June 8, 1998

With the stock market near all time highs, now may be a good time to review recent events and put future expectations in perspective. Likewise, it may also be beneficial to review why I believe Suncoast Equity Management’s Disciplined Investment System (SEM-DIS) will serve us well regardless of overall market conditions.

Investing in the common stocks of high quality businesses over the long run will be a very worthwhile experience. And if we focus on investing for the long term and utilize our discipline for reaching that objective, we will be better able to deal with short term fluctuations.

SEM-DIS is designed to reduce relative risk. We invest in companies that have the financial strength to weather, better than most, adverse economic conditions or a general decline in the stock market. As described in our brochure, we invest in businesses that:

1. Employ low to moderate debt
2. Earn above average returns on capital
3. Generate excess free cash flow

These three key characteristics combined with a successful track record of operating results are at the cornerstone of the SEM-DIS and contribute to financial strength and consequently less risk. We do not believe that risk is the price volatility that common stocks undergo in the short run.

Where we have come from

Stocks in general have experienced significant price appreciation, rising at an average annual rate of 33.7%, as measured by the S&P 500 during the last three and one-quarter years for the period ended March 31, 1998. During the last ten years the average rate of 18.9% is well above the long term average of about 11%.

There have been legitimate reasons for this performance. During the last three plus years we have enjoyed an almost perfect economic environment. Inflation has been nonexistent and interest rates have declined. As a result U.S. corporations, both manufacturers and service providers, have been growing their profits and earning very good returns on capital. U.S. companies have recently earned an average return on capital in the 15% - 20% range, far exceeding the long term average of 10% - 12%.

What has happened recently

So far, economic problems in Asia have slowed economic growth a bit in the U.S. Lower priced goods imported from Asia have helped to keep a lid on inflation in the U.S. These developments may have also been responsible for lower interest rates this year in the U.S. and the corresponding rise in stock prices so far in 1998 (lower interest rates are generally bullish for stock prices).

In another part of the world, Russia is also facing a significant economic and structural instability. The events in India and Pakistan are unsettling. Peace and stability in all corners of the globe is important since most U.S. corporations engage in international business. There is no way to predict what will happen in each of these areas of the world but improvements in each situation would be beneficial.

Where we are going

It is likely that stock market returns could begin to gravitate towards their long-term average of 11%, with the possibility of hitting a few bumps along the way. However, it is my experience that investors who try to "time" their investment decisions by switching completely out of stocks into other assets and then switching back are likely to earn unsatisfactory returns over the long run.

We must be very selective with our investments and remember that we are investing for the long term. We focus on business results, not daily changes in the market price.

SEM currently maintains a portfolio of high quality companies each with outstanding prospects for future growth. Our firm is driven to build a very personal and high quality relationship with you to help you preserve and grow your wealth. Now is a good time to review your equity investments and to contact SEM to let us help you decide if the SEM-DIS will assist you in attaining your investment goals.

Sincerely,

Donald R. Jowdy
President