<PAGE> 1
- --------------------------------------------------------------------------------
A MESSAGE FROM THE INVESTMENT MANAGER
Dear Shareholders:
Despite a volatile fourth quarter, the U.S. stock market rewarded investors with
yet another year of outstanding results. It was, in fact, a very good year for
almost all types of investors. These results can be attributed to a powerful
combination of strong economic growth, increasing corporate profits and slowing
inflation, despite a very low level of unemployment. While the sudden and
pronounced decline in the Asian financial markets caused sharp losses in the
U.S. equity market in October, as investor confidence returned to the market,
stocks recovered to gain 2.8% for the fourth quarter, as measured by the
Standard & Poor's 500 Stock Index (S&P 500).
For the year 1997, large capitalization stocks once again played an important
role in the market's performance. The S&P 500 rose by 33.3% while the Russell
2000, a small stock index, gained by only 22.3%. Furthermore, the stocks of the
25 largest companies in the S&P 500 provided more than 43% of the Index's total
return for the year. The continuing difference in returns between large and
small company stocks has been attributed largely to stronger earnings growth
achieved by larger companies during the past two years. Within the S&P 500, the
best performing sector was financial services. Helped by lower interest rates,
cost cutting and continued takeover activity, this sector posted a 49% return
for 1997. The basic materials sector, suffering from a lack of pricing power,
produced the poorest sector results by gaining only 7.5% for the year.
The stock market has completed an unprecedented rise with three consecutive
years of annual gains exceeding 20%. Stock prices are at or near record levels.
These high prices reflect continuing optimism about growth in the economy as
well as continuing low inflation. Such optimism leaves little margin for error
or disappointment.
VALUE FUND
The Value Fund earned a 26.7% return for the year ended December 31, 1997. The
Fund, which invests in middle and large capitalization companies, lagged the
large capitalization oriented S&P 500 return of 33.3%, but outperformed the
Russell 2000 Index's return of 22.3% for the year. Our investment approach is to
build a carefully selected portfolio of stocks that may be undervalued or
overlooked by other investors. This process results in a broadly diversified,
conservative portfolio of stocks with very low portfolio turnover.
The most important contributors to the Fund's return were the financial and
consumer cyclical sectors. During the past several years, banks and insurance
companies have benefited from declining interest rates, a positive regulatory
environment and continued takeover activity. Investments in companies such as
BB&T Corp., a southeast based bank, Chubb Corp., a property and casualty
insurer, and BankAmerica provided solid investment results for the year. In the
consumer sector, Maytag continues to benefit from much improved earnings
prospects and the successful introduction of new products.
With respect to the technology sector, the Value Fund continues to be
underweighted relative to the S&P 500. While this sector accounts for roughly
14% of the S&P 500, we believe that high valuations and continued price cutting
makes it unattractive for conservative investors.
During the year, the Fund made two new investments, Pharmacia & Upjohn, a
worldwide pharmaceutical company, and Rubbermaid, a manufacturer and marketer of
consumer products.
SHORT-TERM BOND FUND
Interest rates declined on balance during the past year, reflecting investors'
continued expectations that inflation will remain low. In this environment, the
Short-Term Bond Fund had a total return of 6.6% for the year ended December 31,
1997. The Fund began the year with a 30-day SEC yield of 6.0% before declining
to 5.9% by year end. Portfolio composition remained essentially unchanged from
June 30, 1997 through December 31, 1997. During the course of the year,
corporate bond holdings were reduced somewhat, from 42% in January to
<PAGE> 2
- --------------------------------------------------------------------------------
A MESSAGE FROM THE INVESTMENT MANAGER
(CONTINUED)
33% at the end of December. During the same period, investments in asset-backed
bonds were increased from 6% to 18%. The average maturity of the portfolio was
reduced slightly from 2.9 years in January to 2.8 years in December.
SHORT-TERM GOVERNMENT SECURITIES FUND
For the twelve months ended December 31, 1997, the Short-Term Government
Securities Fund had a total return of 5.7%. In order to take advantage of high
yields, government-backed mortgages and government agencies were increased from
4% and 7% to 13% and 11% of the portfolio respectively and treasury securities
went from 86% at the beginning of the year to 68% at year end. Portfolio
maturity increased from 1.9 years at the beginning of the year to 2.0 years by
December 31, 1997.
DAILY INCOME FUND
Money market rates increased modestly throughout the year as the Federal Reserve
Board increased the Federal Funds rate by 0.25% in March, the first tightening
of monetary policy since early 1995.
The Daily Income Fund had a total return of 4.9% for the year ended December 31,
1997. As short-term rates rose, investment strategy shifted to take advantage of
attractive yields being offered by high-quality issues of commercial paper. By
year end, 80% of the portfolio was invested in commercial paper, compared to 39%
at the beginning of January. Additionally, corporate and government securities
in the portfolio were reduced from 36% and 24% to 17% and 2%, respectively, for
the same period. The average maturity of the Fund was increased from 33 days at
January 1, 1997 to 44 days as of December 31, 1997.
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 MORRIS
Peter R. Morris
Executive Director, Investments
- ----------------------------------------------------------------
- ----------------------------------------------------
2
<PAGE> 3
SHORT-TERM BOND FUND ANNUAL TOTAL RETURNS VS. SHORT-TERM INDICES
<TABLE>
<CAPTION>
MERRILL LYNCH MERRILL LYNCH
1-2.99 YEAR SHORT-TERM 1-4.99 YEAR
YEAR U.S. TREASURY INDEX BOND FUND CORP./GOV. INDEX
<S> <C> <C> <C>
1997 6.7% 6.6% 7.2%
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>
HOMESTEAD MERRILL LYNCH
SHORT-TERM 1-4.99 YEAR
YEAR BOND FUND CORP./GOV. INDEX
<S> <C> <C>
Nov 91 $10,000 $10,000
Dec 92 10,842 11,007
Dec 93 11,560 11,792
Dec 94 11,570 11,727
Dec 95 12,820 13,247
Dec 96 13,482 13,858
Dec 97 14,374 14,850
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
FUND M.L. INDEX
<S> <C> <C>
1 YEAR 6.6% 7.2%
5 YEARS 5.8% 6.2%
SINCE INCEPTION
(11/5/91) 6.1% 6.6%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE SHORT-TERM BOND
FUND AVERAGE ANNUAL TOTAL RETURNS ARE NET OF ANY FEE WAIVERS AND
REIMBURSEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
3
<PAGE> 4
SHORT-TERM GOVERNMENT SECURITIES FUND
ANNUAL TOTAL RETURN VS. SHORT-TERM INDICES
<TABLE>
<CAPTION>
MERRILL LYNCH SHORT-TERM MERRILL LYNCH
1-2.99 YEAR GOVERNMENT 1-4.99 YEAR
YEAR U.S. TREASURY INDEX SECURITIES FUND U.S. TREASURY INDEX
<S> <C> <C>
1997 6.7% 5.7% 7.1%
1996 5.0% 4.5% 4.5%
</TABLE>
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
<TABLE>
<CAPTION>
HOMESTEAD SHORT-TERM MERRILL LYNCH
GOVERNMENT 1-4.99 YEAR
YEAR SECURITIES FUND U.S. TREASURY INDEX
<S> <C> <C>
May 95 $10,000 $10,000
Dec 95 10,544 10,757
Dec 96 11,014 11,238
Dec 97 11,645 12,037
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
FUND M.L. INDEX
<S> <C> <C>
1 YEAR 5.7% 7.1%
SINCE INCEPTION
(5/1/95) 5.9% 7.2%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE SHORT-TERM
GOVERNMENT SECURITIES FUND AVERAGE ANNUAL TOTAL RETURNS ARE NET OF ANY FEE
WAIVERS AND REIMBURSEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
4
<PAGE> 5
VALUE FUND ANNUAL TOTAL RETURNS VS. S&P 500 INDEX
<TABLE>
<CAPTION>
YEAR VALUE FUND S&P 500 INDEX
<S> <C> <C>
1997 26.7% 33.3%
1996 17.9% 22.9%
</TABLE>
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
<TABLE>
<CAPTION>
HOMESTEAD VALUE S&P 500
YEAR FUND INDEX
<S> <C> <C>
Nov 90 $10,000 $10,000
Dec 91 11,784 13,546
Dec 92 13,161 14,575
Dec 93 15,639 16,047
Dec 94 16,029 16,256
Dec 95 21,444 22,385
Dec 96 25,292 27,488
Dec 97 32,044 36,669
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIODS ENDED 12/31/97
<TABLE>
<CAPTION>
S&P 500
FUND INDEX
<S> <C> <C>
1 YEAR 26.7% 33.3%
5 YEARS 19.5% 20.2%
SINCE INCEPTION
(11/19/90) 17.8% 19.9%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS ARE NET OF ANY FEE WAIVERS AND REIMBURSEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
5
<PAGE> 6
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (79.9% of portfolio)
American Express Credit Corp. .................................. 5.75% 01/12/98 $ 869,000 $ 867,473
American Express Credit Corp. .................................. 6.25 01/02/98 1,787,000 1,786,690
American General Finance Corp. ................................. 5.83 01/08/98 2,575,000 2,572,081
Baltimore Gas & Electric Co. ................................... 5.85 01/12/98 460,000 459,178
Beneficial Corp. ............................................... 5.74 01/29/98 267,000 265,808
Beneficial Corp. ............................................... 5.59 01/06/98 1,668,000 1,666,705
Beneficial Corp. ............................................... 5.83 01/09/98 112,000 111,855
CIT Group Holdings, Inc. ....................................... 5.68 01/21/98 1,473,000 1,468,352
Chevron USA, Inc. .............................................. 6.05 01/02/98 910,000 909,847
Coca-Cola Co. .................................................. 6.00 01/09/98 500,000 499,333
Coca-Cola Co. .................................................. 5.68 01/09/98 1,356,000 1,354,289
Commercial Credit Co. .......................................... 5.95 01/13/98 514,000 512,981
Commercial Credit Co. .......................................... 5.75 01/28/98 1,143,000 1,138,071
Commercial Credit Co. .......................................... 5.60 01/08/98 1,006,000 1,004,905
Consolidated Natural Gas Co. ................................... 6.20 01/06/98 1,380,000 1,378,812
Deere & Co. .................................................... 6.05 01/07/98 803,000 802,190
John Deere Capital Corp. ....................................... 5.75 01/12/98 1,331,000 1,328,662
John Deere Capital Corp. ....................................... 5.73 01/09/98 525,000 524,331
Ford Motor Credit Corp. ........................................ 6.10 01/02/98 163,000 162,972
Ford Motor Credit Corp. ........................................ 5.82 01/05/98 100,000 99,935
Ford Motor Credit Corp. ........................................ 5.61 01/06/98 2,397,000 2,395,132
General Electric Capital Corp. ................................. 5.61 01/16/98 243,000 242,432
General Electric Capital Corp. ................................. 5.69 01/20/98 619,000 617,141
General Electric Capital Corp. ................................. 5.60 01/05/98 1,710,000 1,708,936
Household Finance Corp. ........................................ 5.78 01/14/98 2,611,000 2,605,550
IBM Credit Corp. ............................................... 5.72 01/16/98 692,000 690,351
IBM Credit Corp. ............................................... 5.68 01/07/98 1,176,000 1,174,887
IBM Credit Corp. ............................................... 5.76 01/09/98 729,000 728,067
Merrill Lynch & Co. ............................................ 5.63 01/14/98 585,000 583,811
Merrill Lynch & Co. ............................................ 5.82 01/16/98 724,000 722,244
Merrill Lynch & Co. ............................................ 5.71 01/22/98 256,000 255,147
Merrill Lynch & Co. ............................................ 5.58 01/05/98 1,034,000 1,033,360
Nicor, Inc. .................................................... 5.58 02/02/98 2,473,000 2,460,734
Norwest Financial, Inc. ........................................ 5.65 01/08/98 1,021,000 1,019,878
Norwest Financial, Inc. ........................................ 5.60 01/09/98 1,157,000 1,155,560
Prudential Funding Corp. ....................................... 5.55 01/12/98 557,000 556,055
Prudential Funding Corp. ....................................... 5.62 01/07/98 2,075,000 2,073,056
Texaco Capital Corp. ........................................... 5.95 01/02/98 854,000 853,859
Transamerica Finance Corp. ..................................... 5.68 01/13/98 1,895,000 1,891,412
Transamerica Finance Corp. ..................................... 5.75 01/22/98 600,000 597,988
-----------
Total Commercial Paper (Cost $42,280,070).......................................................................... 42,280,070
-----------
</TABLE>
- ----------------------------------------------------------------
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6
<PAGE> 7
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
CORPORATE NOTES (17.4% of portfolio)
Associates Corp. of North America............................... 5.25% 09/01/98 $1,155,000 $ 1,149,758
Associates Corp. of North America............................... 7.25 05/15/98 50,000 50,218
Beneficial Corp. ............................................... 5.75 06/29/98 500,000 499,723
CIT Group Holdings, Inc. ....................................... 6.20 04/15/98 51,000 51,020
CIT Group Holdings, Inc. ....................................... 6.35 07/31/98 1,090,000 1,093,167
Coca-Cola Co. .................................................. 7.88 09/15/98 540,000 547,529
Consolidated Natural Gas Co. ................................... 5.88 10/01/98 1,275,000 1,274,828
Eli Lilly & Co. ................................................ 5.50 07/08/98 1,456,000 1,453,360
General Electric Capital Corp. ................................. 8.00 01/15/98 50,000 50,036
Norwest Financial, Inc. ........................................ 6.23 09/01/98 400,000 400,631
Pacific Gas & Electric Co. ..................................... 5.38 08/01/98 850,000 847,142
PepsiCo, Inc. .................................................. 7.75 10/01/98 200,000 202,495
Philip Morris Cos., Inc. ....................................... 6.38 01/15/98 570,000 570,090
Texaco Capital Corp. ........................................... 8.65 01/30/98 750,000 751,640
Transamerica Finance Corp. ..................................... 8.38 02/15/98 89,000 89,194
Wal-Mart Stores, Inc. .......................................... 5.50 03/01/98 160,000 159,900
-----------
Total Corporate Notes (Cost $9,190,731)................................................................. 9,190,731
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS (1.5% of portfolio)
Federal Home Loan Bank.......................................... 5.87 06/26/98 175,000 175,039
Federal National Mortgage Association........................... 8.20 03/10/98 500,000 502,197
Federal National Mortgage Association........................... 7.56 02/06/98 100,000 100,114
-----------
Total U.S. Government Agency Obligations (Cost $777,350)................................................ 777,350
-----------
CORPORATE MASTER NOTE (1.2% of portfolio)
Associates Corp. of North America............................... 5.57(a) 657,000 657,000
-----------
Total Corporate Master Note (Cost $657,000)............................................................. 657,000
-----------
MONEY MARKET ACCOUNT
State Street Bank and Trust SSgA Fund........................... 5.38(b) 1,056
-----------
Total Money Market Account (Cost $1,056)................................................................ 1,056
-----------
TOTAL INVESTMENTS IN SECURITIES (COST $52,906,207) -- 100%.................................................... $52,906,207
===========
</TABLE>
- --------------
(a) Variable coupon rate as of December 31, 1997.
(b) One day yield at December 31, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------------------
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7
<PAGE> 8
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (33.0% of portfolio)
BASIC INDUSTRIES - 4.6%
Allied Corp. .............................................. 5.68-5.70%(a) 09/15/98 $ 475,000 $ 455,753
Allied Corp. .............................................. 6.12-6.22(a) 08/01/99 109,000 99,283
Allied Corp. .............................................. 6.07-6.20(a) 08/01/01 275,000 220,344
Corning, Inc. ............................................. 7.10 08/14/00 100,000 102,500
Dow Chemical Co. .......................................... 9.35 03/15/02 1,063,000 1,131,668
E. I. Dupont De Nemours & Co. ............................. 8.50 02/15/03 125,000 132,756
Ford Capital BV............................................ 9.13 05/01/98 500,000 505,320
General Motors Corp. ...................................... 9.13 07/15/01 200,000 218,250
McKesson Corp. ............................................ 4.50 03/01/04 575,000 522,881
Pet, Inc. ................................................. 5.75 07/01/98 335,000 334,811
Philip Morris Cos., Inc. .................................. 6.38 01/15/98 1,091,000 1,091,044
Ryder System, Inc. ........................................ 7.56 08/15/00 85,000 87,975
Texaco Capital, Inc. ...................................... 8.50 06/01/99 150,000 151,312
------------
Total Basic Industries................................................................................. 5,053,897
------------
CONSUMER NON-DURABLE GOODS - 1.8%
Beverages
Pepsico Capital Resources, Inc. ........................... 6.54(a) 04/01/98 100,000 98,660
Photography
Eastman Kodak Co. ......................................... 9.88 11/01/04 625,000 642,188
Processed Foods
McDonald's Corp. .......................................... 7.38 07/15/02 630,000 640,237
Recreation
Walt Disney Co. ........................................... 1.50 10/20/99 50,000 46,156
Retail
Sears Roebuck and Co. ..................................... 6.00 05/01/00 168,000 167,458
Sears Roebuck and Co. ..................................... 9.50 06/01/99 175,000 183,005
Wal-Mart Stores, Inc. ..................................... 5.50 03/01/98 192,000 191,861
------------
Total Consumer Non-Durable Goods....................................................................... 1,969,565
------------
CONSUMER SERVICES - 0.1%
Healthcare
Hospital Corp. of America.................................. 6.90(a) 06/01/99 111,000 101,557
------------
Total Consumer Services................................................................................ 101,557
------------
FINANCE - 17.8%
Banks
Bank America Corp. ........................................ 6.65(b) 05/17/99 400,000 396,518
Bank America Corp. ........................................ 8.13 08/15/04 210,000 215,830
Bank America Corp. ........................................ 8.95 11/15/04 710,000 746,388
Barclays N.A. Capital Corp. ............................... 9.75 05/15/21 306,000 350,752
Barclays N.A. Capital Corp. ............................... 7.88 08/15/98 90,000 91,013
Chase Manhattan Corp. ..................................... 7.88 08/01/04 600,000 613,422
Chase Manhattan Corp. ..................................... 8.00 05/01/05 500,000 503,750
Chemical New York Corp. NV................................. 6.05(a) 02/16/98 115,000 114,252
</TABLE>
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8
<PAGE> 9
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
FINANCE -- continued
CITICORP................................................... 8.63% 11/01/04 $ 465,000 $ 485,925
CITICORP................................................... 6.50 09/16/01 75,000 75,303
First Interstate Bancorp. ................................. 8.15 03/15/02 1,000,000 1,005,000
First Union Corp. ......................................... 8.77 11/15/04 380,000 396,421
International Bank for Recon. & Dev. ...................... 5.47(a) 02/15/98 125,000 124,219
International Bank for Recon. & Dev. ...................... 7.20(a) 08/15/98 26,000 25,122
International Bank for Recon. & Dev. ...................... 5.93-7.89(a) 02/15/99 732,000 688,080
International Bank for Recon. & Dev. ...................... 6.16-6.54(a) 08/15/99 525,000 479,062
Irving Bank Corp. ......................................... 8.50 06/01/02 233,000 233,168
J.P. Morgan & Co., Inc. ................................... 5.37-6.38(a) 04/01/98 1,104,000 1,089,814
Financial Services
Associates Corp. of North America.......................... 8.38 01/15/98 50,000 50,033
AVCO Financial Services, Inc. ............................. 8.50 10/15/99 50,000 52,187
Beneficial Corp. .......................................... 5.75 06/29/98 500,000 499,750
CM International........................................... 6.02-7.41(a) 09/11/00 1,265,000 1,068,293
Dean Witter Discover Co. .................................. 5.90(b) 03/02/99 1,395,000 1,397,609
Ford Motor Credit Corp. ................................... 6.25 02/26/98 90,000 90,047
Ford Motor Credit Corp. ................................... 6.47(b) 02/03/98 200,000 199,998
Franklin Universal Trust................................... 5.63 09/01/98 500,000 499,245
General Electric Capital Corp. ............................ 6.65(b) 04/14/08 500,000 509,210
Heller Financial Inc. ..................................... 9.38 03/15/98 155,000 155,915
Household Finance Corp. ................................... 8.00 08/15/04 250,000 256,960
Household Finance Corp. ................................... 8.55 10/15/04 180,000 187,122
Household Finance Corp. ................................... 6.08 03/08/06 552,500 550,398
Household Finance Corp. ................................... 8.95 09/15/99 110,000 114,902
IBM Credit Corp. .......................................... 9.68 07/01/08 100,000 114,655
Midland American Capital Corp. ............................ 12.75 11/15/03 175,000 184,406
Sears Overseas Finance Co. ................................ 6.28-6.79(a) 07/12/98 200,000 193,856
Transamerica Finance Corp. ................................ 7.68 03/16/00 500,000 515,650
Transamerica Finance Corp. ................................ 6.60 03/20/01 250,000 252,782
Transamerica Finance Corp. ................................ 8.75 10/01/99 50,000 52,188
Xerox Credit Corp. ........................................ 6.78 05/21/01 500,000 509,375
Insurance
CNA Financial.............................................. 8.88 03/01/98 950,000 954,256
ITT Hartford Group, Inc. .................................. 8.20 10/15/98 357,000 363,280
Liberty Mutual Capital Corp. (d)........................... 7.98 12/01/02 500,000 526,765
Lincoln National Corp. .................................... 7.13 07/15/99 150,000 152,438
Security & Commodity Brokers
Lehman Brothers, Inc. ..................................... 5.62-7.11(a) 05/16/98 2,098,000 2,054,508
Lehman Brothers, Inc. ..................................... 6.25-6.40(a) 05/16/98 313,000 306,511
Lehman Brothers, Inc. ..................................... 7.63 08/01/98 150,000 151,359
------------
Total Finance.......................................................................................... 19,597,737
------------
</TABLE>
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9
<PAGE> 10
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
TRANSPORTATION - 0.6%
Airlines
Delta Airlines, Inc. ...................................... 9.60% 05/26/00 $ 50,000 $ 53,378
Railroad
Atchison Topeka Santa Fe RR Co. ........................... 5.37 09/15/99 228,000 225,720
Chesapeake & Ohio Railroad Co. ............................ 11.63 11/15/98 113,000 117,435
Norfolk & Western Railway Co. ............................. 8.13 11/15/00 100,000 105,396
Seaboard System Railroad Co. .............................. 11.13 04/01/98 200,000 202,353
------------
Total Transportation................................................................................... 704,282
------------
UTILITIES - 8.1%
Electric & Gas
Appalachian Power Co. ..................................... 7.95 03/01/02 250,000 255,316
Central Power & Light Co. ................................. 6.63 01/01/98 260,000 260,000
Commonwealth Edison Co. ................................... 2.75 04/01/99 95,000 90,488
Commonwealth Edison Co. ................................... 7.50 01/01/01 150,000 150,938
Connecticut Light & Power Co. ............................. 7.25 07/01/99 247,000 247,309
Consumers Energy Co. ...................................... 6.88 05/01/98 200,000 200,250
Detroit Edison Co. ........................................ 6.40 10/01/98 150,000 150,099
Duke Power Co. ............................................ 7.41 02/10/04 250,000 259,375
Eastern Edison Co. ........................................ 5.75 07/01/98 530,000 529,018
Florida Power & Light Corp. ............................... 5.50 03/11/98 460,000 459,783
Florida Power Corp. ....................................... 7.38 06/01/02 502,000 508,903
Florida Power Corp. ....................................... 7.25 11/01/02 500,000 507,500
Georgia Power Co. ......................................... 7.00 10/01/00 1,250,000 1,250,000
Indiana & Michigan Electric Co. ........................... 7.00 05/01/98 343,000 342,876
Louisiana Power & Light Co. ............................... 7.13 03/01/98 135,000 135,000
New Orleans Public Service Co. ............................ 7.00 03/01/03 500,000 512,500
New York State Electric & Gas Co. ......................... 6.50 09/01/98 270,000 270,450
Northern States Power Co. ................................. 7.38 03/01/02 585,000 591,581
Pacific Gas & Electric Co. ................................ 7.50 12/01/99 150,000 150,477
South Carolina Electric & Gas Co. ......................... 6.50 09/01/98 490,000 490,000
Southern California Gas Co. ............................... 5.25 03/01/98 114,000 113,858
Texas Utilities Co. ....................................... 5.75 07/01/98 150,000 149,901
West Penn Power Co. ....................................... 5.50 06/01/98 300,000 299,615
Telephone
AT&T Corp. ................................................ 4.75 06/01/98 115,000 114,499
General Telephone Co. of Florida........................... 7.50 08/01/02 100,000 100,750
General Telephone Co. of Michigan.......................... 7.63 05/01/03 500,000 505,912
NYNEX Corp. ............................................... 9.55 05/01/10 185,478 213,556
Southwestern Bell Telephone Co. ........................... 6.05 02/09/98 50,000 50,000
------------
Total Utilities........................................................................................ 8,909,954
------------
Total Corporate Bonds (Cost $36,112,614)............................................................... 36,336,992
------------
</TABLE>
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10
<PAGE> 11
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
FOREIGN BONDS (0.2% of portfolio)
Hydro-Quebec.................................................. 6.50% 07/16/03 $ 100,000 $ 100,856
Hydro-Quebec.................................................. 6.27 01/03/26 80,000 81,300
------------
Total Foreign Bonds (Cost $172,838).................................................................... 182,156
------------
ASSET BACKED SECURITIES (18.4% of portfolio)
Americredit Automobile Receivables Trust 96-B................. 6.50 01/12/02 68,360 68,635
Arcadia Automobile Receivables Trust 97-C..................... 6.05 11/15/00 350,000 350,108
Banc One Auto Grantor Trust 97-A.............................. 6.27 11/20/03 452,570 453,643
Case Equipment Loan Trust 95-B................................ 6.15 09/15/02 491,019 492,198
Case Equipment Loan Trust 96-A................................ 5.50 02/15/03 323,085 321,683
Caterpillar Financial Asset Trust 95-A........................ 6.30 08/25/01 445,933 447,078
Charming Shoppes Master Trust 94-1............................ 7.00 04/15/03 325,000 328,608
Chase Manhattan Grantor Trust 95-A............................ 6.00 09/17/01 274,104 273,988
CIT Revenue Grantor Trust 94-A................................ 4.90 07/15/09 138,488 135,706
Citibank Credit Card Master Trust 97-3........................ 6.84 02/10/04 750,000 767,903
Copelco Capital Funding Corp. 96-A............................ 6.34 07/20/04 230,183 230,869
CSFBTLC Trust II 94-1 (e)..................................... 8.80 12/25/01 525,765 525,764
CSXT Trade Receivables Master Trust 93-1...................... 5.05 09/25/99 950,000 942,856
Discover Card Trust 97-2...................................... 6.79 04/16/10 1,250,000 1,261,063
Discover Card Trust 91-F...................................... 7.85 11/21/00 119,000 120,290
Discover Card Trust 92-B...................................... 6.80 06/16/00 210,000 209,857
First Chicago Master Trust II 92-E............................ 6.25 08/15/99 100,000 99,766
First Security Auto Grantor Trust 95-A........................ 6.25 01/15/01 364,159 364,515
Ford Credit Grantor Trust 95-A................................ 5.90 05/15/00 251,303 251,064
Green Tree Financial Corp. 92-1............................... 6.15 10/15/17 59,069 59,101
Green Tree Financial Corp. 95-9............................... 6.00 01/15/27 569,158 572,683
Green Tree Financial Corp. 93-4............................... 5.85 01/15/19 548,186 547,852
Green Tree Financial Corp. 95-5............................... 6.25 09/15/26 500,000 500,900
Green Tree Financial Corp. 96-1............................... 5.50 03/15/27 433,751 431,981
Green Tree Financial Corp. 95-7............................... 6.70 11/15/26 145,000 147,223
Household Affinity Credit Card Master Trust 93-2.............. 5.60 05/15/02 100,000 99,040
IBM Credit Receivables Lease Asset Master Trust 93-1.......... 4.55 11/15/00 269,117 268,404
ICI Funding Secured Assets Corp. 97-1......................... 7.00 03/25/28 700,000 702,660
Keycorp Auto Grantor Trust 95-A............................... 5.80 07/15/00 120,167 121,068
MBNA Master Credit Card Trust 93-3............................ 5.40 09/15/00 148,000 147,056
Metlife Capital Equipment Loan Trust 97-A..................... 6.85 05/20/08 550,000 566,695
Metris Master Trust 97-1...................................... 6.87 10/20/05 395,000 406,348
MMCA Automobile Trust 95-1.................................... 5.70 11/15/00 199,871 199,520
Navistar Financial Corp. Owner Trust 96-A..................... 6.35 11/15/02 399,215 400,509
Nissan Auto Receivables Grantor Trust 95-A.................... 6.10 08/15/01 88,952 88,938
Olympic Auto Receivable Trust 94-A............................ 5.65 01/15/01 378,245 377,137
Olympic Auto Receivable Trust 95-D............................ 6.15 07/15/01 200,000 200,298
Olympic Auto Receivable Trust 95-E............................ 5.85 03/15/01 500,000 498,990
Olympic Auto Receivable Trust 96-A............................ 5.85 07/15/01 75,000 74,793
PNC Student Loan Trust 97-2................................... 6.45 01/25/02 135,000 137,172
Premier Auto Trust 93-2....................................... 4.90 10/15/98 71,230 71,230
Premier Auto Trust 94-1....................................... 4.75 02/02/00 5,408 5,381
</TABLE>
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11
<PAGE> 12
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES -- continued
Premier Auto Trust 97-2....................................... 6.13% 09/06/00 $ 270,000 $ 270,289
Premier Auto Trust 96-2....................................... 6.58 10/06/00 115,000 115,972
Premier Auto Trust 93-3....................................... 4.90 12/15/98 158,634 158,333
Premier Auto Trust 93-4....................................... 4.65 02/02/99 115,263 115,026
Premier Auto Trust 95-1....................................... 8.05 04/04/00 295,535 299,159
Premier Auto Trust 96-2....................................... 6.35 01/06/00 100,000 100,236
Railcar Trust 92-1............................................ 7.75 06/01/04 88,264 92,841
Small Business Administration 92-10........................... 7.15 09/01/02 238,263 244,586
Standard Credit Card Master Trust 95-6........................ 6.75 06/07/00 260,000 260,824
Standard Credit Card Master Trust 95-8........................ 6.70 09/07/02 1,130,000 1,147,526
TFLC Equipment Leases Trust 95-1.............................. 6.40 09/15/01 222,581 222,911
Union Acceptance Corp. 95-C................................... 6.40 10/10/02 415,927 416,712
Union Acceptance Corp. 96-D................................... 5.96 10/10/00 383,408 383,277
Union Acceptance Corp. 95-D................................... 5.97 01/07/03 318,863 318,175
Union Federal Savings Bank Trust 93-C......................... 4.88 02/15/00 117,500 116,392
WFS Financial Owner Trust 97-A................................ 6.50 09/20/01 100,000 100,681
Western Financial Grantor Trust 95-4.......................... 6.20 02/01/02 466,150 466,676
Western Financial Grantor Trust 93-2.......................... 4.70 10/01/98 311,911 311,142
World Omni Automobile Lease Securitization 96-A............... 6.55 06/25/02 853,619 857,606
------------
Total Asset Backed Securities (Cost $20,146,304)....................................................... 20,268,937
------------
MORTGAGE BACKED SECURITIES (21.8% of portfolio)
Advanta Home Equity Loan Trust 93-2........................... 6.15 10/25/09 114,504 114,270
Advanta Home Equity Loan Trust 92-4........................... 7.20 11/25/08 55,560 56,115
Advanta Home Equity Loan Trust 92-3........................... 6.05 09/25/08 191,991 188,383
Advanta Home Equity Loan Trust 94-1........................... 6.30 07/25/25 773,401 770,880
Advanta Home Equity Loan Trust 93-4........................... 5.70 03/25/25 314,333 306,505
Advanta Home Equity Loan Trust 93-3........................... 4.75 02/25/10 494,359 482,899
Advanta Home Equity Loan Trust 93-3........................... 4.90 01/25/10 157,737 151,868
AFC Home Equity Loan Trust 92-4............................... 6.20 10/11/07 89,852 89,577
American Financial Home Equity Loan 91-1...................... 8.00 07/25/06 108,569 110,251
Amresco Residential Securities Mortgage Loan Trust 97-3....... 6.61 06/25/12 350,000 349,965
Bear Sterns Secured Investors Trust 87-2...................... 9.95 10/20/18 180,252 193,679
Chase Mortgage Finance Corp. 93-G............................. 7.00 04/25/01 85,066 84,856
CITICORP Mortgage Securities, Inc. 92-16...................... 7.50 09/25/22 58,778 60,035
CITICORP Mortgage Trust 3..................................... 9.00 01/25/20 100,000 99,616
Cityscape Home Equity Loan Trust 97-B......................... 7.02 01/25/12 500,000 503,570
CMC Securities Corp. 92-D..................................... 7.43(b) 12/25/23 49,590 50,432
CMC Securities Corp. 93-E..................................... 6.50 11/25/08 903,683 885,982
CMC Securities Corp. 93-E..................................... 7.00 10/25/23 339,750 340,229
CMO Trust 27.................................................. 7.25 04/23/17 331,607 333,503
CMO Trust 14.................................................. 8.00 01/01/17 198,797 203,574
CMO Trust 15.................................................. 5.00 03/20/18 85,194 80,997
CMO Trust 17.................................................. 7.25 04/20/18 63,701 64,335
Corestates Home Equity Trust 94-1............................. 6.65 05/15/09 435,050 441,758
Countrywide Asset-Backed Certificate 96-1..................... 6.53 02/25/14 496,903 497,842
Daiwa Mortgage Acceptance 92-1................................ 7.88 10/25/19 13,689 13,743
</TABLE>
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12
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES -- continued
EQCC Home Equity Loan Trust 95-3.............................. 6.45% 11/15/08 $ 119,691 $ 120,058
EQCC Home Equity Loan Trust 96-2.............................. 6.15 06/15/03 250,526 250,583
Equicon Home Equity Loan Trust 92-7........................... 5.90 09/18/05 24,118 24,024
Equicon Home Equity Loan Trust 94-1........................... 6.05 09/18/11 76,336 76,770
FHLMC 144..................................................... 8.75 06/15/00 30,239 30,945
FHLMC 135..................................................... 8.75 05/15/00 31,426 32,163
FHLMC 1224.................................................... 6.80 08/15/05 29,777 29,766
FHLMC 1221.................................................... 7.00 09/15/05 30,264 30,278
FHLMC 1330.................................................... 7.00 09/15/99 573,928 579,628
FHLMC 1459.................................................... 7.50 10/15/01 50,000 50,863
FHLMC 1458.................................................... 7.00 01/15/08 250,000 253,362
FHLMC 1662.................................................... 6.25 01/15/09 152,072 150,694
FHLMC 1663.................................................... 7.00 07/15/23 136,823 137,157
FHLMC 39...................................................... 8.50 03/25/24 67,504 67,574
FHLMC 1927.................................................... 7.50 09/15/18 531,891 537,518
FHLMC 230013.................................................. 7.25 08/01/98 1,185 1,192
FHLMC 218209.................................................. 8.50 06/01/02 65,522 67,447
FNMA 016782................................................... 6.00 09/01/99 796 767
FNMA 93-85.................................................... 6.50 11/25/07 99,110 98,542
FNMA 94-88.................................................... 7.50 01/25/05 83,398 83,620
FNMA REMIC 92-203............................................. 6.50 11/25/07 199,741 197,915
FNMA REMIC 93-140............................................. 7.00 07/25/12 139,451 138,377
FNMA REMIC 93-15.............................................. 7.00 02/25/08 166,266 168,725
FNMA REMIC 93-68.............................................. 6.00 05/25/08 142,919 137,982
FNMA REMIC 93-88.............................................. 5.40 06/25/00 428,423 420,439
FNMA REMIC 94-4............................................... 6.50 12/25/06 501,614 504,207
FNMA REMIC 97-W1.............................................. 7.00 10/18/10 380,762 381,817
First Alliance Mortgage Loan Trust 94-3....................... 7.83 10/25/25 110,327 113,767
Fleet Finance Home Equity Trust 91-2.......................... 6.70 10/15/06 80,855 80,938
GE Capital Mortgage Services, Inc. 93-3....................... 7.50 03/25/19 71,961 71,983
GE Capital Mortgage Services, Inc. 94-5....................... 5.50 02/25/24 100,000 97,229
GE Capital Mortgage Services, Inc. 94-18...................... 7.00 08/25/24 100,000 100,048
GE Capital Mortgage Services, Inc. 94-18...................... 7.00 08/25/24 164,479 163,784
GE Capital Mortgage Services, Inc. 96-17...................... 7.00 12/25/26 373,142 374,541
GMBS Certificates 98-1........................................ 9.50 12/25/19 294,977 293,851
Green Tree Home Equity Loan Trust 97-B........................ 6.61 04/15/27 474,000 476,664
HFC Home Equity Loan Certificates 93-1........................ 4.75 05/20/08 34,769 34,828
Housing Securities Inc. 92-NB1................................ 7.25 01/25/07 102,447 104,272
Housing Securities Inc. 92-EA................................. 7.50 10/25/07 451,000 463,843
Housing Securities Inc. 94-2.................................. 6.50 07/25/09 210,917 209,863
Independent National Mortgage Corp. 96-E...................... 6.93 05/25/26 865,084 865,711
Merrill Lynch 93-G............................................ 5.40 12/15/13 343,937 338,523
Merrill Lynch 94-A............................................ 6.40(b) 02/15/09 165,701 160,252
Mid-State Trust 3 A........................................... 7.63 04/01/22 191,938 195,893
Morgan Stanley Mortgage Trust T 6............................. 8.75 07/20/19 159,299 163,210
Nomura Asset Securities Corp. 94-4............................ 8.30 09/25/24 39,969 40,986
Old Stone Credit Corp. Home Equity Trust 92-2................. 6.85 05/15/07 293,095 295,885
</TABLE>
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13
<PAGE> 14
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
MORTGAGE BACKED SECURITIES -- continued
Paine Webber Mortgage Acceptance Corp. 93-7................... 7.50% 07/25/23 $ 439,163 $ 443,165
PNC Mortgage Securities Corp. 95-2............................ 7.00 07/25/08 163,132 163,215
Prudential Home Mortgage 91-9................................. 8.24(b) 08/25/21 263,700 267,918
Prudential Home Mortgage 93-10................................ 6.50 02/25/00 414,720 412,828
Prudential Home Mortgage 93-32................................ 6.50 08/25/23 887,576 885,810
Prudential Home Mortgage 93-29................................ 6.75 08/25/08 66,110 66,222
Prudential Home Mortgage 93-41................................ 6.00 10/25/00 85,798 85,039
Prudential Home Mortgage 93-51................................ 6.10 12/25/23 91,473 90,994
Prudential Home Mortgage 94-31................................ 8.00 11/25/09 352,693 350,781
Prudential Securities 18...................................... 7.00 06/25/19 61,233 61,633
Resolution Trust Corporation 92-2............................. 7.94(b) 08/25/21 241,417 243,350
RFMSI 92-S19.................................................. 8.50 03/25/22 87,881 88,254
RFMSI 93-S25.................................................. 6.50 07/25/08 68,242 68,305
RFMSI 93-S7................................................... 7.15 02/25/08 31,708 31,746
RFMSI 95-S18.................................................. 7.00 11/25/10 417,131 418,712
Residential Asset Securitization Trust 96-A10................. 7.50 11/25/11 405,776 405,525
Residential Accredit Loans, Inc. 95-QS1....................... 6.90 01/25/20 336,567 335,793
Ryland Acceptance Corp. 26-C.................................. 9.00 12/01/16 272,272 289,670
Ryland Mortgage Securities Corp. 92-18........................ 7.75 09/25/19 85,857 86,123
Ryland Mortgage Securities Corp. 93-4......................... 7.50 08/25/24 243,669 248,028
Salomon Brothers Mortgage Securities 96-LB2................... 7.25 05/25/25 175,000 178,848
Salomon Brothers Mortgage Securities 97-LB2................... 6.95 04/25/27 311,525 311,543
Saxon Asset Securities Trust 96-2............................. 6.48 11/25/20 190,000 190,325
Sears Mortgage Securities Corp. 92-10......................... 8.00 03/25/22 41,326 41,332
Structured Mortgage Asset Residential Trust 92-10............. 7.80 08/25/21 168,313 169,374
Structured Mortgage Asset Residential Trust 92-11............. 7.80 08/25/21 103,431 103,722
Structured Mortgage Asset Residential Trust 93-5.............. 6.93(b) 06/25/24 468,755 457,017
TMS Home Equity Trust 96-B.................................... 7.55(b) 02/15/20 360,000 371,127
TMS Home Equity Trust 95-B.................................... 6.53 12/15/04 34,005 34,005
TMS Home Equity Trust 92-A.................................... 6.95 01/15/07 84,227 85,556
TMS Home Equity Trust 93-C.................................... 5.75 10/15/22 130,730 128,964
TMS Home Equity Trust 93-D.................................... 5.68 02/15/09 106,436 104,478
UCFC Home Equity Loan 95-A1................................... 8.55 01/10/20 550,000 594,173
UCFC Home Equity Loan 96-D1................................... 6.38 07/15/10 135,000 135,038
Vanderbilt Mortgage Finance 95-B.............................. 6.68 05/07/06 250,000 252,487
Zions Home Ref. Loan Trust 93-1............................... 5.15 09/25/03 91,516 89,650
------------
Total Mortgage Backed Securities (Cost $23,722,003).................................................... 23,984,098
------------
</TABLE>
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14
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (20.1% of portfolio)
Chattanooga Valley Corp....................................... 5.61%(a) 07/01/98 $ 158,000 $ 153,655
Chattanooga Valley Corp....................................... 5.78(a) 01/01/01 256,000 213,120
Chattanooga Valley Corp....................................... 5.83(a) 07/01/01 204,000 165,252
Federal Farm Credit Bank...................................... 6.65 11/20/02 500,000 500,204
Federal Home Loan Bank........................................ 6.41 07/28/00 500,000 500,124
Federal Home Loan Bank........................................ 6.69 12/23/02 1,000,000 1,000,723
Federal Home Loan Bank........................................ 6.69 07/21/03 1,000,000 999,390
Federal Home Loan Bank........................................ 5.74(b) 12/23/98 500,000 500,595
Federal Home Loan Bank........................................ 6.32 12/20/00 250,000 250,067
Federal Home Loan Bank........................................ 6.27 01/10/00 250,000 250,017
Federal Home Loan Bank........................................ 6.45 03/06/01 500,000 500,165
Federal Home Loan Bank........................................ 6.38 03/13/01 500,000 500,115
Federal Home Loan Bank........................................ 7.20 07/02/01 400,000 403,052
Federal Home Loan Bank DA-99.................................. 5.62 03/25/99 170,197 169,871
Federal Home Loan Mortgage Corp............................... 6.85 09/03/02 500,000 503,030
Federal Home Loan Mortgage Corp............................... 6.67 07/23/02 1,250,000 1,253,772
Federal Home Loan Mortgage Corp............................... 5.50(b) 09/20/00 500,000 505,030
Federal National Mortgage Assn................................ 7.12 04/19/02 500,000 505,960
Federal National Mortgage Assn................................ 7.08 05/06/02 250,000 253,845
Federal National Mortgage Assn................................ 5.77 08/25/98 250,000 249,555
Federal National Mortgage Assn................................ 5.75(b) 02/09/99 250,000 249,455
Federal National Mortgage Assn................................ 6.99 05/18/01 250,000 251,127
Federal National Mortgage Assn................................ 6.32(b) 05/11/99 1,000,000 1,002,620
Federal National Mortgage Assn................................ 6.64 10/21/02 500,000 501,231
Government Export............................................. 5.69 02/01/98 25,000 25,111
Private Export Funding Corp................................... 5.75 04/30/98 331,000 331,000
Student Loan Marketing Assn................................... 5.78(b) 01/21/98 70,000 70,063
Student Loan Marketing Assn................................... 5.63(b) 02/22/99 75,000 74,900
Tennessee Valley Authority.................................... 6.25 08/01/99 155,000 155,455
U.S. Treasury Bond............................................ 7.13 02/29/00 250,000 257,315
U.S. Treasury Note............................................ 5.13 03/31/98 550,000 549,736
U.S. Treasury Note............................................ 5.25 07/31/98 250,000 249,647
U.S. Treasury Note............................................ 5.00 01/31/99 750,000 745,305
U.S. Treasury Note............................................ 6.75 06/30/99 1,250,000 1,269,787
U.S. Treasury Note............................................ 7.25 02/15/98 250,000 250,508
U.S. Treasury Note............................................ 5.75 10/31/00 2,250,000 2,253,262
U.S. Treasury Note............................................ 6.38 03/31/01 500,000 509,525
U.S. Treasury Note............................................ 6.38 05/15/99 500,000 504,800
U.S. Treasury Note............................................ 6.00 08/15/99 500,000 502,555
U.S. Treasury Note............................................ 5.88 11/30/01 1,750,000 1,756,230
U.S. Treasury Note............................................ 6.38 05/15/00 800,000 812,272
U.S. Treasury Note............................................ 6.00 07/31/02 500,000 505,314
------------
Total U.S. Government and Agency Obligations (Cost $22,018,458)........................................ 22,204,760
------------
</TABLE>
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15
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
--------- -------- ---------- ------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (0.8% of portfolio)
Albany NY Industrial Development Agency IDR................... 7.20%(b) 02/01/99 $ 735,000 $ 735,000
Rhode Island Housing & Mortgage Finance Corp.................. 6.62 04/01/02 140,000 142,975
------------
Total Municipal Bonds (Cost $873,873).................................................................. 877,975
------------
COMMERCIAL PAPER (5.6% of portfolio)
American Express Credit Corp.................................. 6.10 01/02/98 2,519,000 2,518,573
American Express Credit Corp.................................. 6.25 01/02/98 1,149,000 1,148,800
American Express Credit Corp.................................. 6.65 01/02/98 1,561,000 1,560,712
Merrill Lynch & Co............................................ 5.83 01/12/98 1,000,000 998,219
------------
Total Commercial Paper (Cost $6,226,304)............................................................... 6,226,304
------------
CORPORATE MASTER NOTE (0.1% of portfolio)
Associates Corp. of North America............................. 5.57(b) 100,000 100,000
------------
Total Corporate Master Note (Cost $100,000)............................................................ 100,000
------------
MONEY MARKET ACCOUNT
State Street Bank & Trust SSgA Fund........................... 5.38%(c) 32,981
------------
Total Money Market Account (Cost $32,981)................................................................. 32,981
------------
TOTAL INVESTMENTS IN SECURITIES (COST $109,405,375) -- 100%.................................................. $110,214,203
============
</TABLE>
- --------------
(a) Yield-to-maturity at purchase.
(b) Variable coupon rate as of December 31, 1997.
(c) One day yield at December 31, 1997.
(d) 144A security.
(e) Private placement security.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------------------
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16
<PAGE> 17
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PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
SHORT-TERM GOVERNMENT SECURITIES FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity Face
Rate Date Amount Value
-------- -------- ---------- ------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES (5.4% of portfolio)
Small Business Administration 92-10 A....................... 6.70% 01/01/02 $ 88,015 $ 88,208
Small Business Administration 92-10 C....................... 7.15 09/01/02 142,958 146,752
Government Export Trust 92-3 A.............................. 5.69 02/01/98 187,500 188,330
Government Export Trust 93-2 A.............................. 4.61 09/01/98 40,000 39,743
Guaranteed Trade Trust 92-A A............................... 7.02 09/01/04 204,167 210,733
Guaranteed Trade Trust 93-A A............................... 4.86 04/01/98 200,000 199,551
-----------
Total Asset Backed Securities (Cost $861,792).............................................................. 873,317
-----------
MORTGAGE BACKED SECURITIES (13.2% of portfolio)
GNMA Pool 362840............................................ 6.75 12/15/98 14,651 14,976
GNMA 97-13 A................................................ 6.00 11/16/22 469,579 466,836
GNMA 97-4 A................................................. 7.00 11/20/11 947,675 957,212
GNMA 97-4 B................................................. 7.00 08/20/26 173,216 171,923
GNMA 94-4 A................................................. 7.99 09/16/22 59,171 59,368
GNMA 94-3 EG................................................ 7.50 06/16/13 35,344 35,261
GNMA 94-2................................................... 7.99 04/16/10 62,614 62,856
Vendee Mortgage Trust 92-1 2C............................... 7.75 02/15/11 375,000 377,719
-----------
Total Mortgage Backed Securities (Cost $2,133,273)........................................................ 2,146,151
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (79.2% of portfolio)
Private Export Funding Corp. ............................... 9.10 10/30/98 1,000,000 1,026,798
Private Export Funding Corp. (c)............................ 5.71(a) 02/28/99 250,000 250,155
Private Export Funding Corp. ............................... 5.48 09/15/03 180,000 178,425
Private Export Funding Corp. ............................... 5.75 04/30/98 267,000 267,000
Private Export Funding Corp. ............................... 8.35 01/31/01 25,000 26,656
U.S. Treasury Note.......................................... 7.00 04/15/99 450,000 457,601
U.S. Treasury Note.......................................... 5.25 07/31/98 2,500,000 2,496,475
U.S. Treasury Note.......................................... 4.75 10/31/98 5,400,000 5,362,848
U.S. Treasury Note.......................................... 5.75 10/31/00 100,000 100,145
U.S. Treasury Note.......................................... 6.38 03/31/01 50,000 50,952
U.S. Treasury Note.......................................... 6.38 05/15/99 50,000 50,480
U.S. Treasury Note.......................................... 6.00 08/15/99 800,000 804,088
U.S. Treasury Note.......................................... 5.88 11/15/99 1,200,000 1,204,200
U.S. Treasury Note.......................................... 5.88 11/30/01 350,000 351,246
U.S. Treasury Note.......................................... 6.38 05/15/00 100,000 101,534
U.S. Treasury Note.......................................... 6.00 07/31/02 100,000 101,063
-----------
Total U.S. Government and Agency Obligations (Cost $12,780,632)........................................... 12,829,666
-----------
MONEY MARKET ACCOUNT (2.2% of portfolio)
Vanguard Money Market Reserves, U.S. Treasury............... 5.09(b) 357,233
-----------
Total Money Market Account (Cost $357,233)................................................................. 357,233
-----------
TOTAL INVESTMENTS IN SECURITIES (COST $16,132,930) -- 100%......................................................$16,206,367
===========
</TABLE>
- --------------
(a) Variable coupon rate as of December 31, 1997.
(b) Seven day yield at December 31, 1997.
(c) 144A security.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
----------------------------------------------------------------
- ----------------------------------------------------
17
<PAGE> 18
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
VALUE FUND
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- -------------
<S> <C>
COMMON STOCKS (91.7% of portfolio)
BASIC INDUSTRIES - 15.1%
Aluminum
Alcan Aluminum Ltd. ....... 231,200shs. $ 6,386,900
Chemicals
Avery Dennison Corp. ...... 172,600 7,723,850
Betz Dearborn Laboratories,
Inc. .................... 89,000 5,434,563
Dow Chemical Co. .......... 55,200 5,602,800
Nalco Chemical Co. ........ 213,300 8,438,681
Forest Products
Pope & Talbot, Inc. ....... 140,500 2,116,281
Weyerhaeuser Co. .......... 96,500 4,734,531
Packaging/Containers
Bemis Co., Inc. ........... 128,300 5,653,219
Paper
Champion International
Corp. ................... 114,000 5,165,625
International Paper Co. ... 142,000 6,123,750
------------
Total Basic Industries................ 57,380,200
------------
CAPITAL GOODS - 4.4%
Industrial Machinery
Aeroquip-Vickers, Inc. .... 131,400 6,446,813
Applied Industrial
Technology, Inc. ........ 195,375 5,226,281
Parker-Hannifin Corp. ..... 107,175 4,916,653
------------
Total Capital Goods................... 16,589,747
------------
CONSUMER DURABLE GOODS - 6.9%
Household Appliances & Furnishings
Juno Lighting, Inc. ....... 348,600 6,100,500
Maytag Corp. .............. 251,400 9,380,363
Housewares
Oneida Ltd. ............... 110,550 2,950,303
Rubbermaid, Inc. .......... 304,400 7,610,000
------------
Total Consumer Durable Goods.......... 26,041,166
------------
CONSUMER NON-DURABLE GOODS - 21.5%
Drugs & Health Care
American Home Products
Corp. ................... 75,000 5,737,500
Pharmacia & Upjohn,
Inc. .................... 125,000 4,578,125
SmithKline Beecham Plc. ... 86,000 4,423,625
</TABLE>
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- -------------
<S> <C>
CONSUMER NON-DURABLE GOODS -- continued
Food Processing
J.M. Smucker Co. (Class
B)....................... 315,100shs. $ 7,247,300
Photography
Eastman Kodak Co. ......... 104,500 6,354,906
Retail
Dillard Department Stores,
Inc. .................... 202,000 7,120,500
K Mart Corp. (a)........... 355,700 4,112,781
Longs Drug Stores Corp. ... 240,800 7,735,700
May Department Stores
Co. ..................... 127,500 6,717,656
Rite Aid Corp. ............ 109,000 6,396,938
Ruddick Corp. ............. 402,400 7,016,850
Auto Part Manufacturers
Cooper Tire & Rubber
Co. ..................... 339,500 8,275,313
Genuine Parts Co. ......... 177,300 6,017,119
------------
Total Consumer Non-Durable Goods...... 81,734,313
------------
CONSUMER SERVICES - 4.0%
Restaurants
Brinker International, Inc.
(a)...................... 471,900 7,550,400
Wendy's International,
Inc. .................... 317,200 7,632,625
------------
Total Consumer Services............... 15,183,025
------------
ENERGY - 8.1%
Domestic Oil
Atlantic Richfield Co. .... 61,800 4,951,725
International Oil
Amoco Corp. ............... 57,500 4,894,688
Chevron Corp. ............. 55,000 4,235,000
Texaco, Inc. .............. 83,400 4,534,875
Petroleum Services
Dresser Industries,
Inc. .................... 153,400 6,433,212
Halliburton Co. ........... 110,600 5,744,288
------------
Total Energy.......................... 30,793,788
------------
FINANCE - 16.3%
Banks
Banc One Corp. ............ 153,800 8,353,262
BankAmerica Corp. ......... 84,000 6,132,000
BB&T Corp. ................ 67,400 4,317,812
Chase Manhattan Corp. ..... 64,200 7,029,900
CITICORP................... 38,500 4,867,844
Commerce Bancshares,
Inc. .................... 112,259 7,605,547
</TABLE>
- ----------------------------------------------------------------
- ----------------------------------------------------
18
<PAGE> 19
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
HOMESTEAD FUNDS, INC.
VALUE FUND (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- -------------
<S> <C>
FINANCE -- continued
Insurance
Allstate Corp. ............ 84,817shs. $ 7,707,745
Chubb Corp. ............... 81,000 6,125,625
Ohio Casualty Corp. ....... 115,200 5,140,800
Transamerica Corp. ........ 42,300 4,504,950
------------
Total Finance......................... 61,785,485
------------
GENERAL BUSINESS - 3.9%
Business Services
Deluxe Corp. .............. 208,100 7,179,450
Donnelley, R.R. & Sons
Co. ..................... 206,100 7,677,225
------------
Total General Business................ 14,856,675
------------
TECHNOLOGY - 3.4%
Aerospace
Sundstrand Corp. .......... 73,000 3,677,375
Computer & Business Equipment
Digital Equipment Corp.
(a)...................... 108,500 4,014,500
Xerox Corp. ............... 70,500 5,203,781
------------
Total Technology...................... 12,895,656
------------
TRANSPORTATION - 2.5%
Air Travel
Southwest Airlines Co. .... 385,600 9,495,400
------------
Total Transportation.................. 9,495,400
------------
UTILITIES - 5.6%
Gas & Pipeline
Questar Corp. ............. 160,400 7,157,850
Sonat, Inc. ............... 158,000 7,228,500
Telephone
BellSouth Corp. ........... 126,000 7,095,375
------------
Total Utilities....................... 21,481,725
------------
Total Common Stocks (Cost
$235,420,861)....................... 348,237,180
------------
PREFERRED STOCKS (0.3% of portfolio)
K Mart Corp., 7.75%
Convertible Preferred...... 25,200 1,313,550
------------
Total Preferred Stocks (Cost
$1,281,750)......................... 1,313,550
------------
</TABLE>
<TABLE>
<CAPTION>
Shares/
Face Amount Value
----------- -------------
<S> <C>
COMMERCIAL PAPER (6.1% of portfolio)
American Express Credit
Corp., 6.10%, due
01/02/98................... $3,394,000 $ 3,393,425
American Express Credit
Corp., 6.25%, due
01/02/98................... 4,000,000 3,999,306
American Express Credit
Corp., 6.65%, due
01/02/98................... 101,000 100,981
Merrill Lynch & Co., 5.58%,
due 01/05/98............... 1,489,000 1,488,077
Merrill Lynch & Co., 5.62%,
due 01/02/98............... 7,168,000 7,166,881
Merrill Lynch & Co., 5.88%,
due 01/14/98............... 4,000,000 3,991,506
Merrill Lynch & Co., 5.83%,
due 01/12/98............... 3,000,000 2,994,656
------------
Total Commercial Paper (Cost
$23,134,832)........................ 23,134,832
------------
CORPORATE MASTER NOTE (1.9% of portfolio)
Associates Corp. of North
America, 5.57% (b)......... 7,030,000 7,030,000
------------
Total Corporate Master Note (Cost
$7,030,000)......................... 7,030,000
------------
MONEY MARKET ACCOUNT
State Street Bank and Trust SSgA Fund,
5.38% (c)............................... 1,120
------------
Total Money Market Account (Cost
$1,120)............................. 1,120
------------
TOTAL INVESTMENTS IN SECURITIES (COST
$266,868,563) -- 100%................... $379,716,682
============
</TABLE>
- --------------
(a) Non-income producing.
(b) Variable coupon rate at December 31, 1997.
(c) One day yield at December 31, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
----------------------------------------------------------------
- ----------------------------------------------------
19
<PAGE> 20
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
HOMESTEAD FUNDS, INC.
DECEMBER 31, 1997
<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: $52,906,207; $109,405,375;
$16,132,930; $266,868,563)................. $52,906,207 $110,214,203 $16,206,367 $379,716,682
Receivables
Investment securities sold.................. - 15,924 - -
Dividends and interest...................... 214,193 1,117,016 200,656 448,497
Capital shares sold......................... 380,318 71,388 105 558,707
Prepaid expenses............................... 20,391 26,818 6,363 76,064
----------- ----------- ----------- ------------
Total assets................................ 53,521,109 111,445,349 16,413,491 380,799,950
----------- ----------- ----------- ------------
LIABILITIES
Payables
Investment securities purchased............. - 2,087,426 202,007 -
Accrued expenses............................ 27,863 43,622 16,549 116,031
Due to Manager.............................. 26,233 51,622 2,782 231,692
Capital shares redeemed..................... 426,742 329,797 - 1,584,978
Dividends................................... 6,877 35,109 5,426 246,089
----------- ----------- ----------- ------------
Total liabilities........................... 487,715 2,547,576 226,764 2,178,790
----------- ----------- ----------- ------------
NET ASSETS........................................ $53,033,394 $108,897,773 $16,186,727 $378,621,160
=========== =========== =========== ============
NET ASSETS CONSIST OF:
Unrealized appreciation of investments......... $ - $ 808,828 $ 73,437 $112,848,119
Paid-in-capital applicable to outstanding
shares of 53,033,394 of Daily Income Fund,
21,021,094 of Short-Term Bond Fund, 3,193,981
of Short-Term Government Securities Fund, and
14,846,925 of Value Fund..................... 53,033,394 108,088,945 16,113,290 265,773,041
----------- ----------- ----------- ------------
$53,033,394 $108,897,773 $16,186,727 $378,621,160
=========== =========== =========== ============
NET ASSET VALUE PER SHARE......................... $1.00 $5.18 $5.07 $25.50
=========== =========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
20
<PAGE> 21
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
HOMESTEAD FUNDS, INC.
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM
DAILY INCOME SHORT-TERM GOVERNMENT VALUE
FUND BOND FUND SECURITIES FUND FUND
------------ ---------- --------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest......................................... $3,170,767 $6,259,700 $ 746,890 $ 1,433,477
Dividends........................................ - - - 6,166,415
---------- ---------- -------- -----------
Total income.................................. 3,170,767 6,259,700 746,890 7,599,892
---------- ---------- -------- -----------
Expenses
Management fees.................................. 282,843 578,361 56,654 1,902,966
Custodian and accounting fees.................... 76,448 126,468 51,225 160,710
Shareholder servicing............................ 45,259 52,907 30,975 196,229
Registration expense............................. 31,161 36,444 13,004 79,122
Communication.................................... 9,531 10,959 2,651 54,614
Legal and audit fees............................. 8,734 13,440 1,993 46,361
Insurance........................................ 5,620 8,142 815 24,904
Printing......................................... 4,951 7,670 1,560 32,834
Directors fees................................... 2,171 3,781 547 13,290
Other expenses................................... 3,092 3,937 191 9,883
---------- ---------- -------- -----------
Total expenses................................ 469,810 842,109 159,615 2,520,913
Less fees waived and expenses reimbursed by
Manager..................................... (17,263) (120,074) (65,441) -
---------- ---------- -------- -----------
Net expenses.................................. 452,547 722,035 94,174 2,520,913
---------- ---------- -------- -----------
NET INVESTMENT INCOME............................... 2,718,220 5,537,665 652,716 5,078,979
---------- ---------- -------- -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments................. - 103,298 1,030 10,245,857
Net change in unrealized appreciation............ - 570,361 61,648 56,564,101
---------- ---------- -------- -----------
NET GAIN ON INVESTMENTS............................. - 673,659 62,678 66,809,958
---------- ---------- -------- -----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......... $2,718,220 $6,211,324 $ 715,394 $71,888,937
========== ========== ======== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
----------------------------------------------------------------
- ----------------------------------------------------
21
<PAGE> 22
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
HOMESTEAD FUNDS, INC.
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
DAILY INCOME FUND SHORT-TERM BOND FUND
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income................................... $ 2,718,220 $ 2,531,400 $ 5,537,665 $ 4,118,739
Net realized gain on investments........................ - - 103,298 83,511
Net change in unrealized appreciation (depreciation).... - - 570,361 (528,101)
----------- ----------- ------------ -----------
Increase in net assets from operations.................. 2,718,220 2,531,400 6,211,324 3,674,149
----------- ----------- ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income................................... (2,718,220) (2,531,400) (5,537,665) (4,118,739)
Net realized gain on investments........................ - - (103,298) (83,511)
----------- ----------- ------------ -----------
Total distributions to shareholders..................... (2,718,220) (2,531,400) (5,640,963) (4,202,250)
----------- ----------- ------------ -----------
CAPITAL SHARE TRANSACTIONS, NET......................... (4,838,085) 5,172,330 26,857,500 19,873,017
----------- ----------- ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS................. (4,838,085) 5,172,330 27,427,861 19,344,916
NET ASSETS
Beginning of year....................................... 57,871,479 52,699,149 81,469,912 62,124,996
----------- ----------- ------------ -----------
END OF YEAR............................................. $53,033,394 $57,871,479 $108,897,773 $81,469,912
=========== =========== ============ ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
22
<PAGE> 23
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
HOMESTEAD FUNDS, INC.
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
SHORT-TERM GOVERNMENT
SECURITIES FUND VALUE FUND
------------------------- ----------------------------
1997 1996 1997 1996
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income................................... $ 652,716 $ 257,316 $ 5,078,979 $ 4,020,746
Net realized gain on investments........................ 1,030 1,913 10,245,857 3,956,651
Net change in unrealized appreciation (depreciation).... 61,648 (12,151) 56,564,101 23,576,803
----------- ---------- ------------ ------------
Increase in net assets from operations.................. 715,394 247,078 71,888,937 31,554,200
----------- ---------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income................................... (652,716) (257,316) (5,078,979) (4,020,746)
Net realized gain on investments........................ (1,030) (1,913) (10,245,857) (3,956,651)
----------- ---------- ------------ ------------
Total distributions to shareholders..................... (653,746) (259,229) (15,324,836) (7,977,397)
----------- ---------- ------------ ------------
CAPITAL SHARE TRANSACTIONS, NET......................... 8,432,668 5,046,362 83,506,879 67,467,586
----------- ---------- ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS................. 8,494,316 5,034,211 140,070,980 91,044,389
NET ASSETS
Beginning of year....................................... 7,692,411 2,658,200 238,550,180 147,505,791
----------- ---------- ------------ ------------
END OF YEAR............................................. $16,186,727 $7,692,411 $378,621,160 $238,550,180
=========== ========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
----------------------------------------------------------------
- ----------------------------------------------------
23
<PAGE> 24
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
DAILY INCOME FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
<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 0.05 0.04 0.03
-------- ------- ------- ------- -------
Total from investment operations......................... 0.05 0.05 0.05 0.04 0.03
-------- ------- ------- ------- -------
Distributions
Net investment income.................................... (0.05) (0.05) (0.05) (0.04) (0.03)
-------- ------- ------- ------- -------
Total distributions...................................... (0.05) (0.05) (0.05) (0.04) (0.03)
-------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR................................... $ 1.00 $ 1.00 $1.00 $1.00 $1.00
======== ======== ======== ======= =======
TOTAL RETURN................................................... 4.92% 4.81% 5.38% 3.63% 2.68%
======== ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)......................... $53,033 $57,871 $52,699 $36,668 $25,159
Ratio of expenses to average net assets (a)................. 0.80% 0.76% 0.75% 0.75% 0.75%
Ratio of net investment income to average net
assets (a)................................................ 4.80% 4.71% 5.25% 3.66% 2.64%
Ratio of gross expenses before voluntary expense
limitation to average net assets.......................... 0.83% 0.81% 0.87% 0.99% 1.11%
</TABLE>
- --------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
24
<PAGE> 25
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
SHORT-TERM BOND FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................ $5.15 $ 5.19 $4.95 $5.19 $5.10
-------- -------- ------- - ------- -------
Income from investment operations
Net investment income (a)............................... 0.30 0.29 0.28 0.24 0.24
Net realized and unrealized gain (loss) on
investments........................................... 0.03 (0.04) 0.24 (0.24) 0.09
-------- -------- ------- - ------- -------
Total from investment operations........................ 0.33 0.25 0.52 0.00 0.33
-------- -------- ------- - ------- -------
Distributions
Net investment income................................... (0.30) (0.29) (0.28) (0.24) (0.24)
-------- -------- ------- - ------- -------
Total distributions..................................... (0.30) (0.29) (0.28) (0.24) (0.24)
-------- -------- ------- - ------- -------
NET ASSET VALUE, END OF YEAR.................................. $5.18 $ 5.15 $5.19 $4.95 $5.19
======== ======== ======== ======= =======
TOTAL RETURN.................................................. 6.62% 5.16% 10.81% 0.09% 6.62%
======== ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands)........................ $108,898 $81,470 $62,125 $52,257 $37,046
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)............................................... 5.75% 5.72% 5.49% 4.84% 4.58%
Ratio of gross expenses before voluntary expense
limitation to average net assets......................... 0.87% 0.76% 0.86% 0.98% 1.16%
Portfolio turnover rate.................................... 55% 49% 35% 13% 14%
</TABLE>
- --------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
----------------------------------------------------------------
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25
<PAGE> 26
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
SHORT-TERM GOVERNMENT SECURITIES FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
May 1, 1995
Year Ended December (Commencement
31, of Operations) to
------------------- December 31,
1997 1996 1995
------ ------ -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD...................................... $ 5.05 $ 5.09 $ 5.00
------ ------ ------
Income from investment operations
Net investment income (a)........................................... 0.26 0.26 0.18
Net realized and unrealized gain (loss) on investments.............. 0.02 (0.04) 0.09
------ ------ ------
Total from investment operations.................................... 0.28 0.22 0.27
------ ------ ------
Distributions
Net investment income............................................... (0.26) (0.26) (0.18)
------ ------ ------
Total distributions................................................. (0.26) (0.26) (0.18)
------ ------ ------
NET ASSET VALUE, END OF PERIOD............................................ $ 5.07 $ 5.05 $ 5.09
====== ====== ======
TOTAL RETURN.............................................................. 5.73% 4.46% 5.44%(c)
====== ====== ======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands).................................. $16,187 $7,692 $2,658
Ratio of expenses to average net assets (a)............................ 0.75% 0.75% 0.75%(b)
Ratio of net investment income to average net assets (a)............... 5.19% 5.16% 5.18%(b)
Ratio of gross expenses before voluntary expense limitation to average
net assets........................................................... 1.27% 2.30% 6.21%(b)
Portfolio turnover rate................................................ 12% 21% 7%
</TABLE>
- --------------
(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Annualized.
(c) Aggregate total return for the period.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
- ----------------------------------------------------------------
- ----------------------------------------------------
26
<PAGE> 27
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FINANCIAL HIGHLIGHTS
HOMESTEAD FUNDS, INC.
VALUE FUND
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........................ $20.99 $18.44 $14.50 $ 14.54 $ 12.49
-------- -------- -------- ------- -------
Income from investment operations
Net investment income (a)........................... 0.37 0.39 0.41 0.29 0.22
Net realized and unrealized gain on investments..... 5.22 2.91 4.47 0.07 2.12
-------- -------- -------- ------- -------
Total from investment operations.................... 5.59 3.30 4.88 0.36 2.34
Distributions
Net investment income............................... (0.37) (0.39) (0.41) (0.29) (0.22)
Net realized gain................................... (0.71) (0.36) (0.53) (0.11) (0.07)
-------- -------- -------- ------- -------
Total distributions................................. (1.08) (0.75) (0.94) (0.40) (0.29)
-------- -------- -------- ------- -------
NET ASSET VALUE, END OF YEAR.............................. $25.50 $20.99 $18.44 $ 14.50 $ 14.54
======== ======== ======== ======= =======
TOTAL RETURN.............................................. 26.70% 17.94% 33.78% 2.50% 18.83%
======== ======== ======== ======= =======
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (thousands).................... $378,621 $238,550 $147,506 $91,612 $53,616
Ratio of expenses to average net assets (a)............ 0.79% 0.73% 0.84% 1.15% 1.25%
Ratio of net investment income to
average net assets (a)............................... 1.59% 2.08% 2.50% 2.19% 1.92%
Ratio of gross expenses before voluntary expense
limitation to average net assets..................... n/a n/a n/a 1.15% 1.25%
Portfolio turnover rate................................ 6% 5% 10% 4% 2%
Average commission rate paid per share transacted
(b).................................................. $0.0480 $0.0500 - - -
</TABLE>
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(a) Excludes excess investment management fees and other expenses in accordance
with the Expense Limitation Agreement with the Manager.
(b) Required disclosure for fiscal years beginning after December 1, 1995
pursuant to SEC regulations.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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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 Funds, individually
each Fund).
Each Fund is a separate investment portfolio with distinct investment
objectives, investment programs, policies and restrictions. The investment
objectives of the Fund 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: The Daily Income Fund values all investments 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.
The Short-Term Bond Fund, the Short-Term Government Securities Fund and the
Value Fund value investments in common stocks, preferred stocks, and convertible
preferred stocks traded on national securities exchanges and certain
over-the-counter securities 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. 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. Income dividends for the Value Fund 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.
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, 1997, 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.
At December 31, 1997, net unrealized appreciation consisted of the following:
<TABLE>
<CAPTION>
SHORT- SHORT-TERM
TERM GOVERNMENT VALUE
BOND FUND SECURITIES FUND FUND
--------- --------------- ------------
<S> <C> <C> <C>
Gross
unrealized
appreciation $ 888,820 $76,883 $116,797,151
Gross
unrealized
depreciation 79,992 3,446 3,949,032
--------- --------------- ------------
Net unrealized
appreciation $ 808,828 $73,437 $112,848,119
======== ============== ============
</TABLE>
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28
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NOTES TO FINANCIAL STATEMENTS
HOMESTEAD FUNDS, INC. (CONTINUED)
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, 1997, were as follows:
<TABLE>
<CAPTION>
SHORT-TERM
SHORT-TERM GOVERNMENT VALUE
BOND FUND SECURITIES FUND FUND
------------ --------------- -----------
<S> <C> <C> <C>
Purchases $ 59,538,985 $ 2,212,459 $89,404,696
Proceeds from
sales $ 37,395,082 $ 206,032 $18,995,451
</TABLE>
Purchases and proceeds from sales of long-term U.S. Government securities, for
the year ended December 31, 1997, were as follows:
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT
SHORT-TERM SECURITIES
BOND FUND FUND
----------- -----------
<S> <C> <C>
Purchases $14,016,766 $ 6,441,670
Proceeds from
sales $11,140,476 $ 1,087,664
</TABLE>
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. 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.
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% 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, $17,263 of management fees for
the Daily Income Fund were waived, $120,074 of management fees for the
Short-Term Bond Fund were waived, and $56,654 of management fees were waived and
$8,787 of operating expenses of the Short-Term Government Securities Fund were
reimbursed by the Manager for the year ended December 31, 1997.
At December 31, 1997 certain officers and directors of the Homestead Funds, and
NRECA and its affiliates owned 8% of the Daily Income Fund shares outstanding,
and less than 1% of the Short-Term Bond Fund, Short-Term Government Securities
Fund, and Value Fund shares outstanding.
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NOTES TO FINANCIAL STATEMENTS
HOMESTEAD FUNDS, INC. (CONTINUED)
6. CAPITAL SHARE TRANSACTIONS
As of December 31, 1997, 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 Net
Shares In Reinvestment Shares Shares Increase
Sold of Dividends Issued Redeemed (Decrease)
------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
In Dollars
Daily Income Fund............ $39,331,985 $2,614,275 $41,946,260 ($46,784,345) ($4,838,085)
Short-Term Bond Fund......... $45,129,599 $5,246,887 $50,376,486 ($23,518,986) $26,857,500
Short-Term Government
Securities Fund............. $12,098,248 $596,198 $12,694,446 ($4,261,778) $8,432,668
Value Fund................... $124,815,460 $15,039,867 $139,855,327 ($56,348,448) $83,506,879
In Shares
Daily Income Fund............ 39,331,985 2,614,275 41,946,260 (46,784,345) (4,838,085)
Short-Term Bond Fund......... 8,749,692 1,016,687 9,766,379 (4,560,947) 5,205,432
Short-Term Government
Securities Fund............. 2,396,315 118,030 2,514,345 (843,911) 1,670,434
Value Fund................... 5,235,806 594,106 5,829,912 (2,347,323) 3,482,589
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
</TABLE>
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REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Homestead Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of the Daily Income, Short-Term Bond, Short-Term
Government Securities and Value Funds of the Homestead Funds, Inc. (the "Funds")
as of December 31, 1997, and the related statements of operations, changes in
net assets, and financial highlights for the year then ended. 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
statements of the Homestead Funds, Inc. for the year ended December 31, 1996 and
the financial highlights for each of the periods in the four year period ended
December 31, 1996 were audited by other auditors whose report, dated January 29,
1997, expressed an unqualified opinion on those financial statements and
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1997, 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Daily Income,
Short-Term Bond, Short-Term Government Securities and Value Funds of the
Homestead Funds, Inc. as of December 31, 1997, the results of their operations,
the changes in their net assets, and their financial highlights for the year
then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 13, 1998
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HOMESTEAD FUNDS, INC.
- ---------------------
ANNUAL REPORT
DECEMBER 31, 1997
[HOMESTEAD FUNDS LOGO]
c/o Rodney Square Management Corp.
PO Box 8987
Wilmington, DE 19899
1-800-258-3030
