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hours per response: 19.4
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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 811-21701
----------------------------------------------
The Destination Funds
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
2001 North Main Street, Suite 270 Walnut Creek, California 94596
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Wade R. Bridge, Esq.
Ultimus Fund Solutions, LLC 225 Pictoria Drive, Suite 450 Cincinnati, Ohio 45246
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (925) 935-2900
---------------------------
Date of fiscal year end: August 31, 2006
---------------------------------------------
Date of reporting period: August 31, 2006
---------------------------------------------
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.
DESTINATION FUNDS
DESTINATION SELECT EQUITY FUND
ANNUAL REPORT
AUGUST 31, 2006
INVESTMENT ADVISOR
Destination Capital Management, Inc.
Walnut Creek, CA
THE DESTINATION FUNDS
1277 TREAT BOULEVARD, SUITE 200
WALNUT CREEK, CALIFORNIA 94597
October 27, 2006
TO OUR SHAREHOLDERS
Since the Destination Select Equity Fund's (the "Fund") inception on December
29, 2005, the United States equity markets have experienced a period of
relatively high volatility. After losing approximately 0.5% during the last two
trading days of 2005, the beginning of 2006 saw the S&P 500 Index (the "S&P
500") - a widely used measure for the performance of large capitalization stocks
- - rally on optimism that new Chairman of the Federal Reserve Bank, Ben Bernanke,
would soon bring to an end the Fed's two-year campaign to raise the Fed funds
rate. By the end of April, the S&P 500 had climbed 5.6% for the year. However,
as spring wore on, the reality of rising oil prices, conflicting economic data
and increasing geopolitical tensions weighed on equity markets and by the middle
of June markets had given up all gains and actually entered negative territory.
The markets then started to slowly recover until the Fed's decision on August 8
to pause - if only temporarily - its interest rate hikes after 17 consecutive
increases served to reignite investor enthusiasm for equities. This volatility -
particularly over such a short time frame - only serves to reinforce our
conviction in our investment philosophy. At Destination, we use a bottom-up
approach focusing on long-term company fundamentals. Before we commit your
capital to a new investment, we must feel comfortable that the price we are
paying for a security provides us with enough of an opportunity for future share
price appreciation to compensate for the risk we identify in making that
investment. We believe that this fundamental approach with strong attention paid
to assessing the risk-versus-reward for each investment is the most sensible way
for us to attractively grow your investment in the Fund over the long-term.
FUND PERFORMANCE
The Destination Select Equity Fund had a total return of 2.0% for the period
from its inception on December 29, 2005 through the end of the Fund's fiscal
year on August 31, 2006. In comparison, the S&P 500 produced a total return of
5.3%. Though we are clearly not pleased with these short term results, we
nonetheless feel encouraged for several reasons. First and foremost, our focus
is on building a portfolio to produce long-term outperformance (defined as over
periods of 3 to 5 years). Accordingly, though something clearly to monitor,
short-term performance will never drive our investment decisions.
Additionally, we entered the market with prudence and patience and didn't feel
comfortable rushing into the market for the sake of merely being invested - we
wanted to build the best portfolio comprised of the best securities we could
identify. Furthermore, we wanted to buy only at prices that gave us the
risk-versus-reward trade-off that we insist on.
1
Finally, the Destination Select Equity Fund had no investments in the
telecommunications, energy or utilities sectors of the market which were the
three highest performing sectors of the market for the period, each producing
double-digit returns.
There were several bright spots in the portfolio. Positions contributing the
most to performance for the Fund during the period included the holding in
MasterCard Incorporated, a position we purchased after a tepid reception of the
company's initial public offering by the market. After we entered the position,
there seemingly was a reevaluation and downward revision to the market's
collective estimates of the liabilities the company potentially faces going
forward, which drove the stock's price up dramatically. The Fund's holdings in
Aramark Corporation also positively influenced performance for the period.
Aramark's management team, growing increasingly disenchanted by what it
perceived to be an unjustifiably low valuation of the company by the market,
initiated a transaction to take the company private at a premium to the market
valuation. Investors responded favorably to this news and we subsequently exited
the position. Finally, the Fund's holdings in the health care sector also
produced favorable results. Positions in Baxter, Johnson & Johnson and Pfizer
all contributed meaningfully to performance for the period.
The Destination Select Equity Fund's holdings in consumer-oriented names -
particularly in the consumer discretionary sector - detracted most from
performance for the period. The biggest negative contributor was Dreamworks
Animation. While we anticipate that the performance of this mid cap name will be
volatile, we continue to believe the quality of its franchise, the
attractiveness of its upcoming film slate (including the highly anticipated
Shrek 3) and the fact that it is now the only major independent animated studio
in existence make it an attractive holding. The Fund's position in Carnival
Corporation, the industry's largest cruise line operator, also contributed
negatively to performance. Many investors grew concerned that rising fuel costs
would negatively affect the company's operations and also contain demand by
potential customers. The company's announcement that bookings during "wave
season" - a critical indication of the demand for the upcoming cruise season -
were soft, particularly in the key Caribbean market following initial reports
that the hurricane season was expected to produce an above-average number of
storms, also weighed on investors. However, the stock has recovered nicely from
its lows as these short-term fears appear to have been overly pessimistic. Other
positions that negatively affected Fund performance during the period included
Capital One, Wrigley, Gannet, Home Depot and Wal-Mart.
We thank you for your continued support and the opportunity you have given us to
invest your money on your behalf.
Sincerely,
Michael Yoshikami
Portfolio Manager
2
DESTINATION SELECT EQUITY FUND
Comparison of the Change in Value of a $10,000 Investment in the
Destination Select Equity Fund versus the S&P 500 Index
[GRAPHIC OMITTED]
Destination Select Equity Fund S&P 500 Index
------------------------------ -------------
12/29/2005 $ 10,000 12/29/2005 $ 10,000
2/28/2006 10,200 2/28/2006 10,242
5/31/2006 9,990 5/31/2006 10,206
8/31/2006 10,200 8/31/2006 10,528
Past performance is not predictive of future performance.
---------------------------------------------------------
TOTAL RETURN(a)
SINCE INCEPTION(b)
(FOR PERIOD ENDED
AUGUST 31, 2006)
----------------
Destination Select Equity Fund 2.00%
S&P 500 Index 5.28%
---------------------------------------------------------
(a) The total return shown does not reflect the deduction of taxes a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(b) Commencement of operations was December 29, 2005.
3
DESTINATION SELECT EQUITY FUND
SUPPLEMENTARY PORTFOLIO INFORMATION
AUGUST 31, 2006 (UNAUDITED)
================================================================================
Destination Select Equity Fund vs S&P 500 Index
Sector Diversification (% of Net Assets)
[GRAPHIC OMITTED]
Destination Select
Equity Fund S&P 500 Index
------------------ ----------------
Consumer Discretionary 24.1% 9.8%
Consumer Staples 12.6% 9.9%
Energy 0.0% 9.9%
Financials 15.0% 21.8%
Health Care 18.0% 12.9%
Industrials 4.1% 10.8%
Information Technology 13.1% 15.1%
Materials 0.0% 2.9%
Telecommunication Services 0.0% 3.4%
Utilities 0.0% 3.5%
Cash 13.1% 0.0%
TOP 10 HOLDINGS
- --------------------------------------------------------------------------------
SECURITY DESCRIPTION % OF NET ASSETS
-------------------------------- ----------------------
Carnival Corp. 6.1%
Johnson & Johnson 6.0%
Gannett Co., Inc. 5.7%
Automatic Data Processing, Inc. 4.9%
Capital One Financial Corp. 4.8%
Pfizer, Inc. 4.6%
Microsoft Corp. 4.6%
Stryker Corp. 4.5%
U.S. Bancorp 4.4%
Wal-Mart Stores, Inc. 4.4%
4
DESTINATION SELECT EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2006
================================================================================
ASSETS
Investments in securities:
At acquisition cost $ 513,499
=============
At value $ 509,971
Dividends receivable 907
Other assets 9,650
-------------
Total Assets 520,528
-------------
LIABILITIES
Accrued liabilities:
Payable to affiliate (Note 4) 6,004
Payable to Advisor (Note 4) 1,188
Other accrued expenses and liabilities 1,197
-------------
Total Liabilities 8,389
-------------
NET ASSETS $ 512,139
=============
NET ASSETS CONSIST OF:
Paid-in capital $ 510,828
Accumulated undistributed net investment income 1,673
Accumulated net realized gains from security
transactions 3,166
Net unrealized depreciation on investments (3,528)
-------------
NET ASSETS $ 512,139
=============
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) 50,232
=============
Net asset value, offering price and redemption price
per share(a) $ 10.20
=============
(a) Redemption price may differ from the net asset value per share depending
upon the length of time the shares are held (Note 2).
See accompanying notes to financial statements.
5
DESTINATION SELECT EQUITY FUND
STATEMENT OF OPERATIONS
PERIOD ENDED AUGUST 31, 2006(a)
================================================================================
INVESTMENT INCOME
Dividend income $ 4,266
-------------
EXPENSES
Fund accounting fees (Note 4) 20,021
Administration fees (Note 4) 16,000
Transfer agent fees (Note 4) 12,000
Compliance fees (Note 4) 8,000
Trustee fees 8,000
Insurance expense 7,779
Postage and supplies 4,674
Custody fees 4,246
Registration fees 2,158
Professional fees 1,862
Investment advisory fees (Note 4) 1,556
Other expenses 2,554
-------------
Total expenses 88,850
Less fees waived and expenses reimbursed by
the Advisor (Note 4) (86,257)
-------------
Net expenses 2,593
-------------
NET INVESTMENT INCOME 1,673
-------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from investments 3,166
Net change in unrealized appreciation/depreciation
on investments (3,528)
-------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS (362)
-------------
INCREASE IN NET ASSETS FROM OPERATIONS $ 1,311
=============
(a) Represents the period from the commencement of operations (December 29,
2005) through August 31, 2006.
See accompanying notes to financial statements.
6
DESTINATION SELECT EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
PERIOD ENDED AUGUST 31, 2006(a)
================================================================================
FROM OPERATIONS
Net investment income $ 1,673
Net realized gains from investments 3,166
Net change in unrealized appreciation/
depreciation of investments (3,528)
-------------
Net increase in net assets from operations 1,311
-------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 410,828
-------------
TOTAL INCREASE IN NET ASSETS 412,139
NET ASSETS
Beginning of period 100,000
-------------
End of period $ 512,139
=============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME $ 1,673
=============
CAPITAL SHARE ACTIVITY
Shares sold 40,232
Shares outstanding at beginning of period 10,000
-------------
Shares outstanding at end of period 50,232
=============
(a) Represents the period from the commencement of operations (December 29,
2005) through August 31, 2006.
See accompanying notes to financial statements.
7
DESTINATION SELECT EQUITY FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
================================================================================
PERIOD ENDED
AUGUST 31,
2006(a)
- --------------------------------------------------------------------------------
Net asset value at beginning of period $ 10.00
------------
Income from investment operations:
Net investment income 0.03
Net realized and unrealized gains on investments 0.17
------------
Total from investment operations 0.20
------------
Net asset value at end of period $ 10.20
============
Total return(b) 2.00%(c)
============
Net assets at the end of period $ 512,139
============
RATIOS/SUPPLEMENTARY DATA:
Ratio of gross expenses to average net assets 42.55%(e)
Ratio of net expenses to average net assets(d) 1.24%(e)
Ratio of net investment income to average net assets(d) 0.80%(e)
Portfolio turnover rate 22%(e)
- --------------------------------------------------------------------------------
(a) Represents the period from the commencement of operations (December 29,
2005) through August 31, 2006.
(b) Total return is a measure of the change in value of an investment in the
Fund over the period covered, which assumes any dividends or capital gains
distributions are reinvested in shares of the Fund. The return shown does
not reflect the deduction of taxes a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) Not annualized.
(d) Ratio was determined after advisory fee waivers and expense reimbursements.
(e) Annualized.
See accompanying notes to financial statements.
8
DESTINATION SELECT EQUITY FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 2006
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 86.9% VALUE
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY - 24.1%
745 Carnival Corp. $ 31,215
1,050 DreamWorks Animation SKG, Inc.(a) 22,249
515 Gannett Co., Inc. 29,278
390 Home Depot, Inc. (The) 13,373
450 Viacom, Inc. B(a) 16,335
364 Walt Disney Co. (The) 10,793
-------------
123,243
-------------
CONSUMER STAPLES - 12.6%
270 Coca-Cola Co. (The) 12,099
170 Costco Wholesale Corp. 7,954
500 Wal-Mart Stores, Inc. 22,360
420 Wrigley, William Jr. Co. 19,496
60 Wrigley, William Jr. Co. - Class B 2,772
-------------
64,681
-------------
FINANCIALS - 15.0%
335 Capital One Financial Corp. 24,489
350 Fifth Third Bancorp 13,769
290 MasterCard, Inc.(a) 16,211
700 U.S. Bancorp 22,449
-------------
76,918
-------------
HEALTH CARE - 18.0%
330 Baxter International, Inc. 14,645
475 Johnson & Johnson 30,714
860 Pfizer, Inc. 23,702
480 Stryker Corp. 23,054
-------------
92,115
-------------
INDUSTRIALS - 4.1%
615 General Electric Co. 20,947
-------------
INFORMATION TECHNOLOGY - 13.1%
535 Automatic Data Processing, Inc. 25,252
430 First Data Corp. 18,477
915 Microsoft Corp. 23,506
-------------
67,235
-------------
TOTAL COMMON STOCKS (Cost $448,667) $ 445,139
-------------
================================================================================
SHARES SHORT TERM INVESTMENTS - 12.7% VALUE
- --------------------------------------------------------------------------------
21,165 AIM STIT - Prime Portfolio (The) $ 21,165
43,667 AIM STIT - Liquid Assets Portfolio (The) 43,667
-------------
TOTAL SHORT TERM INVESTMENTS (Cost $64,832) $ 64,832
-------------
TOTAL INVESTMENTS AT VALUE - 99.6%
(Cost $513,499) $ 509,971
OTHER ASSETS IN EXCESS OF LIABILITIES - 0.4% 2,168
-------------
TOTAL NET ASSETS - 100.0% $ 512,139
=============
(a) Non-income producing security.
See accompanying notes to financial statements.
9
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2006
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Destination Select Equity Fund (the "Fund") is a diversified series of The
Destination Funds (the "Trust"), an open-end investment company established as
an Ohio business trust under a Declaration of Trust dated December 14, 2004. On
April 11, 2005, 10,000 shares of the Fund were issued for cash, at $10.00 per
share, to YCMNET Advisors, Inc., an affiliate of the investment advisor to the
Fund. The Fund commenced operations on December 29, 2005.
The investment objective of the Fund is long-term capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Fund's significant accounting policies:
SECURITIES VALUATION - The Fund's portfolio securities are valued as of the
close of business of the regular session of the New York Stock Exchange
(normally 4:00 p.m., Eastern time). Common stocks and other equity-type
securities that are traded on a securities exchange are valued at the last
quoted sales price at the close of regular trading on the day the valuation is
made, or, if not traded on a particular day, at the closing bid price.
Securities which are quoted by NASDAQ are valued at the NASDAQ Official Closing
Price. Price information on listed stocks is taken from the exchange where the
security is primarily traded. Securities and other assets that do not have
market quotations readily available are valued at their fair value as determined
in good faith using procedures established by the Board of Trustees.
SHARE VALUATION - The net asset value per share of the Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding. The offering price and redemption price per share
of the Fund is equal to the net asset value per share, except that shares of the
Fund are subject to a redemption fee of 2% if redeemed within 90 days of the
date of purchase. For the period ended August 31, 2006, no redemption fees were
collected.
INVESTMENT INCOME - Dividend income is recorded on the ex-dividend date.
Interest income is accrued as earned. Other non-cash dividends are recognized as
investment income at the fair value of the property received.
SECURITY TRANSACTIONS - Security transactions are accounted for on the trade
date. Gains and losses on securities sold are determined on a specific
identification basis.
DISTRIBUTIONS TO SHAREHOLDERS - Distributions to shareholders arising from net
investment income and net realized capital gains, if any, are distributed at
least once each year. The amount of distributions from net investment income and
net realized gains are determined in accordance with federal income tax
regulations, which may differ from accounting principles generally accepted in
the United States of America. During the period ended August 31, 2006, the Fund
made no distributions.
10
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
FEDERAL INCOME TAX - It is the Fund's policy to comply with the special
provisions of Subchapter M of the Internal Revenue Code applicable to regulated
investment companies. As provided therein, in any fiscal year in which a Fund so
qualifies and distribute at least 90% of its taxable net income, the Fund (but
not the shareholders) will be relieved of federal income tax on the income
distributed. Accordingly, no provision for income taxes is required.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
The following information is computed on a tax basis for each item as of August
31, 2006:
----------------------------------------------------------------------
Cost of portfolio investments $ 513,499
==============
Gross unrealized appreciation $ 16,461
Gross unrealized depreci (19,989)
--------------
Net unrealized depreciation $ (3,528)
Undistributed ordinary income 4,839
--------------
Distributable earnings $ 1,311
==============
----------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
During the period ended August 31, 2006, cost of purchases and proceeds from
sales of investment securities, other than short-term investments, was $486,770
and $41,269, respectively.
4. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT
Destination Capital Management, Inc. (the "Advisor") serves as the investment
advisor to the Fund. For its services, the Fund pays the Advisor, on a monthly
basis, an investment advisory fee at the annual rate of 0.75% of its average
daily net assets.
The Advisor has contractually agreed to reduce a portion of its advisory fees or
to reimburse the Fund's operating expenses to the extent necessary so that the
Fund's ordinary operating expenses do not exceed an amount equal to 1.25%
annually of its average net assets. This expense limitation agreement remains in
effect for a period of three years from the beginning of the Fund's operations.
During the period ended August 31, 2006, the Advisor waived its entire
investment advisory fee of $1,556 and reimbursed other Fund expenses totaling
$84,701.
11
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The Advisor has concurrently entered into an agreement with the Fund which
permits the Advisor to recover expenses waived and/or reimbursed on behalf of
the Fund, but only for a period of three years after the expense is waived
and/or reimbursed, and only if such recovery will not cause the Fund's expense
ratio to exceed the annual rate of 1.25%. As of August 31, 2006, the amount
available for recovery that has been paid and/or waived by the Advisor on behalf
of the Fund is $86,257, which expires during the year ended August 31, 2009.
The Chief Compliance Officer to the Trust is an officer of the Advisor. The Fund
reimburses the Advisor $12,000 annually for compliance services provided to the
Trust.
ADMINISTRATION AGREEMENT
Under the terms of an Administration Agreement with the Trust, Ultimus Fund
Solutions, LLC ("Ultimus") provides non-investment related statistical and
research data, internal regulatory compliance services and executive and
administrative services for the Fund. Ultimus supervises the preparation of tax
returns, reports to shareholders of the Fund, reports to and filings with the
Securities and Exchange Commission and state securities commissions and
materials for meetings of the Board of Trustees. For these services, the Fund
pays to Ultimus, on a monthly basis, a fee equal to 0.15% per annum of the
Fund's average daily net assets up to $50 million, 0.125% of such assets from
$50 million to $100 million, 0.10% of such assets from $100 million to $250
million, 0.075% of such assets from $250 million to $500 million and 0.05% of
such assets in excess of $500 million, provided, however, that the minimum fee
is $2,000 per month. For the period ended August 31, 2006, Ultimus was paid
$16,000 in administration fees.
FUND ACCOUNTING AGREEMENT
Under the terms of a Fund Accounting Agreement, Ultimus calculates the daily net
asset value per share and maintains the financial books and records of the Fund.
For these services, Ultimus receives a base fee of $2,500 per month, plus an
asset-based fee at the annual rate of .01% of the average value of its daily net
assets. During the period ended August 31, 2006, the Fund paid Ultimus $20,021
in fund accounting fees. In addition, the Fund pays all costs of external
pricing services.
TRANSFER AGENT AND SHAREHOLDER SERVICES AGREEMENT
Under the terms of a Transfer Agent and Shareholder Services Agreement, Ultimus
maintains the records of each shareholder's account, answers shareholders'
inquiries concerning their accounts, processes purchase and redemption of the
Fund's shares, acts as dividend and distribution disbursing agent and performs
other shareholder service functions. For these services, Ultimus receives from
the Fund for its services as transfer agent a fee payable monthly at an annual
rate of $24 per account, provided, however, that the minimum fee is $1,500 per
month. In addition, the Fund pays out-of-pocket expenses, including but not
limited to, postage and supplies. During the period ended August 31, 2006,
Ultimus was paid $12,000 in transfer agent and shareholder services fees.
DISTRIBUTION AGREEMENT
Under the terms of a Distribution Agreement, Ultimus Fund Distributors, LLC (the
"Distributor") serves as principal underwriter to the Fund. The Distributor
receives no compensation from the Fund for acting as principal underwriter.
However, the Distributor receives annual compensation of $6,000 from the Advisor
for such services.
12
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are directors and officers of the
Advisor, or of Ultimus, or of the Distributor.
5. CONTINGENCIES AND COMMITMENTS
The Fund indemnifies the Trust's officers and trustees for certain liabilities
that might arise from their performance of their duties to the Fund.
Additionally, in the normal course of business the Fund enters into contracts
that contain a variety of representations and warranties and which provide
general indemnifications. The Fund's maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the
Fund that have not yet occurred. However, based on experience, the Fund expects
the risk of loss to be remote.
6. ACCOUNTING PRONOUNCEMENTS
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 (FIN 48) "Accounting for Uncertainty in Income Taxes". FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions 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 benefits of positions not
deemed to meet the more-likely-than-not threshold would be booked as a tax
expense in the current year and recognized as: a liability for unrecognized tax
benefits; a reduction of an income tax refund receivable; a reduction of
deferred tax asset; an increase in deferred tax liability; or a combination
thereof. Adoption of FIN 48 is required for fiscal years beginning after
December 15, 2006. At this time, management is evaluating the implications of
FIN 48 and its impact on the financial statements has not yet been determined.
13
[GRAPHIC OMITTED] BRIGGS
BUNTING &
DOUGHERTY, LLP
CERTIFIED
PUBLIC
ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF
DESTINATION FUNDS
AND THE SHAREHOLDERS OF DESTINATION SELECT EQUITY FUND
We have audited the accompanying statement of assets and liabilities of the
Destination Select Equity Fund, a series of shares of the Destination Funds,
including the schedule of investments, as of August 31, 2006, and the related
statement of operations, the statement of changes in net assets and the
financial highlights for the period 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.
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 August 31, 2006 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 the
Destination Select Equity Fund as of August 31, 2006, the results of its
operations, the changes in its net assets and its financial highlights for
period then ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/ BRIGGS, BUNTING & DOUGHERTY, LLP
BRIGGS, BUNTING & DOUGHERTY, LLP
PHILADELPHIA, PENNSYLVANIA
SEPTEMBER 19, 2006
14
DESTINATION SELECT EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (Unaudited)
- --------------------------------------------------------------------------------
We believe it is important for you to understand the impact of costs on your
investment. As a shareholder of the Fund, you incur two types of costs: (1)
transactions costs, including redemption fees; and (2) ongoing costs, including
management fees and other Fund expenses. The following examples are 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.
A Fund's expenses are expressed as a percentage of its average net assets. This
figure is known as the expense ratio. The expenses in the table below are based
on an investment of $1,000 made at the beginning of the period shown and held
for the entire period.
The table below illustrates the Fund's costs in two ways:
ACTUAL FUND RETURN - This section helps you to estimate the actual expenses that
you paid over the period. The "Ending Account Value" shown is derived from the
Fund's actual return, and the third column shows the dollar amount of operating
expenses that would have been paid by an investor who started with $1,000 in the
Fund. You may use the information here, together with the amount you invested,
to estimate the expenses that you paid over the period.
To do so, 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
given for the Fund under the heading "Expenses Paid During Period."
HYPOTHETICAL 5% RETURN - This section is intended to help you compare the Fund's
costs with those of other mutual funds. It assumes that the Fund had an annual
return of 5% before expenses during the period shown, but that the expense ratio
is unchanged. In this case, because the return used is not the Fund's actual
return, the results do not apply to your investment. The example is useful in
making comparisons because the Securities and Exchange Commission requires all
mutual funds to calculate expenses based on a 5% return. You can assess the
Fund's costs by comparing this hypothetical example with the hypothetical
examples that appear in shareholder reports of other funds.
Note that expenses shown in the table are meant to highlight and help you
compare ongoing costs only. The Fund does not charge any sales loads. However, a
redemption fee of 2% is imposed on the sale of shares within 90 days of the date
of purchase.
The calculations assume no shares were bought or sold during the period. Your
actual costs may have been higher or lower, depending on the amount of your
investment and the timing of any purchases or redemptions.
More information about the Fund's expenses, including annualized expense ratios,
can be found in this report. For additional information on operating expenses
and other shareholder costs, please refer to the Fund's prospectus.
15
DESTINATION SELECT EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (Unaudited) (Continued)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Beginning Ending Expenses Paid
Account Value Account Value During
March 1, 2006 August 31, 2006 Period*
- ----------------------------------------------------------------------------------------
Based on Actual Fund Return $1,000.00 $1,000.00 $6.25
Based on Hypothetical 5% Return
(before expenses) $1,000.00 $1,018.95 $6.31
- ----------------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.24% for the
period, multiplied by the average account value over the period, multiplied
by 184/365 (to reflect the period covered by this report).
OTHER INFORMATION (Unaudited)
- --------------------------------------------------------------------------------
A description of the policies and procedures that the Fund uses to vote proxies
relating to portfolio securities is available without charge upon request by
calling toll-free 1-866-738-1128, or on the Securities and Exchange Commission's
("SEC") website at http://www.sec.gov. Information regarding how the Fund voted
proxies relating to prftolio securities during the most recent period ended June
30 is also available without charge upon request by calling toll-free
1-866-738-1128, or on the SEC's website at http://www.sec.gov.
The Trust files a complete listing of portfolio holdings for the Fund with the
SEC as of the first and third quarters of each fiscal year on Form N-Q. These
filings are available upon request by calling 1-866-738-1128. Furthermore, you
may obtain a copy of the filings on the SEC's website at http://www.sec.gov. The
Trust's Forms N-Q may also be reviewed and copied at the SEC's Public Reference
Room in Washington, DC, and information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
16
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (Unaudited)
- --------------------------------------------------------------------------------
Overall responsibility for management of the Trust rests with its Trustees. The
Trustees serve for terms of indefinite duration until death, resignation,
retirement or removal from office. The Trustees, in turn, elect the officers of
the Trust to actively supervise the Trust's day-to-day operations. The officers
are elected annually. Certain officers of the Trust also may serve as a Trustee.
The Trust is managed by the Trustees in accordance with the laws of the State of
Ohio governing business trusts. There are currently five Trustees, four of whom
are not "interested persons" of the Trust within the meaning of that term under
the 1940 Act.
The Trustees and executive officers of the Trust, their addresses and their
principal occupations during the past five (5) years are as follows:
NUMBER OF
PORTFOLIOS IN
PRINCIPAL OCCUPATION(S) DURING FUND
LENGTH OF POSITION(S) HELD PAST 5 YEARS AND DIRECTORSHIPS COMPLEX
NAME, ADDRESS AND AGE TIME SERVED WITH TRUST OF PUBLIC COMPANIES OVERSEEN BY
TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES:
- --------------------------------------------------------------------------------------------------------------------------
*Michael A. Yoshikami Since President President and Chief Investment 1
Three Ygnacio Center December 2004 and Trustee Strategist of Destination Capital
2001 North Main Street, Suite 270 Management, Inc. and YCMNET
Walnut Creek, CA 94596 Advisors, Inc.
Year of birth: 1960
- --------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
- --------------------------------------------------------------------------------------------------------------------------
Brian T. Seager Since Trustee President of BTS Development, 1
Three Ygnacio Center April 18, 2005 Brilor, Inc. and Summit Ridge
2001 North Main Street, Suite 270 Communities
Walnut Creek, CA 94596
Year of birth: 1960
- --------------------------------------------------------------------------------------------------------------------------
Dr. Richard L. Brown Since Trustee Retired. Until June 2004, 1
Three Ygnacio Center April 18, 2005 Psychologist for Fresno School
2001 North Main Street, Suite 270 District
Walnut Creek, CA 94596
Year of birth: 1940
- --------------------------------------------------------------------------------------------------------------------------
17
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (Unaudited) (Continued)
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
PRINCIPAL OCCUPATION(S) DURING FUND
LENGTH OF POSITION(S) HELD PAST 5 YEARS AND DIRECTORSHIPS COMPLEX
NAME, ADDRESS AND AGE TIME SERVED WITH TRUST OF PUBLIC COMPANIES OVERSEEN BY
TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
(CONTINUED):
- --------------------------------------------------------------------------------------------------------------------------
Michael W. Callahan Since Trustee President of Emkay Corporation 1
Three Ygnacio Center April 18, 2005
2001 North Main Street, Suite 270
Walnut Creek, CA 94596
Year of birth: 1955
- --------------------------------------------------------------------------------------------------------------------------
Sabir S. Jaffer Since Trustee President of Merit Hospitality 1
Three Ygnacio Center April 18, 2005 Services from January 2003 -
2001 North Main Street, Suite 270 present; General Manager of
Walnut Creek, CA 94596 HILBA Star LLP from November
Year of birth: 1963 2003 - January 2005; General
Manager of Westmont Hospitality
Group, Inc. from September 1997
- November 2003
- --------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS:
- --------------------------------------------------------------------------------------------------------------------------
Robert G. Dorsey Since Vice President Managing Director of Ultimus
225 Pictoria Drive, Suite 450 April 18, 2005 Fund Solutions, LLC and Ultimus
Cincinnati, Ohio 45246 Fund Distributors, LLC
Year of birth: 1957
- --------------------------------------------------------------------------------------------------------------------------
Mark J. Seger Since Treasurer Managing Director of Ultimus
225 Pictoria Drive, Suite 450 April 18, 2005 Fund Solutions, LLC and Ultimus
Cincinnati, Ohio 45246 Fund Distributors, LLC
Year of birth: 1962
- --------------------------------------------------------------------------------------------------------------------------
John F. Splain Since Secretary Managing Director of Ultimus
225 Pictoria Drive, Suite 450 April 18, 2005 Fund Solutions, LLC and Ultimus
Cincinnati, Ohio 45246 Fund Distributors, LLC
Year of birth: 1956
- --------------------------------------------------------------------------------------------------------------------------
18
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (Unaudited) (Continued)
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION(S) DURING
LENGTH OF POSITION(S) HELD PAST 5 YEARS AND DIRECTORSHIPS
NAME, ADDRESS AND AGE TIME SERVED WITH TRUST OF PUBLIC COMPANIES
- --------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS (CONTINUED):
- --------------------------------------------------------------------------------------------------------------------------
George K.W. Chin Since Chief Executive Vice President of
Three Ygnacio Center April 18, 2005 Compliance YCMNET Advisors, Inc.
2001 North Main Street, Suite 270 Officer
Walnut Creek, CA 94596
Year of birth: 1956
- --------------------------------------------------------------------------------------------------------------------------
* Messrs. Yoshikami and Chin are affiliated persons of Destination Capital
Management, Inc., the Fund's investment adviser, and are each considered an
"interested person" of the Trust within the meaning of Section 2(a)(19) of
the 1940 Act.
Additional information about members of the Board of Trustees and executive
officers is available in the Statement of Additional Information (SAI). To
obtain a free copy of the SAI, please call 1-866-738-1128.
19
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, 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. Pursuant to Item 12(a)(1), a
copy of registrant's code of ethics is filed as an exhibit to this Form N-CSR.
During the period covered by this report, the code of ethics has not been
amended, and the registrant has not granted any waivers, including implicit
waivers, from the provisions of the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees has determined that the registrant has at
least one audit committee financial expert serving on its audit committee. The
name of the audit committee financial expert is Brian T. Seager. Mr. Seager is
"independent" for purposes of this Item.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The aggregate fees billed for professional services
rendered by the principal accountant for the audit of the registrant's
annual financial statements or for services that are normally provided
by the accountant in connection with statutory and regulatory filings
or engagements were $10,500 with respect to the registrant's fiscal
year ended August 31, 2006.
(b) AUDIT-RELATED FEES. No fees were billed in the last fiscal year for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item.
(c) TAX FEES. The aggregate fees billed for professional services rendered
by the principal accountant for tax compliance, tax advice, and tax
planning were $1,500 with respect to the registrant's fiscal year
ended August 31, 2006. The services comprising these fees are the
preparation of the registrant's federal income and excise tax returns.
(d) ALL OTHER FEES. No fees were billed in the last fiscal year for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item.
(e)(1) The audit committee has not adopted pre-approval policies and
procedures described in paragraph (c)(7) of Rule 2-01 of Regulation
S-X.
(e)(2) None of the services described in paragraph (b) through (d) of this
Item were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50% of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year were attributed to work performed by persons other
than the principal accountant's full-time, permanent employees.
(g) With respect to the fiscal year ended August 31, 2006, aggregate
non-audit fees of $1,500 were billed by the registrant's accountant
for services rendered to the registrant. No non-audit fees were billed
during the last fiscal year by the registrant's accountant for
services rendered to the registrant's investment adviser (not
including any sub-adviser whose role is primarily portfolio management
and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control
with the adviser that provides ongoing services to the registrant.
(h) The principal accountant has not provided any non-audit services to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted with
or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable [schedule filed with Item 1]
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 INVESTMENT
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.
The registrant has not adopted procedures by which shareholders may recommend
nominees to the registrant's board of trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) as of a date within 90 days of the filing date of this report, the
registrant's principal executive officer and principal financial officer have
concluded that such disclosure controls and procedures are reasonably designed
and are operating effectively to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to them
by others within those entities, particularly during the period in which this
report is being prepared, and that the information required in filings on Form
N-CSR is recorded, processed, summarized, and reported on a timely basis.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940)
that occurred during the second fiscal quarter of the period covered by this
report that have materially affected, or are 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)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Attached hereto
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the Act (17 CFR 270.30a-2(a)): Attached hereto
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act (17 CFR 270.23c-1) sent or given during the period covered by the report
by or on behalf of the registrant to 10 or more persons: Not applicable
(b) Certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)): Attached hereto
Exhibit 99.CODE ETH Code of Ethics
Exhibit 99.CERT Certifications required by Rule 30a-2(a) under the Act
Exhibit 99.906CERT Certifications required by Rule 30a-2(b) under the Act
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) The Destination Funds
-------------------------------------------------------------------
By (Signature and Title)* /s/ Michael A. Yoshikami
--------------------------------------------
Michael A. Yoshikami, President
Date November 2, 2006
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Michael A. Yoshikami
--------------------------------------------
Michael A. Yoshikami, President
Date November 2, 2006
---------------------------------------
By (Signature and Title)* /s/ Mark J. Seger
--------------------------------------------
Mark J. Seger, Treasurer
Date November 2, 2006
---------------------------------------
* Print the name and title of each signing officer under his or her signature.