THE PARNASSUS FUND
ANNUAL REPORT
DECEMBER 31, 1997
February 10, 1998
Dear Shareholder:
As of December 31, 1997, the net asset value per share (NAV) of The
Parnassus Fund was $35.74, so after reinvestment of the dividend of $8.55 on
December 19, the overall return for 1997 was 29.70%. This compares to a return
of 33.36% for the S&P 500 and 25.30% for the average growth fund according to
Lipper Analytical Services. For the year, then, we under-performed the S&P, but
we beat the average growth fund.
Although it was a good year for the Fund, it was somewhat disappointing to
finish behind the S&P since we had outpaced that index for most of the year. A
weak fourth quarter caused by the "Asian flu" was responsible for turning a
spectacular year into just a good year.
What happened in the fourth quarter? The financial meltdown in Asia caused
technology stocks to plummet and since our portfolio had over 40% of its assets
in technology issues, we felt the effects. The Fund dropped 13.28% for the
fourth quarter compared to a decline of 1.15% for the average growth fund and an
increase of 2.87% for the S&P 500.
Five of our stocks dropped more than 35% in the fourth quarter and they
were all technology issues. Genus dropped 53.2%, going from $6.88 to $3.22
during the quarter. Because the company sells a substantial portion of its
semiconductor manufacturing equipment to Korea, investors sold off the stock as
Korea's troubles became apparent.
Cypress Semiconductor lost 45.2% as the stock went from $15.50 to $8.50 a
share. Advanced Micro Devices (AMD), another semiconductor manufacturer, saw its
shares slump 45.1%, dropping from $32.56 to $17.88. Manufacturing difficulties
as well as the Asian crisis hurt AMD's stock. FEI, a maker of electron
microscopes as well as semiconductor testing equipment, had a 40% decrease in
the value of its shares that went from $20.75 to $12.44.
Electro Scientific Industries (ESI), the maker of lasers for use in
semiconductor manufacturing, saw a drop of 37.7% in its stock price as it went
from $61 to $38 during the fourth quarter. This decline occurred despite strong
earnings and a good outlook for the company. Because ESI sells lasers to Korean
companies, investors dropped the stock like a hot potato. In my view, the drop
in share price was completely unjustified and the company is way undervalued. I
expect ESI to help the Fund have strong returns in 1998.
Another example of a stock that dropped sharply for no good reason during
the fourth quarter was Compaq which plunged 24.6%, going from $74.94 to $56.50.
Compaq, the world's largest producer of personal computers, is a well-managed
company with only modest exposure to Asia. Like ESI, the company is undervalued
and should bounce back in 1998.
Some of our stocks did very well during the fourth quarter. InFocus, a
maker of high performance video projectors, saw an increase of 35.7% in its
share price as its multimedia machines received tremendous market acceptance.
The stock went from $22.38 to $30.38.
Whole Foods Market, the nation's largest natural foods retailer, had a
32.4% increase in its stock value, climbing from $38.63 to $51.13. Intuit, the
company that makes Quicken and Turbotax, had a 28.9% jump in value as it went
from $32.00 to $41.25 a share. Delta Air Lines also saw a nice increase of 26.3%
as its shares moved from $94.19 to $119.00 each.
Turning to the year as a whole, there were a number of stocks that
contributed to our strong 1997 performance. The best one was Whole Foods Market
that gained 134% from the time of its purchase in early 1997 to the end of the
year as it soared from our average cost of $21.83 to $51.13.
Tandem Computers also helped us quite a bit because of its merger with
Compaq. On average, we had held our Tandem shares for well over three years and
until 1997 we hadn't had much return on the stock. Our average cost was $11.99
and the stock was trading around $15 per share at the time of the merger
announcement on June 23. Compaq offered around $22.40 a share for Tandem, to be
paid with Compaq shares. Tandem's stock jumped to $20.75 per share on the
announcement for a gain of about 38%. However, by the time the merger was
consummated on August 29, Tandem received $34.25 a share or an additional 65%
gain in the stock. This second stage increase was all due to increases in the
value of Compaq's stock.
So although Compaq hurt the Fund's performance in the fourth quarter, it
certainly helped us for the year. Taking the Tandem/Compaq combination into
account, the stock gained 116% for the year.
Intuit gained 80.7% during 1997 as its shares climbed from $22.83 to
$41.25. Sullivan Dental, a company that merged during the year, went up 71.8% as
shares increased from $13.13 to $22.56 when we sold them in August.
Delta Air Lines came in with a gain of 67.9% since its stock went from
$70.88 to $119.00. Declining oil prices, better cost control and increased
revenue from a strong economy combined to give Delta a strong boost.
Nellcor Puritan Bennett, the health care equipment manufacturer, gained
63.9% during the part of the year that it was in the portfolio. The Fund's cost
was $17.39 and it was taken over at $28.50 a share.
Centigram, a voice mail and telecommunications company based in Silicon
Valley, gained 61.9% for the year as it went from $10.46 to $16.94 from the time
of our initial investment in May to the end of the year.
Although Electro Scientific Industries hurt us in the fourth quarter, it
helped us for the year. The stock gained 46.2% as it went from $26.00 to $38.00
per share. Strong management and high quality products fueled the increase.
Similarly, FEI hurt us in the fourth quarter, but helped us for the year with an
increase of 32.6% as the stock went from $9.38 to $12.44.
Houghton Mifflin, the Boston-based quality publisher, saw an increase of
35.6% as its stock climbed from $28.31 to $38.38. United Healthcare contributed
a gain of 28.5% from the beginning of the year when the stock was at $45.00 to
the time we sold it in August at an average price of $57.83.
Below is a graph and table comparing the performance of The Parnassus Fund
with the S&P 500, the NASDAQ Composite Index and the average growth fund over
the past one, five and ten-year periods. The graph and the total return column
of the performance table as well as the "Value of $10,000" table assume that the
maximum sales charge of 3.5% was deducted from the initial investment in The
Parnassus Fund. The overall return column in the performance table shows
investment performance only and does not deduct the sales charge. The
performance figures for the average growth fund also do not deduct any sales
charges that may apply.
<TABLE>
<CAPTION>
Average Annual Average Annual S&P 500 NASDAQ Average
Total Return Overall Return Index Index Growth Fund
<S> <C> <C> <C> <C> <C>
One Year 25.16% 29.70% 33.36% 21.64% 25.30%
Five Years 13.06% 13.87% 20.27% 18.33% 16.06%
Ten Years 16.11% 16.52% 18.04% 16.87% 15.65%
<FN>
Returns for average growth fund supplied by Lipper Analytical Services.
</FN>
</TABLE>
Value on December 31, 1997 of $10,000 invested on December 31, 1987
The Parnassus Fund $44,532
S&P 500 Index $52,528
NASDAQ Index $47,519
Average Growth Fund $42,811
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
The S&P 500 Average NASDAQ
Parnassus Index Growth Fund Index
Fund
----------------------------------------------
<S> <C> <C> <C> <C>
1/1/87 9,650.00 10,000.00 10,000.00 10,000.00
12,706.63 12,136.09 12,015.22 12,328.35
12,609.64 12,745.42 12,292.21 12,174.12
13,593.57 13,586.91 13,034.72 12,736.58
12/31/87 9,650.00 10,000.00 10,000.00 10,000.00
12,086.39 10,569.60 10,743.97 11,336.58
13,418.04 11,274.70 11,348.99 11,942.39
13,185.15 11,312.18 11,261.65 11,732.08
13,744.98 11,660.96 11,422.70 11,540.53
1989 14,732.52 12,487.26 12,250.26 12,307.62
15,149.04 13,589.42 13,248.26 13,171.85
15,478.22 15,045.01 14,575.69 14,310.53
14,136.59 15,355.66 14,442.08 13,762.82
1990 13,821.22 14,894.61 14,130.15 13,179.41
14,616.49 15,829.79 15,139.55 13,988.86
10,688.14 13,653.72 12,743.24 10,424.85
11,144.73 14,877.05 13,785.49 11,312.37
1991 14,912.74 17,038.36 16,239.49 14,594.37
15,175.95 17,001.06 16,085.24 14,401.31
15,307.55 17,910.82 17,265.99 15,943.35
17,002.95 19,412.12 18,840.84 17,742.61
1992 19,271.93 18,922.39 18,625.93 18,270.04
18,498.74 19,282.50 18,092.38 17,054.50
18,737.20 19,890.80 18,634.13 17,649.71
23,259.50 20,890.00 20,326.52 20,484.46
1993 24,424.81 21,801.71 20,837.50 20,883.29
24,587.95 21,906.01 20,989.44 21,301.48
25,147.30 22,470.17 22,030.18 23,081.67
27,285.95 22,991.70 22,536.18 23,506.52
1994 28,281.88 22,121.09 21,760.94 22,497.05
26,610.42 22,214.01 21,188.62 21,361.39
29,492.33 23,298.90 22,332.81 23,131.30
30,557.00 23,293.96 22,033.55 22,754.26
1995 32,289.59 25,559.51 23,664.03 24,728.72
34,963.16 27,996.22 25,874.25 28,246.13
34,515.64 30,219.60 28,094.26 31,577.45
30,746.53 32,037.68 28,757.29 31,837.69
1996 29,701.15 33,756.76 30,301.56 33,327.68
31,114.92 35,269.84 31,649.97 35,858.63
29,923.22 36,360.29 32,567.82 37,126.21
34,336.90 39,388.40 34,241.81 39,066.48
1997 35,823.68 40,446.66 33,803.52 36,968.56
42,135.82 47,502.74 39,154.61 43,636.94
51,350.92 51,061.82 43,308.92 51,008.87
12/31/97 44,531.52 52,527.59 42,810.86 47,518.69
<FN>
Past performance is not predictive of future performance
</FN>
</TABLE>
Outlook And Strategy
On the whole, I think the technology shares in our portfolio are trading
well below their intrinsic value. Although the Asian crisis is serious, its
effect on the American economy in general and on the technology sector in
particular has been exaggerated by investors. Asia is still a dynamic part of
the world's economy and if reforms are made, it should have a strong recovery.
In my view, there is much more value in the Parnassus portfolio than shown
by current market quotations. We're holding onto most of our technology shares
and also using this opportunity to exchange some of our weaker companies for
stronger technology companies.
In the last quarterly report dated September 30, we reviewed three of the
new investment techniques we were using to improve our performance: the 12-month
catalyst, the cash flow analysis and re-evaluating our initial "sell" target.
While the first two techniques are still sound, I am considering modifying the
third one in light of last quarter's experience.
Two companies illustrate my dilemma: Compaq and Electro Scientific
Industries. Although Compaq contributed enormously to our gains this year, it
dropped almost 25% in the fourth quarter. Because of the company's excellent
business prospects, we continued to hold the stock once it had reached its
intrinsic value of around $70 a share. Our idea was that the company's intrinsic
value could be increasing because of its strong fundamentals. With good
management, quality products, effective cost control and increasing market
share, Compaq looked and continues to look like a winner. Nevertheless, the
Asian crisis knocked down the company's stock price. When a company reaches its
intrinsic value and momentum investors hold the stock, its shares are vulnerable
to negative surprises. Had we sold at least part of our position, the fourth
quarter's performance would have been much better.
Electro Scientific Industries provides another case study. Based just
outside Portland, ESI makes lasers for use in semiconductor manufacturing and in
other industries as well. Like Compaq, it made a significant contribution to our
strong performance this year, but it hurt the fourth quarter's performance as it
dropped almost 38%. The company reached its intrinsic value of around $60 per
share, but we held onto the stock because its business outlook was so strong.
Its shares became vulnerable as it reached its intrinsic value and momentum
investors bought the stock because of its strong growth. Because its business is
strong, the stock of ESI will rebound, but selling off some shares would have
helped our performance.
In the case of both Compaq and ESI, I still think we're in good shape and
the stocks will rebound in time. However, I think there is an opportunity to
improve our performance by adhering more closely to our contrarian guidelines.
When a stock approaches intrinsic value and its risk/return ratio becomes less
attractive, we may consider selling some shares even with positive business
prospects. Selling a stock is more an art than a science and our "sell"
discipline is still a work in progress.
As we begin a new year, my view is that a lot of our companies will bounce
back in 1998 and we should get some good performance. However, I think it's
unlikely that the S&P 500 will gain 33% again this year and it's also unlikely
that The Parnassus Fund will gain 30% again this year. Nevertheless, I think our
performance should be respectable when compared with the average growth fund.
Company Notes
Mentor Graphics and the Orchard School District in San Jose, California
have announced a partnership to provide improved day care for pre-school
children through the public school system. The Early Learning Center will
initially be open just to children of Mentor employees, but both partners hope
to demonstrate improved early childcare and expand the program. Mentor hopes to
make a contribution to improving the learning opportunities for children of
working parents.
Aetna announced $6 million in educational grants to medical schools
including awards to Duke, Emory and Morehouse. Invacare recently won an EDI
award from the National Easter Seal Society for its Action Power Chair featuring
the rock group Van Gogh using wheel chairs. Delta Air Lines had more employees
participating in the 1997 AIDS Walk Atlanta than any other company as 480 Delta
employees helped raise funds.
A recent article in Fortune magazine by Milton Moskowitz and Robert
Levering named their choices for the 100 best companies to work for in America.
Five of our portfolio companies were on the list: Hewlett-Packard, Whole Foods
Market, Compaq, Adobe and Amgen.
Shareholder Meeting
By now, all of you who were shareholders as of January 5 should have
received the mailing about the Shareholders' Meeting on March 26. There will be
a reception at 6:00 p.m. at the Sheraton Palace Hotel in San Francisco followed
by the meeting at 7:00 p.m. If you live in the San Francisco Bay Area or are
visiting here, I hope you will be able to attend. Since we will need to know how
many people to prepare for, we are asking you to RSVP by calling (800) 999-3505
if you plan to attend.
There will be a discussion period after the meeting and I will be answering
questions about the Fund's investments and on any other subject you may wish to
discuss. Everyone who attended our last meeting thought it was very worthwhile
so I urge you to attend if at all possible. Regardless of whether you plan to
attend in person or not, I would like to ask all of you to sign and vote your
proxy card and send it in as soon as possible. The Fund can save money by
avoiding follow-up costs if you promptly send in your proxy card.
SEC Matters
As many of you know, the U.S. Securities and Exchange Commission (SEC) last
year proposed a set of regulations that, if adopted, would have greatly
restricted shareholders' ability to file resolutions to be considered at
corporate annual meetings. Social investors felt that this was aimed at
shareholders' right to influence corporate behavior from the standpoint of
ethical responsibility.
After the SEC proposed these restrictive regulations, a broad movement of
institutional investors, pension funds, trade unions and socially responsible
investors complained to the SEC about the unnecessarily restrictive nature of
these regulations. The Parnassus Fund and some of our shareholders were among
those sending letters of opposition to the SEC. The Fund also participated in
developing a study showing how the new regulations, if in effect the past few
years, would have thrown out many important resolutions.
Apparently, the SEC was unprepared for the firestorm of opposition to these
restrictive regulations. The agency appears to be backing down from their
original proposals and, hopefully, there will be more enlightened regulations. I
would like to thank all the shareholders who wrote to the SEC and to Congress
members. It appears to have done some good.
At the end of May of last year, the SEC also filed charges against
Parnassus Investments, a former and current Parnassus independent Trustee, and
against yours truly. We sent a letter to all shareholders at that time outlining
the charges and our response. The SEC alleged that the Fund had mispriced an
illiquid security, the common stock of Margaux, Inc., that had been delisted
from the NASDAQ. The Fund priced the stock at 34 cents a share and the SEC
claimed that it was worth much less, perhaps as little as 1 cent per share.
Ultimately, the Fund sold its position for 27 cents per share -- close to what
we were pricing it for and far more than the SEC claimed the company was worth.
(Part of the Fund's investment in Margaux was in the form of convertible debt,
i.e., an instrument that paid interest and was convertible into stock. The
Fund's investment restrictions allow investments in convertible debt, but the
Fund cannot make loans. Despite the fact that the security was convertible, the
SEC claims that the Fund made an illegal loan.)
The other principal SEC charge involved soft dollars (i.e., brokerage
credits) that the Fund's management company, Parnassus Investments, used to
purchase computer hardware and software to do fund accounting and shareholder
service work. The SEC claimed that these soft dollars were a benefit to
Parnassus Investments and should not have been allowed. We argued that the soft
dollars were not a benefit to Parnassus Investments since Parnassus Investments
charged a lower fee for fund accounting and shareholder service work than it
otherwise would have in recognition of the benefits of the computer hardware and
software.
Although Parnassus Investments didn't feel that there had been any misuse
of funds, we voluntarily paid back the Fund the approximately $65,000 that the
SEC claimed was the amount in dispute. We did this to avoid any suggestion that
we had benefited unfairly at the expense of The Parnassus Fund. (The SEC also
claims that I made a false statement on an investment adviser form since I
hadn't indicated that Parnassus Investments was benefiting from soft dollars.)
We decided to fight the charges since we believed we had done nothing wrong
and a consent to their findings might have been interpreted as agreeing with
their charges that we had violated securities laws. The hearing is over and an
SEC administrative law judge will make a decision.
The SEC is now asking for a fine of only $5,000 per person which is a
relatively small amount in the total scheme of things. After sitting through a
week of SEC hearings, I'm confident that all charges will ultimately be
dismissed.
Personnel Matters
Joining us as a spring intern is Jeff Tha, a senior in economics at the
University of California at Berkeley. His previous experience includes work at
Merrill Lynch and at Suisse Global Investments. He has also tutored students in
computer science courses and assisted in community service projects that raised
funds to promote awareness of the consequences of drunk driving.
The other spring intern is Audrey Miyaji, a senior majoring in managerial
economics at the University of California at Davis. When not attending classes,
Audrey works as a general manager of Cantina del Cabo Restaurant and Bar in
Davis. (I've heard that it's the place to go in Davis just like Rick's Cafe was
in Casablanca.)
Parnassus Interns Reunion
Below is a photograph taken at the Parnassus intern reunion dinner on June
13, 1997 outside The Parnassus Fund's offices with the San Francisco Bay Bridge
in the background. Seated in the first row from left to right are David Pogran,
Research Director, Gail Horvath, Trustee, David Gibson, Trustee, Thao Dodson, my
wife, Jerome Dodson, Jeanine Corr, intern, Howard Fong, Vice President, and Lori
Keith, intern. Middle row (left to right): Feliz Fuentes, intern, Jon Shoen,
intern, Nicos Stephanou, intern, Victor Thay, intern, Allen Young, intern, Heidi
Chu, intern, Marcus Lo, intern, Sheila Alfaro, staff, Ben Liao, staff, Anh Tran,
intern, Minnie Chen, staff, Edward Harris, intern, Julie Lee, intern, Fred
Jones, intern, and Marie Chen, staff. Back row (left to right): Robert Kimsey,
intern, Andy Rubinson, former staff member, Vince Wood, intern, my son Stephen
Dodson, intern, Todd Ahlsten, staff, Matt Speakman, intern, Steve Monticelli,
research analyst, Patrick Rooney, intern, Dan Sullivan, intern, and Ben Suppe,
intern.
Finally, I would like to thank all of you for investing in The Parnassus
Fund.
Yours truly,
Jerome L. Dodson
President
P.S. Parnassus Investments has formed a joint venture with Copper Mountain
Advisors of Portland, Oregon. We will manage 401(k) and 403(b) retirement
accounts in conjunction with Copper Mountain. If your firm would like to start a
retirement program or would like to convert an existing program, please call
William Thomason, Director of Portfolio Management at Parnassus. He can be
reached at (800) 999-3505.
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED GAIN (LOSS) SUMMARY AS OF DECEMBER 31, 1997 (UNAUDITED)
Number of Per Per Unrealized
Shares Issuer Cost Share Market Value Share Gain (Loss)
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
400,000 ATC Group Services, Inc. $ 4,517,316 $11.29 $ 4,650,000 $11.63 $ 132,684
100,000 Acme Metals, Inc. 1,583,524 15.84 987,500 9.88 (596,024)
275,000 Adobe Systems Incorporated 10,115,938 36.79 11,343,750 41.25 1,227,812
600,000 Advanced Micro Devices, Inc. 13,283,750 22.14 10,725,000 17.88 (2,558,750)
140,000 Aetna, Inc. 9,578,763 68.42 9,878,750 70.56 299,987
100,000 Amgren, Inc. 4,655,937 46.56 5,412,500 54.13 756,563
450,000 Ann Taylor Stores Corporation 6,926,694 15.39 6,018,750 13.38 (907,944)
250,000 Broderbund Software, Inc. 5,449,573 21.80 6,406,250 25.63 956,677
575,000 Building Materials Holding Corp. 7,449,147 12.96 6,037,500 10.50 (1,411,647)
100,000 Burlington Coat Factory Warehouse 1,847,187 18.47 1,631,250 16.31 (215,937)
90,000 Cannodale Corporation 1,942,500 21.58 1,957,500 21.75 15,000
535,000 Centigram Communications Corporation 5,596,589 10.46 9,061,563 16.94 3,464,974
400,000 Compaq Computer Corporation 8,963,969 22.41 22,600,000 56.50 13,636,031
900,000 Cypress Semiconductor Corporation 12,210,438 13.57 7,650,000 8.50 (4,560,438)
50,000 Delta Air Lines, Inc. 3,584,505 71.69 5,950,000 119.00 2,365,495
500,000 Electro Scientific Industries, Inc. 10,646,344 21.29 19,000,000 38.00 8,353,656
300,000 FEI Company 2,976,250 9.92 3,731,250 12.44 755,000
600,000 First Data Corporation 22,448,854 37.41 17,550,000 29.25 (4,898,854)
50,000 Galoob Toys, Inc. 816,877 16.34 509,375 10.19 (307,502)
750,000 Genus, Inc. 3,922,500 5.23 2,414,062 3.22 (1,508,438)
250,000 Green Tree Financial Corporation 6,718,513 26.87 6,546,875 26.19 (171,638)
200,000 Helix Technology Corporation 3,983,125 19.92 3,900,000 19.50 (83,125)
80,000 Hewlett-Packard Company 3,167,800 39.60 5,000,000 62.50 1,832,200
50,000 Houghton Mifflin Company 1,020,625 20.41 1,918,750 38.38 898,125
550,000 In Focus Systems 12,850,760 23.37 16,706,250 30.38 3,855,490
450,000 Intuit, Inc. 10,274,469 22.83 18,562,500 41.25 8,288,031
15,000 Invacare Corporation 307,750 20.52 326,250 21.75 18,500
500,000 Lam Research Corporation 17,834,048 35.67 14,625,000 29.25 (3,209,048)
170,000 Mentor Graphics Corporation 2,395,000 14.09 1,646,875 9.69 (748,125)
50,000 The Money Store, Inc. 953,500 19.07 1,062,500 21.25 109,000
1,000,000 Morgan Products, Ltd. 6,131,156 6.13 5,500,000 5.50 (631,156)
347,800 Mylan Laboratories 4,403,096 12.66 7,282,063 20.94 2,878,967
455,000 Oxford Health Plans, Inc. 8,701,880 19.13 7,080,938 15.56 (1,620,942)
800,000 Protocol Systems, Inc. 7,362,369 9.20 8,050,000 10.06 687,631
275,000 Quantum Corporation 5,803,750 21.10 5,517,187 20.06 (286,563)
220,000 Read-Rite Corporation 3,702,033 16.83 3,465,000 15.75 (237,033)
50,000 Ryerson Tull, Inc. 703,825 14.08 687,500 13.75 (16,325)
350,000 St. John Knits, Inc. 13,827,781 39.51 14,000,000 40.00 172,219
825,000 Sequent Computer Systems, Inc. 18,293,429 22.17 16,500,000 20.00 (1,793,429)
100,000 3Com Corporation 3,373,875 33.74 3,493,750 34.94 119,875
300,000 Toys "R" Us, Inc. 7,391,328 24.64 9,431,250 31.44 2,039,922
47,100 Wellman, Inc. 762,747 16.19 918,450 19.50 155,703
50,000 West Marine, Inc. 971,875 19.44 1,118,750 22.38 146,875
450,000 Western Digital Corporation 8,800,915 19.56 7,228,125 16.06 (1,572,790)
300,000 Whole Foods Market, Inc. 6,550,033 21.83 15,337,500 51.13 8,787,467
------------ ------------ -----------
TOTAL $294,802,337 $329,420,513 $34,618,176
============ ============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STOCKS SOLD JANUARY 1, 1997 THROUGH DECEMBER 31, 1997 (UNAUDITED)
Realized No. of Per Sale Per
Company Gain (Loss) Shares Cost Share Proceeds Share
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adobe Systems Incorporated $ 780,212 60,000 $ 2,156,564 $35.94 $ 2,936,776 $48.95
Advanced Micro Devices, Inc. 3,904,331 250,000 5,885,507 23.54 9,789,838 39.16
Aetna, Inc. 560,017 40,000 2,682,175 67.05 3,242,192 81.05
Amgen, Inc. 425,140 100,000 4,838,125 48.38 5,263,265 52.63
AnnTaylor Stores Corporation (1,346,900) 450,000 7,627,622 16.95 6,280,722 13.96
Apple Computer, Inc. (6,580,203) 340,000 12,680,625 37.30 6,100,422 17.94
ATC Group Services, Inc. (508,470) 200,000 2,755,273 13.78 2,246,803 11.23
Autodesk, Inc. 331,830 35,000 1,004,375 28.70 1,336,205 38.18
Broderbund Software, Inc. 1,587,314 256,200 7,320,077 28.57 8,907,391 34.77
Burlington Coat Factory Warehouse (143,299) 36,900 708,022 19.19 564,723 15.30
Compaq Computer Corporation 444,832 9,500 214,731 22.60 659,563 69.43
Corporate Express, Inc. 12,844 70,000 945,000 13.50 957,844 13.68
Delta Air Lines, Inc. 1,400,906 50,000 3,557,054 71.14 4,957,960 99.16
Electro Scientific Industries, Inc. 2,180,476 100,000 2,235,000 22.35 4,415,476 44.15
FEI Company 365,596 50,000 493,750 9.88 859,346 17.19
H.B. Fuller Company 4,315,040 260,000 8,390,105 32.27 12,705,145 48.87
The Gymboree Corporation 64,021 50,000 1,195,313 23.91 1,259,334 25.19
Houghton Mifflin Company 1,407,808 90,000 2,237,375 24.86 3,645,183 40.50
In Focus Systems 316,118 25,000 493,230 19.73 809,348 32.37
Inland Steel Industries, Inc. (1,584,505) 400,000 9,594,736 23.99 8,010,231 20.03
Intuit, Inc. 561,156 50,000 1,214,375 24.29 1,775,531 35.51
Invacare Corporation 519,189 133,000 2,493,469 18.75 3,012,658 22.65
Lam Research Corporation 2,774,827 270,000 7,877,501 29.18 10,652,328 39.45
The Limited, Inc. 448,317 530,000 9,823,864 18.54 10,272,181 19.38
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 (94,919) 310,000 3,090,625 9.97 2,995,706 9.66
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
Mylan Laboratories 3,519,093 552,200 9,181,815 16.63 12,700,908 23.00
Nellcor Puritan Bennett, Inc. 6,441,712 580,000 10,088,288 17.39 16,530,000 28.50
Netscape Communications Corporation 3,541 2,100 79,669 37.94 83,210 39.62
Planar Systems 286,154 245,000 2,580,625 10.53 2,866,779 11.70
Quantum Corporation 13,510,514 795,000 8,831,562 11.11 22,342,076 28.10
Ryerson Tull, Inc. (221,699) 150,000 2,402,800 16.02 2,181,101 14.54
Siebel Systems, Inc. 364 1,466 60,656 41.38 61,020 41.62
Southwest Airlines 1,180,017 160,000 2,796,150 17.48 3,976,167 24.85
Sullivan Dental Products, Inc. 6,386,371 600,000 6,445,777 10.74 12,832,148 21.39
Sun Company, Inc. 1,785,213 252,500 6,783,200 26.86 8,568,413 33.93
TJ International, Inc. 2,907,381 500,000 8,720,612 17.44 11,627,993 23.26
Tandem Computers, Inc. (129,441) 70,000 1,013,074 14.47 883,633 12.62
Toys "R" Us, Inc. 1,238,440 200,000 5,360,440 26.80 6,598,880 32.99
United Healthcare Corporation 5,351,085 320,000 12,682,400 39.63 18,033,485 56.35
Wellman, Inc. 738,083 577,900 11,965,954 20.71 12,704,037 21.98
The Wet Seal, Inc. 1,767,910 265,000 5,686,779 21.46 7,454,689 28.13
Whole Foods Market, Inc. 2,607,870 100,000 1,884,480 18.84 4,492,350 44.92
------------- ------------ ------------
TOTAL $ 66,534,491 $209,074,754 $275,609,245
============= ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1997
Percent of
Shares Common Stocks Net Assets Market Value
<S> <C> <C> <C>
AIR TRANSPORT
50,000 Delta Air Lines, Inc. 1.8% $ 5,950,000
APPAREL
450,000 AnnTaylor Stores Corporation* 6,018,750
100,000 Burlington Coat Factory Warehouse 1,631,250
350,000 St. John Knits, Inc. 14,000,000
Total 6.4% 21,650,000
BUILDING MATERIALS
575,000 Building Materials Holding Corp.* 6,037,500
1,000,000 Morgan Products, Ltd.* 5,500,000
Total 3.4% 11,537,500
CHEMICALS
47,100 Wellman, Inc. 0.3% 918,450
COMPUTER
PERIPHERALS
100,000 3Com Corporation * 3,493,750
550,000 In Focus Systems* 16,706,250
275,000 Quantum Corporation* 5,517,187
220,000 Read-Rite Corporation* 3,465,000
450,000 Western Digital Corporation* 7,228,125
Total 10.8% 36,410,312
COMPUTER SOFTWARE
275,000 Adobe Systems Incorporated 11,343,750
250,000 Broderbund Software, Inc.* 6,406,250
450,000 Intuit, Inc.* 18,562,500
170,000 Mentor Graphics Corporation* 1,646,875
Total 11.1% 37,959,375
COMPUTERS
400,000 Compaq Computer Corporation 22,600,000
80,000 Hewlett-Packard Company 5,000,000
825,000 Sequent Computer Systems, Inc.* 16,500,000
Total 13.0% 44,100,000
DATA PROCESSING
600,000 First Data Corporation 5.3% 17,550,000
ENVIRONMENTAL
SERVICES
400,000 ATC Group Services, Inc.* 1.4% 4,650,000
FINANCIAL SERVICES
250,000 Green Tree Financial Corporation $ 6,546,875
50,000 The Money Store, Inc. 1,062,500
Total 2.3% 7,609,375
HEALTH CARE
140,000 Aetna, Inc. 9,878,750
455,000 Oxford Health Plans, Inc. * 7,080,938
Total 5.0% 16,959,688
MEDICAL EQUIPMENT
15,000 Invacare Corporation 326,250
800,000 Protocol Systems, Inc.* 8,050,000
Total 2.5% 8,376,250
MICROELECTRONIC
PROCESSING EQUIPMENT
500,000 Electro Scientific Industries, Inc.* 19,000,000
300,000 FEI Company* 3,731,250
750,000 Genus, Inc.* 2,414,062
200,000 Helix Technology Corporation 3,900,000
500,000 Lam Research Corporation* 14,625,000
Total 12.9% 43,670,312
PHARMACEUTICALS
100,000 Amgen, Inc.* 5,412,500
347,800 Mylan Laboratories, Inc. 7,282,063
Total 3.8% 12,694,563
PUBLISHING
50,000 Houghton Mifflin Company 0.6% 1,918,750
RETAIL
90,000 Cannondale Corporation* 1,957,500
50,000 Galoob Toys, Inc.* 509,375
300,000 Toys "R" Us, Inc.* 9,431,250
50,000 West Marine, Inc.* 1,118,750
300,000 Whole Foods Market, Inc.* 15,337,500
Total 8.4% 28,354,375
<PAGE>
SEMICONDUCTORS
600,000 Advanced Micro Devices, Inc.* 10,725,000
900,000 Cypress Semiconductor
Corporation* 7,650,000
Total 5.4% 18,375,000
STEEL
100,000 Acme Metals, Inc.* 987,500
50,000 Ryerson Tull, Inc.* 687,500
Total 0.5% 1,675,000
TELECOMMUNICATIONS
EQUIPMENT
535,000 Centigram Communications Corp.* 2.7% $ 9,061,563
Total Common Stocks
(Cost $294,802,337) 97.6% 329,420,513
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Short-Term Investments Net Assets Market Value
---------------------- ---------- ------------
<S> <C> <C>
Union Bank of California
Money Market Account
(variable rate-5.01% as of 12-31-97) 3,591,904
South Shore Bank
Money Market Account
(variable rate-4.40% as of 12-31-97) 2,243,345
Goldman Sachs
Government Portfolio
(variable rate-5.23% as of 12-31-97) 1,284,873
Goldman Sachs
Treasury Obligation Portfolio
(variable rate-5.18% as of 12-31-97) 122,887
Albina Community Capital Bank
(variable rate-5.50% as of 12-31-97) 100,000
Community Capital Bank
(variable rate-4.89% as of 12-31-97) 102,519
Community Bank of The Bay
(variable rate-5.21% as of 12-31-97) 100,000
Wainwright Bank & Trust Co.
(variable rate-5.50% as of 12-31-97) 100,000
Alternatives Federal Credit Union
(variable rate-2.75% as of 12-31-97) 26,113
Self-Help Credit Union
(variable rate-4.83% as of 12-31-97) 28,711
Total Short-Term Investments 2.3% 7,700,352
Total Investments 99.9% 337,120,865
Other Assets and Liabilities-Net 0.1% 304,274
Total Net Assets 100.0% $ 337,425,139
<FN>
*Non-income producing
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Assets:
Investments in securities, at market value
(identified cost $294,802,337) (Note 1) $ 329,420,513
Temporary investments in short term securities
(at cost which approximates market) 7,700,352
Receivables:
Dividends and interest 130,058
Capital shares sold 797,698
Other assets 23,071
Total assets 338,071,692
Liabilities:
Accounts payable 375,766
Capital shares redeemed 270,787
Total liabilities 646,553
Net Assets (equivalent to $35.74
per share based on 9,441,405.570
shares of capital stock outstanding) $337,425,139
Net assets consisting of:
Distributions in excess of net investment income $(1,960,473)
Unrealized appreciation on investments 34,618,176
Undistributed net realized gain 1,496,446
Capital paid-in 303,270,990
Total Net Assets $337,425,139
Computation of net asset value and offering price per share:
Net asset value and redemption price
per share ($337,425,139 divided by
9,441,405.570 shares) $ 35.74
Offering price per share (100/96.5 of $35.74)+ $ 37.04
+ 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".
<PAGE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Investment Income:
Dividends $ 1,146,176
Interest 1,011,717
----------
Total investment income 2,157,893
----------
Expenses:
Investment advisory fees (Note 5) 2,120,608
Transfer agent fees (Note 5) 586,433
Reports to shareholders 141,130
Fund administration (Note 5) 70,000
Registration fees and expenses 87,100
Custody fees 63,900
Service provider fees (Note 5) 165,778
Audit fees 29,250
Legal fees 257,918
Trustee fees and expenses 14,630
Other expenses 22,170
-----------
Total expenses 3,558,917
-----------
Net investment loss (1,401,024)
-----------
Realized and Unrealized
Gain on Investments:
Realized gain from security transactions:
Proceeds from sales 275,609,245
Cost of securities sold (209,074,754)
-------------
Net realized gain 66,534,491
-------------
Unrealized appreciation of investments:
Beginning of year 23,931,581
End of year 34,618,176
-----------
Unrealized appreciation during the year 10,686,595
-----------
Net Realized and Unrealized
Gain on Investments 77,221,086
-----------
Net Increase in Net Assets Resulting
from Operations $ 75,820,062
============
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
From Operations:
Net investment loss $ (1,401,024) $ (438,787)
Net realized gain from
security transactions 66,534,491 8,282,111
Net unrealized appreciation
during the year 10,686,595 20,599,200
------------- ------------
Increase in net assets
resulting from operations 75,820,062 28,442,524
Dividends to shareholders:
From realized capital gains (65,130,186) (8,282,081)
Increase (Decrease) in
Net Assets from Capital
Share Transactions 58,500,547 (11,058,284)
------------ ------------
Increase in Net Assets 69,190,423 9,102,159
Net Assets:
Beginning of year 268,234,716 259,132,557
------------ ------------
End of year
(including distributions in
excess of net investment
income of $1,960,473 in
1997 and $559,449 in 1996) $ 337,425,139 $ 268,234,716
============== ==============
<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 in-vestment 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
December 19, 1997, a capital gains distribution of $65,130,186 ($8.5521 per
share) was paid to shareholders of record on December 18, 1997.
3. Capital Stock
As of December 31, 1997, there were an unlimited number of shares of no par
value capital stock authorized and capital paid-in aggregated $303,270,990.
Transactions in capital stock (shares) were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
------------------------------- ----------------------------
Shares Amount Shares Amount
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Shares sold 1,206,984 $ 1,134,858 1,403,618 $ 44,793,353
Shares issued through dividend reinvestment 1,691,391 58,336,117 216,880 7,443,315
Shares repurchased (1,256,450) (50,970,428) (1,976,494) (63,294,952)
------------ ------------- ----------- -------------
Net Increase (Decrease) 1,641,925 $ 58,500,547 (355,996) $(11,058,284)
============ ============= =========== =============
</TABLE>
<PAGE>
4. Purchases of Securities
Purchases of securities for the year ended December 31, 1997 were
$278,680,959. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at December 31, 1997 are the same as
for financial statement purposes. Of the $34,618,176 of net unrealized
appreciation at December 31, 1997, $63,715,784 related to appreciation of
securities and $29,097,608 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 $2,120,608 for the year ended December 31, 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 $656,433 for the year ended December
31, 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 $165,778 for the year ended December 31, 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 year ended December 31, 1997 totaling $447,056 of which
$140,162 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. Subsequent 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.
<PAGE>
7. Financial Highlights
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for each of the ten years in the period ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------
<S> <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
-----------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (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 10.04 3.77 0.07 1.00 4.84 8.60 8.29 (4.52) 0.30 6.90
-----------------------------------------------------------------------------------------
Total from investment operations 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 (8.55) (1.27) (2.72) (3.24) (2.20) (0.91) (0.17) (0.41) (2.55)
-----------------------------------------------------------------------------------------
Net asset value at end of period $35.74 $34.39 $31.77 $32.82 $31.81 $29.94 $23.53 $16.09 $20.62 $20.46
=========================================================================================
TOTAL RETURN*
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 1.11% 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 (0.44%) (0.17%) 0.54% 0.43% 0.13% 0.02% 0.26% 0.87% 1.21% (0.49%)
Portfolio turnover rate 68.90% 59.60% 29.10% 28.10% 21.00% 32.80% 24.61% 38.25% 11.45% 32.34%
Average commission per share+ $0.024 $0.033 .-- .-- .-- .-- .-- .-- .-- .--
Net assets, end of period (000's) $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.
+ Average commission rate is calculated for the periods beginning on or after
January 1, 1996.
</FN>
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of The Parnassus Fund:
We have audited the accompanying statement of assets and liabilities of The
Parnassus Fund (the "Fund"), including the portfolio of investments by industry
classification, as of December 31, 1997, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights (Note 7) for
each of the ten years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned at December 31, 1997 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Fund as of December 31, 1997, the results of its operations, the changes in its
net assets and financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
January 16, 1998
<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.
