September 30, 2011 Letter to Shareholders

September 30, 2011

Dear Shareholder:

Operation Twist:

The Federal Reserve Board recently announced that it will extend the average maturity of its securities holdings by selling $400 billion in short term debt to fund the purchase of $400 billion in long term debt. Between now and June 2012, the Fed will be selling Treasuries with maturities of less than 3 years and buying Treasuries with maturities of 6 to 30 years. The Fed will also reinvest maturing agency bonds and mortgage assets in agency-backed mortgage debt. The aim is to lower interest rates charged on home mortgages, car loans, and other big-ticket items. The hope is that lower interest rates will spur more consumer borrowing and spending and greater business investment in order to kick-start a faltering economy.

A similar move was made by the Fed in 1961 around the time Chubby Checker’s “The Twist” was topping Billboard’s list of most popular singles (hence “Operation Twist”). Economists estimate that this monetary policy tool was successful in lowering long-term Treasury yields by approximately 15 basis points (0.15 percent) back in the early 1960s. Operation Twist is less aggressive than the Fed’s previous two rounds of quantitative easing but the goal is similar--to reduce the supply of long-term bonds, thereby decreasing long-term yields. Yields on 30-year Treasury bonds dropped approximately 20 basis points on the day of the Fed’s announcement, but since then have nudged back up closer to pre-announcement levels. It is unclear at the present time whether the new Operation Twist will work as intended. However, given the high levels of unemployment, a still-soft housing market, and with consumers still busy paying down debt, it seems likely that its effect on the economy will be modest.

Municipal Market Update:

Municipals bonds turned in a strong performance during the third quarter. The strong rally in Treasuries pulled municipal bond yields lower (prices up). Municipal bond yields were also pulled lower as demand for municipal bonds was strong during the quarter. The Fed indicated in mid-August after its meeting that it would hold the fed funds rate at exceptionally low levels (0 to ¼ percent)at least through mid-2013. This is the first time ever that the Fed has specified an actual time frame for keeping short-term rates unchanged. The expectation of continued low rates and a lighter than average supply of municipal bonds pushed yields lower and prices higher during the quarter. Lower yields will likely lead to an increase in the supply of bonds during the final quarter of this year as issuers of municipal bonds take advantage of some of the lowest borrowing costs on record. Defaults rates on municipal bonds this year continue to run well below historical averages and the credit quality of all of our investment portfolios continues to be very strong.

A word of caution may be in order. The share prices of all of our funds are at or near their 52-week highs. While this undoubtedly will make you feel good when you look at your quarter-end account balances, we would be remiss if we didn’t remind you that at some point these share prices may revert to more normal levels. Elevated share prices can lead to a sense of “false prosperity” which may be counterproductive for investors. Don’t get me wrong--I’m not saying that the prices of our funds are

getting ready to fall next week or even in the near future. With the current state of the economy, stable inflation, and low interest rates, bonds will likely continue to perform well for some time--maybe even two or three years. But, at some point in the future, you can and should expect to see the share prices of our funds come down to more realistic levels in keeping with their historical averages.

The primary objective of all of our funds is to provide a high level of income. If you’re lucky enough to obtain some capital appreciation along the way, consider it icing on the cake. However, don’t lose sight of the fact that it is the dividends that you earn that are the real prize.

The Euro Zone Sovereign Debt Crisis:

The sovereign debt crisis currently engulfing the euro zone countries is proving difficult to resolve and is weighing heavily on equity and fixed-income markets around the world. Much attention has been focused on the potential for a default by Greece on its public debt but this is only a small part of the story. Weakening growth prospects for the euro zone countries has led to sovereign credit rating downgrades (S&P recently lowered Italy’s credit rating) which makes it more difficult for those countries to finance their debts. This also puts added pressure on a banking sector that is already under significant stress. Slow economic growth or a sharp economic contraction raises the possibility that deflation rather than inflation could become a threat for euro zone countries. The European Central Bank has raised interest rates twice this year (its benchmark rate is now 1.5 percent) but may find that it has to reverse course and cut rates to address the deteriorating situation.

In the meantime, the most pressing task facing European leaders is getting all 17 euro zone parliaments to approve the overhaul of the European Financial Stability Facility (the euro zone equivalent of our TARP) in a timely manner and making sure that it is adequately funded. That may be easier said than done. If the euro zone rescue fund is approved and fully funded, the focus can then shift to a discussion about how to restructure Greece’s debts before they run out of money in mid-October. The fear is that these problems could spread around the world and tip the global economy back into a recession. More than just the future of the euro zone is at stake here, so stay tuned for further developments.

Annual Shareholder Meeting:

It’s that time of year again! Our annual shareholder meeting will be held on Tuesday, October 18^th at 10:00 a.m. at the Hilton Lexington Downtown Hotel. A Proxy Statement was mailed to you on or about September 8, 2011. If you haven’t done so already, please vote and return your Proxy as soon as possible so that we can ensure that we have a quorum at the meeting. We are utilizing the services of an outside Proxy vendor this year so your signed Proxy should be returned directly to Proxy Services in the postage paid envelope provided. I look forward to seeing many of you at the shareholder meeting.

As always, we appreciate your business.

Sincerely,

Allen E. Grimes, III Executive Vice President

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