THE PARNASSUS FUND
- --------------------------------------------------------------------------------
July 25, 1996
Dear Shareholder:
As of June 30, 1996, the net asset value per share (NAV) of the Parnassus
Fund was $32.15 so the return for the second quarter was 4.76%. This compares to
a gain of 4.49% for the S&P 500 and 4.38% for the average growth fund according
to Lipper Analytical Services. For the quarter, then, we beat the S&P by 0.27%
and the average growth fund by 0.38%.
<TABLE>
For the year-to-date, we're only up 1.2% because of our weak performance in
the first quarter. This compares to 10.10% for the S&P and 9.99% for the average
growth fund. Below you will find a table summarizing our average annual returns
as of June 30, 1996 for the one, five and ten-year periods and for the life of
the Fund. The overall return figures give investment performance only while the
total return figures are reduced by the amount of the maximum sales charge.
Average Annual Average Annual
<CAPTION>
Total Return Overall Return
------------ --------------
<S> <C> <C>
One Year ..................................... (14.12%) (11.01%)
Five Years ..................................... 14.62% 15.44%
Ten Years ...................................... 10.22% 10.61%
Since Inception on 12/31/84 .................... 11.45% 11.80%
</TABLE>
Companies Making An Impact On The Portfolio
- -------------------------------------------
As usual, there was quite a bit of divergence in individual company returns
during the quarter. Five companies lost more than ten percent while twelve
companies gained more than ten percent.
Three of the five losers were technology companies: Advanced Micro Devices
(AMD), Quantum Corporation and Apple Computer. The other two were Inland Steel
and Sullivan Dental Products. AMD lost 21.6% as its stock declined from $17.38
to $13.63 on weakness in the semiconductor industry. The company has announced
that there will be a loss in the quarter ending June 30.
Many of you will remember that AMD has disappointed us since last year when
the company was unable to bring out its fifth generation microprocessor to
compete with Intel's Pentium chip. AMD has started producing its Pentium
substitute, but much of that product cycle is over and the company's hopes lie
with its sixth generation microprocessor. The stock is selling at bargain
basement levels now so a pick-up in the semiconductor industry and success with
the sixth generation should move the stock up a long way. Any upward movement,
though, probably won't occur before the end of the year.
Inland Steel lost 20.7% as its stock went from $24.75 to $19.63 during the
quarter because of weak demand and difficulties in its steel-making operation.
Lower steel prices, reduced demand from the auto industry and high production
costs are hurting earnings.
Quantum went down 18.8% as its stock declined from $18.00 to $14.63. Last
year, Quantum was up to $29 a share before dropping to $16 a share early this
year. We paid an average of $17.77 in March and the stock promptly went to $26
on May 20, netting us a nice, though unrealized, profit. The stock dropped to
$17 when the company announced weak demand for its hard disk drives as personal
computer sales sagged.
Sullivan Dental Products dropped 17.4% as its stock went from $12.25 to
$10.13. Earnings were disappointing amid intense competition.
Apple Computer saw its shares fall 14.5%, going from $24.56 to $21.00. For
a discussion of Apple, see the Company Notes section.
Second Quarter Winners
- ----------------------
Genus' stock went up 54.0% during the quarter as it climbed from $6.25 to
$9.63 a share. We first bought Genus over three years ago when its shares were
trading well under $3.00 each. Last year, the stock hit $18, but it dropped back
to $7.50. We think the stock will continue climbing.
Genus makes equipment for use in manufacturing semiconductors and the
equipment can save manufacturers millions of dollars each year. Traditionally,
the equipment has been used to produce memory chips, but recently, the company
has made sales to makers of microprocessors. This opens up a whole new market
for Genus' products. The company recently expanded its plant in Newburyport,
Massachusetts and the enlarged capacity should lead to much higher earnings.
Genus has just sold an ion implant machine to AMD and this should help AMD
reduce its manufacturing cost. IBM, Motorola, Texas Instruments and Intel are
other microprocessor manufacturers that could benefit from Genus' cost-saving
techniques.
Tandem Computers' stock went up 37.5% during the quarter on an increase
from $9.00 to $12.38 per share. Tandem now has a new CEO and a new strategy and
if the company can execute that strategy and control its costs, the future could
be bright.
Sunrise Medical's stock also went up 37.5%, going from $14.00 to $19.25 per
share. Sunrise is the company that had the accounting scandal last year. The
company's earnings were better than expected and the stock has recovered
somewhat.
H.B. Fuller, the Minnesota-based maker of industrial adhesives, saw its
stock rise 21.9% as earnings increased because of better cost control. Its
shares went from $29.75 to $36.25.
Sequent Computer's shares increased 16.1% during the quarter as they went
from $11.63 to $13.50. Sequent manufactures computer hardware and also consults
with large corporations on how to integrate their computer systems. The company
has developed a new technology called NUMA-Q that greatly speeds computer
processing for applications with enormous amounts of data. Prospects for the
future look bright.
Morgan Products which manufactures wooden doors and distributes windows had
an increase of 15.9% in its stock price as it went from $5.50 to $6.38. The
company recently sold an inefficient plant and moved the production to a more
efficient one.
Electro Scientific Industries makes equipment for the semiconductor
industry. Besides its traditional laser equipment used to produce memory chips
and automotive circuits, the company has developed vision products that can read
minute markings on semiconductors. During the quarter, the stock went up 14.1%,
going from $17.75 to $20.25.
Mentor Graphics, a developer of software for use in designing
semiconductors, saw an increase of 14.0% in its stock price as it climbed from
$14.25 to $16.25. As semiconductors become a greater part of our everyday life,
demand for software to design those semiconductors will continue to increase.
The Limited's stock went up 13.2% as retail sales improved in the women's
apparel industry. The shares went from $19.00 to $21.50.
Houghton Mifflin, the Boston-based publishing concern, saw its stock
increase 12.8% as it went from $44.13 to $49.75. Last year, the company acquired
D.C. Heath and the merger of the two companies is going smoothly.
Calgon Carbon, the maker of activated carbon, had an 11.3% increase as the
stock went from $12.13 to $13.50. H.F. Ahmanson, the parent of Home Savings of
America, gained 10.8% as its shares climbed from $24.38 to $27.00.
Outlook And Strategy
- --------------------
Although we beat the S&P 500 and the average growth fund this quarter, our
results were still somewhat disappointing. Because of our poor performance in
the last half of 1995 and the first quarter of 1996, we had a lot to make up
for. Earlier in the quarter, things looked much better.
The Fund hit a high of $35.72 on May 20 which meant that we were up 16.43%
for the quarter-far ahead of the S&P which at that point had only gained 4.65%
for the second quarter. In fact, despite our weak first quarter, we were even
ahead of the S&P for the year-to-date. As of May 20, the Fund was up 12.43%
compared to only 10.26% for the S&P 500.
Technology explains most of our ups and downs. Last year, technology stocks
did very well until the fourth quarter when they started to plunge. They
continued their decline during the first quarter of this year. Prices were so
low that we started investing a substantial portion of the Fund's assets in that
sector.
What appeared to be good luck began the first of April as technology stocks
soared and so did the Fund. After weak demand for personal computers in late
'95, demand looked much better by the spring of '96. Investors quickly moved
into technology stocks.
By the end of May, however, that picture had changed. Weakness in demand
reappeared and technology stocks plummeted and so did the Parnassus Fund. From
May 20 to June 30, the Morgan Stanley High Tech Index dropped 8.80% and the
Philadelphia Semiconductor Index declined an incredible 17.47%. By comparison,
the Parnassus Fund dropped 10.0%
As I write this report in early July, the situation is uncertain.
Technology stocks are trading at unbelievably low prices and I don't think these
bargains will last long.
Our strategy is to increase our position in technology stocks at these
bargain prices and wait for demand to strengthen. Computer demand is still
growing, but it is not growing as fast as most firms had forecast. There is now
excess capacity and surplus inventory in semiconductors, computers, disk drives
and other high-tech products. Within six months, I expect this excess capacity
and surplus inventory to disappear and demand should start growing strongly
again. Technology stocks should make substantial gains by the end of the year.
Company Notes
- -------------
Advanced Micro Devices (AMD) announced on June 13 that it will join forces
with the U.S. Environmental Protection Agency (EPA) and other semiconductor
manufacturers in a voluntary emission reduction partnership. The voluntary
agreement represents AMD's commitment to work toward reducing the emissions of
six fluorinated compounds commonly used in semiconductor devices. Although
relatively small amounts of the six compounds are used in semiconductor
manufacturing operations, the agreement is important because it represents a
commitment to the environment.
In a study of the nine biggest U.S. airlines, Southwest Airlines ranked
first in quality from a consumer perspective. The study was conducted by Brent
Bowen of the University of Nebraska's Aviation Institute and Dean Headley of
Wichita State University's Barton School of Business and focused on 19 items
including on-time arrivals, baggage handling, fares and accidents. Bowen said
that Southwest has an excellent on-time performance and one of the best
frequent-flier programs. He added that the company has strong employee morale
and has achieved a remarkable record of profitability.
A recent study by Evans Research Associates found that people who use both
Apple Macintosh computers and Windows 95-based computers say that the Mac makes
them more creative, productive and satisfied. Study participants also rated the
Macintosh as being easier to use, more enjoyable and better for graphics,
multimedia and running educational software. The study was conducted in March
and April of 1996 by surveying 150 people who regularly use both Macintosh and
Windows-based systems.
According to another study done by Computer Intelligence InfoCorp (CII),
the Macintosh led the PC industry in repurchase loyalty in 1995 as it did in
1994. The findings emerged from CII's recently released 1996 Consumer Technology
Index, the largest and most comprehensive survey of personal computer usage in
the United States. The repurchase rates measure what percentage of each brand's
users who purchased a PC in 1995 purchased the same brand they previously owned.
Apple had a repurchase loyalty rate of 87% while Dell was second with 74%,
Hewlett-Packard was third with 72%, Acer had 68% and Gateway 2000 had 66%.
Shareholder Bob Pattison of Nashville, Tennessee recently sent me an
article reprint from the New York Times Sunday Magazine entitled "Why the Best
Doesn't Always Win" by Peter Passell. The article casts some interesting light
on why Apple's superior products don't always win out in the marketplace.
The article cites Paul David, an economic historian at Stanford, who wrote
in 1985 about QWERTY (the first six letters on the upper left of the keyboard),
saying that the current keyboard standard dating from the 1890's was a solution
to minimize the jamming of keys in primitive typewriters. David pointed out that
once thousands of people had learned to type using QWERTY's merely adequate
layout, the technology was effectively locked in.
Keyboard design is an example of an economic concept rarely taught in
college called "path dependence," the idea that small, random events at critical
moments can determine choices in technology that are extremely difficult and
expensive to change. Once a technology is chosen and gets an edge over competing
technologies, production costs fall with greater manufacturing experience and
consumer acceptance grows with greater familiarity. So the best technology does
not always win out in the marketplace.
Another good example of path dependence is the triumph of Matsushita's VHS
standard for videocassette recorders over Sony's Betamax. Betamax was first and,
by most accounts, better. Sony made two key marketing errors. First, it
initially sold Betamax machines that played one-hour tapes-too short for an
entire movie. Sony also chose not to license its technology. Matsushita
introduced VHS a year later and its machines played two-hour tapes and the
company freely licensed its technology. Matsushita, with its second-best VHS
technology, beat Sony hands-down in the marketplace.
Is Apple the computer version of Sony's Betamax and is Microsoft the
equivalent of the VHS technology? Certainly for the broad market, this is the
case. Apple's failure to license its technology years ago prevented it from
becoming the industry standard and its current licensing effort will not change
that.
However, I don't see Apple going into extinction like the Sony Betamax.
Apple has a dominant position in certain market niches like graphics and
education and it doesn't need to be the industry standard to be a successful
business enterprise.
The biggest problem has been Apple's management which for the course of its
history has ranged from the mediocre (John Sculley and Mike Markkula) to the
dreadful (Steven Jobs and Michael Spindler). Despite its unimpressive
management, Apple has been a successful company for most of its history because
of its strong corporate culture and its excellent products. I'm betting that the
new CEO, Gilbert Amelio, will be an above average manager and that there is
still a lot of value left in the company - certainly more than its current stock
price shows.
Shareholder Letters
- -------------------
In the last quarterly report, we published a letter from shareholder John
G. Rauck of San Rafael, California who suggested we amend the Parnassus Fund
investment policy so we would continue to exclude alcohol, but not wine from our
portfolio. He pointed out certain benefits from table wine and said that wine
was not abused as much as other alcoholic drinks. I replied that he made some
good points (e.g. a moderate amount of wine with a meal does no harm and may
even have some benefits), but that my inclination was to leave the policy as is
because of the great social problem of alcohol abuse. However, I did agree to
poll our investors on this issue at the next shareholders' meeting. In response
to this exchange, we received a flurry of letters from shareholders objecting to
any modification of our "no alcohol" policy. We don't have room to print all of
them, but the following two are representative.
Dear Jerry:
I read with interest the recent Quarterly Report for The Parnassus Fund
that we received. I am concerned with John Rauck's letter requesting that
Parnassus reconsider an exclusion of companies that produce and market alcohol
as table wine.
I do strongly agree with your statement as to why companies that produce
and market alcohol should be excluded from a socially responsible portfolio and
have included a pamphlet that Robert Levering wrote about the Quaker stand on
the use of alcohol that you might find interesting.
Some of my concerns with Mr. Rauck's letter follow. First, his assertion
that table wine is abused far less often does not exclude it from the category
of being abused as you point out. Also, people who abuse table wine (as opposed
to those poor down and out people who have to drink the fortified stuff) are
generally more likely to have the resources to cover up their abuse and tend to
have their abuse more overlooked or excused by society. It is also sometimes
harder for those who are the victims of a table wine drinker's abuse to receive
attention because of the above points.
Also, the benefits that Rauck sights are not universally accepted. While
the consumption of alcohol as wine has been endorsed as having some health
benefits, from a whole person perspective it is a rare individual who can
consume alcohol in the form of wine (or any other form) and receive the health
benefits without also succumbing to some of the health drawbacks. Dr. Dean
Ornish made a point once regarding the health benefits of wine consumption in
which he said that it may actually be that those people who consume table wine
in moderation under the conditions deemed to provide health benefits are
actually receiving greater benefit from the social setting in which the
consumption occurs. That is, the fact that they are engaged in a meal with
friends and family and sharing food and drink may be the true health benefit and
the wine may simply be going along for the ride. People tend to drink less
alcohol when they are drinking socially with friends or eating a meal.
I am also concerned with asking people to vote on the matter at a
shareholder meeting. I do not think that all shareholders will be well educated
on the social and personal costs of alcohol consumption, and some may vote to
support their personal behavior or ease their conscience. Is there any plan to
provide educational materials to shareholders?
Mr. Rauck is also not a disinterested party in having alcohol sold as table
wine deemed socially responsible. I hate to think of the publicity that would be
generated if a socially responsible investment fund were to give its stamp of
approval to the consumption of alcohol as table wine.
I will obviously be watching with interest to see what happens at the next
shareholder meeting.
Sincerely,
Amy Lyman
San Francisco, California
Dear Mr. Dodson:
I am writing regarding the letter, printed in the May 10th report, from Mr.
John G. Rauck. I appreciated your response as you made some valid points
regarding why the Fund policy is to avoid investments in companies producing
alcohol. I also appreciate the fact that we shareholders will get to vote on
this later in the year.
My vote will be to continue the policy as is. That policy, combined with
the other types of companies the Fund avoids, and social responsibility criteria
companies must meet, are the reason I have invested some money in The Fund. At
this time I am a small investor but plan to deposit more as I can.
I am a nurse who has worked in numerous emergency rooms and in health
related programs with youth. Unfortunately, due to a lack of self education and
because wine is promoted more as a "thinking person's mild alcohol" (my
impression) many people I have been involved in caring for were surprised at the
effects of wine on their body. A person can get just as inebriated or just as
addicted to wine as any other form of alcohol. The effects on their physical,
mental and emotional health can be just as ominous as for someone whose drink of
choice is beer or hard liquor. The effects on significant others can be just as
devastating also.
Please stick to the philosophy on which The Fund is based and don't back
down.
Sincerely,
Pauline Cahalan
Cedar Hill, Texas
Summer Interns
- --------------
We have an excellent group of interns with us this summer including a lot
of international experience. Nicos Stephanou, a junior in economics at the
University of California at Berkeley, is a native of Cyprus. Named a Fullbright
scholar in 1994, Mr. Stephanou previously worked as an assistant financial
analyst at Imperial Eurobrokers in Cyprus and as an assistant consultant and
financial auditor in the Cyprus office of Coopers & Lybrand. A graduate of the
Greek Military Academy, he served for two years as a second lieutenant in the
Cypriot National Guard.
David Parvin is a 1995 honors graduate in political science from the
University of Chicago. At the University of Chicago, he participated in the
Model United Nations, served as Treasurer of the International House Residents'
Council and played tympany with the Symphony Orchestra. Mr. Parvin also served
with the United States Coast Guard and his political experience includes
campaign work for United States Senator Dianne Feinstein and former California
Lt. Governor Leo T. McCarthy. Of interest to Parnassus shareholders is the fact
that he graduated from Lowell High School in San Francisco, the institution that
has produced so many staff and interns for the Parnassus Fund. (Lowell is also
the alma mater of three of my four children.)
Yohannes Skoda is a senior at the University of California at Berkeley
where he is majoring in economics and also studying engineering, math and
physics. His previous work experience includes stints at Tax Data Analysis in
Berkeley, at the Biology Stores at Stanford University and as a marketing
representative for the U.C. Berkeley Chancellor's Fund. He has also worked as a
tutor and for Precision Navigation in Mountain View, California.
Peter Harding will be a senior at Pomona College in Claremont, California
where he is majoring in economics and public policy analysis. At Pomona, he
served as Chairman of the College Judicial Board and as Chairman of the
Economics Club. Mr. Harding spent the fall semester of 1995 studying at
Edinburgh University in Scotland and he spent July of that year in Roscigno,
Italy with Volunteers for Peace doing mountain trail mapping as part of an
environmental restoration project. His business experience includes work as a
trust accountant in Los Altos, California and as an assistant to the director of
the Silicon Valley Business and Leadership Conference. He also played fullback
on the Claremont Colleges Rugby Team.
Alexander Dunlap will be a senior at Stanford University where he is
studying economics and political science. At Stanford, he served as Vice
President of the Charles R. Blyth Fund, an investment fund run by the students.
He also studied at Oxford University in the fall of 1995. His community
activities include serving as Director of the Dish Dash, a 5-kilometer run
through the Stanford foothills that benefits The Sanctuary, a San Francisco
charity for the homeless. Mr. Dunlap also worked as a computer consultant for
United Neighbors of East Midtown in New York, developing a database of clients
for a firm providing services to the homebound elderly. He has also worked as a
lifeguard and swimming instructor.
Coming to us from Germany is Dirk Elflein, a student studying business
administration and computer science at the European Business School in Oestrich
Winkel, Germany. His work experience includes an apprenticeship in real estate
and asset management with the Nassauische Sparkasse Bank in Wiesbaden, Germany
and a summer internship with the BayerischeHypotheken und Wechselbank in Munich.
He is also a member of the Investment Management Club at the European Business
School.
As you can see, we have a very interesting and talented group working with
us this summer.
Yours truly,
Jerome L. Dodson
President
<TABLE>
Unrealized Gain (Loss) Summary as of June 30, 1996 (unaudited)
<CAPTION>
Number of Per Per Unrealized
Shares Issuer Cost Share Market Value Share Gain (Loss)
------ ------ ----------- ------ ------------ ----- -----------
<S> <C> <C> <C> <C> <C>
60,000 Acme Metals, Inc...................$ 976,038 $ 16.27 $1,020,000 $17.00 $ 43,962
750,000 Advanced Micro Devices, Inc. ...... 16,531,007 22.04 10,218,750 13.63 (6,312,257)
340,000 Apple Computer, Inc. .............. 12,680,625 37.30 7,140,000 21.00 (5,540,625)
375,000 Calgon Carbon Corporation ........ 4,315,066 11.51 5,062,500 13.50 747,434
800,000 Cypress Semiconductor Corporation . 11,085,037 13.86 9,600,000 12.00 (1,485,037)
600,000 Electro Scientific Industries ..... 12,881,344 21.47 12,150,000 20.25 (731,344)
320,000 Ethan Allen Interiors, Inc. ....... 6,841,270 21.38 7,920,000 24.75 1,078,730
1,310,000 Genus, Inc. ....................... 5,181,438 3.96 12,608,750 9.63 7,427,312
381,000 H.B. Fuller Company ............... 12,543,580 32.92 13,811,250 36.25 1,267,670
305,000 H.F. Ahmanson & Company ........... 5,583,773 18.31 8,235,000 27.00 2,651,227
150,000 Herman Miller, Inc. ............... 3,173,938 21.16 4,593,750 30.63 1,419,812
80,000 Houghton Mifflin Company .......... 3,258,000 40.73 3,980,000 49.75 722,000
825,000 Integrated Device Technology, Inc.. 10,753,275 13.03 8,765,625 10.63 (1,987,650)
400,000 Inland Steel Industries, Inc. ..... 9,594,736 23.99 7,850,000 19.63 (1,744,736)
530,000 The Limited, Inc................... 9,823,864 18.54 11,395,000 21.50 1,571,136
500,000 Liz Claiborne, Inc. ............... 9,233,312 18.47 17,312,500 34.63 8,079,188
620,000 Mentor Graphics Corporation ....... 6,997,063 11.29 10,075,000 16.25 3,077,937
115,000 Merix Corporation.................. 2,481,875 21.58 2,300,000 20.00 (181,875)
940,000 Morgan Products, Ltd. ............. 5,741,156 6.11 5,992,500 6.38 251,344
615,000 Quantum Corporation ............... 10,928,438 17.77 8,994,375 14.63 (1,934,063)
150,000 Ryerson Tull, Inc. ................ 2,402,800 16.02 2,418,750 16.13 15,950
930,000 Sequent Computer Systems, Inc. .... 14,455,313 15.54 12,555,000 13.50 (1,900,313)
160,000 Southwest Airlines ................ 2,796,150 17.48 4,660,000 29.13 1,863,850
600,000 Sullivan Dental Products, Inc. .... 6,445,778 10.74 6,075,000 10.13 (370,778)
154,700 Sun Company, Inc................... 4,524,829 29.25 4,699,013 30.38 174,184
200,000 Sunrise Medical, Inc. ............. 3,622,330 18.11 3,850,000 19.25 227,670
460,000 TJ International, Inc. ............ 8,019,863 17.43 7,935,000 17.25 (84,863)
850,000 Tandem Computers .................. 10,191,774 11.99 10,518,750 12.38 326,976
520,000 Toys R Us, Inc................... 13,356,917 25.69 14,820,000 28.50 1,463,083
451,000 Wellman, Inc. ..................... 9,782,178 21.69 10,542,125 23.38 759,947
300,000 Zurn Industries, Inc. ............. 6,075,762 20.25 6,225,000 20.75 149,238
------- ------------ ------------- -------------
Totals $242,278,529 $253,323,638 $ 11,045,109
============ ============ ============
</TABLE>
<TABLE>
Stocks Sold January 1, 1996 through June 30, 1996 (unaudited)
- -------------------------------------------------------------
<CAPTION>
Realized Number Per Sale Per
Company Gain (Loss) of Shares Cost Share Proceeds Share
- ------- ----------- --------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
H.F. Ahmanson & Company ....................... $ 76,639 15,000 $ 267,300 $17.82 $ 343,939 $22.93
Advanced Technology Labs, Inc. ................ 4,514,899 265,000 4,204,531 15.87 8,719,430 32.90
Chemed Corporation ............................ 1,046,360 100,000 2,682,788 26.83 3,729,148 37.29
CML Group, Inc. ............................... (4,537,355) 1,420,200 9,907,421 6.98 5,370,066 3.78
Cirrus Logic, Inc. ............................ (58,750) 200,000 3,752,500 18.76 3,693,750 18.47
Flour Daniel/GTI, Inc. ........................ (116,442) 261,327 2,738,833 10.48 2,622,391 10.03
Groundwater Technology, Inc. .................. (626,457) 520,000 5,219,792 10.04 4,593,335 8.83
Handleman Company ............................. (1,749,611) 320,000 3,567,275 11.15 1,817,664 5.68
Huffy Corporation ............................. (2,320,679) 700,000 10,001,769 14.29 7,681,090 10.97
Inland Steel Industries,Inc ................... (415,666) 150,000 3,292,570 21.95 2,876,904 19.18
Kenetech Corporation .......................... (1,922,317) 369,400 2,295,288 6.21 372,971 1.01
Longs Drug Stores, Inc. ....................... 1,403,931 122,600 4,117,315 33.58 5,521,246 45.03
Liz Clairborne, Inc. .......................... 233,497 30,000 615,625 20.52 849,122 28.30
The Limited, Inc. ............................. 292,321 273,661 4,907,238 17.93 5,199,559 19.00
Herman Miller, Inc. ........................... 1,817,125 188,000 4,261,813 22.67 6,078,938 32.33
Phillips-Van Heusen ........................... (114,828) 180,000 2,086,587 11.59 1,971,759 10.95
Radius, Inc. .................................. (2,855,892) 320,000 3,202,933 10.01 347,041 1.08
Student Loan Marketing Association ............ 4,985,797 130,000 4,868,099 37.45 9,853,896 75.80
Sunrise Medical, Inc. ......................... (3,898,708) 570,000 14,287,246 25.07 10,388,538 18.23
Sun Company, Inc. ............................. (141,167) 48,200 1,395,626 28.95 1,254,459 26.03
TJ International, Inc. ........................ (9,960) 40,000 769,960 19.25 760,000 19.00
----------- -------- ---------- ----------
Totals $(4,397,263) $88,442,509 $84,045,246
</TABLE>
<TABLE>
Portfolio of Investments by Industry Classification as of June 30, 1996
(unaudited)
<CAPTION>
Percent of
Shares Common Stocks Net Assets Market Value
------ ------------- ---------- ------------
<S> <C> <C> <C> <C>
AIR TRANSPORT
160,000 Southwest Airlines 1.9% $ 4,660,000
--------------
APPAREL
500,000 Liz Claiborne, Inc. 17,312,500
530,000 The Limited, Inc. 11,395,000
--------------
Total 11.0% 28,707,500
--------------
BUILDING MATERIALS
940,000 Morgan Products, Ltd.* $ 5,992,500
460,000 TJ International, Inc. 7,935,000
--------------
Total 5.3% 13,927,500
--------------
CHEMICALS
381,000 H.B. Fuller Company $ 13,811,250
451,000 Wellman, Inc. 10,542,125
--------------
Total 9.4% 24,353,375
--------------
COMPUTER
PERIPHERALS
615,000 Quantum Corporation* 3.4% $ 8,994,375
--------------
COMPUTER SOFTWARE
620,000 Mentor Graphics
Corporation* 3.9% 10,075,000
--------------
COMPUTERS
340,000 Apple Computer, Inc.* 7,140,000
930,000 Sequent Computer
Systems, Inc.* 12,555,000
850,000 Tandem Computers, Inc.* 10,518,750
--------------
Total 11.6% 30,213,750
--------------
ELECTRONICS
115,000 Merix Corporation* 0.9% 2,300,000
--------------
ENVIRONMENTAL
SERVICES
375,000 Calgon Carbon Corporation 5,062,500
300,000 Zurn Industries, Inc. 6,225,000
--------------
Total 4.3% 11,287,500
--------------
FINANCIAL SERVICES
305,000 H.F. Ahmanson & Company 3.3% 8,235,000
--------------
FURNITURE
150,000 Herman Miller, Inc. 1.8% 4,593,750
--------------
MEDICAL EQUIPMENT
200,000 Sunrise Medical, Inc.* 1.5% 3,850,000
--------------
MEDICAL PRODUCTS
600,000 Sullivan Dental Products, Inc. 2.3% 6,075,000
--------------
MICROELECTRONIC
PROCESSING EQUIPMENT
600,000 Electro Scientific Industries* 12,150,000
1,310,000 Genus, Inc.* 12,608,750
--------------
Total 9.5% 24,758,750
--------------
PETROLEUM REFINING
& MARKETING
154,700 Sun Company, Inc. 1.8%$ 4,699,013
--------------
PUBLISHING
80,000 Houghton Mifflin Company 1.5% 3,980,000
--------------
RETAIL
320,000 Ethan Allen Interiors, Inc.* 7,920,000
520,000 Toys R Us, Inc.* 14,820,00
--------------
Total 8.8% 22,740,000
--------------
SEMICONDUCTORS
750,000 Advanced Micro
Devices, Inc.* 10,218,750
800,000 Cypress Semiconductor
Corporation* 9,600,000
825,000 Integrated Device
Technology, Inc.* 8,765,625
--------------
Total 11.0% 28,584,375
--------------
STEEL
60,000 Acme Metals, Inc.* 1,020,000
400,000 Inland Steel
Industries, Inc.* 7,850,000
150,000 Ryerson Tull, Inc.* 2,418,750
--------------
Total 4.3% 11,288,750
--------------
Total Common Stocks
(Cost $242,278,529) 97.5% $253,323,638
<FN>
--------------
* Non-income producing
</FN>
</TABLE>
<TABLE>
<CAPTION>
Portfolio of Investments
by Industry Classification
As of June 30, 1996 (continued)
<S> <C> <C>
Percent
of Net Market Value
Short-Term Investments Assets (Note 1)
- --------------------------------------------------------------------------------
Union Bank of California
Money Market Account
(variable rate-4.68% as of 6-30-96) $ 2,433,212
South Shore Bank
Money Market Account
(variable rate-4.40% as of 6-30-96) 2,084,490
Goldman Sachs
Institutional Liquid Assets
(variable rate-5.00% as of 6-30-96) 1,463,402
Community Capital Bank
(variable rate-4.45% as of 6-30-96) 100,000
Albina Community Capital Bank
(variable rate-5.00% as of 6-30-96) 100,000
Alternatives Federal Credit Union
(variable rate-2.54% as of 6-30-96) 25,000
Self Help Credit Union
(variable rate-5.12% as of 6-30-96) 26,641
Union Bank of California Account
(variable rate-2.66% as of 6-30-96) 18,404
Total Short-Term Investments
(Cost $6,251,149) 2.4% 6,251,149
---- ---------
Total Investments 99.9% 259,574,787
Other Assets and Liabilities-Net 0.1% 233,213
----- -----------
Total Net Assets 100.0% $259,808,000
====== ============
</TABLE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
June 30, 1996 (unaudited)
<S> <C>
Assets:
Investments in securities, at market value
(identified cost $242,278,529) (Note 1) $253,323,638
Temporary investments in short term securities
(at cost which approximates market) 6,251,149
Receivables:
Dividends and interest 151,200
Capital shares sold 309,539
Other assets 200,998
-----------
Total assets 260,236,524
===========
Liabilities:
Accounts payable 174,913
Capital shares redeemed 253,611
-----------
Total liabilities 428,524
-----------
Net Assets (equivalent to $32.15
per share based on 8,081,689.816
shares of capital stock outstanding) $259,808,000
============
Net assets consist of:
Distributions in excess of net
investment income $ ( 279,958)
Unrealized appreciation on investments 11,045,109
Accumulated net realized loss (4,305,152)
Capital paid 253,348,001
-----------
Total Net Assets 259,808,000
===========
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($259,808,000 divided by
8,081,689.816 shares) $ 32.15
================
Offering price per share (100/96.5 of $32.15)* $ 33.32
================
<FN>
*On investments of $15,000 or more, the sales charge is reduced as stated
in the Prospectus in the section entitled "How to Purchase Shares."
</FN>
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
six months ended June 30, 1996 (unaudited)
<S> <C>
Investment Income:
Dividends $ 1,004,197
Interest 236,850
------------
Total investment income 1,241,047
------------
Expenses:
Investment advisory fees (Note 5) 889,891
Transfer agent fees (Note 5) 275,956
Reports to shareholders 91,144
Fund administration expense (Note 5) 30,000
Registration fees and expenses 32,531
Custody fees 30,423
Audit fees 11,512
Legal fees (Note 5) 22,569
Trustee fees and expenses 6,105
Other expenses 10,212
------------
Total expenses 1,400,343
------------
Net Investment Income (Loss) (159,296)
------------
Realized and Unrealized
Gain (Loss) on Investments:
Realized loss from security transactions
(excluding short-term investments):
Proceeds from sales 84,045,246
Cost of securities sold (88,442,509)
------------
Net realized loss (4,397,263)
------------
Unrealized appreciation of investments:
Beginning of year 3,332,380
End of period June 30, 1996 11,045,109
----------
Unrealized appreciation during the year 7,712,729
---------
Net Realized and Unrealized
Gain on Investments 3,315,466
---------
Net Increase in Net Assets Resulting
from Operations $ 3,156,170
=============
</TABLE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
six months ended June 30, 1996 (unaudited)
and year ended December 31, 1995
<S> <C> <C>
June 30, 1996 1995
------------- ----
From Operations:
Net investment income (loss) $ (159,296) $ 1,277,122
Net realized gain (loss)
from security transactions (4,397,263) 8,636,880
Net unrealized appreciation
(depreciation) during
the period 7,712,729 (16,126,308)
--------- -----------
Increase (decrease) in
net assets derived from
operations 3,156,170 (6,212,306)
Dividends to shareholders:
From net investment incom 0 (1,277,031)
From realized capital gains 0 (8,643,338)
Increase (Decrease) in
Net Assets from Capital
Share Transactions (2,480,727) 114,270,902
---------- -----------
Increase in Net Assets 675,443 98,138,227
Net Assets:
Beginning of period 259,132,557 160,994,330
----------- -----------
End of period
(including distributions in
excess of net investment
income of $279,958 in 1996
and $120,662 in 1995) $259,808,000 $259,132,557
============ ============
</TABLE>
Notes To Financial Statements
- -----------------------------
1. Significant Accounting Policies
The Parnassus Fund (the Fund) is an open-end, diversified management
investment company (mutual fund), registered under the Investment Company Act of
1940, as amended. The following is a summary of significant accounting policies
of the Fund.
Securities Valuations - Investment securities are stated at market value
based on recorded closing sales on a national securities exchange or on the
NASD's National Market System, or in the absence of a recorded sale, and for
over-the-counter securities, at the mean between the last recorded bid and asked
prices. Short-term securities are money market instruments and are valued at
cost, which approximates market value.
Federal Income Taxes - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
Security Transactions - In accordance with industry practice, security
transactions are accounted for on the date the securities are purchased or sold
(trade date). Realized gains and losses on security transactions are determined
on the basis of first-in, first-out for both financial statement and federal
income tax purposes.
Investment Income, Expenses, and Distributions - Dividend income is
recorded on the ex-dividend date. Interest income and estimated expenses are
accrued daily. Distributions to shareholders are recorded on the record date.
Use of Estimates - 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 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.
2. Distributions
Net realized gains are distributed in the year in which the gains arise. As
of June 30, 1996 there was no undistributed net capital gain or undistributed
net investment income.
3. Capital Stock
<TABLE>
As of June 30, 1996 there were an unlimited number of shares of no par
value capital stock authorized and capital paid-in aggregated $253,348,001.
Transactions in capital stock (shares) were as follows:
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold ................................ 969,839 $ 31,043,787 3,586,999 $ 126,741,948
Shares issued through dividend reinvestment. 0 0 273,013 8,826,500
Shares repurchased ......................... (1,043,626) (33,524,514) (610,655) (21,297,546)
Net Increase (Decrease) .................... (73,787) $ (2,480,747) 3,249,357 $ 114,270,902
</TABLE>
4. Purchases and Sales of Securities
Purchases and sales of securities for the six months ended June 30, 1996
were $91,231,030 and $88,442,508 respectively. For federal income tax purposes,
the aggregate cost of securities and unrealized appreciation at June 30, 1996
are the same as for financial statement purposes. Of the $11,045,109 of net
unrealized appreciation at June 30, 1996, $20,615,537 related to appreciation of
securities and $9,570,428 related to depreciation of securities.
5. Transactions with Affiliates and Related Parties
Under terms of an agreement which provides for furnishing investment
management and advice to the Fund, Parnassus Investments received fees computed
monthly, based on the Fund's average daily net assets for the month, at an
annualized rate of 1% of the first $10,000,000, 0.75% of the next $20,000,000,
and 0.70% of the next $70,000,000 and 0.65% of the next $100,000,000 and 0.60%
of the balance. Fees paid by the Fund to Parnassus Investments under the
agreement totaled $889,891 for the six months ended June 30, 1996.
Under terms of a separate agreement which provides for furnishing transfer
agent and fund administration services to the Fund, Parnassus Investments
received fees paid by the Fund totaling $305,956 for the six months ended June
30, 1996. The transfer agent fee is $2.10 per month per account, and the fund
administration fee is $5,000 per month.
In its capacity as underwriter and general distributor of the shares of the
Fund, Parnassus Investments received commissions on sales of the Fund's shares
for the six months ended June 30, 1996 totaling $483,498, of which $157,059 was
paid to other dealers. Commissions are deducted from the gross proceeds received
from the sale of the shares of the Fund and as such are not expenses of the
Fund.
Jerome L. Dodson is the President of the Fund and is the President and sole
shareholder of Parnassus Investments.
For the six month period ended June 30, 1996, the Fund incurred legal fees
of $2,418 to Richard D. Silberman, counsel for the Fund. Mr. Silberman is also
the Secretary of the Fund.
6. Financial Highlights
<TABLE>
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for the six months ended June 30, 1996 and for each of
the ten years in the period ended December 31:
<CAPTION>
June 30, 1996
(unaudited) 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ....... $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62
Income from investment operations:
Net investment income (loss) ........ (0.02) 0.15 2.73 0.27 0.01 0.06 0.16
Net realized and unrealized
gain (loss) on securities ....... 0.40 0.07 1.00 4.84 8.60 8.29 (4.52)
Total from investment operations .... 0.38 0.22 3.73 5.11 8.61 8.35 (4.36)
Distributions:
Dividends from net investment
income .......................... 0.00 (0.16) (0.47) (0.25) (0.04) (0.06) (0.17)
Distributions from net realized
gain on securities .............. 0.00 (1.11) (2.25) (2.99) (2.16) (0.85) .-
Total distributions ................. 0.00 (1.27) (2.72) (3.24) (2.20) (0.91) (0.17)
Net asset value at end of period ............. $32.15 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09
Total Return* ................................ 1.20% 0.62% 11.98% 17.31% 36.80% 52.56% (21.16%)
Ratios / Supplemental Data:
Ratio of expenses to average
net assets ...................... 1.06% 1.02% 1.14% 1.26% 1.47% 1.51% 1.77%
Ratio of net investment income (loss)
to average net assets ........... (0.12%) 0.54% 0.43% 0.13% 0.02% 0.26% 0.87%
Portfolio turnover rate ...................... 34.80% 29.10% 28.10% 21.00% 32.80% 24.61% 38.25%
Net assets, end of period (000's) ............ $259,808 $259,133 $160,994 $98,774 $56,237 $31,833 $20,738
<FN>
* Total return figures do not adjust for the sales charge.
</FN>
1989 1988 1987 1986
<S> <C> <C> <C> <C>
Net asset value at beginning of period ................... $20.46 $16.16 $18.09 $17.79
Income from investment operations:
Net investment income (loss) .................... 0.27 (0.05) (0.04) (0.09)
Net realized and unrealized
gain (loss) on securities ................... 0.30 6.90 (1.19) 0.53
Total from investment operations ................ 0.57 6.85 (1.23) 0.44
Distributions:
Dividends from net investment
income ...................................... (0.18) .- (0.03) (0.03)
Distributions from net realized
gain on securities .......................... (0.23) (2.55) (0.67) (0.11)
Total distributions ............................. (0.41) (2.55) (0.70) (0.14)
Net asset value at end of period ......................... $20.62 $20.46 $16.16 $18.09
Total Return* ............................................ 2.85% 42.44% (7.95%) 2.39%
Ratios / Supplemental Data:
Ratio of expenses to average
net assets .................................. 1.65% 2.15% 2.13% 2.58%
Ratio of net investment income (loss)
to average net assets ....................... 1.21% (0.49%) (0.24%) (0.13%)
Portfolio turnover rate .................................. 11.45% 32.34% 31.69% 31.22%
Net assets, end of period (000's) ........................ $23,048 $10,863 $5,374 $3,321
<FN>
*Total return figures do not adjust for the sales charge.
</FN>
</TABLE>
The Parnassus Fund
One Market-Steuart Tower #1600
San Francisco, California 94105
415-778-0200
800-999-3505
Investment Adviser
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
Legal Counsel
Richard D. Silberman, Esq.
465 California Street, #1020
San Francisco, California 94104
Auditors
Deloitte & Touche llp
50 Fremont Street
San Francisco, California 94105
Custodian
Union Bank of California
475 Sansome Street
San Francisco, California 94111
Distributor
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
