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, 2003
Item 1. Reports to Stockholders.
The registrant's annual report to shareholders, for the period ended December
31, 2003, is hereby included.
Item 2. Code of Ethics.
On February 5, 2004, the registrant adopted a code of ethics that applies to the
registrant's principal executive and principal financial officers. A copy of the
code of ethics is attached as Exhibit 10(a)(1).
Item 3. Audit Committee Financial Expert.
The registrant's audit committee has determined that it does not have an audit
committee financial expert serving on its audit committee. Although no single
audit committee member possesses the attributes necessary for qualification as
an audit committee financial expert, several members have significant experience
in the management of their personal assets and the assets of the businesses with
which they are or have been associated. All members of the audit committee are
also financially literate and have the necessary education and experience to
be effective members of the audit committee. In addition, the registrant's
nominating committee intends to recommend the appointment and election of an
additional director who will qualify as an audit committee financial expert
and theregistrant's board will consider this nomination at a future meeting,
with such appointment to take effect upon satisfying the requirements of
section 16 of the 1940 Act.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate audit fees billed by the registrant's principal
accountant to the registrant were $34,000 for the fiscal year ended December 31,
2002 and $40,000 for the fiscal year ended December 31, 2003.
(b) Audit-Related Fees. The aggregate audit-related fees billed by the
registrant's principal accountant to the registrant were $6,000 for the fiscal
year ended December 31, 2002 and $6,000 for the fiscal year ended December 31,
2003. These fees were billed in connection with agreed upon procedures performed
by the registrant's principal accountant relating to after-tax return
calculations.
(c) Tax Fees. The aggregate tax fees billed by the registrant's principal
accountant to the registrant were $8,900 for the fiscal year ended December 31,
2002 and $9,800 for the fiscal year ended December 31, 2003. These fees were
billed in connection with the preparation of tax returns, calculation and
designation of dividends and other miscellaneous tax services.
(d) All Other Fees. There were no other fees billed by the registrant's
principal accountant to the registrant for the fiscal years ended December 31,
2002 and December 31, 2003.
For the fiscal year ended December 31, 2002, the aggregate fees billed by the
registrant's principal accountant to the registrant's investment adviser for
services provided by the principal accountant were $46,000. These fees were
billed in connection with internal control reviews and
AIMR performance reviews and were not required to be approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X since this portion of the
Rule was not effective until 2003.
For the fiscal year ended December 31, 2003, the aggregate fees billed by the
registrant's principal accountant to the registrant's investment adviser for
services provided by the principal accountant and approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X were $49,500. These fees were billed
in connection with internal control reviews and AIMR performance reviews.
(e)(1) Before the registrant's principal accountant is engaged to render audit
or non-audit services to the registrant and non-audit services to the
registrant's investment adviser and its affiliates, each engagement is approved
by the registrant's audit committee.
(e)(2) None.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant's principal accountant
for services rendered to the registrant and the registrant's investment adviser
and its affiliates were $60,900 for the fiscal year ended December 31, 2002 and
$65,300 for the fiscal year ended December 31, 2003.
(h) This item was not applicable for the fiscal year ended December 31, 2003
since no such non-pre-approved services were rendered. For the fiscal year ended
December 31, 2002, the registrant's audit committee did consider whether the
provision of non-audit services that were rendered to the registrant's
investment adviser and its affiliates was compatible with maintaining the
principal accountant's independence. These non-audit services were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
since this portion of the Rule was not effective until 2003.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. [Reserved]
Item 9. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have concluded that the registrant's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the registrant
in this Form N-CSR was recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, based upon such officers' evaluation of these controls and procedures as
of a date within 90 days of the filing date of this report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 10. Exhibits.
(a) (1) Code of Ethics for Principal Executive and Principal Financial Officers
(a) (2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(b) Certifications of chief executive officer and chief financial officer as
required by Rule 30a-2(b) under the Investment Company Act of 1940.
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
----------------------------------
Name: Robert H. Steers
Title: Chairman
Date: February 27, 2004
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 By: /s/ Martin Cohen
---------------------------------- -----------------------------------
Name: Robert H. Steers Name: Martin Cohen
Title: Chairman, Secretary and Title: President, Treasurer and
principal executive officer principal financial officer
Date: February 27, 2004
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
February 17, 2004
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, 2003. On that date the
net asset value of the fund was $38.55 per share. In addition, a semiannual
dividend of $1.06 per share was declared for shareholders of record on December
22, 2003 and was paid on December 23, 2003. No capital gains distribution was
made in 2003.
2003 RESULTS AND STRATEGY UPDATE
Cohen & Steers Special Equity Fund was one of the best performing domestic
real estate mutual funds in 2003. For the full year in 2003, the fund had a
total return of 46.9%, which compares to the NAREIT Equity REIT Index(a) total
return of 37.1%. In the fourth quarter of 2003, the fund had a total return of
10.5%, compared to NAREIT's return of 10.0%.
In the past two annual reports we discussed changes that were made to the
fund's investment strategy two years ago. We are pleased with the results of
these changes, as shown below, and that the long-term track record of the fund
has improved considerably.
COHEN & STEERS SPECIAL EQUITY FUND
<Table>
<Caption>
ANNUALIZED RETURN
----------------- EXCESS
FUND NAREIT RETURN
---- ------ ------
2003 46.9% 37.1% 9.8%
2002 7.7% 3.9% 3.8%
Inception 11.5% 10.8% 0.7%
(5/8/97)
</Table>
To reiterate our goals, the fund will be positioned as 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 property
sectors and companies, constrain risk by adhering to a defined universe of REITs
and other owners of income property, and outperform the REIT indexes. We
continue to employ a proprietary valuation/portfolio construction model that
focuses on real estate net asset value and cash flow growth.
For the third year the fund's investment advisor has extended through
December 31, 2004 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.
- -------------------
(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.
INVESTMENT REVIEW
Exceeding even the most optimistic expectations, and frustrating many
skeptics, 2003 was simply the best year for REIT investors in the modern era
(since 1991).
This was the year that REITs gained wider acceptance as both an important
asset class and a financial instrument. We have long believed that REITs'
investment characteristics -- namely high current yield, low correlation to
other asset classes and strong total return potential -- were highly desirable.
Over the past year, more and more investors came to recognize the potential
benefits of REITs. Record low returns on fixed-income investments made REIT
current income and dividend growth capabilities all the more attractive. In our
view, their low correlation to other asset classes, particularly following a
major bear market in equities, offered a welcomed respite to investors whose
risk tolerance has been dramatically reduced. The resilience of REIT cash flows
and asset values, despite the sluggish economy and weak real estate markets,
contributed to investors' confidence in their ability to produce healthy growth
once these macro trends began to reverse, as they did in the second half of the
year.
While almost all REITs performed well in 2003, there were some interesting
trends with respect to sector performance. We were surprised to see the health
care sector produce the best returns both in the fourth quarter (17.2%) and full
year (53.6%). Health care fundamentals were better than expected due to a
surprise increase in nursing home reimbursement in 2003, in spite of federal and
local budget deficits. In addition, the continued low interest rate environment
favored this interest-rate-sensitive, defensive sector. More predictably, in the
fourth quarter the hotel sector fared second best (14.2%), followed by regional
malls (12.5%). The full year runner-up to health care was the mall sector,
delivering 52.2%. As was the case in the past several years, underperformers for
both the quarter and full year were apartment and office building owners.
Our strong performance in 2003 was driven primarily by stock selection.
Standout performers included Alexander's (93.1%), Ventas (105.8%), Mills Corp.
(60.3%) and Brookfield Properties (60.1%). All of these standout performers
shared a common attribute: their common stocks were materially undervalued in
our proprietary valuation model at the beginning of 2003. Also, for each company
there was an event or catalyst that emerged during the year that demonstrated
that its assets or business was undervalued. For Alexander's, speculation
emerged that the company would be sold or restructured once its Bloomberg LP
headquarters development in midtown Manhattan was complete. Ventas sold nursing
homes to its primary operator, Kindred, at prices that far exceeded most
expectations -- thereby demonstrating, in our view, that Ventas, Kindred's
largest landlord, holds strategic influence over Kindred's business. As regional
mall prices have escalated, we believe that investors have recognized that Mills
Corp, one of the most active developers of value-oriented malls, is well
positioned to create value. And finally, Brookfield spun off a homebuilding
company, thereby surfacing value and enhancing the focus of the company as a
trophy office owner. Other contributions to performance came from our overweight
in hotels and regional malls and our underweight in apartments.
Detracting from performance was our underweight in the shopping center and
the health care sectors, two defensive sectors whose stocks were expected to lag
in the improving economic environment that we have been expecting. However, both
sectors continued to enjoy very strong asset pricing in the private market, and
both continue to benefit from the low interest rate environment. Two laggards in
terms of stock selection were Sun
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
Communities (12.7%), which continues to be hurt by the downturn in the
manufactured home community sector, and Crescent Real Estate (13.4%), whose
highly cyclical group of office, hotel and land businesses have yet to see signs
of recovery. We have added to our Sun position recently, as its shares offer one
of the best values in our valuation model.
We believe that REITs became an important component of many investment
portfolios in 2003. Pension, endowment and charitable funds, along with many
insurance companies found them to be attractive instruments with which to
satisfy liabilities and other obligations. Investors shifting their investment
objectives from pure growth to income and growth, particularly those approaching
retirement age, found REITs to be an appealing alternative. REITs were included
more than ever in portfolios of income-oriented and diversified investment
vehicles and funds, both public and private, leveraged and unleveraged. For many
investors who began to anticipate an increase in inflation and interest rates,
REITs may have become a perceived safe haven from both, as REITs have
historically performed well in high inflation and high interest rate
environments. The consistent strong returns from REITs even attracted the
attention of many die-hard direct real estate investors who had trouble finding
bargains in the private market.
To be sure, there were a fair number of fundamental reasons for REITs to
have done well in 2003. Real estate has undergone a re-pricing over the past
year, appreciating in value despite rising vacancies and softness in rents.
Investors in both the public and private markets seemed to ignore recent market
conditions, and instead valued property based on expected future cash flows.
This strong real estate pricing bolstered REIT asset values. Low interest rates
have clearly added to this pricing situation as it has enabled leveraged buyers
to purchase properties at lower current returns than would be possible, or
prudent, in a higher rate environment. Nonetheless, we are still not convinced
that private real estate buyers in general have fully adapted, as much as REITs
have, to the extraordinary credit market conditions that have prevailed.
Over the past two years low interest rates and ready access to the financial
markets have enabled most REITs to re-price their liabilities by retiring or
refinancing high cost debt, or by adding to their leverage without assuming
meaningfully higher risk. This phenomenon has not necessarily been fully
appreciated by the investment community, in our opinion, but has undoubtedly
enhanced equity values. In addition to stabilizing balance sheets and extending
debt maturities, this has improved both the absolute level and, in our view, the
quality of REIT earnings. As a result, REIT earnings performance overall in 2003
greatly exceeded what one would have expected in light of soft real estate
markets. For example, the weighted average earnings per share of the 110 largest
REITs declined by approximately 2.0%. More surprisingly, the dividends per share
of the same group of companies grew by approximately 3.8%.
As REITs consistently performed well throughout the year (rising in 11 out
of 12 months), investor expectations for improving fundamentals were vindicated
by economic statistics. The 8.2% rise in third quarter GDP was the highest rate
of economic growth in 20 years. Following this showing, the expected 5.0% fourth
quarter growth rate in our view should essentially dispel any lingering doubts
about the durability of the U.S. economic recovery. Moreover, robust profit
growth of corporate America validated the across-the-board rise in stock prices.
The bottom line for investors in 2003 is that all major equity market indexes
ended the year at annual highs in price, and REITs ended the year at record high
share prices.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
INVESTMENT OUTLOOK
We believe that the key to REIT performance in 2004 will be the course of
the U.S. economy. Not interest rates. Not Wall Street estimates of NAVs. Not
valuations based on last year's earnings. A strong economy is essential to
supporting real estate fundamentals. And strong fundamentals are essential to
supporting REIT earnings growth and share prices. We remain optimistic about the
course of the economy. In light of the return of business and consumer
confidence, soaring profitability, ongoing fiscal stimulus and
still-accommodative monetary policy, we believe the economy will remain strong.
Our expectation is that in 2004 GDP will increase by at least 4%.
We also believe that for the first time since the economic recovery began,
the U.S. will experience strong job growth. We expect that 1.5 to 2.0 million
jobs will be created this year. To the extent that this occurs, several dynamics
of the real estate markets are likely to change significantly, primarily in the
office and apartment sectors. Growth in service jobs will directly benefit
owners of office buildings, particularly in larger cities such as New York,
Boston, and Washington. We have concentrated our holdings in companies that have
a strong presence in these cities. We are already seeing vacancy rates in these
cities begin to decline, coincident with companies now shifting from layoffs to
new hiring, such as those in the financial service industry. Because a
relatively high percentage of new jobholders tend to rent apartments, the strong
job growth we expect should benefit owners of multi-family properties.
Consequently we have increased our apartment weight and concentrated our
holdings in the companies that have a strong presence in the northeast and
western states where there is a higher tendency to rent apartments due to high
population density and high home prices. We believe the hotel industry should
benefit from increased business travel and increased tourism due to the weak
dollar.
One sector that we expect to experience little change in 2004 is regional
malls. With ongoing economic growth, we expect consumers to continue their
spending patterns. As a result, the already-low level of retail bankruptcies and
mall vacancy rates should translate into higher profits for mall owners. We
expect that, for the third year in a row, mall companies will enjoy the highest
earnings growth rates in the real estate industry and this should continue to
support strong stock price performance. Further, with payout ratios among the
lowest in the REIT industry, we expect dividend growth to also remain well above
average. In 2003, the average mall REIT enjoyed earnings growth of 9.2% per
share and raised its dividend by 11.2%. We expect a similar pattern to develop
this year.
Notwithstanding our broad industry views, we believe that stock selection
will be much more important than sector weights in 2004. The general level of
REIT share prices has been adjusted upward and the strong economy should drive
fundamentals for every property sector. What may differentiate performance will
be individual company strategies, property acquisitions or the ability to
capitalize on new opportunities. In 2003, companies that executed on such
strategic initiatives enjoyed strong share price performance irrespective of the
property sector or geographic region in which they operated.
Following the extraordinary returns that REITs delivered in 2003, it is
natural to ask whether they can continue to perform well this year. As shown in
the table below, the years following those in which REITs have turned in their
best total returns have historically shown a continuation of strong performance.
Thus, one should not assume that one year of very strong performance is
necessarily followed by a subpar year. If the past is any guide to what
investors may see in 2004, it appears that strong trends tend to remain in
place.
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4
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NAREIT EQUITY REIT RETURNS FOLLOWING BEST PERFORMING YEARS
<Table>
<Caption>
TOTAL RETURN IN THE FOLLOWING:
TOTAL ------------------------------------
YEAR RETURN 3 MOS. 6 MOS. 9 MOS. 12 MOS.
- ---- ------ ------ ------ ------ -------
1976 47.6% 7.6% 14.0% 15.0% 22.4%
1979 35.9% -4.4% 7.1% 17.0% 24.4%
1983 30.6% 4.4% 3.8% 13.8% 20.9%
1991 35.7% 0.7% 3.3% 10.4% 14.6%
1996 35.3% 0.7% 5.7% 18.2% 20.3%
2000 26.4% 0.4% 11.4% 8.5% 13.9%
2003 37.1% -- -- -- --
</Table>
Past performance is no guarantee of future results. Returns are historical,
include changes in share price and reflect reinvestment of all distributions.
This information is presented for illustrative purposes only and does not
represent the past performance of the fund. Investors cannot invest in this
unmanaged index.
Whereas REIT share prices are much higher than they were one year ago, we
believe the health of the industry and the outlook for profit growth are
stronger as well. In our experience, bear markets rarely, if ever, commence at
this stage of economic and real estate cycles. In fact, the strengthening real
estate markets are attracting an increasing amount of investment capital -- it
is our understanding that a record amount of capital has been allocated to
direct property ownership. We expect this to help to maintain strong pricing in
most real estate markets. In our opinion, the rise in REIT prices has not
changed the investment characteristics that investors are increasingly seeking.
Further, based on the prices of most other asset classes, we are not
convinced that REITs are any less attractively valued than any others. Consider
that owners of nearly everything from stocks to commodities, foreign currencies
and gold all had a spectacular year in 2003. In addition, with the current
yields on money market and fixed-income instruments at modern day lows, it is
hard to imagine anything but a very low return outcome for their holders. Many
observers have suggested that a rise in interest rates could attract more money
into bonds and possibly out of REITs. We disagree. If interest rates rise,
investors will begin losing money in bonds and may seek to reduce their exposure
to the bond market. This could increase the attractiveness of REITs, which offer
the potential for income as well as protection from inflation.
It remains our belief that while REITs are no longer as undervalued as they
were over the past several years, the conditions to sustain continued strength
and growth in this asset class are firmly in place. While we can rationally
expect there to be share price corrections along the way -- as there always
are -- we believe that REITs can still deliver solid, long-term returns to
investors. In light of these strong fundamentals, combined with the valuation of
REITs in comparison to many other asset classes, we believe that REITs will
continue to appeal to
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5
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
investors seeking the potential for portfolio diversification, a high level of
current income and attractive total returns.
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
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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.
In 2003, the fund's total return was 46.89%, compared to 37.13% for the
NAREIT Equity REIT Index and 28.70% for the S&P 500. During the year, REITs
gained wider acceptance as both an important asset class and a financial
instrument as their low correlation to other asset classes offered a welcomed
respite to investors whose risk tolerance has been dramatically reduced. In
addition, investor expectations for improving fundamentals were vindicated by
economic statistics. The fund's strong performance in 2003 was driven primarily
by stock selection. Standout performers included Alexander's (93.1% return),
Ventas (105.8%), Mills Corp. (60.3%) and Brookfield Properties (60.1%). Other
contributions to performance came from our overweight in hotels and regional
malls and our underweight in apartments. Detracting from performance was our
underweight in the shopping center and the health care sectors. Two laggards in
terms of stock selection were Sun Communities (12.7% return) and Crescent Real
Estate (13.4%).
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7
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
PERFORMANCE REVIEW - (CONTINUED)
<Table>
<Caption>
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DEC. 31, 2003
-------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION (5/8/97)
Fund 46.89% 17.06% 11.49%
NAREIT Equity(a) 37.13% 14.35% 10.79%
S&P 500(a) 28.70% -0.56% 6.25%
</Table>
[PERFORMANCE GRAPH]
<Table>
<Caption>
COHEN & STEERS
SPECIAL EQUITY NAREIT EQUITY
FUND REIT INDEX(a) S&P 500(a)
-------------- ------------- ----------
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 $12,223 $13,638
6/30/98 $12,827 $11,662 $14,088
9/30/98 $ 9,660 $10,435 $12,687
12/31/98 $ 9,375 $10,131 $15,389
3/31/99 $ 8,881 $ 9,642 $16,155
6/30/99 $10,386 $10,614 $17,294
9/30/99 $ 9,337 $ 9,761 $16,213
12/31/99 $12,072 $ 9,662 $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 $14,027 $14,440 $11,622
3/31/03 $14,068 $14,538 $11,256
6/30/03 $16,737 $16,444 $12,991
9/30/03 $18,645 $18,010 $13,335
12/31/03 $20,604 $19,803 $14,959
</Table>
The performance data quoted represents past performance. Past performance is no
guarantee of future results. The rate of return will vary and the principal
value of an investment will fluctuate and shares, if redeemed, may be worth more
or less than their original cost. Current performance may be lower or higher
than the performance data quoted. 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 indexes 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 index 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.
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
<Table>
<Caption>
NUMBER VALUE
OF SHARES (NOTE 1)
--------- ------------
EQUITIES 98.65%(a)
DIVERSIFIED 10.98%
Alexander's(b)............................................ 12,300 $ 1,533,318
Colonial Properties Trust................................. 5,000 198,000
Vornado Realty Trust...................................... 25,500 1,396,125
------------
3,127,443
------------
HEALTH CARE 1.00%
Ventas.................................................... 13,000 286,000
------------
HOTEL 14.23%
Hilton Hotels Corp. ...................................... 45,100 772,563
Host Marriott Corp.(b).................................... 103,500 1,275,120
MeriStar Hospitality Corp.(b)............................. 117,600 765,576
Starwood Hotels & Resorts Worldwide....................... 34,400 1,237,368
------------
4,050,627
------------
INDUSTRIAL 3.87%
ProLogis.................................................. 34,300 1,100,687
------------
OFFICE 14.60%
Boston Properties......................................... 33,800 1,628,822
Brookfield Properties Corp. .............................. 24,400 700,280
CarrAmerica Realty Corp. ................................. 27,900 830,862
SL Green Realty Corp. .................................... 24,300 997,515
------------
4,157,479
------------
OFFICE/INDUSTRIAL 6.16%
Kilroy Realty Corp. ...................................... 37,000 1,211,750
Reckson Associates Realty Corp. .......................... 22,300 541,890
------------
1,753,640
------------
RESIDENTIAL 24.79%
APARTMENT 20.60%
Apartment Investment & Management Co. .................... 15,600 538,200
AvalonBay Communities..................................... 28,600 1,367,080
BRE Properties............................................ 23,900 798,260
Essex Property Trust...................................... 14,100 905,502
Gables Residential Trust.................................. 5,000 173,700
Post Properties........................................... 42,200 1,178,224
Summit Properties......................................... 37,700 905,554
------------
5,866,520
------------
</Table>
- -------------------
(a) Percentages indicated are based on the net assets of the fund.
(b) Nonincome producing security.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003
<Table>
<Caption>
NUMBER VALUE
OF SHARES (NOTE 1)
--------- ------------
MANUFACTURED HOME 4.19%
Sun Communities........................................... 30,800 $ 1,191,960
------------
TOTAL RESIDENTIAL......................................... 7,058,480
------------
SELF STORAGE 4.08%
Public Storage............................................ 16,800 728,952
Shurgard Storage Centers.................................. 11,500 432,975
------------
1,161,927
------------
SHOPPING CENTER 18.94%
COMMUNITY CENTER 2.49%
Federal Realty Investment Trust........................... 18,500 710,215
------------
REGIONAL MALL 16.45%
Mills Corp. .............................................. 29,900 1,315,600
Rouse Co. ................................................ 29,100 1,367,700
Simon Property Group...................................... 11,400 528,276
Taubman Centers........................................... 71,500 1,472,900
------------
4,684,476
------------
TOTAL SHOPPING CENTER..................................... 5,394,691
------------
TOTAL EQUITIES (Identified cost -- $23,447,107)...... 28,090,974
------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT
---------
COMMERCIAL PAPER 2.55%
UBS Financial, 0.75%, due 01/02/2004
(Identified cost -- $724,985).......................... $725,000 724,985
------------
TOTAL INVESTMENTS (Identified cost -- $24,172,092) ...... 101.20% 28,815,959
LIABILITIES IN EXCESS OF OTHER ASSETS ................... (1.20%) (341,152)
------ ------------
NET ASSETS (Equivalent to $38.55 per share based on 738,567
shares of capital stock outstanding) .................. 100.00% $ 28,474,807
------ ------------
------ ------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
10
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS:
Investments in securities, at value (Identified
cost -- $24,172,092) (Note 1)........................ $ 28,815,959
Cash.................................................... 2,258
Receivable for investment securities sold............... 897,830
Receivable for fund shares sold......................... 202,523
Dividends receivable.................................... 169,611
Other assets............................................ 1,650
------------
Total Assets....................................... 30,089,831
------------
LIABILITIES:
Payable for investment securities purchased............. 1,528,233
Payable for professional fees........................... 38,858
Payable for reports to shareholders..................... 19,436
Payable for fund shares redeemed........................ 17,616
Payable to administrator................................ 741
Other liabilities....................................... 10,140
------------
Total Liabilities.................................. 1,615,024
------------
NET ASSETS applicable to 738,567 shares of $0.001 par value
common stock outstanding (Note 5)....................... $ 28,474,807
------------
------------
NET ASSET VALUE PER SHARE:
($28,474,807[div]738,567 shares outstanding)............ $ 38.55
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 5)......................... $ 46,544,894
Accumulated net realized loss on investments............ (22,713,954)
Net unrealized appreciation on investments.............. 4,643,867
------------
$ 28,474,807
------------
------------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
11
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
Investment Income (Note 1):
Dividend income (net of $2,403 of foreign withholding
tax)................................................. $ 698,490
Interest income......................................... 2,520
----------
Total Income....................................... 701,010
----------
Expenses:
Investment advisory fees (Note 2)....................... 190,096
Reports to shareholders................................. 64,040
Professional fees....................................... 49,639
Directors' fees and expenses (Note 2)................... 42,342
Registration and filing fees............................ 19,315
Administration and transfer agent fees (Note 2)......... 18,401
Custodian fees and expenses............................. 18,382
Line of credit fees and expenses (Note 6)............... 1,581
Miscellaneous........................................... 15,864
----------
Total Expenses..................................... 419,660
Reduction of Expenses (Note 2).......................... (102,834)
----------
Net Expenses....................................... 316,826
----------
Net Investment Income....................................... 384,184
----------
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments........................ 4,148,622
Net change in unrealized depreciation on investments.... 3,710,763
----------
Net realized and unrealized gain on investments.... 7,859,385
----------
Net Increase in Net Assets Resulting from Operations........ $8,243,569
----------
----------
</Table>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
12
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002(a)
----------------- --------------------
Change in Net Assets:
From Operations:
Net investment income................. $ 384,184 $ 537,175
Net realized gain on investments...... 4,148,622 2,162,115
Net change in unrealized
appreciation/(depreciation) on
investments........................ 3,710,763 (1,296,285)
----------- -----------
Net increase in net assets
resulting from operations...... 8,243,569 1,403,005
----------- -----------
Dividends and Distributions to Shareholders from
(Notes 1 and 4):
Net investment income................. (1,143,611) (892,484)
----------- -----------
Capital Stock Transactions (Note 5):
Increase/(decrease) in net assets from
fund share transactions............ 3,169,414 (2,514,576)
----------- -----------
Total increase/(decrease) in net
assets......................... 10,269,372 (2,004,055)
Net Assets:
Beginning of year.......................... 18,205,435 20,209,490
----------- -----------
End of year................................ $28,474,807 $18,205,435
----------- -----------
----------- -----------
</Table>
- -------------------
(a) See Note 1.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
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: 2003 2002(a) 2001(a) 2000(a) 1999(a)
- -------------------------------- ------ ------- ------- ------- -------
Net asset value, beginning of year..................... $27.50 $26.63 $26.60 $26.76 $20.88
------ ------ ------ ------ ------
Income from investment operations:
Net investment income.............................. 0.64 0.73 0.69 0.85 0.07
Net realized and unrealized gain/(loss) on
investments...................................... 12.06 1.29 0.49 0.01 5.92
------ ------ ------ ------ ------
Total income from investment operations........ 12.70 2.02 1.18 0.86 5.99
------ ------ ------ ------ ------
Less dividends and distributions to shareholders from:
Net investment income.............................. (1.67) (1.21) (0.52) (1.02) (0.07)
Tax return of capital.............................. -- -- (0.63) -- (0.04)
------ ------ ------ ------ ------
Total dividends and distributions to
shareholders................................. (1.67) (1.21) (1.15) (1.02) (0.11)
------ ------ ------ ------ ------
Redemption fees retained by the fund................... 0.02 0.06 -- -- --
------ ------ ------ ------ ------
Net increase/(decrease) in net assets.................. 11.05 0.87 0.03 (0.16) 5.88
------ ------ ------ ------ ------
Net asset value, end of year........................... $38.55 $27.50 $26.63 $26.60 $26.76
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
Total investment return................................ 46.89% 7.67% 4.39% 3.38% 28.76%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- -------------------------------------------------------------------------------------------------------------------
<Caption>
RATIOS/SUPPLEMENTAL DATA:
- -------------------------
Net assets, end of year (in millions). $ 28.5 $ 18.2 $ 20.2 $ 33.5 $ 43.0
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of expenses to average daily net assets
(before expense reduction)........................... 1.99% 2.09% 1.83% 2.40% 2.21%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of expenses to average daily net assets
(net of expense reduction)........................... 1.50% 1.50% 1.83% 2.37% 1.96%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net investment income to average daily net
assets (before expense reduction).................... 1.33% 1.96% 2.16% 3.07% 0.03%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net investment income to average daily net
assets (net of expense reduction)................... 1.82% 2.55% 2.16% 3.10% 0.28%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Portfolio turnover rate................................ 181.13% 179.19% 107.68% 58.99% 115.43%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</Table>
- -------------------
(a) See Note 1.
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
14
- --------------------------------------------------------------------------------
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 official
closing 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 that 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. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such
- --------------------------------------------------------------------------------
15
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amounts are based on estimates if actual amounts are not available, and actual
amounts of income, realized gain and return of capital may differ from the
estimated amounts. The Fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as necessary once the
issuers provide information about the actual composition of the distributions.
Revision of Financial Information: Due to the nature of commercial real
estate and the REIT structure, which generally is not subject to corporate tax,
REIT dividends can be characterized as a combination of net income, capital
gains (from asset dispositions) and return of capital (which generally relates
to property depreciation). To date, it has been the fund's policy to distribute
to its shareholders all dividends received, regardless of dividend
characterization, from the securities it holds in the year that such dividends
were received. The fund has reclassified a portion of its net investment income
as an increase to net realized gain on investments and as an increase to
unrealized appreciation/(depreciation) on investments for the current year and
for prior periods. These reclassifications are being done to recognize the
return of capital and realized gains that have been reported by the securities
held in the portfolio of investments. These changes for the year ended December
31, 2002 are reflected in the Statement of Changes in Net Assets as follows:
<Table>
<Caption>
PREVIOUSLY
REPORTED AS REVIESD
-------- ----------
Net investment income.................................... $ 898,614 $ 537,175
Net realized gain on investments......................... 1,997,128 2,162,115
Net change in unrealized depreciation on investments..... (1,492,737) (1,296,285)
----------- -----------
Net increase in net assets resulting from
operations........................................ $ 1,403,005 $ 1,403,005
----------- -----------
----------- -----------
</Table>
On the Financial Highlights, the net investment income per share figures
have been reduced and the net realized gain/(loss) on investments per share have
been correspondingly increased. In addition, the ratios of net investment income
have been reduced. These reclassifications do not change the actual dividends
that were received by the fund, nor do they alter any taxpayer records, as such
adjustments have historically been captured in the fund's tax reporting to its
shareholders.
The reclassifications for the Financial Highlights are as follows:
<Table>
<Caption>
DECREASE IN RATIOS OF NET
INVESTMENT INCOME TO
INCREASE IN NET AVERAGE DAILY NET ASSETS
DECREASE IN NET REALIZED AND UNREALIZED (BEFORE EXPENSE
PERIOD ENDED INVESTMENT INCOME GAIN/(LOSS) ON REDUCTION AND NET OF
DECEMBER 31, PER SHARE INVESTMENTS PER SHARE EXPENSE REDUCTION)
- ------------ --------- --------------------- ------------------
2002 $0.49 $0.49 1.72%
2001 $0.32 $0.32 1.01%
2000 $0.17 $0.17 0.60%
1999 $0.05 $0.05 0.23%
</Table>
- --------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These reclassifications had no effect on net assets or the net increase in
net assets resulting from operations or cash received from the underlying
investments.
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.
NOTE 2. INVESTMENT ADVISORY AND ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Investment Advisory Fees: Cohen & Steers Capital Management, Inc. (the
advisor) serves as the fund's investment advisor pursuant to an investment
advisory agreement (the advisory agreement). Under the terms of the advisory
agreement, the advisor 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 advisor 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, 2003, the fund incurred $190,096 in
advisory fees.
The investment advisor 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,
2004. As long as this expense cap continues, it may lower the fund's expenses
and increase its total return. After December 31, 2004, 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, 2003, the investment advisor waived
investment advisory fees of $102,834.
Administration Fees: The fund has entered into an administration agreement
with the advisor under which the advisor performs certain administrative
functions for the fund and receives a monthly fee in an amount equal
- --------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
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, 2003, the fund paid the advisor $4,224 in fees under this
administration agreement.
Directors' Fees: Certain directors and officers of the fund are also
directors, officers, and/or employees of the advisor. None of the directors and
officers so affiliated received compensation from the fund for their services.
For the year ended December 31, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $42,342.
Other: At December 31, 2003, there was one investor owning 9% of the fund's
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, 2003 totaled $40,123,111 and $37,459,407, respectively.
NOTE 4. INCOME TAXES
The fund had no return of capital for the year ended December 31, 2003.
Short-term capital gains are reflected in the financial statements as realized
gains on investments but are typically treated 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,
--------------------------------
2003 2002
---- ----
Ordinary income.......................... $1,143,611 $892,484
---------- --------
Total dividends and distributions to
shareholders...................... $1,143,611 $892,484
---------- --------
---------- --------
</Table>
At December 31, 2003, the cost of investments and net unrealized
appreciation for federal income tax purposes were as follows:
<Table>
Aggregate cost......................................... $24,374,583
-----------
Gross unrealized appreciation.......................... $ 4,549,403
Gross unrealized depreciation.......................... $ (108,027)
-----------
Net unrealized appreciation............................ $ 4,441,376
-----------
-----------
</Table>
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to taxable overdistribution of income and wash
sales on portfolio securities. To the extent such differences are permanent in
nature, such amounts are reclassified within the capital accounts. During the
year ended December 31, 2003, the fund increased undistributed net investment
income on investments by $759,427 and decreased paid-in capital by $759,427,
related primarily to taxable overdistribution of income in the current year.
- --------------------------------------------------------------------------------
18
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of distributable earnings on a tax basis consist of
undistributed ordinary income of $0 and undistributed capital gains of $0.
At December 31, 2003, 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................................... $14,895,092
2007................................... 6,065,253
2008................................... 1,314,704
2009................................... 236,415
-----------
$22,511,464
-----------
-----------
</Table>
For the year ended December 31, 2003, the fund utilized capital loss
carryovers of $4,191,297.
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, 2003 DECEMBER 31, 2002
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- -----------
Sold.......................... 166,537 $ 5,988,858 123,790 $ 3,683,795
Issued as reinvestment of
dividends................... 29,602 1,049,429 29,379 847,195
Redemption fees retained by
fund(a)..................... -- 15,331 -- 42,027
Redeemed...................... (119,543) (3,884,204) (250,155) (7,087,593)
-------- ----------- -------- -----------
Net increase/decrease......... 76,596 $ 3,169,414 (96,986) $(2,514,576)
-------- ----------- -------- -----------
-------- ----------- -------- -----------
</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, 2003, the fund did not have any loans
outstanding. For the year ended December 31, 2003, the fund paid commitment fees
and other expenses of $1,581.
- -------------------
(a) The fund charges a 2% redemption fee on shares sold within one year of the
time of purchase.
- --------------------------------------------------------------------------------
19
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
REPORT OF INDEPENDENT AUDITORS
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, 2003, 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, 2003 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
As explained in Note 1, the Fund has revised amounts previously reported as
net investment income to reflect the reclassification of distributions in excess
of income received from underlying investments. These reclassifications had no
effect on net assets or the net increase in net assets resulting from
operations.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 17, 2004
- --------------------------------------------------------------------------------
20
- --------------------------------------------------------------------------------
COHEN & STEERS SPECIAL EQUITY FUND, INC.
TAX INFORMATION -- 2003 (UNAUDITED)
For the year ended December 31, 2003, the fund had qualifying income
distributions of $130,174. Pursuant to the Jobs and Growth Tax Relief
Reconciliation Act of 2003, this dividend is eligible for a maximum allowable
rate of 15% for individuals.
For the year ended December 31, 2003 the fund had no post May 5th long term
capital gains distributions and no long term capital gains distributions.
Shareholders are advised to consult with their own tax advisors as to the
Federal, state, and local tax status of the income received.
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
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 Co-chairman and 10
757 Third Avenue and secretary election of inception co-chief Executive
New York, New York directors Officer of Cohen &
Age: 50 Steers Capital
Management, Inc., the
fund's investment
manager since 2003.
Prior thereto, chairman
of Cohen &
Steers Capital
Management, Inc.
Martin Cohen ......... Director, Until next Since Co-chairman and 10
757 Third Avenue president and election of inception co-chief executive
New York, New York treasurer directors officer of Cohen &
Age: 55 Steers Capital
Management, Inc., the
fund's investment
manager. Prior thereto,
president of Cohen &
Steers Capital
Management, Inc.
Gregory C. Clark ..... Director Until next Since Private investor. Prior 10
99 Jane Street election of inception thereto, President of
New York, New York directors Wellspring Management
Age: 56 Group (investment advisory
firm).
Bonnie Cohen ......... Director Until next 2001 to Consultant. Prior 10
1824 Phelps election of present thereto, undersecretary
Place, N.W. directors of state, United States
Washington, D.C. Department of State.
Age: 61
George Grossman ...... Director Until next Since Attorney-at-law. 10
17 Elm Place election of inception
Rye, New York directors
Age: 50
Richard J. Norman .... Director Until next 2001 to Private investor. Prior 10
7520 Hackamore Drive election of present thereto, investment
Potomac, Maryland directors representative of
Age: 60 Morgan Stanley Dean
Witter.
Willard H. Smith, Director Until next 1996 to Director. Board member 10
Jr. .................. election of present of Essex Property
7231 Encelia Drive directors Trust, Inc., Highwoods
La Jolla, California Properties, Inc. and
Age: 67 Realty Income
Corporation. Managing
director at Merrill
Lynch & Co., Equity
Capital Markets
Division from 1983 to
1995.
</Table>
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22
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
<Table>
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 IN
REITS
A, B, C AND I SHARES AVAILABLE
SYMBOL: CSRSX
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX
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 IN
REITS
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO
OFFERS LOW TOTAL EXPENSE RATIO
SYMBOL: CSSPX
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
PLEASE CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF THE FUND CAREFULLY BEFORE
INVESTING. THIS INFORMATION, AS WELL AS OTHER INFORMATION ABOUT THE FUND, IS DESCRIBED IN THE
PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
</Table>
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23
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
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
Joseph M. Harvey 757 Third Avenue
Vice president New York, NY 10017
Lawrence B. Stoller Nasdaq Symbol: CSSPX
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.
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24
COHEN & STEERS
SPECIAL EQUITY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
COHEN & STEERS
SPECIAL EQUITY FUND
ANNUAL REPORT
DECEMBER 31, 2003
STATEMENT OF DIFFERENCES
------------------------
The division sign shall be expressed as................................. [div]
The section symbol shall be expressed as................................ 'SS'