<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
February 3, 2000
To Our Shareholders:
We are pleased to submit to you the annual report for Cohen & Steers Special
Equity Fund for the quarter and year ended December 31, 1999. The net asset
value at that date was $26.76 per share. In addition, a semi-annual dividend of
$0.04 per share was declared for shareholders of record on December 15, 1999 and
paid on December 16, 1999. The Fund did not make a capital gains distribution in
1999.
1999 REVIEW
Cohen & Steers Special Equity Fund had an outstanding 1999, finishing the
year as the nation's best performing real estate mutual fund. The Fund had a
total return of 28.76% in 1999, outperforming both the NAREIT Equity REIT
Index*, which had a total return of -4.62%, and the Standard & Poor's 500
Index, which had a total return of 21.04%.
The Fund's performance was driven primarily by Reckson Service Industries
(RSII), a company that is capitalizing on real estate-related business
opportunities fostered by the Internet -- a new investment theme developed in
1999. RSII, which was spun off from the office REIT, Reckson Associates Realty,
invests in business-to-business, e-commerce companies whose services can be
offered to small businesses and mobile workers via RSII's office network. RSII's
principal holdings include an 81% interest in HQ Global Workplaces, the largest
executive office suites company in the U.S., and a 43% interest in OnSiteAccess,
which provides broadband Internet/telecommunication services to office building
tenants. The Fund also took advantage of the proliferation of initial public
offerings during 1999. There is, of course, no guarantee that this environment
will continue into the future.
Our value-added research on RSII enabled the Fund to deliver positive
returns in spite of a difficult environment for real estate securities: 1998-99
was the first period of back-to-back negative return years for REITs since
1973-74. In contrast to 1998, when there were numerous negative surprises in
real estate security fundamentals (threats of recession and overbuilding,
capital markets crisis, and deflation trends), the macro-environment for real
estate was favorable in 1999 and fundamentals met expectations. The U.S. economy
was vibrant, real estate supply was disciplined, new construction was absorbed,
and REITs generated strong earnings growth (10%).
Notwithstanding solid company fundamentals, the market continued to devalue
real estate securities during 1999. Consequently, REIT valuation multiples have
now declined 45% since share prices peaked in December of 1997. A significant
portion of the multiple erosion can be attributed to a) the decline in projected
growth rates
1
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
from the mid-teens in the mid-1990's to the high single digits today; and b) a
higher risk premium needed to account for the age of the real estate cycle.
A new factor that impacted real estate company valuations in 1999 was the
Internet. Not surprisingly, the Retail sectors, which face the greatest
competitive threat by the Internet, had among the worst returns for REITs in
1999. Needless to say, the Internet is a revolution that is affecting every
sector of the economy. We believe that the Internet will affect demand for most
property types -- some positively, and some negatively -- as well as create new
revenue opportunities for landlords. Unlike many businesses, however, the
Internet does not radically alter the business model for real estate. That is
why capital is flowing to technology-producers and beneficiaries, and away from
real estate companies, whose investment opportunities pale by comparison.
Consequently, the market seemingly places little or no value on real estate's
primary investment characteristic, current income -- at least for the time
being.
INVESTMENT OUTLOOK
Our strategy is to invest in approximately twenty companies that offer the
best capital appreciation potential in the real estate industry and in related
businesses. We believe that several of these can be found among companies that
are benefiting from the spectacular growth of the Internet. To take advantage of
the opportunities emanating from the Internet and its impact on the real estate
industry, we have created a new sector within the real estate universe --
Services & Technology -- and have established a dedicated research effort to
cover these companies. At year-end, 29% of the Fund's assets were invested in
companies pursuing real estate-related business opportunities fostered by
e-commerce. While this allocation increases the risk profile of the Fund
relative to those that only invest in REITs, we believe the return potential
justifies the added risk.
In our opinion, the greatest new revenue opportunity for property landlords
is to provide broadband Internet/telecommunication services to tenants. We have
established a meaningful position in three 'building-centric' telecommunication
service providers: RSII, Allied Riser Communications, and CAIS Internet. Allied
Riser provides Internet/telecommunication services to office building owners.
CAIS Internet is the leading provider of Internet services to the Hotel and
Apartment sectors. These companies have an opportunity to create an entirely new
infrastructure for the real estate industry to provide highly sought-after
bandwidth via an attractive value-service proposition.
Despite the poor performance of real estate securities in 1999, we believe
that the positive factors influencing real estate securities outweigh the
negatives, and have invested 67% of the Fund's assets in companies that own
income-producing properties. That weighting is divided between a limited number
of REITs, selected for their superior total return potential, and other
companies that offer little or no current dividend income but unique capital
appreciation potential. The following factors should serve to stabilize real
estate company growth rates and security valuations and, in our opinion, enable
share prices to appreciate along with earnings growth:
2
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STRONG U.S. ECONOMY -- the economy entered 2000 with strong momentum and
projections call for 4% GDP growth in 2000, buttressed by acceleration
in nearly every region of the global economy.
RECORD LOW VALUATIONS -- in a high multiple market, REITs, on average,
have attractive valuations: price-to-asset value (17% discount from
asset value), dividend yield (8.7%), and price-to-cash flow ratio
(8.1x).
EQUILIBRIUM ENVIRONMENT -- most real estate markets are in equilibrium,
where growth in demand equals new supply and rents are rising at least
with inflation. The rising cost of debt capital, combined with public
market governance, should keep new construction in check.
IMPROVING SUPPLY-DEMAND FOR REIT SHARES -- the supply-demand
relationship for real estate securities could be a positive surprise in
2000. Equity capital raising has ground to a halt and company share
buyback programs now exceed $4 billion.
WASHED OUT PSYCHOLOGY -- in our opinion, the negative psychology towards
real estate securities is approaching levels last seen in 1990, when the
real estate industry was at the depths of a recession -- a positive
contrarian indicator.
We see three principal negatives for real estate securities: 1) the age of
the real estate cycle; 2) lack of external growth; and 3) the Internet threat.
While real estate conditions appear favorable, the risk potential in the real
estate market is higher today because occupancies and rents could deteriorate if
the economy were to slow. While we expect stable earnings growth for most
companies, the potential for upside earnings surprises is limited because the
cost of capital is high and high return acquisition opportunities are limited.
Finally, the Internet will remain a high growth, competitive threat to some
property types, particularly to retail but also to generic industrial, office in
commodity locations, and non-branded hotels. In our opinion these three
negatives are fully discounted in real estate company share prices.
Our investments in owners of income property are concentrated in the Office
(25%) and Health Care (19%) sectors. Office fundamentals should benefit from a
slowdown in new construction and continued strength in job growth, particularly
in 'knowledge-based' employment centers and markets benefiting from the growth
in technology. In Health Care, while Medicare cutbacks continue to challenge
nursing home operators, we see signs of bottoming. The balance of the portfolio
is invested in some of the blue-chip REITs, or 'Realty Majors' companies. We
believe these market leaders offer compelling risk-adjusted returns at current
valuations. When capital returns to the REIT sector, the Realty Majors will be
the first recipients of that capital due to their value-added management,
superior financial strength, and protected market positions.
In closing, we are pleased to report strong investment results despite the
second year of a bear market for real estate securities. While it is impossible
to predict when sentiment might improve, current fundamentals justify
3
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
an allocation to real estate securities for many investors, in our opinion. We
believe that the Fund is well positioned for investors with a capital
appreciation objective, considering the new opportunities that are being created
by the Internet, and the values we see in real estate securities.
Sincerely,
Martin Cohen Robert H. Steers
MARTIN COHEN ROBERT H. STEERS
President Chairman
Joseph M. Harvey
JOSEPH M. HARVEY
Portfolio Manager
- --------------------------------------------------------------------------------
Cohen & Steers is now online at WWW.COHENANDSTEERS.COM. Visit our website
for daily NAVs, portfolio information, performance information, recent news
articles, literature and insights on the REIT market.
- --------------------------------------------------------------------------------
* The NAREIT Equity REIT Index is an unmanaged, market capitalization
weighted index of all publicly-traded REITs that invest predominately in
the equity ownership of real estate. The index is designed to reflect the
performance of all publicly-traded REITs as a whole.
4
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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 companies. The Fund pursues its investment objective by seeking
investments in a limited number of companies which are engaged in the real
estate industry or related industries, or in companies which own significant
real estate assets and are believed by the investment advisor to have
unrecognized intrinsic value. Investments are selected for long-term capital
appreciation; current income is incidental to the Fund's investment objective.
In 1999, the Fund's investment performance significantly exceeded the total
returns of its real estate benchmark index and the S&P 500 Index. Although real
estate securities performed poorly in 1999, the Fund outperformed its benchmark
due to several factors. The largest factor was the Fund's position in Reckson
Service Industries, a company that is capitalizing on real estate-related
business opportunities fostered by the Internet. To a lesser extent, the Fund
benefited from both stock selection and from property sector selection by
focusing on the Office sector, which had positive total returns, and by avoiding
the Retail sector, which was among the worst performing real estate sectors.
Finally, the Fund also took advantage of the proliferation of initial public
offerings in 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DEC. 31, 1999
- ----------------------------------------------------------------------------
1 YEAR SINCE INCEPTION (5/8/97)
- ----------------------------------------------------------------------------
<S> <C> <C>
Fund 28.76% 7.37%
- ----------------------------------------------------------------------------
NAREIT Equity -4.62% -1.06%
- ----------------------------------------------------------------------------
S&P 500 21.04% 26.49%
- ----------------------------------------------------------------------------
</TABLE>
GROWTH OF A $10,000 INVESTMENT
SINCE INCEPTION
<TABLE>
<CAPTION>
COHEN & STEERS NAREIT S&P
<S> <C> <C> <C>
5/8/97 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 3,881 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
</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.
* Commencement of operations.
'D' 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 comprised of 167 real estate investment
trusts. 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.
5
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER VALUE % OF
OF SHARES (NOTE 1) NET ASSETS
--------- ----------- ----------
<S> <C> <C> <C>
EQUITIES
*Reckson Service Industries.............. 140,300 $ 8,751,212 20.34%
*Alexander's............................. 62,200 4,913,800 11.42
*Ventas.................................. 1,012,400 4,239,425 9.85
*Allied Riser Communications............. 108,500 2,244,594 5.22
Starwood Hotels & Resorts Worldwide..... 89,700 2,107,950 4.90
Vornado Realty Trust.................... 64,300 2,089,750 4.86
**Brookfield Properties Corp.............. 192,000 2,004,272 4.66
Equity Office Properties Trust Co....... 80,100 1,972,462 4.58
*Manor Care.............................. 121,900 1,950,400 4.53
*CAIS Internet........................... 54,400 1,931,200 4.49
Mack-Cali Realty Corp................... 63,500 1,654,969 3.85
SL Green Realty Corp.................... 70,200 1,526,850 3.55
AvalonBay Communities................... 41,800 1,434,262 3.33
Apartment Investment & Management
Co. -- Class A....................... 35,300 1,405,381 3.26
*Crescent Operating...................... 355,700 978,175 2.27
Health Care Property Investors.......... 40,500 966,938 2.25
Omega Healthcare Investors.............. 73,200 928,725 2.16
*Premier Parks........................... 31,300 903,788 2.10
Crescent Real Estate Equities Co........ 48,700 894,863 2.08
Mission West Properties................. 98,100 760,275 1.77
Nationwide Health Properties............ 24,400 335,500 0.78
----------- ------
TOTAL EQUITIES (Identified
cost -- $42,514,088)............. 43,994,791 102.25
----------- ------
</TABLE>
See accompanying notes to financial statements.
6
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT (NOTE 1) NET ASSETS
---------- ----------- ----------
<S> <C> <C> <C>
COMMERCIAL PAPER
Leggett & Platt Corp., 4.25%, due
1/3/00............................... $1,091,000 $ 1,090,742 2.53%
Eiffel Funding, 4.25%, due 1/3/00....... 1,090,000 1,089,743 2.53
----------- ------
TOTAL COMMERCIAL PAPER (Identified
cost -- $2,180,485)............. 2,180,485 5.06
----------- ------
TOTAL INVESTMENTS (Identified
cost -- $44,694,573)...................... 46,175,276 107.31
LIABILITIES IN EXCESS OF OTHER ASSETS....... (3,146,395) (7.31)
----------- ------
NET ASSETS (Equivalent to $26.76 per share
based on 1,607,804 shares of capital stock
outstanding).............................. $43,028,881 100.00%
----------- ------
----------- ------
</TABLE>
- -------------------
* Non-income producing security.
** Brookfield Properties Corp. is a Canadian company listed on the Toronto and
New York Stock Exchanges. The Toronto Stock Exchange is deemed the principal
exchange for valuation purposes. The market value of the Fund's position in
Canadian dollars on December 31, 1999 was $2,908,800 based on an exchange
rate of 1 Canadian dollar to 0.689 U.S. dollars.
See accompanying notes to financial statements.
7
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (Identified
cost -- $44,694,573) (Note 1)........................ $ 46,175,276
Receivable for fund shares sold......................... 1,638,225
Dividends receivable.................................... 112,184
Receivable for investment securities sold............... 17,807
Unamortized organization costs and other assets
(Note 1)............................................. 55,470
------------
Total Assets....................................... 47,998,962
------------
LIABILITIES:
Payable for outstanding borrowings (Note 6)............. 4,000,000
Payable for investment securities purchased............. 789,979
Payable for fund shares redeemed........................ 53,856
Payable to investment adviser........................... 30,052
Payable to administrator................................ 2,694
Other liabilities....................................... 93,500
------------
Total Liabilities.................................. 4,970,081
------------
NET ASSETS applicable to 1,607,804 shares of $0.001 par
value common stock outstanding (Note 4)................. $ 43,028,881
------------
------------
NET ASSET VALUE PER SHARE:
($43,028,881 [div] 1,607,804 shares outstanding)........ $ 26.76
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 4)......................... $ 69,840,876
Accumulated net realized loss on investments............ (28,292,698)
Net unrealized appreciation on investments.............. 1,480,703
------------
$ 43,028,881
------------
------------
</TABLE>
See accompanying notes to financial statements.
8
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Investment Income (Note 1):
Dividend income (net of $7,387 of foreign withholding
tax)................................................. $ 968,734
Interest income......................................... 92,128
-----------
Total Income....................................... 1,060,862
-----------
Expenses:
Investment advisory fees (Note 2)....................... 385,250
Interest expense (Note 6)............................... 236,514
Administration and transfer agent fees (Note 2)......... 99,226
Reports to shareholders................................. 64,327
Professional fees....................................... 54,175
Directors' fees and expenses (Note 2)................... 32,572
Amortization of organization expenses (Note 1).......... 22,404
Registration and filing fees............................ 21,488
Custodian fees and expenses............................. 15,551
Miscellaneous........................................... 15,542
-----------
Total Expenses..................................... 947,049
-----------
Reduction of Expenses (Note 5).......................... (106,216)
-----------
Net Expenses....................................... 840,833
-----------
Net Investment Income....................................... 220,029
-----------
Net Realized and Unrealized Gain/(Loss) on Investments:
Net realized loss on investments........................ (7,132,338)
Net change in unrealized appreciation/(depreciation) on
investments.......................................... 16,766,295
-----------
Net realized and unrealized gain/(loss) on
investments..................................... 9,633,957
-----------
Net Increase in Net Assets Resulting from Operations........ $ 9,853,986
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
9
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Change in Net Assets:
From Operations:
Net investment income................ $ 220,029 $ 1,964,591
Net realized loss on investments..... (7,132,338) (22,083,208)
Net change in unrealized
appreciation/(depreciation) on
investments....................... 16,766,295 (29,250,377)
------------ ------------
Net increase/(decrease) in net
assets resulting from
operations.................... 9,853,986 (49,368,994)
------------ ------------
Dividends and Distributions to Shareholders
from (Note 1):
Net investment income................ (121,783) (1,288,005)
Tax return of capital................ (77,627) (618,421)
------------ ------------
Total dividends and distributions to
shareholders...................... (199,410) (1,906,426)
------------ ------------
Capital Stock Transactions (Note 4):
Decrease in net assets from Fund
share transactions................ (21,784,897) (29,499,782)
------------ ------------
Total decrease in net assets.... (12,130,321) (80,775,202)
Net Assets:
Beginning of year.................... 55,159,202 135,934,404
------------ ------------
End of year.......................... $ 43,028,881 $ 55,159,202
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
10
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding
throughout each period 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, FOR THE PERIOD
------------------------------- MAY 8, 1997'D' THROUGH
PER SHARE OPERATING PERFORMANCE: 1999 1998 DECEMBER 31, 1997
- -------------------------------- ------------ ------------ ----------------------------
<S> <C> <C> <C>
Net asset value, beginning of period.......... $ 20.88 $ 32.25 $ 25.00
------- ------- --------
Income from investment operations:
Net investment income..................... 0.12 0.53 0.31
Net realized and unrealized gain/(loss) on
investments............................. 5.87 (11.39) 9.92
------- ------- --------
Total from investment operations...... 5.99 (10.86) 10.23
------- ------- --------
Less dividends and distributions to
shareholders from:
Net investment income..................... (0.07) (0.34) (0.27)
Net realized gain on investments.......... -- -- (2.59)
Tax return of capital..................... (0.04) (0.17) (0.12)
------- ------- --------
Total dividends and distributions to
shareholders....................... (0.11) (0.51) (2.98)
------- ------- --------
Net asset value, end of period................ $ 26.76 $ 20.88 $ 32.25
------- ------- --------
------- ------- --------
- --------------------------------------------------------------------------------------------------------------
Total investment return....................... 28.76% -33.83% 41.68%(1)
------- ------- --------
------- ------- --------
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -------------------------
Net assets, end of period (in millions)... $ 43.0 $ 55.2 $ 135.9
------- ------- --------
------- ------- --------
Ratios of expenses to average daily net
assets (before expense reduction)....... 2.21% 1.31% 1.35%(2)
------- ------- --------
------- ------- --------
Ratios of expenses to average daily net
assets (net of expense reduction)....... 1.96% 1.28% 1.35%(2)
------- ------- --------
------- ------- --------
Ratios of net investment income to average
daily net assets (before expense
reduction).............................. 0.26% 1.68% 1.73%(2)
------- ------- --------
------- ------- --------
Ratios of net investment income to average
daily net assets (net of expense
reduction).............................. 0.51% 1.71% 1.73%(2)
------- ------- --------
------- ------- --------
Portfolio turnover rate................... 115.43% 112.32% 96.68%(1)
------- ------- --------
------- ------- --------
</TABLE>
- -------------------
'D' Commencement of operations.
(1) Not annualized.
(2) Annualized.
See accompanying notes to financial statements.
11
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<PAGE>
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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, non-diversified
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 generally accepted accounting
principles. 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 reporting 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.
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.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid semi-annually. A portion of the Fund's dividend may
consist of amounts in excess of net investment income derived from non-taxable
components of the dividends from the Fund's portfolio investments. As a result,
the Fund had a return of capital of $77,627 ($0.04 per share) for the year ended
December 31, 1999, which has been
12
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
deducted from paid-in captial. Net realized capital gains, unless offset by any
available capital loss carryforward, are distributed to shareholders annually.
Distributions to shareholders are recorded on the ex-dividend date.
Dividends will automatically be 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.
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. During the year ended
December 31, 1999, the Fund decreased undistributed net investment income and
decreased accumulated net realized loss on investments sold by $98,246. These
differences are primarily due to return of capital and capital gain
distributions received by the Fund on portfolio securities.
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. At December 31, 1999
the Fund had, for federal income tax purposes, an unused capital loss
carryforward of $20,978,620 and $6,065,253 expiring in 2006 and 2007,
respectively.
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, 1999, the Fund amortized $22,404 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, 1999, the Fund incurred $385,250 in
advisory fees.
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 fee of 0.02% of the Fund's average daily
net assets. For the year ended December 31, 1999, the Fund paid the Adviser
$8,561 in fees under this administration agreement.
In addition, Cohen & Steers Special Equity Fund, Inc., Cohen & Steers Realty
Shares, Inc., Cohen & Steers Equity Income Fund, Inc. and Cohen & Steers Realty
Income Fund, Inc. (the 'Funds') have entered into a fund accounting, transfer
agency and sub-administration agreement with the Chase Manhattan Bank ('Chase')
pursuant to which an affiliate of Chase performs administration functions for
the Funds. Chase receives a monthly
13
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
sub-administration fee at the annual rate of 0.08% on the first $500 million of
the Funds' average daily net assets and at lower rates on the Funds' average
daily net assets in excess of that amount.
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 for their services as directors of
the Fund. For the year ended December 31, 1999, fees and related expenses
accrued for non-affiliated directors totaled $32,572.
Other: At December 31, 1999, there was one institutional investor owning 26%
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, 1999 totaled $52,324,861 and $74,600,022, respectively.
At December 31, 1999, the cost and unrealized appreciation or depreciation
in value of the investments owned by the Fund, as computed on a federal income
tax basis, are as follows:
<TABLE>
<S> <C>
Aggregate cost..................................... $45,943,398
-----------
Gross unrealized appreciation...................... $ 8,133,133
Gross unrealized depreciation...................... $(7,901,255)
-----------
Net unrealized appreciation........................ $ 231,878
-----------
-----------
</TABLE>
NOTE 4. 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 YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sold...................... 255,578 $ 5,946,184 1,527,210 $ 44,026,634
Issued as reinvestment of
dividends............... 5,940 139,354 62,196 1,534,584
Redeemed.................. (1,296,024) (27,870,435) (3,162,004) (75,061,000)
---------- ------------ ---------- ------------
Net decrease.............. (1,034,506) $(21,784,897) (1,572,598) $(29,499,782)
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
14
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DIRECTED BROKERAGE ARRANGEMENTS
The Adviser has directed certain portfolio trades to brokers who paid a
portion of the Fund's expenses. For the year ended December 31, 1999, the Fund's
expenses were reduced by $106,216 under this arrangement.
NOTE 6. BORROWINGS
The Fund, in conjunction with Cohen & Steers Realty Shares, Inc. and Cohen &
Steers Equity Income Fund, Inc., has entered into a Line of Credit Agreement
with Chase Manhattan Bank for $200,000,000. At December 31, 1999, the Fund had
loans outstanding totaling $4,000,000. For the year ended December 31, 1999, the
average daily balance of loans outstanding was $4,000,000 at a weighted average
interest rate of 5.62%. The maximum amount of loans outstanding at any time
during the year ended was $4,000,000. The loan is collaterized by the Fund's
portfolio to the extent of the loan outstanding.
15
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors 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, 1999, 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 two years in the
period then ended and for the period from May 8, 1997 (commencement of
operations) to December 31, 1997, in conformity with accounting principles
generally accepted in the United States. 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, 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, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 3, 2000
16
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<PAGE>
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
<TABLE>
<S> <C>
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 SUB-ADMINISTRATOR AND TRANSFER AGENT
Director Chase Global Funds Services Co.
73 Tremont Street
George Grossman Boston, MA 02108
Director (800) 437-9912
Jeffrey H. Lynford CUSTODIAN
Director The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
Willard H. Smith, Jr. New York, NY 10081
Director
LEGAL COUNSEL
Elizabeth O. Reagan Simpson Thacher & Bartlett
Vice President 425 Lexington Avenue
New York, NY 10017
Adam Derechin
Vice President and Assistant DISTRIBUTOR
Treasurer Cohen & Steers Securities, Inc.
757 Third Avenue
Lawrence B. Stoller New York, NY 10017
Assistant Secretary
NASDAQ Symbol: CSSPX
Website: www.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>
17
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<PAGE>
COHEN & STEERS
SPECIAL EQUITY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
[LOGO]
COHEN & STEERS
-------------------
SPECIAL EQUITY FUND
- ------------------------
ANNUAL REPORT
DECEMBER 31, 1999
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as ................................. 'D'
The division sign shall be expressed as ................................. [div]
