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TPF AR'99.word 2/23/2000 Page 21 of 21
THE PARNASSUS Fund
Annual Report December 31, 1999
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February 7, 2000
Dear Shareholder:
As of December 31, 1999, the net asset value per share (NAV) of The
Parnassus Fund was $50.67 so after taking into account the dividend, the overall
return for 1999 was 47.74%. This compares to a return of 21.04% for the S&P 500,
23.82% for the Wilshire 5000 and 9.68% for the average mid-cap value fund
followed by Lipper. We placed fourth out of the 199 mid-cap value funds followed
by Lipper *. It was a terrific year for the Fund as our return was double that
of the two indices and almost five times the return of the average mid-cap value
fund. In fact, the Fund's return was the second highest in our 15-year history,
behind only the 52.56% we earned in 1991.
Below are a table and a graph comparing The Parnassus Fund with the Lipper
Mid-Cap Value Average, the Wilshire 5000 and the S&P 500 over the past one,
three, 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 table shows investment
performance only and does not deduct the sales charge. The performance figures
for the average mid-cap value fund also do not deduct any sales charges that may
apply.
<TABLE>
<CAPTION>
Periods Ending Average Annual Average Annual Lipper Mid-Cap Wilshire 5000 S&P 500
December 31, 1999 Total Return Overall Return Value Average Index Index
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<S> <C> <C> <C> <C> <C>
One Year 42.57% 47.74% 9.68% 23.82% 21.04%
Three Years 23.31% 24.78% 12.90% 26.13% 27.52%
Five Years 16.07% 16.90% 16.55% 27.11% 28.46%
Ten Years 16.37% 16.78% 12.71% 17.61% 18.14%
<FN>
Past performance is no guarantee of future returns. Principal value will
fluctuate and an investor's shares, when redeemed, may be worth more or less
than their original cost. The Wilshire 5000 and the S&P 500 are unmanaged
indices of common stocks and it is not possible to invest directly in an index.
</FN>
</TABLE>
Value on December 31, 1999 of $10,000 invested on December 31, 1989
The Parnassus Fund $45,536
S&P 500 Index $52,976
Wilshire 5000 Index $50,640
Lipper Mid-Cap Value Fund Average $33,085
* For the three years ended December 31, 1999, The Parnassus Fund placed 11th
out of 118 mid-cap value funds, for the five years, it placed 29th out of 75
funds and for the ten years, it placed 7th out of 34 funds.
<PAGE>
RESULTS FOR THE YEAR
The main reason for the Fund's banner year was the high percentage of
technology stocks in the portfolio. Although the S&P was up over 20% for the
year, most stocks did not gain that much. Rather, technology stocks had strong
gains while the rest of the market had small gains or even losses. Fortunately,
we were in the right place at the right time.
The other thing that helped us was the new investment technique that we
discussed in the last quarterly report: changing our "sell" strategy. To
illustrate the importance of the new "sell" strategy, I'd like to review some of
Parnassus' history. For the four years from 1991 through 1994, Parnassus had one
of the best records of all stock mutual funds and performed much better than the
S&P 500. In 1995, our performance fell off substantially. We sold off our
winners (they were mostly technology then, too) because we felt they were fully
valued and replaced them with stocks that were way undervalued. Unfortunately
for us, the winners we sold just kept heading higher while the deeply
undervalued companies stayed undervalued for a couple of years. We
underperformed the market in 1995 and 1996 before making a strong comeback in
1997.
Some observers describe what happened to us as a "value trap." It means
that undervalued companies may stay undervalued for long periods of time until
something happens to change their business prospects. After that experience, we
tried to correct for the "value trap" by looking for a catalyst that would
change the fortunes of an undervalued company. Although this made a lot of
sense, it didn't work as well as we hoped since it sometimes took much longer
for the catalyst to develop than we had expected. Because of the difficulty in
identifying a catalyst, determining its importance and predicting the timing,
the technique was only partially effective. We needed something else.
It now appears to me that the "something else" is a different "sell"
discipline. What seems to be working for us is holding onto our winners longer
even if they appear to be fully-valued. As business prospects improve for a
company, the intrinsic value may increase quite a bit and what appears to be a
fully-valued stock may, in fact, be somewhat undervalued. For 1999, increasing
the holding period for our winners has greatly improved our performance. It also
has the added advantage of deferring taxes and holding down trading costs.
Even with this technique, though, every year won't be a great year. We'll
still have our ups and downs, but early results show that the new "sell"
discipline should improve our investment returns.
<PAGE>
WINNERS AND LOSERS
Although we were up over 47% for the year, we actually had five companies
in the portfolio that declined more than 40% each. Only one was a technology
stock, Western Digital, and that one declined 78% from the first of the year
until the time we sold it. Overcapacity in the disk drive industry put pressure
on prices and Western Digital lost money the whole year. Because we think that
weak pricing in the disk drive industry will last at least another year, we sold
the stock at $3.31 a share. It was difficult to sell at such a low price, but
the company's finances had deteriorated so much that it no longer qualified for
the Parnassus portfolio.
ADAC Laboratories dropped 63% from the first of the year to the time we
sold it at $7.33 a share. Although this maker of medical diagnostic equipment
has excellent products, hospitals and clinics did not have the funding to buy a
large amount of its equipment and we did not see the situation changing for at
least a year.
Just For Feet, an athletic shoe retailer, dropped 58% to $4.43 at the time
we sold the stock. The company expanded too quickly which put a strain on
finances. Compounding the problem was ordering too much inventory and ordering
the wrong kind of inventory so they had lots of shoes left on the shelves.
Weakness in the athletic shoe market completed the dismal picture so we took our
losses and sold the stock.
Mattel, the large toy maker, dropped 49% from the first of the year until
the time we sold it at $12.59 a share. It bought The Learning Company and
earnings problems developed in its new subsidiary after the merger.
Mattel is a good example of another thing I've had to learn and relearn
over the years: most mergers just do not work out. Problems always develop.
Although I've known this for 20 years, I sometimes think that "this merger is
different" and almost every time, I lose money. From now on, my new rule is
never to invest in a company right after a merger and if a portfolio company has
a major merger, sell the stock right away. Most merger-related problems come out
within a year after the transaction, so it's important to wait at least a year
after a large merger before considering a stock for investment.
Henry Schein, a supplier of dental products, dropped 47% from the time we
bought the stock in 1999 to the end of the year when the price hit $13.31. Like
Mattel, Schein went through a merger and the reorganization of the sales force
caused sales to plummet. Again, I broke my own rule about not investing in a
company after a merger and now all of us are paying for it. You'll notice,
though, that Schein is the only one of the five worst performing companies that
we're still holding in the portfolio; the rest have been sold. I still think
there's hope for Schein since it's a well-managed company and has a strong
position in the dental supply market. The same reasons I disregarded my own
anti-merger advice are the same reasons we're holding onto the company. Had we
waited a year after the merger to invest in the stock, we would have done quite
well on the investment. Right now, prospects are good for the company and I
think the investment will work out in the long run.
<PAGE>
The fact that we sold all of the five worst performing stocks in the
portfolio except Schein is an illustration of another change we've made in our
investment policy. We're quicker to cut our losses. There's an old stock market
saying that an investor should cut the losses and let the winners run. To many
contrarians (including myself in previous years), this made no sense. A stock
that was a real winner should probably be sold since it was more than likely
moving into overvalued territory while a loser should be held because it had
dropped into undervalued territory. The trouble with this philosophy that I held
for so long was that the losers stayed undervalued for long periods of time and
sometimes, they never recovered. Conversely, the stocks that did well kept doing
well for long periods of time. Although we still buy stocks that we consider
undervalued, our "sell" strategy has changed so that we hang onto our winners
longer and we're quicker to sell the losers. I've now discovered that there was
a lot of truth in that old cliche I once disparaged: "Sell your losers and let
your winners run." The immediate business prospects of a company are more
important to us now. We won't sell a company as long as its fundamentals are
strong and we won't hold a company if its fundamentals over the next year look
weak.
A good example of our new strategy is our experience with Lam Research, a
semiconductor equipment company located in Silicon Valley. We bought Lam in
early 1998 for $22.52 a share and by the beginning of 1999, the price had
dropped to $17.81. At the time of purchase, we estimated that the intrinsic
value of the company was around $55 a share. Because of the strong resurgence in
the semiconductor market in early 1999, the stock went to $55 a share in a
matter of months. We were then faced with a decision on whether to sell the
stock or hold on.
Because of the strong semiconductor market and Lam's excellent equipment,
we figured that the intrinsic value of the company had gone up and we calculated
it was worth about $70 a share. Before long, the stock climbed to $70 and we
were again faced with a "hold or sell" decision. This decision was harder than
the first one since we figured that Lam's value hadn't gone up since the last
calculation and the intrinsic value was still around $70 a share. Although the
company appeared to be fully valued, the fundamentals were still strong: good
management, good cost control, excellent products and strong demand for
semiconductor capital equipment. We decided to hang on and much to our surprise,
Lam hit $111 by the end of the year. As this report is being written in January
of 2000, we're still trying to decide whether to sell the stock now that it's
over $100 a share.
Naturally, all our stocks won't follow this pattern and there's also the
risk that a stock could fall back down again after hitting our target price.
Nevertheless, the new strategy seems to be working well in the current market.
For the year, ten of our companies gained more than 80% and nine of the ten
were technology issues. As I indicated, Lam Research was the best-performing
company in the portfolio with a gain of an incredible 526%.
The second best-performing company was LSI Logic which gained 319%, closing
out the year at $67.50. LSI makes custom chips for a variety of uses including
DVD video players, the Sony PlayStation, computer networking and internet
communication.
Helix, a manufacturer of cryogenic pumps for creating vacuums to use in
semiconductor production, climbed 245% to end the year at $44.81. Strong demand
for semiconductor equipment and a new system to monitor the performance of
vacuum pumps contributed to the strong gains.
Adaptec makes chips for use in connecting hard disk drives and other
peripheral equipment to the central processing unit of computers. Strong demand
for its products moved the stock up 184% as it went to $49.88 by the end of the
year.
Symantec produces anti-virus and other software and the company saw its
shares increase in value by 170%. Agreements with IBM and other large companies
and strong demand for computer security propelled the shares to $58.63 by
year-end.
Xylan, a maker of switches for communications equipment, saw its stock rise
111% to $37 per share as the company was bought out by Alcatel, the French
telecommunications giant. Adobe Systems makes graphic design and other software
and the company's shares increased 110% from the first of the year until the
time we sold it for $98 a share. Adobe is an example of a stock we sold too soon
as its shares continued climbing above $120 each on a pre-split basis.
FEI climbed 103% during the year as its stock went to $15.50 a share. The
Oregon-based company makes focused ion beams for process monitoring in
semiconductor production. As semiconductor companies shrink the size of their
integrated circuits, they need more sophisticated equipment such as the kind
that FEI supplies.
Cognex is a Massachusetts-based provider of software that enables computers
to "see." Strong earnings from higher orders for its vision equipment caused the
stock price to increase 95% to $39 a share.
The only one of the top ten winners for the year that was not a technology
company was Wellman, the nation's largest recycler of plastic. Wellman's stock
went to $18.63 a share for a gain of 83%. Strong demand for its plastic bottle
resin caused the share price to increase.
OUTLOOK AND STRATEGY
In our view, the three biggest dangers to stocks in 2000 are (1) a hike in
interest rates (2) a downturn in technology shares and (3) a crash of internet
stocks. In the past, most stock market rallies have been killed off by a rise in
interest rates. What's unique about the current strong economy is the absence of
inflation and relatively stable interest rates. There's no sign of strong
inflation, but Chairman Alan Greenspan keeps talking about the strong economy
needing some restraint. This may mean higher interest rates and if rates climb
much higher, the party could be over.
By most measures, technology stocks are overvalued taken as a whole. Strong
fundamentals, though, are pushing technology stocks higher and higher. If those
fundamentals change in 2000, the stock market will lose its leadership and
shares may languish. On the other hand, most non-technology stocks are
undervalued in varying degrees. They could go higher and provide new leadership.
Finally, there is the curious case of the internet stocks. In my view,
virtually all of them are over-valued. There's just no way that internet stocks
can earn enough money in the future to support present valuations. A crash is
definitely coming, but no one knows when. It could be this year, next year or
even a couple of years away. The problem is that a crash of internet stocks will
probably bring down other stocks with them -- especially technology issues. What
would precipitate such a crash? Possibilities include slower growth in sales of
the internet retailers or a change in the climate of opinion so that investors
realize that internet valuations are preposterous. There's no way that companies
with little or no earnings can have intrinsic values in the billions of dollars.
Despite these risks, we plan to stay invested in stocks. We hope to provide
good returns to our shareholders in 2000. Technology stocks led the way for us
in 1999. After their tremendous run-up this year, the technology stocks in our
portfolio are, on the whole, fully-valued and in some case overvalued. The
fundamentals for the sector, though, are very strong (sales, earnings, growth,
etc.) and the stocks could go higher. Our strategy now is to sell half our
holdings in technology and hold onto the other half until the fundamentals are
no longer strong. Some technology shares such as Intel and Compaq are still
undervalued and we plan to hold our entire position in issues like these.
There are a number of sectors where stocks are still undervalued. Health
care in general and pharmaceuticals in particular are areas where values abound.
Financial stocks are also trading at bargain levels. We plan to look for quality
companies in these sectors for possible investment by the Fund.
COMPANY NOTES
Advanced Micro Devices (AMD), the world's second largest manufacturer of
microprocessors for personal computers, was named "Corporation of the Year" by
the Greater Austin Chapter of the National Society of Fund-Raising Executives.
AMD was honored for its support of a wide variety of community-based
organizations including those fulfilling basic needs and providing education,
health and human services. More than 500 AMD employees in the Austin area are
currently involved with dozens of non-profit organizations such as the Special
Olympics, Goodwill Industries, the Salvation Army, Capital Area Food Bank, the
March of Dimes and Keep Austin Beautiful. The company makes grants to
organizations where AMD employees volunteer time.
Compaq Computers is sponsoring a "Reading is Cool" program aimed at public
elementary schools in Santa Clara and Alameda Counties (in the San Francisco Bay
Area). Among other things, Compaq executives, San Jose Mercury News executives
and reporters and hockey players from the San Jose Sharks will read to children
in 20 schools and encourage students to sign up for reading programs.
In November, Target Stores, a subsidiary of Dayton-Hudson, presented checks
totaling $7 million to K-12 schools. Target School Fundraising allows families,
teachers and members of the community to designate their school of choice to
receive an amount equal to one percent of their purchases at Target.
Kroger Stores and the IRS have formed a partnership to provide customers at
24 Kroger stores in Georgia with free tax assistance. Additionally, all Kroger
stores in Georgia and selected stores in Alabama and South Carolina will provide
tax forms as a free service.
<PAGE>
PERSONNEL MATTERS
As you know, we have begun featuring one of our permanent staff members in
each of our quarterly reports. Last time, we talked about Susan Loughridge, Vice
President and Manager of Shareholder Services. For this report, we'll feature
one of the staff who works in her department.
Keith Bang was born in Saigon, Vietnam and is of Chinese descent. He came
to the United States in 1980 when he was seven years old. His first language was
Chinese (Cantonese) and he studied Vietnamese in school, but he no longer
remembers much of what he learned in Vietnam. He spent one year in Seattle
before coming to San Francisco in 1981 where he attended Treasure Island
Elementary School. With only a rudimentary knowledge of English, he studied
academic subjects in school and also took courses in English as a second
language. Later, he studied at Presidio Middle School and graduated from George
Washington High School in San Francisco. He also graduated from San Francisco
State University with a bachelor's degree in economics.
Keith does a great job for us in shareholder services at The Parnassus
Fund. Besides working in shareholder services, Keith is filling in for another
employee in the accounting department while she is off on maternity leave. One
of the skills that I find most impressive and which shareholders will find most
interesting is that Keith is the top proofreader for these quarterly reports.
He's saved me from a lot of mistakes. Considering that English is not his first
language, his facility in the language is extremely impressive. One thing I can
say is that Keith does a much better job proofreading in English than I could
ever do proofreading in Chinese. We're all proud of having someone like Keith
working with us at Parnassus Investments. He's a very versatile person --
talented and a good worker. In his free time, Keith works out at the gym to keep
in shape and also socializes with his friends. He lives in Oakland, right across
the Bay Bridge from San Francisco.
Our intern for the spring semester is Geddes Golay, a junior at Dartmouth
College majoring in economics and sociology. At Dartmouth, he tutored students
in economics, judged high school debates and taught inmates at the Woodstock
Correctional Facility. His previous experience includes working at Yosemite
National Park and serving meals and snacks at Rosey's Cafe in Hanover, New
Hampshire. Geddes was also a National Merit Scholarship Finalist.
SHAREHOLDER PROFILES
Besides profiling staff members and interns, I also intend to profile
shareholders from time to time. I'm proud of our shareholders and their
commitment to social justice and the environment are impressive. For this annual
report, I'm going to talk about two of our shareholders who are environmental
activists.
Michael Lozeau began working as an attorney for the Sierra Club Legal
Defense Fund in 1989 and while there he started doing volunteer legal work for
San Francisco Baykeeper with an emphasis on helping interpret the Clean Water
Act. In 1991, Mike moved into private practice in environmental law, but
continued his volunteer work with Baykeeper, then a new organization with the
goal of stopping pollution in San Francisco Bay. One of the victories that Mike
and Baykeeper participated in was catching Donco Industries doing illegal
dredging (at night, naturally) near Hunter's Point Naval Shipyard on San
Francisco Bay. The illegal dredging (that stirred up toxics) was stopped and the
two owners of the company did some time in jail .
<PAGE>
In 1995, Mike became a part-time staff member of Baykeeper and in 1996, he
became executive director of the organization. Among Baykeeper's accomplishments
was a case that stopped Union Oil from dumping selenium into the Bay from its
refinery in Rodeo. A lawsuit stopped the dumping and resulted in an almost $4
million fine to Union Oil which was donated to the San Francisco Foundation for
grant-making to environmental organizations.
One thing I admire about Mike and Baykeeper is that they don't use
confrontation and lawsuits unless absolutely necessary. Rather, they try to
negotiate with development entities and point out the opportunity to improve the
environment. For example, in 1997, they negotiated with the Catellus
Corporation, developer of the huge, new Mission Bay Development in San
Francisco, to install separate storm and sewer drainage systems so that sewage
would not overflow into the Bay during the rainy season. They also negotiated
with the San Francisco Giants who are building a new stadium. At the new
ballpark, the team will provide for treatment of storm water before it goes into
the Bay.
Mike is now on the board of Baykeeper and he also does volunteer legal work
with them, but he stepped down as executive director late last year to take a
position with Earthlaw, a non-profit environmental law firm, teaching and
practicing environmental law at Stanford Law School.
Shimon (Bert) Schwarzschild, a longtime shareholder, has been an
environmental activist for almost 30 years. I first heard of him in the early
1970's when he ran for the board of the California State Automobile Association
on a platform urging cleaner air and better public transit. I also remember him
when he worked in the late 70's and early 80's as executive director of the
Golden Gate Council of American Youth Hostels where he supervised the opening of
four new hostels including a beautiful one overlooking the Bay in San
Francisco's Ft. Mason. For almost 30 years, he has also written environmental
articles for publications like Audubon, Sierra magazine, the San Francisco
Chronicle and the San Francisco Examiner. He also served for 14 years as a
member of the Commission on Education and Communication of the World
Conservation Union. Shimon has also been active in forest preservation, working
on the award-winning documentaries, "The Forest through the Trees --The Battle
for California's Redwoods" and "Eldorado" as well as founding and serving as
past President of the Native Yew Conservation Council where he worked to promote
sustainable yew harvesting and propagation. When he's not volunteering his time
as an environmental activist, he works as an editor with the U.S. Forest
Service.
<PAGE>
Since 1983, Shimon has been working to preserve Mt. Subasio in Assisi,
Italy, birthplace of St. Francis, the patron saint of nature and ecology. He
helped to establish the Assisi Nature Council that resulted in a moratorium on
hunting songbirds in Assisi, establishment of an environmental education and
ethics center there and government approval for a nature preserve on the slopes
of Mt. Subasio. Based on his experience in Italy, Shimon founded the Assisi
Nature Council/USA now called Action for Nature (AFN) which helps to "foster
respect and affection for nature through personal action."
One project of AFN that particularly intrigued me was the publication of a
book called Acting for Nature that describes the environmental protection
efforts initiated by each of 15 young individuals in 11 countries who saw
environmental problems in their communities and took personal action to solve
them. The book has been praised by primate scientist Jane Goodall, American
conservationist David Brower and UK environmentalist Dr. Ralph Bellamy. I'm
enclosing a flyer about the book along with an order form in case any of you
would like to read the book or give it to a young person who you would like to
inspire.
Yours truly,
Jerome L. Dodson
President
<PAGE>
<TABLE>
<CAPTION>
THE PARNASSUS FUND
STOCKS SOLD JANUARY 1, 1999 THROUGH DECEMBER 31, 1999 (UNAUDITED)
Realized No. of Per Sale Per
Company Gain (Loss) Shares Cost Share Proceeds Share
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<S> <C> <C> <C> <C> <C> <C>
ADAC Laboratories $ (5,215,538) 435,000 $8,402,438 $19.32 $ 3,186,900 $ 7.33
Adaptec, Inc. 2,128,058 200,000 4,465,005 22.33 6,593,063 32.97
Adobe Systems, Inc. 8,347,249 150,000 5,993,963 39.96 14,341,212 95.61
Advanced Micro Devices, Inc. (1,360,311) 300,000 7,072,750 23.58 5,712,439 19.04
Apex, Inc. 123,735 30,000 350,000 11.67 473,735 15.79
Applied Materials, Inc. 8,973,713 275,000 8,075,406 29.37 17,049,119 62.00
BankBoston Corporation 1,656,030 150,000 5,322,237 35.48 6,978,267 46.52
Becton Dickinson & Co. (218,562) 270,000 7,382,625 27.34 7,164,063 26.53
Borders Group, Inc. (763,930) 250,000 4,053,970 16.22 3,290,040 13.16
Building Materials Holding Corp. (1,411,585) 580,000 7,503,522 12.94 6,091,937 10.50
Cognex Corporation 214,755 25,000 576,000 23.04 790,755 31.63
Consolidated Stores Corp. 65,414 10,000 258,975 25.90 324,389 32.44
Dayton Hudson 984,984 50,000 1,733,800 34.68 2,718,784 54.38
DENTSPLY International, Inc. (48,730) 14,500 383,094 26.42 334,364 23.06
Department 56, Inc. (833,921) 150,000 4,004,314 26.70 3,170,393 21.14
Electro Scientific Industries, Inc. 6,434,507 225,000 4,535,000 20.16 10,969,507 48.75
Electronics for Imaging, Inc. 5,444,393 275,000 5,544,437 20.16 10,988,830 39.96
Ethan Allen Interiors, Inc. 316,334 25,000 910,000 36.40 1,226,334 49.05
FEI Company (335,079) 280,000 2,675,000 9.55 2,339,921 8.36
The Gymboree Corporation (1,267,912) 150,000 2,489,503 16.60 1,221,591 8.14
Helix Technology Corporation 5,716,956 375,000 7,257,395 19.35 12,974,351 34.60
Henry Schein, Inc. (261,577) 30,000 705,625 23.52 444,048 14.80
Herman Miller, Inc. 540,293 140,000 3,019,062 21.56 3,559,355 25.42
Hewlett-Packard Company 7,785,056 170,000 8,162,325 48.01 15,947,381 93.81
Invacare Corporation 18,899 10,000 220,000 22.00 238,899 23.89
Just For Feet, Inc. (2,968,189) 565,000 6,699,249 11.86 3,731,060 6.60
LSI Logic Corporation 2,491,523 120,000 2,665,513 22.21 5,157,036 42.98
Lam Research Corporation 5,670,033 100,000 2,695,625 26.96 8,365,658 83.66
Lands' End, Inc. 2,238,076 175,000 3,081,982 17.61 5,320,058 30.40
Liz Claiborne, Inc. 871,951 389,800 13,469,651 34.56 14,341,602 36.79
Mattel, Inc. (6,132,733) 500,000 12,427,322 24.85 6,294,589 12.59
McKesson HBOC, Inc. (50,686) 10,000 371,850 37.19 321,164 32.12
Micrion Corporation 101,406 160,000 858,594 5.37 960,000 6.00
Morgan Products, Ltd. (2,375,227) 1,000,000 6,131,156 6.13 3,755,929 3.76
Oxford Health Plans, Inc. 629,511 230,000 3,756,500 16.33 4,386,011 19.07
Petco Animal Supplies, Inc. (2,640,770) 400,000 5,973,565 14.93 3,332,795 8.33
Read-Rite Corporation (1,657,772) 400,000 5,292,030 13.23 3,634,258 9.09
Reebok International Ltd. 1,473,373 590,000 8,050,182 13.64 9,523,555 16.14
St. John Knits, Inc. (2,808,724) 385,500 14,373,724 37.29 11,565,000 30.00
Sequent Computer Systems, Inc. (4,392,801) 425,000 10,003,428 23.54 5,610,627 13.20
Snap-on, Inc. (308,749) 160,000 5,145,087 32.16 4,836,338 30.23
Stride Rite Corporation (682,075) 260,000 2,293,595 8.82 1,611,520 6.20
Symantec Corp. (258,428) 75,000 1,814,626 24.20 1,556,198 20.75
3Com Corporation 1,234 20,000 468,750 23.44 469,984 23.50
Western Digital Corporation (15,726,990) 1,200,000 19,703,900 16.42 3,976,910 3.31
Xylan Corporation 10,072,227 430,000 5,328,251 12.39 15,400,478 35.82
Total $20,579,421 $231,701,026 $252,280,447
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE PARNASSUS FUND
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1999
Percent of
Shares Common Stocks Net Assets Market Value
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<S> <C> <C> <C> <C>
AIR TRANSPORT
200,000 Delta Air Lines, Inc. 2.8% $ 9,962,500
COMPUTER PERIPHERALS
200,000 Adaptec, Inc.1, 2 9,975,000
200,000 Apex Inc.1 6,450,000
525,000 Quantum Corp. -
DLT & Storage Systems 1 7,940,625
262,500 Quantum Corp. -
Hard Disk Drive1, 2 1,821,094
Total 7.2% 26,186,719
COMPUTER SOFTWARE
190,000 Autodesk, Inc.2 6,412,500
600,000 Mentor Graphics
Corporation 1 7,912,500
250,000 Symantec Corp.1 14,656,250
Total 8.0% 28,981,250
COMPUTERS
500,000 Compaq Computer Corp. 13,593,750
30,000 Hewlett-Packard Company 3,423,750
Total 4.7% 17,017,500
FINANCIAL SERVICES
70,000 Federal Home Loan
Mortgage Corp. 0.9% 3,294,375
HEALTH CARE
550,000 Oxford Health Plans, Inc.1 1.9% 6,978,125
INDUSTRIAL
100,000 Baldor Electric Company 1,812,500
360,000 Wellman, Inc.2 6,705,000
Total 2.3% 8,517,500
INDUSTRIAL
AUTOMATION
675,000 Cognex Corporation1 7.2% 26,325,000
MEDICAL PRODUCTS
210,000 Boston Scientific Corporation1 4,593,750
400,000 Henry Schein, Inc.1, 2 5,325,000
300,000 DENTSPLY International, Inc.2 7,087,500
Total 4.7% 17,006,250
<PAGE>
Percent of
Shares Common Stocks Net Assets Market Value
- --------------------------------------------------------------------------------
MICROELECTRONIC
PROCESSING EQUIPMENT
125,000 Credence Systems Corp.1, 2 $ 10,812,500
375,000 Electro Scientific Industries1, 2 27,375,000
355,000 FEI Company1 5,502,500
225,000 Helix Technology Corporation 10,082,813
300,000 Lam Research Corporation1, 2 33,468,750
Total 24.0% 87,241,563
PHARMACEUTICALS
10,000 Merck & Co. Inc. 670,625
500,000 Steris Corporation1 5,125,000
150,000 Watson Pharmaceuticals, Inc.1, 2 5,371,875
Total 3.1% 11,167,500
RETAIL
150,000 Borders Group, Inc.1 2,437,500
300,000 Consolidated Stores Corp.1 4,875,000
125,000 Dayton Hudson Corporation 9,179,687
200,000 The Gap, Inc. 9,200,000
100,000 The Kroger Co.1 1,887,500
600,000 Whole Foods Market, Inc.1, 2 27,825,000
Total 15.2% 55,404,687
SEMICONDUCTORS
460,000 Advanced Micro Devices1 13,311,250
200,000 LSI Logic Corporation1, 2 13,500,000
400,000 Intel Corporation 32,925,000
Total 16.4% 59,736,250
Total common stocks
(Cost $220,236,282) 98.4% 357,819,219
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE PARNASSUS FUND
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1999
(CONTINUED)
Percent of
Short-Term Investments Net Assets Market Value
- ---------------------------------------------------------------------------------
<S> <C> <C>
Union Bank of California
Money Market Account
(variable rate 4.66%) $ 5,347,918
South Shore Bank
Money Market Account
(variable rate 4.50%) 310,369
Goldman Sachs
Government Portfolio
(variable rate 4.87%) 61,161
Goldman Sachs
Treasury Obligation Portfolio
(variable rate 4.84%) 27,882
Albina Community Capital Bank
Certificate of Deposit 5.00%,
matures 1/24/00 115,399
Community Capital Bank
(variable rate 4.40%) 100,000
Community Bank of The Bay
Certificate of Deposit 5.07%,
matures 9/4/00 100,000
Wainwright Bank & Trust Co.
Certificate of Deposit 5.10%,
matures 10/22/00 100,000
Alternatives Federal Credit Union
(variable rate 2.750%) 27,547
Self Help Credit Union
Certificate of Deposit 4.17%,
matures 1/16/00 31,463
Repurchase Agreements
Greenwich Capital Triparty Repurchase
Agreement (Repurchase agreement with
Greenwich Capital dated 12/31/99,
effective yield is 5.200% due 1/3/00,
Face value is $32,891,474
with price at 100)3 32,891,474
Lehman Bros.
Triparty Repurchase Agreement
(Repurchase agreement
with Lehman Bro.
dated 12/31/99, effective
yield is 4.580% due 1/3/00,
Face value is $7,678,017
with price at 100)3 7,678,017
<PAGE>
THE PARNASSUS FUND
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF DECEMBER 31, 1999
(CONTINUED)
Percent of
Short-Term Investments Net Assets Market Value
- --------------------------------------------------------------------------------
Floating Rate Securities
Amex Centurion
(variable rate 5.700%,
matures 4/19/00)3 $ 5,000,000
Bear Stearns Co.
(variable rate 4.730%,
matures 1/7/00)3 10,000,000
Household CCMT
(variable rate 6.523%,
matures 1/18/00)3 10,000,000
Merrill Lynch & Co.
(variable rate 4.770%,
matures 2/28/00)3 2,500,000
Morgan Stanley Dean Witter
(variable rate 5.250%,
matures 1/20/00)3 3,000,000
Money Market Funds
Janus Money Market Fund
(variable rate 5.635%,
matures 1/3/00)3 10,000,000
Scudder Institutional
Money Fund
(variable rate 5.825%,
matures 1/3/00)3 10,000,000
Total short-term investments 26.7% 97,291,230
Total investments 125.1% 455,110,449
Payable upon return of securities loaned -25.0% (91,069,491)
Other assets and liabilities-net - 0.1% (224,179)
Total net assets 100.0% $ 363,816,779
<FN>
1 Non-income producing
2 This security or partial position of this security is on loan at December 31,
1999 (Note 1). The total value of securities on loan at December 31, 1999 was
$88,439,959.
3 This security purchased with cash collateral held from securities lending.
</FN>
</TABLE>
<PAGE>
THE PARNASSUS FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
Assets:
Investments in securities, at market value
(identified cost $220,236,282) (Note 1) $ 357,819,219
Temporary investments in short term securities
(at cost which approximates market) 97,291,230
Receivables:
Dividends and interest 119,929
Capital shares sold 63,551
Other assets 53,931
Total assets 455,347,860
Liabilities:
Payable upon return of securities loaned 91,069,491
Capital shares redeemed 107,502
Other liabilities 354,088
Total liabilities 91,531,081
Net assets (equivalent to $50.67
per share based on 7,179,559.203
shares of capital stock outstanding) $ 363,816,779
Net assets consisting of:
Distributions in excess of net investment income $ (3,770,461)
Unrealized appreciation on investments 137,582,937
Accumulated net realized gain 1,921,223
Capital paid-in 228,083,080
Total net assets $ 363,816,779
Computation of net asset value and
offering price per share:
Net asset value and redemption price
per share ($363,816,779 divided by
7,179,559.203 shares) $ 50.67
Offering price per share (100/96.5 of $50.67)+ $ 52.51
+ 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>
THE PARNASSUS FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Investment income:
Dividends $ 951,017
Interest 709,798
Other income 58,163
Total investment income 1,718,978
Expenses:
Investment advisory fees (Note 5) 2,010,365
Transfer agent fees (Note 5) 544,141
Reports to shareholders 157,765
Fund administration (Note 5) 70,000
Registration fees and expenses 36,131
Custody fees 62,098
Service provider fees (Note 5) 185,000
Professional fees 52,666
Trustee fees and expenses 101,283
Other expenses 25,856
Total expenses 3,245,305
Net investment loss (1,526,327)
Realized and unrealized gain on investments: Realized gain from security
transactions:
Proceeds from sales 252,280,447
Cost of securities sold (231,701,026)
Net realized gain 20,579,421
Unrealized appreciation of investments:
Beginning of year 33,404,587
End of year 137,582,937
Unrealized appreciation during the year 104,178,350
Net realized and unrealized gain on investments 124,757,771
Net increase in net assets resulting
from operations $ 123,231,444
<PAGE>
THE PARNASSUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
From operations:
Net investment loss $ (1,526,327) $ (283,661)
Net realized gain (loss)
from security transactions 20,579,421 (2,044,291)
Net unrealized appreciation
(depreciation) during
the year 104,178,350 (1,213,589)
Increase (decrease) in
net assets resulting
from operations 123,231,444 (3,541,541)
Dividends to shareholders:
From realized capital gains (18,110,353) 0
Decrease in net assets from
capital share transactions (44,066,022) (31,121,888)
Increase (decrease) in
net assets 61,055,069 (34,663,429)
Net assets:
Beginning of year 302,761,710 337,425,139
End of year
(including distributions in
excess of net investment
income of $3,770,461
in 1999 and $2,244,134
in 1998) $363,816,779 $302,761,710
<PAGE>
THE PARNASSUS FUND
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.
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. On
December 17, 1999 an income distribution (all short term capital gains) of
$8,388,097 ($1.226 per share), and a capital gains distribution of
$9,722,256 ($1.421 per share) was paid out to shareholders of record on
December 16, 1999.
3. Capital Stock
As of December 31, 1999 there were an unlimited number of shares of no par
value capital stock authorized and capital paid-in aggregated $228,083,080.
<TABLE>
<CAPTION>
Transactions in capital stock (shares) were as follows:
Year Ended Year Ended
December 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares Amount Shares Amount
Shares sold 310,313 $ 12,698,171 1,367,451 $ 46,126,426
Shares issued through dividend reinvestment 344,842 16,107,565 -- --
Shares repurchased (1,830,350) (72,871,758) (2,454,103) (77,248,314)
Net decrease (1,179,195) $ (44,066,022) (1,086,652) $ (31,121,888)
</TABLE>
<PAGE>
THE PARNASSUS FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Purchases of Securities
Purchases of securities for the year ended December 31, 1999 were
$191,978,554. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at December 31, 1999 are the same as
for financial statement purposes. Of the $137,582,937 of net unrealized
appreciation at December 31, 1999, $147,907,034 related to appreciation of
securities and $10,324,097 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 $2,010,365 for the year ended
December 31, 1999. 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 $614,141 for
the year ended December 31, 1999. 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 $185,000 for the year ended December 31, 1999.
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, 1999 totaling $121,437 of which
$34,824 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. 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 year ended
<TABLE>
<CAPTION>
December 31 are as follows:
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $36.24 $ 35.74 $ 34.39 $ 31.77 $ 32.82
Income from investment operations:
Net investment income(loss) (0.21) (0.06) (0.14) (0.06) 0.15
Net realized and unrealized gain on securities 17.29 0.56 10.04 3.77 0.07
Total from investment operations 17.08 0.50 9.90 3.71 0.22
Distributions:
Dividends from net investment income .-- .-- .-- .-- (0.16)
Distributions from net realized gain on securities (2.65) .-- (8.55) (1.09) (1.11)
Total distributions (2.65) 0.00 (8.55) (1.09) (1.27)
Net asset value at end of year $50.67 $36.24 $ 35.74 $ 34.39 $ 31.77
Total return* 47.74% 1.40% 29.70% 11.68% 0.62%
Ratios/supplemental data:
Ratio of expenses to average net assets 1.07% 1.10% 1.11% 1.10% 1.02%
Ratio of net investment income (loss) to average net assets(0.50%) (0.09%) (0.44%) (0.17%) 0.54%
Portfolio turnover rate 65.70% 99.20% 68.90% 59.60% 29.10%
Net assets, end of year (000's) $363,817 $302,762 $337,425 $268,235 $259,133
<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, 1999, 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 6) 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, 1999 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, 1999, 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 14, 2000
<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
Gardner, Carton & Douglas
321 N. Clark Street
Chicago, IL 60610
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.
Rcycled paper.
