February 24, 2003

Suncoast Equity Management (SEM) is celebrating its five year anniversary. If you invested in a SEM managed portfolio since inception the results would have been far superior to both the market averages and most other money managers.

The growth since inception of a $1 million portfolio has become:

• SEM: $1,455,000
• S&P 500: $ 969,500

>Effton/PSN's new rankings have been released and SEM earned a top 2% ranking since inception versus a collection of over 2,500 money managers in the Effron/PSN's entire equity manager database. You can view this new report at www.SuncoastEquity.com.

As we have discussed in prior letters, no one has the ability to predict what the stock market will precisely deliver to investors in the short-run. Over the very long-term investing in equities has delivered a satisfying annual average rate of return of 10% and we see no reason, including current geopolitical instabilities that this should change in a meaningful way.

We would like to share why we believe SEM's excellent relative results should continue into the future and consequently why you should consider becoming a client. Let's revisit SEM's investment objective:

SEM's investment objective for its clients is to consistently produce returns in excess of the market and most other managers while incurring less risk.

Let's break this down into two parts. First, less risk. One strategy we use to lower risk is to own only those companies that have strong balance sheets and moderate to low debt. Companies with this characteristic have several advantages. Foremost, they can weather an economic storm more easily if they have excess cash and little to no debt. During tough times they are also better equipped to take advantage of opportunities such as purchasing assets of competitors or complementary companies at distressed prices.

Another opportunity for our companies arises during a general stock market decline, which is the opportunity to repurchase their own shares at a discount. Repurchases reduce the number of shares outstanding and increase the profit per share for existing owners.

Part two is earning investment returns above the results of the market and most other money managers. We have discussed in the past that our greatest advantage is understanding that when you invest in a stock. you have in reality, bought into the opportunity to share in the profits of that business for as long as you own your shares. Our observation is that most money managers and individuals alike spend their time trying to predict the daily, weekly, or next months' stock prices with no consideration towards the benefits of long-term ownership. Portfolio stock turnover statistics support that most investment professionals are not long term thinkers, as on average their turnover is in excess of 100% per year as compared to SEMs turnover of 17.6% in 2002.

Earning a portfolio return in excess of the market over time begins with understanding the definition of an above average company. We noted earlier that the stock market has earned on average 10% over the long run. Though explanations are scarce (we never seen it explained in the Wall Street Journal), SEM believes the catalyst for this level of return is that the average business in the United States earns about 1 0% return on capital. The stock market advances over long periods of time in lock-step with what businesses earn. So, what is return on capital and why is it 10%? Return on capital is the net profits in a single year divided into the capital employed by a business to earn those profits. Capital can be contributed by owners or borrowed from a bank. For example, three partners putting in $1 million each to start a business and also borrowing $1 million from a bank has total capital of $4 million. If we had started such a business with $4 million in capital and it earned each year $400,000 (10%) it would represent the profile of an average business in the U.S.

For the most part, two factors explain why the average business in the U.S. earns a 10% return on capital. First, some businesses require significantly more capital to produce their product or service. For example, starting, operating and maintaining an airline company is capital intensive due to the need for large equipment purchases versus the more limited capital it takes to purchase the machinery to manufacture the syrup Coca-Cola makes for their product. Second, competition in the United States causes inordinate returns in a business to be competed down to an industry/market average. Free enterprise in the U.S. allows any person to attempt to compete against another successful enterprise. For example Caribou Coffee tries to compete against Starbucks, whereby, over time the potential for Starbucks to consistently earn greater profits on the capital invested in their stores gets reduced through market share attacks by Caribou which reduce Starbucks' returns through price competition, better service, superior product, etc.

Without digging too deeply into other factors that influence return on capital, it is important for you to understand that SEM's Disciplined Investment System (SEM-DIS) focuses on the qualitative analysis and selection of a small group of high return on capital businesses. Whereas, the average return on capital for the companies representing the S&P 50() is 11% today, the SEM portfolio of companies has an average return on capital of 18%. That difference combined with financially strong balance sheets, has yielded and should continue to produce above average returns for our clients over the long run.

Good values exist today and they have set the stage for better returns that could lie ahead over the next five to ten years. The U.S. economy is in low gear and fighting towards a positive direction. The obvious near term uncertainty is global stability and we b hope for reasonable resolutions. We believe that the SEM-DIS portfolio will continue to prove its value and we invite you to call us. Thank you for your continued interest.

Sincerely,

Donald R. Jowdy
President