THE PARNASSUS FUND
ANNUAL REPORT
DECEMBER 31, 1998
January 25, 1999
Dear Shareholder:
As of December 31, 1998, the net asset value per share (NAV) of The
Parnassus Fund was $36.24 so the overall return for 1998 was 1.40%. This
compares to a return of 28.58% for the S&P 500 and 22.86% for the average growth
fund according to Lipper Analytical Services.
Although the return of 1.40% is certainly disappointing, it's an amazing
comeback compared to where we were earlier in the year. The NAV on October 8
(the low point of the year) was only $20.93 so on that date, we were down 41.4%
for the year. The Fund had a huge surge in the fourth quarter that propelled us
into the black.
Below are a graph and a 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
of 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>
- --------------------------------------------------------------------------------------------------------------------------
Periods Ending Average Annual Average Annual S&P 500 NASDAQ Lipper Growth
December 31, 1998 Total Return Overall Return Index Index Fund Average
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year (2.15%) 1.40% 28.58% 39.63% 22.86%
Five Years 9.81% 10.60% 24.01% 23.06% 19.03%
Ten Years 12.23% 12.63% 19.18% 19.11% 17.18%
- --------------------------------------------------------------------------------------------------------------------------
<FN>
Past performance is no guarantee of future returns. Investment return and
principal value will fluctuate and an investor's shares, when redeemed, may be
worth more or less than their original cost.
</FN>
</TABLE>
<PAGE>
Value on December 31, 1998 of $10,000 invested on December 31, 1988
The Parnassus Fund $31,701
S&P 500 Index $57,831
NASDAQ Index $57,494
Lipper Growth Fund Average $45,710
[GRAPHIC HERE]
RESULTS FOR THE YEAR
Later in this report, I'll talk about what happened in the fourth quarter,
but first let's review the year in more detail. Going into 1998, we saw the
market as fully valued. There were, however, sectors with undervalued companies.
We chose to put our assets into small to medium-sized companies as well as into
three technology industries: disk drives, semiconductors and semiconductor
capital equipment. We felt that these areas were undervalued and had the most
upside potential. Unfortunately for us, these sectors became even more
undervalued during the year and the Fund's NAV took an enormous plunge. On
October 8, things began to change. The small and medium-sized companies stayed
undervalued, but our technology stocks took off and pushed us into the black for
the year.
<PAGE>
The Russell 2000 index of smaller companies actually lost 3.5% for the year
so the Fund did beat this index. Our six biggest losers were smaller companies
and each of them declined more than 40%.
West Marine, a retailer of boating supplies, dropped 63.9% to $8.08 when we
sold the stock. Weak demand and operating problems with a new distribution
center hurt earnings. Gymboree, a retailer of children's clothes, saw its stock
drop 61.6% to $6.38 because of its poor merchandising strategy. InFocus, a
manufacturer of sophisticated, lightweight slide projectors dropped 59.7% as its
stock went to $6.12 a share. Although InFocus has great products, poor marketing
and cut-throat competition led to its downfall. Centigram Communications, a
voice mail concern, declined 55.7% during the year to $7.51 at the time we sold
the stock. Operating problems and stiff competition hurt the company's
performance. Morgan Products, a distributor of building materials, dropped to
$3.50 a share by year's end for a loss of 36.4%. Here again, operating problems
and stiff competition caused the decline. Finally, Cannondale, a manufacturer of
high quality bicycles, dropped 42.5% to $12.50 a share at the time we sold the
stock. Slow sales and lack of focus hurt the company.
Although we did have some gigantic losses during the year, we also had some
strong gains that canceled out our losses. Thirteen companies were up more than
40%. Six were technology companies and seven were from other industries.
Electronics for Imaging, a company that provides technology for color
printers and copiers, saw its stock price increase 99.3% from the time we bought
it to the end of the year when it hit $40.19. Higher sales of color printers and
copiers propelled the stock higher. Intel, the Silicon Valley manufacturer of
semiconductors, increased 65.8% as its stock went to $118.56 on strong sales of
personal computers.
Advanced Micro Devices (AMD), Intel's main competitor, increased 62.2% as
the stock ended the year at $29. AMD has established itself in the growing
market for sub-$1,000 personal computers, even exceeding Intel's market share in
that niche. Just for Feet, a retailer of athletic and other shoes, gained 58.5%
as the stock went to $24.04 at the time we sold it. Despite a weak market for
shoes, the company's management turned in a good performance.
Dayton-Hudson, the parent of Target and a number of department store
chains, saw its stock increase to $54.25 for a gain of 56.4%. The company has
good management, strong retailing knowledge and a well-developed social
conscience. Green Tree Financial, a leading lender to the mobile home industry,
saw its stock rise 54.8% to $40.53 on a buy-out. The Money Store, a lender to
consumers and small businesses, also was bought out at $32.74 a share for a gain
of 54.1%.
<PAGE>
Lands' End, a catalog retailer of quality apparel, gained 53.0% as its
stock went to $26.94. Operating results were not particularly strong, but we
were able to buy the stock at a very depressed price and it bounced back by the
end of the year. Compaq, the largest maker of personal computers, had an
increase of 48.5% with its stock hitting $41.94 on strong sales. Applied
Materials, the largest semiconductor equipment company, returned 45.4% as its
stock went to $42.69. We'll talk more about this company when we discuss the
results for the fourth quarter.
The stock of Amgen, the biotechnology company, went to $69.67 at the time
we sold it for a gain of 48.5%. Whole Foods, the largest retailer of natural
foods, had an increase of 41.9% from the depressed levels where we purchased it.
The stock of Xylan, a maker of telecommunications equipment, climbed 41.8% to
$17.56; we bought the stock at depressed levels and as results continued on
track, it returned to normal valuation levels.
WHAT HAPPENED IN THE FOURTH QUARTER?
Those of you who have been investing a few years know that the same
investment strategy can look stupid in one quarter and brilliant in the next.
This is what happened to The Parnassus Fund. There was no change in our strategy
from the third quarter to the fourth quarter, but we lost 24.28% in the third
quarter and made 44.61% in the fourth. This return of 44.61% compares with a
gain of 21.43% for the S&P 500 and 22.61% for the average growth fund according
to Lipper so the outperformance in the fourth quarter was substantial.
In the last Parnassus Fund quarterly report, you may remember the narrative
that described how fast semiconductor capital equipment stocks jumped up in the
summer of 1997--essentially doubling in a matter of months. Well, the same thing
happened again in the fourth quarter of this year. The same companies were in
our portfolio, but the market put a much higher value on them because the
climate of opinion had changed. Although the fundamentals for our technology
companies in the semiconductor, semiconductor capital equipment and hard disk
drive industries have not changed substantially, things are no longer getting
worse and, in fact, things are looking somewhat better. Investors have taken
this relatively small change as a harbinger of things to come. Since the market
values companies based on anticipation, investors are driving up the price of
our technology stocks on the expectation that 1999 will be a good year. For the
record, I agree with those expectations, but I think the improvement will slowly
unfold over the year whereas based on price changes, most investors think there
will be a dramatic change in a short period of time. Some of our technology
stocks are now fully priced, but most of them are still below their intrinsic
value.
<PAGE>
With only three exceptions, all of our 38 stocks rose during the fourth
quarter and 24 of them had gains of more than 30%; 19 of those 24 were
technology stocks.
Electro Scientific Industries gained 185% during the quarter as its stock
went from $15.88 to $45.31 --just short of a triple. The company makes lasers
for use in semiconductor manufacturing and unlike many semiconductor capital
equipment companies, it has continued to operate profitably during this
difficult period. Investors sold off the stock to a price far below its
intrinsic worth and it has now recovered much of its value. We think the stock
is still undervalued so we'll continue to hold.
Electronics for Imaging which we discussed earlier in this report gained
90% for the quarter while Read-Rite, a manufacturer of heads for hard disk
drives, gained 89% as its stock went to $14.78. Adaptec, a company that provides
technology to control the flow of information between peripherals and the
central processing unit of personal computers, increased its share price by 85%
as sales of personal computers soared and new management improved operations.
Lam Research, a semiconductor capital equipment company that makes devices that
etch circuits on computer chips, had a 78% gain in its share price because of
the expected strong demand for its high quality products.
Cognex, a Massachusetts-based provider of software that enables computers
to "see", increased 72% as its stock went to $20 on anticipated demand for its
products for use with semiconductor equipment. Applied Materials, the largest
manufacturer of semiconductor capital equipment which we talked about earlier in
this report, went up 69% during the quarter as its shares went to $42.69.
Applied makes the most complete line of semiconductor capital equipment so any
increase in equipment orders will bring more revenue into the company.
Other notable technology stocks that did well for the quarter included
Symantec, up 56%, AMD up 56%, Sequent Computers, up 39%, Western Digital, up
40%, Intel, up 38%, Autodesk, up 36%, Adobe, up 35%, Quantum, up 34%, Compaq
Computers, up 33% and Helix, up 32%. Non-technology stocks that helped our
performance included Dayton-Hudson, up 52%, St. John Knits, up 61%, Oxford
Health Plans, up 43%, Whole Foods, up 42% and Morgan Products, up 33%.
<PAGE>
OUTLOOK AND STRATEGY
Most of our technology stocks have bounced sharply off their lows, but for
the most part, they are still undervalued. I expect 1999 to be a good year for
technology stocks so we'll continue to hold a substantial portion of our
portfolio in these issues. Later in the year, I expect that many of these
companies will reach full value and we will sell them off slowly as they hit
their target prices.
More than half the portfolio is now in technology issues and it will
probably remain this way during the year. Although we won't be buying many new
names in technology, those stocks are appreciating faster than other industries
so this will mean a continued high concentration in that area. Even as we sell
off the fully-valued issues, appreciation of the existing companies will keep us
heavily in technology.
The new companies we are now investing in are mostly non-technology. We
want to diversify slowly into other industries. Despite the fact that the stock
market as a whole is pretty richly valued, there are areas where stocks are
undervalued. We hope to find some of these companies where there is a catalyst
that will improve earnings. As we find them, we will sell off the more
fully-priced technology issues to get cash for these new investments.
As of January 22, The Parnassus Fund is up 7.73% for 1999 year-to-date.
This compares to a loss of 0.46% for the S&P 500. So far, then, we've been
substantially outperforming the indices and the momentum from the last quarter
of 1998 is carrying over into the first quarter of 1999. Technology stocks are
driving our performance
COMPANY NOTES
The Coastal Rainforest Coalition, representing 150 environmental
organizations, is urging a boycott of products from a number of companies that
log old growth forests in British Columbia. The Coalition also praised 27 firms
that refused to buy products from the logging companies and named them leaders
in protecting old growth forests. Among them were Hewlett-Packard and Quantum
Corporation.
Target Stores, the discount division of Dayton-Hudson, held its 25th annual
Holiday Shopping Party for seniors and shoppers with disabilities. In December,
200,000 guests received personal shopping assistance, refreshments, free
gift-wrapping and a 10% discount on all purchases made at the event.
Reebok recently initiated a program to take kids "out to the ballgames."
The company will take young people out to games of teams sponsored by Reebok
including college football and basketball teams, professional baseball and
hockey and women's professional basketball.
<PAGE>
The Bank of Boston was a corporate sponsor of Summit 1998, a major
conference on women in business. As part of its commitment to women in business,
the bank invested $500,000 in The Women's Growth Capital Fund and committed to
lending $100 million to women-owned and managed businesses.
Although not a portfolio company since it's not publicly traded, Deloitte &
Touche, the Fund's auditors for the last 12 years, has some important social
achievements to its credit. For 1999, Fortune magazine named Deloitte & Touche
No. 8 on its list of the "100 Best Companies to Work for in America." I also
can't resist pointing out that the Fortune article was co-authored by Robert
Levering and Milton Moskowitz, two shareholders of The Parnassus Fund who have
done pioneering work in corporate social research.
Deloitte & Touche has also been named to the Working Mother magazine's list
of the "100 Best Companies for Working Mothers" every year from 1994 through
1998, the only major professional services firm to make this list for five
consecutive years.
Also of note is the fact that Deloitte & Touche won the 1997 "Townsend
Award" for social responsibility given by Working Mother. The "Townsend Award"
was named for Carol Townsend, the late wife of Milton Moskowitz. Carol was a
distinguished journalist in her own right and along with her husband did
groundbreaking work in developing the Working Mother list.
SHAREHOLDER'S LETTER
Dear Mr. Dodson,
Your letter last fall urging investors not to sell came a week too late for
me. I had sold most of my regular Parnassus in the low 30s (though I have kept
my IRA) . I sold on the principle - "sell until you can sleep at night" -- there
was no way I could ride it down to just above 20 (as it turned out). Now, of
course, I regret the decision and once again congratulate you. Nevertheless, I
did what I needed to do--the volatility just scared me too much.
Perhaps in some future report you could comment on the volatility of the
fund in relation to the investment philosophy. By watching your stock selection
recently, I gathered that concentrating in those few undervalued areas set the
fund up for decline when those companies did not turn around as fast as
expected. Of course, now that they have--the fund looks wonderful. Some comment
to help an investor like me sleep at night next time this happens would be
appreciated. Of course, just having gone through this--my first really steep
decline and recovery--does offer it's own lessons.
Sincerely,
A wiser, I hope, investor
Ron Weisberg
Oakland, CA 94611
<PAGE>
Dear Mr. Weisberg:
My biggest regret of 1998 is that a lot of shareholders sold while the Fund
was down. I completely understand your reaction. It's frightening when the Fund
goes into a tailspin. Even with all my years of investing experience, I still
felt an enormous emotional impact as the Fund fell toward $20 per share. The
truth of the matter is that the Fund went down much further than I ever imagined
possible. When this happened, I realized that most of my shareholders would be
greatly concerned. It was at this point that I wrote a special letter to
shareholders to try and reassure them and I also offered to talk to anyone who
phoned in on "call-in" day. It's hard to stay the course when an
investment--even temporarily--loses 40% of its value. Fortunately, the vast
majority of shareholders did stick with the Fund during the difficult times.
I would hope that the Fund would never drop that far again. I am working on
trying to make the Fund less volatile, but as a practical matter, it will always
have its ups and downs. I hope that shareholders will put up with some bumps in
the road as long as I get them to the right destination. In terms of advice to
you as an investor, the most important thing is never to sell after the Fund
takes a big drop. The reason I go into much more detail than other mutual fund
reports is to get my shareholders to understand that they really own shares in a
number of businesses. As long as those businesses are operating well and have
good prospects for the future, the value of the investment is not going to
"zero" or even to a permanently lower value. Even though stock market quotations
may be temporarily down, the value of the businesses is still there. Ultimately,
stock market valuation will come back if the businesses are sound. As I tried to
indicate in the quarterly reports, we have been very careful to select
businesses that are sound. The best strategy when the NAV goes down would be to
add substantially to your Parnassus investment. This, of course, is emotionally
difficult to do. What anyone can do, though, is start a program for dollar-cost
averaging. This involves putting the same dollar amount into your Parnassus
account each month. To facilitate this program, we have a Parnassus Automatic
Investment Plan (PAIP) where we can take the money directly out of your checking
account each month. This prevents your emotions from taking control and giving
in to the temptation to skip a month. The best buys are when the NAV is down. To
summarize, then
1) Never sell an investment after a sharp plunge if you still feel the
investment method is sound.
2) Try to understand that your investments are shares in a collection of
businesses and if you think that the businesses are good ones, don't
worry about the low current market quotations.
3) Try to start an automatic investment program.
Yours truly,
Jerome L. Dodson
President
<PAGE>
WINDOW ENVELOPES AND Y2K
In the past, we have used window envelopes with glassine windows for some
shareholder correspondence. We received complaints from some of our shareholders
who said that their local recyclers would not accept these envelopes. Because of
this, we started using window envelopes with no glassine windows, i.e., empty
windows.
Since that time, we have encountered numerous problems with these envelopes
without the glassine windows. The material inserted gets caught in the open
window which requires more time to stuff the envelopes. The open windows also
get caught in the postage machine and cause it to jam. Certain foreign countries
will not accept open window envelopes for security reasons. The worst problem,
though, is that the envelopes tear easily and expose people's account
information to anyone handling the mail. We have received far more complaints
about this problem than we did from the recycler problem.
Because of these factors, we are returning to envelopes with the glassine
windows. These glassine windows can be recycled so please explain that to your
recycler if you have a problem. Most recyclers have now had enough experience
with these glassine windows so that they know that they can be recycled.
Another administrative matter that I would like to comment on is the Year
2000 problem which is also known as Y2K. Back in the 1960's and the 1970's when
computers first came into widespread use, memory was very expensive so
programmers devised ways to cut down on the amount of memory used. One method
widely adopted was to cut the space for the year down to two digits from four
digits. So, for example, "1965" became just "65". This worked just fine as long
as we stayed in the 20th century. Unfortunately, most computers will read the
year "00" as "1900" instead of "2000" so the old programs will have some
problems next year.
Regulations require us to come up with a plan to make our computer system
functional in the Year 2000 or "Y2K Compliant" in computer jargon. Most of our
computers are Apple Macintoshes and they all use a four-digit year so there is
no problem there. For some purposes, though, we use a Compaq with a Windows
operating system. We checked some of our old Compaqs and one of them could not
read the year 2000 so we had to replace that machine.
<PAGE>
We have also gone through all our programs and it now appears that we will
be Y2K compliant. Much of our Y2K work centered on making sure our suppliers and
vendors (e.g., banks) were Y2K compliant. Although we will still be doing one
more round of testing in 1999, it appears that our internal programs and systems
will be compliant long before the millennium begins. However, we cannot be 100%
certain since our trading operations are dependent on our external vendors and
counter parties.
We are also checking on portfolio companies to see if they are Y2K
compliant. We want to make sure that their computers will be able to function in
the Year 2000. Any major problems, of course, would have investment
implications.
PERSONNEL MATTERS
We have two excellent interns on our staff this semester. Jeannie W. Hsu is
an MBA candidate at the University of Chicago. She did her undergraduate work at
the University of Texas and is also a graduate of the University of Texas
Medical School. Her previous experience includes research work at Seton Medical
Center in Austin, Texas and work as a general practice physician in Austin,
Texas and Memphis, Tennessee. She also worked as a summer associate in the
equity research division of the Morgan Keegan brokerage firm.
Neil Ahlsten is a recent Phi Beta Kappa graduate of the University of
California at Berkeley where he majored in Development Studies and Environmental
Sciences. He also studied African Economic Development at the University of
Legon in Ghana under the UC Education Abroad Program. He has volunteered as a
youth mentor to disadvantaged youth in Oakland, California and also worked on
the homeless issue. His previous experience includes performing biochemical
analysis of environmental hazards.
Above you will find a picture of the Trustees of The Parnassus Fund. Seated from
the left are Joan Shapiro, Cecilia Lee, Jerome Dodson and Gail Horvath.
Standing, from the left, are David Gibson, Howard Shapiro, Fund counsel Richard
Silberman, Leo McCarthy and Herb Houston. Not pictured is Trustee Donald
O'Connor.
Yours truly,
Jerome L. Dodson
President
<PAGE>
<TABLE>
<CAPTION>
STOCKS SOLD JANUARY 1, 1998 THROUGH DECEMBER 31, 1998 (UNAUDITED)
Realized No. of Per Sale Per
Company Gain (Loss) Shares Cost Share Proceeds Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADE Corporation $ (642,969) 250,000 $ 3,995,990 $15.98 $ 3,353,021 $13.41
ATC Group Services, Inc. 282,684 400,000 4,517,316 11.29 4,800,000 12.00
Acme Metals, Inc. (1,078,030) 100,000 1,583,524 15.84 505,494 5.05
ADAC Laboratories 330,661 60,500 1,414,032 23.37 1,744,693 28.84
Adaptec, Inc. (3,791,549) 350,000 7,511,875 21.46 3,720,326 10.63
Adept Technology, Inc. (409,559) 125,000 1,238,719 9.91 829,160 6.63
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
Agouron Pharmaceuticals 272,261 75,000 1,824,075 24.32 2,096,336 27.95
Amgen, Inc. 2,729,221 120,000 5,631,251 46.93 8,360,472 69.67
AnnTaylor Stores Corporation (1,133,980) 450,000 6,926,694 15.39 5,792,714 12.87
Apogee Enterprises, Inc. (555,123) 175,000 2,506,308 14.32 1,951,185 11.15
Applied Materials, Inc. 1,205,221 125,000 4,172,720 33.38 5,377,941 43.02
Autodesk, Inc. 1,039,242 115,000 2,905,000 25.26 3,944,242 34.30
Broderbund Software, Inc. (274,485) 250,000 5,449,573 21.80 5,175,088 20.70
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. (755,759) 535,000 5,596,589 10.46 4,840,830 9.05
Claire's Stores, Inc. (31,701) 100,000 1,855,513 18.56 1,823,812 18.24
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
Electronics for Imaging, Inc. 941,898 185,000 3,129,689 16.92 4,071,587 22.01
FEI Company (359,404) 125,000 1,234,375 9.88 874,971 7.00
First Data Corporation (7,817,718) 600,000 22,448,854 37.41 14,631,136 24.39
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
The Gymboree Corporation (10,423,615) 650,000 14,979,563 23.05 4,555,948 7.01
Houghton Mifflin Company 636,771 50,000 1,020,625 20.41 1,657,396 33.15
Illinois Tool Works, Inc. 74,027 5,000 239,725 47.95 313,752 62.75
In Focus Systems 4,095,111 770,000 12,850,760 16.69 16,945,871 22.01
Intel Corporation 1,090,726 145,000 10,835,751 74.73 11,926,477 82.25
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
LSI Logic Corporation (2,591,394) 230,000 5,279,343 22.95 2,687,949 11.69
Lam Research Corporation (4,824,574) 500,000 17,834,048 35.67 13,009,474 26.02
Liz Claiborne, Inc. (1,792,893) 150,000 6,056,125 40.37 4,263,232 28.42
McKesson Corporation (4,198) 10,000 701,700 70.17 697,502 69.75
Mentor Graphics Corporation (471,939) 170,000 2,395,000 14.09 1,923,061 11.31
The Money Store, Inc. 3,808,603 275,000 5,195,093 18.89 9,003,696 32.74
Mylan Laboratories, Inc. 2,574,674 347,800 4,403,096 12.66 6,977,770 20.06
Oxford Health Plans, Inc. (2,436,984) 200,000 4,568,443 22.84 2,131,459 10.66
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 (112,279) 37,000 934,502 25.26 822,223 22.22
Read-Rite Corporation (4,174,816) 500,000 7,906,408 15.81 3,731,592 7.46
Ryerson Tull, Inc. (33,742) 50,000 703,825 14.08 670,083 13.40
St. John Knits, Inc. (1,730,984) 75,000 3,126,125 41.68 1,395,141 18.60
Sequent Computer Systems, Inc. (4,276,109) 400,000 8,290,002 20.73 4,013,893 10.03
Silicon Graphics, Inc. 71,753 400,000 5,336,313 13.34 5,408,066 13.52
3Com Corporation (24,925) 100,000 3,373,874 33.74 3,348,949 33.49
Toys R Us, Inc. (1,445,721) 300,000 7,391,327 24.64 5,945,606 19.82
Wellman, Inc. 152,376 47,100 762,746 16.19 915,122 19.43
West Marine, Inc. (3,076,006) 250,000 5,153,157 20.61 2,077,151 8.31
Whole Foods Market, Inc. 9,000,170 300,000 6,550,031 21.83 15,550,201 51.83
-------------- ------------ ------------
Total $ (2,044,291) $313,000,574 $310,956,283
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1998
Percent of
Shares Common Stocks Net Assets Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
APPAREL
76,000 Liz Claiborne, Inc. $ 2,398,750
325,000 St. John Knits, Inc. 8,429,688
Total 3.6% 10,828,438
BANKING
70,000 BankBoston Corporation2 0.9% 2,725,625
BUILDING MATERIALS
580,000 Building Materials Holding Corp.1 7,032,500
1,000,000 Morgan Products, Ltd.1 3,500,000
Total 3.5% 10,532,500
COMPUTER PERIPHERALS
400,000 Adaptec, Inc.1 7,025,000
525,000 Quantum Corporation1 11,156,250
400,000 Read-Rite Corporation1 5,912,500
1,050,000 Western Digital Corporation1, 2 15,815,625
430,000 Xylan Corporation1, 2 7,551,875
Total 15.7% 47,461,250
COMPUTER SOFTWARE
150,000 Adobe Systems Incorporated 7,012,500
275,000 Electronics for Imaging, Inc.1 11,051,563
150,000 Symantec Corporation1, 2 3,262,500
Total 7.0% 21,326,563
COMPUTERS
450,000 Compaq Computer Corporation 18,871,875
170,000 Hewlett-Packard Company 11,613,125
425,000 Sequent Computer Systems, Inc.1, 2 5,126,563
Total 11.8% 35,611,563
FURNITURE
35,000 Herman Miller, Inc. 0.3% 940,625
<PAGE>
Percent of
Shares Common Stocks Net Assets Market Value
- --------------------------------------------------------------------------------
HEALTH CARE
92,500 ADAC Laboratories 2 $ 1,847,109
700,000 Oxford Health Plans, Inc.1, 2 10,412,500
Total 4.0% 12,259,609
INDUSTRIAL
160,000 Snap-on Inc. 5,570,000
165,900 Wellman, Inc. 1,690,106
Total 2.4% 7,260,106
RETAIL
50,000 Dayton-Hudson Corporation 2,712,500
25,000 Ethan Allen Interiors Inc. 1,025,000
150,000 The Gymboree Corporation1 956,250
175,000 Lands' End, Inc.1, 2 4,714,062
400,000 Petco Animal Supplies, Inc.1 4,025,000
325,000 Reebok International Ltd.1, 2 4,834,375
175,000 Whole Foods Market, Inc.1, 2 8,465,625
Total 8.8% 26,732,812
SEMICONDUCTOR CAPITAL EQUIPMENT
275,000 Applied Materials, Inc.1 11,739,062
700,000 Cognex Corporation1, 2 14,000,000
600,000 Electro Scientific Industries, Inc.1, 2 27,187,500
475,000 FEI Company1, 2 3,621,875
600,000 Helix Technology Corporation 7,800,000
400,000 Lam Research Corporation1, 2 7,125,000
80,000 Micrion Corporation1 940,000
Total 23.9% 72,413,437
SEMICONDUCTORS
600,000 Advanced Micro Devices, Inc.1, 2 17,400,000
320,000 LSI Logic Corporation1 5,160,000
200,000 Intel Corporation 23,712,500
Total 15.3% 46,272,500
Total common stocks
(Cost $260,960,441) 97.2% 294,365,028
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of
Short-Term Investments Net Assets Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Albina Community
Capital Bank
(variable rate 5.50%,
matures 1/24/99) $ 106,549
Alternatives Federal
Credit Union
(variable rate 3.25%) 26,784
Bank Brussels Lambert
FYCD (variable rate 5.17%,
matures 2/16/99)3 10,002,093
Community Bank of The Bay
(variable rate 5.07%,
matures 9/4/99) 100,000
Community Capital Bank
(variable rate 4.99%) 106,735
Goldman Sachs
Government Portfolio
(variable rate 4.70%) 1,050,198
Goldman Sachs
Treasury Obligation Portfolio
(variable rate 4.50%) 26,656
Kaiser Foundation Hospital
Commercial Paper
(variable rate 5.38%,
matures 1/4/99)3 9,994,028
Lehman Bros.
Triparty Repurchase
Agreement
(Repurchase agreement with
Lehman Bros. dated 12/31/98,
effective yield 5.45%,
due 1/4/99. Face value is
$38,645,231 with price at 100.)3 38,645,231
McKesson Corporation
Commercial Paper
(variable rate 6.17%,
matures 1/8/99)3 2,493,167
Merrill Lynch & Company
Floating Rate Security
(variable rate 4.95%,
matures 9/23/99)3 10,000,000
Self Help Credit Union
(variable rate 4.79%,
matures 1/16/99) 30,124
SLM Holding Corporation
Commercial Paper
(variable rate 6.76%,
matures 1/5/99)3 8,688,581
South Shore Bank
Money Market Account
(variable rate 4.40%) 296,930
Union Bank of California
Money Market Account
(variable rate 4.30%) 7,883,852
Wainwright Bank & Trust Co.
(variable rate 5.10%,
matures 10/22/99) 100,000
-----------
Total short-term investments 29.6% 89,550,928
-----------
Total investments 126.8% 383,915,956
Payable upon return of
securities loaned -26.4% (79,823,100)
Other assets and
liabilities-net -0.4% (1,331,146)
------- -------------
Total net assets 100.0% $ 302,761,710
======= =============
<FN>
1 Non-income producing
2 This security or partial position of this security is on loan at December
31, 1998 (Note 1). The total value of securities on loan at December 31,
1998 was $77,020,106.
3 This security purchased with cash collateral held from securities lending.
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
Assets:
Investments in securities, at market value
(identified cost $260,960,441) (Note 1) $ 294,365,028
Temporary investments in short term securities
(at cost which approximates market) 89,550,928
Receivables:
Dividends and interest 136,255
Capital shares sold 1,067,758
Other assets 23,072
--------------
Total assets 385,143,041
--------------
Liabilities:
Payable upon return of securities loaned 79,823,100
Payable for securities purchased 366,450
Capital shares redeemed 1,959,446
Other liabilities 232,335
--------------
Total liabilities 82,381,331
--------------
Net assets (equivalent to $36.24
per share based on 8,354,753.927
shares of capital stock outstanding) $ 302,761,710
==============
Net assets consisting of:
Distributions in excess of net investment income $ (2,244,134)
Unrealized appreciation on investments 33,404,587
Accumulated net realized loss (547,845)
Capital paid-in 272,149,102
--------------
Total net assets $ 302,761,710
==============
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($302,761,710 divided by
8,354,753.927 shares) $ 36.24
==============
Offering price per share (100/96.5 of $36.24)+ $ 37.55
==============
+ 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
YEAR ENDED DECEMBER 31, 1998
Investment income:
Dividends $ 822,013
Interest 1,144,900
Other income (Note 6) 1,096,868
--------------
Total investment income 3,063,781
--------------
Expenses:
Investment advisory fees (Note 5) 2,022,491
Transfer agent fees (Note 5) 573,112
Reports to shareholders 159,410
Fund administration (Note 5) 70,000
Registration fees and expenses 50,000
Custody fees 64,000
Service provider fees (Note 5) 170,000
Professional fees 118,184
Trustee fees and expenses 95,044
Other expenses 25,201
--------------
Total expenses 3,347,442
--------------
Net investment loss (283,661)
--------------
Realized and unrealized
gain (loss) on investments:
Realized loss from security transactions:
Proceeds from sales 310,956,283
Cost of securities sold (313,000,574)
--------------
Net realized loss (2,044,291)
--------------
Unrealized appreciation (depreciation)
of investments:
Beginning of year 34,618,176
End of year 33,404,587
--------------
Unrealized depreciation during the year (1,213,589)
--------------
Net realized and unrealized
loss on investments (3,257,880)
--------------
Net decrease in net assets resulting
from operations $ (3,541,541)
==============
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---------------- --------------
From operations:
Net investment loss $ (283,661) $ (1,401,024)
Net realized gain (loss)
from security transactions (2,044,291) 66,534,491
Net unrealized appreciation
(depreciation) during the year (1,213,589) 10,686,595
---------------- --------------
Increase (decrease) in
net assets resulting
from operations (3,541,541) 75,820,062
Dividends to shareholders:
From realized capital gains 0 (65,130,186)
Increase (decrease) in
net assets from capital
share transactions (31,121,888) 58,500,547
---------------- --------------
Increase (decrease) in
net assets (34,663,429) 69,190,423
Net assets:
Beginning of year 337,425,139 268,234,716
---------------- --------------
End of year
(including distributions in
excess of net investment
income of $2,244,134
in 1998 and $1,960,473 in
1997) $302,761,710 $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.
Security Lending: The Fund lends its securities to approved brokers to earn
additional income and receives cash and/or securities as collateral to
secure the loans. Collateral is maintained at not less than 102% of the
value of loaned securities. Although the risk of lending is mitigated by
the collateral, the Fund could experience a delay in recovering its
securities and a possible loss of income or value if the borrower fails to
return them.
Repurchase Agreements: Securities purchased with cash collateral held from
securities lending may include investments in repurchase agreements secured
by U.S. government obligations or other securities. Securities pledged as
collateral for repurchase agreements are held by the Funds' custodian bank
until maturity of the repurchase agreements. Provisions of the agreements
ensure that the market value of the collateral is sufficient in the event
of default; however, in the event of default or bankruptcy by the other
party to the agreements, realization and/or retention of the collateral may
be subject to legal proceedings.
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. No
distribution was made in 1998.
3. Capital Stock
As of December 31, 1998 there were an unlimited number of shares of no par
value capital stock authorized and capital paid-in aggregated $272,149,102.
Transactions in capital stock (shares) were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Shares Amount Shares Amount
------------------------------ ------------------------------
Shares sold 1,367,451 $ 46,126,426 1,206,984 $ 51,134,858
Shares issued through dividend reinvestment -- -- 1,691,391 58,336,117
Shares repurchased (2,454,103) (77,248,314) (1,256,450) (50,970,428)
----------- -------------- ----------- -------------
Net increase (decrease) (1,086,652) $ (31,121,888) 1,641,925 $ 58,500,547
=========== ============== =========== =============
</TABLE>
4. Purchases of Securities
Purchases of securities for the year ended December 31, 1998 were
$279,158,679. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at December 31, 1998 are the same as
for financial statement purposes. Of the $33,404,587 of net unrealized
appreciation at December 31, 1998, $66,378,267 related to appreciation of
securities and $32,973,680 related to depreciation of securities.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $2,022,491 for the year ended
December 31, 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 $643,112 for the year ended
December 31, 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 $170,000 for the year ended December 31, 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 year ended December 31, 1998 totaling $420,326 of which
$147,111 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. Other Income
In January 1998 the Fund received notification and related settlement
proceeds of $1,096,868 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
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for each of the five years in the period ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 35.74 $ 34.39 $ 31.77 $ 32.82 $ 31.81
-------- --------- --------- --------- ----------
Income from investment operations:
Net investment income(loss) (0.06) (0.14) (0.06) 0.15 2.73
Net realized and unrealized gain on securities 0.56 10.04 3.77 0.07 1.00
-------- --------- --------- --------- ----------
Total from investment operations 0.50 9.90 3.71 0.22 3.73
-------- --------- --------- --------- ----------
Distributions:
Dividends from net investment income -- -- -- (0.16) (0.47)
Distributions from net realized gain on securities -- (8.55) (1.09) (1.11) (2.25)
-------- --------- --------- --------- ----------
Total distributions 0.00 (8.55) (1.09) (1.27) (2.72)
-------- --------- --------- --------- ----------
Net asset value at end of year 36.24 35.74 34.39 31.77 32.82
======== ========= ========= ========= ==========
Total return* 1.40% 29.70% 11.68% 0.62% 11.98%
Ratios/supplemental data:
Ratio of expenses to average net assets 1.10% 1.11% 1.10% 1.02% 1.14%
Ratio of net investment income (loss) to
average net assets (0.09%) (0.44%) (0.17%) 0.54% 0.43%
Portfolio turnover rate 99.20% 68.90% 59.60% 29.10% 28.10%
Net assets, end of year (000's) $302,762 $337,425 $268,235 $259,133 $160,994
<FN>
* Total return figures do not adjust for the sales charge.
</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, 1998, 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 five 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, 1998 by correspondence with the custodian and
brokers; where replies were not received, we performed other auditing
procedures. 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, 1998, 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 15, 1999
<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.
1061 Eastshore #200
Albany, California 94710
Independent 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 or profile.
