<PAGE>
MILWAUKEE
LAND
COMPANY
=========================================================================
1997 SEMI-ANNUAL REPORT
<PAGE>
To Our Shareholders:
For the six months ended June 30, 1997, the net decrease in net assets resulting
from operations amounted to $4,732, which has an immaterial impact per common
share. Net assets at June 30, 1997 amounted to $17,579,416 equivalent to a net
asset value of $10.52 per common share.
Net investment loss for the six months ended June 30, 1997 totaled $252,713
compared to net investment income of $14,877 for the similar period of 1996 or a
decrease of $267,590. The decrease is attributable primarily to higher operating
expenses, principally those related to acquisition activities.
The net realized loss from sales of investments for the six months ended June
30, 1997 amounted to $51,561 compared to a gain of $48,694 in the similar period
of 1996. Together, net investment loss plus realized loss on sale of investments
for the six months ended June 30, 1997 totaled $304,274 or $.18 per common share
compared to net investment income plus realized gain on sales of investments of
$63,571 or $.04 per common share for the similar period of 1996. Income per
share of common stock is based upon the weighted average number of common shares
outstanding.
During the second quarter of 1997, the Company liquidated its entire non-
affiliated investment portfolio. Most of the resulting cash was used on May 30,
1997 to acquire the assets, subject to certain liabilities, of P.G. Design
Electronics, Inc. The Company's total investment in P.G. Design Electronics,
Inc. at May 30, 1997 was $13,337,569. The fair value of the Company's investment
in P.G. Design Electronics, Inc. at June 30, 1997, including P.G. Design's net
profit for the month of June 1997, was $13,695,395 (which is essentially cost
plus net profit for June).
Shortly after the successful acquisition of P. G. Design Electronics, Inc., the
Company applied for deregistration under the Investment Company Act of 1940 with
the Securities and Exchange Commission. That application is pending.
At the shareholders meeting scheduled for Wednesday, September 17, 1997, in
Chicago, Illinois, the shareholders have been asked to approve an amendment of
the Company's Certificate of Incorporation to change the Company's name from
"Milwaukee Land Company" to "Heartland Technology, Inc." The shareholders have
also been asked to approve two new director nominees, Alan Andreini as a Class I
director and John R. Torell, III as a Class III director.
Sincerely,
/s/ Edwin Jacobson
-------------------------------------
Edwin Jacobson,
President and Chief Executive Officer
August 29, 1997
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
ASSETS
Investments at Value:
<S> <C> <C>
Nonaffiliates (cost $300,000).................................................... $ 300,000
Heartland Partners, L.P. and CMC Heartland Partners (cost $12,260,845)........... 7,589,129
PG Design Electronics, Inc. (cost $13,337,569)................................... 13,695,395
-----------
Total Investments.............................................................. 21,584,524
Cash.................................................................................. 148,163
Receivables:
Management fees - affiliate........................................ $ 212,503
Accrued interest................................................... 19,646
Other.............................................................. 52,126
-----------
Total Receivables..................................................................... 284,275
Prepaid and deferred expenses and other assets........................................ 190,235
-----------
Total Assets..................................................................... 22,207,197
LIABILITIES
Directors and officers................................................................ 8,092
Allowance for claims and liabilities.................................................. 1,309,278
Notes payable......................................................................... 3,000,000
Other................................................................................. 310,411
-----------
Total Liabilities................................................................ 4,627,781
-----------
NET ASSETS............................................................................ $17,579,416
===========
COMMON SHARES OUTSTANDING............................................................. 1,671,238
===========
NET ASSET VALUE PER COMMON SHARE...................................................... $10.52
===========
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF OPERATIONS
Six months ended June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Investment Income:
- -------------------------------------------------------------------------------------
<S> <C> <C>
Interest - Nonaffiliates................................. $271,125
Interest - Affiliates.................................... 18,345
Management fee from affiliate............................ 212,503
Other.................................................... 5,124
--------
Total Investment Income................................ $ 507,097
Expenses:
Compensation and benefits................................ 275,454
Director's fees and expenses............................. 24,871
Professional fees........................................ 81,754
Advisory fees............................................ 7,395
Custodian fees........................................... 2,987
Taxes.................................................... 10,693
Insurance................................................ 64,423
Facility expense allocation.............................. 18,690
General and administrative expenses...................... 273,543
--------
Total Expenses......................................... 759,810
---------
Net Investment Loss............................................. (252,713)
Net Realized Loss and Unrealized Appreciation on Investments:
Net realized loss on sales of investments....................... (51,561)
Net change in unrealized appreciation on investments:
Nonaffiliates................................................ (58,284)
Affiliates................................................... 357,826
--------
Net change in unrealized appreciation on investments......... 299,542
--------
Net Realized Loss and Unrealized Appreciation on Investments.... 247,981
---------
Net Decrease in Net Assets Resulting From Operations............ $ (4,732)
=========
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
MILWAUKEE LAND COMPANY
STATEMENT OF CHANGES IN NET ASSETS
Six months ended June 30, 1997 and Year ended December 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Period Ended
--------------------------
<S> <C> <C>
6/30/97 12/31/96
----------- -----------
Operations:
Net investment (loss) income............................... $ (252,713) $ 125,510
Net realized (loss) gain on sales of investments........... (51,561) 57,132
Net change in unrealized appr. (depr.) on investments...... 299,542 (1,567,344)
----------- -----------
Net Decrease in Net Assets Resulting From Operations... (4,732) (1,384,702)
Net Assets at Beginning of Beginning of Period............. 17,584,148 18,968,850
----------- -----------
Net Assets at End of Period (including undistributed
net investment income of $10,079,892 at June 30, 1997
and $10,332,605 at December 31, 1996).................... $17,579,416 $17,584,148
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements
5
<PAGE>
MILWAUKEE LAND COMPANY
SCHEDULE OF INVESTMENTS
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
NON-AFFILIATE
FIXED INCOME SECURITIES
Money Market Fund -- 1.71% Value
-----------
<S> <C>
Norwest Cash Investment Fund (cost $300,000)............................... $ 300,000
-----------
Total Non-Affiliate (cost $300,000)................................... 300,000
AFFILIATES -- 121.07%
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 Partnerships (cost $12,260,845)................................. 7,589,129
-----------
PG Design Electronics, Inc. (cost $13,337,569)............................. 13,695,395
-----------
Total Affiliates (cost $25,598,414)................................... 21,284,524
-----------
Total Investments (cost $25,898,414) (122.78%)........................ 21,584,524
OTHER ASSETS AND LIABILITIES, NET -- (22.78%).............................. (4,005,108)
-----------
NET ASSETS - 100%.......................................................... $17,579,416
===========
</TABLE>
(a) Investments not readily marketable
See accompanying Notes to Financial Statements
6
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
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. Short-term
securities are valued at amortized cost, which approximates market value. Other
securities for which prices are not readily available are valued at a fair value
as determined by the Board of Directors for reporting purposes under the 1940
Act.
The Company's investments in the securities of its affiliates, including
the Class B limited partner interest (the "Class B Interest") and general
partner interest in Heartland Partners, L.P., the general partner interest in
CMC Heartland, and common stock of P.G. Design Electronics, Inc., are not
publicly traded, and accordingly there are no available market quotations.
In making its determination of a fair value for the Class B Interest, the
Board of Directors of the Company considers the market value of the publicly
traded Class A limited partner interest in Heartland Partners, L.P. (the
"Units"), the operating results and current development activities of Heartland
Partners, L.P., the likelihood and timing of any distributions from Heartland to
its Class A unitholders, the likelihood that the Class B interest will be
entitled to any significant distributions until liquidation of Heartland, which
absent an earlier termination event will be the year 2065, the market price of
the Company's common stock and such other factors as the Board of Directors
deems appropriate. In making its determination of a fair value for the common
stock of P.G. Design Electronics, Inc., ("PG Design"), the Board of Directors of
the Company considers the cost of the Company's investment in PG Design, the
operating results of PG Design and such other factors as the Board of Directors
deems appropriate.
Due to the inherent uncertainty of valuation, the recorded value of the
Class B Interest and the general partner interests in Heartland Partners, L.P.
and CMC Heartland Partners, and the recorded value of the common stock of PG
Design 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.
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 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.
7
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
NOTE 2. NET ASSETS
<S> <C>
Net assets at June 30, 1997 consisted of the following items:
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............................. 10,079,892
Undistributed net realized gains on investment transactions..... 538,624
Net unrealized depreciation on investments...................... (4,313,890)
----------
Net Assets.................................................... $17,579,416
===========
</TABLE>
NOTE 3. INVESTMENT SERVICES
Through June 2, 1997, the Company paid advisory fees for investment
advisory services under a revised agreement with OFFITBANK, a nonaffiliated
investment advisor. For the services rendered by OFFITBANK under the revised
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 revised
agreement provided that the advisory fee was payable quarterly in arrears based
on the average month-end value of the portfolio during such quarter. The
Company terminated the agreement with OFFITBANK on June 2, 1997.
NOTE 4. FEDERAL INCOME TAXES
As of June 30, 1997, the Company had deferred tax assets consisting of tax
NOL carryforwards of approximately $146,000, AMT credit carryforwards of
approximately $919,000. The NOL carryforwards expire in 2009 and 2010. For
financial reporting purposes, a valuation allowance has been provided.
Based on cost of investments for federal income tax purposes of $24,291,814
on June 30, 1997, gross unrealized depreciation was $2,977,290.
8
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 1997
(unaudited)
NOTE 5. INTERESTS IN PARTNERSHIPS AND RELATED TRANSACTIONS
The Company has a 1% general partner 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 June 30, 1997.
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 0.5% 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 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 June 30, 1997, 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 six months ended June 30, 1997, the Company paid CMC Heartland
approximately $269,000 for officer salary, staff salary and operating expense
allocations.
9
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 1997
(unaudited)
NOTE 6. CONTINGENT LIABILITIES
The Company, 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 six months ended June 30, 1997 (excluding
short-term investments) are as follows:
<TABLE>
<S> <C>
Purchases....................................... $2,540,238
Proceeds from sales and maturities.............. $9,518,377
</TABLE>
During the second quarter of 1997, the Company liquidated its entire non-
affiliates portfolio which was used to finance the acquisition of P.G. Design
Electronics, Inc. On May 30, 1997, the Company closed the transaction to
acquire the assets, subject to certain liabilities of P.G. Design Electronics,
Inc. and a subsidiary formed in connection with the transaction. The purchase
price was $15 million and the assumption of bank debt approximating $1.2
million. $12 million was payable at closing with two interest bearing notes at
8% payable $1.5 million on May 30, 2000 and $1.5 million payable on May 30,
2002. The Company's total investment in P.G. Design Electronics, Inc. at June
30, 1997, was $13,337,569.
P.G. Design Electronics, Inc. is a contract design manufacturer of printed
circuit board assemblies and products for computer and computer products
manufacturers. P.G. Design Electronics, Inc. had sales of approximately $25
million in 1996.
10
<PAGE>
MILWAUKEE LAND COMPANY
NOTES TO FINANCIAL STATEMENTS - (Concluded)
June 30, 1997
NOTE 8. FINANCIAL HIGHLIGHTS
The table below reflects per share financial highlights and ratios for a
share of common stock outstanding during the periods presented.
<TABLE>
<CAPTION>
Six Months Years Ending
Ended ----------------------------------------------------
6/30/97 1996 1995 1994 1993
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value, Beginning
of period.................... $ 10.52 $ 11.35 $ 13.76 $ 13.39 $ 6.59
Net Investment (Loss) Income.... (0.15) 0.07 0.07 0.05 0.02
Net (Losses)/Gains on Securities
(realized and unrealized).... 0.15 (0.90) (2.48) 0.32 0.81
----------- ----------- ----------- ----------- -----------
Total From Investment
Operations................... --- (0.83) (2.41) 0.37 0.83
Capital Contribution
From CMC..................... --- --- --- --- 5.97
Less Distributions:
From Net Investment Income
Common Shareholders....... --- --- --- --- ---
----------- ----------- ----------- ----------- -----------
Total Distributions............. --- --- --- --- ---
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of
Period....................... $ 10.52 $ 10.52 $ 11.35 $ 13.76 $ 13.39
=========== =========== =========== =========== ===========
Per Share Market Value,
End of Period................ 9.75 6.19 7.38 8.00 6.50
Total Investment Return:
Market (a)................... 115.02% (16.11)% (7.81)% 23.08% (10.34)%
Net Asset Value (a).......... --- (7.31)% (17.51)% 2.76% 103.19%
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Period....... $17,579,416 $17,584,148 $18,968,850 $22,989,831 $22,377,842
Ratio of:
Expenses to Average
Net Assets (a)............ 8.88% 5.89% 4.17% 5.82% 6.52%
Net Investment Income to
Average Net Assets (a).... (2.96)% 0.69% 0.53% 0.36% 0.17%
Portfolio Turnover Rate......... 15.42% 98.64% 35.16% 24.25% 99.64%
</TABLE>
(a) Annualized returns for 1997
11
<PAGE>
MILWAUKEE LAND COMPANY
<TABLE>
<CAPTION>
<S> <C>
Board of Directors Milwaukee Land Company
ROBERT S. DAVIS A closed-end management investment company traded
Consultant on the American Stock Exchange, symbol MWK.
EDWIN JACOBSON 547 W. Jackson Blvd.
President and Chief Executive Officer Chicago, IL 60661
Milwaukee Land Company (312) 294-0497
EZRA K. ZILKHA Custodian
President, Zilkha & Sons, Inc. Norwest Bank Minnesota, N.A.
Norwest Center
Officers 6th and Marquette
Minneapolis, MN 55479-0065
EDWIN JACOBSON
President and Chief Executive Officer Transfer Agent, Stock Registrar and
Dividend Disbursing Agent
LEON F. FIORENTINO LaSalle National Trust, N.A.
Vice President - Finance, 135 S. LaSalle Street
Secretary and Treasurer Room 1811
Chicago, IL 60690
LAWRENCE S. ADELSON (312) 904-2450
Vice President and General Counsel
Independent Auditors
THOMAS F. REDLER Ernst & Young LLP
Assistant Treasurer and 233 S. Wacker Drive
Assistant Secretary Chicago, IL 60606
</TABLE>
