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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, 2008
-----------------------
Date of reporting period: August 31, 2008
-----------------------
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, 2008
INVESTMENT ADVISOR
Destination Capital Management, Inc.
Walnut Creek, CA
THE DESTINATION FUNDS
1277 TREAT BOULEVARD, SUITE 200
WALNUT CREEK, CALIFORNIA 94597
October 29, 2008
To Our Shareholders:
We are very pleased to present to you the Annual Report covering the second full
fiscal year of operations for the Destination Select Equity Fund ("Destination"
or the "Fund").
For the year ending August 31, 2008 the Fund produced a return of -0.72% which
compares favorably to a return of -11.14% for the S&P 500 Index(R) for the same
period. As you may know, the S&P 500 Index (R) is an index of 500 companies and
is commonly used as a comparison benchmark for large capitalization equities.
Though it pains us to see any decline in Fund assets, we view Destination's
performance relative to its benchmark over this period as quite satisfactory.
As you know, 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.
Though our focus is on bottom-up analysis, we are quite aware of the
macroeconomic environment in which the companies we own operate. Beginning in
late 2007 we found it increasingly challenging to identify new investment
opportunities which offered sufficient potential investment returns to
compensate for the risks we identified in owning the companies. Accordingly, we
began positioning Destination more defensively and began to accumulate cash in
the Fund. Though we don't operate Destination with a net cash target level, we
expect that our elevated cash balances will return to more normalized levels in
due course.
Despite the numerous challenges facing the equity markets, we were quite pleased
with the stock price performance of several of Destination's holdings which
managed to produce positive returns for the Fund during the reporting period.
The position benefiting Destination's performance the most for the fiscal year
ended August 31 was once again the Fund's holdings in MasterCard Incorporated.
Though subsequent to the fiscal year end period the company's share price has
fallen sharply, we remain confident in the company's execution of its business
plan, the secular trends shaping the payment industry and the overall strength
of its management team and we remain shareholders in the company.
1
Another position contributing to Fund performance was Wrigley. Wrigley has been
a Fund holding since March of 2006 and during April of this year the company
announced it had agreed to be acquired by private confectionary company Mars,
Inc. with financing provided in part by Berkshire Hathaway. The announcement of
the transaction provided for a sharp increase in the stock price of Wrigley as
the acquisition price offered a meaningful premium to the then-current price of
Wrigley shares. The takeover closed on October 6, 2008.
Another position benefiting the Fund was Wal Mart. The company's stock price has
appreciated substantially this year as investors have acknowledged the merits of
the company's business proposition of providing a broad spectrum of merchandise
to shoppers at aggressive prices. This business model has proven to be
particularly attractive as shoppers increasingly seek bargains in light of the
current challenging economic environment.
Other positions contributing to Fund performance include Western Union,
McDonalds, Johnson & Johnson and Baxter.
Numerous Fund holding's offset this positive performance. International Game
Technology ("IGT"), the largest manufacturer of casino gaming equipment,
produced the largest loss for the Fund. We had owned shares in IGT with the
expectation that the company could continue to expand its international presence
while maintaining its market share in the United States as the company continues
to develop its innovative server-based gaming technologies. However as the
economic downturn worsened the stock continued to fall in value. Subsequent to
the fiscal year end we have sold all shares of IGT.
The Fund's holdings in General Electric also detracted from performance. As an
industrial conglomerate, the company's operations touch many different aspects
of the global economy. In fact, part of our investment thesis for this company
centers on the company's global infrastructure business which is well positioned
to continue to provide products and services important to the economic
development of expanding economies globally over the long-term. However, the
company also has substantial operations in financial services, including
commercial and consumer finance businesses which has created considerable
near-term headwinds for the stock. Though not pleased with recent stock price
performance, we believe our long-term thesis remains intact and we continue to
maintain our position.
Another position detracting from this year's performance is Nokia, a company we
mentioned last year as contributing to last year's positive results. Nokia's
share price has fallen as global cellular phone competition has accelerated and
macroeconomic concerns affect investor perception of global handset demand.
However, as identified last year, we have confidence in the company's ability to
maintain and even grow its market share in both developing and developed
markets. Furthermore, even with a more challenging economic environment we
believe the company's operational prowess can result in
2
sustained operating margins as it continues to produce a complete product line
from high-end smart phones to entry-level low-priced handsets.
Finally our holdings in Legg Mason also produced a substantial loss to the Fund.
In owning the position we expected the company to begin to turnaround its
operations and stop the outflows of assets from its investment products.
However, earlier in the year it became clear that the company would require more
time to fix its operations than we initially surmised, so we sold our holdings.
However, as of the date of this letter we have reestablished an ownership
position in Legg Mason, after the price of the company's shares plummeted in
excess of 75% since we sold our shares. We viewed this share price drop to be an
extreme market overreaction not based on company fundamentals.
Other positions detracting from the Fund's performance for the period included
Home Depot, Gannett, Getty Images and Carnival Cruise Lines, all of which were
sold during the year.
Finally, we would once again like to take this occasion to express our gratitude
to you for the trust you have placed in us. Managing your money is a
responsibility we take very seriously 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 prospectus contains
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 Advisor's current
opinions and views of the financial markets. Although the Advisor believes it
has a reasonable basis for any opinions or views expressed, actual results may
differ, sometimes significantly so, from those expected or expressed. Securities
discussed in the Letter to Shareholders are provided for informational purposes
only and should not be considered a recommendation by the Advisor.
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
--------------------- --------------------
DATE VALUE DATE VALUE
---- ------- ---- -------
12/29/2005 $10,000 12/29/2005 $10,000
2/28/2006 10,000 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
11/30/2007 12,273 11/30/2007 12,241
2/29/2008 11,434 2/29/2008 11,056
5/31/2008 12,073 5/31/2008 11,694
8/31/2008 11,643 8/31/2008 10,771
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (a)
(FOR PERIODS ENDED AUGUST 31, 2008)
1 YEAR SINCE INCEPTION(b)
------ ------------------
Destination Select Equity Fund (0.72%) 5.86%
S&P 500 Index (11.14%) 2.82%
- --------------------------------------------------------------------------------
(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, 2008 (UNAUDITED)
================================================================================
DESTINATION SELECT EQUITY FUND VS S&P 500 INDEX
SECTOR DIVERSIFICATION (% OF NET ASSETS)
[BAR CHART OMITTED]
DESTINATION
SELECT
EQUITY S&P 500
FUND INDEX
--------------------------------
Consumer Discretionary 13.2% 8.5%
Consumer Staples 18.9% 11.4%
Energy 3.9% 13.8%
Financials 7.7% 15.1%
Health Care 13.7% 12.7%
Industrials 8.8% 11.5%
Information Technology 21.7% 16.5%
Materials 0.0% 3.7%
Telecommunications Services 2.6% 3.2%
Utilities 0.0% 3.7%
Cash Equivalents 9.5% 0.0%
TOP 10 EQUITY HOLDINGS
- --------------------------------------------------------------------------------
SECURITY DESCRIPTION % OF NET ASSETS
------------------------------- ---------------
MasterCard, Inc. - Class A 6.2%
Wm. Wrigley Jr. Co. * 5.9%
Johnson & Johnson 5.3%
Microsoft Corp. 4.5%
Wal-Mart Stores, Inc. 4.3%
Nokia Corp. - ADR 4.2%
General Electric Co. 4.1%
Marsh & McLennan Cos., Inc. 3.9%
Exxon Mobil Corp. 3.9%
Automatic Data Processing, Inc. 3.9%
5
DESTINATION SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS
AUGUST 31, 2008
================================================================================
SHARES COMMON STOCKS - 90.4% VALUE
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE - 1.1%
150 United Technologies Corp. $ 9,839
------------
BEVERAGES - 1.8%
320 Coca-Cola Co. (The) 16,662
------------
COMMERCIAL BANKS - 3.3%
960 U.S. Bancorp 30,586
------------
COMMUNICATIONS EQUIPMENT - 4.2%
1,550 Nokia Corp. - ADR 39,014
------------
DIVERSIFIED FINANCIAL SERVICES - 0.5%
100 Moody's Corp. 4,066
------------
FOOD & STAPLES RETAILING - 7.2%
410 Costco Wholesale Corp. 27,495
665 Wal-Mart Stores, Inc. 39,282
------------
66,777
------------
FOOD PRODUCTS - 7.9%
500 Campbell Soup Co. 18,405
630 Wm. Wrigley Jr. Co. 50,072
60 Wm. Wrigley Jr. Co. - Class B 4,752
------------
73,229
------------
HEALTH CARE EQUIPMENT & SUPPLIES - 5.6%
390 Baxter International, Inc. 26,426
375 Stryker Corp. 25,196
------------
51,622
------------
HOTELS, RESTAURANTS & LEISURE - 6.4%
1,230 International Game Technology 26,359
525 McDonald's Corp. 32,576
------------
58,935
------------
HOUSEHOLD PRODUCTS - 1.9%
250 Procter & Gamble Co. (The) 17,442
------------
INDUSTRIAL CONGLOMERATES - 4.1%
1,335 General Electric Co. 37,513
------------
INSURANCE - 3.9%
1,135 Marsh & McLennan Cos., Inc. 36,241
------------
IT SERVICES - 13.0%
810 Automatic Data Processing, Inc. 35,948
235 MasterCard, Inc. - Class A 56,999
975 Western Union Co. 26,930
------------
119,877
------------
MACHINERY - 3.6%
875 Graco, Inc. 33,381
------------
6
DESTINATION SELECT EQUITY FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
================================================================================
SHARES COMMON STOCKS - 90.4% (CONTINUED) VALUE
- --------------------------------------------------------------------------------
MEDIA - 6.8%
350 Comcast Corp. - Class A $ 7,413
830 DreamWorks Animation SKG, Inc. - Class A (a) 26,460
100 McGraw-Hill Cos., Inc. (The) 4,284
750 Walt Disney Co. (The) 24,262
------------
62,419
------------
OIL, GAS & CONSUMABLE FUELS - 3.9%
450 Exxon Mobil Corp. 36,004
------------
PHARMACEUTICALS - 8.1%
700 Johnson & Johnson 49,301
1,350 Pfizer, Inc. 25,799
------------
75,100
------------
SOFTWARE - 4.5%
1,530 Microsoft Corp. 41,754
------------
WIRELESS TELECOMMUNICATION SERVICES - 2.6%
950 Vodafone Group plc - ADR 24,273
------------
TOTAL COMMON STOCKS (Cost $751,934) $ 834,734
------------
================================================================================
SHARES SHORT TERM INVESTMENTS - 10.8% VALUE
- --------------------------------------------------------------------------------
44,338 AIM Liquid Assets Portfolio (The), 2.539% (b) $ 44,338
42,256 AIM Short Term Investments Company
Prime Portfolio (The), 2.361% (b) 42,256
12,795 Fidelity Institutional Money Market Portfolio
- Select Class, 2.627% (b) 12,795
------------
TOTAL SHORT TERM INVESTMENTS (Cost $99,389) $ 99,389
------------
TOTAL INVESTMENTS AT VALUE - 101.2% (Cost $851,323) $ 934,123
LIABILITIES IN EXCESS OF OTHER ASSETS - (1.2%) (11,380)
------------
TOTAL NET ASSETS - 100.0% $ 922,743
============
(a) Non-income producing security.
(b) Variable rate security. The rate shown is the effective 7-day yield as of
August 31, 2008.
ADR - American Depositary Receipt
See accompanying notes to financial statements.
7
DESTINATION SELECT EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2008
================================================================================
ASSETS
Investments in securities:
At acquisition cost $ 851,323
============
At value $ 934,123
Dividends receivable 1,690
Receivable from Advisor (Note 4) 13,423
Other assets 5,685
------------
Total assets 954,921
------------
LIABILITIES
Accrued liabilities:
Payable for investment securities purchased 23,121
Payable to Administrator (Note 4) 5,510
Other accrued expenses and liabilities 3,547
------------
Total liabilities 32,178
------------
NET ASSETS $ 922,743
============
NET ASSETS CONSIST OF:
Paid-in capital $ 881,831
Accumulated undistributed net investment income 4,941
Accumulated net realized losses
from security transactions (46,829)
Net unrealized appreciation on investments 82,800
------------
NET ASSETS $ 922,743
============
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) 83,044
============
Net asset value, offering price and
redemption price per share (a) $ 11.11
============
(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.
8
DESTINATION SELECT EQUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2008
================================================================================
INVESTMENT INCOME
Dividend income $ 19,282
Foreign withholding taxes on dividends (199)
------------
Total investment income 19,083
------------
EXPENSES
Fund accounting fees (Note 4) 30,089
Professional fees 27,154
Administration fees (Note 4) 24,000
Transfer agent fees (Note 4) 17,500
Trustees' fees and expenses (Note 4) 15,511
Compliance fees (Note 4) 12,000
Insurance expense 7,577
Investment advisory fees (Note 4) 6,671
Custody and bank service fees 5,920
Postage and supplies 4,318
Registration fees 1,633
Other expenses 6,406
------------
Total expenses 158,779
Less fees waived and expenses reimbursed
by the Advisor (Note 4) (147,661)
------------
Net expenses 11,118
------------
NET INVESTMENT INCOME 7,965
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized losses from security transactions (46,396)
Net change in unrealized appreciation/
depreciation on investments 32,498
------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS (13,898)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (5,933)
============
See accompanying notes to financial statements.
9
DESTINATION SELECT EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31,
2008 2007
- --------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 7,965 $ 5,887
Net realized gains (losses) from security
transactions (46,396) 24,510
Net change in unrealized
appreciation/depreciation on
investments 32,498 53,830
------------ ------------
Net increase (decrease) in net assets from
operations (5,933) 84,227
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (6,828) (3,750)
From net realized gains on investments (24,947) (3,168)
------------ ------------
Decrease in net assets from distributions to
shareholders (31,775) (6,918)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 82,619 265,428
Net asset value of shares issued in
reinvestment of distributions
to shareholders 31,775 6,918
Payments for shares redeemed (15,172) (565)
------------ ------------
Net increase in net assets from capital share
transactions 99,222 271,781
------------ ------------
TOTAL INCREASE IN NET ASSETS 61,514 349,090
NET ASSETS
Beginning of year 861,229 512,139
------------ ------------
End of year $ 922,743 $ 861,229
============ ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME $ 4,941 $ 3,810
============ ============
CAPITAL SHARE ACTIVITY
Shares sold 7,380 23,442
Shares reinvested 2,725 614
Shares redeemed (1,299) (50)
------------ ------------
Net increase in shares outstanding 8,806 24,006
Shares outstanding at beginning of year 74,238 50,232
------------ ------------
Shares outstanding at end of year 83,044 74,238
============ ============
See accompanying notes to financial statements.
10
DESTINATION SELECT EQUITY FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
==========================================================================================================
YEAR ENDED YEAR ENDED PERIOD ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
2008 2007 2006 (a)
- ----------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 11.60 $ 10.20 $ 10.00
---------- ---------- ----------
Income (loss) from investment operations:
Net investment income 0.10 0.09 0.03
Net realized and unrealized gains (losses) on investments (0.16) 1.44 0.17
---------- ---------- ----------
Total from investment operations (0.06) 1.53 0.20
---------- ---------- ----------
Less distributions:
From net investment income (0.09) (0.07) --
From net realized gains on security transactions (0.34) (0.06) --
---------- ---------- ----------
Total distributions (0.43) (0.13) --
---------- ---------- ----------
Net asset value at end of period $ 11.11 $ 11.60 $ 10.20
========== ========== ==========
Total return (b) (0.72%) 14.97% 2.00%(c)
========== ========== ==========
Net assets at the end of period $ 922,743 $ 861,229 $ 512,139
========== ========== ==========
RATIOS/SUPPLEMENTARY DATA:
Ratio of gross expenses to average net assets 17.87% 22.23% 42.55%(e)
Ratio of net expenses to average net assets (d) 1.25% 1.25% 1.24%(e)
Ratio of net investment income to average net assets (d) 0.90% 0.81% 0.80%(e)
Portfolio turnover rate 17% 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.
11
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2008
================================================================================
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 years ended August 31, 2008 and 2007, 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, 2008 was $24,969 of ordinary income and $6,806 of
long-term capital gains. The tax character of distributions paid during the year
ended August 31, 2007 was $6,918 of ordinary income. Dividends and distributions
to shareholders are recorded on the 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, 2008:
Tax cost of portfolio investments $ 851,323
============
Gross unrealized appreciation $ 137,714
Gross unrealized depreciation (54,914)
------------
Net unrealized appreciation $ 82,800
Undistributed ordinary income 4,941
Post-October losses (46,764)
Capital loss carryforward (65)
------------
Distributable earnings $ 40,912
============
As of August 31, 2008, the Fund had a capital loss carryforward of $65 which
expires August 31, 2016. In addition, the Fund had net realized losses of
$46,764 during the period November 1, 2007 through August 31, 2008, which are
treated for federal income tax purposes as arising during the Fund's tax year
ending August 31, 2009. These capital loss carryforwards and "post-October"
losses may be utilized in future years to offset net realized capital gains, if
any, prior to distributing such gains to shareholders.
The Financial Accounting Standards Board's ("FASB") Interpretation No. 48 ("FIN
48") "Accounting for Uncertainty in Income Taxes" 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.
Based on management's analysis, the adoption of FIN 48 does not have a material
impact on these financial statements. The statute of limitations on the Fund's
tax returns remains open for the tax years ended August 31, 2006 and August 31,
2007.
13
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
3. INVESTMENT TRANSACTIONS
During the year ended August 31, 2008, cost of purchases and proceeds from sales
of investment securities, other than short-term investments, was $160,662 and
$140,278, 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 its advisory fees and 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, 2017. During the year ended August 31, 2008, the
Advisor waived its entire investment advisory fee of $6,671 and reimbursed other
Fund expenses totaling $140,990.
The Advisor has concurrently entered into an agreement with the Fund which
permits the Advisor to recover fee reductions and expense reimbursements on
behalf of the Fund, but only for a period of three years after such reduction 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, 2008, the Advisor may in
the future recoup fee reductions and expense reimbursements totaling $386,695.
The Advisor may recoup a portion of this amount no later than the dates as
stated below:
August 31, 2009 August 31, 2010 August 31, 2011
--------------- --------------- ---------------
$86,257 $152,777 $147,661
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.
TRUSTEE FEES
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.
14
DESTINATION SELECT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
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. 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 purchases and redemptions 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 a fee payable monthly at an annual rate of $24 per account, provided,
however, that the minimum fee is $1,500 per month. Effective August 1, 2008, the
monthly minimum was reduced to $1,000 if the Fund has fewer than 100 accounts.
In addition, the Fund pays out-of-pocket expenses, including but not limited to,
postage and supplies.
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.
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. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, the FASB 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, 2008, the Fund does not believe
the adoption of SFAS No. 157 will impact the amounts reported in the financial
statements; however, additional disclosures will 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.
15
[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, 2008, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the two years in the period 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 audits 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, 2008 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
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, 2008, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the two years in the period 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 23, 2008
16
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 mutual 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 most
recent semi-annual period (March 1, 2008) and held until the end of the period
(August 31, 2008).
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.
17
DESTINATION SELECT EQUITY FUND
ABOUT YOUR FUND'S EXPENSES (UNAUDITED) (CONTINUED)
================================================================================
- ------------------------------------------------------------------------------------
Beginning Ending
Account Value Account Value Expenses Paid
March 1, 2008 August 31, 2008 During Period*
- ------------------------------------------------------------------------------------
Based on Actual Fund Return $1,000.00 $1,018.30 $6.36
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, 2008. For the year ended
August 31, 2008, 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 $24,969 as
taxed at a maximum rate of 15%, as well as $6,806 as long-term gain
distributions. Complete information was computed and reported in conjunction
with your 2007 Form 1099-DIV.
18
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 COMPLEX
LENGTH OF POSITION(S) PAST 5 YEARS AND DIRECTORSHIPS OF OVERSEEN BY
NAME, ADDRESS AND AGE TIME SERVED HELD WITH 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
- ----------------------------------------------------------------------------------------------------------------------------------
19
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (UNAUDITED) (CONTINUED)
================================================================================
NUMBER OF
PORTFOLIOS IN
PRINCIPAL OCCUPATION(S) DURING FUND COMPLEX
LENGTH OF POSITION(S) PAST 5 YEARS AND DIRECTORSHIPS OF OVERSEEN BY
NAME, ADDRESS AND AGE TIME SERVED HELD WITH 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
- ----------------------------------------------------------------------------------------------------------------------------------
20
DESTINATION SELECT EQUITY FUND
TRUSTEES AND OFFICERS (UNAUDITED) (CONTINUED)
================================================================================
PRINCIPAL OCCUPATION(S) DURING
LENGTH OF POSITION(S) PAST 5 YEARS AND DIRECTORSHIPS OF
NAME, ADDRESS AND AGE TIME SERVED HELD WITH TRUST PUBLIC COMPANIES
- -------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS (CONTINUED):
- -------------------------------------------------------------------------------------------------------------------
Alexis B. Stice Since Chief Compliance Chief Compliance Officer of YCMNET
Three Ygnacio Center June 2008 Officer Advisors and Destination Capital
2001 North Main Street, Suite 270 Management, Inc. Operations
Walnut Creek, CA 94596 Manager of Net Equity Associates
Year of birth: 1970 (registered investment adviser)
from June 2001-September 2004.
From September 2004 through the
date of her hiring at YCMNET Advisors
(June 2008) she was voluntarily out
of the work place.
- -------------------------------------------------------------------------------------------------------------------
* 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.
21
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, 2008, at which a majority of Trustees were present,
including all 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.
In this regard, the Independent Trustees reviewed the services being
provided to the Fund by the Adviser. They discussed the responsibilities
of the Adviser under the 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 by
reviewing the Adviser's Form ADV and the biographies included in the Board
materials. 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. In this regard,
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. It was noted by the Independent Trustees that the Fund
has performed better than 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 during 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 COSTS OF THE SERVICES TO BE PROVIDED AND PROFITS TO BE REALIZED BY THE
ADVISER AND ITS AFFILIATES FROM THE RELATIONSHIP WITH THE FUND. In this
regard, 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., an affiliate of the Adviser, and reviewed the financial
condition of YCMNET. Next, the Independent Trustees reviewed the rate of
the advisory fee (0.75%) paid by the Fund under the Advisory Agreement and
compared it to the average advisory fee ratios for all
22
DESTINATION SELECT EQUITY FUND
APPROVAL OF INVESTMENT ADVISORY AGREEMENT (UNAUDITED)
(CONTINUED)
================================================================================
Large Cap Blend funds (0.52%), Large Cap Blend funds with under $100
million in assets (0.62%), and Large Cap Blend funds with under $50
million in assets (0.65%), according to statistics derived from
Morningstar. They also compared the operating expense ratio of the Fund,
after fee waivers and expense reductions (1.25%). with the average
operating expense ratio for all Large Cap Blend funds (1.11%), Large Cap
Blend funds under $100 million in assets (1.28%), and Large Cap Blend
funds under $50 million in assets (1.33%), according to statistics derived
from Morningstar. The Independent Trustees noted that the Fund's average
operating expense ratio was less than the averages for Large Cap Blend
funds under $100 million and Large Cap Blend funds under $50 million. The
Independent Trustees next 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, 2008, has reimbursed the Fund for other operating expenses in
excess of $300,000. 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. After 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. In this regard, 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
Advisory Agreement.
The Independent Trustees concluded that, based upon the Fund's performance
record and other factors, they believe that the Adviser has provided quality
advisory services to the Fund. The Independent Trustees indicated 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
Advisory Agreement. The Independent Trustees also noted that the Fund's average
operating expense ratio was less than the average for Large Cap Blend funds, as
categorized by Morningstar, with less than $100 million in assets.
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.
23
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 $12,500 and $10,500 with
respect to the registrant's fiscal years ended August 31, 2008 and
2007, 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, 2008 and 2007,
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, 2008 and 2007,
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
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By (Signature and Title)* /s/ Michael A. Yoshikami
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Michael A. Yoshikami, President
Date November 6, 2008
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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
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Michael A. Yoshikami, President
Date November 6, 2008
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By (Signature and Title)* /s/ Mark J. Seger
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Mark J. Seger, Treasurer
Date November 6, 2008
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* Print the name and title of each signing officer under his or her signature.