp.
o wholesale distributor of swimming pool supplies 275,950 10,270,859
32,371,982
Total Common Stocks (Cost $601,277,380) $ 938,252,070
TEMPORARY INVESTMENTS (14.6%)
Money Market Fund (2.8%)
First American Treasury Fund 30,922,380 30,922,380
U.S. Government Obligations (11.8%) PRINCIPAL
U.S. Treasury Bill, 3.7%, with maturity
to 2/2/06 $80,000,000 79,740,444
U.S. Treasury Bill, 3.5%, with maturity
to 2/9/06 $50,000,000 49,812,448
129,552,892
Total Temporary Investments (Cost $160,475,272) $ 160,475,272
Total Investments (Cost $761,752,652) (100%) $1,098,727,342
*Non-income producing securities.
See Notes to Financial Statements.
17
FAM Value Fund [LOGO]
December 31, 2005
STATEMENT OF ASSETS AND LIABILITIES
Assets
Investment in securities at value (Cost $761,752,652) $1,098,727,342
Cash 404,276
Receivable for fund shares 503,578
Dividends and interest receivable 474,224
Total Assets 1,100,109,420
Liabilities
Payable for fund shares 1,558,194
Accrued investment advisory fees 937,378
Accrued shareholder servicing and administrative fee 106,182
Accrued expenses 146,708
Total Liabilities 2,748,462
Net Assets
Source of Net Assets:
Net capital paid in on shares of beneficial interest$ 760,381,384
Undistributed net investment income 4,884
Net unrealized appreciation 336,974,690
Net Assets $1,097,360,958
Net Asset Value Per Share
Investor Class Shares -- based on net assets of
$1,089,368,723 and 22,697,457 shares outstanding $48.00
Advisor Class Shares -- based on net assets of
$7,992,235 and 168,719 shares outstanding $47.37
See Notes to Financial Statements.
18
FAM Value Fund [LOGO]
Year Ended December 31, 2005
STATEMENT OF OPERATIONS
INVESTMENT INCOME
Income
Dividends $15,127,954
Interest 5,323,397
Total Investment Income 20,451,351
Expenses
Investment advisory fee (Note 2) 10,257,224
Administrative fee (Note 2) 741,697
Shareholder servicing and related expenses (Note 2) 445,436
Printing and mailing 190,037
Professional fees 129,880
Registration fees 102,123
Custodial fees 107,579
Trustees and Officers 66,760
Distribution and Service Fees -- Advisor Class Shares (Note 2) 68,075
Other 63,774
Total Expenses 12,172,585
Less: Investment advisory fee waived (Note 2) (22,058)
Expenses Paid Indirectly (Note 3) (5,940)
Net Expenses 12,144,587
Net Investment Income 8,306,764
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 19,557,451
Unrealized appreciation of investments 30,224,842
Net Gain on Investments 49,782,293
NET INCREASE IN NET ASSETS FROM OPERATIONS $58,089,057
See Notes to Financial Statements.
19
FAM Value Fund [LOGO]
Years Ended December 31, 2005 and 2004
STATEMENT OF CHANGES IN NET ASSETS
2005 2004
CHANGE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 8,306,764 $ 1,371,796
Net realized gain on investments 19,557,451 26,079,518
Unrealized appreciation of investments 30,224,842 90,927,530
Net Increase in Net Assets From Operations 58,089,057 118,378,844
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Investor Class (8,305,767) (1,369,456)
Advisor Class -- --
Net realized gain on investments
Investor Class (19,411,954) (25,922,806)
Advisor Class (143,905) (155,391)
TRANSACTIONS IN SHARES OF BENEFICIAL
INTEREST (NOTE 4): 145,912,510 250,148,458
Total Increase in Net Assets 176,139,941 341,079,649
NET ASSETS:
Beginning of year 921,221,017 580,141,368
End of year (including undistributed
net investment income of $4,884
and $5,269 at December 31, 2005
and 2004, respectively) $1,097,360,958 $921,221,017
See Notes to Financial Statements.
20
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 1. Nature of Business and Summary of Significant Accounting Policies
FAM Value Fund (the "Fund") is a series of Fenimore Asset Management Trust, a
diversified, open-end management investment company registered under the
Investment Company Act of 1940. The Fund offers two classes of shares
(Investor Class and Advisor Class since January 2, 1987 and July 1, 2003,
respectively). Each class of shares has equal rights as to earnings and
assets except the Advisor Class bears its own distribution expenses. Each
class of shares has exclusive voting rights with respect to matters that
affect just that class. Income, expenses (other than expenses attributable to
a specific class), and realized and unrealized gains or losses on investments
are allocated to each class of shares based on its relative net assets. The
investment objective of the Fund is to maximize long-term total return on
capital. The following is a summary of significant accounting policies
followed in the preparation of its financial statements.
a) Valuation of Securities
Securities traded on a national securities exchange or admitted to
trading on NASDAQ are valued at the last reported sale price or the
NASDAQ official closing price. Common stocks for which no sale was
reported, and over-the-counter securities, are valued at the last
reported bid price. Short-term securities are carried at amortized cost,
which approximates value. Securities for which market quotations are not
readily available or have not traded are valued at fair value as
determined by procedures established by the Board of Trustees.
Investments in First American Treasury Fund are valued at that fund's
net asset value.
b) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual results
could differ from those estimates.
d) Other
Securities transactions are recorded on trade date. Realized gains and
losses on securities sold are determined on the basis of identified cost.
Interest income is accrued as earned and dividend income is recorded on
the ex-dividend date. Distributions to shareholders, which are determined
in accordance with income tax regulations, are recorded on the
ex-dividend date.
21
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 2. Investment Advisory Fees and Other Transactions with Affiliates
Under the Investment Advisory Contract, the Fund pays an investment advisory
fee to Fenimore Asset Management, Inc. (the "Advisor") equal, on an annual
basis, to 1% of the Fund's average daily net assets. The Advisor has entered
into a voluntary agreement with the Fund to reduce the investment advisory
fee for the Fund through December 31, 2006 to 0.95% of the Fund's average
daily net assets in excess of $1 billion. For the year ended December 31,
2005, the Advisor waived $22,058 as a result of this investment advisory fee
limitation agreement. Thomas Putnam is an officer and trustee of the Fund and
also an officer and director of the Advisor.
The Investment Advisory Contract requires the Advisor to reimburse the
Investor Class for its expenses to the extent that such expenses, including
the advisory fee, for the fiscal year exceed 2.00% of the average daily net
assets. For the year ended December 31, 2005 the Advisor contractually agreed
to reimburse the Fund for its expenses to the extent such expenses exceed
1.28% and 2.28% of the average daily net assets of the Investor Class and
Advisor Class, respectively. No such reimbursement was required for the year
ended December 31, 2005.
FAM Shareholder Services, Inc. (FSS), a company under common control
with the Advisor, serves as shareholder servicing agent and receives a
monthly fee of $2.00 per shareholder account. For the year ended December 31,
2005, shareholder servicing agent fees paid to FSS amounted to $445,436.
Additionally, FSS serves as the Fund administrative agent and receives an
annual fee of 0.075% on the first $750,000,000 of the Fund's average daily
net assets, 0.065% thereafter.
Fenimore Securities, Inc. (FSI), a company also under common control
with the Advisor, acts as distributor of the Fund's shares. On July 1, 2003,
the Fund adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for the Advisor Class of shares. Under the
plan the Fund pays FSI a total of 1.00% per annum of the Advisor Class
shares' average daily net assets.
Note 3. Indirect Expenses
The Fund's custodian bank has also agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For
the year ended December 31, 2005, these arrangements reduced the Fund's
custodian fees by $5,940.
22
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 4. Shares of Beneficial Interest
At December 31, 2005 an unlimited number of $.001 par value shares of
beneficial interest were authorized. The Advisor Class of shares that are
redeemed within the first eighteen months of purchase are subject to a 1.00%
redemption fee. For the year ended December 31, 2005, redemption fees
amounted to $2,093 and were credited to paid in capital. Transactions were as
follows:
YEAR ENDED 12/31/05 YEAR ENDED 12/31/04
Shares Amount Shares Amount
Shares sold
Investor Class 5,895,231 $ 276,728,327 6,941,006 $305,578,670
Advisor Class 59,170 2,743,877 78,299 3,389,620
Shares issued on
reinvestment of dividends
Investor Class 555,383 26,769,471 570,943 26,605,930
Advisor Class 2,839 139,222 3,219 148,242
Shares redeemed
Investor Class (3,381,827) (159,900,125) (1,945,037) (85,537,860)
Advisor Class (12,121) (568,262) (829) (36,144)
Net Increase from Investor Class
Share Transactions 3,068,787 $ 143,597,673 5,566,912 $246,646,740
Net Increase from Advisor Class
Share Transactions 49,888 $ 2,314,837 80,689 $ 3,501,718
Note 5. Investment Transactions
During the year ended December 31, 2005, purchases and sales of investment
securities, other than short term obligations were $268,304,941 and
$119,594,441. The cost of securities for federal income tax purposes is
substantially the same as shown in the investment portfolio.
23
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 6. Income Taxes and Distribution to Shareholders
The components of tax basis undistributed earnings at December 31, 2005 were
as follows:
Undistributed Ordinary Income $4,884
The aggregate gross unrealized appreciation and depreciation of portfolio
securities, based on cost for federal income tax purposes of $761,752,652,
was as follows:
Unrealized appreciation $338,509,942
Unrealized depreciation (1,535,252)
Net unrealized appreciation $336,974,690
The tax composition of dividends and distributions to shareholders for the
years ended December 31, 2005 and 2004 were as follows:
2005 2004
Ordinary income $ 8,307,149 $ 1,369,456
Long-term capital gain 19,554,477 26,078,197
$27,861,626 $27,447,653
Note 7. Line of Credit
FAM Value Fund has a line of credit up to 33 1/3% of total net assets or a
maximum of $200,000,000. Borrowings under the agreement bear interest at the
prime rate as announced by the lending bank. The line of credit is available
until December 1, 2006 when any advances are to be repaid. During the year
ended December 31, 2005 no amounts were drawn from the available line.
Note 8. Commitments and Contingencies
In the normal course of business, the Fund enters into contracts that contain
a variety of representations and warranties which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that might be made against the
Fund that have not yet occurred. However, based on experience of the Advisor,
the Fund expects the risk of loss to be remote.
24
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights
FAM VALUE FUND -- INVESTOR CLASS SHARES
Years Ended December 31,
Per share information
(For a share outstanding throughout the year) 2005 2004 2003 2002 2001
Net asset value, beginning of year $ 46.65 $ 41.15 $ 33.69 $ 36.17 $ 32.70
Income from investment operations:
Net investment income 0.39+ 0.09+ 0.10 0.11 0.17
Net realized and unrealized
gain (loss) on investments 2.20 6.84 8.32 (2.04) 4.77
Total from investment operations 2.59 6.93 8.42 (1.93) 4.94
Less distributions:
Dividends from net investment income (0.37) (0.07) (0.09) (0.11) (0.17)
Distributions from net realized gains (0.87) (1.36) (0.87) (0.44) (1.30)
Total distributions (1.24) (1.43) (0.96) (0.55) (1.47)
Change in net asset value for the year 1.35 5.50 7.46 (2.48) 3.47
Net asset value, end of year $ 48.00 $ 46.65 $ 41.15 $ 33.69 $ 36.17
Total Return 5.56% 16.86% 24.98% (5.33)% 15.07%
Ratios/supplemental data
Net assets, end of year (000) $1,089,369 $915,742 $578,579 $469,277 $501,417
Ratios to average net assets of:
Expenses 1.18% 1.20% 1.24% 1.21% 1.21%
Net investment income 0.82% 0.20% 0.26% 0.30% 0.56%
Portfolio turnover rate 14.25% 10.29% 9.43% 7.51% 9.62%
+Based on average shares outstanding.
25
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights (continued)
FAM VALUE FUND -- ADVISOR CLASS SHARES
Years Ended Period Ended
December 31, December 31,
Per share information
(For a share outstanding throughout the year) 2005 2004 2003+
Net asset value, beginning of year $46.11 $40.96 $37.10
Income from investment operations:
Net investment income (loss) (0.09)++ (0.35)++ 0.00
Net realized and unrealized gain on investments 2.22 6.86(a) 4.82
Total from investment operations 2.13 6.51(a) 4.82
Less distributions:
Dividends from net investment income -- -- (0.09)
Distributions from net realized gains (0.87) (1.36) (0.87)
Total distributions (0.87) (1.36) (0.96)
Change in net asset value for the year 1.26 5.15(a) 3.86
Net asset value, end of year $47.37 $46.11 $40.96
Total Return 4.62% 15.91% 12.99%**
Ratios/supplemental data
Net assets, end of year (000) $7,992 $5,479 $1,562
Ratios to average net assets of:
Expenses 2.18% 2.20% 2.25%*
Net investment income (loss) (0.19)% (0.80)% (0.02)%*
Portfolio turnover rate 14.25% 10.29% 9.43%
+Beginning of period reflects Advisor Class Shares inception date of 7/1/03.
++Based on average shares outstanding.
*Annualized.
**Not Annualized.
(a) As a result of a typographical error, net realized and unrealized gain
on investments, total from investment operations and change in net asset
value for the period were previously reported as $4.34, $3.99 and $2.63
per share, respectively.
26
FAM Value Fund --
Report of Independent Registered Public Accounting Firm [LOGO]
To the Board of Trustees and Shareholders of FAM Value Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investments, and the related statements of
operations and of changes in net assets and the financial highlights, after
the restatement described in the footnotes to the Advisor Class shares
financial highlights, present fairly, in all material respects, the financial
position of FAM Value Fund, a series of Fenimore Asset Management Trust, at
December 31, 2005, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the periods presented, in conformity
with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 1, 2006
27
FAM Value Fund [LOGO]
Board Consideration of the Continuation of the
Investment Advisory Agreements for the Funds
In accordance with the Investment Company Act of 1940, the Board of Trustees
of the Funds is required, on an annual basis, to consider the continuation of
the Investment Advisory Agreements (the "Agreements") with the Advisor, and
this must take place at an in-person meeting of the Board. The relevant
provisions of the Investment Company Act of 1940 specifically provide that it
is the duty of the Board to request and evaluate such information as the
Board determines is necessary to allow them to properly consider the
continuation of the Agreements, and it is the duty of the Advisor to furnish
the Trustees with such information that is responsive to their request.
Accordingly, in determining whether to renew the Agreements between the
Funds and the Advisor, the Board of Trustees requested, and the Advisor
provided, information and data relevant to the Board's consideration. This
included materials prepared by the Advisor and materials prepared by an
independent mutual fund industry consulting firm that produced materials
specifically for the Board that provided them with information regarding the
investment performance of the Funds and information regarding the fees and
expenses of the Funds, compared to other similar mutual funds. As part of its
deliberations, the Board also considered and relied upon the information
about the Funds and the Advisor that had been provided to them throughout the
year in connection with their regular Board meetings at which they engage in
the ongoing oversight of the Funds and their operations.
The Board engaged in a thorough review process to determine whether or
not to continue the Agreements with the Advisor. After receiving the
materials they had requested to assist them with their review, the Board had
a preliminary meeting by conference call on November 9, 2005, with
representatives of the Advisor in order to discuss the proposed continuation
of the Agreements and to review the materials that had been presented. The
Board then requested certain additional information which the Advisor
provided and the Board also met separately on November 15, 2005 and then with
representatives of the Advisor on two occasions on November 15 and 16, 2005
prior to their required in-person meeting in order to further consider and
discuss the proposed continuation of the Agreements.
The Board then met to consider the continuation of the Agreements at an
in-person meeting of the Board held on November 16, 2005. Among the factors
the Board considered was the overall performance of the Funds relative to the
performance of other similar mutual funds on a long-term basis (five years
and longer) and over shorter time periods (less than five years). In
connection with its review of the performance results achieved for the Funds,
the Board discussed with management the fact that the Advisor maintains a
particular focus on long-term investment performance results and they
reviewed the reasons why this may, from time to time, cause the longer-term
performance results and the shorter-term performance results to under-perform
when compared to other funds for similar time periods. In connection with
this, the Board took note of management's stated
28
FAM Value Fund [LOGO]
position that achieving favorable long-ter investment results is a
primary objective of the firm. The Board also considered and discussed with
the Advisor their focus on "value investing" which may result in short-term
performance that lags the performance results achieved by other managers,
especially those managers that emphasize other types of investment
strategies, such as "growth investing." The Board also took into
consideration the Advisor's stated objective of attaining investment results
with less risk and less volatility than other funds. The Board determined
that it was beneficial to shareholders that the Advisor has continued to
invest on behalf of the Funds in a manner that is consistent with its
long-term investment objectives due to the fact that Advisor has been able to
achieve favorable long-term performance results for the Funds and when
performance is adjusted for risk, it shows even more favorable results.
The Board also took note of the long-term relationship between the
Advisor and the Funds and the efforts that have been undertaken by the
Advisor to foster the growth and development of the Funds since the inception
of each of the Funds. In connection with this, the Board took note of the
fact that Thomas Putnam, the Chairman and founder of the Advisor and the
co-manager of each of the Funds, has been advising each of the Funds since
their inception, during which time the Funds have experienced favorable
long-term investment results on a comparative basis and a steady growth in
assets. The Board also noted that the Advisor has continued to retain and
develop additional portfolio managers and investment analysts to work with
Mr. Putnam in an effort to provide for the continued long-term management and
oversight of the Funds' and their portfolios.
In addition, the Board compared expenses of each Fund to the expenses of
other similar mutual funds, noting that the expenses have generally decreased
over time as assets in each Fund have grown, and noting further that the
expenses for each of the Funds compare favorably with industry averages for
other funds of similar size and investment objective. They noted the range of
investment advisory and administrative services provided by the Advisor and
its affiliates to the Funds and the level and quality of these services, and
in particular, they considered the quality of the personnel providing these
services noting that they were of a high caliber. The Board considered that
the Funds receive administrative and accounting services from an affiliate of
the Advisor, FAM Shareholder Services, Inc. ("FSS"), and the Board reviewed
the fees paid to FSS and the services provided to the Funds and their
shareholders by FSS during the past year and determined that the fees were
fair and reasonable and that the services provided are useful and beneficial
to the ongoing operations of the Funds given that the services provided by
FSS are separate and distinct services apart from the investment advisory
services provided to the Funds by the Advisor. The Board also considered that
the Funds are distributed by an affiliate of the Advisor, Fenimore
Securities, Inc., ("FSI"), and the Board reviewed the distribution related
services provided by FSI, the distribution fees received by FSI in connection
with its distribution of the Advisor Class of shares of the Funds, and they
determined that the fees were fair and
29
FAM Value Fund [LOGO]
reasonable and that the distribution services provided by FSI are useful and
beneficial to the ongoing operations of the Funds. In the course of reviewing
the nature and quality of the services provided to the Funds and their
shareholders by the Advisor and its affiliates, the Board took into
consideration the very favorable scores that had been awarded to the Funds by
their shareholders as indicated in the results of the "Mutual Fund
Shareholder Satisfaction Survey" conducted by the National Investment Company
Service Association, the not-for-profit trade association serving the
operations sector of the mutual fund industry.
The Board also reviewed financial information concerning the Advisor
and its affiliates relating to the operation of the Funds, noting the overall
profitability of the relationship with the Funds to the Advisor and the
financial soundness of the Advisor and its affiliates as demonstrated by the
financial information provided. The Board also took note of the fact that the
Advisor bears the entire cost associated with the Funds' participation in
various "mutual fund supermarket" programs, noting that this is beneficial to
the Funds because it allows them to be held by a wide array of shareholders
in a convenient manner.
The Board reviewed the Advisor's brokerage practices and best-execution
procedures, and noted that these were reasonable and consistent with standard
industry practice. In connection with this review, the Board considered the
fact that the Advisor does not have any express arrangements in place with
respect to "soft dollar" arrangements with brokers or other similar parties
relating to the direct use of Fund brokerage commissions to obtain research
or execution services. With respect to the Advisor's brokerage practices, the
Board also took into consideration the fact that the Advisor has maintained
low portfolio turnover rates for the Funds that are substantially lower than
industry averages for equity-type funds, which the Board determined is
beneficial to shareholders due to the reduced brokerage expenses that are
attributable to low portfolio turnover rates.
The Board also considered information regarding the fees that the
Advisor charges other clients for investment advisory services that are
similar to the advisory services provided to the Funds and noted that the
Funds' fees were reasonable when compared to the relevant circumstances of
the types of accounts involved.
In connection with the Board's consideration of the ways in which
economies of scale are reflected with respect to the Agreements, the Board
took note of the fact that the Advisor had previously entered into a
voluntary expense limitation arrangement with the Funds pursuant to which the
investment advisory fees payable to the Advisor by each of the Funds is
reduced on assets in excess of $1 billion from the stated contractual rate of
1.00% of the average daily net assets of each respective Fund to 0.95% of the
average daily net assets of those assets in each Fund in excess of $1 billion
for the two year period from January 1, 2005 through December 31, 2006. This
limitation on the amount of the investment advisory fees payable under the
Agreements is in addition to the contractual arrangement in place with
respect to each of the Funds pursuant to which the Advisor has previously
agreed to limit the total operating expenses of each class of shares of the
Funds and is reviewed by the Board each year in connection with the further
continuation of the Agreements.
30
FAM Value Fund [LOGO]
In reaching their conclusion with respect to the continuation of the
Agreements, the Trustees did not identify any one single factor as being
controlling, rather, the Board took note of a combination of factors that
influenced their decision making process. The Board did, however, identify
the overall favorable investment performance of the Funds on a long-term
basis, the commitment of the Advisor to the successful operation of the
Funds, and the level of expenses of the Funds, as well as the Advisor's
willingness to enter into agreements to reduce the overall operating expenses
of the Funds and the investment advisory fees payable by the Funds, as being
important elements of their consideration. Based upon their review and
consideration of these factors and other matters deemed relevant by the Board
in reaching an informed business judgment, the Board of Trustees, including
all of the Independent Trustees, unanimously concluded that the terms of the
Investment Advisory Agreements are fair and reasonable and the Board voted to
renew the Agreements for an additional one-year period, subject to the
applicable limitations on the total operating expenses of the Funds and the
investment advisory fees payable by the Funds as considered and approved at
the meeting.
31
FAM Equity-Income Fund [LOGO]
Dear Fellow Equity-Income Fund Shareholder:
2005 was a challenging year for the stock market as well as the Equity-Income
Fund. For the year, the Investor Class appreciated 5.75%. On the one hand,
our performance beat the Russell 2000, as well as the S&P 500. On the other
hand, however, it was well below our 5-year and since inception returns of
11.36% and 11.03% respectively.
12 Month Return
FAM Equity Income Fund 5.75%
S&P 500 4.91%
Russell 2000 4.55%
Overview of 2005
2005 was another choppy year in the market. The up and down pattern was
similar to 2004 although the trend was generally up. Returns for small
capitalization companies, which have dominated the market since 2000, were
essentially the same as large cap companies.
There were three themes that impacted our performance: rising interest
rates, energy price inflation, and devastating hurricanes. All three had the
effect of dampening performance throughout the year.
The Federal Reserve increased short-term interest rates eight times
throughout the year in order to bring rates back to more neutral levels.
While this action didn't affect the overall economy, it did hurt restaurants
and retailers. Investors paid attention to the old saying, "don't fight the
Fed," and avoided these areas. We did take advantage of what we believed to
be periods of extreme weakness to add to some of our positions in these
areas. Once the Fed stops raising short-term interest rates, which may happen
in the near future, we should see better results from these names.
We also saw the price of oil spike to a high of $70 per barrel from
$43.46 at the beginning of the year. This 60% increase in the price of oil
came on the heels of an 11% increase the year before. This negatively
affected the portfolio in two different ways. First, the higher cost made it
more expensive for certain items to be produced and transported. Companies
had to absorb some portion of these higher costs which hurt earnings growth.
Secondly, higher fuel costs hurt retailers and restaurants because consumers
were spending more money to fill up their vehicles which meant they had less
money to spend on eating out and buying clothing and furniture. Again we took
advantage of weakness in these areas to add to certain positions.
Unfortunately we didn't have any investments in the energy area which
was the best performing sector of the market by a wide margin. We don't have
a particular bias against energy companies, but we do believe that we should
buy them when they are out of favor. The bright side, though, is that the
performance of the Fund exceeded both the Russell 2000 and the S&P 500
despite not holding any energy related names.
32
FAM Equity-Income Fund [LOGO]
Finally, we witnessed the most active hurricane season on record. The
devastation was unparalleled, particularly the breaking of the levee in New
Orleans. This led to large losses in even the best of insurance companies. The
event also further exacerbated already high energy prices. The offset was the
rally in building material companies based on the expectation of an enormous
rebuilding effort.
Portfolio Upgrade
We had a very good year of making investments in the Fund.
The Fund began the year with 19.3% of the net assets in short-term
investments. Our disciplined approach means that some times we will let the
cash balance grow if we don't have attractive investment opportunities. We
believe it's best to make investments when the odds of success are firmly in
our favor.
During the year, we were able to take advantage of opportunities to
upgrade the holdings in the portfolio. We added six new names and added
significantly to five others. We also eliminated seven positions where we
thought the future return prospects were below average or the quality of the
company or the management team was below average. We believe that the higher
the quality of the companies in the Fund, the better the long-term results
will be.
At the end of 2005 the cash balance was down to 8.6% of total net
assets, despite the strong year-to-date net cash inflows.
Best and Worst Performers
The largest contributor to performance was Scientific Atlanta, which
appreciated 45.2% from our cost, for a gain of $3.85 million. We owned the
company in the past and liked its leadership position in the cable equipment
market as well as its strong financial position. We were able to buy back our
position in 2005 as the company's earnings grew into the stock price. Earnings
accelerated during the second half of the year which moved the stock higher.
In November, Cisco announced they will buy the company for $43 per share
in cash.
The next largest contributor to performance was Federated Investors,
which appreciated 23.7%, for a gain of $2.07 million. The company struggled
with interest rates that were too low, which made their money market products
less attractive than other investment alternatives. During the period of low
rates, they saw several months of money market asset outflows which hurt
earnings. Now that rates have risen, the company has seen a growth in assets,
resulting in increased earnings. While earnings in 2005 were only slightly
ahead of the previous year, the expectation is that the current year will
have solid double-digit earnings growth which is more in line with the
company's history.
The company that hurt performance the most was Montpelier Re Holdings
which declined 45% from our cost resulting in a loss of $3.36 million. This
reinsurance company was a new holding for the Fund last year. The company
sustained significant losses from Hurricane Katrina.
33
FAM Equity-Income Fund [LOGO}
While losses are normal for insurance companies, the sheer magnitude of
Katrina losses made the future investment prospects for the company
unappealing. We sold the entire position.
The next worst performer was Hickory Tech which declined 21.7% in value
and hurt the value of the Fund by $1.03 million. This rural telephone company
has been under pressure along with the rest of the telephone industry. The
major problems are regulatory uncertainty and the potential for rates to move
lower. These hinder growth and put pressure on cash flow. We believe the
regulatory uncertainty will persist for quite some time; however, we are
encouraged by a recent acquisition that Hickory Tech announced. The
acquisition will give the company a greater percentage of revenues that is
not regulated. We also believe that the company is selling below its fair
value.
Another investment worth mentioning is Movie Gallery. This company had
the leading position in rural video stores. We liked the investment idea
because the company had a solid balance sheet, a track record of growth, and
most importantly, some insulation from the cut throat competition of
Blockbuster and Hollywood Video. Early last year when Movie Gallery threw its
hat in the ring to bid for Hollywood Video, we knew the story was changing
for the worse. All we had to do was look at other "merger of equal"
transactions that were financed with debt to know that Movie Gallery was
making a grave mistake that would most likely put the company into ruin. We
immediately started selling our position. We sold the entire position before
the deal closed and recorded a gain of $0.57 million. The event is
significant because our average cost at the beginning of year was $18.94 and
the stock finished 2005 trading at $5.61. Through our analysis we were able
to record a small gain and sidestep a 70% decline in the price of the stock.
Dividends & Capital Gains
Every company in the Fund pays a dividend. We believe that dividends help
stabilize the returns of individual holdings in turbulent markets. This is
particularly true for high yielding stocks. Dividends are also an overlooked
component of the total return of the Fund.
At year-end, the weighted average dividend yield of all the companies
in the Fund was 1.7% vs. 1.9% for the S&P 500. This figure only takes into
account the equity positions and not money market assets or treasuries.
Investors should be aware that Registered Investment Company accounting may
require all expenses to be deducted from dividend and interest income before
the resulting net income is distributed to shareholders.
In regard to capital gains, our goal is to be as tax efficient as
possible. Our long-term holding period and low turnover are the primary
reasons for the Fund's tax efficiency. We also try to offset gains with any
available losses when appropriate. When we do pass on capital gains they tend
to be long-term gains, which are taxed at a lower rate than short-term gains.
In 2005 we didn't pass along any realized capital gains to shareholders. While
this is bad for the IRS, it's good for you the shareholder -- presuming your
account is taxable.
34
FAM Equity-Income Fund [LOGO]
Outlook
Every year we say that we expect the current year to be challenging and
this year is no different. We don't see many undervalued opportunities in the
market today, but this will change as the year progresses; it always does.
Our research effort is the best it has ever been and we added a new analyst
to help us identify new opportunities. We expect to selectively take
advantage of opportunities as they appear. As always, we will maintain our
discipline of buying what we believe to be superior companies with
outstanding management teams, solid financial underpinnings, and attractive
valuations.
On April 1st of 2006, the Fund will celebrate its 10-year anniversary.
We look forward to sharing our 3, 5, and 10 year results. We manage the Fund
for long-term results. As they say, "the proof is in the pudding," or in this
case, the long-term results.
Thank you for giving us the opportunity to serve you. We will continue
to work diligently on your behalf to maintain your trust and confidence.
Sincerely,
/s/ Paul Hogan
Paul Hogan, CFA
Co-Manager
/s/ Thomas O. Putnam
Thomas O. Putnam
Co-Manager
35
FAM Equity-Income Fund -- Performance Summary [LOGO]
Annual Total Investment Returns:
APRIL 1, 1996 TO DECEMBER 31, 2005
FAM EQUITY-INCOME FUND
INVESTOR SHARES ADVISOR SHARES* RUSSELL 2000 INDEX S&P 500 INDEX
FISCAL YEAR TOTAL RETURN TOTAL RETURN TOTAL RETURN
4/1/96-12/31/96 11.84% -- 10.3% 15.2%
1997 26.90% -- 22.37% 33.35%
1998 4.67% -- -2.55% 28.58%
1999 -6.98% -- 21.26% 21.04%
2000 17.18% -- -3.03% -9.10%
2001 20.79% -- 2.49% -11.88%
2002 -2.25% -- -20.48% -22.09%
2003 20.30% 9.83% 47.25% 28.67%
2004 14.04% 13.05% 18.33% 10.88%
2005 5.75% 4.76% 4.55% 4.91%
*FAM Equity-Income Fund Advisor Shares were launched on July 1, 2003.
36
FAM Equity-Income Fund -- Performance Summary [LOGO]
The chart below depicts the change in the value of a $10,000 investment
in Investor Shares of the FAM Equity-Income Fund, as compared with the growth
of the Standard & Poor's 500 Index and the Russell 2000 Index during the same
period. The information assumes reinvestment of dividends and capital gain
distributions. The Standard & Poor's 500 Index is an unmanaged index
generally representative of the market for the stocks of large size U.S.
companies. The Russell 2000 Index is an unmanaged index generally
representative of the market for the stocks of smaller size U.S. companies.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
FAM EQUITY-INCOME FUND, THE RUSSELL 2000 INDEX, AND THE S&P 500
S&P 500 Russell 2000 FAM Equity-Income Fund
1996 10000 10000 10000
1997 15368 13501 14202
1998 19763 13150 14865
1999 23913 15951 13824
2000 21737 15472 16199
2001 19150 15859 19567
2002 14918 12608 19127
2003 19200 18571 23010
2004 21287 21963 26241
2005 22332 22963 27750
This information represents past performance of Investor Shares of the FAM
Equity-Income Fund and is not indicative of future results. The investment
return and the principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than the original
cost.
An investment of $10,000 in the Advisor Shares of the FAM Equity-Income Fund
since the inception date of this share class, July 1, 2003 would have changed
in value to $13,008 by December 31, 2005.
Average Annual Total Returns as of December 31, 2005
Life of Fund
1-Year 3-Year 5-Year (4/1/96)
FAM Equity-Income Fund
(Investor Shares) 5.75% 13.19% 11.36% 11.03%
(Advisor Shares)* 4.76% N/A N/A 11.07%*
S&P 500 Index 4.91% 14.39% 0.54% 8.72%
Russell 2000 Index 4.55% 22.13% 8.22% 9.03%
*FAM Equity-Income Fund Advisor Shares were launched on July 1, 2003.
The graph and performance table do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund shares.
37
FAM Equity-Income Fund -- Portfolio Data [LOGO]
As of December 31, 2005
TOP TEN HOLDINGS
(% of Net Assets)
Federated Investors 5.8%
Scientific-Atlanta, Inc. 5.6%
Ross Stores, Inc. 5.5%
Gentex Corp. 5.5%
Liz Claiborne, Inc. 4.0%
Ethan Allen Interiors 3.9%
Courier Corporation 3.7%
John Wiley & Sons, Inc. 3.7%
H&R Block, Inc. 3.4%
North Fork Bancorporation 3.3%
COMPOSITION OF NET ASSETS
Temporary Investments 8.6%
Publishing 7.4%
Construction Materials 7.0%
Machinery & Equipment 6.8%
Banking 6.2%
Investment Management 5.8%
Telecomm & Cable Equipment 5.6%
Auto Parts & Equipment 5.5%
Retail Stores 5.5%
Retail Apparel 4.0%
Home Furnishings 3.9%
Consumer Services 3.4%
Property & Casualty Insurance 3.2%
Registered Investment Companies 3.1%
Restaurants 3.1%
Wholesale Distribution 2.8%
Commercial Services 2.6%
Life Insurance 2.6%
Recreation & Entertainment 2.4%
Recreation Vehicles 2.3%
Transportation 2.1%
Insurance Agency 2.0%
Other 4.1%
38
FAM Equity-Income Fund -- Portfolio Data [LOGO]
As of December 31, 2005
COMPARATIVE VALUATIONS
FAM
Equity-Income Russell 2000 S&P 500
Number of Stocks 30 2000 500
Median Market Cap $3.1B $0.6B $11.0B
Price/Earnings Ratio 19.3 19.5 18.7
Price/Book Ratio 3.0 2.3 2.9
Earnings Growth Rate* 15.0%** 15.0% 12.6%
Turnover Rate 14.11% N/A N/A
*5 Years -- S&P 500 as of 11/30/05.
**Source -- Baseline.
Statement Regarding Availability of Quarterly Portfolio Schedule. Please note
that (i) the Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q; (ii) the Fund's Forms N-Q are available on the
Commission's website at http://www.sec.gov; (iii) the Fund's Form N-Q may be
reviewed and copied at the Commission's Public Reference Room in Washington,
DC, and that information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330; and (iv) the Fund makes the information
on Form N-Q available to shareholders upon request, by calling FAM Funds at
1-800-932-3271.
39
FAM Equity-Income Fund -- Expense Data [LOGO]
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees on the Advisor Class Shares; and (2) ongoing
costs, including management fees; distribution (and/or service) (12b-1) fees;
and other Fund expenses. This Example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period (6/30/2005 to
12/31/2005).
Actual Expenses
Lines (A) and (B) of the following table provides information about actual
account values and actual expenses for Investor Class Shares and Advisor
Class Shares, respectively. You may use the information in this line,
together with the amount you invested, to estimate the expenses that you paid
over the period. Simply divide your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the line for your share class under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
Lines (C) and (D) of the following table provides information about
hypothetical account values and hypothetical expenses based on the Fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return for the Investor Class Shares
and Advisor Class Shares, respectively. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare
this 5% hypothetical example with the 5% hypothetical examples that appear in
the shareholder report of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs, such as
redemptions fees. Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative
costs of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
40
FAM Equity-Income Fund -- Expense Data [LOGO]
YEAR ENDED DECEMBER 31, 2005
Beginning Ending Expenses
Account Value Account Value Paid
6/30/2005 12/31/2005 During Period
Ongoing Costs Based on Actual Fund Return
A. Investor Share Class $1,000.00 $1,021.90 $ 6.27*
B. Advisor Share Class $1,000.00 $1,017.20 $11.39**
Ongoing Costs Based on Hypothetical
5% Yearly Return
C. Investor Share Class $1,000.00 $1,018.80 $ 6.26*
D. Advisor Share Class $1,000.00 $1,013.71 $11.37**
*Expenses are equal to the Fund's Investor Class Shares annualized expense
ratio of (1.23%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
**Expenses are equal to the Fund's Advisor Class Shares annualized expense
ratio of (2.24%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
41
FAM Equity-Income Fund -- Statement of Investments [LOGO]
December 31, 2005
SHARES VALUE
COMMON STOCKS (91.4%)
Auto Parts & Equipment (5.5%)
Gentex Corp.
o designs, develops, manufactures and markets
electro-optic products, including
automatic-dimming rearview mirrors for the
automotive industry 510,000 $ 9,945,000
Banking (6.2%)
North Fork Bancorporation
o bank holding company located on Long Island, NY 219,500 6,005,520
TCF Financial Corp.
o holding company for TCF National Bank,
operating throughout the Midwest 193,000 5,238,020
11,243,540
Commercial Services (2.6%)
McGrath RentCorp
o modular building and electronic test equipment
rentals, subsidiary classroom manufacturing 170,000 4,726,000
Construction Materials (7.0%)
Florida Rock Industries
o basic construction materials company 42,000 2,060,520
Martin Marietta Materials
o produces aggregates for the construction industry 63,000 4,833,360
Vulcan Materials Company
o produces, distributes and sells construction
materials and industrial and specialty chemicals 85,500 5,792,625
12,686,505
Consumer Services (3.4%)
H&R Block, Inc.
o leader in individual and small business
tax preparation 251,500 6,174,325
Electronic Equipment (0.8%)
Cognex Corp.
o develops, manufactures and markets machine vision
systems used to automate manufacturing processes 45,700 1,375,113
Home Furnishings (3.9%)
Ethan Allen Interiors
o manufactures and retails home furnishings 195,800 7,152,574
See Notes to Financial Statements.
42
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Insurance Agency (2.0%)
Brown & Brown, Inc.
o one of the largest independent general
insurance agencies in the U.S. 121,200 $ 3,701,448
Investment Management (5.8%)
Federated Investors
o provides investment management products
and services primarily to mutual funds 285,900 10,589,736
Life Insurance (2.6%)
Protective Life Corporation
o individual and group life/health insurance and
guaranteed investment contracts 108,219 4,736,746
Machinery & Equipment (6.8%)
Donaldson Company, Inc.
o designs, manufactures and sells
filtration systems and replacement parts 88,800 2,823,840
IDEX Corporation
o manufactures proprietary, highly engineered
industrial products and pumps 134,137 5,514,372
Kaydon Corporation
o custom-engineers products including bearings,
filters, and piston rings 124,000 3,985,360
12,323,572
Media (1.6%)
Meredith Corporation
o magazine publishing and tv broadcasting 55,300 2,894,402
Property and Casualty Insurance (3.2%)
White Mountains Ins. Grp., Ltd.
o personal property and casualty, and reinsurance 10,575 5,906,666
Publishing (7.4%)
Courier Corporation
o manufactures and publishes specialty books,
including Dover Publications 197,250 6,773,565
John Wiley & Sons, Inc.
o publisher of print and electronic products,
specializing in scientific, technical professional
and medical books and journals 172,650 6,740,256
13,513,821
See Notes to Financial Statements.
43
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Recreation and Entertainment (2.4%)
International Speedway Corporation
o owns and operates auto racing tracks
including Daytona 91,400 $ 4,378,060
Recreation Vehicles (2.3%)
Winnebago Industries
o manufacturer of self-contained recreational
vehicles used primarily in leisure travel 127,500 4,243,200
Registered Investment Company (3.1%)
Allied Capital Corp.
o venture capital corporation for entrepreneurs
and management 193,714 5,689,380
Restaurants (3.1%)
Outback Steakhouse
o operates a diversified restaurant system including
Outback Steakhouse, Carrabba's Italian Grill,
Roy's and Bonefish Grill 5,611,108
Retail Apparel (4.0%)
Liz Claiborne, Inc.
o designs and markets an extensive range
of branded men's and women's apparel,
accessories and fragrance 204,025 7,308,176
Retail Stores (5.5%)
Ross Stores, Inc.
o chain of off-price retail apparel and
home accessories stores 349,041 10,087,285
Telecomm & Cable Equipment (5.6%)
Scientific-Atlanta, Inc.
o manufacturer of electronic test equipment
for antennas and electronics 238,000 10,250,660
Telecommunications Services (1.6%)
Hickory Tech Corp.
o small local telephone company in Minnesota 360,848 2,847,091
Transportation (2.1%)
Heartland Express, Inc.
o short-to-medium-haul truckload carrier
of general commodities 187,900 3,812,491
See Notes to Financial Statements.
44
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2005
SHARES VALUE
Wholesale Distribution (2.9%)
CDW Corp.
o direct marketing of multibrand computers
and related technology products and services 90,000 $ 5,181,300
Total Common Stocks (Cost $127,493,779) $166,378,199
TEMPORARY INVESTMENTS (8.6%)
Money Market Fund (3.1%)
First American Treasury Fund 5,731,014 5,731,014
U.S. Government Obligations (5.5%) PRINCIPAL
U.S. Treasury Bill, 3.7%, with maturity
to 2/2/06 $10,000,000 9,967,555
Total Temporary Investments (Cost $15,698,569) $ 15,698,569
Total Investments (Cost $143,192,348) (100%) $182,076,768
See Notes to Financial Statements.
45
FAM Equity-Income Fund [LOGO]
December 31, 2005
STATEMENT OF ASSETS AND LIABILITIES
Assets
Investment in securities at value (Cost $143,192,348) $182,076,768
Cash 171,859
Receivable for fund shares 142,397
Dividends and interest receivable 125,760
Total Assets 182,516,784
Liabilities
Payable for fund shares 139,643
Accrued investment advisory fee 155,937
Accrued shareholder servicing and administrative fees 18,217
Accrued expenses 62,372
Total Liabilities 376,169
Net Assets
Source of Net Assets:
Net capital paid in on shares of beneficial interest $143,713,057
Undistributed net investment income 3,395
Accumulated net realized loss (460,257)
Net unrealized appreciation 38,884,420
Net Assets $182,140,615
Net Asset Value Per Share
Investor Class Shares -- based on net assets of
$177,740,415 and 8,257,724 shares outstanding $21.52
Advisor Class Shares -- based on net assets of
$4,400,200 and 206,279 shares outstanding $21.33
See Notes to Financial Statements.
46
FAM Equity-Income Fund [LOGO]
Year Ended December 31, 2005
STATEMENT OF OPERATIONS
INVESTMENT INCOME
Income
Dividends $2,696,079
Interest 586,545
Total Investment Income 3,282,624
Expenses
Investment advisory fee (Note 2) 1,710,699
Administrative fee (Note 2) 128,302
Shareholder servicing and related expenses (Note 2) 71,684
Printing and mailing 44,875
Professional fees 53,528
Registration fees 40,920
Custodial fees 22,542
Trustees and Officers 66,760
Distribution and Service Fees -- Advisor Class Shares (Note 2) 36,989
Other 14,119
Total Expenses 2,190,418
Expenses Paid Indirectly (Note 3) (1,741)
Net Expenses 2,188,677
Net Investment Income 1,093,947
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss on investments (460,257)
Unrealized appreciation of investments 8,641,649
Net Gain on Investments 8,181,392
NET INCREASE IN NET ASSETS FROM OPERATIONS $9,275,339
See Notes to Financial Statements.
47
FAM Equity-Income Fund [LOGO]
Years Ended December 31, 2005 and 2004
STATEMENT OF CHANGES IN NET ASSETS
2005 2004
CHANGE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,093,947 $ 989,166
Net realized gain (loss) on investments (460,257) 1,411,947
Unrealized appreciation of investments 8,641,649 14,804,880
Net Increase in Net Assets From Operations 9,275,339 17,205,993
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Investor Class (1,092,959) (988,832)
Advisor Class -- --
Net realized gain on investments
Investor Class -- (1,832,887)
Advisor Class -- (28,400)
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
(NOTE 4): 22,165,381 21,501,560
Total Increase in Net Assets 30,347,761 36,307,434
NET ASSETS:
Beginning of year 151,792,854 115,485,420
End of year (including undistributed
net investment income of $3,395
and $1,705 at December 31, 2005
and 2004, respectively) $182,140,615 $151,792,854
See Notes to Financial Statements.
48
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 1. Nature of Business and Summary of Significant Accounting Policies
FAM Equity-Income Fund (the "Fund") is a series of Fenimore Asset Management
Trust, a diversified, open-end management investment company registered under
the Investment Company Act of 1940. The Fund offers two classes of shares
(Investor Class and Advisor Class since April 1, 1996 and July 1, 2003,
respectively). Each class of shares has equal rights as to earnings and
assets except the Advisor Class bears its own distribution expenses. Each
class of shares has exclusive voting rights with respect to matters that
affect just that class. Income, expenses (other than expenses attributable to
a specific class), and realized and unrealized gains or losses on investments
are allocated to each class of shares based on its relative net assets. The
investment objective of the Fund is to provide current income and long term
capital appreciation from investing primarily in income-producing equity
securities. The following is a summary of significant accounting policies
followed in the preparation of its financial statements.
a) Valuation of Securities
Securities traded on a national securities exchange or admitted to
trading on NASDAQ are valued at the last reported sale price or the
NASDAQ official closing price. Common stocks for which no sale was
reported, and over-the-counter securities, are valued at the last
reported bid price. Short-term securities are carried at amortized cost,
which approximates value. Securities for which market quotations are not
readily available or have not traded are valued at fair value as
determined by procedures established by the Board of Trustees.
Investments in First American Treasury Fund are valued at that fund's net
asset value.
b) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases
in net assets from operations during the reporting period. Actual
results could differ from those estimates.
d) Other
Securities transactions are recorded on trade date. Realized gains and
losses on securities sold are determined on the basis of identified cost.
Interest income is accrued as earned and dividend income is recorded on
the ex-dividend date. Distributions to shareholders, which are determined
in accordance with income tax regulations, are recorded on the
ex-dividend date.
49
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 2. Investment Advisory Fees and Other Transactions with Affiliates
Under the Investment Advisory Contract, the Fund pays an investment advisory
fee to Fenimore Asset Management, Inc. (the "Advisor") equal, on an annual
basis, to 1% of the Fund's average daily net assets. The Advisor has entered
into a voluntary agreement with the Fund to reduce the investment advisory
fee for the Fund through December 31, 2006 to 0.95% of the Fund's average
daily net assets in excess of $1 billion. No such waiver was required for the
year ended December 31, 2005. Thomas Putnam is an officer and trustee of the
Fund and also an officer and director of the Advisor.
The Investment Advisory Contract requires the Advisor to reimburse the
Investor Class for its expenses to the extent that such expenses, including
the advisory fee, for the fiscal year exceed 2% of the average daily net
assets. For the year ended December 31, 2005 the Advisor contractually agreed
to reimburse the Fund for its expenses to the extent such expenses exceed
1.40% and 2.40% of the average daily net assets of the Investor Class and
Advisor Class, respectively. No such reimbursement was required for the year
ended December 31, 2005.
FAM Shareholder Services, Inc. (FSS), a company under common control
with the Advisor, serves as shareholder servicing agent and receives a
monthly fee of $2.00 per shareholder account. For the year ended December 31,
2005, shareholder servicing agent fees paid to FSS amounted to $71,684.
Additionally, FSS serves as the Fund administrative agent and receives an
annual fee of 0.075% on the first $750,000,000 of the Fund's average daily
net assets, 0.065% thereafter.
Fenimore Securities, Inc. ("FSI"), a company also under common control
with the Advisor, acts as distributor of the Fund's shares. On July 1, 2003,
the Fund adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for the Advisor Class of shares. Under the
plan the Fund pays FSI a total of 1.00% per annum of the Advisor Class
shares' average daily net assets.
Note 3. Indirect Expenses
The Fund's custodian bank has also agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For
the year ended December 31, 2005, these arrangements reduced the Fund's
custodian fees by $1,741.
50
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 4. Shares of Beneficial Interest
At December 31, 2005 an unlimited number of $.001 par value shares of
beneficial interest were authorized. The Advisor Class of shares that are
redeemed within the first eighteen months of purchase are subject to a 1.00%
redemption fee. For the year ended December 31, 2005, redemption fees
amounted to $650 and were credited to paid in capital. Transactions were as
follows:
YEAR ENDED 12/31/05 YEAR ENDED 12/31/04
Shares Amount Shares Amount
Shares sold
Investor Class 3,164,629 $ 65,903,167 3,058,255 $ 58,431,438
Advisor Class 67,528 1,402,122 82,587 1,557,644
Shares issued on
reinvestment of distributions
Investor Class 49,603 1,040,432 114,463 2,279,902
Advisor Class -- -- 1,365 27,776
Shares redeemed
Investor Class (2,220,586) (45,981,892) (2,158,122) (40,663,554)
Advisor Class (9,444) (198,448) (6,787) (131,646
Net Increase from Investor Class
Share Transactions 993,646 $ 20,961,707 1,014,596 $ 20,047,786
Net Increase from Advisor Class
Share Transactions 58,084 $ 1,203,674 77,165 $ 1,453,774
Note 5. Investment Transactions
During the period ended December 31, 2005, purchases and sales of investment
securities, other than short term obligations were $56,782,216 and $21,161,504.
The cost of securities for federal income tax purposes is substantially the
same as shown in the investment portfolio.
51
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 6. Income Taxes and Distribution to Shareholders
The components of tax basis undistributed earnings at December 31, 2005 were
as follows:
Undistributed Ordinary Income $3,395
Capital loss carry forward, expires 2013 $460,257
The aggregate gross unrealized appreciation and depreciation of portfolio
securities, based on cost for federal income tax purposes of $143,192,348,
was as follows:
Unrealized appreciation $40,512,118
Unrealized depreciation (1,627,698)
Net unrealized appreciation $38,884,420
The tax composition of dividends and distributions to shareholders for
the years ended December 31, 2005 and 2004 were as follows:
2005 2004
Ordinary income $1,092,257 $ 988,832
Long-term capital gain 702 1,411,287
$1,092,959 $2,400,119
Note 7. Line of Credit
FAM Equity-Income Fund has a line of credit up to 33 1/3% of total net
assets or a maximum of $50,000,000. Borrowings under the agreement bear
interest at the prime rate as announced by the lending bank. The line of
credit is available until December 1, 2006 when any advances are to be
repaid. During the year ended December 31, 2005 no amounts were drawn from
the available line.
Note 8. Commitments and Contingencies
In the normal course of business, the Fund enters into contracts that contain
a variety of representations and warranties which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that might be made against the
Fund that have not yet occurred. However, based on experience, the Fund
expects the risk of loss to be remote.
52
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights
FAM EQUITY-INCOME FUND -- INVESTOR CLASS SHARES
Years Ended December 31,
Per share information
(For a share outstanding throughout the year) 2005 2004 2003 2002 2001
Net asset value, beginning of year $ 20.48 $ 18.27 $ 15.45 $ 16.05 $ 13.47
Income from investment operations:
Net investment income 0.14+ 0.15+ 0.12 0.12 0.19
Net realized and unrealized
gain (loss) on investments 1.03 2.40 3.00 (0.48) 2.58
Total from investment operations 1.17 2.55 3.12 (0.36) 2.77
Less distributions:
Dividends from net investment income (0.13) (0.15) (0.12) (0.12) (0.19)
Distributions from net realized gains -- (0.19) (0.18) (0.12) --
Total distributions (0.13) (0.34) (0.30) (0.24) (0.19)
Change in net asset value for the year 1.04 2.21 2.82 (0.60) 2.58
Net asset value, end of year $ 21.52 $ 20.48 $ 18.27 $ 15.45 $ 16.05
Total Return 5.75% 14.04% 20.30% (2.25)% 20.79%
Ratios/supplemental data
Net assets, end of year (000) $177,740 $148,776 $114,194 $73,969 $31,194
Ratios to average net assets of:
Expenses, total 1.26% 1.27% 1.28% 1.37% 1.56%
Expenses, net of fees waived and
expenses assumed by advisor 1.26% 1.27% 1.28% 1.37% 1.50%
Net investment income 0.66% 0.79% 0.73% 0.84% 1.29%
Portfolio turnover rate 14.11% 17.64% 6.46% 7.11% 2.79%
+Based on average shares outstanding.
53
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights (continued)
FAM EQUITY-INCOME FUND -- ADVISOR CLASS SHARES
Period Ended
Years Ended December 31, December 31,
Per share information
(For a share outstanding throughout the year) 2005 2004 2003+
Net asset value, beginning of year $20.36 $18.18 $16.77
Income from investment operations:
Net investment income (loss) (0.07)++ (0.04)++ 0.10
Net realized and unrealized gain on investments 1.04 2.41 1.54
Total from investment operations 0.97 2.37 1.64
Less distributions:
Dividends from net investment income -- -- (0.05)
Distributions from net realized gains -- (0.19) (0.18)
Total distributions -- (0.19) (0.23)
Change in net asset value for the year 0.97 2.18 1.41
Net asset value, end of year $21.33 $20.36 $18.18
Total Return 4.76% 13.05% 9.83%**
Ratios/supplemental data
Net assets, end of year (000) $4,400 $3,017 $1,291
Ratios to average net assets of:
Expenses 2.26% 2.27% 2.28%*
Net investment income (loss) (0.34)% (0.21)% 1.10%*
Portfolio turnover rate 14.11% 17.64% 6.46%
+Beginning of period reflects Advisor Class Shares inception date of 7/1/03.
++Based on average shares outstanding.
*Annualized.
**Not Annualized.
54
FAM Equity-Income Fund --
Report of Independent Registered Public Accounting Firm [LOGO]
To the Board of Trustees and Shareholders of FAM Equity-Income Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of FAM Equity-Income
Fund, a series of Fenimore Asset Management Trust, at December 31, 2005, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 2005 by correspondence with the custodian, provide
a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 1, 2006
55
FAM Equity-Income Fund [LOGO]
Board Consideration of the Continuation of the
Investment Advisory Agreements for the Funds
In accordance with the Investment Company Act of 1940, the Board of Trustees
of the Funds is required, on an annual basis, to consider the continuation of
the Investment Advisory Agreements (the "Agreements") with the Advisor, and
this must take place at an in-person meeting of the Board. The relevant
provisions of the Investment Company Act of 1940 specifically provide that it
is the duty of the Board to request and evaluate such information as the
Board determines is necessary to allow them to properly consider the
continuation of the Agreements, and it is the duty of the Advisor to furnish
the Trustees with such information that is responsive to their request.
Accordingly, in determining whether to renew the Agreements between the
Funds and the Advisor, the Board of Trustees requested, and the Advisor
provided, information and data relevant to the Board's consideration. This
included materials prepared by the Advisor and materials prepared by an
independent mutual fund industry consulting firm that produced materials
specifically for the Board that provided them with information regarding the
investment performance of the Funds and information regarding the fees and
expenses of the Funds, compared to other similar mutual funds. As part of its
deliberations, the Board also considered and relied upon the information
about the Funds and the Advisor that had been provided to them throughout the
year in connection with their regular Board meetings at which they engage in
the ongoing oversight of the Funds and their operations.
The Board engaged in a thorough review process to determine whether or
not to continue the Agreements with the Advisor. After receiving the
materials they had requested to assist them with their review, the Board had
a preliminary meeting by conference call on November 9, 2005, with
representatives of the Advisor in order to discuss the proposed continuation
of the Agreements and to review the materials that had been presented. The
Board then requested certain additional information which the Advisor
provided and the Board also met separately on November 15, 2005 and then with
representatives of the Advisor on two occasions on November 15 and 16, 2005
prior to their required in-person meeting in order to further consider and
discuss the proposed continuation of the Agreements.
The Board then met to consider the continuation of the Agreements at an
in-person meeting of the Board held on November 16, 2005. Among the factors
the Board considered was the overall performance of the Funds relative to the
performance of other similar mutual funds on a long-term basis (five years
and longer) and over shorter time periods (less than five years). In
connection with its review of the performance results achieved for the Funds,
the Board discussed with management the fact that the Advisor maintains a
particular focus on long-term investment performance results and they
reviewed the reasons why this may, from time to time, cause the longer-term
performance results and the shorter-term performance results to under-perform
when compared to other funds for similar time periods. In connection with
this, the Board took note of management's stated
56
FAM Equity-Income Fund [LOGO]
position that achieving favorable long-term investment results is a
primary objective of the firm. The Board also considered and discussed with
the Advisor their focus on "value investing" which may result in short-term
performance that lags the performance results achieved by other managers,
especially those managers that emphasize other types of investment
strategies, such as "growth investing." The Board also took into
consideration the Advisor's stated objective of attaining investment results
with less risk and less volatility than other funds. The Board determined
that it was beneficial to shareholders that the Advisor has continued to
invest on behalf of the Funds in a manner that is consistent with its
long-term investment objectives due to the fact that Advisor has been able to
achieve favorable long-term performance results for the Funds and when
performance is adjusted for risk, it shows even more favorable results.
The Board also took note of the long-term relationship between the
Advisor and the Funds and the efforts that have been undertaken by the
Advisor to foster the growth and development of the Funds since the inception
of each of the Funds. In connection with this, the Board took note of the
fact that Thomas Putnam, the Chairman and founder of the Advisor and the
co-manager of each of the Funds, has been advising each of the Funds since
their inception, during which time the Funds have experienced favorable
long-term investment results on a comparative basis and a steady growth in
assets. The Board also noted that the Advisor has continued to retain and
develop additional portfolio managers and investment analysts to work with
Mr. Putnam in an effort to provide for the continued long-term management and
oversight of the Funds' and their portfolios.
In addition, the Board compared expenses of each Fund to the expenses of
other similar mutual funds, noting that the expenses have generally decreased
over time as assets in each Fund have grown, and noting further that the
expenses for each of the Funds compare favorably with industry averages for
other funds of similar size and investment objective. They noted the range of
investment advisory and administrative services provided by the Advisor and
its affiliates to the Funds and the level and quality of these services, and
in particular, they considered the quality of the personnel providing these
services noting that they were of a high caliber. The Board considered that
the Funds receive administrative and accounting services from an affiliate of
the Advisor, FAM Shareholder Services, Inc. ("FSS"), and the Board reviewed
the fees paid to FSS and the services provided to the Funds and their
shareholders by FSS during the past year and determined that the fees were
fair and reasonable and that the services provided are useful and beneficial
to the ongoing operations of the Funds given that the services provided by
FSS are separate and distinct services apart from the investment advisory
services provided to the Funds by the Advisor. The Board also considered that
the Funds are distributed by an affiliate of the Advisor, Fenimore
Securities, Inc., ("FSI"), and the Board reviewed the distribution related
services provided by FSI, the distribution fees received by FSI in connection
with its distribution of the Advisor Class of shares of the Funds, and they
determined that the fees were fair and
57
FAM Equity-Income Fund [LOGO]
reasonable and that the distribution services provided by FSI are useful and
beneficial to the ongoing operations of the Funds. In the course of reviewing
the nature and quality of the services provided to the Funds and their
shareholders by the Advisor and its affiliates, the Board took into
consideration the very favorable scores that had been awarded to the Funds by
their shareholders as indicated in the results of the "Mutual Fund
Shareholder Satisfaction Survey" conducted by the National Investment Company
Service Association, the not-for-profit trade association serving the
operations sector of the mutual fund industry.
The Board also reviewed financial information concerning the Advisor
and its affiliates relating to the operation of the Funds, noting the overall
profitability of the relationship with the Funds to the Advisor and the
financial soundness of the Advisor and its affiliates as demonstrated by the
financial information provided. The Board also took note of the fact that the
Advisor bears the entire cost associated with the Funds' participation in
various "mutual fund supermarket" programs, noting that this is beneficial to
the Funds because it allows them to be held by a wide array of shareholders
in a convenient manner.
The Board reviewed the Advisor's brokerage practices and best-execution
procedures, and noted that these were reasonable and consistent with standard
industry practice. In connection with this review, the Board considered the
fact that the Advisor does not have any express arrangements in place with
respect to "soft dollar" arrangements with brokers or other similar parties
relating to the direct use of Fund brokerage commissions to obtain research
or execution services. With respect to the Advisor's brokerage practices, the
Board also took into consideration the fact that the Advisor has maintained
low portfolio turnover rates for the Funds that are substantially lower than
industry averages for equity-type funds, which the Board determined is
beneficial to shareholders due to the reduced brokerage expenses that are
attributable to low portfolio turnover rates.
The Board also considered information regarding the fees that the
Advisor charges other clients for investment advisory services that are
similar to the advisory services provided to the Funds and noted that the
Funds' fees were reasonable when compared to the relevant circumstances of
the types of accounts involved.
In connection with the Board's consideration of the ways in which
economies of scale are reflected with respect to the Agreements, the Board
took note of the fact that the Advisor had previously entered into a
voluntary expense limitation arrangement with the Funds pursuant to which the
investment advisory fees payable to the Advisor by each of the Funds is
reduced on assets in excess of $1 billion from the stated contractual rate of
1.00% of the average daily net assets of each respective Fund to 0.95% of the
average daily net assets of those assets in each Fund in excess of $1 billion
for the two year period from January 1, 2005 through December 31, 2006. This
limitation on the amount of the investment advisory fees payable under the
Agreements is in addition to the contractual arrangement in place with
respect to each of the Funds pursuant to which the Advisor has previously
agreed to limit the total operating expenses of each class of shares of the
Funds and is reviewed by the Board each year in connection with the further
continuation of the Agreements.
58
FAM Equity-Income Fund [LOGO]
In reaching their conclusion with respect to the continuation of the
Agreements, the Trustees did not identify any one single factor as being
controlling, rather, the Board took note of a combination of factors that
influenced their decision making process. The Board did, however, identify
the overall favorable investment performance of the Funds on a long-term
basis, the commitment of the Advisor to the successful operation of the
Funds, and the level of expenses of the Funds, as well as the Advisor's
willingness to enter into agreements to reduce the overall operating expenses
of the Funds and the investment advisory fees payable by the Funds, as being
important elements of their consideration. Based upon their review and
consideration of these factors and other matters deemed relevant by the Board
in reaching an informed business judgment, the Board of Trustees, including
all of the Independent Trustees, unanimously concluded that the terms of the
Investment Advisory Agreements are fair and reasonable and the Board voted to
renew the Agreements for an additional one-year period, subject to the
applicable limitations on the total operating expenses of the Funds and the
investment advisory fees payable by the Funds as considered and approved at
the meeting.
59
FAM Funds -- Information About Trustees and Officers [LOGO]
The business and affairs of the Funds are managed under the direction of the
Funds' Board of Trustees. Information pertaining to the Trustees and Officers
of the Funds is set forth below.
Independent Trustees**
Number of
Position(s) Principal Portfolios in Other
Held With Fund Occupation(s) Fund Complex* Directorships
Name, Address, and Length of During Past Overseen Held by
and Age Time Served 5 Years by Trustee Trustee
Fred "Chico" Lager Trustee since 1996 Business Consultant; 2 N/A
384 North Grand Street Retired President and
Cobleskill, NY 12043 Chief Executive Officer
Age: 51 of Ben & Jerry's
Homemade, Inc.
C. Richard Pogue Trustee since 2000 Retired Executive Vice 2 N/A
384 North Grand Street President, Investment
Cobleskill, NY 12043 Company Institute
Age: 69
David A. Hughey Trustee since 2000 Retired Executive 2 N/A
384 North Grand Street Chairman since Vice President and
Cobleskill, NY 12043 November 2004 Chief Administrative
Age: 74 Officer, Morgan Stanley
Investment Advisors
John McCormack Trustee since 2004 Retired Group President, 2 N/A
384 North Grand Street TIAA-Cref Enterprises
Cobleskill, NY 12043
Age: 61
Barbara Weidlich Trustee since 2004 President, National 2 N/A
384 North Grand Street Investment Company
Cobleskill, NY 12043 Service Association;
Age: 61 Managing Director --
DEXIA BIL Fund Services,
Dublin, Ireland
60
FAM Funds -- Information About Trustees and Officers continued [LOGO]
Interested Trustees and Officers***
Number of
Position(s) Principal Portfolios in Other
Held With Fund Occupation(s) Fund Complex* Directorships
Name, Address, and Length of During Past Overseen Held by
and Age Time Served 5 Years by Trustee Trustee
Thomas O. Putnam**** President Chairman, Fenimore 2 N/A
384 North Grand Street since 1986 Asset Management, Inc.
Cobleskill, NY 12043
Age: 61
Joseph A. Bucci***** Secretary and Controller, Fenimore 2 N/A
384 North Grand Street Treasurer since Asset Management, Inc.
Cobleskill, NY 12043 2000
Age: 52
Charles Richter, Esq. Chief Compliance Chief Compliance 2 N/A
384 North Grand Street Officer since Officer, Fenimore Asset
Cobleskill, NY 12043 March 2005 Management, Inc.
Age: 49 Chief Operating Officer
and Chief Compliance
Officer, Manarin
Securities Corporation
and Chief Compliance
Officer, Manarin
Investment Counsel,
Omaha, NE
*"Fund Complex" includes the two series of the Trust, FAM Value Fund and
FAM Equity-Income Fund.
**The "Independent Trustees" are those Trustees that are not considered
"interested persons" of the Trust, as that term is defined in the
1940 Act.
***Mr. Putnam, by virtue of his employment with Fenimore Asset Management,
Inc., the Trust's investment adviser, is considered an "interested
person" of the Trust.
****Mr. Putnam was Chairman of the Board through November 2004.
*****Mr. Bucci was Trustee from 2000 to March 2004.
61
FAM Funds -- Definition of Terms [LOGO]
Earnings Growth Rate. The earnings growth rate is the annual average
rate of growth in earnings over the past five years for the stocks currently
in a portfolio.
Expense Ratio. The expense ratio is the percentage of a portfolio's
average net assets used to pay its annual administrative and advisory
expenses. These expenses directly reduce returns to investors.
Median Market Cap. The median market cap is the midpoint of market
capitalization (market price times shares outstanding) of stocks in a
portfolio.
Number of Stocks. This is an indication of diversification. The more
stocks a portfolio holds, the more diversified, and the more likely it is to
perform in line with the overall stock market.
Price/Book Ratio. The share price of a stock, divided by its net worth,
or book value, per share. For a portfolio the weighted average price/book
ratio of the stocks it holds.
Price/Earnings Ratio (P/E). We would like to take this opportunity to
review one fundamental concept, P/E, which, if not properly understood, can
lead to some confusion. This measure is included to give investors an idea of
how much is being paid for a company's earning power, and thereby, to assist
in evaluating a portfolio's risk. Typically, the higher the P/E, the more
investors are paying and the more growth they are expecting. Lower P/E stocks
tend to be in lower-growth industries, in stock groups that have fallen out
of favor, or in mature companies that have long records of earnings
stability.
If you look at Morningstar, Lipper or Value Line mutual fund data, you
will most likely encounter P/E ratios that differ perhaps from each other, as
well as from the one that we have included in this report. The major reasons
for discrepancies are two-fold. One reason is that reporting services use
unadjusted data that is obtained from filed annual reports, 10Ks, 10Qs and
quarterly reports; as such, this data is historically based, and does include
current year estimates. Some of this information may also come from Standard
and Poor's and Comstock. While these databases are good sources for raw
statistics, we have observed that they do not carry all the data that is
necessary to record every relevant element that factors into operating
earnings.
Additionally, we make adjustments to operating earnings to eliminate one
time events (if they are truly one time!). For example, we would eliminate
the gain or loss on an investment that was sold if it is obvious that the
likelihood of this recurring is remote. We also eliminate negative P/Es and
P/Es of companies where valuation has little to do with the company's
reported earnings and most to do with asset growth, i.e. Berkshire Hathaway.
We believe that this methodology is more representative of the relevant
fundamentals of the P/E for the FAM Value Fund and the FAM Equity-Income Fund
and provides you with a better understanding of what you own.
62
FAM Funds -- Definition of Terms continued [LOGO]
Return on Equity. The rate of return generated by a company during the
past year for each dollar or shareholder's equity (net income for the year
divided by shareholder's equity). For a portfolio, the weighted average
return on equity for the companies represented in the portfolio.
Turnover Rate. Indicates the trading activity during the past year.
Portfolios with high turn over rates incur higher transaction costs and are
more likely to realize and distribute capital gains (which may be taxable to
investors).
Yield. This is the portfolio's income from interest and dividends. The
yield, expressed as a percentage of a portfolio's net asset value, is based
on income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
63
FAM Funds -- Supplemental Information [LOGO]
Statement Regarding Availability of Proxy Voting Policies and Procedures.
Please note that a description of the policies and procedures the Funds use
to determine how to vote proxies relating to portfolio securities is
available (i) without charge, upon request, by calling FAM Funds at
1-800-932-3271; (ii) and on the Commission's website at http://www.sec.gov.
Statement Regarding Availability of Proxy Voting Record. Please note that
information regarding how the Funds voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
(i) without charge, upon request, by calling FAM Funds at 1-800-932-3271; or
on the FAM Fund's Website at http://FAMFunds.com (ii) and on the Commission's
website at http://www.sec.gov.
SPECIAL 2005 TAX INFORMATION (UNAUDITED) FOR FAM FUNDS
This information for the fiscal year ended December 31, 2005, is included
pursuant to provisions of the Internal Revenue Code.
The Value Fund distributed $19,554,477 as capital gain dividends (from
net long-term capital gains) to shareholders during the fiscal year.
The Equity-Income Fund distributed $702 as capital gain dividends (from
net long-term capital gains) to shareholders during the fiscal year.
The Value Fund's Net Income distribution is eligible for qualified
dividend income status in its entirety, or 100% of net income distributed to
shareholders during the fiscal year is qualified.
The Equity-Income Fund's Net Income distribution is eligible for
qualified dividend income status in its entirety, or 100% of net income
distributed to shareholders during the fiscal year is qualified.
For Value Fund corporate shareholders, 100% of investment income
(dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction.
For Equity-Income Fund corporate shareholders, 100% of investment
income (dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction.
64
Investment Advisor
Fenimore Asset Management, Inc.
Cobleskill, NY
Custodian
U.S. Bank, N.A.
Cincinnati, OH
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
New York, NY
Trustees
David A. Hughey,
Independent Chairman
Fred "Chico" Lager
John J. McCormack, Jr.
C. Richard Pogue
Thomas O. Putnam
Barbara V. Weidlich
Legal Counsel
Dechert, LLP
Washington, DC
Shareholder Servicing Agent
FAM Shareholder Services, Inc.
Cobleskill, NY
Distributor
Fenimore Securities, Inc.
Cobleskill, NY
[LOGO] FAM Funds
384 North Grand Street
PO Box 399
Cobleskill, New York 12043-0399
(800) 932-3271
www.famfunds.com
[LOGO] FAM Funds
384 North Grand Street
PO Box 399
Cobleskill, New York 12043-0399
(800) 932-3271
www.famfunds.com
FINANCIAL PEACE OF MIND THROUGH A VALUE APPROACH TO INVESTING
Item 2. Code of Ethics.
The Registrant has adopted a code of ethics that applies to the Registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Registrant or a
third party. The Registrant has undertaken in this report filed on Form N-CSR
to provide to any person without charge, upon request by calling
1-(800)932-3271, a copy of such code of ethics.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Trustees has determined that David A. Hughey and
Fred Lager are each an "audit committee financial expert" and are
"independent," as these terms are defined in this Item 3.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees 2005 - $78,297; Audit Fees 2004 - $71,073
(b) Audit-Related Fees - None.
(c) Tax Fees 2005 - $11,100; Tax Fees 2004 - $10,000 - Tax Preparation
Expenses
(d) All Other Fees - 2005 - $1195- Form N-1A filing review; 2004 - None
(e)(1) Audit Committee Pre-Approval Policy. All services to be performed for
the Registrant by PricewaterhouseCoopers LLP must be pre-approved
by the audit committee. All services performed during 2005 and 2004
were pre-approved by the committee.
(e)(2) 100 percent.
(f) Not applicable.
(g) The aggregate fees paid by the Registrant's investment advisor for
Non-audit professional services rendered by PricewaterhouseCoopers LLP
for 2005 and 2004 were $22,129 and $21,000, respectively. The aggregate
fees paid to PricewaterhouseCoopers LLP for professional services to
Registrant's affiliated broker-dealer for 2005 and 2004 were $10,000 and
$8,200 respectively.
(h) Not applicable.
Item 5. Audit Committee of Listed Registrants
Not Applicable.
Item 6. Schedule of Investments
This Schedule of Investments in securities of unaffiliated issuers is
included as part of the Report to Shareholders.
Item 7. Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c)) under the Investment Company
Act of 1940, as amended (the "Act") are effective based on their
evaluation of these controls and procedures as of a date within 90 days
of the filing date of this document.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act that
occurred during the registrant's second fiscal half-year of the period
covered by this report that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 12. Exhibits.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2) in the exact form set forth below:
(Attached hereto).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Fenimore Asset Management Trust
By (Signature and Title)* /s/ Thomas O. Putnam
---------------------------
Thomas O. Putnam, President
Date April 25, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By (Signature and Title)* /s/ Thomas O. Putnam
---------------------------
Thomas O. Putnam, President
Date April 25, 2006
By (Signature and Title)* /s/ Joseph A. Bucci
--------------------------
Joseph A. Bucci, Treasurer
Date April 25, 2006
* Print the name and title of each signing officer under his or her signature.