THE PARNASSUS FUND
SemiAnnual Report
June 30, 1998
August 3, 1998
Dear Shareholder:
As of June 30, 1998, the net asset value per share (NAV) of The Parnassus
Fund was $33.10 so the overall return for the quarter was a loss of 13.26%. This
compares to a gain of 3.30% for the S&P 500 and a gain of 1.85% for the average
growth fund according to Lipper Analytical Services. Our results for the quarter
were substantially below the market indices and it brought our performance for
the year-to-date down to a loss of 7.39%.
Below you will find a table summarizing our average annual returns as of June
30, 1998 for the one, five and ten-year periods. The overall return figures give
investment performance only while the total return figures are reduced by the
amount of the maximum sales charge (3.5%).
Average Annual Average Annual
Total Return Overall Return
----------------------------------------------------------------------
One Year (5.54%) (2.12%)
----------------------------------------------------------------------
Five Years 10.11% 10.90%
----------------------------------------------------------------------
Ten Years 11.48% 11.88%
----------------------------------------------------------------------
Since Inception on 12/31/84 11.98% 12.28%
----------------------------------------------------------------------
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.
WHAT HAPPENED IN THE SECOND QUARTER?
Going into the second quarter, our assessment was that the market as a
whole was fully valued and in some cases overvalued. Given this situation, we
looked for sectors we considered undervalued, i.e., where the market value was
substantially below our estimate of the intrinsic value. Three related
industries caught our attention: hard disk drives, semiconductors and
semiconductor capital equipment (i.e., the tools used to manufacture
semiconductors). Our thinking was that these three out-of-favor industries were
among the few places where one could find good value and invest in long-term
healthy companies.
Prices of most stocks in these industries were trading at only a fraction
of their intrinsic value and far below their market prices of only one year
before. At the beginning of the quarter, these stocks seemed like absolute
bargains, but unfortunately for us, they became even better bargains by the end
of the period.
I realize that most shareholders are concerned about the second quarter's
performance and I admit that things look bad right now. What I will try to
demonstrate in this report is that there is a lot more value in our portfolio
companies than current quotations indicate and that if we stick with our
strategy, at some point in the not too distant future, market values will
approach intrinsic values.
WHY THE THREE INDUSTRIES HAVE VALUE
These three industries are among the most important to our economy and
they are not going to go away. The hard disk drive industry is absolutely vital
for storing information in an electronic format. Without disk drives, computers
could not store and access information in a way that makes our modern society
possible. As the demand for digital storage grows, there will be huge increases
in sales of disk drive companies.
The semiconductor industry is even more vital than the disk drive
industry. Semiconductors are the brains of almost all the machines operating
today including computers, cars, consumer appliances and industrial machinery.
The lives all of us lead are completely dependent on semiconductors whether we
know it or not.
The semiconductor equipment industry derives its importance from
semiconductors. Without the equipment to make them, you wouldn't have any
semiconductors.
Given the vital nature of these three industries, why are their stocks
now on the bargain table with their prices marked down? The short answer is that
the previous success of these companies has caused their current difficulty.
Last year's enormous demand for their products caused the companies to boost
capacity sharply. Current capacity now exceeds available demand and this
supply-demand imbalance has caused product prices to drop. At the same time,
these increases in capacity have saddled the companies with high fixed-costs and
current sales levels are not high enough to cover these new fixed-costs.
Complicating matters further has been excess inventory of personal
computers (PCs). PC makers are the largest users of disk drives and
semiconductors, and they haven't been ordering many of these products since
they're cutting way back on manufacturing. A substantial amount of current sales
is now coming out of inventory. The good news is that this reduces excess
inventory, but it also means that current sales of disk drives and
semiconductors are artificially depressed even though there is good final demand
for PCs.
Another element in the equation is the Asian financial crisis. Since
Asians now have less money, they are buying fewer personal computers and this,
in turn, reduces demand for disk drives and semiconductors.
The impact is even greater on the semiconductor equipment industry. Since
Japan, South Korea and Taiwan produce a high percentage of the world's
semiconductors, they normally buy a large percentage of the output of the
semiconductor equipment industry. Because of their difficult financial position,
they are purchasing much less equipment than normal and sales of the
semiconductor equipment industry have suffered.
INDIVIDUAL COMPANIES
Now let's turn to some individual companies in these three industries and
see what impact the individual firms are having on the Fund. The example I gave
in the recent letter I sent to all shareholders was Western Digital (WD), one of
the large makers of hard disk drives. Last year, WD could sell all the drives it
could make at very good prices and, in fact, its customers were on allocation
which meant that WD had to limit the number of drives it could sell to its
customers. Because of this allocation procedure, customers such as PC makers
would double and triple order from drive companies to get the maximum allocation
possible. Because of this over-ordering, disk drive companies overestimated
demand and increased capacity.
When supply caught up with demand, customers went off allocation and many
orders were canceled. Most customers had also been stockpiling drives because of
the shortage and so they had excess inventory. This meant that they started to
order even fewer disk drives than normal. Higher fixed-costs due to increased
capacity combined with lower sales meant losses for Western Digital.
After receiving the recent letter talking about WD, John Paul Pietrus, a
Parnassus shareholder from Bethesda, Maryland wrote in to ask why the company
didn't have a better understanding of customer orders including the double and
triple-ordering phenomenon. (Several other shareholders also wrote in to ask the
same question.)
My answer is that Western Digital did know about the double and
triple-ordering phenomenon, but there were other factors at work. My reply to
Mr. Pietrus and the others is that forecasting demand is not as easy as it
looks.
First of all, a disk drive company is several steps removed from the
ultimate customer. Some of a company's drives go to PC manufacturers and some go
into the replacement market to be sold through retail stores like Fry's
Electronics and Comp USA. In the case of PC makers, the drive company ships to
the computer company which, in turn, ships to the wholesaler, who in turn ships
to the retailer who then sells to the ultimate purchaser. Inventory builds up
along the way and orders go back and forth. This makes it difficult to get an
accurate fix on real demand in a dynamic market like electronics.
The same thing applies to the replacement market. The drive company sells
to the distributor who sells to the retail outlet who sells to the ultimate
consumer. With all these layers, it's hard to tell exactly what's happening.
Combine this complex distribution chain with the enormous increase in
sales seen in 1997 and it was hard to assess the actual level of final demand.
Orders came rushing in and although Western Digital discounted some of them as
over-ordering, they wanted to increase capacity as much as demand allowed so
they could maintain their market share and keep faith with their customers. In
my view, the decision to increase capacity was the right one although the
company is now suffering the consequences.
Western Digital's stock hit a high of over $54 a share last fall. The
stock dropped into the low 20's late last year. At this point, we started buying
the stock since we calculated its intrinsic value somewhere in the low 30's. Our
average cost is just under $18 a share which is about half our assessment of the
company's intrinsic value. During the second quarter, the stock dropped 32.7% to
$11.81 a share.
Read-Rite is another portfolio company involved in the disk drive
industry. It makes the mechanism (called a "head") that writes the digital
information onto the hard disk for storage and then reads the information off
the disk to send it back to the computer. Read-Rite sells heads to Western
Digital and other disk drive companies. Read-Rite has been caught in the same
excess demand/excess supply/inventory correction phenomenon as its customer
Western Digital. The stock hit a high of $36 in February of 1997 and traded in
the high 20's last fall. Our average cost is a little under $15 per share. The
stock dropped 34.4% during the quarter to hit $9.06 a share.
Adaptec, a company that makes controllers for disk drives and other
equipment that controls the flow of information to and from the computer, saw
its stock hit a high of $54 in the fall of 1997. Our cost is $21 a share, but
the stock hit $14.31 for a decline of 27.1% during the quarter.
The fourth company in our portfolio in the disk drive industry is Quantum
Corporation which like Western Digital is a maker of disk drives. Quantum's
stock hit $43 a share last fall and our average cost is $19.71 a share. The
stock dropped 2.6% during the quarter to end up at $20.75.
It's impossible to predict when strong demand will return to the disk
drive industry. When I talked to industry sources early this year, the consensus
was sometime between June and September and that was the information used to
make the investment decision. At the present time, though, it looks as if it
will be at least until the end of the year before healthy demand will once again
return.
Since the stock market always anticipates events, share prices in the
industry should start to rise even before strong demand returns. Even a modest
increase in demand should help these stocks and the Fund's NAV.
I'm optimistic on all the disk drive companies since more PCs are being
sold than disk drives. This means that the inventory in the channel is being
reduced. The major disk drive companies have also reduced capacity and this
should help supply and demand to come back into balance.
SEMICONDUCTORS AND CAPITAL EQUIPMENT
As with the disk drive industry, the current difficulties in the
semiconductor industry can be traced to its success in previous years. The
enormous growth in sales of personal computers fed the huge growth in demand for
semiconductors and the companies made large investments in new capacity to meet
this new demand. Things changed quickly in 1998 as growth slowed and personal
computer makers found themselves with excess inventory so they reduced their
purchases of semiconductors. The semiconductor companies also found themselves
stuck with excess capacity and their prices also started to fall.
Reduced demand from Asia contributed to the problem and so did a new
phenomenon: the emergence of the sub-$1,000 PC. Computer buyers became more
price-conscious and decided that they didn't need the fastest, most powerful
computer on the market and customers began to purchase machines with a lower
price tag. This meant that PC vendors purchased lower-cost semiconductors and
revenue declined.
There are three semiconductor companies in our portfolio: Advanced Micro
Devices (AMD), Intel and LSI Logic. AMD and Intel make general purpose
semiconductors such as microprocessors and flash memories while LSI Logic makes
custom chips for specialized purposes.
AMD dropped 41.3% during the quarter as its stock declined to $17.06,
partly because of the poor climate for semiconductors and partly because of
difficulties it encountered in manufacturing the newest version of its
microprocessor. Last fall, AMD was trading in the high 30's.
The stock of Intel dropped 5.0% during the quarter as it went to $74.13 a
share. Our average cost on Intel is $71.91 a share so we still have a small
profit. We seem to have done a better job on calling the bottom for Intel than
we have on some other companies. The stock hit $102 a share last fall. Intel is
a dominant force in the semiconductor industry and its stock should rebound
sharply at the first signs of improvement in the industry.
LSI Logic dropped 8.7% during the quarter as its stock price closed at
$23.06 a share. Our cost is $23.24 a share so we're just about even for this
company. LSI traded as high as $46 a share last year.
Toward the end of the year, we expect conditions to be greatly improved
in the semiconductor industry. As with the disk drive industry, demand should
improve once the current excess inventory of personal computers has been sold
off. The companies have also been reducing capacity and this should help the
outlook.
Because of their current difficulties, semiconductor companies have not
been ordering much new equipment. This has been especially true in Asia where a
substantial portion of the world's semiconductors are manufactured. They just
don't have the money to buy a lot of equipment. This has hurt the semiconductor
capital equipment industry.
We have six equipment companies in the portfolio. Lam Research dropped
32.0% as its stock went to $19.13 a share. Helix, a maker of specialty pumps for
semiconductor manufacturers, dropped 25.0% as it declined to $15.00 a share. FEI
dropped 25.5% as its stock sank to $9.31. Electro Scientific's stock suffered a
decline of 18.3% as it went to $31.56. Applied Materials, the largest company in
the industry, dropped 16.5% to end the quarter at $29.50. Cognex, the largest
manufacturer of machine vision equipment, saw its stock go to $18.50 a share, a
decrease of 13.5%.
Although space does not allow me to discuss each of these companies in
detail, let me just say that each of them has strong management and excellent
products. In my view, each stock is trading far below its intrinsic value and as
conditions improve, there is the potential for substantial capital gains.
NON-TECHNOLOGY COMPANIES
Unfortunately, our technology companies weren't the only ones that did
poorly for us during the quarter. Five of our non-technology companies had
difficulties during the period. Gymboree, a retailer of children's clothes,
dropped 41.4% as the stock closed at $15.16. Merchandising mistakes required
markdowns of slow-selling apparel, particularly in the boy's line, and the
company incurred extra expenses due to future expansion plans. We still have
confidence in the company's management and its market position so we're hanging
on to the stock.
West Marine, a retailer of boating supplies and equipment, sank 38.2% to
$18 per share because of costs involved with consolidating three distribution
facilities into one. We have sold our position in Cannondale, a maker of
high-end bicycles, because we no longer have confidence in management. The stock
declined 38.0% to $12.50 during the time we owned it.
Toys "R" Us dropped 21.8% during the quarter, going to $23.56 a share.
St. John Knits declined 18.3% to $38.63 because of production problems in making
its apparel. The production problems appeared to be solved, so we expect the
stock to rebound.
THERE WERE SOME WINNERS
Believe it or not, there were some winners in the portfolio this quarter.
Green Tree Financial gained 42.5% on a takeover offer from Conseco Insurance
Company. We sold our shares at $40.53.
Just for Feet, the shoe retailer, increased 18.0% during the quarter. We
sold the company at $24.04 per share for a gain of 58.5% during our six-month
holding period.
Compaq Computer climbed 9.2% to $28.31 as it reduced its inventory to
manageable levels. This reduction is a leading indicator for improved conditions
for our semiconductor and disk drive companies.
Amgen, a pharmaceutical company, saw its stock rise to $65.38 for a gain
of 7.4%. Financial results continue to be strong for the company.
I would like to conclude this section of the report by saying that I
understand the concern many shareholders have expressed about our recent
performance. What I tried to convey in this discussion is my view that the
current decline in the NAV does not represent a permanent loss of capital unless
you sell your shares now. In my opinion, Parnassus shares are now selling at
bargain prices. For many of our companies, we are at the bottom of the cycle and
there is a lot more value in these businesses than current quotations indicate.
COMPANY NOTES
An independent study by J. D. Power & Associates and healthcare expert,
The MEDSTAT Group, ranked Oxford Health Plans the top health plan in the New
York City/Long Island area. The study covered all types of health plans in the
area including HMOs, point of service plans and traditional indemnity plans. The
four categories of service deemed most important by health plan members were (1)
choice of providers (2) confidence in the plan (to provide needed service) (3)
physician care (listening skills & attentiveness) and (4) time pressures (health
care staff not being rushed). Recently, New York Magazine published a list of
"The Best Doctors in New York" and of the 923 physicians affiliated with an HMO,
770 participated in Oxford Health Plan networks. (The next highest number of
"best doctors" had 530 in its network.)
Each year, the Amgen Foundation sponsors a $10,000 Award for Teacher
Excellence that is given to three recipients in three geographical areas:
Jefferson County, Kentucky (Louisville), Ventura County, California and Boulder
County, Colorado. A panel of three anonymous judges (community leaders not
associated with Amgen or the local school system) selects the winners from
nominees who are teachers in grades K-12. Amgen gives the awards to show its
commitment to community education.
Two of our semiconductor equipment companies recently made donations of
expensive equipment to institutions of higher learning. Lam Research donated a
high-density TCP 9100 plasma etch system to support oxide etch research at the
University of New Mexico. Applied Materials is donating a Precision 5000
chemical vapor deposition (CVD) system to Nanyang Technological University (NTU)
in Singapore, where students will use it to study semiconductor manufacturing
technology.
The Learning Company, which is acquiring Broderbund, one of our portfolio
holdings, announced that it will form a partnership with the Points of Light
Foundation to donate 20,000 units of skills-building software to grass-roots
non-profit organizations across the country. The software will teach job seekers
how to master the computer keyboard.
PERSONNEL MATTERS
David Pogran has resigned as Director of Research of Parnassus
Investments to take a job as a senior analyst with Pacific Alliance Capital
Management, the money management subsidiary of Union Bank of California. David
has given us many years of dedicated service and is a person of high integrity.
We will miss him. Todd Ahlsten will replace David Pogran as Director of
Research. Todd is an honors graduate of the University of California at Berkeley
and has been with Parnassus Investments for three years as a financial analyst.
We have five excellent interns working with us this summer. Lori Lai is
an MBA candidate in the Graduate School of Business at the University of
Chicago. She is a Students for Responsible Business co-chair and has also been
selected as an ARCH Development Corporation Associate, researching the
commercial potential of recently discovered diabetes gene technology. Prior to
going to business school, Lori worked for more than a decade for Dako A/S, a
Danish medical laboratory products firm. She worked for the company in
California, Japan and most recently, as regional manager in Hong Kong. She is
also a graduate of the University of Hawaii where she received a bachelor of
science degree in medical technology. She is fluent in Japanese and has a
working knowledge of Mandarin and Cantonese.
Ryan Wilsey will be a junior at Princeton University where he is majoring
in Engineering and Management Systems. He is a graduate of the Branson School in
Ross, California and was also a National Merit Finalist. His work experience
includes an internship with the Towers Perrin consulting firm and a sales
position at the Nordstrom Department Store. He has taught underprivileged fifth
and sixth grade students through the Summerbridge National program. He is
Editor-in-Chief of the Princeton Yearbook and program director of Princeton
One-on-One tutoring.
Tommy Kriengprarthana is an MBA candidate at the Fuqua School of Business
at Duke University. He also holds a bachelor of business administration degree
from Assumption University in Bangkok, Thailand where he was captain of the
basketball team and tutored international students in finance. His previous
experience includes work as a credit account administrator at the Bank of
America branch in Bangkok. He was also a financial supervisor at the Nation
Multimedia Group in Bangkok, a firm involved in publishing and radio and
television broadcasting.
Benjamin Hom will be a junior in business economics at UCLA where he also
studies liberal arts and computer technology. His previous experience includes
work as a customer service representative for The Mechanic's Bank in Walnut
Creek, California and as a sales representative for Joe Sun, Big and Tall
Clothing in Sacramento. He has also been active in the activities of his church.
Chi Tran-Brandli is a graduate student in finance and capital markets at
the University of St. Gallen in Zurich, Switzerland. She also holds a bachelor's
degree in microbiology and immunology from the University of California at
Berkeley. Previously, she served as a research assistant in the Department of
Genetics at Stanford University and as a research associate in the Department of
Biochemistry and Biophysics at the University of California Medical Center in
San Francisco. Most recently, she worked as a research associate at the Swiss
Federal Institute of Technology.
Yours truly,
Jerome L. Dodson
President
<TABLE>
<CAPTION>
UNREALIZED GAIN (LOSS) SUMMARY AS OF JUNE 30, 1998 (UNAUDITED)
Number of Per Per Unrealized
Shares Issuer Cost Share Market Value Share Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
113,100 ADE Corporation $ 1,790,625 $15.83 $ 1,654,087 $14.63 $ (136,538)
68,500 Acme Metals, Inc. 1,077,212 15.73 316,813 4.63 (760,399)
750,000 Adaptec, Inc. 15,755,633 21.01 10,734,375 14.31 (5,021,258)
125,000 Adept Technology, Inc. 1,238,719 9.91 945,313 7.56 (293,406)
10,000 Adobe Systems Incorporated 393,438 39.34 424,375 42.44 30,937
600,000 Advanced Micro Devices, Inc. 13,283,750 22.14 10,237,500 17.06 (3,046,250)
120,000 Amgen, Inc. 5,631,250 46.93 7,845,000 65.38 2,213,750
175,000 Apogee Enterprises, Inc. 2,506,308 14.32 2,679,688 15.31 173,380
325,000 Applied Materials, Inc. 10,282,501 31.64 9,587,500 29.50 (695,001)
150,000 Broderbund Software, Inc. 3,190,585 21.27 3,421,875 22.81 231,290
580,000 Building Materials Holding Corp. 7,503,522 12.94 8,011,250 13.81 507,728
500,000 Centigram Communications Corp. 5,259,399 10.52 5,625,000 11.25 365,601
100,000 Claire's Stores, Inc. 1,855,513 18.56 2,050,000 20.50 194,487
578,000 Cognex Corporation 12,515,016 21.65 10,693,000 18.50 (1,822,016)
450,000 Compaq Computer Corporation 5,357,232 11.90 12,740,625 28.31 7,383,393
595,000 Electro Scientific Industries, Inc. 13,767,125 23.14 18,779,687 31.56 5,012,562
455,000 Electronics for Imaging, Inc. 8,586,001 18.87 9,611,875 21.13 1,025,874
600,000 FEI Company 5,783,736 9.64 5,587,500 9.31 (196,236)
600,000 First Data Corporation 22,448,854 37.41 19,987,500 33.31 (2,461,354)
800,000 The Gymboree Corporation 17,469,065 21.84 12,125,000 15.16 (5,344,065)
575,000 Helix Technology Corporation 11,054,790 19.23 8,625,000 15.00 (2,429,790)
80,000 Hewlett-Packard Company 3,167,800 39.60 4,790,000 59.88 1,622,200
375,000 In Focus Systems 4,295,938 11.46 2,648,438 7.06 (1,647,500)
225,000 Intel Corporation 16,180,757 71.91 16,678,125 74.13 497,368
550,000 LSI Logic Corporation 12,783,618 23.24 12,684,375 23.06 (99,243)
300,000 Lam Research Corporation 7,960,875 26.54 5,737,500 19.13 (2,223,375)
1,000,000 Morgan Products, Ltd. 6,131,156 6.13 4,562,500 4.56 (1,568,656)
900,000 Oxford Health Plans, Inc. 16,130,943 17.92 13,781,250 15.31 (2,349,693)
350,000 Petco Animal Supplies, Inc. 5,405,627 15.44 6,978,125 19.94 1,572,498
275,000 Quantum Corporation 5,419,063 19.71 5,706,250 20.75 287,187
20,000 RadiSys Corporation 505,136 25.26 430,000 21.50 (75,136)
900,000 Read-Rite Corporation 13,198,438 14.66 8,156,250 9.06 (5,042,188)
400,000 St. John Knits, Inc. 15,742,219 39.36 15,450,000 38.63 (292,219)
825,000 Sequent Computer Systems, Inc. 18,293,429 22.17 9,951,562 12.06 (8,341,867)
400,000 Silicon Graphics, Inc. 5,336,313 13.34 4,850,000 12.13 (486,313)
300,000 Toys "R" Us, Inc. 7,391,328 24.64 7,068,750 23.56 (322,578)
250,000 West Marine, Inc. 5,153,158 20.61 4,500,000 18.00 (653,158)
1,050,000 Western Digital Corporation 18,788,650 17.89 12,403,125 11.81 (6,385,525)
------------ ------------ -------------
Total $328,634,722 $298,059,213 $(30,575,509)
============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
STOCKS SOLD JANUARY 1, 1998 THROUGH JUNE 30, 1998 (UNAUDITED)
Realized Number Per Sale Per
Company Gain (Loss) of Shares Cost Share Proceeds Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADE Corporation $ (354,996) 136,900 $ 2,205,365 $16.11 $ 1,850,369 $13.52
ATC Group Services, Inc. 282,684 400,000 4,517,316 11.29 4,800,000 12.00
Acme Metals, Inc. (244,226) 31,500 506,312 16.07 262,086 8.32
Adobe Systems, Inc. 1,482,146 275,000 10,115,938 36.79 11,598,084 42.17
Aetna, Inc. 1,195,955 140,000 9,578,763 68.42 10,774,718 76.96
AnnTaylor Stores Corporation (1,133,980) 450,000 6,926,694 15.39 5,792,714 12.87
Broderbund Software, Inc. (112,841) 100,000 2,258,988 22.59 2,146,147 21.46
Burlington Coat Factory Warehouse (295,613) 100,000 1,847,187 18.47 1,551,574 15.52
Cannondale Corporation (2,382,323) 325,000 6,444,688 19.83 4,062,365 12.50
Centigram Communications Corp. 195,021 35,000 337,190 9.63 532,211 15.21
Compaq Computer Corporation 8,340,746 350,000 3,606,737 10.30 11,947,483 34.14
Cypress Semiconductor Corporation (3,847,086) 900,000 12,210,438 13.57 8,363,352 9.29
Delta Air Lines, Inc. 2,299,379 50,000 3,584,505 71.69 5,883,884 117.68
Galoob Toys, Inc. (246,046) 50,000 816,877 16.34 570,831 11.42
Genus, Inc. (2,686,119) 750,000 3,922,500 5.23 1,236,381 1.65
Green Tree Financial Corporation 9,657,612 600,000 14,661,202 24.44 24,318,814 40.53
Houghton Mifflin Company 636,771 50,000 1,020,625 20.41 1,657,396 33.15
In Focus Systems 6,233,432 395,000 8,554,822 21.66 14,788,254 37.44
Intel Corporation 10,325 120,000 8,960,001 74.67 8,970,326 74.75
Intuit, Inc. 9,673,171 450,000 10,274,469 22.83 19,947,640 44.33
Invacare Corporation 18,064 15,000 307,750 20.52 325,814 21.72
Just For Feet, Inc. 2,045,815 205,000 3,109,660 15.17 5,155,475 25.15
Lam Research Corporation (4,824,574) 500,000 17,834,048 35.67 13,009,474 26.02
Mentor Graphics Corporation (471,939) 170,000 2,395,000 14.09 1,923,061 11.31
The Money Store, Inc. 3,808,604 275,000 5,195,093 18.89 9,003,697 32.74
Mylan Laboratories, Inc. 2,574,675 347,800 4,403,096 12.66 6,977,771 20.06
Protocol Systems, Inc. (1,103,203) 800,000 7,362,369 9.20 6,259,166 7.82
Quantum Corporation (231,732) 250,000 5,327,812 21.31 5,096,080 20.38
RadiSys Corporation (6,505) 17,000 429,366 25.26 422,861 24.87
Ryerson Tull, Inc. (33,742) 50,000 703,825 14.08 670,083 13.40
3Com Corporation (24,926) 100,000 3,373,875 33.74 3,348,949 33.49
Wellman, Inc. 152,375 47,100 762,747 16.19 915,122 19.43
Whole Foods Market, Inc. 9,000,169 300,000 6,550,032 21.83 15,550,201 51.83
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $39,607,093 $170,105,290 $209,712,383
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF JUNE 30, 1998 (UNAUDITED)
Percent of
Shares Common Stocks Net Assets Market Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
APPAREL
400,000 St. John Knits, Inc. 4.9% $ 15,450,000
-------------
BUILDING MATERIALS
175,000 Apogee Enterprises, Inc. 2,679,688
580,000 Building Materials Holding Corp.* 8,011,250
1,000,000 Morgan Products, Ltd.* 4,562,500
-------------
Total 4.9% 15,253,438
-------------
COMPUTER PERIPHERALS
750,000 Adaptec, Inc.* 10,734,375
375,000 In Focus Systems* 2,648,438
275,000 Quantum Corporation* 5,706,250
900,000 Read-Rite Corporation* 8,156,250
1,050,000 Western Digital
Corporation* 12,403,125
-------------
Total 12.6% 39,648,438
-------------
COMPUTER SOFTWARE
125,000 Adept Technology, Inc.* 945,313
10,000 Adobe Systems Incorporated 424,375
150,000 Broderbund Software, Inc.* 3,421,875
455,000 Electronics for Imaging, Inc.* 9,611,875
-------------
Total 4.6% 14,403,438
-------------
COMPUTERS
450,000 Compaq Computer Corporation 12,740,625
80,000 Hewlett-Packard Company 4,790,000
20,000 RadiSys Corporation* 430,000
825,000 Sequent Computer Systems, Inc.* 9,951,562
400,000 Silicon Graphics, Inc.* 4,850,000
-------------
Total 10.4% 32,762,187
-------------
DATA PROCESSING
600,000 First Data Corporation 6.3% 19,987,500
-------------
HEALTH CARE
900,000 Oxford Health Plans, Inc.* 4.4% 13,781,250
-------------
MICROELECTRONIC
PROCESSING EQUIPMENT
113,100 ADE Corporation* $ 1,654,087
325,000 Applied Materials, Inc.* 9,587,500
578,000 Cognex Corporation* 10,693,000
595,000 Electro Scientific Industries, Inc.* 18,779,687
600,000 FEI Company* 5,587,500
575,000 Helix Technology Corporation 8,625,000
300,000 Lam Research Corporation* 5,737,500
-------------
Total 19.3% 60,664,274
-------------
PHARMACEUTICALS
120,000 Amgen, Inc.* 2.5% 7,845,000
-------------
RETAIL
100,000 Claire's Stores, Inc. 2,050,000
800,000 The Gymboree Corporation* 12,125,000
350,000 Petco Animal Supplies, Inc.* 6,978,125
300,000 Toys "R" Us, Inc.* 7,068,750
250,000 West Marine, Inc.* 4,500,000
-------------
Total 10.4% 32,721,875
-------------
SEMICONDUCTORS
600,000 Advanced Micro Devices, Inc.* 10,237,500
550,000 LSI Logic Corporation* 12,684,375
225,000 Intel Corporation 16,678,125
-------------
Total 12.6% 39,600,000
-------------
STEEL
68,500 Acme Metals, Inc.* 0.1% 316,813
-------------
TELECOMMUNICATIONS
EQUIPMENT
500,000 Centigram Communications Corp.* 1.8% 5,625,000
-------------
Total Common Stocks
(Cost $328,634,722) 94.8% $298,059,213
<FN>
* Non-income producing
</FN>
Percent
of Net Market Value
Short-Term Investments Assets (Note 1)
- ------------------------------------------------------------------------------------------------------------
Union Bank of California
Money Market Account
(variable rate-4.83% as of 6-30-98) $ 11,046,458
Federal Farm Credit
Discount Note
(variable rate-5.38% as of 6-30-98) 4,979,078
South Shore Bank
Money Market Account
(variable rate-4.40% as of 6-30-98) 290,346
Goldman Sachs
Government Portfolio
(variable rate-5.20% as of 6-30-98) 35,374
Goldman Sachs
Treasury Obligation Portfolio
(variable rate-5.20% as of 6-30-98) 25,585
Albina Community Capital Bank
(variable rate-5.50% as of 6-30-98) 106,549
Community Capital Bank
(variable rate-4.99% as of 6-30-98) 104,657
Community Bank of The Bay
(variable rate-5.21% as of 6-30-98) 105,654
Wainwright Bank & Trust Co.
(variable rate-5.50% as of 6-30-98) 100,000
Alternatives Federal Credit Union
(variable rate-3.25% as of 6-30-98) 26,495
Self Help Credit Union
(variable rate-4.79% as of 6-30-98) 29,409
-------------
Total Short-Term Investments 5.3% 16,849,605
TOTAL INVESTMENTS 100.1% 314,908,818
OTHER ASSETS AND LIABILITIES-NET -0.1% (168,146)
------ -------------
Total Net Assets 100.0% $314,740,672
====== =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
Assets:
Investments in securities, at market value
(identified cost $328,634,722) (Note 1) $298,059,213
Temporary investments in short term securities
(at cost which approximates market) 16,849,605
Receivables:
Dividends and interest 91,396
Capital shares sold 336,914
Securities sold 681,440
Other assets 60,822
-------------
Total assets 316,079,390
-------------
Liabilities:
Payable for securities purchased 889,625
Capital shares redeemed 449,093
-------------
Total liabilities 1,338,718
-------------
Net Assets (equivalent to $33.10
per share based on 9,509,029.923
shares of capital stock outstanding) $ 314,740,672
=============
Net assets consist of:
Distributions in excess of net investment income $ (1,498,221)
Unrealized depreciation on investments (30,575,509)
Undistributed net realized gain 41,103,540
Capital paid-in 305,710,862
-------------
Total Net Assets $ 314,740,672
=============
Computation of net asset value and offering price per share:
Net asset value and redemption price
per share ($314,740,672 divided by
9,509,029.923 shares) $ 33.10
=============
Offering price per share (100/96.5 of $33.10)* $ 34.30
=============
* 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.
<PAGE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
Investment Income:
Dividends $ 384,250
Interest 817,001
Other income 1,096,869
-------------
Total investment income 2,298,120
-------------
Expenses:
Investment advisory fees (Note 5) 1,143,654
Transfer agent fees (Note 5) 286,592
Reports to shareholders 78,229
Fund administration (Note 5) 35,000
Registration fees and expenses 24,795
Custody fees 31,737
Service provider fees (Note 5) 84,301
Audit fees 21,176
Legal fees 69,820
Trustee fees and expenses 47,317
Other expenses 13,246
-------------
Total expenses 1,835,867
-------------
Net Investment Income 462,253
-------------
Realized and Unrealized Gain (Loss) on Investments:
Realized gain from security transactions:
Proceeds from sales 209,712,383
Cost of securities sold (170,105,290)
-------------
Net realized gain 39,607,093
-------------
Unrealized appreciation (depreciation) of investments:
Beginning of year 34,618,176
End of period (30,575,509)
-------------
Unrealized depreciation during the year (65,193,685)
-------------
Net Realized and Unrealized Loss on Investments (25,586,592)
-------------
Net Decrease in Net Assets Resulting from Operations $ (25,124,339)
=============
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
AND YEAR ENDED DECEMBER 31, 1997
June 30, 1998 1997
- --------------------------------------------------------------------------------
From Operations:
Net investment income (loss) $ 462,253 $ (1,401,024)
Net realized gain from security transactions 39,607,093 66,534,491
Net unrealized appreciation (depreciation)
during the period (65,193,685) 10,686,595
------------- --------------
Increase (decrease) in net assets resulting
from operations (25,124,339) 75,820,062
Dividends to shareholders:
From realized capital gains 0 (65,130,186)
Increase in Net Assets
from Capital Share Transactions 2,439,872 58,500,547
------------- --------------
Increase (Decrease) in Net Assets (22,684,467) 69,190,423
Net Assets:
Beginning of year 337,425,139 268,234,716
------------- --------------
End of period
(including distributions in excess of
net investment income of $1,498,221
in 1998 and $1,960,473 in 1997) $314,740,672 $337,425,139
============ ==============
The accompanying notes are an integral part of these financial statements.
<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. On
June 30, 1998, there was undistributed net capital gain of $41,103,540.
3. Capital Stock
<TABLE>
<CAPTION>
As of June 30, 1998 there were an unlimited number of shares of no par
value capital stock authorized and capital paid-in aggregated $305,710,862.
Transactions in capital stock (shares) were as follows:
Six Months Ended June 30, 1998 Year Ended December 31,1997
------------------------------ ----------------------------
Shares Amount Shares Amount
--------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 805,299 $ 29,443,548 1,206,984 $ 51,134,858
Shares issued through dividend reinvestment - - 1,691,391 58,336,117
Shares repurchased (737,675) (27,003,676) (1,256,450) (50,970,428)
--------- --------------- ----------- ------------
Net Increase (Decrease) 67,624 $ 2,439,872 1,641,925 $ 58,500,547
========= =============== =========== ============
</TABLE>
4. Purchases and Sales of Securities
Purchases of securities for the six months ended June 30, 1998 were
$203,937,675. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at June 30, 1998 are the same as for
financial statement purposes. Of the $30,575,509 of net unrealized
depreciation at June 30, 1998, $9,461,954 related to appreciation of
securities and $40,037,463 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, 0.70% of the next $70,000,000, 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 $1,143,654 for the six months ended
June 30, 1998.
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 $321,592 for the six months ended
June 30, 1998. 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 $84,301 for the six months ended June 30, 1998.
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, 1998 totaling $319,786 of which
$114,571 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.
6. Significant Event
In January 1998 the Fund received notification and related settlement
proceeds of $1,096,866 resulting from the Fund's participation as a
plaintiff in a class action lawsuit against several parties associated with
one of the Fund's former portfolio investment companies.
7. Financial Highlights
<TABLE>
<CAPTION>
Selected data for each share of capital stock outstanding, total return and ratios/supplemental data for the six
months ended June 30, 1998 each of the ten years in the period ended December 31 are as follows:
June 30, 1998
(unaudited) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $35.74 $34.39 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46 $16.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income (loss) 0.05 (0.14) (0.06) 0.15 2.73 0.27 0.01 0.06 0.16 0.27 (0.05)
Net realized and unrealized
gain (loss) on securities (2.69) 10.04 3.77 0.07 1.00 4.84 8.60 8.29 (4.52) 0.30 6.90
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations (2.64) 9.90 3.71 0.22 3.73 5.11 8.61 8.35 (4.36) 0.57 6.85
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
DISTRIBUTIONS:
Dividends from net
investment income .- .- .- (0.16) (0.47) (0.25) (0.04) (0.06) (0.17) (0.18) .-
Distributions from net
realized gain on securities .- (8.55) (1.09) (1.11) (2.25) (2.99) (2.16) (0.85) .- (0.23) (2.55)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions 0.00 (8.55) (1.09) (1.27) (2.72) (3.24) (2.20) (0.91) (0.17) (0.41) (2.55)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of
period 33.10 $35.74 $34.39 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN* (7.39%) 29.70% 11.68% 0.62% 11.98% 17.31% 36.80% 52.56% (21.16%) 2.85% 42.44%
RATIOS / SUPPLEMENTAL DATA:
Ratio of expenses to average
net assets 1.05% 1.11% 1.10% 1.02% 1.14% 1.26% 1.47% 1.51% 1.77% 1.65% 2.15%
Ratio of net investment
income (loss) to average
net assets 0.26% (0.44%) (0.17%) 0.54% 0.43% 0.13% 0.02% 0.26% 0.87% 1.21% (0.49%)
Portfolio turnover rate 64.49% 68.90% 59.60% 29.10% 28.10% 21.00% 32.80% 24.61% 38.25% 11.45% 32.34%
Net assets, end of
period (000's) $314,741 $337,425 $268,235 $259,133 $160,994 $98,774 $56,237 $31,833 $20,738 $23,048 $10,863
<FN>
* Total return figures do not adjust for the sales charge. June 30, 1998 ratios reflect returns for six months and are
not annualized.
</FN>
</TABLE>
<PAGE>
THE PARNASSUS FUND
One Market-Steuart Tower #1600
San Francisco, California 94105
415-778-0200
800-999-3505
www.parnassus.com
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.
