<PAGE> 1
- --------------------------------------------------------------------------------
A MESSAGE FROM THE INVESTMENT MANAGER
Dear Shareholders:
The U.S. economy continued its trend of solid growth accompanied by a low rate
of inflation during 1996. The year followed a five-year uptrend that kept
factories busy and unemployment at low levels. This is the second longest
expansion in this century.
Most analysts, however, do not believe it will die of old age. Generally,
economic cycles end when strong growth causes an increase in price levels and,
to slow the economy, the Federal Reserve tightens monetary policy which results
in rising interest rates. The current economic environment, however, has been
referred to as a "Goldilocks" economy, "not too hot, not too cold", which has
continued unabated and gives no signs of coming to an abrupt end any time soon.
This upbeat environment provided the backdrop for another year of exceedingly
strong stock market returns. For 1996, the S&P 500 Stock Index increased by
22.9%, and for the past two years it has averaged 30.2% per year. This is nearly
three times the past 70-year average of 10.7%. In fact, the 1995-96 stock market
performance was the best two-year performance in twenty years.
While this does not necessarily spell trouble ahead, periods of very high
returns, i.e. higher than the long-term averages, are often followed by periods
of lower, although not necessarily negative, investment results. No one can
predict with precision short-term changes in the direction of the financial
markets. Currently, experts disagree as to whether stocks are overpriced,
however, it is reasonable to assume that the extended bull market has increased
the risks of investing in equities.
Within the equity market, there has been significant disparity in investment
returns even in this generally positive environment. In 1996, large
capitalization "blue-chip" stocks significantly outperformed smaller
capitalization stocks. For example, the return for the Russell 2000, a small
stock index, was 16.5% for 1996 compared to 29.5% for the blue-chip Dow Jones
Industrial Average. Investors eager to get into the booming market have been
investing significant amounts in stock index funds. These funds are designed to
track the market movements in general and are not designed to benefit from any
skill of the portfolio manager in selecting individual stocks. The most popular
index is the large cap S&P 500 Stock Index and its recent popularity has
contributed to the outperformance in the equity markets.
The fixed-income markets experienced some volatility throughout the course of
the year. Interest rates often move up or down based on investors' expectations
of the economy's strength and inflation. If investors think that inflation will
increase, they usually require higher yields from bonds to offset the negative
impact of inflation. When the economy slows, investors are willing to accept
lower yields, since the principle value of bonds tend to rise.
<PAGE> 2
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A MESSAGE FROM THE INVESTMENT MANAGER
(CONTINUED)
During the first half of the year, economic data seemed to indicate stronger
economic growth and a possible increase in the level of inflation. During that
time, the yield on 10-year Treasury bonds increased by 1.2 percentage points.
However, during the second half of the year, most of the economic data released
suggested a reversal of this trend and the upward pressure on interest rates
disappeared. While the market value of bonds may vary depending upon the
direction of interest rates, most bonds do pay a fixed level of interest
payments until they mature. Investors should remember that coupon income
comprises a major component of bond returns over time.
VALUE FUND
The Value Fund is invested in both middle and large capitalization companies in
the value sector of the market. As such, Fund performance lagged behind the
popular large capitalization indexes. Nevertheless, its return of 17.9% for the
twelve months ended December 31, 1996 was competitive with the mid-cap indexes,
particularly the Russell 2000, and with funds of similar investment objectives.
The Fund's holdings include substantial investments in financials, consumer
cyclicals and the energy sector of the economy. Portfolio strategy continues to
avoid companies in the popular technology sector, which we believe to be
overpriced at this time. The financial and energy sectors were strong performers
in the market overall. However, the absence of the high tech stocks and the
market emphasis on larger capitalized companies partially offset the benefits of
the good sector allocations. We believe that when the current market excesses
correct themselves and the overvalued sectors of the market reverse their
current trends, our value approach towards investing will prove to be rewarding
to our shareholders.
SHORT-TERM BOND FUND
The Short-Term Bond Fund had a total return of 5.2% for the twelve months ended
December 31, 1996. Yield spreads between the various sectors remained relatively
narrow throughout the year. The Fund continued to emphasize high-quality,
short-term corporate issues. In the beginning of the year, the Fund's
concentration was 45% in corporate securities and 25% in the U.S. Government and
agencies. This portfolio mix remained essentially unchanged throughout the
course of the year. The 30-day SEC yield began the year at 5.4% and ended the
year at 6.0%. The average weighted maturity of the Fund varied only slightly
throughout 1996, beginning the year at 2.8 years and ending the year at 2.9
years.
DAILY INCOME FUND
Money market interest rates declined modestly throughout the year, not unlike
the short-term interest rate environment for 1995. For the twelve months ended
December 31, 1996, the Daily Income Fund had a total return of 4.8%. The Fund's
7-day simple yield began the year at 5.1% and ended at 4.7%. The average
weighted maturity remained within a narrow range, beginning the year at 40 days
and ending the year at 33 days. As in the past, the investment strategy
continues to emphasize the highest-quality, short-term money market securities
available for investment.
- ----------------------------------------------------
2
<PAGE> 3
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A MESSAGE FROM THE INVESTMENT MANAGER
(CONTINUED)
SHORT-TERM GOVERNMENT SECURITIES FUND
The Short-Term Government Securities Fund had a total return of 4.5% for the
twelve months ended December 31, 1996. This Fund invests in short-term,
fixed-income securities backed by the full faith and credit of the U.S.
Government. The modest return reflects the continuing low level interest rate
environment in the short-term sector of the fixed-income marketplace. The Fund
began the year with a 30-day SEC yield of 4.8% and ended the year at 5.1%. The
average weighted maturity remained relatively unchanged from 1.7 years at the
beginning of the year to 1.9 years at year end.
If you have questions about your fund, please contact a Homestead representative
at 1-800-258-3030. Thank you for choosing Homestead Funds to help meet your
investment needs.
Sincerely,
/s/ PETER R. MORRIS
Peter R. Morris
Executive Director, Investments
- ----------------------------------------------------
3
<PAGE> 4
- ----------------------------------------------------------------
SHORT-TERM BOND FUND ANNUAL TOTAL RETURNS VS. SHORT-TERM INDEXES
<TABLE>
<CAPTION>
MERRILL LYNCH MERRILL LYNCH
1-2.99 YEAR SHORT-TERM 1-4.99 YEAR
U.S. TREASURY INDEX BOND FUND CORP./GOV. INDEX
------------------- ------------ ----------------
<S> <C> <C> <C>
1995 11.0% 10.8% 13.0%
1996 5.0% 5.2% 4.6%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE SHORT-TERM BOND FUND ANNUAL TOTAL RETURNS ARE NET OF ANY FEE WAIVERS AND
REIMBURSEMENTS.
SHORT-TERM BOND FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FUND AT
INCEPTION AND THE MERRILL LYNCH 1-4.99 YEAR CORPORATE/GOVERNMENT BOND INDEX
<TABLE>
<CAPTION>
MERRILL LYNCH
1-4.99 YEAR SHORT-TERM
DATE CORP./GOV. INDEX BOND FUND
---- ---------------- ----------
<S> <C> <C>
NOV 91 $10,000 $10,000
DEC 92 10,843 11,013
DEC 93 11,559 11,798
DEC 94 11,570 11,733
DEC 95 12,819 13,254
DEC 96 13,481 13,866
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
<TABLE>
<CAPTION>
FUND M.L. INDEX
<S> <C> <C>
-----------------------------------------------
1 YEAR 5.2% 4.6%
-----------------------------------------------
5 YEARS 5.7% 6.1%
-----------------------------------------------
SINCE
INCEPTION 6.0% 6.5%
(11/5/91)
-----------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE SHORT-TERM BOND FUND ANNUAL TOTAL RETURNS ARE NET OF ANY FEE WAIVERS AND
REIMBURSEMENTS.
- ----------------------------------------------------
4
<PAGE> 5
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SHORT-TERM GOVERNMENT SECURITIES FUND
ANNUAL TOTAL RETURNS VS. SHORT-TERM INDEXES
MERRILL LYNCH MERRILL LYNCH
1-2.99 YEAR SHORT-TERM GOVERNMENT 1-4.99 YEAR
U.S. TREASURY INDEX SECURITIES FUND U.S TREASURY INDEX
------------------- ------------ ------------------
1996 5.0% 4.5% 4.5%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE SHORT-TERM GOVERNMENT SECURITIES FUND ANNUAL TOTAL RETURN IS NET OF ANY FEE
WAIVERS AND REIMBURSEMENTS.
SHORT-TERM GOVERNMENT SECURITIES FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FUND AT
INCEPTION AND THE MERRILL LYNCH 1-4.99 YEAR U.S. TREASURY INDEX
MERRILL LYNCH
1-4.99 YEAR SHORT-TERM GOVERNMENT
DATE U.S TREASURY INDEX SECURITIES FUND
---- ------------------ ---------------------
MAY 95 $10,000 $10,000
JUNE 95
10,293 10,229
DEC 95 10,756 10,644
JUNE 96 10,827 10,788
DEC 96 11,237 11,174
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
FUND M.L. INDEX
-----------------------------------------------
1 YEAR 4.5% 4.5%
-----------------------------------------------
SINCE
INCEPTION 5.9% 7.2%
(5/1/95)
-----------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE SHORT-TERM GOVERNMENT SECURITIES FUND ANNUAL TOTAL RETURN IS NET OF ANY FEE
WAIVERS AND REIMBURSEMENTS.
- ----------------------------------------------------
5
<PAGE> 6
- ----------------------------------------------------------------
VALUE FUND ANNUAL TOTAL RETURNS VS. S&P 500 INDEX
VALUE S&P 500
FUND INDEX
----- -------
1995 33.8% 37.5%
1996 17.9% 22.9%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE VALUE FUND ANNUAL TOTAL RETURNS ARE NET OF ANY FEE WAIVERS AND
REIMBURSEMENTS.
VALUE FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE FUND AT
INCEPTION AND THE S&P 500 INDEX
VALUE S&P 500
DATE FUND INDEX
---- ----- -------
NOV 90 $10,000 $10,000
DEC 91 11,783 13,413
DEC 92 13,160 14,443
DEC 93 15,638 15,889
DEC 94 16,026 16,093
DEC 95 21,443 22,097
DEC 96 25,291 27,167
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/96
VALUE S&P 500
FUND INDEX
-----------------------------------------------
1 YEAR 17.9% 22.9%
-----------------------------------------------
5 YEARS 16.5% 15.2%
-----------------------------------------------
SINCE
INCEPTION 16.4% 17.9%
(11/19/90)
-----------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
THE VALUE FUND AVERAGE ANNUAL TOTAL RETURNS ARE NET OF ANY FEE WAIVERS AND
REIMBURSEMENTS.
- ----------------------------------------------------
6
<PAGE> 7
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7
<PAGE> 8
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STATEMENTS OF ASSETS AND LIABILITIES
HOMESTEAD FUNDS, INC.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT-TERM
DAILY INCOME SHORT-TERM GOVERNMENT VALUE
FUND BOND FUND SECURITIES FUND FUND
------------ ----------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(cost: $56,673,177; $81,065,884;
$7,592,057; $182,704,233)..................... $56,673,177 $81,304,352 $ 7,603,847 $238,988,250
Receivables
Investment securities sold................... - 9,952 - -
Dividends and interest....................... 958,051 993,365 121,758 240,048
Capital shares sold.......................... 908,562 3,635 1,115 125,963
Due from Manager............................. - - 1,391 -
Prepaid expenses................................ 21,301 25,846 5,190 54,712
----------- ------------ ----------- ------------
Total assets................................. 58,561,091 82,337,150 7,733,301 239,408,973
----------- ------------ ----------- ------------
LIABILITIES
Payables
Investment securities purchased.............. 273,491 451,313 - 517,600
Accrued expenses............................. 25,241 32,408 13,578 68,245
Due to Custodian Bank........................ 325,000 255,000 - -
Due to Manager............................... 36,693 50,645 - 167,095
Capital shares redeemed...................... 23,690 47,379 25,000 15,400
Dividends.................................... 5,497 30,493 2,312 90,453
----------- ------------ ----------- ------------
Total liabilities............................ 689,612 867,238 40,890 858,793
----------- ------------ ----------- ------------
NET ASSETS......................................... $57,871,479 $81,469,912 $ 7,692,411 $238,550,180
=========== =========== =========== ============
NET ASSETS CONSIST OF:
Unrealized appreciation of investments.......... $ - $ 238,467 $ 11,789 $ 56,284,017
Paid-in-capital applicable to outstanding shares
of 57,871,479 of Daily Income Fund, 15,815,662
of Short-Term Bond Fund, 1,523,547 of
Short-Term Government Securities Fund, and
11,364,336 of Value Fund...................... 57,871,479 81,231,445 7,680,622 182,266,163
----------- ----------- ----------- ------------
$57,871,479 $81,469,912 $ 7,692,411 $238,550,180
=========== =========== =========== ============
NET ASSET VALUE PER SHARE.......................... $1.00 $5.15 $5.05 $20.99
=========== =========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
8
<PAGE> 9
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
HOMESTEAD FUNDS, INC.
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT-TERM
DAILY INCOME SHORT-TERM GOVERNMENT VALUE
FUND BOND FUND SECURITIES FUND FUND
------------ ---------- --------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest......................................... $2,937,366 $4,658,345 $ 294,662 $ 1,114,056
Dividends........................................ - - - 4,310,273
---------- ---------- --------- -----------
Total income.................................. 2,937,366 4,658,345 294,662 5,424,329
---------- ---------- --------- -----------
Expenses
Management fees.................................. 268,634 338,086 24,988 978,928
Custodian and accounting fees.................... 65,696 102,925 46,781 113,847
Shareholder servicing............................ 36,881 38,540 28,340 115,121
Registration expense............................. 24,750 23,258 9,867 44,378
Legal and audit fees............................. 9,276 11,699 685 30,597
Communication.................................... 8,139 9,124 1,562 41,986
Insurance........................................ 7,274 8,479 379 20,739
Printing......................................... 5,514 7,155 1,178 30,284
Directors fees................................... 2,321 3,107 221 8,406
Other expenses................................... 6,140 7,927 615 19,297
---------- ---------- --------- -----------
Total expenses................................ 434,625 550,300 114,616 1,403,583
Less fees waived and expenses paid by
Manager..................................... (28,659) (10,694) (77,270) -
---------- ---------- --------- -----------
Net expenses.................................. 405,966 539,606 37,346 1,403,583
---------- ---------- --------- -----------
NET INVESTMENT INCOME............................... 2,531,400 4,118,739 257,316 4,020,746
---------- ---------- --------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain on investments................. - 83,511 1,913 3,956,651
Net change in unrealized appreciation
(depreciation)................................. - (528,101) (12,151) 23,576,803
---------- ---------- --------- -----------
NET GAIN (LOSS) ON INVESTMENTS...................... - (444,590) (10,238) 27,533,454
---------- ---------- --------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......... $2,531,400 $3,674,149 $ 247,078 $31,554,200
========== ========== ========= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
9
<PAGE> 10
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
HOMESTEAD FUNDS, INC.
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
DAILY INCOME FUND SHORT-TERM BOND FUND
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income.................................... $ 2,531,400 $ 2,385,572 $ 4,118,739 $ 3,195,639
Net realized gain on investments......................... - - 83,511 40,352
Net change in unrealized appreciation (depreciation)..... - - (528,101) 2,737,120
------------ ------------ ------------ ------------
Increase in net assets from operations................... 2,531,400 2,385,572 3,674,149 5,973,111
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.................................... (2,531,400) (2,385,572) (4,118,739) (3,195,639)
Net realized gain on investments......................... - - (83,511) (39,502)
CAPITAL SHARE TRANSACTIONS, NET.......................... 5,172,330 16,030,967 19,873,017 7,129,945
------------ ------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS............................. 5,172,330 16,030,967 19,344,916 9,867,915
NET ASSETS
Beginning of year........................................ 52,699,149 36,668,182 62,124,996 52,257,081
------------ ------------ ------------ ------------
END OF YEAR.............................................. $ 57,871,479 $ 52,699,149 $ 81,469,912 $ 62,124,996
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
10
<PAGE> 11
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
HOMESTEAD FUNDS, INC.
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT
SECURITIES FUND VALUE FUND
-------------------------- ------------------------------
1996 1995(a) 1996 1995
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income.................................... $ 257,316 $ 50,982 $ 4,020,746 $ 2,997,202
Net realized gain on investments......................... 1,913 469 3,956,651 4,035,929
Net change in unrealized appreciation (depreciation)..... (12,151) 23,940 23,576,803 27,067,900
----------- ----------- ------------- -------------
Increase in net assets from operations................... 247,078 75,391 31,554,200 34,101,031
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.................................... (257,316) (50,982) (4,020,746) (2,997,202)
Net realized gain on investments......................... (1,913) (469) (3,956,651) (4,035,929)
CAPITAL SHARE TRANSACTIONS, NET.......................... 5,046,362 2,634,260 67,467,586 28,826,300
----------- ----------- ------------- -------------
TOTAL INCREASE IN NET ASSETS............................. 5,034,211 2,658,200 91,044,389 55,894,200
NET ASSETS
Beginning of year........................................ 2,658,200 - 147,505,791 91,611,591
----------- ----------- ------------- -------------
END OF YEAR.............................................. $ 7,692,411 $ 2,658,200 $ 238,550,180 $ 147,505,791
=========== =========== ============= =============
</TABLE>
- --------------
(a) For the period May 1, 1995 (commencement of operations) to December 31,
1995.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
11
<PAGE> 12
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (39.1% of portfolio)
AI Credit Corp. .......................................... 6.50% 01/02/97 $1,100,000 $ 1,099,801
American Express Credit Corp. ............................ 5.32 01/16/97 993,000 990,799
American Express Credit Corp. ............................ 5.33 01/22/97 892,000 889,227
American General Finance Corp. ........................... 5.40 01/23/97 500,000 498,350
American General Finance Corp. ........................... 5.90 01/02/97 500,000 499,918
American General Finance Corp. ........................... 5.40 01/07/97 1,000,000 999,100
Beneficial Corp. ......................................... 5.42 01/21/97 1,700,000 1,694,881
Beneficial Corp. ......................................... 5.31 01/06/97 1,000,000 999,262
Chevron Oil Finance Corp. ................................ 5.55 01/02/97 750,000 749,884
General Electric Capital Corp. ........................... 5.42 01/03/97 1,100,000 1,099,669
Household Finance Corp. .................................. 5.40 01/24/97 700,000 697,585
Household Finance Corp. .................................. 5.43 01/27/97 1,200,000 1,195,294
IBM Credit Corp. ......................................... 5.31 01/17/97 1,500,000 1,496,456
IBM Credit Corp. ......................................... 5.40 01/23/97 1,200,000 1,196,040
J.C. Penney Funding Corp. ................................ 5.31 01/08/97 2,500,000 2,497,419
John Deere Capital Corp. ................................. 5.40 01/14/97 900,000 898,245
Merrill Lynch & Co. ...................................... 5.35 01/22/97 800,000 797,503
Merrill Lynch & Co. ...................................... 5.55 01/02/97 750,000 749,884
Merrill Lynch & Co. ...................................... 5.33 01/03/97 1,200,000 1,199,645
Norwest Financial, Inc. .................................. 5.28 01/10/97 1,000,000 998,680
Norwest Financial, Inc. .................................. 5.33 01/21/97 900,000 897,335
-----------
Total Commercial Paper (Cost $22,144,977)............................................................. 22,144,977
-----------
CORPORATE NOTES (36.4% of portfolio)
American General Finance Corp............................. 7.75 01/15/97 50,000 50,042
Associates Corp. of North America......................... 5.88 08/15/97 15,000 15,019
Associates Corp. of North America......................... 6.88 01/15/97 745,000 745,416
Associates Corp. of North America......................... 8.62 06/15/97 275,000 278,620
Associates Corp. of North America......................... 8.70 01/01/97 1,050,000 1,050,000
Associates Corp. of North America......................... 6.74 06/23/97 25,000 25,134
Associates Corp. of North America......................... 6.71 06/23/97 35,000 35,178
Campbell Soup Co. ........................................ 7.75 02/24/97 2,525,000 2,532,356
CIT Group Holdings, Inc. ................................. 5.75 03/21/97 500,000 500,215
CIT Group Holdings, Inc. ................................. 8.00 01/13/97 2,000,000 2,001,583
Commercial Credit Co. .................................... 8.13 03/01/97 240,000 240,808
Commercial Credit Co. .................................... 6.75 01/15/97 250,000 250,097
Consolidated Natural Gas Co. ............................. 9.38 02/01/97 1,000,000 1,002,936
E.I. Dupont Co. .......................................... 7.17 03/03/97 250,000 250,703
E.I. Dupont Co. .......................................... 6.92 04/21/97 100,000 100,431
Ford Motor Credit Corp. .................................. 7.88 01/15/97 817,000 817,659
Ford Motor Credit Corp. .................................. 5.63 03/03/97 1,053,000 1,053,085
Ford Motor Credit Corp. .................................. 6.80 08/15/97 445,000 448,004
</TABLE>
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12
<PAGE> 13
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
CORPORATE NOTES -- continued
Ford Motor Credit Corp. .................................. 8.13% 03/26/97 $ 500,000 $ 503,068
General Electric Capital Corp. ........................... 7.67 02/03/97 500,000 500,972
General Electric Capital Corp. ........................... 8.00 02/01/97 1,075,000 1,077,038
Household Finance Corp. .................................. 7.75 06/15/97 50,000 50,489
Household Finance Corp. .................................. 7.50 03/15/97 785,000 787,917
John Deere Capital Corp. ................................. 7.20 05/15/97 540,000 543,193
Mobil Corp. .............................................. 6.50 02/15/97 300,000 300,194
Northern Illinois Gas Co. ................................ 5.50 02/01/97 1,000,000 999,905
Norwest Financial, Inc. .................................. 6.25 02/15/97 875,000 875,580
Pepsico, Inc. ............................................ 6.88 05/15/97 50,000 50,244
Pepsico, Inc. ............................................ 5.00 02/24/97 2,575,000 2,572,699
PHH Group, Inc. .......................................... 8.00 01/01/97 325,000 325,000
Philip Morris Cos., Inc. ................................. 9.75 05/01/97 60,000 60,708
Shell Oil Co. ............................................ 6.00 01/15/97 615,000 615,067
-----------
Total Corporate Notes (Cost $20,659,360).............................................................. 20,659,360
-----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (24.4% of portfolio)
Federal Farm Credit Bank.................................. 4.97 02/03/97 500,000 499,789
Federal Farm Credit Bank.................................. 7.15(a) 03/17/97 500,000 500,812
Federal Farm Credit Bank.................................. 6.25 01/02/97 100,000 100,000
Federal Farm Credit Bank.................................. 5.32 02/03/97 500,000 499,956
Federal Farm Credit Bank.................................. 5.33 01/02/97 500,000 500,000
Federal Home Loan Bank.................................... 6.85 02/25/97 975,000 976,951
Federal Home Loan Bank.................................... 4.75 01/13/97 850,000 849,808
Federal Home Loan Bank.................................... 4.53 01/24/97 496,689 496,389
Federal Home Loan Bank.................................... 7.41 02/18/97 300,000 300,759
Federal Home Loan Bank.................................... 7.80 01/10/97 150,000 150,082
Federal Home Loan Bank.................................... 6.38 05/12/97 25,000 25,070
Federal Home Loan Mortgage Corp. ......................... 4.53 01/27/97 350,000 349,773
Federal Home Loan Mortgage Corp. ......................... 7.91 01/13/97 1,700,000 1,701,320
Federal Home Loan Mortgage Corp. ......................... 7.64 01/24/97 100,000 100,127
Federal National Mortgage Association..................... 7.60 01/10/97 625,000 625,311
Federal National Mortgage Association..................... 9.20 06/10/97 50,000 50,766
Federal National Mortgage Association..................... 8.95 07/10/97 25,000 25,428
Federal National Mortgage Association..................... 9.55 12/10/97 100,000 103,402
Federal National Mortgage Association..................... 4.38 01/21/97 100,000 99,938
Federal National Mortgage Association..................... 6.94 03/17/97 250,000 250,758
Federal National Mortgage Association..................... 4.78 02/14/97 550,000 549,537
Tennessee Valley Authority................................ 6.00 01/15/97 80,000 80,000
U.S. Treasury Note........................................ 6.88 04/30/97 500,000 501,747
U.S. Treasury Note........................................ 4.75 02/15/97 4,500,000 4,496,476
-----------
Total U.S. Government & Agency Obligations (Cost $13,834,199)......................................... 13,834,199
-----------
</TABLE>
- ----------------------------------------------------
13
<PAGE> 14
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Face
Amount Value
---------- -----------
<S> <C> <C>
MONEY MARKET ACCOUNT (0.1% of portfolio)
State Street Bank and Trust SSgA Fund, 5.16% (b)............................................$ 34,641
$ 34,641
-----------
Total Money Market Account (Cost $34,641)............................................................ 34,641
-----------
TOTAL INVESTMENTS IN SECURITIES (COST $56,673,177) -- 100%................................................. $56,673,177
===========
</TABLE>
- --------------
(a) Variable coupon rate as of December 31, 1996.
(b) One day yield at December 31,1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
14
<PAGE> 15
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
CORPORATE BONDS (42.1% of portfolio)
BASIC INDUSTRIES - 4.9%
Allied Corp. ...................................... 5.68-5.70%(a) 09/15/98 $ 475,000 $ 428,687
Allied Corp. ...................................... 5.69-6.32(a) 08/01/97 566,000 547,107
Allied Corp. ...................................... 6.12-6.22(a) 08/01/99 109,000 93,339
Allied Corp. ...................................... 6.07-6.20(a) 08/01/01 275,000 203,156
Corning, Inc. ..................................... 7.10 08/14/00 100,000 102,125
Corning, Inc. ..................................... 7.75 11/15/98 603,000 603,754
Ford Capital BV.................................... 9.13 05/01/98 500,000 519,375
Ford Motor Co. .................................... 5.78 01/01/99 400,000 397,100
Philip Morris Cos., Inc. .......................... 9.75 05/01/97 300,000 303,648
Philip Morris Cos., Inc. .......................... 9.25 12/01/97 200,000 206,016
Philip Morris Cos., Inc. .......................... 7.50 03/15/97 50,000 50,159
Philip Morris Cos., Inc. .......................... 6.38 01/15/98 250,000 250,938
Ryder System, Inc. ................................ 7.56 08/15/00 85,000 87,550
Texaco Capital, Inc. .............................. 8.50 06/01/99 150,000 153,938
Texaco Capital, Inc. .............................. 8.95 01/15/00 50,000 50,085
-----------
Total Basic Industries............................................................................ 3,996,977
-----------
CONSUMER NON-DURABLE GOODS - 2.2%
Beverages
Pepsico Capital Resources, Inc. ................... 6.54(a) 04/01/98 100,000 92,875
Department Stores
J.C. Penney & Co. ................................. 10.00 10/15/97 900,000 926,973
Sears Roebuck and Co. ............................. 9.25 08/01/97 85,000 86,593
Medical Supplier
Baxter International............................... 6.25 03/11/97 150,000 150,111
Photography
Eastman Kodak Co. ................................. 9.88 11/01/04 470,000 494,087
Recreational
Walt Disney Co. ................................... 1.50 10/20/99 50,000 44,031
-----------
Total Consumer Non-Durable Goods.................................................................. 1,794,670
-----------
CONSUMER SERVICES - 0.1%
Healthcare
Hospital Corp. of America.......................... 6.90(a) 06/01/99 111,000 93,240
-----------
Total Consumer Services............................................................................ 93,240
-----------
ENERGY - 1.9%
Domestic Oil
Atlantic Richfield Co. ............................ 10.25 07/02/00 1,487,000 1,537,186
-----------
Total Energy...................................................................................... 1,537,186
-----------
</TABLE>
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15
<PAGE> 16
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
FINANCE - 20.6%
Banks
Bank America Corp. ................................ 6.65%(b) 05/17/99 $ 400,000 $ 399,941
Barclays N.A. Capital Corp. ....................... 9.75 05/15/21 306,000 356,872
Chase Manhattan Corp. ............................. 8.80 02/01/00 100,000 100,125
Chase Manhattan Corp. ............................. 9.05 02/01/02 150,000 150,187
Chase Manhattan Corp. ............................. 8.00 04/15/02 1,025,000 1,028,844
Chase Manhattan Corp. ............................. 8.00 05/01/05 500,000 506,250
CITICORP........................................... 6.50 09/16/01 75,000 74,448
International Bank for Recon. & Dev. .............. 4.75-6.40(a) 02/15/97 934,000 928,163
International Bank for Recon. & Dev. .............. 5.47(a) 02/15/98 125,000 117,031
International Bank for Recon. & Dev. .............. 7.20(a) 08/15/98 26,000 23,627
International Bank for Recon. & Dev. .............. 5.93-7.89(a) 02/15/99 732,000 644,160
International Bank for Recon. & Dev. .............. 6.16-6.54(a) 08/15/99 525,000 447,562
Irving Bank Corp. ................................. 8.50 06/01/02 320,000 321,611
J.P. Morgan & Co., Inc. ........................... 5.37-6.38(a) 04/01/98 1,104,000 1,028,100
Financial Services
American Express Co. .............................. 11.63 12/12/00 870,000 931,117
American RE Corp. ................................. 10.88 09/15/04 219,000 238,710
Associates Corp. of North America.................. 6.75 07/15/97 76,000 76,530
Associates Corp. of North America.................. 8.38 01/15/98 50,000 51,250
Avco Financial Services, Inc. ..................... 8.50 10/15/99 50,000 52,813
Beneficial Corp. .................................. 9.80 05/12/97 110,000 111,597
CIT Group Holdings, Inc. .......................... 6.00 02/15/97 100,000 99,988
CM International................................... 6.02-7.41(a) 09/11/00 1,020,000 799,425
Commercial Credit Co. ............................. 6.75 01/15/97 400,000 400,128
Dean Witter Discover Co. .......................... 5.69(b) 03/02/99 965,000 966,206
Ford Motor Credit Corp. ........................... 5.50(b) 03/14/97 250,000 250,000
Ford Motor Credit Corp. ........................... 5.93(b) 02/03/98 200,000 200,000
Franklin Universal Trust........................... 5.63 09/01/98 500,000 497,500
General Electric Capital Corp. .................... 6.65(b) 04/14/08 500,000 503,005
General Electric Capital Corp. .................... 6.20 03/15/97 267,400 267,766
Heller Financial Corp. ............................ 6.45 02/15/97 12,500 12,511
Household Finance Corp. ........................... 6.08 03/08/06 617,500 593,960
Lincoln National Corp. ............................ 7.13 07/15/99 150,000 152,625
Midland American Capital Corp. .................... 12.75 11/15/03 115,000 126,931
Mony Funding, Inc. ................................ 8.13 04/07/97 130,000 130,710
Morgan Stanley Group, Inc. ........................ 7.32 01/15/97 250,000 250,100
Reliance Financial Services Corp. ................. 7.87 12/01/00 45,000 45,000
Sears Overseas Finance Co. ........................ 6.79(a) 07/12/98 150,000 137,063
Transamerica Finance Corp. ........................ 8.75 10/01/99 50,000 52,875
Xerox Credit Corp. ................................ 6.78 05/21/01 500,000 503,750
Xerox Credit Corp. ................................ 9.63 09/01/97 182,000 186,310
</TABLE>
- ----------------------------------------------------
16
<PAGE> 17
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
FINANCE -- continued
Insurance
CNA Financial...................................... 8.88% 03/01/98 $ 500,000 $ 515,000
ITT Hartford Group, Inc. .......................... 8.20 10/15/98 357,000 369,049
Liberty Mutual Capital Corp. ...................... 7.98 12/01/02 500,000 519,660
Manufacturers Life Mortgage Sec. .................. 8.25 03/01/97 250,000 253,438
Security & Commodity Brokers
Lehman Brothers, Inc. ............................. 5.94(a) 05/16/97 120,000 117,534
Lehman Brothers, Inc. ............................. 5.62-7.11(a) 05/16/98 840,000 772,800
Lehman Brothers, Inc. ............................. 7.00 05/15/97 250,000 250,965
Lehman Brothers, Inc. ............................. 7.63 08/01/98 150,000 152,813
Salomon Brothers, Inc. ............................ 6.55 05/15/97 40,000 40,089
-----------
Total Finance...................................................................................... 16,756,139
-----------
TRANSPORTATION - 1.1%
Airlines
Delta Airlines, Inc. .............................. 9.60 05/26/00 50,000 54,334
Railroad
Atchison Topeka Santa Fe RR Co. ................... 5.37 09/15/99 228,000 222,870
Norfolk & Western Railway Co. ..................... 8.13 11/15/00 100,000 105,524
St. Louis-San Francisco Railway Co. ............... 4.00 01/01/97 250,000 250,000
Seaboard System Railroad........................... 11.13 04/01/98 200,000 211,883
-----------
Total Transportation............................................................................... 844,611
-----------
UTILITIES - 11.3%
Electric & Gas
Arkansas Power & Light Co. ........................ 5.88 03/01/97 200,000 200,000
Central Illinois Light Co. ........................ 5.50 03/01/97 100,000 99,875
Central Power & Light Co. ......................... 6.63 01/01/98 260,000 260,975
Cincinnati Gas & Electric Co. ..................... 8.13 08/01/03 250,000 255,937
Commonwealth Edison Co. ........................... 2.75 04/01/99 100,000 91,500
Connecticut Light & Power Co. ..................... 7.25 07/01/99 247,000 247,309
Consumers Power Co. ............................... 6.88 05/01/98 200,000 200,750
Duke Power Co. .................................... 7.41 02/10/04 250,000 255,000
Florida Power Corp. ............................... 7.38 06/01/02 502,000 509,530
International Standard Electric Corp. ............. 5.98(a) 03/15/97 400,000 396,000
Iowa Electric Light & Power Co. ................... 7.88 12/01/00 198,000 200,227
Iowa Southern Utilities............................ 6.13 06/01/97 100,000 100,000
Louisiana Power & Light Co. ....................... 7.13 03/01/98 100,000 100,375
Missouri Power & Light Co. ........................ 5.63 04/01/97 100,000 99,875
New Orleans Public Service Co. .................... 5.88 04/01/97 250,000 249,687
New York State Electric & Gas...................... 5.63 01/01/97 298,000 298,000
Northern States Power Co. ......................... 7.38 03/01/02 585,000 593,044
</TABLE>
- ----------------------------------------------------
17
<PAGE> 18
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
UTILITIES -- continued
Ohio Power Co. .................................... 8.30% 04/01/97 $ 24,000 $ 24,111
Pacific Gas & Electric Co. ........................ 4.63 06/01/97 195,000 194,025
Pennsylvania Power & Light Co. .................... 7.25 02/01/01 650,000 647,563
Portland General Electric Co. ..................... 6.60 10/01/97 159,000 159,398
Potomac Electric Power Co. ........................ 5.00 09/01/02 551,000 512,430
Sierra Pacific Power Co. .......................... 6.50 07/01/97 532,000 532,665
South Carolina Electric & Gas Co. ................. 6.50 09/01/98 240,000 240,600
Southern California Gas Co. ....................... 5.25 03/01/98 114,000 113,145
Southwestern Public Service Co. ................... 5.70 02/01/97 75,000 75,000
Western Massachusetts Electric Co. ................ 5.75 03/01/97 196,000 195,755
Telephone
AT&T Corp. ........................................ 7.50(b) 09/01/09 500,000 492,805
General Telephone Co. of Florida................... 6.50 11/01/97 200,000 200,250
General Telephone Co. of Florida................... 8.00 03/01/01 225,000 228,094
General Telephone Co. of Indiana................... 6.38 08/01/98 300,000 300,000
General Telephone Co. of Indiana................... 7.50 12/01/01 100,000 101,125
GTE California..................................... 6.75 12/01/97 500,000 500,000
GTE California..................................... 7.13 12/01/98 250,000 250,625
GTE Southwest...................................... 6.88 03/01/98 100,000 100,250
Hawaiian Telephone Co. ............................ 6.75 04/01/98 100,000 100,250
Southwestern Bell Telephone Co. ................... 6.05 02/09/98 50,000 49,875
-----------
Total Utilities................................................................................... 9,176,050
-----------
Total Corporate Bonds (Cost $34,094,911)........................................................... 34,198,873
-----------
FOREIGN BONDS (1.5% of portfolio)
Hydro-Quebec.......................................... 6.27 01/03/26 80,000 78,800
Kingdom of Sweden..................................... 5.86(a) 04/01/97 257,000 253,788
Metropolis of Tokyo................................... 7.50 03/18/97 119,000 119,446
Province of Ontario................................... 15.25 08/31/12 700,000 780,500
-----------
Total Foreign Bonds (Cost $1,229,290)............................................................. 1,232,534
-----------
ASSET BACKED SECURITIES (6.4% of portfolio)
Bear Sterns Secured Investors Trust 87-2 D............ 9.95 10/20/18 198,399 205,934
CIT Revenue Grantor Trust 94-A A...................... 4.90 07/15/09 187,507 183,084
Case Equipment Loan Trust 93-B A...................... 4.30 05/17/99 9,596 9,542
Caterpillar Financial Asset Trust 94-A A2............. 6.10 06/25/00 13,531 13,537
Caterpillar Financial Asset Trust 95-A................ 6.10 08/25/01 152,617 152,829
Chase Manhattan Credit Card Master Trust 92-1 A....... 7.40 05/15/00 37,500 37,649
Chase Manhattan Grantor Trust 93-A A.................. 4.20 04/15/99 15,961 15,938
Chase Manhattan Grantor Trust 95-A A.................. 6.00 09/17/01 252,997 253,300
Daimler-Benz Vehicle Trust 94-A A..................... 5.95 12/15/00 29,450 29,506
Discover Card Trust 92-B A............................ 6.80 06/16/00 85,000 85,665
</TABLE>
- ----------------------------------------------------
18
<PAGE> 19
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES -- continued
Ford Credit Grantor Trust 93-B A...................... 4.30% 07/15/98 $ 26,096 $ 25,977
Ford Credit Grantor Trust 95-A A...................... 5.90 05/15/00 405,547 405,801
Household Affinity Credit Card Master Trust 93-2 A.... 5.60 05/15/02 100,000 98,086
Keycorp Auto Grantor Trust 95-A A..................... 5.80 07/15/00 287,548 287,552
MBNA Master Credit Card Trust 93-3.................... 5.40 09/15/00 148,000 146,066
Navistar Financial Corp. 93-A A2...................... 4.48 10/15/98 27,942 27,943
Nissan Auto 94-A A.................................... 6.45 09/15/99 106,577 107,154
Olympic Auto Receivable Trust 94-A A.................. 5.65 01/15/01 97,925 97,797
Olympic Auto Receivable Trust 96-A.................... 5.85 02/15/99 75,000 74,435
Premier Auto Trust 93-2 A3............................ 4.90 10/15/98 60,625 60,318
Premier Auto Trust 93-3 A3............................ 4.90 12/15/98 180,633 180,009
Premier Auto Trust 93-4 A2............................ 4.65 02/02/99 322,224 320,466
Premier Auto Trust 94-1 A3............................ 4.75 02/02/00 41,337 41,128
Premier Auto Trust 95-1 A6............................ 8.05 04/04/00 150,000 155,012
Railcar Trust 92-1 A.................................. 7.75 06/01/04 95,713 100,284
Resolution Trust Corporation 92-2 A................... 7.94(b) 08/25/21 314,544 316,997
Standard Credit Card Master Trust 95-8 A.............. 6.70 09/07/02 1,000,000 1,010,560
Standard Credit Card Trust 90-6 A..................... 9.38 09/10/98 100,000 101,854
Union Acceptance Corp. 95-D A......................... 5.97 01/07/03 502,197 500,790
Volvo Auto Rec. 92-A A................................ 4.65 06/15/98 9,787 9,762
Zions Auto Trust Series 93-1 A2....................... 4.65 06/15/99 164,318 164,627
-----------
Total Asset Backed Securities (Cost $5,180,397)................................................... 5,219,602
-----------
MORTGAGE BACKED SECURITIES (19.3% of portfolio)
Advanta Home Equity Loan Trust 93-2 A1................ 6.15 10/25/09 152,744 149,169
Advanta Home Equity Loan Trust 93-3 A1................ 4.90 10/25/09 229,054 216,477
Advanta Home Equity Loan Trust 92-4 A................. 7.20 11/25/08 75,408 75,685
Advanta Mortgage Loan Trust 93-4 A3................... 5.70 03/25/25 371,944 353,787
American Financial Home Equity Loan 91-1 A............ 8.00 07/25/06 163,640 167,561
American Housing Trust SER X1 3 B..................... 7.50 08/25/12 52,777 52,757
Chase Mortgage Finance Corp. 93-G A1.................. 7.00 04/25/01 112,784 112,157
CITICORP Mortgage Securities, Inc. 92-16 A1........... 7.50 09/25/22 75,025 75,184
CITICORP Mortgage Trust 3 A5.......................... 9.00 01/25/20 100,000 100,821
CMC Securities Corp. 92-D D3S......................... 6.74(b) 12/25/23 60,962 61,685
CMC Securities Corp. 93-E S9.......................... 6.50 11/25/08 903,683 863,607
CMO Trust 14.......................................... 8.00 01/01/17 238,106 239,474
CMO Trust 15.......................................... 5.00 03/20/18 103,491 96,567
CMO Trust 17 B........................................ 7.25 04/20/18 79,253 79,308
Contimortgage Home Equity Loan Trust 95-3 A1.......... 6.65 07/15/09 22,472 22,526
Corestates Home Equity Trust 94-1..................... 6.65 05/15/09 401,915 398,939
Daiwa Mortgage Acceptance 92-1........................ 7.88 10/25/19 33,587 33,585
EQCC Home Equity Loan Trust 95-3 A2................... 6.45 11/15/08 250,000 251,252
</TABLE>
- ----------------------------------------------------
19
<PAGE> 20
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES -- continued
Equicon Home Equity Loan Trust 92-7................... 5.90% 09/18/05 $ 46,377 $ 46,060
Equicon Home Equity Loan Trust 95-2 A1................ 6.45 07/18/10 144,634 144,970
Equicon Home Equity Loan Trust 94-1................... 6.05 09/18/11 171,514 171,051
FHLB DA-99............................................ 5.62 03/25/99 252,826 249,385
FHLMC 1224 F.......................................... 6.80 08/15/05 79,115 79,320
FHLMC 1330 G.......................................... 7.00 09/15/99 591,838 597,633
FHLMC 1771 PN......................................... 8.00 03/15/24 634,337 636,894
FHLMC................................................. 8.50 06/01/02 88,860 91,636
FHLMC 1221 G.......................................... 7.00 09/15/05 75,048 75,378
FHLMC 135 A........................................... 8.75 05/15/00 46,616 48,077
FHLMC 144 A........................................... 8.75 06/15/00 62,029 63,939
FHLMC 1458 M.......................................... 7.00 01/15/08 250,000 246,532
FHLMC 1459 TC......................................... 7.50 10/15/01 50,000 50,430
FHLMC 1662 H.......................................... 6.25 01/15/09 201,548 196,797
FHLMC 1663 A.......................................... 7.00 07/15/23 182,607 178,922
FHLMC 39 ED........................................... 8.50 03/25/24 165,000 166,317
FHLMC................................................. 6.50 10/15/12 72,936 72,786
FHLMC #230013......................................... 7.25 08/01/98 23,863 24,042
FNMA #016782.......................................... 6.00 09/01/99 2,018 1,875
FNMA 92-33 G.......................................... 7.75 05/25/19 14,466 14,421
FNMA 92-73 E.......................................... 7.50 05/25/19 42,459 42,455
FNMA 93-85 E.......................................... 6.50 11/25/07 224,159 219,963
FNMA REMIC 92-203 K................................... 6.50 11/25/07 288,795 287,934
FNMA REMIC 93-140 L................................... 7.00 07/25/12 162,067 161,763
FNMA REMIC 93-15 K.................................... 7.00 02/25/08 182,542 180,814
FNMA REMIC 93-68 Z.................................... 6.00 05/25/08 158,432 147,348
FNMA REMIC 93-88 B.................................... 5.40 06/25/00 428,423 411,282
FNMA REMIC 94-4 K..................................... 6.50 12/25/06 543,095 544,178
First Alliance Mortgage Loan Trust.................... 7.83 10/25/25 146,637 149,382
Fleet Finance 93-1 A.................................. 5.45 03/20/23 80,993 80,520
Fleet Finance Home Equity Trust 91-2 A................ 6.70 10/15/06 235,425 236,084
GE Capital Mortgage Services, Inc. 93-3 A............. 7.50 03/25/19 135,013 135,738
GE Capital Mortgage Services, Inc. 94-18 A3........... 7.00 08/25/24 100,000 99,990
GE Capital Mortgage Services, Inc. 94-95.............. 5.50 02/25/24 100,000 95,687
HFC Home Equity Loan 92-1 A3.......................... 5.80 05/20/07 4,840 4,863
HFC Home Equity Loan 93-1 A3.......................... 4.75 05/20/08 52,678 52,366
Housing Securities, Inc. 92-NB 1G..................... 7.25 01/25/07 202,240 203,378
Housing Securities, Inc. 92-EA A4..................... 7.50 10/25/07 451,000 451,140
Housing Securities, Inc. 94-2 A....................... 6.50 07/25/09 240,952 231,018
Independent National Mortgage Assn. 96-E A2........... 6.93 05/25/26 104,665 103,688
Merrill Lynch 91-1 A.................................. 8.00 06/15/10 33,043 33,538
Merrill Lynch 94-A A4................................. 6.41(b) 02/15/09 184,356 174,585
</TABLE>
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20
<PAGE> 21
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C>
MORTGAGE BACKED SECURITIES -- continued
Mid-State Trust 3 A................................... 7.63% 04/01/22 $ 247,247 $ 251,668
Morgan Stanley Mortgage Trust T6...................... 8.75 07/20/19 149,286 152,855
Nomura Asset Securities Corp. 94-4 B.................. 8.30 09/25/24 57,075 57,026
Novus Home Equity Loan Trust 93-1 A................... 5.84(b) 12/31/03 35,663 35,752
Old Stone Credit Corp. Home Equity Trust 92-2 A1...... 6.85 05/15/07 401,241 402,669
PNC Mortgage Securities Corp. 95-2 A5................. 7.00 07/25/08 215,411 214,195
Prudential Home Mortgage 92-44 A1..................... 6.00 01/25/98 167,240 166,524
Prudential Home Mortgage 93-10 A1..................... 6.50 02/25/00 231,118 229,416
Prudential Home Mortgage 93-29 A6..................... 6.75 08/25/08 84,515 84,266
Prudential Home Mortgage 94-31 A11.................... 8.00 11/25/09 386,214 383,653
Prudential Securities 18-D............................ 7.00 06/25/19 88,596 88,125
RFMSI 87-S2 A......................................... 8.50 04/01/02 26,578 26,494
RFMSI 92-S19.......................................... 8.50 03/25/22 223,631 226,725
RFMSI 93-S25 A1....................................... 6.50 07/25/08 86,622 86,658
RFMSI 93-57 A6........................................ 7.15 02/25/08 49,715 49,944
Residential Accredit Loans, Inc....................... 6.90 01/25/20 600,000 601,015
Ryland 26C............................................ 9.00 12/01/16 302,524 313,398
Ryland Mortgage Acceptance Corp. 93-4 A5.............. 7.50 08/25/24 278,966 281,168
Ryland Mortgage Securities Corp. 92-18 C.............. 7.75 09/25/19 100,000 100,585
Sears Mortgage Securities Corp. 92-10 A7.............. 8.00 03/25/22 114,484 116,952
Structured Mortgage Asset Residential Trust 92-11 B... 7.80 08/25/21 59,277 59,828
TMS Home Equity Trust 93-C2 A3........................ 5.75 10/15/22 162,777 158,162
TMS Home Equity Loan 93-D A1.......................... 5.68 02/15/09 136,801 133,634
TMS Home Equity Trust 96-B............................ 7.55 02/15/20 360,000 367,001
TMS Home Equity Trust 92-A............................ 6.95 01/15/07 114,706 114,737
Vanderbilt Mortgage Finance 95-B A3................... 6.68 05/07/06 250,000 250,931
Zions Home Ref. Loan Trust 93-1....................... 5.15 09/25/03 137,786 132,882
-----------
Total Mortgage Backed Securities (Cost $15,589,208)................................................ 15,640,983
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (23.0% of portfolio)
Chattanooga Valley Corp. ............................. 5.61(a) 07/01/98 158,000 144,570
Chattanooga Valley Corp. ............................. 5.78(a) 01/01/01 256,000 197,120
Chattanooga Valley Corp. ............................. 5.83(a) 07/01/01 204,000 152,534
Federal Farm Credit Bank.............................. 6.96 06/06/00 125,000 124,987
Federal Farm Credit Bank.............................. 6.50 04/29/99 500,000 499,940
Federal Farm Credit Bank.............................. 6.60 05/27/99 500,000 500,065
Federal Farm Credit Bank.............................. 6.86 07/23/99 250,000 249,810
Federal Farm Credit Bank.............................. 6.61 10/06/99 830,000 830,299
Federal Home Loan Bank................................ 5.74(b) 12/23/98 500,000 497,600
Federal Home Loan Bank................................ 7.87 12/15/97 250,000 254,903
Federal Home Loan Bank................................ 6.67 10/30/00 1,000,000 997,680
Federal Home Loan Bank................................ 6.32 12/20/00 250,000 246,882
</TABLE>
- ----------------------------------------------------
21
<PAGE> 22
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- continued
Federal Home Loan Bank................................ 6.45% 03/06/01 $ 500,000 $ 493,130
Federal Home Loan Bank................................ 6.38 03/13/01 500,000 492,375
Federal Home Loan Bank................................ 7.20 07/02/01 400,000 401,516
Federal Home Loan Bank................................ 6.89 12/27/01 750,000 747,569
Federal Home Loan Mortgage Corp. ..................... 7.06 05/22/01 250,000 248,905
Federal Home Loan Mortgage Corp. ..................... 6.77 04/03/01 500,000 497,020
Federal Home Loan Mortgage Corp. ..................... 7.40 06/27/01 500,000 500,645
Federal Home Loan Mortgage Corp. ..................... 5.50(b) 09/20/00 500,000 487,250
Federal National Mortgage Assn. ...................... 6.99 05/18/01 250,000 250,065
Federal National Mortgage Assn. ...................... 5.77 08/25/98 250,000 248,703
Federal National Mortgage Assn. ...................... 5.75 02/09/99 250,000 247,795
Federal National Mortgage Assn. ...................... 4.37(b) 06/04/97 100,000 99,375
Federal National Mortgage Assn. ...................... 6.56 08/25/99 250,000 251,591
Government Export..................................... 5.69 02/01/98 75,000 75,045
Private Export Funding Corp. ......................... 5.75 04/30/98 331,000 330,173
Student Loan Marketing Association.................... 5.57(b) 01/21/98 70,000 70,053
Student Loan Marketing Association.................... 6.92 07/17/00 500,000 499,920
Treasury Bond Receipt................................. 5.40(a) 11/15/97 49,875 47,388
U.S. Treasury Bond.................................... 7.13 02/29/00 250,000 257,448
U.S. Treasury Note.................................... 5.13 03/31/98 550,000 546,320
U.S. Treasury Note.................................... 5.25 07/31/98 250,000 248,122
U.S. Treasury Note.................................... 5.00 01/31/99 750,000 737,212
U.S. Treasury Note.................................... 6.75 06/30/99 1,250,000 1,272,562
U.S. Treasury Note.................................... 6.50 08/15/97 500,000 503,115
U.S. Treasury Note.................................... 7.25 02/15/98 250,000 254,095
U.S. Treasury Note.................................... 5.75 10/31/00 2,250,000 2,221,717
U.S. Treasury Note.................................... 6.38 03/31/01 500,000 503,715
U.S. Treasury Note.................................... 6.38 05/15/99 500,000 504,585
U.S. Treasury Note.................................... 6.00 08/15/99 500,000 500,075
U.S. Treasury Note.................................... 5.88 11/30/01 500,000 492,650
-----------
Total U.S. Government and Agency Obligations (Cost $18,688,502).................................... 18,726,524
-----------
MUNICIPAL BONDS (1.1% of portfolio)
Albany NY Industrial Development Agency IDR........... 6.75(b) 02/01/99 750,000 750,000
Rhode Island Housing and Mortgage Finance Corp. ...... 6.62 04/01/02 165,000 165,619
-----------
Total Municipal Bonds (Cost $913,359).............................................................. 915,619
-----------
</TABLE>
- ----------------------------------------------------
22
<PAGE> 23
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (6.6% of portfolio)
AI Credit Corp. ...................................... 6.50% 01/02/97 $1,000,000 $ 999,819
American General Finance Corp. ....................... 5.90 01/02/97 500,000 499,918
CIT Group Holdings, Inc. ............................. 5.48 01/21/97 1,000,000 996,956
Ford Motor Credit Corp. .............................. 5.60 01/03/97 1,000,000 999,689
Merrill Lynch & Co. .................................. 5.45 01/06/97 1,000,000 999,243
Merrill Lynch & Co. .................................. 6.25 01/07/97 875,000 874,089
-----------
Total Commercial Paper (Cost $5,369,714).......................................................... 5,369,714
-----------
MONEY MARKET ACCOUNT
State Street Bank & Trust SSgA Fund, 5.16% (c)............................................. 503
503
-----------
Total Money Market Account (Cost $503)............................................................. 503
-----------
TOTAL INVESTMENTS IN SECURITIES (COST $81,065,884) -- 100%...............................................$81,304,352
===========
</TABLE>
- --------------
(a) Yield-to-maturity at purchase.
(b) Variable coupon rate as of December 31, 1996.
(c) One day yield at December 31, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
23
<PAGE> 24
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM GOVERNMENT SECURITIES FUND
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
-------- -------- ---------- ----------
<S> <C> <C> <C>
ASSET BACKED SECURITIES (5.8% of portfolio)
GNMA Pool 362840......................................... 6.75% 12/15/98 $ 60,038 $ 60,394
GNMA 94-2................................................ 7.99 04/16/10 108,745 109,768
GNMA 94-3 EG............................................. 7.50 06/16/13 78,000 77,850
GNMA 94-4 A.............................................. 7.99 09/16/22 83,929 83,943
Small Business Administration 92-10 A.................... 6.70 01/01/02 106,120 105,674
----------
Total Asset Backed Securities (Cost $436,809)........................................................ 437,629
----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (93.1% of portfolio)
Franklin Steamship Co. Title XI.......................... 7.10 05/31/98 29,000 29,410
Private Export Funding Corp. ............................ 8.35 01/31/01 25,000 26,719
Private Export Funding Corp. ............................ 5.50(a) 02/28/99 250,000 250,000
Private Export Funding Corp. ............................ 5.48 09/15/03 210,000 205,275
U.S. Treasury Note....................................... 7.00 04/15/99 450,000 460,192
U.S. Treasury Note....................................... 5.63 08/31/97 1,200,000 1,200,936
U.S. Treasury Note....................................... 6.00 11/30/97 250,000 250,617
U.S. Treasury Note....................................... 5.25 07/31/98 2,400,000 2,381,976
U.S. Treasury Note....................................... 4.75 10/31/98 1,400,000 1,373,750
U.S. Treasury Note....................................... 6.50 04/30/97 550,000 552,200
U.S. Treasury Note....................................... 5.75 10/31/00 100,000 98,743
U.S. Treasury Note....................................... 6.38 03/31/01 50,000 50,372
U.S. Treasury Note....................................... 6.38 05/15/99 50,000 50,459
U.S. Treasury Note....................................... 6.00 08/15/99 100,000 100,015
U.S. Treasury Note....................................... 5.88 11/30/01 50,000 49,265
----------
Total U.S. Government and Agency Obligations (Cost $7,068,959)....................................... 7,079,929
----------
MONEY MARKET ACCOUNT (1.1% of portfolio)
Vanguard Money Market Reserves, U.S. Treasury, 4.93% (b)................................... 86,289
86,289
----------
Total Money Market Account (Cost $86,289)............................................................ 86,289
----------
TOTAL INVESTMENTS IN SECURITIES (COST $7,592,057) -- 100%..................................................$7,603,847
==========
</TABLE>
- --------------
(a) Variable coupon rate as of December 31, 1996.
(b) 7-day yield at December 31, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
24
<PAGE> 25
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
VALUE FUND
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- ------------
<S> <C> <C>
COMMON STOCKS (88.3% of portfolio)
BASIC INDUSTRIES - 18.7%
Aluminum
Alcan Aluminum Ltd. ........................................................... 131,200 shs. $ 4,411,600
Chemicals
Avery Dennison Corp. .......................................................... 137,600 4,867,600
Betz Dearborn Laboratories, Inc. .............................................. 89,000 5,206,500
Dow Chemical Co. .............................................................. 20,200 1,583,175
Monsanto Co. .................................................................. 75,000 2,915,625
Nalco Chemical Co. ............................................................ 122,200 4,414,475
Forest Products
Pope & Talbot, Inc. ........................................................... 140,500 2,230,438
Weyerhaeuser Co. .............................................................. 46,500 2,202,937
Packaging/Containers
Bemis Co., Inc. ............................................................... 112,500 4,148,438
Paper
Champion International Corp. .................................................. 89,000 3,849,250
International Paper Co. ....................................................... 107,000 4,320,125
Rubber
Cooper Tire & Rubber Co. ...................................................... 228,000 4,503,000
------------
Total Basic Industries........................................................................... 44,653,163
------------
CAPITAL GOODS - 4.1%
Industrial Machinery
Bearings, Inc. ................................................................ 105,250 2,933,844
Parker-Hannifin Corp. ......................................................... 71,450 2,768,687
Trinova Corp. ................................................................. 110,500 4,019,438
------------
Total Capital Goods............................................................................. 9,721,969
------------
CONSUMER DURABLE GOODS - 4.3%
Household Appliances & Furnishings
Maytag Corp. .................................................................. 244,400 4,826,900
Juno Lighting, Inc. ........................................................... 172,000 2,752,000
Oneida Ltd. ................................................................... 153,700 2,766,600
------------
Total Consumer Durable Goods..................................................................... 10,345,500
------------
CONSUMER NON-DURABLE GOODS - 15.7%
Drugs & Health Care
American Home Products Corp. .................................................. 50,000 2,931,250
SmithKline Beecham Plc. ....................................................... 43,000 2,924,000
Food Processing
J.M. Smucker Co. .............................................................. 218,700 3,499,200
</TABLE>
- ----------------------------------------------------
25
<PAGE> 26
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
VALUE FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- ------------
<S> <C> <C>
CONSUMER NON-DURABLE GOODS -- continued
Photography
Eastman Kodak Co. ............................................................. 39,500 shs. $ 3,169,875
Retail
Dillard Department Stores, Inc. ............................................... 146,000 4,507,750
K Mart Corp. (a)............................................................... 170,700 1,771,012
Longs Drug Stores Corp. ....................................................... 90,400 4,440,900
May Department Stores Co. ..................................................... 77,500 3,623,125
Rite Aid Corp. ................................................................ 137,000 5,445,750
Ruddick Corp. ................................................................. 290,700 4,069,800
Trucks & Auto Parts
Genuine Parts.................................................................. 27,200 1,210,400
------------
Total Consumer Non-Durable Goods................................................................. 37,593,062
------------
CONSUMER SERVICES - 3.5%
Restaurants
Brinker International, Inc. (a)................................................ 239,600 3,833,600
Wendy's International, Inc. ................................................... 227,700 4,667,850
------------
Total Consumer Services......................................................................... 8,501,450
------------
ENERGY - 8.2%
Domestic Oil
Atlantic Richfield Co. ........................................................ 18,400 2,438,000
International Oil
Amoco Corp. ................................................................... 42,500 3,421,250
Chevron Corp. ................................................................. 50,000 3,250,000
Texaco, Inc. .................................................................. 41,700 4,091,813
Petroleum Services
Dresser Industries, Inc. ...................................................... 99,200 3,075,200
Halliburton Co. ............................................................... 55,300 3,331,825
------------
Total Energy..................................................................................... 19,608,088
------------
FINANCE - 17.8%
Banks
Banc One Corp. ................................................................ 123,800 5,323,400
BankAmerica Corp. ............................................................. 42,000 4,189,500
Chase Manhattan Corp. ......................................................... 66,200 5,908,350
CITICORP....................................................................... 38,500 3,965,500
Commerce Bancshares, Inc. ..................................................... 106,914 4,944,772
Southern National Corp. ....................................................... 67,400 2,443,250
Insurance
Allstate Corp. ................................................................ 84,817 4,908,784
Chubb Corp. ................................................................... 66,000 3,547,500
</TABLE>
- ----------------------------------------------------
26
<PAGE> 27
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
VALUE FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- ------------
<S> <C> <C>
FINANCE -- continued
Ohio Casualty Corp. ........................................................... 115,200 shs. $ 4,089,600
Transamerica Corp. ............................................................ 42,300 3,341,700
------------
Total Finance.................................................................................... 42,662,356
------------
GENERAL BUSINESS - 3.6%
Business Services
Deluxe Corp. .................................................................. 132,300 4,332,825
Donnelley, R.R. & Sons Co. .................................................... 136,100 4,270,137
------------
Total General Business.......................................................................... 8,602,962
------------
TECHNOLOGY - 4.2%
Aerospace
Sundstrand Corp. .............................................................. 64,000 2,720,000
Computer & Business Equipment
Digital Equipment Corp. (a).................................................... 38,500 1,400,438
Xerox Corp. ................................................................... 70,500 3,710,062
Electronics
Harris Corp. .................................................................. 30,500 2,093,062
------------
Total Technology................................................................................ 9,923,562
------------
TRANSPORTATION - 2.1%
Air Travel
Southwest Airlines Co. ........................................................ 225,400 4,986,975
------------
Total Transportation............................................................................ 4,986,975
------------
UTILITIES - 6.1%
Electric
American Electric Power Co. ................................................... 35,300 1,451,713
Gas & Pipeline
Questar Corp. ................................................................. 113,900 4,185,825
Sonat, Inc. ................................................................... 89,000 4,583,500
Telephone
Bellsouth Corp. ............................................................... 106,000 4,279,750
------------
Total Utilities.................................................................................. 14,500,788
------------
Total Common Stocks (Cost $154,765,758).......................................................... 211,099,875
------------
PREFERRED STOCKS (0.5% of portfolio)
K Mart Corp. 7.75% Convertible Preferred.......................................... 25,200 1,231,650
------------
Total Preferred Stocks (Cost $1,281,750)........................................................ 1,231,650
------------
</TABLE>
- ----------------------------------------------------
27
<PAGE> 28
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
VALUE FUND (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- ------------
<S> <C> <C>
COMMERCIAL PAPER (11.1% of portfolio)
AI Credit Corp., 6.5%, due 01/02/97............................................... $7,600,000 $ 7,598,628
American Express Credit Corp., 5.33%, due 01/14/97................................ 2,000,000 1,996,151
Ford Motor Credit Co., 5.40%, due 01/02/97........................................ 3,000,000 2,999,550
Ford Motor Credit Co., 5.60%, due 01/02/97........................................ 3,000,000 2,999,533
General Electric Capital Corp., 5.5%, due 01/29/97................................ 2,000,000 1,991,444
Household Finance Corp., 5.43%, due 01/22/97...................................... 3,000,000 2,990,498
IBM Credit Corp., 5.39%, due 01/08/97............................................. 3,000,000 2,996,856
Merrill Lynch & Co., 6.15%, due 01/06/97.......................................... 3,000,000 2,997,437
------------
Total Commercial Paper (Cost $26,570,097)........................................................ 26,570,097
------------
MONEY MARKET ACCOUNT (0.1% of portfolio)
State Street Bank and Trust SSgA Fund, 5.16% (b)...................................... 86,628
86,628
------------
Total Money Market Account (Cost $86,628)........................................................ 86,628
------------
TOTAL INVESTMENTS IN SECURITIES (COST $182,704,233) -- 100%............................................$238,988,250
============
</TABLE>
- --------------
(a) Non-income producing.
(b) One-day yield at December 31, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------
28
<PAGE> 29
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
HOMESTEAD FUNDS, INC.
1. ORGANIZATION
Homestead Funds, Inc. (Homestead Funds) is a Maryland corporation registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 as a no-load, open-end diversified management investment company. Homestead
Funds currently consists of four funds: Daily Income Fund, Short-Term Bond Fund,
Short-Term Government Securities Fund and Value Fund. The Short-Term Government
Securities Fund commenced operations on May 1, 1995.
Each Fund is a separate investment portfolio with distinct investment
objectives, investment programs, policies and restrictions. The investment
objectives of the Funds as well as the nature and risks of the investment
activities of each Fund are set forth more fully in the Homestead Funds'
Prospectus and Statement of Additional Information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security valuation: With respect to the Daily Income Fund, all money market
instruments are valued on an amortized cost basis, which approximates market
value. Under the amortized cost method, discounts and premiums on securities
purchased are amortized over the life of the respective securities.
With respect to the Short-Term Bond Fund, the Short-Term Government Securities
Fund and the Value Fund, investments in common stocks, preferred stocks, and
convertible preferred stocks traded on national securities exchanges and certain
over-the-counter securities are valued at the last quoted sale price at the
close of the New York Stock Exchange. Short-term debt instruments with a
remaining maturity of more than 60 days, intermediate and long-term bonds,
convertible bonds, and other debt securities are generally valued at market
prices furnished by an independent pricing service. Where such prices are not
available, valuations are obtained from brokers who are market makers for such
securities. Over-the-counter issues not quoted on the NASDAQ system, other
equity securities and debt instruments for which a sale price is not available
are valued at the mean of the closing bid and asked prices, or the last
available sale price may be used for exchange-traded debt securities. Securities
with a maturity of 60 days or less are valued on an amortized cost basis, which
approximates market value.
Distributions to shareholders: Dividends to shareholders are recorded on the
ex-dividend date. Income dividends for the Daily Income Fund, the Short-Term
Bond Fund and the Short-Term Government Securities Fund are declared daily and
paid monthly. With respect to the Value Fund, income dividends are declared and
paid semi-annually. Capital gains dividends, if any, are declared and paid at
the end of each fiscal year.
Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other: Dividend income is recorded on the ex-dividend date. Interest income and
expenses are recorded on the accrual basis. Investment transactions are recorded
on the trade date. Realized gains and losses from investment transactions are
reported on the identified cost basis.
- ----------------------------------------------------
29
<PAGE> 30
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
HOMESTEAD FUNDS, INC. (CONTINUED)
3. FEDERAL INCOME TAXES
The Funds comply with the provisions of the Internal Revenue Code that are
applicable to regulated investment companies and distribute all of their taxable
income to their shareholders. Therefore, no provision for federal income or
excise tax is required.
At December 31, 1996, the aggregate costs of investments for the Daily Income
Fund, the Short-Term Bond Fund, the Short-Term Government Securities Fund and
the Value Fund for federal income tax is the same as for financial reporting
purposes. With respect to the Short-Term Bond Fund at December 31, 1996, net
unrealized appreciation aggregated $238,467, of which $501,807 related to gross
unrealized appreciation and $263,340 related to gross unrealized depreciation.
With respect to the Short-Term Government Securities Fund at December 31, 1996,
net unrealized appreciation aggregated $11,789, of which $23,605 related to
gross unrealized appreciation and $11,816 related to gross unrealized
depreciation. With respect to the Value Fund at December 31, 1996, net
unrealized appreciation aggregated $56,284,017, of which, $59,401,410 related to
gross unrealized appreciation and $3,117,393 related to gross unrealized
depreciation.
4. INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than short-term and U.S.
Government securities, for the year ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
SHORT-TERM
SHORT-TERM GOVERNMENT VALUE
BOND FUND SECURITIES FUND FUND
----------- --------------- ---------------
<S> <C> <C> <C>
Purchases $49,100,796 $ 911,171 $67,609,809
Proceeds from Sales $26,486,613 $71,867 $8,499,785
</TABLE>
For the Short-Term Bond Fund and Short-Term Government Securities Fund,
purchases of long-term U.S. Government securities were $5,708,647 and $3,854,406
respectively, for the year ended December 31, 1996, and sales of U.S. Government
securities for the same period were $6,108,461 and $921,348, respectively.
5. INVESTMENT MANAGER
The investment management agreements between Homestead Funds, with respect to
each Fund, and RE Advisers Corporation (Manager), an indirect, wholly-owned
subsidiary of National Rural Electric Cooperative Association (NRECA), provide
for an annual investment management fee, computed daily and paid monthly, based
on each Fund's average daily net assets. Effective December 1, 1996 for the
Daily Income Fund and the Value Fund and January 1, 1997 for the Short-Term Bond
Fund and the Short-Term Government Securities Fund, the annualized management
fee rates are: with respect to the Daily Income Fund, .50% of average daily net
assets; with respect to the Short-Term Bond Fund, .60% of average daily net
assets; with respect to the Short-Term Government Securities Fund, .45% of
average daily net assets; with respect to the Value Fund, .65% of average daily
net assets up to $200 million, .50% of average daily net assets up to the next
$200 million, .40% of average daily net assets in excess of $400 million. Prior
to the above dates, the management fees were: with respect to the Daily Income
Fund, .50% of the average daily net assets up to $100 million, .40% of the
average daily net assets up to the next $100 million, .30% of the average daily
net assets up to the next $300 million, and .25% of such assets in excess
- ----------------------------------------------------
30
<PAGE> 31
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
HOMESTEAD FUNDS, INC. (CONTINUED)
of $500 million; with respect to the Short-Term Bond Fund and the Short-Term
Government Securities Fund, .50% of the average daily net assets up to $50
million, .40% of the average daily net assets up to the next $50 million, and
.30% of such assets in excess of $100 million; and, with respect to the Value
Fund, .65% of the average daily net assets up to $50 million, .50% of the
average daily net assets up to the next $50 million, and .40% of such assets in
excess of $100 million.
The Manager has agreed, as part of the Expense Limitation Agreements entered
into with Homestead Funds, with respect to each Fund, to waive its management
fee and/or reimburse for all Fund operating expenses, excluding certain
non-recurring expenses, which in any year exceed .80% (.75% prior to December 1,
1996) of the average daily net assets of the Daily Income Fund, .75% of the
average daily net assets of the Short-Term Bond Fund and the Short-Term
Government Securities Fund, and 1.25% of the average daily net assets of the
Value Fund.
Pursuant to the Expense Limitation Agreements, $28,659 of management fees for
the Daily Income Fund were waived, $10,694 of management fees for the Short-Term
Bond Fund were waived, and $24,988 of management fees were waived and $52,282 of
operating expenses of the Short-Term Government Securities Fund were reimbursed
by the Manager for the year ended December 31, 1996. At December 31, 1996
certain officers and directors of the Homestead Funds, and NRECA and its
affiliates owned 1.9% of the Daily Income Fund shares outstanding, less than 1%
of the Short-Term Bond Fund shares outstanding, 5.3% of the Short-Term
Government Securities Fund shares outstanding, and less than 1% of the Value
Fund shares outstanding.
- ----------------------------------------------------
31
<PAGE> 32
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
HOMESTEAD FUNDS, INC. (CONTINUED)
6. CAPITAL SHARE TRANSACTIONS
As of December 31, 1996, 250 million shares of $.01 par value capital shares are
authorized for each Fund. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Shares Issued Total Total
Shares In Reinvestment Shares Shares Net
Sold of Dividends Issued Redeemed Increase
------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
In Dollars
Daily Income Fund............. $28,353,723 $2,454,388 $30,808,111 ($25,635,781) $5,172,330
Short-Term Bond Fund.......... $32,737,236 $3,902,324 $36,639,560 ($16,766,543) $19,873,017
Short-Term Government
Securities Fund.............. $7,070,135 $236,513 $7,306,648 ($2,260,286) $5,046,362
Value Fund.................... $85,367,500 $7,869,999 $93,237,499 ($25,769,913) $67,467,586
In Shares
Daily Income Fund............. 28,353,723 2,454,388 30,808,111 (25,635,781) 5,172,330
Short-Term Bond Fund.......... 6,351,110 758,347 7,109,457 (3,256,320) 3,853,137
Short-Term Government
Securities Fund.............. 1,403,653 46,915 1,450,568 (449,087) 1,001,481
Value Fund.................... 4,285,509 379,578 4,665,087 (1,298,015) 3,367,072
YEAR ENDED DECEMBER 31, 1995
In Dollars
Daily Income Fund............. $32,402,034 $2,300,431 $34,702,465 ($18,671,498) $16,030,967
Short-Term Bond Fund.......... $18,717,052 $2,927,165 $21,644,217 ($14,514,272) $7,129,945
Short-Term Government
Securities Fund(a)........... $2,732,242 $49,005 $2,781,247 ($146,987) $2,634,260
Value Fund.................... $39,949,688 $6,936,475 $46,886,163 ($18,059,863) $28,826,300
In Shares
Daily Income Fund............. 32,402,034 2,300,431 34,702,465 (18,671,498) 16,030,967
Short-Term Bond Fund.......... 3,679,842 571,497 4,251,339 (2,848,599) 1,402,740
Short-Term Government
Securities Fund(a)........... 541,405 9,676 551,081 (29,015) 522,066
Value Fund.................... 2,378,552 382,894 2,761,446 (1,084,229) 1,677,217
</TABLE>
- --------------
(a) For the period May 1, 1995 (commencement of Operations) to December 31,
1995.
- ----------------------------------------------------
32
<PAGE> 33
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Income from investment operations
Net investment income (a)................................ 0.05 0.05 0.04 0.03 0.03
------- ------- ------- ------- -------
Total from investment operations......................... 0.05 0.05 0.04 0.03 0.03
------- ------- ------- ------- -------
Distributions
Net investment income.................................... (0.05) (0.05) (0.04) (0.03) (0.03)
------- ------- ------- ------- -------
Total distributions...................................... (0.05) (0.05) (0.04) (0.03) (0.03)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
TOTAL RETURN................................................... 4.81% 5.38% 3.63% 2.68% 3.39%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)......................... $ 57,871 $ 52,699 $ 36,668 $ 25,159 $ 22,330
Ratio of expenses to average net assets (a)................. 0.76% 0.75% 0.75% 0.75% 0.75%
Ratio of net investment income to
average net assets (a).................................... 4.71% 5.25% 3.66% 2.64% 3.34%
Ratio of gross expenses before voluntary expense limitation
to average net assets..................................... 0.81% 0.87% 0.99% 1.11% 1.21%
</TABLE>
- --------------
(a) Excludes investment management fees and other expenses in excess of the
Expense Limitation Agreement with the Manager (See Note 5 to financial
statements).
- ----------------------------------------------------
33
<PAGE> 34
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................. $ 5.19 $ 4.95 $ 5.19 $ 5.10 $ 5.06
------- ------- ------- ------- -------
Income from investment operations
Net investment income (a)................................ 0.29 0.28 0.24 0.24 0.26
Net realized and unrealized gain (loss) on investments... (0.04) 0.24 (0.24) 0.09 0.04
------- ------- ------- ------- -------
Total from investment operations......................... 0.25 0.52 0.00 0.33 0.30
------- ------- ------- ------- -------
Distributions
Net investment income.................................... (0.29) (0.28) (0.24) (0.24) (0.26)
------- ------- ------- ------- -------
Total distributions...................................... (0.29) (0.28) (0.24) (0.24) (0.26)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR................................... $ 5.15 $ 5.19 $ 4.95 $ 5.19 $ 5.10
======= ======= ======= ======= =======
TOTAL RETURN................................................... 5.16% 10.81% 0.09% 6.62% 6.30%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)......................... $81,470 $62,125 $52,257 $37,046 $10,991
Ratio of expenses to average net assets (a)................. 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of net investment income to
average net assets (a).................................... 5.72% 5.49% 4.84% 4.58% 5.20%
Ratio of gross expenses before voluntary expense limitation
to average net assets..................................... 0.76% 0.86% 0.98% 1.16% 1.94%
Portfolio turnover rate..................................... 49% 35% 13% 14% 19%
</TABLE>
- --------------
(a) Excludes investment management fees and other expenses in excess of 0.75%,
pursuant to the Expense Limitation Agreement with the Manager (See Note 5 to
financial statements).
- ----------------------------------------------------
34
<PAGE> 35
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
SHORT-TERM GOVERNMENT SECURITIES FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
May 1, 1995
(Commencement
Year Ended of Operations) to
December 31, December 31,
1996 1995
------------ -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $ 5.09 $ 5.00
------ ------
Income from investment operations
Net investment income (a)............................................... 0.26 0.18
Net realized and unrealized gain (loss) on investments.................. (0.04) 0.09
------ ------
Total from investment operations........................................ 0.22 0.27
------ ------
Distributions
Net investment income................................................... (0.26) (0.18)
------ ------
Total distributions..................................................... (0.26) (0.18)
------ ------
NET ASSET VALUE, END OF YEAR.................................................. $ 5.05 $ 5.09
====== ======
TOTAL RETURN.................................................................. 4.46% 5.44%(c)
====== ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)...................................... $7,692 $2,658
Ratio of expenses to average net assets (a)................................ 0.75% 0.75%(b)
Ratio of net investment income to average net assets (a)................... 5.16% 5.18%(b)
Ratio of gross expenses before voluntary expense limitation to average net
assets................................................................... 2.30% 6.21%(b)
Portfolio turnover rate.................................................... 21% 7%
</TABLE>
- --------------
(a) Excludes investment management fees and other expenses in excess of 0.75%,
pursuant to the Expense Limitation Agreement with the Manager (See Note 5 to
financial statements).
(b) Annualized.
(c) Aggregate total return for the period.
- ----------------------------------------------------
35
<PAGE> 36
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
VALUE FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......................... $ 18.44 $ 14.50 $ 14.54 $ 12.49 $ 11.48
-------- -------- ------- ------- -------
Income from investment operations
Net investment income (a)............................ 0.39 0.41 0.29 0.22 0.25
Net realized and unrealized gain on investments...... 2.91 4.47 0.07 2.12 1.09
-------- -------- ------- ------- -------
Total from investment operations..................... 3.30 4.88 0.36 2.34 1.34
-------- -------- ------- ------- -------
Distributions
Net investment income................................ (0.39) (0.41) (0.29) (0.22) (0.25)
Net realized gain.................................... (0.36) (0.53) (0.11) (0.07) (0.08)
-------- -------- ------- ------- -------
Total distributions.................................. (0.75) (0.94) (0.40) (0.29) (0.33)
-------- -------- ------- ------- -------
NET ASSET VALUE, END OF YEAR............................... $ 20.99 $ 18.44 $ 14.50 $ 14.54 $ 12.49
======== ======== ======= ======= =======
TOTAL RETURN............................................... 17.94% 33.78% 2.50% 18.83% 11.68%
======== ======== ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)..................... $238,550 $147,506 $91,612 $53,616 $19,730
Ratio of expenses to average net assets (a)............. 0.73% 0.84% 1.15% 1.25% 1.25%
Ratio of net investment income to average net assets
(a)................................................... 2.08% 2.50% 2.19% 1.92% 2.33%
Ratio of gross expenses before voluntary expense
limitation to average net assets...................... n/a n/a 1.15% 1.25% 1.61%
Portfolio turnover rate................................. 5% 10% 4% 2% 5%
Average commission rate paid per share transacted (b)... $0.0500 - - - -
</TABLE>
- --------------
(a) Excludes investment management fees and other expenses in excess of 1.25%,
pursuant to the Expense Limitation Agreement with the Manager (See Note 5 to
financial statements).
(b) Required disclosure for fiscal years beginning after December 1, 1995
pursuant to SEC regulations.
- ----------------------------------------------------
36
<PAGE> 37
- --------------------------------------------------------------------------------
SPECIAL INFORMATION
HOMESTEAD FUNDS, INC.
DECEMBER 31, 1996
(unaudited)
Special Meetings of Shareholders (the "Special Meetings") were held on November
25, 1996 for the Daily Income Fund, November 27, 1996 for the Value Fund, and
December 12, 1996 for the Short-Term Bond Fund and Short-Term Government
Securities Fund. The record date for these Special Meetings was October 25,
1996. The voting tabulation was as follows:
<TABLE>
<CAPTION>
Abstain/
Shares Withhold
Outstanding For Against Authority
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Approval of amendments to the Investment Management
Agreement of each Fund
Daily Income Fund................................... 55,908,173 20,217,992 8,455,426 407,127
Short-Term Bond Fund................................ 14,895,759 6,933,017 358,609 223,173
Short-Term Government Securities Fund............... 1,414,947 682,003 31,734 7,587
Value Fund.......................................... 10,644,118 4,816,348 397,591 181,895
</TABLE>
- ----------------------------------------------------
37
<PAGE> 38
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Homestead Funds, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Homestead Funds, Inc. (comprising,
respectively, the Daily Income Fund, Short-Term Bond Fund, Short-Term Government
Securities Fund and Value Fund) as of December 31, 1996, and the related
statements of operations for the year then ended and statements of changes in
net assets and financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the years ended December 31, 1993 and 1992 were audited by other
auditors whose report dated February 11, 1994 expressed an unqualified opinion
thereon.
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 disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian
and brokers. 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 each
of the respective funds constituting Homestead Funds, Inc. at December 31, 1996,
the results of their operations for the year then ended, and the changes in
their net assets and financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young Signature
Washington, D.C.
January 29, 1997
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<PAGE> 40
[LOGO]
HOMESTEAD FUNDS, INC.
- --------------------------
ANNUAL REPORT
DECEMBER 31, 1996
HOMESTEAD FUNDS INC LOGO
c/o Rodney Square Management Corp.
PO Box 8987
Wilmington, DE 19899
1-800-258-3030
