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, 2007
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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, 2007
Table of Contents
Chairman's Commentary 1
FAM Value Fund 4
Letter to Shareholders 4
Performance Summary 8
Portfolio Data 10
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 29
Investment Advisor Contract Renewal Disclosure 30
FAM Equity-Income Fund 34
Letter to Shareholders 34
Performance Summary 38
Portfolio Data 40
Expense Data 41
Statement of Investments 43
Statement of Assets and Liabilities 47
Statement of Operations 48
Statement of Changes in Net Assets 49
Notes to Financial Statements 50
Report of Independent Registered Public Accounting Firm 58
Investment Advisor Contract Renewal Disclosure 59
Information About Trustees and Officers 63
Proxy Information 65
Definition of Terms 66
Supplemental Information 68
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, by calling FAM Funds at (800) 932-3271.
Chairman's Commentary [LOGO]
December 2007
Dear Fellow Shareholder:
The year 2007 has turned out to be one of disappointment. The Standard
& Poor's Index ended up 5.5% while the Russell 2000 Index was off -1.57%. Our
optimism for decent returns which we experienced through June was dashed by
the market's rising fear of an economic slowdown. High energy prices, rising
inflation and the subprime credit crisis have unnerved the market and
investors. While this period of weakness is painful, it is not unusual; the
market has provided similarly challenging periods in the past.
With alarming reports coming from radio, T.V. and the newspapers it is
very easy to be caught up in the negative outlook of the day. Some examples
illustrate the media environment:
"Most Stocks Down, Energy Up"
`Last Monday, the stock market retreated under the pressure of
record gold prices, a slumping dollar and worries about rising
prices for imported oil.'
"White House Urges Fed to
Lower Rates in Light of Data
on Inflation, Housing"
"Home Builders, Hurt
by Credit Crunch"
These headlines are typical of today's news items, yet they are taken
from newspaper archives. The first is from The New York Times in 1979 during
the post-oil embargo years. The second and third headlines are from newspaper
articles written in 1990 during the Savings and Loan crisis and subsequent
housing recession. Both periods were followed by significant rises in stock
prices.
With all the media hype, there is a temptation to buy stocks that are
"working" now. Yet these are often the ones that have already had substantial
price increases. I must caution -- it is difficult to jump on the train once
the engine has left the station! That is what investors were encouraged to do
at the peak of the Internet /.com stock boom in late 1999 and early 2000.
Recently I have been hearing financial advisors on the radio encourage
investors to over weight their portfolio in international sectors. Could they
be repeating history? It is too early to tell.
1
Chairman's Commentary [LOGO]
One thing is certain -- the Shanghai index has increased 365% over the last
two years and more importantly the average P/E (price to earnings ratio, a
simplified method of valuation) of stocks on the Chinese market has risen
from 19X to 46X. Sound familiar? Warren Buffett sold all of his holding in
PetroChina, the large Chinese oil producing company, in 2007. Since Warren
comments little on the reasons for his investment activity it is difficult to
know exactly why he sold this stock holding. It is worth noting that the
stock had risen 1021% while he owned it. Could it be valuation had something
to do with his thinking?
Valuation and the subsequent purchase of a stock at a reasonable
economic price are important to successful investing. Equally important is to
remain focused on the long term and not get caught up in short-term thinking.
We are constantly reminded that our goal is to protect your capital and not
to take undue risks. During periods of uncertainty, it is important for you
as an investor and us as your investment advisor to remember that patience
and discipline are required for a successful outcome.
We remain committed to owning companies that we understand, have a
solid financial footing as represented by their balance sheet, and are run by
honest people who have a passion for the business and are good allocators of
capital. While our weightings in banks, insurance companies, and consumer
stocks have not been helpful to your 2007 return, we feel confident that
these well-managed companies continue to build economic value that will
become the foundation for future investor return.
Each of our six analysts, including myself, has been doing a fair
amount of traveling to visit the companies you own. These visits give us the
confidence that the future over the next five to six years looks bright. What
you may not know is that over this past year we visited all of our holdings,
some more than once. Additionally, twenty-two visits were made to companies
that looked intriguing but were not purchased. Some of these trips were to
get background on an industry or competitor or to learn more about a company
we have admired. Many of these we filed for possible future purchase. In a
normal year we find maybe a handful of ideas that we think would make
worthwhile investments at the right price. Valuation and price are normally
the determining factors that limit our choices. This year is different. Not
only would we add new money to many companies we own, but there are several
new ideas that merit consideration because they are selling at attractive
valuations.
My confidence in our investment team and our disciplined investment
process leads me to believe this may be a period of unique opportunity.
2
Chairman's Commentary [LOGO]
I personally have added to my ownership of each mutual fund and I would
encourage you to add to your fund holdings if you are able to do so. We feel
optimistic that your long-term investment future is bright. The short term is
unpredictable, but over the long term the solid economic growth of your
holdings speaks volumes about your investment future.
Thank you for your continued trust in our investment oversight for you.
We pledge to continue to work diligently to serve your investment needs.
Sincerely,
/s/ Thomas O. Putnam
Thomas O. Putnam
Chairman
Fenimore Asset Management, Inc.
Research Team
Andrew F. Boord
Eric C. Elbell, CFA
John D. Fox, CFA
Paul C. Hogan, CFA
Marc Roberts
P.S. -- The FAM Annual Shareholder Informational Meeting will be held on
Tuesday, October 14, 2008. The event will be held twice on that day. The
morning meeting will be held at the Holiday Inn Turf in Albany, NY and the
afternoon meeting at the Cobleskill-Richmondville High School in Cobleskill,
NY. Detailed information will be provided to you later in the year.
3
FAM Value Fund [LOGO]
Dear Fellow Value Fund Shareholder:
At December 31, 2007 the net asset value of the Investor Class of the
FAM Value Fund was $45.42. This is a decrease of -.79% from the beginning of
the year. By comparison, the S&P 500 increased 5.49% and the Russell 2000
index declined -1.57%.
2007 in Review
The most significant economic story in 2007 was housing. The drips of
bad news coming from the housing market in the first half of the year became
a tidal wave by December. It is clear that the spectacular appreciation in
housing in 2003-2006 was driven by loose lending standards and in many cases
fraud. The unwinding of these lending practices has put pressure on
residential real estate resulting in the biggest decline in home prices since
1990-91. The other major story in 2007 was energy prices. The price of oil
hit an all-time high near $100 a barrel in the fourth quarter.
Portfolio Activity
We made three significant purchases in the Fund during 2007 -- American
Express, Illinois Tool Works, and Johnson & Johnson. These three companies
share some common traits. Over the last few years we have noticed that large
companies are selling at more reasonable prices than smaller companies. In
addition, we have been watching the tremendous growth occurring around the
world. Our 2007 purchases are all large companies with significant sales
outside of the United States. These companies have great business franchises
in many countries and were available for purchase at a reasonable multiple of
earnings.
We were quite active selling stocks in 2007. Four companies that we
owned at the beginning of the year were acquired by private equity funds or
other corporations. As a result we sold CDW Corporation, Florida Rock,
Kronos, and OSI Restaurants. In addition, we sold two consumer stocks --
Ethan Allen and Liz Claiborne -- due to concerns about the ability of these
companies to grow their earnings. We also sold our entire position in Plum
Creek Timber as we are concerned about its need to generate real estate sales
to produce cash flow.
Performance Detail
Best Performers
Our best performing stock, on a dollar basis, was Berkshire Hathaway
with an increase in value of $12.5 million. Berkshire is the investment
vehicle for the world's most famous investor -- Warren Buffett. Berkshire's
stock had a terrific year increasing 29%. While the credit crisis hurt many
financial stocks in 2007 -- for Berkshire
4
FAM Value Fund [LOGO]
the crisis means opportunity. Berkshire Hathaway has unparallel financial
strength with $120 billion in shareholders' equity and $39 billion in cash.
The company recently announced a number of acquisitions and entry into the
municipal bond ratings business.
The second best performing stock was Kaydon Corporation (+39%)
generating $10.7 million in gains. Kaydon manufactures custom engineered
products that are components to other industrial products. An example is ball
bearings. Bearings go into a wide range of products from ball point pens to
helicopters. Kaydon has a booming business in providing bearings to wind
turbines which are used to generate clean energy.
Once again, one of our construction materials stocks led the pack. Our
third best performer was Martin Marietta Materials (+29%) with a gain of $8.3
million. A continued scarcity of materials and excellent cost control
measures by management has resulted in strong earnings growth.
Worst Performers
The biggest negative impact on performance, on a dollar basis, was from
Brown & Brown (-16%) with a loss of $8.4 million. Brown & Brown is an
insurance broker with headquarters in Daytona Beach, Florida. The state of
Florida has instituted a number of changes in insurance laws that have
resulted in a reduction in insurance premiums. While this may be good for
insurance buyers in the short term, it hurt the earnings growth at Brown &
Brown in 2007. Prior to this year, Brown & Brown had a record of growing its
earnings per share at a double-digit rate for 14 consecutive years. We
believe this record is indicative of management's skill. We are very
confident that we have a great management team and that this company will
continue to grow its earnings over the coming years.
Our second and third worst performers come from the same industry --
banking. We own two banks that performed poorly in 2007 -- TCF Financial and
M&T Bank (both -31%) generating losses of $7 million and $6.4 million
respectively. Bank stocks in general were down over 30% in 2007. These
declines are due to fears about credit losses in banks' loan portfolios. We
always strive to own banks that have strong credit cultures. Both TCF and M&T
Bank rank above average in credit performance over the last five and ten
years. While we expect the banks we own to experience an increase in credit
losses, we do not expect they will need to reduce their dividends or raise
capital. We believe our bank holdings will emerge as survivors in the current
credit crisis.
5
FAM Value Fund [LOGO]
Our Investment Outlook
Following a disappointing year in the market and a drumbeat of negative
headlines, investors are looking for a good reason to stay invested. We
believe there are two good reasons to invest in the FAM Value Fund. The first
is we only invest in companies that are financially strong and can thrive in
a difficult environment. In these trying times companies with strong balance
sheets and free cash flow can improve their competitive position. In the last
few months we have seen two of our companies make acquisitions of weaker
competitors. We expect this trend to continue.
The second reason to be positive on stocks is valuation. The golden
rule of investing is to buy low and sell high. While the news headlines are
negative, we believe many stock prices already reflect the difficult economic
environment. As of December 31, 2007 we calculate over half of the stocks in
the S&P 500 index have declined more than 15% from their high price.
Companies in the homebuilding and mortgage lending business are down
significantly more than 15%.
Many of the holdings in the FAM Value Fund are selling at attractive
prices that we have not seen in five years. For example, two of our insurance
holdings, Protective Life and White Mountains, are selling at valuation
levels not seen since the 2000-2002 bear market. In addition, a number of
consumer-related names like International Speedway Corporation are selling at
the lowest valuations in eight years. In other words, these stocks are cheap.
The good news is that low prices have always been the catalyst for positive
future returns.
Capital Gains Distribution
Our capital gains distribution was higher than normal in 2007. We sold
$85 million worth of stocks that were acquired by other investors or
companies, which generated almost $24 million in gains, or $1.32 per share.
We have no change in our philosophy or desired holding period. We continue to
invest in well-managed businesses with an intention of owning them for a long
period of time.
6
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, 2007
Life of Fund
1-Year 3-Year 5-Year 10-Year (1/2/87)
FAM Value Fund
(Investor Shares) -0.79% 4.42% 10.70% 8.11% 11.69%
(Advisor Shares)* -1.91% 3.47% N/A N/A *
S&P 500 Index 5.49% 8.62% 12.82% 5.91% 11.36%
Russell 2000 Index -1.57% 6.80% 16.25% 7.08% 10.28%
*FAM Value Fund Advisor Shares were launched on July 1, 2003.
The return since inception is 8.61%.
Thank you for investing with us in FAM Value Fund.
Sincerely,
/s/ John D. Fox /s/ Thomas O. Putnam
John D. Fox, CFA Thomas O. Putnam
Co-Manager Co-Manager
7
FAM Value Fund -- Performance Summary [LOGO]
Annual Total Investment Returns:
JANUARY 2, 1987 TO DECEMBER 31, 2007
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%
2006 8.73% 7.96% 18.37% 15.79%
2007 -0.79% -1.91% -1.57% 5.49%
*FAM Value Fund Advisor Shares were launched on July 1, 2003.
8
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, since inception of January 2, 1987, 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
2006 93039 79398 102553
2007 98147 78151 101800
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 $14,510 by December 31, 2007.
Average Annual Total Returns as of December 31, 2007
Life of Fund
1-Year 3-Year 5-Year 10-Year (1/2/87)
FAM Value Fund
(Investor Shares) -0.79% 4.42% 10.70% 8.11% 11.69%
(Advisor Shares)* -1.91% 3.47% N/A N/A *
S&P 500 Index 5.49% 8.62% 12.82% 5.91% 11.36%
Russell 2000 Index -1.57% 6.80% 16.25% 7.08% 10.28%
*FAM Value Fund Advisor Shares were launched on July 1, 2003. The return
since inception is 8.61%.
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.
9
FAM Value Fund -- Portfolio Data [LOGO]
As of December 31, 2007
TOP TEN HOLDINGS
(% of Net Assets)
Berkshire Hathaway, Inc. 6.4%
White Mountains Insurance Group 6.3%
Brown & Brown, Inc. 5.0%
Yum! Brands, Inc. 3.6%
Markel Corporation 3.5%
Kaydon Corporation 3.3%
John Wiley & Sons, Inc. 3.2%
General Electric Company 3.2%
IDEX Corporation 3.2%
Federated Investors 2.8%
COMPOSITION OF NET ASSETS
Property & Casualty Insurance 16.2%
Machinery & Equipment 9.2%
Temporary Investments 6.8%
Health Care Services 5.8%
Retail Stores 5.3%
Banking 5.2%
Insurance Agency 5.0%
Diversified Manufacturing 4.4%
Transportation 4.2%
Construction Materials 4.1%
Restaurants 3.6%
Publishing 3.2%
Investment Management 2.8%
Media 2.8%
Life Insurance 2.8%
Electronic Equipment 2.5%
Recreation & Entertainment 2.4%
Diversified Health Care 2.3%
Home Furnishings 2.1%
Real Estate Development 2.0%
Other 7.3%
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 on the Advisor Class Shares only) 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 (6/30/2007 to
12/31/2007).
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]
SIX MONTHS ENDED DECEMBER 31, 2007
Beginning Ending Expenses
Account Value Account Value Paid
6/30/2007 12/31/2007 During Period
Ongoing Costs Based on Actual Fund Return
A. Investor Share Class $1,000.00 $ 923.50 $ 5.82*
B. Advisor Share Class $1,000.00 $ 917.10 $10.68**
Ongoing Costs Based on Hypothetical
5% Yearly Return
C. Investor Share Class $1,000.00 $1,018.95 $ 6.11*
D. Advisor Share Class $1,000.00 $1,013.86 $11.22**
*Expenses are equal to the Fund's Investor Class Shares annualized expense
ratio of (1.20%), 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 (2.21%), 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, 2007
SHARES VALUE
COMMON STOCKS (93.2%)
Automotive (1.3%)
CarMax, Inc.*
o specialty retailer of used cars and light-trucks
in the United States 600,000 $ 11,850,000
Banking (5.2%)
M&T Bank Corporation
o bank holding company that provides
commercial and retail banking services
to individuals, businesses, corporations
and institutions in the Northeast 143,000 11,664,510
TCF Financial Corp.
o holding company that offers various banking
services throughout the United States 796,000 14,272,280
Westamerica Bancorp
o provides banking services to individual
and corporate customers in northern
and central California 436,100 19,428,255
45,365,045
Construction Materials (4.1%)
Martin Marietta Materials
o produces aggregates for the construction industry 163,443 21,672,542
Vulcan Materials Company
o produces, distributes and sells construction
aggregates and industrial and specialty chemicals 177,065 14,004,071
35,676,613
Diversified Health Care (2.3%)
Johnson & Johnson
o manufacture and sales of various products
in the health care field 300,000 20,010,000
Diversified Manufacturing (4.4%)
General Electric Company
o diversified industrial manufacturer 763,875 28,316,846
Illinois Tool Works, Inc.
o manufactures engineered products such as
plastic and metal components and fasteners
and specialty systems which consist of
machinery and consumable products 199,950 10,705,323
39,022,169
See Notes to Financial Statements.
13
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Electronic Equipment (2.5%)
Zebra Technologies Corp.*
o designs, manufactures and supports bar code
label printers 638,502 $ 22,156,019
Financial Services (1.0%)
American Express
o operates as a payments, network, and
travel company worldwide as well as
offers individual consumer credit cards 177,000 9,207,540
Health Care Services (5.8%)
Amsurg Corp.*
o develops, acquires and operates practice-based
ambulatory surgery centers in partnership with
physician practice groups in the U.S. 696,150 18,837,819
Lincare Holdings*
o provides respiratory therapy services
to patients in the home 530,000 18,634,800
Pediatrix Medical Group, Inc.*
o healthcare services company focused on physician
services for newborn, maternal-fetal and other
pediatric subspecialty care 200,000 13,630,000
51,102,619
Home Furnishings (2.1%)
Mohawk Industries, Inc.*
o produces floor covering products for
residential and commercial applications 248,100 18,458,640
Insurance Agency (5.0%)
Brown & Brown, Inc.
o one of the largest independent general
insurance agencies in the U.S. 1,879,696 44,172,856
Investment Management (2.8%)
Federated Investors, Inc.
o provides investment management products
and services primarily to mutual funds 600,000 24,696,000
Life Insurance (2.8%)
Protective Life Corporation
o individual and group life/health insurance
and guaranteed investment contracts 591,400 24,259,228
See Notes to Financial Statements.
14
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Machinery & Equipment (9.2%)
Donaldson Company, Inc.
o designs, manufactures and sells
filtration systems and replacement parts 311,200 $ 14,433,456
Graco Inc.
o supplies systems and equipment for the
management of fluids in industrial, commercial
and vehicle lubrication applications 261,550 9,745,353
IDEX Corporation
o manufactures proprietary, highly engineered
industrial products and pumps 771,750 27,883,327
Kaydon Corporation
o custom-engineers products including bearings,
filters, and piston rings 530,700 28,944,378
81,006,514
Media (2.8%)
Meredith Corporation
o magazine publishing and tv broadcasting 447,450 24,600,801
Pharmaceuticals (1.5%)
Barr Pharmaceuticals*
o specialty pharmaceutical company that
develops, manufactures and markets both
generic and pharmaceutical products 250,000 13,275,000
Property and Casualty Insurance (16.1%)
Berkshire Hathaway Inc.*
o holding company for various insurance
and industrial companies 395 55,932,000
Markel Corporation*
o sells specialty insurance products 61,850 30,374,535
White Mountains Ins. Grp., Ltd.
o personal property and casualty, and reinsurance 108,275 55,658,764
141,965,299
Publishing (3.2%)
John Wiley & Sons, Inc.
o publisher of print and electronic products,
specializing in scientific, technical professional
and medical books and journals 661,700 28,340,611
Real Estate Development (2.0%)
Forest City Enterprises
o ownership, development, management and
acquisition of commercial and residential
real estate properties 400,000 17,776,000
See Notes to Financial Statements.
15
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Recreation and Entertainment (2.4%)
International Speedway Corporation
o owns and operates auto racing tracks
including Daytona 515,688 $ 21,236,032
Recreation Vehicles (1.1%)
Winnebago Industries
o manufacturer of self-contained recreational
vehicles used primarily in leisure travel 457,500 9,616,650
Registered Investment Company (1.8%)
Allied Capital Corp
o venture capital corporation for entrepreneurs
and management 736,391 15,832,407
Restaurants (3.6%)
YUM! Brands, Inc.
o quick service restaurants including KFC,
Pizza Hut and Taco Bell 833,600 31,901,872
Retail Stores (5.3%)
Bed Bath & Beyond, Inc.*
o national chain of retail stores selling domestic
merchandise such as bed linens, bath items,
kitchen textiles and home furnishings 502,600 14,771,414
Ross Stores, Inc.
o chain of off-price retail apparel and
home accessories stores 921,422 23,560,760
Whole Foods Market, Inc.
o national grocery store selling organic
and natural products 200,000 8,160,000
46,492,174
Transportation (4.2%)
Forward Air Corporation
o provides surface transportation and
related logistics services to the deferred
air freight market in North America 439,233 13,690,893
Heartland Express, Inc.
o short-to-medium-haul truckload carrier
of general commodities 1,333,333 18,906,662
Knight Transportation, Inc.
o transportation of general commodities
in the U.S. 300,000 4,443,000
37,040,555
See Notes to Financial Statements.
16
FAM Value Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Wholesale Distribution (0.7%)
SCP Pool Corp.
o wholesale distributor of swimming pool supplies 290,950 $ 5,769,538
Total Common Stocks (Cost $518,654,483) $820,830,182
TEMPORARY INVESTMENTS (6.8%)
Money Market Fund (3.4%)
First American Treasury Fund 29,855,141 $ 29,855,141
U.S. Government Obligations (3.4%) PRINCIPAL
U.S. Treasury Bill, 2.6%, with maturity to 2/14/08 $30,000,000 29,904,667
Total Temporary Investments (Cost $59,759,808) $ 59,759,808
Total Investments (Cost $578,414,291) (100%) $880,589,990
*Non-income producing securities.
See Notes to Financial Statements.
17
FAM Value Fund [LOGO]
December 31, 2007
STATEMENT OF ASSETS AND LIABILITIES
Assets
Investment in securities at value (Cost $578,414,291) $880,589,990
Cash 536,596
Receivable for fund shares 179,218
Dividends and interest receivable 740,018
Total Assets 882,045,822
Liabilities
Payable for fund shares 2,346,085
Accrued investment advisory fees 760,759
Accrued shareholder servicing and administrative fee 93,441
Accrued expenses 164,615
Total Liabilities 3,364,900
Net Assets
Source of Net Assets:
Net capital paid in on shares of beneficial interest $576,476,872
Undistributed net investment income 11,285
Accumulated net realized gains 17,066
Net unrealized appreciation 302,175,699
Net Assets $878,680,922
Net Asset Value Per Share (unlimited shares of
beneficial interest authorized at $.001 par value)
Investor Class Shares -- based on net assets of
$871,090,421 and 19,179,765 shares outstanding $45.42
Advisor Class Shares -- based on net assets of
$7,590,501 and 170,989 shares outstanding $44.39
See Notes to Financial Statements.
18
FAM Value Fund [LOGO]
Year Ended December 31, 2007
STATEMENT OF OPERATIONS
INVESTMENT INCOME
Income
Dividends $ 12,937,631
Interest 3,645,552
Total Investment Income 16,583,183
Expenses
Investment advisory fee (Note 2) 10,090,054
Administrative fee (Note 2) 730,855
Shareholder servicing and related expenses (Note 2) 457,908
Printing and mailing 209,732
Professional fees 155,886
Registration fees 53,295
Custodial fees 121,880
Trustees and Officers 94,645
Distribution and Service Fees -- Advisor Class Shares (Note 2) 87,028
Other 112,552
Total Expenses 12,113,835
Less: Investment advisory fee waived (Note 2) (16,051)
Expenses Paid Indirectly (Note 3) (12,122)
Net Expenses 12,085,662
Net Investment Income 4,497,521
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 62,631,695
Realized gain distributions 1,739,512
Unrealized depreciation of investments (70,486,406)
Net Loss on Investments (6,115,199)
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (1,617,678)
See Notes to Financial Statements.
19
FAM Value Fund [LOGO]
Years Ended December 31, 2007 and 2006
STATEMENT OF CHANGES IN NET ASSETS
2007 2006
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 4,497,521 $ 5,127,249
Net realized gain on investments 62,631,695 45,384,718
Realized gain distributions 1,739,512 909,443
Unrealized (depreciation) appreciation
of investments (70,486,406) 35,687,415
Net (Decrease) Increase in Net Assets
From Operations (1,617,678) 87,108,825
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Investor Class (4,486,236) (6,249,474)
Advisor Class -- --
Net realized gain on investments
Investor Class (63,799,876) (44,788,894)
Advisor Class (569,131) (373,060)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (NOTE 4): (101,512,904) (82,391,608)
Total Decrease in Net Assets (171,985,825) (46,694,211)
NET ASSETS:
Beginning of year 1,050,666,747 1,097,360,958
End of year $ 878,680,922 $1,050,666,747
Undistributed net investment income $ 11,285 --
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.
FIN 48 provides guidance for how certain tax positions should be
recognized, measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the Fund's tax returns
to determine whether the tax positions are "more-likely-than-not" of
being sustained by the applicable tax authority. Tax positions not
deemed to meet the "more-likely-than-not" threshold would be recorded as
a reduction in a tax benefit or expense in the current year and
recognized as: a reduction of an income tax refund receivable; a
reduction of deferred tax assets; an increase in deferred tax liability;
or a combination thereof. Management has evaluated the application of
FIN 48 and has determined it has no impact on the financial statements.
21
FAM Value Fund -- Notes to Financial Statements [LOGO]
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. The Fund records distributions received in excess
of income from underlying investments as a reduction of cost of
investments and/or realized gain. Such amounts are based on estimates if
actual amounts are not available, and actual amounts of income, realized
gain and return of capital may differ from the estimated amounts. The
Fund adjusts the estimated amounts of the components of distributions
(and consequently its net investment income) as an increase to unrealized
appreciation/(depreciation) and realized gain/(loss) on investments as
necessary once the issuers provide information about the actual
composition of the distributions. Distributions to shareholders are
recorded on the ex-dividend date. Distributions to shareholders are
determined in accordance with income tax regulations and may differ from
those determined for financial statement purposes. To the extent these
differences are permanent such amounts are reclassified within the
capital accounts.
e) New Accounting Pronouncement
In September 2006, Statement of Financial Accounting Standards No. 157,
"Fair Value Measurements" (SFAS 157), was issued and is effective for
fiscal years beginning after November 15, 2007. SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Management continues to
evaluate the application of the Standard to the Fund, and is not in a
position at this time to estimate the significance of its impact, if any,
on the Fund's financial statements.
22
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, 2008, to 0.95% of the Fund's
average daily net assets in excess of $1 billion. For the year ended December
31, 2007, the Advisor waived $16,051 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, 2007 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, 2007.
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,
2007, shareholder servicing agent fees paid to FSS amounted to $457,908.
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, 2007, these arrangements reduced the Fund's
custodian fees by $12,122.
23
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 4. Shares of Beneficial Interest
At December 31, 2007, 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, 2007, redemption fees
amounted to $1,039 and were credited to paid-in capital. Transactions were as
follows:
YEAR ENDED 12/31/07 YEAR ENDED 12/31/06
Shares Amount Shares Amount
Shares sold
Investor Class 1,230,162 $ 63,167,925 2,279,435 $ 112,324,360
Advisor Class 13,920 695,414 26,575 1,290,049
Shares issued on
reinvestment of dividends
Investor Class 1,449,817 65,647,727 983,049 49,044,308
Advisor Class 12,032 532,433 6,976 350,132
Shares redeemed
Investor Class (4,490,926) (230,126,546) (4,969,229) (244,031,112)
Advisor Class (28,605) (1,429,857) (28,628) (1,369,345)
Net Decrease from Investor Class
Share Transactions (1,810,947) $(101,310,894) (1,706,745) $ (82,662,444)
Net Decrease (Increase) from
Advisor Class Share Transactions (2,653) $ (202,010) 4,923 $ 270,836
Note 5. Investment Transactions
During the year ended December 31, 2007, purchases and sales of
investment securities, other than short term obligations were $81,236,401 and
$211,756,061. The cost of securities for federal income tax purposes is
substantially the same as shown in the investment portfolio.
24
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 6. Income Taxes and Distribution to Shareholders
The components of distributable earnings on a tax basis at December 31,
2007 were as follows:
Undistributed Ordinary Income $12,323
Undistributed Long-term Capital Gain $16,028
The aggregate gross unrealized appreciation and depreciation of
portfolio securities, based on cost for federal income tax purposes of
$578,414,291, was as follows:
Unrealized appreciation $319,646,777
Unrealized depreciation (17,471,078)
------------
Net unrealized appreciation $302,175,699
============
The tax composition of dividends and distributions to shareholders for
the years ended December 31, 2007 and 2006 were as follows:
2007 2006
Ordinary income $12,202,304 $15,089,676
Long-term capital gain 56,652,939 36,321,752
----------- -----------
$68,855,243 $51,411,428
=========== ===========
Undistributed net investment income, accumulated net realized gains,
net investment income and realized gain distributions, per the financial
statements, differ from undistributed ordinary income, undistributed
long-term capital gains, ordinary income distributions and long-term gain
distributions for federal income tax purposes due to the differing book/tax
treatment of short-term capital gains.
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, 2008, when any advances are to be repaid. During
the year ended December 31, 2007, 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.
25
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) 2007 2006 2005 2004 2003
Net asset value, beginning of year $ 49.65 $ 48.00 $ 46.65 $ 41.15 $ 33.69
Income from investment operations:
Net investment income 0.25 0.24 0.39 0.09 0.10
Net realized and unrealized
gain (loss) on investments (0.66) 3.96 2.20 6.84 8.32
Total from investment operations (0.41) 4.20 2.59 6.93 8.42
Less distributions:
Dividends from net investment income (0.25) (0.31) (0.37) (0.07) (0.09)
Distributions from net realized gains (3.57) (2.24) (0.87) (1.36) (0.87)
Total distributions (3.82) (2.55) (1.24) (1.43) (0.96)
Change in net asset value for the year (4.23) 1.65 1.35 5.50 7.46
Net asset value, end of year $ 45.42 $ 49.65 $ 48.00 $ 46.65 $ 41.15
Total Return (0.79)% 8.73% 5.56% 16.86% 24.98%
Ratios/supplemental data
Net assets, end of year (000) $871,090 $1,042,174 $1,089,369 $915,742 $578,579
Ratios to average net assets of:
Expenses 1.19% 1.18% 1.18% 1.20% 1.24%
Net investment income 0.45% 0.49% 0.82% 0.20% 0.26%
Portfolio turnover rate 8.74% 17.53% 14.25% 10.29% 9.43%
26
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 9. Financial Highlights (continued)
FAM VALUE FUND -- ADVISOR CLASS SHARES
Period Ended
Years Ended December 31, December 31,
Per share information
(For a share outstanding throughout the year) 2007 2006 2005 2004 2003+
Net asset value, beginning of year $48.91 $47.37 $46.11 $40.96 $37.10
Income from investment operations:
Net investment income (loss) (0.28) (0.25)++ (0.09)++ (0.35)++ 0.00
Net realized and unrealized
gain (loss) on investments (0.67) 4.03 2.22 6.86 4.82
Total from investment operations (0.95) 3.78 2.13 6.51 4.82
Less distributions:
Dividends from net
investment income -- -- -- -- (0.09)
Distributions from net
realized gains (3.57) (2.24) (0.87) (1.36) (0.87)
Total distributions (3.57) (2.24) (0.87) (1.36) (0.96)
Change in net asset value
for the year (4.52) 1.54 1.26 5.15 3.86
Net asset value, end of year $44.39 $48.91 $47.37 $46.11 $40.96
Total Return (1.91)% 7.96% 4.62% 15.91% 12.99%*
Ratios/supplemental data
Net assets, end of year (000) $7,591 $8,494 $7,992 $5,479 $1,562
Ratios to average net assets of:
Expenses 2.19% 2.18% 2.18% 2.20% 2.25%**
Net investment income (loss) (0.55)% (0.51)% (0.19)% (0.80)% (0.02)%**
Portfolio turnover rate 8.74% 17.53% 14.25% 10.29% 9.43%
+Beginning of period reflects Advisor Class Shares inception date of 7/1/03.
++Based on average shares outstanding.
*Not Annualized.
**Annualized.
27
FAM Value Fund -- Notes to Financial Statements [LOGO]
Note 10. Change of Independent Registered Public Accounting Firm
On October 10, 2007, the Board of Trustees of Fenimore Asset Management
Trust (the "Funds"), upon the recommendation of the Funds' audit committee,
determined not to retain PricewaterhouseCoopers LLP and approved a change of
the Funds' independent registered public accounting firm to Briggs, Bunting &
Dougherty, LLP. PricewaterhouseCoopers LLP's reports on the financial
statements of the Funds for each of the two years in the period ended
December 31, 2006 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as uncertainty, audit scope, or
accounting principles.
During the two years ended December 31, 2006 and through October 10,
2007, there were no disagreements between the Funds and
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused it to make reference to the
subject matter of the disagreements in connection with its report. During the
two years ended December 31, 2006 and through October 10, 2007, there were no
reportable events within the meaning of paragraphs (1)(v)(A) through (D) of
Item 304(a) of Regulation S-K.
28
FAM Value Fund --
Report of Independent Registered Public Accounting Firm [LOGO]
To the Board of Trustees of Fenimore Asset Management Trust
and Shareholders of FAM Value Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of FAM Value Fund, a series of shares
of beneficial interest of Fenimore Asset Management Trust, as of December 31,
2007, and the related statements of operations and changes in net assets and
the financial highlights for the year then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net
assets for the year ended December 31, 2006 and the financial highlights for
each of the years or period in the four-year period ended December 31, 2006
have been audited by other auditors, whose report dated February 1, 2007,
expressed an unqualified opinion on such financial statement and financial
highlights.
We conducted our audit 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 and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 2007
by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
FAM Value Fund as of December 31, 2007, the results of its operations,
changes in its net assets and its financial highlights for the year then
ended in conformity with accounting principles generally accepted in the
United States of America.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
February 5, 2008
29
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 Agree ments (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 6, 2007, 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 14, 2007, and then
with representatives of the Advisor on two occasions on November 14 and 15,
2007, 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 15, 2007. 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
30
FAM Value 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 the 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 over the long-term. 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 Share holder 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
31
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 was extended to December 31, 2007 and again extended to December
31, 2008. The 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
32
FAM Value Fund [LOGO]
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.
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.
33
FAM Equity-Income Fund [LOGO]
Dear Fellow Equity-Income Fund Shareholder:
We are disappointed by the 2007 performance of the FAM Equity-Income
Fund. The year showed promise in the first half, but was overshadowed by the
sub-prime mortgage issue which kicked off a worldwide credit crunch and a
lockup in the credit markets. While the Fund did not have any investments in
the areas experiencing the large asset write-offs, many of the financial
companies in the Fund were painted with the same brush even though their
balance sheets are solid.
FAM Equity-Income Fund
(Investor Class Shares) -3.64%
Russell 2000 Index (small companies) -1.57%
S&P 500 Index (large companies) +5.49%
Overview of 2007
The biggest story in 2007 was the meltdown in the sub-prime mortgage
market. For the last few years mortgage lenders were eager to lend money up
to 100% of the value of the home or more. They even extended credit to people
who couldn't verify their income. This was a huge departure from the past
when lenders would only loan up to 80% of the value of the home without
requiring mortgage insurance. We have invested in banks for years and have
seen first-hand what happens when other banks have loose lending standards.
It always ends badly for them. It didn't take a rocket scientist to know that
these lax mortgage lending standards would come back to haunt the mortgage
companies. As Yogi Berra said, "It's like deja vu all over again."
As it turns out, the sub-prime mortgage mess touched off a financial
crisis which is much broader than anyone imagined. The good news is that we
made a conscious decision to stay clear of sub-prime mortgage lenders. We
sold our position in H&R Block and North Fork bank in 2006, since both
companies had sub-prime mortgage operations. The bad news is that investors
have shunned the entire financial sector for fear that there is another shoe
to drop. Our opinion is that the brunt of the fallout will be with the
investment banks and mortgage lenders. We have never owned any of these
companies. We believe our banks (7.3% of the portfolio) are solid and are
actually in a better competitive position today than they were at this time
last year. Our investments in life insurance and property casualty insurance
(9.3% of the portfolio) are also very sound.
Another significant trend in 2007 was the number of companies purchased
by private equity funds. These funds were able to attract massive amounts of
capital and borrow at very advantageous rates combined with easy terms. This
led to a speculative environment where investors tried to figure out which
company would be purchased next. We had two companies purchased by private
equity during the year. Unfortunately, CDW was purchased by a private equity
fund. We did get a nice pop in the stock, but we think we would have made
more money by owning the company for many more years. One of the negative
aspects of the private equity activity was that it made companies much more
expensive to be acquired by strategic buyers.
34
FAM Equity-Income Fund [LOGO]
We heard this numerous times from management teams of companies that we
own in the Fund. There were several businesses that were bought by private
equity funds that our companies would have liked to own, but the final
purchase price was just too rich for them. We like companies that are
disciplined buyers; however, they were at a disadvantage for the last few
years. Now, with the problems in the financial markets, lending standards
have tightened considerably and many private equity deals are falling apart.
Once again the environment is turning more favorable for the companies that
we own in the Fund.
What we Look for in an Investment
Each year we highlight what we look for in an investment so that
investors can gain an understanding of what they own. This year we think it
is even more important given the fear in the markets. First, we seek good
businesses that we understand, have a competitive advantage, and possess high
profit margins. We also want these businesses to grow and increase their
market share.
Second, we want companies that have little or no debt and strong free
cash flow, and deploy capital wisely. In today's environment, where the
possibility of going into a recession is talked about on a daily basis, this
may be the most important element. We favor companies that have little or no
debt. When companies have a lot of debt they lose financial flexibility. For
example, a debt-laden company may have to pass on an attractive acquisition
opportunity if no one is willing to provide them with additional financing.
The more debt a company has, the more risky it becomes. In every business
cycle we see companies that aren't able to make their payments under their
debt obligations. They usually don't turn out to be good investments. Our
philosophy is "you can't go bankrupt if you don't owe anyone money."
Next, we want enterprises with superior management teams -- leaders who
are honest, ethical, energetic and have a strong track record of increasing
the economic value of their organizations, not just stock prices. The
management team sets the tone for the business. They should make sure that
all the employees are pulling in the same direction to reach the goals of the
company. Honest and ethical behavior is critical. We believe the values of a
company start at the top and work their way down. We look to the management
team to increase the intrinsic value of the company over time.
The final thing we look for in an investment is the valuation. We like
to buy stocks that are on sale. That means buying a company for less than we
think it is worth; in other words, buying at a discount to our estimate of
actual value. We refer to this as a margin of safety and concentrate on
minimizing downside risk as well as potential gain. We use many methods to
determine the value of a company. Today we see many of our investments
selling at attractive valuations due to the fearful environment.
35
FAM Equity-Income Fund [LOGO]
Best and Worst Performing Companies
The company with the best return for the year was Kaydon Corp. (+39%),
generating a gain of $1.48 million. Kaydon is benefiting from the strong
industrial economy. The company manufactures custom engineered products that
are components to other industrial products. Kaydon saw orders grow
significantly during the year. One area of strong growth was in large
diameter bearings which are used in wind turbines. Kaydon is able to charge a
premium for its product because they are engineered not to fail. They
typically are used in applications where the cost of failure is high. An
example of this is the bearing in the rotor assembly of a helicopter. If the
bearing fails, the helicopter crashes. Kaydon's business is volume sensitive
so the increase in orders has a positive impact on profitability.
The next best performing investment in the Fund was Federated Investors
(+24%) generating a gain of $1.47 million. Federated is an Investment
Management Company specializing in money market funds. Assets have grown
nicely with all the uncertainty in the financial markets. Earnings grew 18%
over the previous twelve months. We expect that money markets will continue
to be an attractive investment vehicle amid the slowing U.S. economy and
stock market volatility.
The worst performing company in the Fund was Winnebago (-34%) with a
loss of $2.40 million. The company experienced a soft year; however, results
were not as bad as the stock price indicates. Earnings declined 4% in fiscal
year 2007, yet the stock was down much more. It's interesting that in the
last two quarters the company posted strong results and Wall Street estimates
are calling for 18% growth this year. We believe Winnebago is the strongest
player in the market and will be able to exploit the misfortunes of the
weaker ones.
The second worst performing company in the Fund was Allied Capital
(-26%) with a loss of $2.16 million. Allied is a business development company
and provides long-term debt and equity capital to small and medium sized
businesses. The stock was down on fears that the economy will slide into a
recession. From an operational standpoint things are fine. The dividend grew
nicely in 2007 and a special dividend was even paid. The dividend yield was
12.3% as of year-end. This is the highest dividend yield for this company
since the bear market of 2003.
Dividends
Every company in the Fund pays a dividend. We like dividends because
they are an important component of total return. Dividends are essentially
cash that gets paid to shareholders of the company. The beauty of dividends
is that they are yours to keep, no matter what happens to the stock price. If
the stock price goes down, you still have the dividend in your bank account.
If management makes a bad acquisition or pays too much for the target
company, you still have the dividend. Even though we believe all the
companies in the Fund are well managed and the management teams are good
stewards of your capital, we like the fact that they pay a portion of
earnings to us as shareholders. As the saying goes, dividends
36
FAM Equity-Income Fund [LOGO]
are "cash in the bank." This is different from other things that management
can do with cash that may or may not increase the value of the stock. For
example, if a company buys back a lot of stock with its excess cash at too
high a price and then the stock price goes down, the shareholder is actually
worse off than if management paid out the cash as a dividend.
Growth of dividends is also an important component of an investment. As
companies grow, often the dividend is increased over time to keep pace with
earnings. A good way to look at this is yield-to-cost. The cost of the shares
stays the same but as the dividend goes up so does the yield-to-cost also
goes up. In other words, it's like a bond where the coupon payment grows over
time. A good example of this is McGrath RentCorp, one of the holdings in the
Fund. Their current dividend yield is 2.5%. Since we have owned shares in the
company for years, our cost is $14.77 which makes the yield-to-cost 4.7%,
almost twice the dividend yield of an investor buying shares in the company
today. We hope you share our enthusiasm for companies that grow their
dividends over time.
Outlook
From a big picture perspective we think the period of highest risk from
the mortgage crisis has likely passed. The prices of stocks, bonds, and other
financial instruments have already adjusted to reflect the current state. The
problems in the mortgage market and the financial system are now known and
can be fixed. We also see some signs that things are improving, but
ultimately this will take time. Once investors feel things are not getting
worse, the market will focus on the turnaround. Remember, the markets are
inherently forward looking.
Despite the poor performance in 2007, the Fund owns companies that have
strong market positions and will be able to weather the storm over the
long-term. We believe they are selling at attractive valuations. In fact,
several companies in the Fund are selling at valuations we haven't seen in
several years. These valuations give us confidence in the future because it's
easier to make good investment returns when stocks are trading at low
valuations than when they are high.
We thank you for your continued support in this challenging
environment. We are working diligently on your behalf. We hope you have a
great 2008.
Sincerely,
/s/ Paul Hogan
Paul Hogan, CFA
Co-Manager
/s/ Thomas O. Putnam
Thomas O. Putnam
Co-Manager
37
FAM Equity-Income Fund -- Performance Summary [LOGO]
Annual Total Investment Returns:
APRIL 1, 1996 TO DECEMBER 31, 2007
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%
2006 6.57% 5.73% 18.37% 15.79%
2007 -3.64% -4.58% -1.57% 5.49%
*FAM Equity-Income Fund Advisor Shares were launched on July 1, 2003.
38
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, since inception April 1, 1996,
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
2006 25858 27181 29573
2007 27278 26754 28484
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 $13,123 by December 31, 2007.
Average Annual Total Returns as of December 31, 2007
Life of Fund
1-Year 3-Year 5-Year 10-Year (4/1/96)
FAM Equity-Income Fund
(Investor Shares) -3.64% 2.79% 8.30% 7.21% 9.31%
(Advisor Shares)* -4.58% 1.86% N/A N/A *
S&P 500 Index 5.49% 8.62% 12.82% 5.91% 9.02%
Russell 2000 Index -1.57% 6.80% 16.25% 7.08% 8.85%
*FAM Equity-Income Fund Advisor Shares were launched on July 1, 2003.
The return since inception is 6.22%.
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.
39
FAM Equity-Income Fund -- Portfolio Data [LOGO]
As of December 31, 2007
TOP TEN HOLDINGS
(% of Net Assets)
John Wiley & Sons, Inc. 5.8%
White Mountains Insurance 5.5%
Courier Corporation 5.4%
McGrath Rentcorp 4.7%
Kaydon Corporation 4.7%
IDEX Corporation 4.7%
Ross Stores, Inc. 4.7%
Martin Marietta Materials 4.6%
Westamerica Bancorp 4.5%
Brown & Brown, Inc. 3.9%
COMPOSITION OF NET ASSETS
Machinery & Equipment 13.0%
Publishing 11.2%
Banking 7.4%
Temporary Investments 6.6%
Investment Management 6.2%
Construction Materials 5.7%
Property & Casualty Insurance 5.5%
Transportation 5.5%
Commercial Services 4.7%
Retail Stores 4.7%
Insurance Agency 3.9%
Life Insurance 3.8%
Recreation Vehicles 3.7%
Registered Investment Company 3.6%
Diversified Manufacturing 3.3%
Diversified Health Care Services 2.9%
Financial Services 2.7%
Real Estate Investment Trust 2.7%
Other 2.9%
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.
40
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 on the Advisor Class Shares only) 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 (6/30/2007 to
12/31/2007).
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.
41
FAM Equity-Income Fund -- Expense Data [LOGO]
SIX MONTHS ENDED DECEMBER 31, 2007
Beginning Ending Expenses
Account Value Account Value Paid
6/30/2007 12/31/2007 During Period
Ongoing Costs Based on Actual Fund Return
A. Investor Share Class $1,000.00 $ 875.20 $ 6.24*
B. Advisor Share Class $1,000.00 $ 870.00 $10.98**
Ongoing Costs Based on Hypothetical
5% Yearly Return
C. Investor Share Class $1,000.00 $1,018.35 $ 6.72*
D. Advisor Share Class $1,000.00 $1,013.25 $11.82**
*Expenses are equal to the Fund's Investor Class Shares annualized expense
ratio of (1.32%), 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 (2.33%), multiplied by the average account value over the period,
multiplied by 184/365 (to reflect the one-half-year period).
42
FAM Equity-Income Fund -- Statement of Investments [LOGO]
December 31, 2007
SHARES VALUE
COMMON STOCKS (93.4%)
Banking (7.3%)
M&T Bank Corporation
o bank holding company that provides
commercial and retail banking services
to individuals, businesses, corporations
and institutions in the Northeast 40,100 $ 3,270,957
Westamerica Bancorp
o provides banking services to individual
and corporate customers in northern
and central California 118,000 5,256,900
8,527,857
Commercial Services (4.7%)
McGrath RentCorp
o modular building and electronic test equipment
rentals, subsidiary classroom manufacturing 213,600 5,500,200
Construction Materials (5.7%)
Martin Marietta Materials
o produces aggregates for the construction industry 40,200 5,330,520
Vulcan Materials Company
o produces, distributes and sells construction
materials and industrial and specialty chemicals 16,399 1,296,997
6,627,517
Diversified Health Care (2.9%)
Johnson & Johnson
o manufacture and sales of various products
in the health care field 51,000 3,401,700
Diversified Manufacturing (3.3%)
General Electric Company
o diversified industrial manufacturer 104,221 3,863,472
Electronic Equipment (1.5%)
Cognex Corp.
o develops, manufactures and markets
machine vision systems used to
automate manufacturing processes 85,700 1,726,855
Financial Services (2.7%)
American Express
o operates as a payments, network, and
travel company worldwide as well as
offers individual consumer credit cards 60,500 3,147,210
See Notes to Financial Statements.
43
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Insurance Agency (3.8%)
Brown & Brown, Inc.
o one of the largest independent general
insurance agencies in the U.S. 191,200 $ 4,493,200
Investment Management (6.2%)
Federated Investors
o provides investment management products
and services primarily to mutual funds 105,200 4,330,032
Franklin Resources, Inc.
o provides investment management and
fund administration services as well as
retail-banking and consumer lending services 25,000 2,860,750
7,190,782
Life Insurance (3.8%)
Protective Life Corporation
o individual and group life/health insurance and
guaranteed investment contracts 108,219 4,439,143
Machinery & Equipment (12.9%)
Donaldson Company, Inc.
o designs, manufactures and sells
filtration systems and replacement parts 88,800 4,118,544
IDEX Corporation
o manufactures proprietary, highly engineered
industrial products and pumps 150,205 5,426,907
Kaydon Corporation
o custom-engineers products including bearings,
filters, and piston rings 100,000 5,454,000
14,999,451
Media (1.1%)
Meredith Corporation
o magazine publishing and tv broadcasting 24,373 1,340,028
Property and Casualty Insurance (5.5%)
White Mountains Ins. Grp., Ltd.
o personal property and casualty, and reinsurance 12,375 6,361,369
See Notes to Financial Statements.
44
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Publishing (11.2%)
Courier Corporation
o manufactures and publishes specialty books,
including Dover Publications 189,850 $ 6,266,949
John Wiley & Sons, Inc.
o publisher of print and electronic products,
specializing in scientific, technical professional
and medical books and journals 157,650 6,752,149
13,019,098
Real Estate Investment Trust (2.7%)
CBL & Associates Properties, Inc.
o real estate investment trust (REIT),
engaging in the ownership, development,
acquisition, leasing, management,
and operation of regional malls and
community centers 131,500 3,144,165
Recreation and Entertainment (0.8%)
International Speedway Corporation
o owns and operates auto racing tracks
including Daytona 23,300 959,494
Recreation Vehicles (3.6%)
Winnebago Industries
o manufacturer of self-contained recreational
vehicles used primarily in leisure travel 202,500 4,256,550
Registered Investment Company (3.6%)
Allied Capital Corp.
o venture capital corporation for entrepreneurs
and management 193,714 4,164,851
Retail Stores (4.6%)
Ross Stores, Inc.
o chain of off-price retail apparel and
home accessories stores 211,641 5,411,660
See Notes to Financial Statements.
45
FAM Equity-Income Fund -- Statement of Investments continued [LOGO]
December 31, 2007
SHARES VALUE
Transportation (5.5%)
Forward Air Corporation
o provides surface transportation and
related logistics services to the deferred
air freight market in North America 90,000 $ 2,805,300
Heartland Express, Inc.
o short-to-medium-haul truckload carrier
of general commodities 250,533 3,552,558
6,357,858
Total Common Stocks (Cost $83,792,627) $108,932,460
TEMPORARY INVESTMENTS (6.6%)
Money Market Fund (2.3%)
First American Treasury Fund 2,683,809 $ 2,683,809
U.S. Government Obligations (4.3%) PRINCIPAL
U.S. Treasury Bill, 2.6%, with maturity to 2/14/08 $5,000,000 4,984,111
Total Temporary Investments (Cost $7,667,920) $ 7,667,920
Total Investments (Cost $91,460,547) (100%) $116,600,380
See Notes to Financial Statements.
46
FAM Equity-Income Fund [LOGO]
December 31, 2007
STATEMENT OF ASSETS AND LIABILITIES
Assets
Investment in securities at value (Cost $91,460,547) $116,600,380
Cash 129,422
Dividends and interest receivable 211,498
Receivable for fund shares 13,601
Total Assets 116,954,901
Liabilities
Payable for investment securities purchased 804,621
Payable for fund shares 151,725
Accrued investment advisory fee 100,226
Accrued shareholder servicing and administrative fees 12,753
Accrued expenses 67,834
Total Liabilities 1,137,159
Net Assets
Source of Net Assets:
Net capital paid in on shares of beneficial interest $ 90,669,652
Undistributed net investment income 1,760
Accumulated net realized gains 6,497
Net unrealized appreciation 25,139,833
Net Assets $115,817,742
Net Asset Value Per Share (unlimited shares of
beneficial interest authorized at $.001 par value)
Investor Class Shares -- based on net assets of
$112,471,717 and 5,890,318 shares outstanding $19.09
Advisor Class Shares -- based on net assets of
$3,346,025 and 177,433 shares outstanding $18.86
See Notes to Financial Statements.
47
FAM Equity-Income Fund [LOGO]
Year Ended December 31, 2007
STATEMENT OF OPERATIONS
INVESTMENT INCOME
Income
Dividends $ 2,597,811
Interest 373,964
Total Investment Income 2,971,775
Expenses
Investment advisory fee (Note 2) 1,350,878
Administrative fee (Note 2) 101,316
Shareholder servicing and related expenses (Note 2) 65,620
Printing and mailing 44,815
Professional fees 48,731
Registration fees 33,298
Custodial fees 20,125
Trustees and Officers 94,645
Distribution and Service Fees -- Advisor Class Shares (Note 2) 38,561
Other 24,900
Total Expenses 1,822,889
Expenses Paid Indirectly (Note 3) (3,371)
Net Expenses 1,819,518
Net Investment Income 1,152,257
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 8,409,791
Realized gain distributions 358,578
Unrealized depreciation of investments (13,507,993)
Net Loss on Investments (4,739,624)
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (3,587,367)
See Notes to Financial Statements.
48
FAM Equity-Income Fund [LOGO]
Years Ended December 31, 2007 and 2006
STATEMENT OF CHANGES IN NET ASSETS
2007 2006
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 1,152,257 $ 841,386
Net realized gain on investments 8,409,791 7,917,576
Realized gain distributions 358,578 239,237
Unrealized (depreciation) appreciation
of investments (13,507,993) (236,594)
Net (Decrease) Increase in Net Assets
From Operations (3,587,367) 8,761,605
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Investor Class (1,150,497) (1,078,611)
Advisor Class -- --
Net realized gain on investments
Investor Class (8,512,776) (7,253,566)
Advisor Class (254,654) (203,602)
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST (NOTE 4): (17,143,463) (35,899,942)
Total Decrease in Net Assets (30,648,757) (35,674,116)
NET ASSETS:
Beginning of year 146,466,499 182,140,615
End of year $115,817,742 $146,466,499
Undistributed net investment income $ 1,760 --
See Notes to Financial Statements.
49
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.
FIN 48 provides guidance for how certain tax positions should be
recognized, measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the Fund's tax returns
to determine whether the tax positions are "more-likely-than-not" of
being sustained by the applicable tax authority. Tax positions not
deemed to meet the "more-likely-than-not" threshold would be recorded as
a reduction in a tax benefit or expense in the current year and
recognized as: a reduction of an income tax refund receivable; a
reduction of deferred tax assets; an increase in deferred tax liability;
or a combination thereof. Management has evaluated the application of
FIN 48 and has determined it has no impact on the financial statements.
50
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
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. The Fund records distributions received in excess
of income from underlying investments as a reduction of cost of
investments and/or realized gain. Such amounts are based on estimates if
actual amounts are not available, and actual amounts of income, realized
gain and return of capital may differ from the estimated amounts. The
Fund adjusts the estimated amounts of the components of distributions
(and consequently its net investment income) as an increase to unrealized
appreciation/(depreciation) and realized gain/(loss) on investments as
necessary once the issuers provide information about the actual
composition of the distributions. Distributions to shareholders are
recorded on the ex-dividend date. Distributions to shareholders are
determined in accordance with income tax regulations and may differ from
those determined for financial statement purposes. To the extent these
differences are permanent such amounts are reclassified within the
capital accounts.
e) New Accounting Pronouncement
In September 2006, Statement of Financial Accounting Standards No. 157,
"Fair Value Measurements" (SFAS 157), was issued and is effective for
fiscal years beginning after November 15, 2007. SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Management continues to
evaluate the application of the Standard to the Fund, and is not in a
position at this time to estimate the significance of its impact, if any,
on the Fund's financial statements.
51
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, 2008, 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, 2007. 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, 2007 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, 2007.
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,
2007, shareholder servicing agent fees paid to FSS amounted to $65,620.
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, 2007, these arrangements reduced the Fund's
custodian fees by $3,371.
52
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 4. Shares of Beneficial Interest
At December 31, 2007, 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, 2007, redemption fees
amounted to $184 and were credited to paid-in capital. Transactions were as
follows:
YEAR ENDED 12/31/07 YEAR ENDED 12/31/06
Shares Amount Shares Amount
Shares sold
Investor Class 489,220 $ 10,902,449 993,318 $ 21,825,426
Advisor Class 2,578 56,490 27,694 607,640
Shares issued on
reinvestment of distributions
Investor Class 467,046 9,067,767 359,368 7,845,239
Advisor Class 13,076 246,488 9,114 197,271
Shares redeemed
Investor Class (1,662,408) (36,947,511) (3,013,950) (65,143,264)
Advisor Class (21,532) (469,146) (59,776) (1,232,254)
Net Decrease from Investor Class
Share Transactions (706,142) $(16,977,295) (1,661,264) $(35,472,599)
Net Decrease from Advisor Class
Share Transactions (5,878) $ (166,168) (22,968) $ (427,343)
Note 5. Investment Transactions
During the year ended December 31, 2007, purchases and sales of
investment securities, other than short term obligations were $20,494,943 and
$42,733,159. The cost of securities for federal income tax purposes is
substantially the same as shown in the investment portfolio.
53
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 6. Income Taxes and Distribution to Shareholders
The components of distributable earnings on a tax basis at December 31,
2007 were as follows:
Undistributed Ordinary Income $2,198
Undistributed Long-term Capital Gain $6,059
The aggregate gross unrealized appreciation and depreciation of
portfolio securities, based on cost for federal income tax purposes of
$91,460,546, was as follows:
Unrealized appreciation $29,270,720
Unrealized depreciation (4,130,887)
-----------
Net unrealized appreciation $25,139,833
===========
The tax composition of dividends and distributions to shareholders for
the years ended December 31, 2007 and 2006 were as follows:
2007 2006
Ordinary income $1,343,393 $3,047,152
Long-term capital gain 8,574,534 5,488,627
---------- ----------
$9,917,927 $8,535,779
========== ==========
Undistributed net investment income, accumulated net realized gains,
net investment income and realized gain distributions, per the financial
statements, differ from undistributed ordinary income, undistributed
long-term capital gains, ordinary income distributions and long-term gain
distributions for federal income tax purposes due to the differing book/tax
treatment of short-term capital gains.
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, 2008, when any advances are to be
repaid. During the year ended December 31, 2007, 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.
54
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) 2007 2006 2005 2004 2003
Net asset value, beginning of year $ 21.61 $ 21.52 $ 20.48 $ 18.27 $ 15.45
Income from investment operations:
Net investment income+ 0.20 0.12 0.14 0.15 0.12
Net realized and unrealized
gain (loss) on investments (0.97) 1.30 1.03 2.40 3.00
Total from investment operations (0.77) 1.42 1.17 2.55 3.12
Less distributions:
Dividends from net investment income (0.20) (0.16) (0.13) (0.15) (0.12)
Distributions from net realized gains (1.55) (1.17) -- (0.19) (0.18)
Total distributions (1.75) (1.33) (0.13) (0.34) (0.30)
Change in net asset value for the year (2.52) 0.09 1.04 2.21 2.82
Net asset value, end of year $ 19.09 $ 21.61 $ 21.52 $ 20.48 $ 18.27
Total Return (3.64)% 6.57% 5.75% 14.04% 20.30%
Ratios/supplemental data
Net assets, end of year (000) $112,472 $142,546 $177,740 $148,776 $114,194
Ratios to average net assets of:
Expenses, total 1.32% 1.28% 1.26% 1.27% 1.28%
Net investment income 0.88% 0.55% 0.66% 0.79% 0.73%
Portfolio turnover rate 16.16% 19.01% 14.11% 17.64% 6.46%
+Based on average shares outstanding.
55
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) 2007 2006 2005 2004 2003+
Net asset value, beginning of year $21.39 $21.33 $20.36 $18.18 $16.77
Income from investment operations:
Net investment income (loss) (0.03) (0.10)++ (0.07)++ (0.04)++ 0.10
Net realized and unrealized
gain (loss) on investments (0.95) 1.33 1.04 2.41 1.54
Total from investment operations (0.98) 1.23 0.97 2.37 1.64
Less distributions:
Dividends from net
investment income -- -- -- -- (0.05)
Distributions from net
realized gains (1.55) (1.17) -- (0.19) (0.18)
Total distributions (1.55) (1.17) -- (0.19) (0.23)
Change in net asset value
for the year (2.53) 0.06 0.97 2.18 1.41
Net asset value, end of year $18.86 $21.39 $21.33 $20.36 $18.18
Total Return (4.58)% 5.73% 4.76% 13.05% 9.83%*
Ratios/supplemental data
Net assets, end of year (000) $3,346 $3,921 $4,400 $3,017 $1,291
Ratios to average net assets of:
Expenses 2.32% 2.28% 2.26% 2.27% 2.28%**
Net investment income (loss) (0.12)% (0.45)% (0.34)% (0.21)% 1.10%**
Portfolio turnover rate 16.16% 19.01% 14.11% 17.64% 6.46%
+Beginning of period reflects Advisor Class Shares inception date of 7/1/03.
++Based on average shares outstanding.
*Not Annualized.
**Annualized.
56
FAM Equity-Income Fund -- Notes to Financial Statements [LOGO]
Note 10. Change of Independent Registered Public Accounting Firm
On October 10, 2007, the Board of Trustees of Fenimore Asset Management
Trust (the "Funds"), upon the recommendation of the Funds' audit committee,
determined not to retain PricewaterhouseCoopers LLP and approved a change of
the Funds' independent registered public accounting firm to Briggs, Bunting &
Dougherty, LLP. PricewaterhouseCoopers LLP's reports on the financial
statements of the Funds for each of the two years in the period ended
December 31, 2006 did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as uncertainty, audit scope, or
accounting principles.
During the two years ended December 31, 2006 and through October 10,
2007, there were no disagreements between the Funds and
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused it to make reference to the
subject matter of the disagreements in connection with its report. During the
two years ended December 31, 2006 and through October 10, 2007, there were no
reportable events within the meaning of paragraphs (1)(v)(A) through (D) of
Item 304(a) of Regulation S-K.
57
FAM Equity-Income Fund --
Report of Independent Registered Public Accounting Firm [LOGO]
To the Board of Trustees of Fenimore Asset Management Trust
and Shareholders of FAM Equity-Income Fund
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of FAM Equity-Income Fund, a series
of shares of beneficial interest of Fenimore Asset Management Trust, as of
December 31, 2007, and the related statements of operations and changes in
net assets and the financial highlights for the year then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit. The
statement of changes in net assets for the year ended December 31, 2006 and
the financial highlights for each of the years or period in the four-year
period ended December 31, 2006 have been audited by other auditors, whose
report dated February 1, 2007, expressed an unqualified opinion on such
financial statement and financial highlights.
We conducted our audit 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 and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 2007
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
FAM Equity-Income Fund as of December 31, 2007, the results of its
operations, changes in its net assets and its financial highlights for the
year then ended in conformity with accounting principles generally accepted
in the United States of America.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
February 5, 2008
58
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 Agree ments (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 6, 2007, 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 14, 2007 and then with
representatives of the Advisor on two occasions on November 14 and 15, 2007
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 15, 2007. 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
59
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 the 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 over the long-term. 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 Share holder 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
60
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 was extended to December 31, 2007 and again extended to December
31, 2008. The 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
61
FAM Equity-Income Fund [LOGO]
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.
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.
62
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: 53 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: 71
John J. McCormack, Jr. Trustee since 2004 Retired Group President, 2 N/A
384 North Grand Street TIAA-Cref Enterprises
Cobleskill, NY 12043
Age: 63
Barbara V. Weidlich Trustee since 2004 Retired President, 2 N/A
384 North Grand Street National Investment
Cobleskill, NY 12043 Company Service
Age: 63 Association; Managing
Director -- DEXIA
BIL Fund Services,
Dublin, Ireland
Kevin J. McCoy Trustee since Principal, Marvin and 2 N/A
384 North Grand Street March 2007 Company, P.C., certified
Cobleskill, NY 12043 public accounting firm
Age: 55
63
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 since Chairman, Fenimore 2 N/A
384 North Grand Street 1986; Chairman Asset Management, Inc.
Cobleskill, NY 12043 from 1986-
Age: 63 November 2004
Joseph A. Bucci Secretary and Controller, Fenimore N/A N/A
384 North Grand Street Treasurer since Asset Management, Inc.
Cobleskill, NY 12043 2000
Age: 54
Charles Richter, Esq. Chief Compliance March 2005 to Present, N/A N/A
384 North Grand Street Officer and Chief Compliance
Cobleskill, NY 12043 Anti-Money Officer, Fenimore Asset
Age: 51 Laundering Management Trust.
Compliance November 2004 to
Officer Present, Chief Compliance
since 2005 Officer, Fenimore Asset
Management, Inc.,
Fenimore Securities, Inc.;
Prior to October 2004,
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 October 2004.
64
FAM Funds -- Proxy Information [LOGO]
Results of Special Meeting of Shareholders
(Unaudited)
A special meeting of the shareholders of the Funds was held on February
26, 2007. The meeting was held for the sole purpose of electing Trustees of
the Trust. As of the record date for the Meeting, there were 27,944,305
shares of beneficial interest in the Funds outstanding. Information regarding
the results of the shareholder vote are set forth below. Each of the nominees
was elected to the Board by the requisite shareholder vote.
Trustee Affirmative % of Votes % of
Nominee Votes Outstanding Withheld Outstanding
Fred "Chico" Lager 18,666,548 66.79% 310,358 1.11%
C. Richard Pogue 18,671,567 66.82% 305,339 1.09%
John J. McCormack 18,677,719 66.83% 299,187 1.07%
Kevin J. McCoy 18,690,049 66.88% 286,857 1.02%
Barbara V. Weidlich 18,673,809 66.82% 303,097 1.08%
Thomas O. Putnam 18,674,614 66.83% 302,291 1.08%
65
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.
66
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 turnover 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.
67
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 Securities and Exchange 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 Securities
and Exchange Commission's website at http://www.sec.gov.
SPECIAL 2007 TAX INFORMATION (UNAUDITED) FOR FAM FUNDS
This information for the fiscal year ended December 31, 2007, is included
pursuant to provisions of the Internal Revenue Code.
The Value Fund distributed $56,652,939, or the maximum amount
available, as capital gain dividends (from net long-term capital gains) to
shareholders during the fiscal year.
The Equity-Income Fund distributed $8,574,534, or the maximum amount
available, as capital gain dividends (from net long-term capital gains) to
shareholders during the fiscal year.
For Value Fund taxable non-corporate shareholders, 100% of the Fund's
income represents qualified dividend income subject to the 15% rate category.
For Equity-Income Fund taxable non-corporate shareholders, 100% of the
Fund's income represents qualified dividend income subject to the 15% rate
category.
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.
68
Investment Advisor
Fenimore Asset
Management, Inc.
Cobleskill, NY
Custodian
U.S. Bank, N.A.
Cincinnati, OH
Independent Registered
Public Accounting Firm
Briggs Bunting & Dougherty, LLP
Philadelphia, PA
Trustees
Fred "Chico" Lager
John J. McCormack, Jr.,
Independent Chairman
Kevin J. McCoy
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
MANAGED BY FENIMORE ASSET MANAGEMENT, INC.
384 North Grand Street
PO Box 399
Cobleskill, New York 12043-0399
(800) 932-3271
www.famfunds.com
[LOGO] FAM Funds
MANAGED BY FENIMORE ASSET MANAGEMENT, INC.
384 North Grand Street
PO Box 399
Cobleskill, New York 12043-0399
(800) 932-3271
www.famfunds.com
INVESTMENTS CRAFTED FOR LASTING VALUE
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 Fred Lager and Kevin
J. McCoy 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 2007 - $67,000; Audit Fees 2006 - $98,511
(b) Audit-Related Fees - None.
(c) Tax Fees 2007 - $10,000; Tax Fees 2006 - $13,150; - Tax Preparation
Expenses
(d) All Other Fees - 2006 - None; 2005 - None
(e)(1) Audit Committee Pre-Approval Policy. All services to be performed
for the Registrant by Briggs, Bunting and Dougherty, LLP must be
pre-approved by the audit committee. All services performed during
2007 and 2006 were pre-approved by the committee.
(e)(2) 100 percent.
(f) Not applicable.
(g) The aggregate fees paid to PricewaterhouseCoopers LLP for professional
services to Registrant's affiliated broker-dealer for 2007 and 2006 were
$17,000 and $16,000 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 February 15, 2008
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 February 15, 2008
By (Signature and Title)* /s/ Joseph A. Bucci
--------------------------
Joseph A. Bucci, Treasurer
Date February 15, 2008
* Print the name and title of each signing officer under his or her signature.