September 30th, 2010 Letter to Shareholders

Dear Shareholder:

A common perception of an entrepreneur is embodied in a Henry Ford or Bill Gates or Warren Buffet; wealthy, successful and famous. But out of millions of entrepreneurs, there remains only a small handful like these three notables. Did you know that over 90% of new business start-ups ultimately fail (though not immediately)? New Census data indicates that of new firms, 69% survived at least two years and 51% survived five years or more.

Perhaps a more accurate image of an entrepreneur is a person with a business or social enterprise idea, and not enough capital to make it work. Most new entrepreneurial enterprises fail because they don’t have enough initial capital to get the business operating with a positive cash flow. Yet, thousands try every year, thank God; I don’t think we could make it economically without them.

Entrepreneurs come in all sizes and shapes. They look like folks doing business in manufacturing, starting cell phone services, creating and selling native arts and crafts in third world countries, people working as volunteers (social enterprise entrepreneurs), doctors, lawyers, and even Indian chiefs.

There are entrepreneurs everywhere! They have abounded in the United States for the approximate 300 years of its history, but they can also be found in abundance even in Russia and in China. Where are our entrepreneurs when we need them? Why haven’t they come marching in from all directions to the stirring beat of fife and drum, liberating us from this discouraging recession we are struggling with? What is different this time?

The big difference, I am afraid, is the political climate. For the first time in many years, perhaps since the 1930’s, the entrepreneur is perceived as the enemy. They belong to, or aspire to belong to that “rich class” of people who are going to be singled out to pay for the excessive spending by both parties. The entrepreneur doesn’t know what medical insurance is going to cost, and he or she has very little handle on where their total tax bill will top out. In short, people are frightened because of all of the uncertainty that exists, and frightened men and women don’t make capital investments.

Meanwhile, at our shop we are looking to the future. Dupree is busy registering a new bond fund, the Taxable Municipal Bond Series. This fund will invest in bonds issued by states and their political subdivisions that pay interest which is not tax-free. There have always been taxable municipal bonds. Recently, the Federal government has offered a Build America Bond program that assists these issuers in paying debt service providing they voluntarily forgo tax-exemption of their interest payments. There are now enough of these taxable bonds available in the market to allow us to operate a fund and have ample choices of highly rated bonds. We think certain fixed income investors may find this interesting. We will, of course, continue to sell our single state tax-exempt family of funds as always.

Since this is a letter about entrepreneurs, I have a U S Navy story about how entrepreneurship works in the service. Every ship’s commanding officer (the Captain) has a stand alone responsibility for his ship. In the performance of his duties the Captain is granted a lot of leeway, but he bears full responsibility for the actions of his crew and ship.

When I graduated from college my ship was in dry dock in Charleston, South Carolina being refitted to operate in Korea. In 1952, one of the major armaments on the Fletcher Class Destroyer was its arsenal of five torpedo tubes amidships which could fire on submarines as well as enemy ships and port facilities. To use these torpedoes effectively the navy had equipped newer Destroyers with two torpedo directors, one on each side of the bridge. These were sort of a gun sight computer box filled with metal cams and gears designed to solve the calculus problem of “lead” on a moving target. They weighed about a half ton each. Due to an error at the Bureau of Ships, our ship as not scheduled to receive torpedo directors. Since the other three ships in our division already had installed the Captain decided to do something about it.

When I arrived in Charleston I was sent straight to the Captain’s office to meet him. He wasted no time in notifying me that I was the new torpedo officer. He gave me the keys to the torpedo fuel locker. The fuel was 180 proof grain alcohol. The Captain said he had bartered a two gallon can of this alcohol for two torpedo directors. All I had to do was go down to the torpedo alcohol locker and get a two gallon can and take it into Charleston to the address of the Shipyard Superintendent and deliver it. I did so immediately, and as a bonus, got an invitation to the 4^th of July party where it would be consumed.

At 6:00 AM the next morning two giant cranes came trundling down our pier with a torpedo director swinging from each one. About twenty technicians came with the cranes. The new directors were installed and the specialists had disappeared by noon.

I often think about that story. The Captain had taken me into his confidence and together we took a big risk. He mentored me throughout the eighteen months I served under him. He trusted me to be his navigator; made me negotiate with navy divers to get back an anchor lost on my watch, chewed me out when I got too smart for my britches and all in all, made me grow up to be a man. Who cares if my first task was to help lighten the navy’s inventory of torpedo directors? We needed them worse than the Bureau of Ships.

Sincerely,

Thomas P. Dupree, President

P.S. The annual Proxy Statement has been mailed to you. Please sign and return it to ensure that we have a quorum at the annual Shareholder Meeting on October 26, 2010.

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