THE PARNASSUS FUND
Semiannual Report
June 30, 1997
July 28, 1997
Dear Shareholder:
As of June 30, 1997, the net asset value per share (NAV) of the Parnassus
Fund was $42.20, so the overall return for the quarter was 17.62%. This compares
to a return of 17.47% for the S&P 500 and a return of 15.83% for the average
growth fund according to Lipper Analytical Services. For the third consecutive
quarter, we've outperformed both the S&P and the average growth fund.
For the year-to-date, the Fund is up 22.71% compared to 20.62% for the S&P
and 14.29% for the average growth fund; Lipper ranks us 25th out of 840 growth
funds for the six-month period. Since the first of the year, we're 8.42% ahead
of the average growth fund which is more than the 7.56% by which we
underperformed the average growth fund in 1996. So we've more than made up for
last year's deficit in the first six months of 1997.
Below you will find a table summarizing our average annual returns as of
June 30, 1997 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.
<TABLE>
<CAPTION>
Average Annual Average Annual
Total Return Overall Return
- ----------------------------------------------------------------------------
<S> <C> <C>
One Year 30.68% 35.42%
- ----------------------------------------------------------------------------
Five Years 17.06% 17.90%
- ----------------------------------------------------------------------------
Ten Years 11.49% 11.89%
- ----------------------------------------------------------------------------
Since Inception on 12/31/84 13.20% 13.52%
- ----------------------------------------------------------------------------
<FN>
Past performance is no guarantee of future returns. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may
be worth more or less than their original cost.
</FN>
</TABLE>
PERFORMANCE OF INDIVIDUAL COMPANIES
The vast majority of companies in the portfolio had strong gains and only
two companies lost more than 10% during the quarter. Advanced Micro Devices lost
13.5% as the stock went from $41.63 to $36.00 a share. This was a relatively
small correction in the price of AMD's stock after it soared 61.7% during the
first quarter. We think there's more upside left as the new K-6 chip appears to
be selling quite well. Protocol, the maker of medical monitoring equipment,
dropped 12.3% during the quarter as the stock declined from $9.13 to $8.00.
We're not concerned about the decline as we like the products and management of
this company. We anticipate better results in the months to come.
The company with the biggest gain in the second quarter was FEI, a
Portland, Oregon-based manufacturer of semiconductor testing and repair
equipment and electron microscopes. The stock went from $8.50 to $15.75 a share
for a gain of 85.3%. Earlier this year, the stock was depressed, but it bounced
back after the realization that its products were of high quality and its
business plan made sense. Orders from semiconductor manufacturers for processing
equipment were especially strong.
Our old friend, Tandem Computers, gained 70.5% as its stock went from
$11.88 to $20.25 because of an agreement to merge with Compaq. Tandem has been
in the portfolio for years and we haven't had much return on our investment
until recently. In fact, judging from its performance prior to the merger,
Tandem looked like one of the "stuck-in-the-mud" stocks we pledged to purge from
the portfolio in last year's "Restructuring of '96." For years, the company had
great products, but could not earn significant amounts of money on a consistent
basis. Over the past year, though, the company has made good progress and a new
chief executive officer took the helm. I thought about selling the stock even
with the improvements underway since I had been disappointed so many times
before. We decided, however, to give the company one more chance and it was
fortunate that we did.
Tandem illustrates one of the challenges of managing a portfolio. Last
year, we took a giant step forward by improving our investment analysis. One of
the most important changes was to look for a 12-month catalyst to improve
earnings before investing in a company even if it were undervalued. This system
has worked well for us and our performance for the last nine months has been
remarkable. (There's no guarantee that this will continue, but the early returns
look good.) However, it's not always possible to tell if a catalyst will
actually develop in the next twelve months and sometimes what looks like a
catalyst will turn out to have no effect at all. Until recently, Tandem was a
good example. So even though the 12-month catalyst analysis is not perfect, it
helps us to analyze a company's future and it should give us better performance.
Compaq is offering stock for all of Tandem's shares instead of cash so we
will have to decide whether to take Compaq stock or sell our shares. We have
owned Compaq in the past and we think that both Tandem and Compaq are socially
responsible companies. We think that Compaq is a very well managed company, but
we have not yet made a decision on whether Compaq is undervalued or not. If we
take stock instead of cash, the gain on Tandem will not be taxed until we sell
the Compaq stock. This will be a consideration in our decision.
Electro Scientific Industries (ESI) had an excellent quarter as its stock
soared 65.8%, climbing from $25.25 to $41.88. The company has excellent
management and its laser-based products are in high demand in the semiconductor
industry. Recent, well-chosen acquisitions are also helping ESI.
Whole Foods Market, the nation's largest natural foods supermarket company,
saw its stock increase 59.6%, rising from $20.75 to $33.13. The company's stock
price was depressed when we bought it because of weakness in its Los Angeles
region and other concerns. Since then, though, operations have been strong and
so have earnings. The company has good managers and it has good social factors
including community relations and treatment of employees.
Centigram, a voice mail company, rose 28.6% during the quarter as its stock
climbed from $10.06 to $12.94. The company has excellent products, but its costs
were too high and its marketing unfocused. Recent changes in management should
improve the company's performance.
Toys 'R' Us increased 25.0% during the quarter as its shares climbed from
$28.00 to $35.00 each. Stronger demand for toys and improved appearance and
design of the stores contributed to better earnings. Star Wars toys have also
had very strong sales at the stores.
Sullivan Dental Products gained 24.8% while its stock moved from $14.63 to
$18.25. Increased demand because of a better-trained sales force was responsible
for most of the improvement in company operations. Improved cost control also
made an impact.
TJ International, the Boise, Idaho-based company that produces engineered
lumber products, had a 23.7% gain in its stock price as it went from $19.00 to
$23.50 a share. After having problems at a couple of its plants, productivity
has picked up and things are now running efficiently. Lower raw material costs
and stronger demand also helped TJ.
Houghton Mifflin's stock went up 23.6% during the quarter, going from
$54.00 to $66.75 a share. Efficiencies from the D.C. Heath merger and strong
sales of textbooks contributed to the increased value of its stock. A dividend
increase also helped push up the price.
Aetna, the health maintenance organization (HMO) and health insurer based
in Hartford, Connecticut, had a 19.7% increase in the price of its stock as it
went from $85.88 to $102.81. Aetna provides good quality health care to its
patients and its operations have improved substantially.
OUTLOOK AND STRATEGY
As we indicated earlier in this report, the S&P 500 index has outperformed
the average growth fund by a substantial margin for the first half of this year.
While the S&P has climbed 20.62% for the year-to-date, the average growth fund
has increased only 14.29%. Why has this happened?
The answer is that large, blue-chip corporations have gone up much faster
than the market as a whole. While the S&P 500 index represents 500 large
companies, they are not all given equal weight in the index. They are weighted
according to market capitalization (i.e. stock price times the number of shares
outstanding). Because of this market weighting, the top 10 companies account for
19.6% of the index's value, the top 50 account for 49.3% of the value and the
top 100 account for 66.3% of the value. Given this situation, the smallest 400
of the S&P 500 don't affect the index very much. Since growth funds have stocks
that are more broadly distributed than the top 10, top 50 or top 100 companies
in the S&P, the average growth fund has gained less than the S&P 500 index.
Given this situation, why have the biggest companies gone up so much more
than the other ones? Part of the answer is that because of the high valuations,
large institutional investors want to be in corporations whose shares are liquid
and can be traded easily. If things turn sour, the idea is that they can sell
their shares relatively easily and sit on the sidelines until the storm passes.
As a practical matter, though, this strategy hasn't worked too well. It's
almost impossible to time the market accurately on a long-term basis. No one
rings a bell at market tops and no one rings a bell at market bottoms. If an
investor waits for a downdraft, he or she may be selling at the bottom and if
they stay out of the market for a while, stocks may jump up and leave the
investor stranded. All the buying and selling will also penalize a portfolio
since there are commissions to pay and "spreads" between "bid" and "ask" to
absorb when trades are made. Despite these realities, people still think they
can time the market and timers prefer large capitalization stocks.
Well-known names give many investors comfort (especially foreigners) and
this causes more buying of big companies and pushes up indices like the Dow
Jones Industrial Average and the S&P 500. Also, the fact that the S&P has done
better than the market in recent years, makes some investors more comfortable
buying the biggest companies and this, in turn, makes the largest issues go up
even more.
A relatively new phenomenon is the enormous growth of "index funds." These
mutual funds buy the stocks that are in the S&P 500 and try to duplicate the
S&P's returns. Since the S&P has beat the average growth fund in recent years,
this causes a growing number of investors to put their money into index funds.
As the index funds keep growing and buying more and more shares in the biggest
companies, the trend is reinforced.
At some point, though, the biggest companies become overvalued in
comparison with the broader market. As this trend continues, the overvaluation
of large companies becomes more pronounced and the trend reverses itself. This
is what happened in 1991, 1992 and 1993 when smaller companies did better than
larger companies and the average growth fund beat the S&P 500 for most of the
3-year period.
In my view, we're at a point now where most of the biggest issuers are
overvalued and a correction could come sometime this year. This doesn't
necessarily mean that stocks will crash, but it's possible that will happen.
Unfortunately, shares of smaller companies also fall during a correction. The
smaller companies, though, usually come back stronger after this kind of
correction so it generally pays to ride out the storm.
At this point, some of you may be saying to yourselves, "If Dodson thinks
large companies are overvalued and we're due for a correction that will hit both
large and small companies, why doesn't he get out of the market, put the Fund's
assets in cash, wait for the crash and then get back into the market?" The
theory behind this question is absolutely correct, but the difficulty is in the
practice.
I have no idea when the correction will come and we could underperform if
we got out of the market and stocks continued to soar. Also, the correction may
not take the form of a crash, but rather the shares of big companies could stay
flat while issues of smaller companies soar.
What I've chosen to do is stay in the market with our companies which we
think are undervalued. These tend to be medium-sized companies and if a
correction comes, they should't get hammered as much as the overvalued ones or
at least, they should bounce back sooner and with more vigor.
COMPANY NOTES
In an effort to expand and build upon "Bring Your Daughter to Work Day,"
Quantum Corporation hosted its first "Bring Your Children to Work Day" during
the week of April 23. 1000 children attended the event at four Quantum sites
around the country: Milpitas, California, Shrewsbury, Massachusetts, Colorado
Springs, Colorado and Louisville, Colorado. Activities included demonstrations
on how to build and take apart a computer disk drive, tours of manufacturing and
engineering facilities and mock meeting sessions.
The annual Aetna Voice of Conscience Awards, honoring Arthur Ashe and the
humanitarian ideals he stood for, recognized four winners with crystal
sculptures and $25,000 each to be donated to the recipient's choice of charity.
Dierdra Gray, a graduate student at Columbia and President of the People of
Color Alliance, organized toy and clothing drives for impoverished residents of
Harlem. In response to ethnic tensions on campus, Ms. Gray and a Jewish graduate
student created Common Ground, an organization focused on creating shared
experiences and dialogue among Jewish and African-American students.
Another recipient was Henry J. Fernandez, a graduate of Harvard and Yale
Law School, who started LEAP, an education and social development program which
serves over 800 inner-city Connecticut children. Richard Lapchick, founder and
director of the Center for the Study of Sport and Society at Northeastern
University, received an award for helping former college and professional
athletes complete their college educations.
Maria McKeon, a lawyer in Aetna's Hartford office, has served for five
years as Chairman of Connecticut Lawyers Legal Aid to the Elderly program, which
provides pro bono legal services to senior citizens. Ms. McKeon also received
her award for helping to create Lawyers for Children which advocates on behalf
of abused and neglected children in the court system. The awards honor Arthur
Ashe who served on Aetna's board from 1982 until his death in 1993.
TAX ISSUES
The following letter came from a friend of mine, Donald J. Boteler, Vice
President of Operations and Training, at the Investment Company Institute (ICI),
the official trade association of the mutual fund industry. The letter makes tax
comments to amplify a response I made to a shareholder question on taxes.
Dear Jerry:
The annual report for the Parnassus Fund dated February 5, 1997
contained your response to a letter from one of your shareholders
asking if you take into account a shareholder's tax situation in
managing the fund. In your response, you outlined five ways in which
you seek to minimize taxes for shareholders. I applaud your use of each
of those techniques as very pro-shareholder. I would like to suggest a
clarifying comment about the point you made regarding the proper use of
the tax basis of shares in calculating capital gains. Your letter noted
as follows:
We remind shareholders to use the tax basis (not just the cost of
shares) in calculating capital gains. The tax basis of shares is the
cost of the shares plus the dividends paid out during the holding
period. For example, if you paid $25.00 for your Parnassus Fund shares
and you received dividends of $4.00 during the holding period, your tax
basis is $29.00 - not the $25.00 cost. Some taxpayers overpay capital
gains by using the actual cost of shares instead of the tax basis. This
would make the capital gain appear larger than it was.
What you said is essentially correct (particularly with respect to full
redemptions), but it is important to note that dividends are part of
the tax basis of shares only to the extent that they are reinvested in
additional shares of the fund. I'm sure that is what your words
intended to convey, but it would probably be a good idea to state it
explicitly when next you visit this topic.
You might also wish to consider informing shareholders that, when
computing taxable gains from partial account redemptions, they may use
one of the three available methods to calculate tax basis: (1) the
average cost method, (2) the specific identification method, or (3) the
first-in, first-out method. Whichever method is elected by a
shareholder for a particular account must be used consistently for that
account. Shareholders should be urged to consult a tax advisor or
obtain IRS Publication No. 564 - Mutual Fund Distributions, for
instructions on how to apply each of the methods.
I always enjoy reading your reports, Jerry. Keep up the good work!
Best regards,
Donald J. Boteler
Washington, D.C.
Note: When the Parnassus Fund sends out cost information for taxes, we
base it on the first-in, first-out method (FIFO).
SHAREHOLDER LETTERS
Dear Mr. Dodson:
Thanks for your letter of June 6 explaining the SEC charges and your
position regarding the Margaux investment and the "soft dollars." I
don't follow the financial news closely; your letter was the first I
heard about it. From what you write, your position seems reasonable to
me. Being neither a lawyer nor a financial analyst, this view is only a
layman's reaction. Still, my view is fortified by my high regard for
your acumen and integrity as revealed in the splendid reports you write
about the Parnassus Fund's activity and which I do read closely.
There are a few questions about the Margaux investment about which I
would appreciate some illumination. I vaguely recall the name Margaux
on the Fund's list of investments sometime in the past, but little
else. What was its business? How large was the Fund's investment in it?
In the end, how much did the Fund lose or gain from it? What was the
basis of your faith in Margaux despite its bankruptcy filing? None of
the questions necessarily relate to the SEC charges, but the answers
might afford some better perspective on the matter.
I do support your effort to stand your ground against the charges
rather than settle "out of court."
My wife and I have been loyal shareholders in the Fund since 1992.
We are well-satisfied and not bothered by the flat experience of
1995-96. The long run is what matters for us. We like and have
confidence in your investment philosophy and strategy. Don't be
intimidated by bureaucrats when you know you are right.
Sincerely,
Saul J. Blaustein
Tucson, Arizona
Dear Mr. Blaustein:
Thank you for your letter. I appreciate the kind words. With regard to
the investment in Margaux, the company manufactured refrigeration equipment
for use in supermarkets. We invested in the company because of both
financial and environmental reasons. The equipment was energy efficient and
we liked the management.
We started buying Margaux in April of 1986 and we purchased our last
shares in March of 1989. We also sold some shares in October of 1989. As of
November of 1989, we owned 565,000 shares at a cost of $562,187.50 or just
about $1.00 per share.
The Fund also made a $100,000 investment in a convertible debenture
issued in April of 1989. The debenture was convertible into common shares
of Margaux at the rate of 15 per dollar so the cost of these shares was 6.7
cents each. We invested in the company after Margaux filed for Chapter 11
reorganization. The company was forced into Chapter 11 because its
commercial bank called an outstanding loan. Despite the Chapter 11 filing,
I thought there was a lot of value in the company.
Dover Diversified acquired Margaux for 27 cents per share on March 6 of
1995. The Fund lost money on its 565,000 common shares since our cost was
about $1.00. We did, however, make a lot of money on the convertible
debenture. We sold our 1,500,000 shares converted from the debenture for 27
cents each for a total of $405,000 so we made over four times our
investment of $100,000. However, when you factor in the cost of the shares
plus the convertible debenture, the Fund lost $104,637.50 or about 5 cents
per share on the total investment. (After converting the debenture, we
owned 2,065,000 shares and we sold them all for 27 cents each for total
proceeds of $557,550. Our total cost for the 565,000 shares and the
convertible debenture was $662,187.50)
Yours truly,
Jerome L. Dodson
I would also like to thank all of the shareholders who wrote letters of
support in the wake of the SEC charges. I remain confident that we will win our
battle with the SEC.
Finally, on another subject, I would like to admit that I am guilty of a
grammatical error in the last quarterly report. Robert W. Hansen, a shareholder
from Carpinteria, California, and William Edgerton, a veteran Parnassus investor
and frequent correspondent from Bloomington, Indiana, both wrote in to point out
the error in the following sentence: This has lead us to choose growth stocks
that have stumbled rather than picking companies that have extremely low
valuations. It should have been "led" instead of "lead." As always, we
appreciate feedback from our shareholder-grammarians.
JOAN SHAPIRO
Joan Shapiro, an original investor with the Parnassus Fund and a Trustee of
the Parnassus Income Fund, has retired from the South Shore Bank in Chicago
after 20 years of service with the bank. As many of you know, South Shore is the
nation's most prominent development bank, having gone into depressed areas of
Chicago and pioneered community economic development. Joan joined South Shore in
1976 and became Director of Development Deposits in 1982 where she increased
assets from $20 million to $150 million. Prior to her retirement, she served as
Executive Vice President with responsibilities for marketing, communications,
press relations and raising capital.
In addition to service as a Parnassus Trustee, Joan was a founding board
member of the Social Investment Forum and served as President for two years. She
has made significant contributions to Parnassus and to the social investment
movement. Joan is a very youthful retiree so I'm sure we'll be hearing more from
her before too long. I hope all of you will join me in wishing her well in
whatever her next venture may be.
SUMMER INTERNS
This summer we have a record seven interns working at the Parnassus Fund.
Robert Kimsey is a graduate of the University of California at Santa Barbara and
a Level 2 candidate for the Chartered Financial Analyst Designation (CFA). His
previous work experience includes being an account representative at the Benham
Group (now American Century Investments) and a sales representative at
Nordstrom.
Heidi Chu majored in molecular and cell biology at the University of
California at Berkeley where she graduated in May. At UC, she was a member of
the Korean Students Association and the Molecular and Cell Biology Undergraduate
Student Association. Her work experience includes a stint as a research
assistant in a laboratory doing DNA work as well as working as a swimming
instructor at UC Medical School and as a salesclerk at the Cannery Kid in San
Francisco.
Yimin Feng is also a May graduate of the University of California at
Berkeley and he was also an exchange student at Hong Kong University of Science
and Technology. He is founder and president of INSPIRE, a youth mentorship
program that provides guidance, support and information to inner-city youths. He
also serves on the board of the Oakland Asian Student Educational Services
(OASES) which provides tutorial and mentoring services for low income students.
Yimin has also worked on developing business plans for small enterprises.
Christian Schuetz is a student at the European Business School in
Oestrich-Winkel, Germany. His previous experience includes banking at the
Nassauische Sparkasse in Wiesbaden, Germany. He has also done social work in
Meisenheim, Germany, counseling recent Russian immigrants. At 6'9", Christian is
also an enthusiastic basketball player.
Aster Chin is a senior at the University of California at Davis where she
is majoring in managerial economics and physiology. She is also a graduate of
Lowell High School in San Francisco and while at Lowell, she was first-place
winner at the London Royal School International Piano Competition. At UC Davis,
she was Programs and Facilities Committee Chairman of the Campus Union and
Recreation Board where she participated in planning for capital improvement
projects and reviewed and approved budgets for various student fee-funded
facilities.
Stephen Dodson is a junior studying economics at the University of
California at Berkeley. He is also a graduate of Lowell High School in San
Francisco where he was captain of the crew team and editor of the school
newspaper. At Berkeley, he is a founding member of the California Investment
Association and a media relations assistant in the Athletic Department.
Patrick Rooney graduated in electrical engineering from Montana State
University. His experience includes working for two years as a product marketing
engineer at Integrated Device Technology. He is currently an emergency room
volunteer at San Francisco General Hospital and he has volunteered for Project
Open Hand, delivering meals to homebound AIDS patients.
Finally, I would like to thank all of you for investing in the
Parnassus Fund and supporting socially responsible investing.
Yours truly,
Jerome L. Dodson
President
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED GAIN (LOSS) SUMMARY AS OF JUNE 30, 1997 (UNAUDITED)
Number of Per Per Unrealized
Shares Issuer Cost Share Market Value Share Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
600,000 ATC Group Services, Inc. $ 7,272,588 $12.12 $ 6,900,000 $ 11.50 $ (372,588)
80,000 Acme Metals, Inc. 1,299,624 16.25 1,370,000 17.13 70,376
100,000 Adobe Systems Incorporated 3,576,564 35.77 3,506,250 35.06 (70,314)
500,000 Advanced Micro Devices, Inc. 10,645,500 21.29 18,000,000 36.00 7,354,500
140,000 Aetna, Inc. 9,007,863 64.34 14,393,750 102.81 5,385,887
505,000 Broderbund Software, Inc. 12,743,324 25.23 12,467,187 24.69 (276,137)
435,000 Centigram Communications Corporation 4,446,589 10.22 5,627,812 12.94 1,181,223
70,000 Corporate Express, Inc. 945,000 13.50 1,010,625 14.44 65,625
800,000 Cypress Semiconductor Corporation 11,085,038 13.86 11,600,000 14.50 514,962
60,000 Delta Air Lines, Inc. 4,301,406 71.69 4,920,000 82.00 618,594
600,000 Electro Scientific Industries, Inc. 12,881,344 21.47 25,125,000 41.88 12,243,656
350,000 FEI Company 3,470,000 9.91 5,512,500 15.75 2,042,500
3,500 First Data Corporation 126,683 36.20 153,781 43.94 27,098
654,000 Genus, Inc. 3,427,000 5.24 2,943,000 4.50 (484,000)
80,000 Hewlett-Packard Company 3,167,800 39.60 4,460,000 55.75 1,292,200
60,000 Houghton Mifflin Company 2,493,475 41.56 4,005,000 66.75 1,511,525
420,000 In Focus Systems 9,818,365 23.38 10,762,500 25.63 944,135
400,000 Intuit, Inc. 9,076,344 22.69 9,175,000 22.94 98,656
115,500 Invacare Corporation 2,121,594 18.37 2,699,813 23.38 578,219
160,000 Lam Research Corporation 4,767,188 29.79 5,930,000 37.06 1,162,812
125,000 The Limited, Inc. 2,405,413 19.24 2,531,250 20.25 125,837
275,000 Mentor Graphics Corporation 3,661,875 13.32 2,543,750 9.25 (1,118,125)
1,000,000 Morgan Products, Ltd. 6,131,156 6.13 7,500,000 7.50 1,368,844
900,000 Mylan Laboratories 13,584,911 15.09 13,275,000 14.75 (309,911)
580,000 Nellcor Puritan Bennett, Inc. 10,088,288 17.39 10,512,500 18.13 424,212
600,000 Protocol Systems, Inc. 5,483,494 9.14 4,800,000 8.00 (683,494)
525,000 Quantum Corporation 4,847,188 9.23 10,664,063 20.31 5,816,875
200,000 Ryerson Tull, Inc. 3,106,625 15.53 3,300,000 16.50 193,375
350,000 Sequent Computer Systems, Inc. 7,238,751 20.68 7,371,875 21.06 133,124
500,000 Sullivan Dental Products, Inc. 5,370,777 10.74 9,125,000 18.25 3,754,223
212,500 Sun Company, Inc. 5,733,250 26.98 6,587,500 31.00 854,250
210,000 T.J. International, Inc. 3,561,312 16.96 4,935,000 23.50 1,373,688
780,000 Tandem Computers, Inc. 9,178,700 11.77 15,795,000 20.25 6,616,300
500,000 Toys "R" Us, Inc. 12,751,767 25.50 17,500,000 35.00 4,748,233
150,000 United Healthcare Corporation 5,689,250 37.93 7,800,000 52.00 2,110,750
625,000 Wellman, Inc. 12,728,701 20.37 10,859,375 17.38 (1,869,326)
350,000 Whole Foods Market 6,717,638 19.19 11,593,750 33.13 4,876,112
------------ ------------ -----------
TOTAL $234,952,385 $297,256,281 $62,303,896
============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STOCKS SOLD JANUARY 1, 1997 THROUGH JUNE 30, 1997 (UNAUDITED)
Realized Number Per Sale Per
Company Gain (Loss) of Shares Cost Share Proceeds Share
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advanced Micro Devices, Inc. $ 3,904,331 250,000 $ 5,885,507 $23.54 $ 9,789,838 $39.16
Aetna, Inc. 447,865 20,000 1,355,775 67.79 1,803,640 90.18
Apple Computer, Inc. (6,580,203) 340,000 12,680,625 37.30 6,100,422 17.94
Autodesk, Inc. 331,830 35,000 1,004,375 28.70 1,336,205 38.18
Delta Air Lines, Inc. 935,184 40,000 2,840,153 71.00 3,775,337 94.38
H.B. Fuller Company 4,315,040 260,000 8,390,105 32.27 12,705,145 48.87
Houghton Mifflin Company 329,038 20,000 764,525 38.23 1,093,563 54.68
Inland Steel Industries, Inc. (1,584,505) 400,000 9,594,736 23.99 8,010,231 20.03
Lam Research Corporation 1,052,054 110,000 3,110,313 28.28 4,162,367 37.84
The Limited, Inc. 117,446 405,000 7,418,452 18.32 7,535,898 18.61
Liz Claiborne, Inc. 5,462,619 200,000 3,326,000 16.63 8,788,619 43.94
Macromedia, Inc. (414,865) 520,500 4,408,543 8.47 3,993,678 7.67
Mentor Graphics Corporation 61,368 205,000 1,823,750 8.90 1,885,118 9.20
Merix Corporation (599,422) 97,500 2,014,687 20.66 1,415,265 14.52
Herman Miller, Inc. 2,571,873 105,000 1,246,750 11.87 3,818,623 36.37
Quantum Corporation 5,444,686 270,000 3,984,375 14.76 9,429,061 34.92
Southwest Airlines 1,180,017 160,000 2,796,150 17.48 3,976,167 24.85
Sullivan Dental Products, Inc. 474,948 100,000 1,075,000 10.75 1,549,948 15.50
Sun Company, Inc. 222,208 40,000 1,049,950 26.25 1,272,158 31.80
T.J. International, Inc. 1,374,107 290,000 5,159,300 17.79 6,533,407 22.53
Tandem Computers, Inc. (129,441) 70,000 1,013,074 14.47 883,633 12.62
United Healthcare Corporation 2,365,250 170,000 6,993,150 41.14 9,358,400 55.05
------------ ----------- ------------
TOTAL $ 21,281,428 $87,935,295 $109,216,723
============ =========== ============
</TABLE>
<TABLE>
<PAGE>
<CAPTION>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF JUNE 30, 1997 (UNAUDITED)
Percent of
Shares Common Stocks Net Assets Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
AIR TRANSPORT
60,000 Delta Air Lines, Inc. 1.6% $ 4,920,000
------------
APPAREL
125,000 The Limited, Inc. 0.8% 2,531,250
------------
BUILDING MATERIALS
1,000,000 Morgan Products, Ltd.* 7,500,000
210,000 T.J. International, Inc. 4,935,000
------------
Total 4.0% 12,435,000
------------
CHEMICALS
625,000 Wellman, Inc. 3.5% 10,859,375
------------
COMPUTER
PERIPHERALS
420,000 In Focus Systems* 10,762,500
525,000 Quantum Corporation* 10,664,063
------------
Total 6.8% 21,426,563
------------
COMPUTER SOFTWARE
100,000 Adobe Systems Incorporated 3,506,250
505,000 Broderbund Software, Inc.* 12,467,188
400,000 Intuit, Inc.* 9,175,000
275,000 Mentor Graphics
Corporation* 2,543,750
------------
Total 8.7% 27,692,188
------------
COMPUTERS
80,000 Hewlett-Packard
Company 4,460,000
350,000 Sequent Computer
Systems, Inc.* 7,371,875
780,000 Tandem Computers, Inc.* 15,795,000
------------
Total 8.8% 27,626,875
------------
DATA PROCESSING
3,500 First Data Corporation 0.1% 153,781
------------
ENVIRONMENTAL
SERVICES
600,000 ATC Group Services, Inc.* 2.2% 6,900,000
------------
HEALTH CARE
140,000 Aetna, Inc. 14,393,750
150,000 United Healthcare
Corporation 7,800,000
------------
Total 7.1% 22,193,750
------------
MEDICAL EQUIPMENT
115,500 Invacare Corporation 2,699,812
580,000 Nellcor Puritan
Bennett, Inc.* 10,512,500
600,000 Protocol Systems, Inc.* 4,800,000
500,000 Sullivan Dental
Products, Inc. 9,125,000
------------
Total 8.6% 27,137,312
------------
<PAGE>
MICROELECTRONIC
PROCESSING EQUIPMENT
600,000 Electro Scientific
Industries, Inc.* 25,125,000
350,000 FEI Company* 5,512,500
654,000 Genus, Inc.* 2,943,000
160,000 Lam Research Corporation* 5,930,000
------------
Total 12.5% 39,510,500
------------
PETROLEUM REFINING
& MARKETING
212,500 Sun Company, Inc. 2.1% 6,587,500
------------
PHARMACEUTICALS
900,000 Mylan Laboratories 4.2% 13,275,000
------------
PUBLISHING
60,000 Houghton Mifflin Company 1.3% 4,005,000
------------
RETAIL
70,000 Corporate Express, Inc.* 1,010,625
500,000 Toys "R" Us, Inc.* 17,500,000
350,000 Whole Foods Market* 11,593,750
------------
Total 9.6% 30,104,375
------------
SEMICONDUCTORS
500,000 Advanced Micro
Devices, Inc.* 18,000,000
800,000 Cypress Semiconductor
Corporation* 11,600,000
------------
Total 9.4% 29,600,000
------------
STEEL
80,000 Acme Metals, Inc.* 1,370,000
200,000 Ryerson Tull, Inc.* 3,300,000
------------
Total 1.5% 4,670,000
------------
TELECOMMUNICATIONS
EQUIPMENT
435,000 Centigram
Communications Corp.* 1.8% 5,627,812
------------
Total Common Stocks
(Cost $234,952,385) 94.6% $297,256,281
------------
<FN>
* Non-income producing
* The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
PORTFOLIO OF INVESTMENTS
BY INDUSTRY CLASSIFICATION
AS OF JUNE 30, 1997 (continued)
<CAPTION>
Percent of Market Value
Short-Term Investments Net Assets (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Union Bank of California
Money Market Account
(variable rate-4.78% as of 6-30-97) $ 10,920,506
Goldman Sachs
Institutional Liquid Assets
(variable rate-5.20% as of 6-30-97) 103,030
South Shore Bank
Money Market Account
(variable rate-4.40% as of 6-30-97) 2,193,608
Albina Community Bank
(variable rate-4.95% as of 6-30-97) 100,000
Community Capital Bank
(variable rate-4.89% as of 6-30-97) 100,000
Community Bank of The Bay
(variable rate-5.50% as of 6-30-97) 100,000
Wainwright Bank & Trust Co.
(variable rate-5.40% as of 6-30-97) 100,000
Alternatives Federal Credit Union
(variable rate-3.00% as of 6-30-97) 25,756
Self Help Credit Union
(variable rate-4.83% as of 6-30-97) 28,024
-------------
Total Short-Term Investments 4.3% 13,670,924
TOTAL INVESTMENTS 98.9% 310,927,205
OTHER ASSETS AND LIABILITIES - NET 1.1% 3,314,552
----- -----------
TOTAL NET ASSETS 100.0% $ 314,241,757
====== =============
<FN>
*The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
<S> <C>
Assets:
Investments in securities, at market value
(identified cost $234,952,385) (Note 1) $297,256,281
Temporary investments in short term securities
(at cost which approximates market) 13,670,924
Receivables:
Dividends and interest 132,901
Capital shares sold 192,454
Other assets 5,161,839
-----------
Total assets 316,414,399
-----------
Liabilities:
Accounts payable 1,955,017
Capital shares redeemed 217,625
-----------
Total liabilities 2,172,642
-----------
Net Assets (equivalent to $42.20
per share based on 7,446,176.920
shares of capital stock outstanding) $314,241,757
============
Net assets consist of:
Distributions in excess of net investment income $ (1,149,921)
Unrealized appreciation on investments 62,303,896
Undistributed net realized gain 21,373,569
Capital paid-in 231,714,213
------------
Total Net Assets $314,241,757
============
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($314,241,757 divided by
7,446,176.920 shares) $ 42.20
==========
Offering price per share (100/96.5 of $42.20)* $ 43.73
==========
<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."
* The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C>
Investment Income:
Dividends $ 693,956
Interest 329,708
----------
Total investment income 1,023,664
----------
Expenses:
Investment advisory fees (Note 5) 945,963
Transfer agent fees (Note 5) 299,097
Reports to shareholders 71,235
Fund administration (Note 5) 35,000
Registration fees and expenses 43,192
Custody fees 29,753
Service provider fees (Note 5) 68,659
Professional fees 107,551
Trustee fees and expenses 4,576
Other expenses 9,109
----------
Total expenses 1,614,135
----------
Net Investment Loss (590,471)
----------
Realized and Unrealized
Gain on Investments:
Realized gain from security transactions:
Proceeds from sales 109,216,723
Cost of securities sold (87,935,295)
-----------
Net realized gain 21,281,428
-----------
Unrealized appreciation of investments:
Beginning of year 23,931,581
End of period June 30, 1997 62,303,896
-----------
Unrealized appreciation during the year 38,372,315
-----------
Net Realized and Unrealized
Gain on Investments 59,653,743
-----------
Net Increase in Net Assets Resulting
from Operations $59,063,272
============
<FN>
* The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1996
June 30, 1997 1996
------------------------------------
<S> <C> <C>
From Operations:
Net investment loss $ (590,471) $ (438,787)
Net realized gain
from security transactions 21,281,428 8,282,111
Net unrealized appreciation
during the period 38,372,315 20,599,200
-------------- --------------
Increase in net assets
resulting from operations 59,063,272 28,442,524
Dividends to shareholders:
From realized capital gains 0 (8,282,081)
Decrease in Net Assets
from Capital Share
Transactions (13,056,231) (11,058,284)
------------- --------------
Increase in Net Assets 46,007,041 9,102,159
Net Assets:
Beginning of period 268,234,716 259,132,557
------------- -------------
End of period
(including distributions in
excess of net investment
income of $1,149,921 in
1997 and $559,449
in 1996) $314,241,757 $268,234,716
============= =============
<FN>
* The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
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, 1997 there was undistributed net capital gain of $21,373,569.
3. Capital Stock
As of June 30, 1997 there were an unlimited number of shares of no par value
capital stock authorized and capital paid-in aggregated $231,714,213.
Transactions in capital stock (shares) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------ ----------------------------
Shares Amount Shares Amount
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Shares sold 422,176 $ 15,703,940 1,403,618 $ 44,793,353
Shares issued through dividend reinvestment - - 216,880 7,443,315
Shares repurchased (775,480) (28,760,171) (1,976,494) (63,294,952)
------------- ------------ ------------ ------------
NET INCREASE (DECREASE) (353,304) $(13,056,231) (355,996) $(11,058,284)
============= ============ ============ ============
</TABLE>
4. Purchases and Sales of Securities
Purchases and sales of securities for the six months ended June 30, 1997
were $97,691,548. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at June 30, 1997 are the same as for
financial statement purposes. Of the $62,303,896 of net unrealized
appreciation at June 30, 1997, $70,240,823 related to appreciation of
securities and $7,936,927 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 $945,963 for the six months ended
June 30, 1997.
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 $334,097 for the six months ended
June 30, 1997. The transfer agent fee is $2.30 per month per account, and
the fund administration fee is $5,833 per month.
Parnassus Investments may also arrange for third parties to provide certain
services, including account maintenance, recordkeeping and other personal
services to their clients who invest in the Fund. For these services, the
Fund may pay Parnassus Investments an aggregate service fee at a rate not to
exceed 0.25% per annum of the Fund's average daily net assets. Parnassus
Investments will not keep any of this fee for itself, but will instead use
the fee to pay the third party service providers. Service provider fees paid
by the Fund totaled $68,659 for the six months ended June 30, 1997.
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, 1997 totaling $200,359 of which
$62,362 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 months ended June 30, 1997, the Fund incurred legal fees of
$2,360 to Richard D. Silberman, counsel for the Fund. Mr. Silberman is also
the Secretary of the Fund.
6. Financial Highlights
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for the six months ended June 30, 1997 and for each
of the ten years in the period ended December 31 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997
(UNAUDITED) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $34.39 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46 $16.16 $18.09
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.08) (0.06) 0.15 2.73 0.27 0.01 0.06 0.16 0.27 (0.05) (0.04)
Net realized and unrealized
gain (loss) on securities 7.89 3.77 0.07 1.00 4.84 8.60 8.29 (4.52) 0.30 6.90 (1.19)
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 7.81 3.71 0.22 3.73 5.11 8.61 8.35 (4.36) 0.57 6.85 (1.23)
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Dividends from net investment
income .- .- (0.16) (0.47) (0.25) (0.04) (0.06) (0.17) (0.18) .- (0.03)
Distributions from net realized
gain on securities .- (1.09) (1.11) (2.25) (2.99) (2.16) (0.85) .- (0.23) (2.55) (0.67)
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions 0.00 (1.09) (1.27) (2.72) (3.24) (2.20) (0.91) (0.17) (0.41) (2.55) (0.70)
----------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $42.20 $34.39 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46 $16.16
=========== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN* 22.71% 11.68% 0.62% 11.98% 17.31% 36.80% 52.56% (21.16%) 2.85% 42.44% (7.95%)
RATIOS / SUPPLEMENTAL DATA:
Ratio of expenses to average
net assets 1.13% 1.10% 1.02% 1.14% 1.26% 1.47% 1.51% 1.77% 1.65% 2.15% 2.13%
Ratio of net investment income
(loss) to average net assets (0.42%) (0.17%) 0.54% 0.43% 0.13% 0.02% 0.26% 0.87% 1.21% (0.49%) (0.24%)
Portfolio turnover rate 64.40% 59.60% 29.10% 28.10% 21.00% 32.80% 24.61% 38.25% 11.45% 32.34% 31.69%
Average commission per share+ $0.054 $0.033
Net assets, end of period (000's) $314,242 $268,235 $259,133 $160,994 $98,774 $56,237 $31,833 $20,738 $23,048 $10,863 $5,374
<FN>
* Total return figures do not adjust for the sales charge.
+ Average commission rate is calculated for the periods beginning on or after January 1, 1996.
</FN>
</TABLE>
<PAGE>
THE PARNASSUS FUND
One Market-Steuart Tower #1600
San Francisco, California 94105
415-778-0200
800-999-3505
networth.quicken.com/parnassus
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
This report must be preceded or accompanied by a current prospectus.