<PAGE>
MILWAUKEE
LAND
COMPANY
- -------------------------------------------------------------------------------
1996 ANNUAL REPORT
<PAGE>
To Our Shareholders:
For the year ended December 31, 1996, the net decrease in net assets resulting
from operations was $1,384,702. Net investment income for the same period
totaled $125,510, compared to $122,543 in 1995, or an increase of $2,967.
The net realized gain from sales of investments for 1996 amounted to $57,132,
compared to a loss of $52,728 in 1995. Together, net investment income and
realized gains on sales of investments for 1996 totaled $182,642, or $.11 per
common share, compared to net investment income plus realized losses on sales of
investments of $69,815, or $.04 per common share in 1995. Income per share of
common stock is based on the weighted average number of common shares
outstanding.
The unrealized depreciation on investments for 1996 increased $1,567,344. The
increase is primarily attributable to the decreased valuation of the Heartland
Partners L.P. Class B Interest and general partnership interest that were
transferred to Milwaukee Land Company by Chicago Milwaukee Corporation as part
of its conversion to an open-end investment company. The Class B Interest is
not publicly traded and is stated in the financial statements at a fair value as
determined by the Company's Board of Directors. The methodology used to
determine a fair value imputes a value to the Class B Interest based on the
market value of the publicly traded Class A limited partnership units at date of
valuation. Due to the inherent uncertainty of valuation, the recorded value of
the Class B Interest on the Company's financial statements may differ from the
value that would have been used had a ready market existed for the Class B
Interest, and the difference could be material.
The Company's principal investments in securities of nonaffiliates at year-end
consisted of portfolio securities invested in direct obligations of the U.S.
Government (all U.S. Treasury Notes and Bills) and high yield corporate
obligations. At December 31, 1996, 14.56% of the Company's net assets was
invested in high yield corporate obligations, 39.62% in U.S. Treasury
Obligations and .05% in cash equivalents. The current yield on high yield
corporate bonds held by the Company at December 31, 1996 was 9.26% with a yield
to maturity of 8.65%. The current yield on U.S. Government securities held by
the Company at December 31, 1996 was 6.12% with a yield to maturity of 5.95%.
The average maturity of all of the Company's portfolio investments in securities
of nonaffiliates at December 31, 1996 was 2.7 years and the current yield was
6.95%.
At December 31, 1996, the net asset value per common share amounted to $10.52
based on 1,671,238 common shares outstanding.
On December 31, 1996, the Company signed a letter of intent for the acquisition
of PG Design Electronics, a contract and product design manufacturer of printed
circuit boards for the computer industry. The Company is currently conducting
due diligence. The acquisition is subject to negotiation of a final contract and
approval by the Company's Board of Directors and shareholders. If the
acquisition is consummated, the Company will cease to be an Investment Company
within the meaning of the Investment Company Act of 1940 and will seek to
deregister.
Sincerely,
/s/ Edwin Jacobson
Edwin Jacobson
President and Chief Executive Officer
February 28, 1997
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Milwaukee Land Company
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Milwaukee Land Company as of December 31, 1996,
the related statement of operations for the year then ended, and the statement
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the four years in the period then ended.
These financial statements and the financial highlights are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits. The
financial highlights for the year ended December 31, 1992, were audited by other
auditors whose report dated February 19, 1993, expressed an unqualified opinion
on the financial statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosure in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Milwaukee Land Company at December 31, 1996, the results of its operations for
the year then ended, and the changes in its net assets for each of the two years
in the period then ended and financial highlights for each of the four years in
the period then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
February 18, 1997
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
Investments at Value:
<S> <C> <C>
Nonaffiliates (cost $9,477,090)............... $ 9,535,374
Affiliates (cost $12,260,845)................. 7,589,129
-----------
Total Investments............................. 17,124,503
Cash............................................. 1,191,774
Receivables:
Management fees - affiliate....... $425,006
Accrued interest.................. 169,200
Partnership distribution ......... 41,054
affiliates
Other............................. 51,770
--------
Total Receivables.................................. 687,030
Prepaid expenses................................... 61,942
-----------
Total Assets 19,065,249
LIABILITIES
Directors and officers............................. 12,389
Allowance for claims and liabilities............... 1,309,278
Other.............................................. 159,434
-----------
Total Liabilities............................... 1,481,101
NET ASSETS......................................... $17,584,148
===========
COMMON SHARES OUTSTANDING.......................... 1,671,238
===========
NET ASSET VALUE PER COMMON SHARE................... $10.52
===========
</TABLE>
See accompanying Notes to Financial Statements
2
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF OPERATIONS
Year ended December 31, 1996
<TABLE>
<CAPTION>
Investment Income:
<S> <C> <C>
Interest - nonaffiliates.............................. $ 658,005
Interest - affiliates................................. 107,331
Management fee from affiliate......................... 425,006
Equity in earnings - affiliates....................... 7,131
Other 2,696
-----------
Total Investment Income.............................. $ 1,200,169
Expenses:
Compensation and benefits............................. 427,482
Directors' fees and expenses.......................... 28,258
Professional fees..................................... 209,684
Advisory fees......................................... 19,457
Custodian fees........................................ 6,079
Franchise taxes....................................... 19,997
Insurance............................................. 90,186
Facility expense allocation........................... 37,128
General and administrative expenses................... 236,388
-----------
Total Expenses....................................... 1,074,659
------------
Net Investment Income.................................... 125,510
Net Realized Gain and Unrealized Depreciation on Investments:
Net realized gain on sales of investments................ 57,132
Net Change in Unrealized Depreciation on Investments:
Nonaffiliates......................................... (31,435)
Affiliates............................................ (1,535,909)
-----------
Net change in unrealized depreciation on investments (1,567,344)
-----------
Net Realized Gain and Unrealized Depreciation on Investments. (1,510,212)
------------
Net Decrease in Net Assets Resulting From Operations..... $(1,384,702)
============
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Year Ended
---------------------------
12/31/96 12/31/95
----------- -----------
<S> <C> <C>
Operations:
Net investment income............................................. $ 125,510 $ 122,543
Net realized gain (loss) on sales of investments.................. 57,132 (52,728)
Net change in unrealized depreciation on investments.............. (1,567,344) (4,090,796)
----------- -----------
Net Decrease in Net Assets Resulting From Operations.......... (1,384,702) (4,020,981)
Net Assets at Beginning of Year................................... 18,968,850 22,989,831
----------- -----------
Net Assets at End of Year (including undistributed net
investment income of $10,332,605 at December 31, 1996 and
$10,207,095 at December 31, 1995)............................. $17,584,148 $18,968,850
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
MILWAUKEE LAND COMPANY
SCHEDULE OF INVESTMENTS
December 31, 1996
NON-AFFILIATES
FIXED INCOME SECURITIES
Principal
U.S. Treasury Obligations -- 39.62% Amount Value
- ----------------------------------- ---------- -----------
<S> <C> <C>
U.S. Treasury bill, due 5/22/97........................................ $1,655,000 $ 1,617,956
U.S. Treasury notes, 6.125% due 3/31/98................................ 950,000 954,598
U.S. Treasury notes, 6.375% due 1/15/99................................ 1,600,000 1,614,992
U.S. Treasury notes, 6.875% due 7/31/99................................ 1,500,000 1,530,465
U.S. Treasury notes, 5.750% due 10/31/00............................... 1,265,000 1,248,201
-----------
Total U.S. Treasury Obligations (cost 6,968,346)................ 6,966,212
Corporate Obligations -- 14.56%
- -------------------------------
Navistar Finl Sr Sub Nt, 8.875%, due 11/15/98.......................... 150,000 153,750
Revlon Consumer Prods Corp Sr Nt, 9.500%, due 6/1/99................... 150,000 153,750
Unisys Corp Nt, 10.625%, due 10/1/99................................... 200,000 207,250
SIFTO CDA Inc Gtd Sr Secd Nt, 8.500% due 7/15/00....................... 200,000 199,000
Armco Inc. Sr Nt, 9.375%, due 11/1/00.................................. 250,000 251,250
Reliance Group Hldgs Inc Sr Nt, 9.000%, due 11/15/00................... 150,000 154,500
Stone Consol Corp Sr Secd Nt, 10.250%, due 12/15/00.................... 200,000 213,000
Repap Wis Inc 1st Priority Sr Secd Nt, 9.250%, due 2/1/02.............. 200,000 201,500
Sequa Corp Sr Nt, 8.75%, due 12/15/01.................................. 250,000 250,000
Century Communications Corp Sr Nt, 9.750%, due 2/15/02................. 200,000 206,000
Owens Il Inc Sr Sub Nt, 10.500%, due 6/15/02........................... 200,000 211,000
Rogers Cablesystems Ltd Sr Secd 2nd Priority Nt, 9.625%, due 8/1/02.... 200,000 208,500
CTC Mansfield Fdg Corp Sec Lease Oblig, 10.250%, due 3/30/03........... 149,000 151,199
-----------
Total Corporate Obligations (cost $2,500,281)....................... 2,560,699
Money Market Fund -- .05%
- -------------------------
Norwest Cash Investment Fund (cost $8,463)............................. 8,463
-----------
Total Non-Affiliates (cost $9,477,090).............................. 9,535,374
AFFILIATES -- 43.16%
- --------------------
Heartland Partners, L.P. - 1% General Partnership Interest and
.5% Class B Limited Partnership Interest (a)....................... 7,587,854
CMC Heartland Partners - .01% General Partnership Interest (a)........ 1,275
-----------
Total Affiliates (cost $12,260,845)................................. 7,589,129
-----------
Total Investments (cost $21,737,935) - 97.39%....................... 17,124,503
OTHER ASSETS AND LIABILITIES, NET -- 2.61%............................. 459,645
-----------
NET ASSETS - 100%...................................................... $17,584,148
===========
</TABLE>
(a) Investments not readily marketable
See accompanying Notes to Financial Statements
5
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Milwaukee Land Company (the "Company") registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as a non-diversified, closed-
end management investment company on March 23, 1988. Prior to June 30, 1993 the
Company was a wholly owned subsidiary of Chicago Milwaukee Corporation ("CMC").
Security valuation:
Investments are stated at value. Securities traded on securities exchanges
or on the NASDAQ National Market System are valued at the last sales price on
the principal exchange or market on which they are traded or listed or, if there
has been no sale that day, at the mean of closing bid and asked prices. Fixed-
income securities are valued at the most recent bid quotation. Money market
instruments are valued at cost, which approximates market value. Other
securities for which prices are not readily available are valued for reporting
purposes under the 1940 Act at a fair value as determined by the Board of
Directors.
The Company's investment in the Class B limited partnership interest and
the general partner interest (together, the "Class B Interest") of Heartland
Partners, L.P. is not publicly traded, and accordingly there are no available
market quotations. On December 7, 1995, the Board of Directors of the Company
changed the methodology for valuing the Class B Interest. In making its
determination of a fair value for the Class B Interest, the Board of Directors
of the Company considers an imputed value based on the change in the market
value of the publicly traded Class A limited partnership interests in Heartland
Partners, L.P. (the "Units"). The percentage change in the market value of the
publicly traded Units from June 30, 1990, is applied to the initial cost of the
Class B Interest (approximately $9.6 million) to the date of valuation.
Due to the inherent uncertainty of valuation, the recorded value of the
Class B Interest and the general partnership interest in Heartland on the
Company's financial statements may differ from values that would have been used
had a ready market existed for these interests, and the difference could be
material.
The change in methodology adopted by the Board resulted in a decrease in
the value of the Class B Interest of $6.2 million in 1995 and reduced unrealized
gains $4.5 million, net of tax. The effect on the net asset value of the
Company at December 31, 1995 was a decrease of $2.69 per share.
Investment transactions and investment income:
Security transactions are accounted for on the trade date. Realized gains
and losses on investment transactions are determined on an identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of premium and accretion of discount on securities owned.
Use of Estimates:
Management is required to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
6
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 2. NET ASSETS
Net assets at December 31, 1996 consisted of the following items:
<TABLE>
<CAPTION>
<S> <C>
Common stock - $0.30 par value per share, authorized 10,000,000
shares, 1,671,238 shares issued and outstanding.................... $ 501,371
Paid in capital..................................................... 10,773,419
Undistributed net investment income................................. 10,332,605
Undistributed net realized gains on investment transactions......... 590,185
Net unrealized depreciation on investments.......................... (4,613,432)
-----------
Net Assets......................................................... $17,584,148
===========
</TABLE>
Certain reclassifications have been made within the components of net
assets as of December 31, 1995 to conform to the 1996 presentation.
NOTE 3. INVESTMENT SERVICES
During 1996 the Company paid advisory fees for investment advisory services
under an agreement with OFFITBANK, a nonaffiliated investment advisor. For the
services rendered by OFFITBANK under the agreement, the Company paid OFFITBANK
an annual investment advisory fee equal to .20 of 1% per annum of the value of
the portfolio under management. The agreement provides that the advisory fee is
payable quarterly in arrears based on the average month-end value of the
portfolio during such quarter.
NOTE 4. FEDERAL INCOME TAXES
As of December 31, 1996, the Company has deferred tax assets consisting of
tax NOL carryforwards of approximately $146,000, AMT credit carryforwards of
approximately $919,000 and tax unrealized investment losses of approximately
$1,113,000. The NOL carryforwards expire in 2009 and 2010. For financial
reporting purposes, a valuation allowance has been provided to offset the
deferred tax assets.
Based on cost of investments for federal income tax purposes of $19,773,509
on December 31, 1996, net unrealized depreciation was $2,649,006, consisting of
gross unrealized appreciation of $77,650 and gross unrealized depreciation of
$2,726,656.
7
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 5. INTERESTS IN PARTNERSHIPS AND RELATED TRANSACTIONS
The Company has a 1% general partnership interest in Heartland Partners,
L.P. ("Heartland") which entitles the Company to 1% of Heartland's available
cash for distribution and allocation of taxable income and loss. The Company
also has a .01% general partnership interest in CMC Heartland Partners ("CMC
Heartland") which entitles the Company to .01% of CMC Heartland's available cash
for distribution and an allocation of taxable income and loss before
distributions and allocations are made by Heartland. The Company's interests in
Heartland and CMC Heartland (collectively, the "Partnerships"), including the
Class B Interest in Heartland described below, were included in investments at a
value of $7,589,129 at December 31, 1996.
The Company, in its capacity as the general partner of Heartland and the
managing general partner of CMC Heartland, has full, exclusive and complete
discretion to manage the business and affairs of the Partnerships and is
authorized in general to perform all acts necessary or appropriate to carry out
the purposes and conduct the business of the Partnerships.
In general, the Class B Interest entitles the holder to .5% of Heartland's
available cash for distribution and allocations of taxable income and loss. In
addition, items of deduction, loss, credit and expense attributable to the
satisfaction of Plan Liabilities (as defined below) are specially allocated 99%
to the holder of the Class B Interest and 1% to the Company as the general
partner until the aggregate amount of all such items allocated to the Class B
Interest equals to the aggregate capital contribution with respect to the Class
B Interest. If the aggregate amount to such items specially allocated to the
holder of the Class B Interest is less than the amounts contributed by such
holder to Heartland, such excess will be reflected in the capital account of the
Class B Interest. Plan Liabilities consist of most of the liabilities for
claims remaining under the plan of reorganization of the predecessor of CMC Real
Estate Corporation, formerly a wholly owned subsidiary of CMC, and previously
named the Chicago Milwaukee, St. Paul and Pacific Railroad Company (the
"Railroad"), certain other contingent liabilities with respect to the properties
transferred to CMC Heartland arising after the consummation of such plan, and
the costs and expenses incurred in resolving such plan and other contingent
liabilities, for which the Partnerships have assumed primary liability.
The Company has a management agreement with CMC Heartland, pursuant to
which CMC Heartland is required to pay to the Company an annual management fee
in the amount of $425,006. On December 31, 1996, the Company received
$1,180,853 related to previously accrued management fees including $107,331 for
interest related to past due amounts. The 1996 accrued management fee in the
amount of $425,006 was paid on February 14, 1997.
For the year ended December 31, 1996, the Company paid CMC Heartland
approximately $141,000 for staff salary and operating expense allocations.
8
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 6. CONTINGENT LIABILITIES
The Company, by reason of its serving as the general partner of the
Partnerships, is liable and responsible to third parties for the Partnerships'
liabilities to the extent the assets of the Partnerships are insufficient to
satisfy such liabilities. In addition to liabilities incurred as a result of
their ongoing real estate business, the Partnerships assumed primary
responsibility for the Plan Liabilities (see Note 5).
Included in the Plan Liabilities are known environmental liabilities
associated with certain of the properties transferred to the Partnerships
arising out of the activities of the Railroad or certain lessees or other third
parties. Further environmental obligations as yet unknown in respect of these
properties may become due and owing in the future. A majority of the known
environmental matters stem from the use of petroleum products, such as motor oil
and diesel fuel, in the operation of a railroad, the primary liabilities in
connection with certain of these real estate properties. Descriptions of the
known material environmental matters are included in the reports filed by
Heartland with the Securities and Exchange Commission pursuant to the provisions
of the Securities Exchange Act of 1934, as amended.
NOTE 7. INVESTMENT TRANSACTIONS
Investment transactions for the year ended December 31, 1996 (excluding
short-term investments) are as follows:
<TABLE>
<S> <C>
Purchases................................ $3,504,625
Proceeds from sales and maturities....... $4,920,861
</TABLE>
9
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31, 1996
NOTE 8. CERTAIN DISCLOSURES PURSUANT TO RULE 8b-16, AS AMENDED
The Company has no divided reinvestment plan and has no plans to implement
such a plan. The Company's Certificate of Incorporation and By-laws contain
several provisions intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and in the
policies formulated by such board. These provisions provide for, among other
things, a classified board of directors, the prohibition of stockholder action
by written consent, the authorization of "blank ticket" preferred stock, the
prohibition of calling special stockholder meetings unless requested by the
Chairman, President or the holders of not less than 80% of the outstanding
common stock of the Company, and the prohibition of calling special Board
meetings unless requested by the Chairman, President or 75% of the directors.
The portfolio manager associated with the investment policies of the fund
has not changed. No material changes to the Company's investment objective or
policies were made during 1996.
NOTE 9. POTENTIAL ACQUISITION
On December 31, 1996, the Company signed a letter of intent for the
acquisition of PG Design Electronics, a contract and product design manufacturer
of printed circuit boards for the computer industry. The Company is currently
conducting due diligence. The acquisition is subject to negotiation of a final
contract and approval by the Company's Board of Directors and shareholders. If
the acquisition is consummated, the Company will cease to be an Investment
Company within the meaning of the Investment Company Act of 1940 and will seek
to deregister.
10
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Concluded)
December 31, 1996
NOTE 10. FINANCIAL HIGHLIGHTS
The table below reflects per share financial highlights and ratios for a
share of common stock outstanding during the years presented.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning
of Year......................... $ 11.35 $ 13.76 $ 13.39 $ 6.59 $ 6.42
Net Investment Income.............. .08 .07 .05 .02 .17
Net (Losses)/Gains on Securities
(realized and unrealized)....... (.91) (2.48) .32 .81 ---
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations...................... (0.83) (2.41) .37 .83 .17
Capital Contribution
From CMC........................ --- --- --- 5.97 ---
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of
Year............................ $ 10.52 $ 11.35 $ 13.76 $ 13.39 $ 6.59
=========== =========== =========== =========== ===========
Per Share Market Value,
End of Year..................... $ 6.19 $ 7.38 $ 8.00 $ 6.50 N/A
Total Investment Return:
Market.......................... (16.11%) (7.81%) 23.08% (10.34%) N/A
Net Asset Value................. (7.31%) (17.51%) 2.76% 103.19% 2.65%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Year............ $17,584,148 $18,968,850 $22,989,831 $22,377,842 $11,013,637
Ratio of:
Expenses to Average
Net Assets.................... 5.89% 4.17% 5.82% 6.52% 3.4%
Net Investment Income to
Average Net Assets............ .69% .53% .36% .17% 2.6%
Portfolio Turnover Rate............ 22.09% 35.16% 24.25% 99.64% 2.24%
</TABLE>
11
<PAGE>
MILWAUKEE LAND COMPANY
Board of Directors Milwaukee Land Company
CLARENCE G. FRAME A closed-end management
Chairman of the Board investment company traded on the
Milwaukee Land Company American Stock Exchange, symbol
MWK.
EDWIN JACOBSON
President and Chief Executive Officer 547 W. Jackson Blvd.
Milwaukee Land Company Chicago, IL 60661
(312) 294-0497
ROBERT S. DAVIS
Consultant Investment Advisor
OFFITBANK
EZRA K. ZILKHA 520 Madison Avenue
President, Zilkha & Sons, Inc. New York, NY 10022
Officers Custodian
Norwest Bank Minnesota, N.A.
EDWIN JACOBSON Norwest Center
President and Chief Executive Officer 6th and Marquette
Minneapolis, MN 55479-0065
LEON F. FIORENTINO
Vice President - Finance, Transfer Agent, Stock Registrar and
Secretary and Treasurer Dividend Disbursing Agent
LaSalle National Trust, N.A.
LAWRENCE S. ADELSON 135 S. LaSalle Street
Vice President and General Counsel Room 1811
Chicago, IL 60690
THOMAS F. REDLER (312) 904-2450
Assistant Treasurer and
Assistant Secretary Independent Auditors
Ernst & Young LLP
233 S. Wacker Drive
Chicago, IL 60606
