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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, 2007
---------------------------------------------
Date of reporting period: August 31, 2007
---------------------------------------------
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, 2007
INVESTMENT ADVISOR
Destination Capital Management, Inc.
Walnut Creek, CA
THE DESTINATION FUNDS
1277 TREAT BOULEVARD, SUITE 200
WALNUT CREEK, CALIFORNIA 94597
October 25, 2007
To Our Shareholders:
We are very pleased to present to you the annual report covering the first full
fiscal year of operations for the Destination Select Equity Fund ("Destination"
or the "Fund").
For the year ended August 31, 2007, the Fund produced a return of 14.97% which
compares to a return of 15.13% for the S&P 500(R) Index for the same period. As
you may know, the S&P 500(R) is an index of 500 companies and is commonly used
as a comparison benchmark for large capitalization equities. We find
Destination's relative performance to its benchmark to be quite satisfactory,
particularly in light of the Fund's portfolio positioning during the period.
To select securities for the Fund's portfolio we use a predominantly bottom-up
investment approach very much focused on the long term. We seek to buy great
businesses, but only when we feel that the price we must pay to purchase the
security provides for an attractive opportunity for price appreciation while
simultaneously affording us a comfortable margin of safety in the event we are
wrong in our assessment of the company's prospects. We often find this required
margin of safety in situations when a company's share price has declined due to
short-term operating challenges or in situations when a company or their
industry have (temporarily in our view) fallen out of favor with other
investors. This is not to say that we are contrarian investors that by design
seek to invest against the grain, but we will invest in a company when we
believe that negative sentiment surrounding it is unwarranted by company and
industry fundamentals.
Given this investment approach, it is not a surprise that from time to time the
Fund may be positioned more towards sectors of the market that are currently
out-of-favor with investors. Such was the case for Destination during the year
ended August 31, 2007 as the Fund's sector allocation was a significant
detractor from performance for the year. Destination did not own a single
security in two of the three top-performing sectors during the period - namely
Energy and Materials. Additionally, the Fund's weighting to the other of the top
performing sectors (Telecommunications) was lower than that of its benchmark. To
make matters worse, Destination maintained overweight positions in the three
poorest-performing sectors of the market (Financials, Health Care, and Consumer
Staples) for the period.
Clearly this allocation in the aggregate provided a challenging portfolio
positioning to overcome and it is not hard to imagine that the results for
Destination could have
1
meaningfully underperformed market benchmarks in the short run. Fortunately, the
strong security selection of the Fund was enough to offset its sector
positioning.
Once again the Fund's holding in MasterCard produced the largest gain in the
portfolio as the company continues to superbly execute its strategy. We remain
shareholders of the company as we continue to see opportunities for MasterCard
to continue to gain market share and to profit from further innovation in the
debit and credit card space.
Another position that contributed meaningfully to the Fund's results for the
year ended August 31, 2007 was Nokia Corporation. We invested in Nokia during
the year with the thesis that the company's efforts in numerous emerging
markets, notably China and India, were substantially underappreciated by the
market. The company had been investing substantially in these markets recently
and we were confident that they would soon begin to see the payoff from those
investments. This thesis has certainly begun to play out. In fact, the company
has seen its share price climb over 60% from our initial purchase through the
end of August (and has continued to appreciate meaningfully since then). Despite
this tremendous revaluation, we maintain our ownership in the company as we
expect Nokia's efforts to improve its market position in established markets
through developing mobile handsets with more consumer appeal to be successful
and we further expect that the company's efforts to reinvigorate its mobile
network division will start to produce results in the near term.
Another position contributing meaningfully to Fund performance was DreamWorks
Animation, a position we highlighted last year as one of the detractors from
Fund performance. We are pleased that our thesis with this company has continued
to play out as we expected and the market has rewarded us for our patience.
Two other positions that contributed meaningfully to Fund performance, SLM Corp
(often referred to as "Sallie Mae") and First Data Corporation, are also
noteworthy for the reason that these companies were the beneficiaries of offers
from private equity firms seeking to take them private during the period. These
companies both received purchase offers during the month of April as
"going-private" transactions reached a fever pitch in the market. These types of
transactions are often bittersweet for long-term investors; on one hand we often
receive a substantial premium to the then-current market price but on the other
hand we lose a great business that we believe can, in many cases, provide even
more substantial returns over the long-term.
While we evaluated each investment situation independently, we sold the Fund's
holdings in both companies shortly after each of the transactions were announced
as we estimated that the risk of the deal "breaking" (that is the transaction
being renegotiated or, worse, ultimately falling apart) was material. That has
certainly proven to be the case with SLM as the proposed transaction appears to
be far from completion as of the date of this letter.
Offsetting these successes were numerous positions that are yet to produce the
results that we expect them to over our investment horizon. The most notable
detractor from
2
Destination's performance for the period was the Fund's ownership of Getty
Images, a company that provides a variety of visual content to advertising
agencies, graphic design firms and others, having customers in more than 100
countries across the globe. The timing of our purchase could hardly have been
worse - within two weeks of purchasing our position the stock lost over 30% of
its value. Certainly this was not the outcome we had expected. We were
originally attracted to the company's unique business model, high operating
profitability, strong cash flow generation and the viral nature of its efforts
to develop new content for distribution to its customers. Though we still find
these attributes attractive, we failed to correctly anticipate how quickly the
company's product mix would shift towards lower margin products and the ultimate
impact that shift would have on profitability. We continue to believe in the
longer-term prospects for Getty's businesses and remain a shareholder of the
company, though the weighting of the position is substantially reduced.
Other positions detracting from Destination's performance during the period
include the Fund's holdings in Gannett, Marsh & McLennan Companies, Pfizer and
Capital One.
Finally, we would like to take this occasion to express our gratitude to you for
the trust you have placed in us. Managing your money is not a responsibility we
take lightly and we very much appreciate the opportunity you have given us.
Thank you for your continued support.
Sincerely,
Michael Yoshikami Craig Gentry
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RESULTS AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER
THAN THE PERFORMANCE DATA QUOTED. PERFORMANCE DATA CURRENT TO THE MOST RECENT
MONTH-END, ARE AVAILABLE BY CALLING 1-866-738-1128.
An investor should consider the investment objectives, risks, charges and
expenses of the Fund carefully before investing. The Fund's prospectuses contain
this and other important information. To obtain a copy of the Fund's prospectus
please call 1-866-738-1128 and a copy will be sent to you free of charge. Please
read the prospectus carefully before you invest. The Destination Select Equity
Fund is distributed by Ultimus Fund Distributors, LLC.
The Letter to Shareholders seeks to describe some of the Adviser's current
opinions and views of the financial markets. Although the Adviser believes it
has a reasonable basis for any opinions or views expressed, actual results may
differ, sometimes significantly so, from those expected or expressed.
3
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
[LINE GRAPH 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 $ 10,207
8/31/2006 $ 10,200 8/31/2006 $ 10,528
11/30/2006 $ 11,250 11/30/2006 $ 11,364
2/28/2007 $ 11,353 2/28/2007 $ 11,468
5/31/2007 $ 12,405 5/31/2007 $ 12,533
8/31/2007 $ 11,727 8/31/2007 $ 12,122
Past performance is not predictive of future performance.
AVERAGE ANNUAL TOTAL RETURNS(a)
(FOR PERIODS ENDED AUGUST 31, 2007)
SINCE
1 YEAR INCEPTION(b)
------------ ------------
Destination Select Equity Fund 14.97% 10.00%
S&P 500 Index 15.13% 12.20%
(a) The returns shown do 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.
4
DESTINATION SELECT EQUITY FUND
SUPPLEMENTARY PORTFOLIO INFORMATION
AUGUST 31, 2007 (UNAUDITED)
================================================================================
DESTINATION SELECT EQUITY FUND VS S&P 500 INDEX
SECTOR DIVERSIFICATION (% OF NET ASSETS)
[BAR CHART OMITTED]
Destination Select
Equity Fund S&P 500 Index
------------------ -------------
Consumer Discretionary 29.1% 9.8%
Consumer Staples 13.0% 9.5%
Energy 0.0% 11.1%
Financials 18.1% 20.1%
Health Care 14.0% 11.7%
Industrials 9.2% 11.4%
Information Technology 7.6% 16.3%
Materials 0.0% 3.1%
Telecommunications Services 5.2% 3.7%
Utilities 0.0% 3.4%
Cash 3.8% 0.0%
TOP 10 HOLDINGS
- --------------------------------------------------------------------------------
SECURITY DESCRIPTION % OF NET ASSETS
------------------------------ ----------------------
Carnival Corp. 5.8%
International Game Technology 5.5%
Nokia Oyj - ADR 5.2%
General Electric Co. 5.1%
Johnson & Johnson 5.0%
DreamWorks Animation SKG, Inc. 4.9%
Wm. Wrigley Jr. Co. 4.7%
Graco, Inc. 4.1%
Automatic Data Processing, Inc. 3.8%
Microsoft Corp. 3.8%
5
DESTINATION SELECT EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2007
================================================================================
ASSETS
Investments in securities:
At acquisition cost $ 802,201
==========
At value $ 852,503
Dividends receivable 1,557
Receivable from Advisor (Note 4) 6,277
Other assets 7,285
----------
Total assets 867,622
----------
LIABILITIES
Accrued liabilities:
Payable to Administrator (Note 4) 6,010
Other accrued expenses and liabilities 383
----------
Total liabilities 6,393
----------
NET ASSETS $ 861,229
==========
NET ASSETS CONSIST OF:
Paid-in capital $ 782,609
Accumulated undistributed net investment income 3,810
Accumulated net realized gains from security
transactions 24,508
Net unrealized appreciation on investments 50,302
----------
NET ASSETS $ 861,229
==========
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) 74,238
==========
Net asset value, offering price and redemption price per
share (a) $ 11.60
==========
(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.
6
DESTINATION SELECT EQUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2007
================================================================================
INVESTMENT INCOME
Dividend income $ 15,095
Foreign withholding taxes on dividends (117)
----------
Total investment income 14,978
----------
EXPENSES
Fund accounting fees (Note 4) 30,076
Professional fees 26,099
Administration fees (Note 4) 24,000
Transfer agent fees (Note 4) 18,000
Trustees' fees 16,313
Compliance fees (Note 4) 12,000
Insurance expense 7,802
Custody fees 6,385
Investment advisory fees (Note 4) 5,455
Postage and supplies 4,137
Registration fees 3,809
Other expenses 7,792
----------
Total expenses 161,868
Less fees waived and expenses reimbursed by the
Advisor (Note 4) (152,777)
----------
Net expenses 9,091
----------
NET INVESTMENT INCOME 5,887
----------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains from security transactions 24,510
Net change in unrealized appreciation/depreciation on
investments 53,830
----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 78,340
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 84,227
==========
See accompanying notes to financial statements.
7
DESTINATION SELECT EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
2007 2006 (a)
- -------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 5,887 $ 1,673
Net realized gains from security transactions 24,510 3,166
Net change in unrealized appreciation/depreciation on investments 53,830 (3,528)
----------- -----------
Net increase in net assets from operations 84,227 1,311
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (3,750) --
From net realized gains on investments (3,168) --
----------- -----------
Net decrease in net assets from distributions to shareholders (6,918) --
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 265,428 410,828
Net asset value of shares issued in reinvestment of
distributions to shareholders 6,918 --
Payments for shares redeemed (565) --
----------- -----------
Net increase in net assets from capital share transactions 271,781 410,828
----------- -----------
TOTAL INCREASE IN NET ASSETS 349,090 412,139
NET ASSETS
Beginning of period 512,139 100,000
----------- -----------
End of period $ 861,229 $ 512,139
=========== ===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME $ 3,810 $ 1,673
=========== ===========
CAPITAL SHARE ACTIVITY
Shares sold 23,442 40,232
Shares reinvested 614 --
Shares redeemed (50) --
----------- -----------
Net increase in shares outstanding 24,006 40,232
Shares outstanding at beginning of period 50,232 10,000
----------- -----------
Shares outstanding at end of period 74,238 50,232
=========== ===========
(a) Represents the period from the commencement of operations (December 29,
2005) through August 31, 2006.
See accompanying notes to financial statements.
8
DESTINATION SELECT EQUITY FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
================================================================================
YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31,
2007 2006(a)
- ----------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 10.20 $ 10.00
----------- -----------
Income from investment operations:
Net investment income 0.09 0.03
Net realized and unrealized gains on investments 1.44 0.17
----------- -----------
Total from investment operations 1.53 0.20
----------- -----------
Less distributions:
From net investment income (0.07) --
From net realized gains on security transactions (0.06) --
----------- -----------
Total distributions (0.13) --
----------- -----------
Net asset value at end of period $ 11.60 $ 10.20
=========== ===========
Total return(b) 14.97% 2.00%(c)
=========== ===========
Net assets at the end of period $ 861,229 $ 512,139
=========== ===========
RATIOS/SUPPLEMENTARY DATA:
Ratio of gross expenses to average net assets 22.23% 42.55%(e)
Ratio of net expenses to average net assets(d) 1.25% 1.24%(e)
Ratio of net investment income to average net assets(d) 0.81% 0.80%(e)
Portfolio turnover rate 34% 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 periods covered, which assumes any dividends or capital
gains distributions are reinvested in shares of the Fund. The returns
shown do 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.
9
DESTINATION SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS
AUGUST 31, 2007
================================================================================
Shares COMMON STOCKS - 96.2% VALUE
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY - 29.1%
1,100 Carnival Corp. $ 50,149
1,380 DreamWorks Animation SKG, Inc. (a) 42,573
260 Gannett Co., Inc. 12,220
750 Getty Images, Inc. (a) 23,393
640 Home Depot, Inc. (The) 24,518
1,230 International Game Technology 46,949
525 McDonald's Corp. 25,856
750 Walt Disney Co. (The) 25,200
---------
250,858
---------
CONSUMER STAPLES - 13.0%
320 Coca-Cola Co. (The) 17,210
410 Costco Wholesale Corp. 25,317
665 Wal-Mart Stores, Inc. 29,014
630 Wm. Wrigley Jr. Co. 36,698
60 Wm. Wrigley Jr. Co. - Class B 3,492
---------
111,731
---------
FINANCIALS - 18.1%
215 Capital One Financial Corp. 13,902
350 Legg Mason, Inc. 30,387
1,135 Marsh & McLennan Cos., Inc. 30,248
235 MasterCard, Inc. - Class A 32,193
960 U.S. Bancorp 31,056
975 Western Union Co. 18,359
---------
156,145
---------
HEALTH CARE - 14.0%
390 Baxter International, Inc. 21,356
700 Johnson & Johnson 43,253
1,250 Pfizer, Inc. 31,050
375 Stryker Corp. 25,050
---------
120,709
---------
INDUSTRIALS - 9.2%
1,135 General Electric Co. 44,117
875 Graco, Inc. 35,359
---------
79,476
---------
INFORMATION TECHNOLOGY - 7.6%
710 Automatic Data Processing, Inc. 32,475
1,130 Microsoft Corp. 32,465
---------
64,940
---------
TELECOMMUNICATIONS SERVICES - 5.2%
1,350 Nokia Oyj - ADR 44,388
---------
TOTAL COMMON STOCKS (Cost $777,945) $ 828,247
---------
10
DESTINATION SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
================================================================================
SHARES SHORT TERM INVESTMENTS - 2.8% VALUE
- --------------------------------------------------------------------------------
24,256 AIM STIT - Liquid Assets Portfolio (The) -
Institutional Class (Cost $24,256) $ 24,256
---------
TOTAL INVESTMENTS AT VALUE - 99.0% (Cost $802,201) $ 852,503
OTHER ASSETS IN EXCESS OF LIABILITIES - 1.0% 8,726
---------
TOTAL NET ASSETS - 100.0% $ 861,229
=========
(a) Non-income producing security.
ADR - American Depositary Receipt
See accompanying notes to financial statements.
11
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2007
- --------------------------------------------------------------------------------
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 or are considered to be unreliable due to
market or other events will be valued at their fair values as determined under
procedures adopted by the Fund's Board of Trustees. When fair value pricing is
employed, the prices of securities used by the Fund to calculate its NAV may
differ from quoted or published prices for the same securities.
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. During the periods ended August 31, 2007 and 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. The tax character of distributions paid during the
year ended August 31, 2007 was ordinary income. There were no distributions for
the period ended August 31, 2006. Dividends and distributions to shareholders
are recorded on ex-dividend date.
12
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 and disclosure of contingent 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 distributes 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, 2007:
Tax cost of portfolio investments $ 802,635
=========
Gross unrealized appreciation
$ 84,794
Gross unrealized depreciation (34,926)
---------
Net unrealized appreciation $ 49,868
Undistributed ordinary income 21,948
Undistributed long-term gains 6,804
---------
Distributable earnings $ 78,620
=========
The difference between the federal income tax cost of portfolio investments and
the financial statement cost is due to the certain timing differences in the
recognition of capital losses under income tax regulations and accounting
principles generally accepted in the United States of America. These "book/tax"
differences are temporary in nature and are primarily due to the tax deferral of
losses on wash sales.
3. INVESTMENT TRANSACTIONS
During the year ended August 31, 2007, cost of purchases and proceeds from sales
of investment securities, other than short-term investments, was $536,113 and
$231,345, 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.
13
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 through December 31, 2016. During the year ended August 31, 2007, the
Advisor waived its entire investment advisory fee of $5,455 and reimbursed other
Fund expenses totaling $147,322.
The Advisor has concurrently entered into an agreement with the Fund which
permits the Advisor to recover fees waived and expenses reimbursed on behalf of
the Fund, but only for a period of three years after such waiver or
reimbursement, 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, 2007, the Advisor may in
the future recoup fees waived and expenses reimbursed totaling $239,034. The
Advisor may recoup a portion of this amount no later than the dates as stated
below:
August 31, 2009 August 31, 2010
--------------- ---------------
$ 86,257 $152,777
The Chief Compliance Officer to the Trust is an employee of the Advisor. The
Fund reimburses the Advisor $12,000 annually for compliance services provided to
the Trust.
The Fund pays each Trustee who is not affiliated with the Advisor a per meeting
fee of $1,000. Trustees who are affiliated with the Advisor do not receive
compensation.
ADMINISTRATION AGREEMENT
Under the terms of an Administration Agreement with the Trust, Ultimus Fund
Solutions, LLC ("Ultimus") provides 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 year ended August 31, 2007, Ultimus was
paid $24,000 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 0.01% of the average value of the Fund's
daily net assets. For the year ended August 31, 2007, the Fund paid Ultimus
$30,076 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
14
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
$1,500 per month. In addition, the Fund pays out-of-pocket expenses, including
but not limited to, postage and supplies. For the year ended August 31, 2007,
Ultimus was paid $18,000 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. For the year ended August 31, 2007, the Distributor waived
the annual compensation.
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
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Recent SEC guidance allows
implementing FIN 48 in Fund NAV calculations as late as the Fund's last NAV
calculation in the first required financial statement reporting period. As a
result, the Fund will incorporate FIN 48 in its Semi-Annual Report on February
29, 2008. Management is in the process of determining the impact of the adoption
of FIN 48.
In September 2006, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." This
standard establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. SFAS No. 157 applies to fair value measurements already
required or permitted by existing standards. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The changes to current generally
accepted accounting principles from the application of SFAS No. 157 relate to
the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. As of August 31, 2007, the
Fund does not believe the adoption of SFAS No. 157 will impact the amounts
reported in the financial
15
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
statements, however, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain of the measurements
reported on the statement of changes in net assets for a fiscal period.
16
[LOGO] 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, 2007, and the related
statement of operations for the year then ended and the statement of changes in
net assets and the financial highlights for the year then ended and for the
period December 29, 2005 (commencement of operations) through August 31, 2006.
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 audits.
We conducted our audits 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, 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 audits provide 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, 2007, the results of its
operations for the year then ended and the changes in its net assets and its
financial highlights for the year then ended and for the period December 29,
2005 through August 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BRIGGS, BUNTING & DOUGHERTY, LLP
BRIGGS, BUNTING & DOUGHERTY, LLP
PHILADELPHIA, PENNSYLVANIA
OCTOBER 18, 2007
17
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 ongoing costs 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.
18
DESTINATION SELECT EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Beginning Ending Expenses Paid
Account Value Account Value During Period*
March 1, 2007 August 31, 2007
- --------------------------------------------------------------------------------
Based on Actual Fund Return $1,000.00 $1,032.90 $6.41
Based on Hypothetical 5%
Return (before expenses) $1,000.00 $1,018.90 $6.36
- --------------------------------------------------------------------------------
* Expenses are equal to the Fund's annualized expense ratio of 1.25% for the
period, multiplied by the average account value over the period, multiplied
by 184/365 (to reflect the one-half year period).
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 portfolio securities during the most recent 12-month 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 end 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.
FEDERAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
In accordance with federal tax requirements, the following provides shareholders
with information concerning distributions from ordinary income and net realized
gains made by the Fund during the year ended August 31, 2007. For the fiscal
year ended August 31, 2007, certain dividends paid by the Fund may be subject to
a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. The Fund intends to designate up to a maximum amount
of $6,918 as taxed at a maximum rate of 15%. Complete information will be
computed and reported in conjunction with your 2007 Form 1099-DIV.
19
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
POSITION(S) PRINCIPAL OCCUPATION(S) DURING FUND COMPLEX
LENGTH OF HELD WITH PAST 5 YEARS AND DIRECTORSHIPS OF OVERSEEN BY
NAME, ADDRESS AND AGE TIME SERVED TRUST PUBLIC COMPANIES 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 2005 Brilor, Inc. and Summit Ridge
2001 North Main Street, Suite 270 Communities; Director of American
Walnut Creek, CA 94596 Vantage Companies
Year of birth: 1960
- ----------------------------------------------------------------------------------------------------------------------------------
Dr. Richard L. Brown Since Trustee Retired. Until June 2004, 1
Three Ygnacio Center April 2005 Psychologist for Fresno School
2001 North Main Street, Suite 270 District
Walnut Creek, CA 94596
Year of birth: 1940
- ----------------------------------------------------------------------------------------------------------------------------------
20
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
NUMBER OF
PORTFOLIOS IN
POSITION(S) PRINCIPAL OCCUPATION(S) DURING FUND COMPLEX
LENGTH OF HELD WITH PAST 5 YEARS AND DIRECTORSHIPS OF OVERSEEN BY
NAME, ADDRESS AND AGE TIME SERVED TRUST PUBLIC COMPANIES TRUSTEE
- ----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES (CONTINUED):
- ----------------------------------------------------------------------------------------------------------------------------------
Michael W. Callahan Since Trustee President of Emkay Corporation 1
Three Ygnacio Center April 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 2005 Services from January 2003 -
2001 North Main Street, Suite 270 present; General Manager of HILBA
Walnut Creek, CA 94596 Star LLP from November 2003 -
Year of birth: 1963 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 Fund
225 Pictoria Drive, Suite 450 April 2005 Solutions, LLC and Ultimus Fund
Cincinnati, Ohio 45246 Distributors, LLC
Year of birth: 1957
- ----------------------------------------------------------------------------------------------------------------------------------
Mark J. Seger Since Treasurer Managing Director of Ultimus Fund
225 Pictoria Drive, Suite 450 April 2005 Solutions, LLC and Ultimus Fund
Cincinnati, Ohio 45246 Distributors, LLC
Year of birth: 1962
- ----------------------------------------------------------------------------------------------------------------------------------
John F. Splain Since Secretary Managing Director of Ultimus Fund
225 Pictoria Drive, Suite 450 April 2005 Solutions, LLC and Ultimus Fund
Cincinnati, Ohio 45246 Distributors, LLC
Year of birth: 1956
- ----------------------------------------------------------------------------------------------------------------------------------
21
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
POSITION(S) PRINCIPAL OCCUPATION(S) DURING
LENGTH OF HELD WITH PAST 5 YEARS AND DIRECTORSHIPS OF
NAME, ADDRESS AND AGE TIME SERVED TRUST PUBLIC COMPANIES
- ----------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS (CONTINUED):
- ----------------------------------------------------------------------------------------------------------------------------------
Angela Crawford Since Chief Compliance Officer of YCMNET
Three Ygnacio Center July 2007 Advisors and Destination Capital
2001 North Main Street, Suite 270 Management, Inc.
Walnut Creek, CA 94596
Year of birth: 1981
- ----------------------------------------------------------------------------------------------------------------------------------
* Mr. Yoshikami is an affiliated person of Destination Capital
Management, Inc., the Fund's investment advisor, and is 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.
22
DESTINATION SELECT EQUITY FUND
APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED)
- --------------------------------------------------------------------------------
The Board of Trustees, including a majority of the Independent Trustees voting
separately, has reviewed and approved the continuance of the Fund's Investment
Advisory Agreement with the Adviser. Approval took place at an in-person
meeting, held on April 17, 2007, at which a majority of Trustees was present,
including a majority of the Independent Trustees.
In the course of their consideration of the Investment Advisory Agreement, the
Independent Trustees were advised by independent legal counsel. The Independent
Trustees received and reviewed a substantial amount of information provided by
the Adviser in response to requests of independent legal counsel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of the
Investment Advisory Agreement with management and also met in a private session
with counsel at which no representatives of the Adviser were present.
In considering the Investment Advisory Agreement and reaching their conclusions,
the Trustees reviewed and analyzed various factors that they determined were
relevant, including the factors described below.
THE NATURE, EXTENT, AND QUALITY OF THE SERVICES PROVIDED BY THE ADVISER. The
Independent Trustees reviewed the services being provided to the Fund by the
Adviser. They discussed the responsibilities of the Adviser under the Investment
Advisory Agreement and the Adviser's compensation under the Agreement. The
Independent Trustees also reviewed the background and experience of the
Adviser's key investment and operating personnel. After reviewing the foregoing
information, the Independent Trustees concluded that the quality, extent and
nature of the services provided to the Fund by the Adviser were satisfactory.
THE INVESTMENT PERFORMANCE OF THE FUND AND THE ADVISER. The Independent Trustees
compared the performance of the Fund with the performance of the S&P 500 Index,
the Fund's primary benchmark, over various periods ended March 31, 2007. It was
noted by the Independent Trustees that, in spite of the conservative approach
taken by the Adviser in fully investing the Fund's cash flows during the Fund's
first six months of operations, the Fund has performed in line with the S&P 500
Index over the relevant periods. The Independent Trustees were also provided
with comparative performance statistics of the universe of funds categorized by
Morningstar as "large cap blend" funds, which is the category to which the Fund
has been assigned. The Independent Trustees noted that, according to statistics
derived from Morningstar, the Fund outperformed the average large cap blend fund
for the one year period ended March 31, 2007. The Independent Trustees also
considered the consistency of the Adviser's management of the Fund with the
Fund's investment objective and policies. The Independent Trustees concluded
that the investment performance of the Fund has been in line with the averages
for its peer group over both the one year period ended March 31, 2007 and for
the period from the Fund's inception through March 31, 2007.
THE COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
ADVISER AND ITS AFFILIATES FROM THE RELATIONSHIP WITH THE FUND. The Independent
Trustees considered the Adviser's staffing, personnel and operations; the
financial condition of the Adviser and the level of commitment to the Fund by
the Adviser; the asset levels of the Fund; and the overall expenses of the Fund.
The Independent Trustees also discussed the Cost Assumption Agreement between
the Adviser and YCMNET Advisors, Inc. (YCMNET), an affiliated investment
adviser, and reviewed the financial condition of YCMNET. Next, the Independent
Trustees reviewed the rate of the
23
DESTINATION
SELECT EQUITY FUND
APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
advisory fee (0.75%) paid by the Fund under the Investment Advisory Agreement
and compared it to the average advisory fee ratio of large cap blend funds
(0.56%) as reported by Morningstar. They compared the total operating expense
ratio of the Fund (1.25%) with the average operating expense ratio of large cap
blend funds as calculated by Morningstar (0.91%). The Independent Trustees noted
that the Fund's current net assets are considerably less than the average net
assets for these large cap blend funds (approximately $1.8 billion), which
factor should be considered when evaluating the reasonableness of the Fund's
advisory fee, and that the Fund's expenses were competitive given the level of
assets. The Independent Trustees also considered the profitability of the
Adviser. It was noted by the Independent Trustees that the Adviser has yet to
recognize a profit with respect to its services to the Fund and, in fact, the
Adviser has waived all of its advisory fees to date and, as of February 28,
2007, has reimbursed the Fund for other operating expenses in the amount of
approximately $159,000. The Independent Trustees considered the "fallout
benefits" to the Adviser from its relationship with the Trust, including the
additional exposure the Adviser has received as a result of managing the Fund.
Following further consideration of the foregoing, the Independent Trustees
concluded that the fees paid to the Adviser by the Fund are reasonable.
THE EXTENT TO WHICH ECONOMIES OF SCALE WOULD BE REALIZED AS THE FUND GROWS AND
WHETHER ADVISORY FEE LEVELS REFLECT THESE ECONOMIES OF SCALE FOR THE BENEFITS OF
THE FUND'S INVESTORS. The Independent Trustees considered that the Adviser has
not received any of its advisory fees because of its commitment to cap annual
operating expenses of the Fund at 1.25% of average net assets. The Independent
Trustees concluded that, at current asset levels, it would not be relevant to
consider the extent to which economies of scale would be realized as the Fund
grows, and whether fee levels reflect these economies of scale. The Independent
Trustees determined, therefore, that it is not necessary or appropriate to
introduce fee breakpoints at the present time. The Independent Trustees noted,
however, that as net assets of the Fund increase, it may become necessary for
the Adviser to consider adding fee breakpoints to the Investment Advisory
Agreement.
The Independent Trustees determined that, although the advisory fees of the Fund
are higher than the average of such fees for other comparably managed funds,
they believe the fees to be reasonable given the quality of services provided by
the Adviser, the relatively small size of the Fund, and the absence to date of
any profits accruing to the Adviser from the Investment Advisory Agreement.
After consideration of these and other factors, the Trustees, including all of
the Independent Trustees, concluded that it was in the best interests of the
Fund and its shareholders to renew the Investment Advisory Agreement for an
additional annual period.
24
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
$12,000 and $10,500 with respect to the registrant's fiscal years ended
August 31, 2007 and 2006, respectively.
(b) AUDIT-RELATED FEES. No fees were billed in either of the last two fiscal
years 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 and $1,500 with respect to the registrant's fiscal years ended
August 31, 2007 and 2006, respectively. 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 either of the last two fiscal years
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 years ended August 31, 2007 and 2006, aggregate
non-audit fees of $1,500 and $1,500, respectively, were billed by the
registrant's accountant for services rendered to the registrant. No
non-audit fees were billed in either of the last two fiscal years 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, 2007
------------------------------------------
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, 2007
------------------------------------------
By (Signature and Title)* /s/ Mark J. Seger
-----------------------------------------------------
Mark J. Seger, Treasurer
Date November 2, 2007
------------------------------------------
* Print the name and title of each signing officer under his or her signature.