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: 811-8059
Cohen & Steers Special Equity Fund, Inc.
(Exact name of registrant as specified in charter)
757 Third Avenue, New York, NY 10017
(Address of principal executive offices) (Zip code)
Robert H. Steers
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 832-3232
Date of fiscal year end: December 31
Date of reporting period: December 31, 2002
Item 1. Reports to Stockholders.
The registrant's annual report to shareholders, for the period ended December
31, 2002, is hereby included.
Item 9. Controls and Procedures.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 10. Exhibits.
(b)(1) Certification, dated as of February 26, 2003, of Robert H. Steers,
principal executive officer of the registrant.
(b)(2) Certification, dated as of February 26, 2003, of Martin Cohen, principal
financial officer of the registrant.
(b)(3) Certification, dated as of February 26, 2003, of Robert H. Steers, chief
executive officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b)(4) Certification, dated as of February 26, 2003, of Martin Cohen, chief
financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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.
COHEN & STEERS SPECIAL EQUITY FUND, INC.
By: /s/ Robert H. Steers, Chairman
Date: February 26, 2003
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: /s/ Robert H. Steers, Chairman, Secretary and principal executive officer
Date: February 26, 2003
By: /s/ Martin Cohen, President, Treasurer and principal financial officer
Date: February 26, 2003
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
February 7, 2003
To Our Shareholders:
We are pleased to submit to you our annual report for Cohen & Steers Special
Equity Fund for the quarter and year ended December 31, 2002. On that date the
net asset value of the fund was $27.50 per share. In addition, a semiannual
dividend of $0.61 per share was declared for shareholders of record on
December 19, 2002 and was paid on December 20, 2002.
INVESTMENT STRATEGY UPDATE
We would like to share with you a progress report on the changes we
implemented last year to the fund's investment strategy. Most importantly, we
are pleased with the bottom line result -- as reviewed in detail below, the fund
had a total return of 7.7% in 2002 and outperformed its benchmark index by 3.9%.
As we outlined in last year's annual report, we believed that the maturation of
both the real estate industry and the public market for real estate companies
dictated a highly focused portfolio management strategy seeking to capitalize on
fundamental and valuation discrepancies among property sectors, geographic
regions, and individual companies. To help implement the strategy we are
utilizing a proprietary valuation/folio construction model that focuses on real
estate net asset value and cash flow growth. As measured by the actual results
of the fund (and the theoretical results of the model), the model is delivering
what we expected.
We are convinced that the fund's strategy is right for the environment.
Return expectations have declined considerably in the capital markets. In that
environment modest share price changes for REITs, which derive a significant
percentage of their total return from current income, can be meaningful. The
model helps us identify those changes. While return expectations have declined,
as you will see in the Investment Review below, the spreads in fundamentals,
performance and valuations among REIT property sectors have been as wide as we
have ever seen. These factors support the opportunity for a focused, nimble
strategy that can take advantage of these fluctuations.
How is the fund positioned among the universe of over 70 real estate funds?
Simply stated: a core REIT fund with a higher return/risk profile. Our
objectives are to manage a concentrated portfolio, be aggressive in taking
advantage of pricing anomalies among sectors and companies, constrain risk by
adhering to a defined universe of REITs (and companies that share their real
estate and correlation characteristics), and outperform the REIT indexes.
Differentiating the fund are the managers that execute the strategy, the
valuation model that guides the strategy, and the fund's tax efficiency
considering its capital loss carryforward.
Demonstrating support for the future, the fund's investment adviser has
extended through December 31, 2003 its agreement to waive its fee and/or
reimburse the fund for expenses incurred in order to limit the fund's expense
ratio to 1.50% of the fund's net assets.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
INVESTMENT REVIEW
In the fourth quarter of 2002, Cohen & Steers Special Equity Fund had a
total return of 1.6%, which compared to the NAREIT Equity REIT Index's(a) total
return of 0.4%. For the full year, the fund had a total return of 7.7%, which
compared to NAREIT's return of 3.8%. For the fourth year in a row the fund
outperformed the broad stock market, as measured by the Standard & Poor's 500
Index, which had a total return of - 22.1% in 2002.
For the third year in a row, REITs produced positive absolute returns in a
financial market environment that most equity investors found both challenging
and discouraging. Stock market losses over the past three years reached historic
proportions as expectations for stronger economic growth and, more importantly,
corporate profit growth dimmed continuously throughout the year.
The best performing REIT sectors were those that experienced the highest
earnings growth. Reflecting the strength of the consumer economy, regional mall
REITs had a total return of 24.6%, shopping centers were up 17.7%, and the
relatively healthy industrial sector rose 17.3%. The worst performers were the
office and apartment sectors, which returned - 6.3% and - 6.2% respectively.
For the second year in a row small capitalization REITs outdistanced larger
companies by roughly 9% to 2%, a phenomenon that in our opinion was more the
result of declining interest rates than superior fundamentals.
Despite our overweight in the office sector, our stock selection helped us
to add value in that sector overall. Specifically, the shares of Brookfield
Properties, which had a 19.9% total return, benefited as investors gained
confidence that its strong growth profile would not be derailed by the company's
New York office properties following 9/11. In addition, Brookfield benefited
from the spin-off of its homebuilding business subsequent to year end. We fully
expect that our office position will be very rewarding in the coming year. Our
overweight in the regional mall sector also helped our performance. CBL &
Associates, which had a 35.0% total return, benefited from its acquisition
program, the appreciation in regional mall values, and its 23.0% dividend growth
over the past year. Rounding out the major property sectors, our significant
underweight in the apartment sector helped our performance during the year,
while our underweight in the shopping center sector detracted from performance.
Other standout holdings were ProLogis (24.0%), the largest industrial property
owner, and Alexander's (13.4%), which is almost a year away from completing its
$650 million headquarters for Bloomberg L.P. in Manhattan.
While REIT share prices escaped the throes of the bear market for the year
as a whole, their fundamentals did not. By year end, prices started catching up
with earnings prospects. In the first half of the year, REITs had a 13.5% total
return. By midyear, however, fears of a return to recession, a decline in
earnings expectations, and the growing threats of war shook even REIT investors'
confidence. Toward year end, these fears became justified as vacancy rates began
to rise at a significant rate. Deterioration was experienced in all sectors with
the exception of retail. Consequently, REIT prices retreated, declining by 13.4%
in the four months from July through October. The delay of a real estate and
earnings recovery until as late as 2004 dictated this correction in prices.
Throughout the second half of the year, earnings estimates for almost all REITs
decayed to the point where a modest decline in REIT industry earnings is
expected for 2003.
- -------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market capitalization weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
For the first time in 10 years, expectations of a decline in earnings also
precipitated fears of weakening dividend safety. In fact, two multifamily REITs
reduced their dividends in the fourth quarter. It is expected by many that
several more such cuts, particularly in the apartment sector, are in the offing
this year. Again, the speed with which fundamentals deteriorated for some of
these companies was alarming. At year end 2001, REIT free cash flows covered
dividends by a ratio of 1.5, whereas by year end 2002 this ratio declined to
1.3. We believe it is unlikely to go much lower. As a result, any notion of
widespread dividend cuts is totally unwarranted in our view. Despite this
cyclical downturn, REIT dividends appear to remain well covered, and we believe
that our portfolio companies are extremely well capitalized, well managed and
well positioned for a cyclical recovery.
The average REIT dividend yield of 7.05% at year end was approximately the
same as the prior year, as was the average P/E multiple, and for that matter the
absolute price level. The valuation measures that did change during the year
were the P/E spread between REITs and stocks, which narrowed, and the premium of
the yield of REITs over the 10-year Treasury, which widened to a record level.
While the year was a roller coaster of price movements, emotions and
expectations, little appears to have changed from start to finish.
INVESTMENT OUTLOOK
As has been our outlook for the past year, we believe that economic growth
will continue at a moderate pace over the coming quarters and well into 2004.
With unprecedented fiscal and monetary stimulus already in the system, recently
introduced additional stimulus, a weakening dollar and the upcoming presidential
election in 2004, this case has only grown stronger. Perhaps the largest
uncertainties that remain ahead are the war on terror (which will likely last
for a long time) and the potential war in Iraq (which, if it happens, could be
fairly short). Our sense is that these concerns are already discounted in REIT
share prices and perhaps the overall stock market as well. Nonetheless, they
will likely increase the popularity of a more conservative, income-oriented
approach to investing that emphasizes absolute returns -- an approach that we
believe will favor REITs.
Currently, we face two misperceptions in our industry. The first is that
REIT share prices are disconnected from real estate and REIT fundamentals. On
the contrary, the previously noted REIT market decline in the second half of
last year probably adequately discounted currently weak fundamentals. We believe
that REIT share prices remain connected with net asset values, which have been
buoyed by the robust private market. Looking forward, the key to investment
success in 2003 will be to accurately project the outlook for profit growth in
2004. Because real estate is an asset class that has considerable visibility,
any profit recovery will be evident well in advance. In our opinion, the key
factors are economic and job growth, and how they translate into improving
health for real estate markets. Just as there was a collapse in demand for space
in the past two years, we expect to see an improvement in demand as the economic
recovery continues to unfold. Because the supply of new space has been
relatively low for many property types, our expectation is that as the year
progresses we will see sequential improvement in occupancy rates, rental rates
and profits for just about every sector of the REIT industry. If the economy
responds as strongly as we expect, real estate fundamentals in some sectors may
potentially recover as fast as they deteriorated last year.
The second misperception is that if stocks do well in 2003, REITs will not.
History simply does not corroborate this assertion, and the diversification
benefits of REITs are extant irrespective of the stock market cycle. Whereas
many analysts have tried to predict REIT performance relative to the stock
market, we believe that this is
3
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
simply not an appropriate comparison. In addition, the stock market debacle of
the past three years has disillusioned many investors and encouraged greater
investment in more predictable asset classes, such as real estate. The continued
demand for property investments has stabilized private market values, and there
are a growing number of institutional and individual investors seeking to
increase their exposure to the real estate asset class. The proven success of
the REIT format has attracted much of this capital to the public market. Early
estimates indicate that in 2002 REITs garnered over 20% of institutional
investor real estate commitments, more than double that in 2001. Real estate
values should hold up as long as the economy grows, interest rates do not soar,
and the demand for property investment remains strong -- all of which we expect
to happen. Finally, with interest rates and total return expectations generally
very low, achieving one's investment objective primarily through income may well
attract even more investors to REITs.
The persistent strength of real estate prices has left REITs with very
limited new investment opportunities in many sectors. One result is that we have
seen a return to substantial share buybacks by many REITs. In addition, if REIT
share prices languish, we would fully expect that REITs themselves would be
targets of opportunistic investors. Indeed, toward the close of last year, Simon
Property Group, the nation's largest owner of shopping centers, launched a
hostile acquisition campaign for Taubman Centers. While the outcome of this
contest is still undecided, it is representative of the discounts from asset
value at which many public companies today are selling. We believe that for the
companies with the best quality properties, anything more than a modest discount
from NAV will invite corporate action to close that gap, thereby mitigating a
great deal of downside risk.
With respect to property weights, we expect to be right in maintaining a
strong emphasis in the office sector and that this will contribute materially to
our performance in 2003. The major office owners today are among the most
undervalued in our universe, with excellent balance sheets that afford them
significant financial flexibility. They are selling at the greatest discounts
from net asset value, even greater discounts from replacement cost, and have
high dividend yields that are adequately covered by cash flows. We are
maintaining an underweight in the apartment sector because of the persistence of
new construction despite continually declining demand. Our expectations for a
stronger economy warrant representation in both the regional mall and industrial
sectors, although high industrial company valuations could limit opportunities
in that sector.
THE TAXATION OF DIVIDENDS
The centerpiece of the Bush administration's recently announced economic
stimulus plan is to eliminate the double taxation of corporate dividends by
making them tax-free at the shareholder level. It is a proposal that, depending
on how it is adopted, could have wide ranging implications for the financial
markets and corporate dividend policies. Although details have not yet been
formulated, it is generally believed that REIT dividends would not be eligible
for this tax-exempt status because REITs do not pay taxes. It is also generally
believed that if REIT dividends remain subject to taxation, REITs would be
somewhat less tax-advantaged than they have been historically with respect to
some parts of the investor universe.
Without knowing the final details (such as whether there will be any
limitations on this exclusion), which indeed we may not know until a bill is
signed into law, it is very difficult to draw any firm conclusions. However,
there are a few points worth making. First, this provision would not remove any
of the intrinsic advantages that REITs currently enjoy -- it essentially leaves
them unchanged. Second is that the majority of shareholders at large,
4
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
including REIT shareholders, are already tax-exempt. For pension funds,
endowments and retirement accounts, as examples, the high dividends of REITs
will remain at least as attractive, if not more so, no matter what the tax
status is for other securities. And third, we believe the major determinant of
all security prices, including those of REITs, will be fundamentals. Thus,
whatever the outcome of this tax bill, real estate fundamentals will remain our
primary focus.
Sincerely,
<Table>
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
JOSEPH M. HARVEY JAMES S. CORL
JOSEPH M. HARVEY JAMES S. CORL
Portfolio Manager Portfolio Manager
</Table>
- -------------------------------------------------------------------------------
Cohen & Steers is online at COHENANDSTEERS.COM
We have enhanced both the look and features of our Web site
to give you more information about our company, our funds
and the REIT market in general.
ONLINE ACCESS is available for shareholders of Cohen &
Steers funds whose accounts are held directly with Boston
Financial Data Services, the fund's transfer agent. After
registering, you will be able to manage your entire account
online including purchasing or redeeming shares, updating
account information, and checking your portfolio holdings.
Check out our interactive Asset Allocation Tool, which
allows you to hypothetically add REITs to any portfolio to
see how they impact expected total returns and risk. Or try
the Fund Performance Calculator and see how our funds have
performed versus the S&P 500 index or Nasdaq composite. As
always, you can also get daily net asset values, fund fact
sheets, portfolio highlights, recent news articles and our
overall insights on the REIT market.
- -------------------------------------------------------------------------------
So visit us today at COHENANDSTEERS.COM
5
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
PERFORMANCE REVIEW
The investment objective of Cohen & Steers Special Equity Fund, Inc. is
maximum capital appreciation over the long term through investment in real
estate securities. The fund pursues its investment objectives by seeking
investments in a limited number of REITs and other real estate companies.
Securities in the portfolio are selected by the adviser based on the outlook for
various property types and regions of the country, as well as fundamental
research on the individual companies. Among the investment criteria applied to
individual companies are organizational structure, management depth, track
record of profitability, balance sheet strength, growth potential, and
valuation. Investments are selected for capital appreciation; current income is
incidental to the fund's investment objective.
The fund dramatically outperformed the S&P 500 in 2002, and outperformed the
NAREIT Equity REIT Index by 3.9%. While the U.S. economy struggled to recover,
REITs outperformed the broader equity markets due to their favorable relative
earnings growth, attractive relative valuations and, notably, their high
relative dividend yields. Our overweight and stock selection in the regional
mall sector helped our performance during the year, as did our underweight in
the apartment sector. The regional mall sector benefited from strong earnings
growth, which was driven by the strength in consumer spending and the demand for
space by retailers, as well as a high level of acquisition activity. Apartments
suffered from a persistent level of new construction while at the same time
demand was curtailed by job losses and single-family homebuying. Detracting from
the portfolio's performance was the underweight in the shopping center sector
and an overweight in the office sector. While the office sector was affected by
the economic slowdown and the contraction in employment and corporate space
needs, our stock selection helped us to add value in the office sector overall.
<Table>
<Caption>
Average Annual Total Returns
For period Ended Dec. 31, 2002
1 Year 5 Years Since Inception (3/8/97)
Fund 7.67% -0.20% 6.18%
NARIET Equity(a) 3.82% 3.30% 6.70%
S&P 500(a) -22.12% -0.58% 2.70%
</Table>
GROWTH OF A $10,000 INVESTMENT
SINCE INCEPTION
<Table>
<Caption>
Cohen & Steers NAREIT
Special Equity REIT S&P
Equity Fund Index 500
-------------- ------------- -----------
5/8/97(b) 10,000 10,000 10,000
6/30/97 10,917 10,794 10,824
9/30/97 13,627 12,070 11,635
12/31/97 14,169 12,281 11,969
3/31/98 13,742 12,224 13,638
6/30/98 12,827 11,663 14,088
9/30/98 9,660 10,436 12,687
12/31/98 9,375 10,131 15,389
3/31/99 8,881 9,643 16,155
6/30/99 10,386 10,615 17,294
9/30/99 9,337 9,762 16,213
12/31/99 12,072 9,663 18,626
3/31/00 11,324 9,893 19,054
6/30/00 10,467 10,935 18,549
9/30/00 11,960 11,772 18,369
12/31/00 12,480 12,210 16,933
3/31/01 12,955 12,257 14,925
6/30/01 13,587 13,607 15,798
9/30/01 12,577 13,250 13,479
12/31/01 13,028 13,910 14,921
3/31/02 14,516 15,058 14,962
6/30/02 15,355 15,812 12,957
9/30/02 13,813 14,381 10,718
12/31/02(b) 14,027 14,441 11,622
</Table>
Past performance is not predictive of future performance. Your investment return
and principal value will fluctuate. When shares are redeemed, they may be worth
more or less than the original cost. The performance information and graph do
not reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
(a) The comparative indices are not adjusted to reflect expenses or other fees
that the SEC requires to be reflected in the fund's performance. The fund's
performance assumes the reinvestment of all dividends and distributions. The
NAREIT Equity REIT Index is an unmanaged, market-capitalization-weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded REITs as a whole. Prior to January 4, 1999, the
NAREIT Equity REIT Index was published monthly. Total returns and
cumulative values of a $10,000 investment are based on April 30, 1997, the
date nearest the fund's inception date for which comparable performance data
exist. The S&P 500 Index is an unmanaged list of common stocks that is
frequently used as a general measure of stock market performance. For more
information, including charges and expenses, please read the prospectus
carefully before you invest.
(b) Commencement of operations.
6
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2002
<Table>
<Caption>
NUMBER VALUE
OF SHARES (NOTE 1)
----------- -----------
EQUITIES 99.49%
DIVERSIFIED 4.57%
Alexander's(a)....................................... 12,900 $ 832,695
-----------
HEALTH CARE 3.35%
Ventas............................................... 53,200 609,140
-----------
HOTEL 8.61%
FelCor Lodging Trust................................. 18,600 212,784
Host Marriott Corp.(a)............................... 75,200 665,520
Starwood Hotels & Resorts Worldwide.................. 29,000 688,460
-----------
1,566,764
-----------
INDUSTRIAL 3.48%
Catellus Development Corp.(a)........................ 2,900 57,565
ProLogis............................................. 22,900 575,935
-----------
633,500
-----------
OFFICE 39.14%
Arden Realty......................................... 44,900 994,535
Boston Properties.................................... 21,300 785,118
Brookfield Properties Corp.(b)....................... 61,400 1,240,280
CarrAmerica Realty Corp. ............................ 20,500 513,525
Crescent Real Estate Equities Co. ................... 60,500 1,006,720
Equity Office Properties Trust....................... 25,200 629,496
SL Green Realty Corp. ............................... 20,800 657,280
Vornado Realty Trust................................. 34,900 1,298,280
-----------
7,125,234
-----------
OFFICE/INDUSTRIAL 11.81%
Kilroy Realty Corp. ................................. 59,000 1,359,950
Reckson Associates Realty Corp. ..................... 37,500 789,375
-----------
2,149,325
-----------
</Table>
- -------------------
(a) Nonincome producing security.
(b) Brookfield Properties Corp. is a Canadian company whose common stock is
listed on the Toronto and New York Stock Exchanges. The Toronto Stock
Exchange is normally deemed the principal exchange for valuation purposes.
However, at December 31, 2002 the fund valued Brookfield Properties using
the closing price on the New York Stock Echange, pursuant to the directive
of the fund's board of directors.
See accompanying notes to financial statements.
7
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2002
<Table>
<Caption>
NUMBER VALUE
OF SHARES (NOTE 1)
----------- -----------
RESIDENTIAL 8.34%
APARTMENT 5.81%
Archstone-Smith Trust................................ 29,000 $ 682,660
AvalonBay Communities................................ 9,600 375,744
-----------
1,058,404
-----------
MANUFACTURED HOME 2.53%
Sun Communities...................................... 12,600 460,782
-----------
TOTAL RESIDENTIAL.................................... 1,519,186
-----------
SELF STORAGE 0.94%
Public Storage....................................... 5,300 171,243
-----------
SHOPPING CENTER -- REGIONAL MALL 19.25%
Macerich Co. ........................................ 19,400 596,550
Mills Corp. ......................................... 12,900 378,486
Rouse Co. ........................................... 29,000 919,300
Simon Property Group................................. 22,500 766,575
Taubman Centers...................................... 52,000 843,960
-----------
3,504,871
-----------
TOTAL INVESTMENTS (Identified cost -- $17,623,558)... 99.49% 18,111,958
OTHER ASSETS IN EXCESS OF LIABILITIES ............... 0.51% 93,477
------ -----------
NET ASSETS (Equivalent to $27.50 per share based on 661,971
shares of capital stock outstanding) .............. 100.00% $18,205,435
------- -----------
------- -----------
</Table>
See accompanying notes to financial statements.
8
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
<Table>
ASSETS:
Investments in securities, at value (Identified
cost -- $17,623,558) (Note 1)........................ $ 18,111,958
Receivable for investment securities sold............... 408,247
Dividends receivable.................................... 148,050
Other assets............................................ 632
------------
Total Assets....................................... 18,668,887
------------
LIABILITIES:
Due to custodian........................................ 349,316
Payable for professional fees........................... 50,601
Payable for fund shares redeemed........................ 30,481
Payable for reports to shareholders..................... 12,404
Payable to investment adviser........................... 4,920
Payable to administrator................................ 948
Other liabilities....................................... 14,782
------------
Total Liabilities.................................. 463,452
------------
NET ASSETS applicable to 661,971 shares of $0.001 par value
common stock outstanding (Note 5)....................... $ 18,205,435
------------
------------
NET ASSET VALUE PER SHARE:
($18,205,435 [div] 661,971 shares outstanding).......... $ 27.50
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 5)......................... $ 44,134,907
Accumulated net realized loss on investments............ (26,417,872)
Net unrealized appreciation on investments.............. 488,400
------------
$ 18,205,435
------------
------------
</Table>
See accompanying notes to financial statements.
9
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
Investment Income (Note 1):
Dividend income (net of $3,551 of foreign withholding
tax)................................................. $ 1,206,197
Interest income......................................... 8,146
-----------
Total Income....................................... 1,214,343
-----------
Expenses:
Investment advisory fees (Note 2)....................... 189,437
Professional fees....................................... 73,245
Reports to shareholders................................. 44,451
Directors' fees and expenses (Note 2)................... 38,599
Registration and filing fees............................ 25,360
Administration and transfer agent fees (Note 2)......... 24,641
Custodian fees and expenses............................. 18,147
Amortization of organization expenses (Note 1).......... 7,736
Line of credit fees and expenses (Note 6)............... 1,908
Miscellaneous........................................... 16,989
-----------
Total Expenses..................................... 440,513
-----------
Reduction of Expenses (Note 2).......................... (124,784)
-----------
Net Expenses....................................... 315,729
-----------
Net Investment Income....................................... 898,614
-----------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized gain on investments........................ 1,997,128
Net change in unrealized (depreciation) on
investments.......................................... (1,492,737)
-----------
Net realized and unrealized gain/(loss) on
investments..................................... 504,391
-----------
Net Increase in Net Assets Resulting from Operations........ $ 1,403,005
-----------
-----------
</Table>
See accompanying notes to financial statements.
10
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Change in Net Assets:
From Operations:
Net investment income.................. $ 898,614 $ 974,937
Net realized gain/(loss) on
investments......................... 1,997,128 (213,810)
Net change in unrealized (depreciation)
on investments...................... (1,492,737) 524,951
------------ -----------
Net increase in net assets
resulting from operations....... 1,403,005 1,286,078
------------ -----------
Dividends and Distributions to Shareholders
from (Note 1):
Net investment income.................. (892,484) (453,593)
Tax return of capital.................. -- (541,959)
------------ -----------
Total dividends and distributions
to shareholders................. (892,484) (995,552)
------------ -----------
Capital Stock Transactions (Note 5):
Decrease in net assets from fund share
transactions........................ (2,514,576) (13,544,186)
------------ -----------
Total decrease in net assets...... (2,004,055) (13,253,660)
Net Assets:
Beginning of year........................... 20,209,490 33,463,150
------------ -----------
End of year................................. $ 18,205,435 $20,209,490
------------ -----------
------------ -----------
</Table>
See accompanying notes to financial statements.
11
<Page>
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each year and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 2002 2001 2000 1999 1998
- -------------------------------- ------ ------ ------ ---- ----
Net asset value, beginning of year..................... $26.63 $26.60 $26.76 $20.88 $ 32.25
------ ------ ------ ------ -------
Income from investment operations:
Net investment income.............................. 1.22 1.01 1.02 0.12 0.53
Net realized and unrealized gain/(loss) on
investments...................................... 0.80 0.17 (0.16) 5.87 (11.39)
------ ------ ------ ------ -------
Total from investment operations............... 2.02 1.18 0.86 5.99 (10.86)
------ ------ ------ ------ -------
Less dividends and distributions to shareholders from:
Net investment income.............................. (1.21) (0.52) (1.02) (0.07) (0.34)
Tax return of capital.............................. -- (0.63) -- (0.04) (0.17)
------ ------ ------ ------ -------
Total dividends and distributions to
shareholders................................. (1.21) (1.15) (1.02) (0.11) (0.51)
------ ------ ------ ------ -------
Redemption fees retained by fund....................... 0.06 -- -- -- --
------ ------ ------ ------ -------
Net increase/(decrease) in net assets.................. 0.87 0.03 (0.16) 5.88 (11.37)
------ ------ ------ ------ -------
Net asset value, end of year........................... $27.50 $26.63 $26.60 $26.76 $ 20.88
------ ------ ------ ------ -------
------ ------ ------ ------ -------
====================================================================================================================
Total investment return................................ 7.67% 4.39% 3.38% 28.76% -33.83%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
====================================================================================================================
RATIOS/SUPPLEMENTAL DATA:
- -------------------------
Net assets, end of year (in millions). $ 18.2 $ 20.2 $ 33.5 $ 43.0 $ 55.2
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Ratio of expenses to average daily net assets
(before expense reduction)........................... 2.09% 1.83% 2.40% 2.21% 1.31%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Ratio of expenses to average daily net assets
(net of expense reduction)........................... 1.50% 1.83% 2.37% 1.96% 1.28%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Ratio of net investment income to average daily net
assets (before expense reduction).................... 3.68% 3.17% 3.67% 0.26% 1.68%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Ratio of net investment income to average daily net
assets (net of expense reduction).................... 4.27% 3.17% 3.70% 0.51% 1.71%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Portfolio turnover rate................................ 179.19% 107.68% 58.99% 115.43% 112.32%
------ ------ ------ ------ -------
------ ------ ------ ------ -------
</Table>
See accompanying notes to financial statements.
12
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Special Equity Fund, Inc. (the fund) was incorporated under
the laws of the State of Maryland on February 14, 1997 and is registered under
the Investment Company Act of 1940, as amended, as an open-end, nondiversified
management investment company.
The following is a summary of significant accounting policies followed by
the fund in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United States of
America. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reported period. Actual results could differ from those
estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by Cohen & Steers
Capital Management, Inc. to be over-the-counter, but excluding securities
admitted to trading on the Nasdaq national list, are valued at the mean of the
current bid and asked prices as reported by Nasdaq, the National Quotation
Bureau, or such other comparable sources as the board of directors deems
appropriate to reflect their fair market value. Where securities are traded on
more than one exchange and also over-the-counter, the securities will generally
be valued using the quotations the board of directors believes reflect most
closely the value of such securities.
Unrealized gains and losses on securities which result from changes in
foreign exchange rates, as well as changes in market prices of securities, are
included in unrealized appreciation/(depreciation) on investments.
Short-term debt securities, which have a maturity value of 60 days or less,
are valued at amortized cost, which approximates value.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date.
13
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid semiannually. Distributions to shareholders are
recorded on the ex-dividend date. Dividends are automatically reinvested in full
and fractional shares of the fund based on the net asset value per share at the
close of business on the ex-dividend date unless the shareholder has elected to
have them paid in cash.
A portion of the fund's dividend may consist of amounts in excess of net
investment income derived from nontaxable components of the dividends from the
fund's portfolio investments. Net realized capital gains, unless offset by any
available capital loss carryforward, are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. Federal Income Tax regulations, which may
differ from generally accepted accounting principles.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
Organization Costs: All costs incurred in connection with organizing and
establishing the fund are being amortized on the straight-line basis over a
period of five years from the date on which the fund commenced operations. For
the year ended December 31, 2002, the fund amortized $7,736 in organization
expenses.
NOTE 2. INVESTMENT ADVISORY AND ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Investment Advisory Fees: Cohen & Steers Capital Management, Inc. (the
adviser) serves as the fund's investment adviser pursuant to an investment
advisory agreement (the advisory agreement). Under the terms of the advisory
agreement, the adviser provides the fund with the day-to-day investment
decisions and generally manages the fund's investments in accordance with the
stated policies of the fund, subject to the supervision of the fund's board of
directors. For the services provided to the fund, the adviser receives a monthly
fee in an amount equal to 1/12th of 0.90% of the average daily net assets of the
fund. For the year ended December 31, 2002, the fund incurred $189,437 in
advisory fees.
The investment adviser has voluntarily agreed to limit the total expenses of
the fund (excluding interest, taxes, brokerage, and extraordinary expenses) to
an annual rate of 1.50% of the fund's average net assets until December 31,
2003. As long as this expense cap continues, it may lower the fund's expenses
and increase its total return. After December 31, 2003, the expense limitation
may be terminated or revised at any time, at which time the fund's expenses may
increase and its total return may be reduced depending on the total assets of
the fund. For the year ended December 31, 2002, the investment adviser waived
investment advisory fees of $124,784.
Administration Fees: The fund has entered into an administration agreement
with the adviser under which the adviser performs certain administrative
functions for the fund and receives a monthly fee in an amount equal
14
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to 1/12th of 0.02% of the fund's average daily net assets. For the year ended
December 31, 2002, the fund paid the adviser $4,210 in fees under this
administration agreement.
Directors' Fees: Certain directors and officers of the fund are also
directors, officers, and/or employees of the adviser. None of the directors and
officers so affiliated received compensation from the fund for their services.
For the year ended December 31, 2002, fees and related expenses accrued for
nonaffiliated directors totaled $38,599.
Other: At December 31 2001, there was one investor owning 9% of the funds'
outstanding shares. Investment activities of this shareholder could have a
material impact on the fund.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
year ended December 31, 2002 totaled $36,854,749 and $37,963,522, respectively.
NOTE 4. INCOME TAXES
The distributions during the year were all treated as ordinary income for
federal income tax purposes. Short-term capital gains are reflected in the
financial statements as realized gains on investments but are typically
reclassified as ordinary income for tax purposes.
The dividends and distributions to shareholders are characterized for tax
purposes as follows:
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2002 2001
---- ----
Ordinary income.......................... $892,484 $453,593
Tax return of capital.................... -- 541,959
-------- --------
Total dividends and distributions to
shareholders...................... $892,484 $995,552
-------- --------
-------- --------
</Table>
At December 31, 2002, the cost of investments and net unrealized
appreciation for federal income tax purposes were as follows:
<Table>
Aggregate cost......................................... $17,338,668
-----------
Gross unrealized appreciation.......................... $ 1,499,610
Gross unrealized depreciation.......................... $ (726,320)
-----------
Net unrealized appreciation............................ $ 773,290
-----------
-----------
</Table>
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts. During the year
15
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 2002, the fund decreased undistributed net investment income
on investments by $6,130, decreased paid-in capital by $355,309 and decreased
accumulated net realized loss on investments by $361,439.
At December 31, 2002, the fund had tax basis capital losses, which may be
carried over to offset future capital gains, as follows:
<Table>
Capital loss carryovers expiring in:
2006................................... $19,086,389
2007................................... 6,065,253
2008................................... 1,314,704
2009................................... 236,415
-----------
$26,702,761
-----------
-----------
</Table>
For the year ended December 31, 2002, the fund utilized capital loss
carryovers of $1,892,231.
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 50 million shares of capital stock, par
value $0.001 per share. The board of directors of the fund may increase or
decrease the aggregate number of shares of common stock that the fund has
authority to issue. Transactions in fund shares were as follows:
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- ------------
Sold......................... 123,790 $ 3,683,795 106,718 $ 2,880,893
Issued as reinvestment of
dividends.................. 29,379 847,195 28,952 786,963
Redemption fees retained by
fund(a).................... -- 42,027 -- --
Redeemed..................... (250,155) (7,087,593) (634,657) (17,212,042)
-------- ----------- -------- ------------
Net decrease................. (96,986) $(2,514,576) (498,987) $(13,544,186)
-------- ----------- -------- ------------
-------- ----------- -------- ------------
</Table>
NOTE 6. BORROWINGS
The fund, in conjunction with Cohen & Steers Realty Shares, Inc., Cohen &
Steers Institutional Realty Shares, Inc. and Cohen & Steers Equity Income Fund,
Inc., has entered into a $200,000,000 credit agreement (the credit agreement)
with Fleet National Bank, as administrative agent, State Street Bank and Trust
Company, as operations agent, and the lenders identified in the credit
agreement.
During the year ended December 31, 2002, the fund did not have any loans
outstanding. For the year ended December 31, 2002, the fund paid commitment fees
and other expenses of $1,908.
- -------------------
(a) The fund charges a 2% redemption fee on shares sold within one year of the
time of purchase.
16
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Cohen & Steers Special Equity Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Cohen & Steers Special Equity Fund,
Inc. (the 'Fund') at December 31, 2002, 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 five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 2002 by correspondence with the custodian, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 7, 2003
17
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
INFORMATION ABOUT FUND DIRECTORS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
OVERSEEN
WITHIN THE
POSITION(S) HELD TERM OF LENGTH OF PRINCIPAL OCCUPATION(S) FUND
NAME, ADDRESS AND AGE WITH FUND OFFICE TIME SERVED DURING PAST FIVE YEARS COMPLEX
- --------------------------- ------------------ ----------- ----------- ----------------------- ----------
Robert H. Steers .......... Director, chairman Until next Since Chairman of Cohen & 8
757 Third Avenue and secretary election of inception Steers Capital
New York, New York directors Management, Inc., the
Age: 49 fund's investment
manager.
Martin Cohen .............. Director, Until next Since President of Cohen & 8
757 Third Avenue president and election of inception Steers Capital
New York, New York treasurer directors Management, Inc., the
Age: 54 fund's investment
manager.
Gregory C. Clark .......... Director Until next Since Private Investor. Prior 8
99 Jane Street election of inception thereto, President of
New York, New York directors Wellspring Management
Age: 55 Group (investment
advisory firm).
Bonnie Cohen .............. Director Until next 2001 to Consultant. Prior 8
1824 Phelps Place, N.W. election of present thereto, Undersecretary
Washington, D.C. directors of State, United States
Age: 60 Department of State.
George Grossman ........... Director Until next Since Attorney-at-law. 8
17 Elm Place election of inception
Rye, New York directors
Age: 49
Richard J. Norman ......... Director Until next 2001 to Private Investor. Prior 8
7520 Hackamore Drive election of present thereto, Investment
Potomac, Maryland directors Representative of
Age: 59 Morgan Stanley Dean
Witter.
Willard H. Smith, Jr. .... Director Until next 1996 to Director. Board member 8
7231 Encelia Drive election of present of Essex Property
La Jolla, California directors Trust, Inc., Highwoods
Age: 66 Properties, Inc. and
Realty Income
Corporation. Managing
director at Merrill
Lynch & Co., Equity
Capital Markets
Division from 1983 to
1995
</Table>
18
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
<Table>
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
FOR HIGH CURRENT INCOME: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
EQUITY INCOME FUND REALTY SHARES
IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND
PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY
A, B, C AND I SHARES AVAILABLE IN REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
FOR CAPITAL APPRECIATION: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES
IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND
OF REITS AND OTHER REAL ESTATE COMPANIES CAPITAL APPRECIATION, INVESTING PRIMARILY
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO IN REITS
SYMBOL: CSSPX OFFERS LOW TOTAL EXPENSE RATIO
HIGHER MINIMUM PURCHASE REQUIRED
SYMBOL: CSRIX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-REIT, OR VISIT OUR WEB SITE AT COHENANDSTEERS.COM
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES,
AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
</Table>
19
<Page>
COHEN & STEERS SPECIAL EQUITY FUND, INC.
<Table>
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISER
Director and chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and president (212) 832-3232
Gregory C. Clark FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
TRANSFER AGENT
George Grossman Boston Financial Data Services, Inc.
Director Two Heritage Drive
North Quincy, MA 02171
Richard J. Norman (800) 437-9912
Director
LEGAL COUNSEL
Willard H. Smith Jr. Simpson Thacher & Bartlett
Director 425 Lexington Avenue
New York, NY 10017
Adam Derechin
Vice president and assistant treasurer DISTRIBUTOR
Cohen & Steers Securities, LLC
757 Third Avenue
Joseph M. Harvey New York, NY 10017
Vice president
Nasdaq Symbol: CSSPX
Lawrence B. Stoller
Assistant secretary Web site: cohenandsteers.com
Net asset value (NAV) can be found in
the daily mutual fund listings in the
financial section of most major
newspapers under Cohen & Steers.
This report is authorized for delivery
only to shareholders of Cohen & Steers
Special Equity Fund, Inc. unless
accompanied or preceded by the
delivery of a currently effective
prospectus setting forth details of
the fund. Past performance, of course,
is no guarantee of future results and
your investment may be worth more or
less at the time you sell.
</Table>
20
<Page>
COHEN & STEERS
SPECIAL EQUITY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
SPECIAL EQUITY FUND
ANNUAL REPORT
DECEMBER 31, 2002
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as...................................'SS'