THE
PARNASSUS
INCOME FUND
ONE MARKET--STEUART TOWER #1600 SAN FRANCISCO CA 94105 415-778-0200
- - - --------------------------------------------------------------------------------
February 12, 1996
Dear Shareholder:
Here is your 1995 annual report for the Parnassus Income Fund. I am pleased
to report that all three portfolios had excellent results. Declining interest
rates made for strong total returns. While yields have dropped, total returns
including price appreciation have been excellent. As the portfolio manager for
the Balanced and Fixed-Income Portfolios, I wrote those sections. As manager of
the California Tax-Exempt Portfolio, David Pogran wrote that report.
BALANCED PORTFOLIO
As of December 31, 1995, the net asset value per share (NAV) of the
Balanced Portfolio was $19.58. Taking into account dividends paid, the total
return for the year was 31.13% compared to 25.16% for the average balanced fund
according to Lipper Analytical Services. This strong performance meant that we
placed 12th out of the 220 balanced funds followed by Lipper.
The Balanced Portfolio also has a strong record over longer periods. For
the three-year period, the Portfolio had an average total return of 12.87% per
year compared to 10.77% for the average balanced fund.
Below you will find a graph comparing the Balanced Portfolio with the S&P
500, the Lehman Aggregate Bond Index and the Lipper Balanced Fund average. The
graph also contains the dollar amount an investor would have after investing
$10,000 at the inception of the Portfolio. Below the graph is a table showing
average annual total returns for the one-year and three-year periods and since
inception.
1
<PAGE>
-----------------------
Value on
December 31, 1995
-----------------------
S&P 500
Index $16,296
Balanced
Portfolio $15,616
Lipper
Balanced
Fund Average $14,189
Lehman
Aggregate
Bond Index $12,80
Note: The 30-day SEC
yield in December for
the Balanced Portfolio
was 4.43%
<TABLE>
- - - --------------------------------------------------------------------------------------------
<CAPTION>
Balanced S&P 500 Lipper Balanced Lehman Aggregate
Average Annual Total Return Portfolio Index Fund Average Bond Index
- - - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 31.13% 37.57% 25.16% 18.48%
Three Years 12.87% 15.32% 10.77% 8.07%
Since Inception 9/1/92 14.34% 15.79% 11.07% 7.71%
- - - --------------------------------------------------------------------------------------------
</TABLE>
As shareholders of the Balanced Portfolio, we were very fortunate this
year. Both our stocks and our bonds did well, propelling us into the top 6% of
all balanced funds. Much of our success was due to falling interest rates. The
yield on the 30-year Treasury bond was 7.88% at the beginning of the year and
5.95% at the end of the year for a decline of almost 2%. The yield on the
10-year Treasury bond dropped from 7.83% to 5.57%, a decline of 2.26%. This huge
drop made our fixed-income securities worth more. Lower interest rates also
improved the business prospects for the companies in which we hold shares.
Virtually all our positions increased in value, but there were some that
were especially noteworthy. In this section, I will discuss only our equity
positions (stock) and leave the bond positions for the Fixed-Income Portfolio
report.
There were three important themes in the movement of the stocks in the
Balanced Portfolio: interest rate plays, utilities and undervalued issues. Three
of the stocks that did the best could be called interest rate plays since they
are financial institutions and financial institutions do very well in a falling
interest rate environment.
2
<PAGE>
The Student Loan Marketing Association, better known as Sallie Mae,
increased an astounding 103% during the year as its stock went from $32.50 to
$66.00. Sallie Mae meets our social criteria because it helps to finance higher
education. It buys student loans from banks and other lenders which gives those
institutions enough liquidity to make more loans. Sallie Mae gets its money by
selling bonds in the capital markets and lower interest rates mean that its cost
of money is lower. Sallie Mae also has a "floor" below which the interest rate
it receives from its student loans cannot drop. Thus, the "spread" between the
cost of funds and the interest received widened during the year and helped
earnings.
There was more than falling interest rates behind the incredible increase
in the price of the stock. For a couple of years now, the Clinton administration
has been trying to have the government make direct student loans rather than
guaranteeing loans that are made by banks. This, of course, would reduce the
number of loans made by private lenders and that, in turn, would reduce the
amount of business Sallie Mae could do. When the Republicans gained control of
Congress last year, sentiment swung against direct lending and moved back to
letting private lenders do the job. Congress has now limited the percentage of
direct loans that the government can make which has improved the prospects for
Sallie Mae. The company has also improved its ability to control costs and has
sharpened its focus.
Two savings and loans also contributed to the Balanced Portfolio's
excellent returns. Savings and loans meet our social criteria because they
finance housing. H.F. Ahmanson, the parent of Home Savings, the nations largest
savings and loan, saw its stock price increase 64% as its shares went from
$16.13 to $26.50 each. Declining interest rates helped the savings and loan
industry by lowering its cost of funds as well as by making home ownership more
affordable for most Americans. Also helping was the improved outlook for real
estate prices in California where Home Savings has the majority of its loans.
Great Western Financial Corporation, parent of Great Western Savings,
increased 59% during the year as its stock went from $16.00 to $25.38. The same
factors were at work with Great Western that were at work with Home Savings.
Utility stocks were also very important to our performance in 1995. As most
of you know, bonds and other fixed-income securities increase in value as
interest rates fall. The same stream of income has a higher capital value when
rates are low. What many of you may not have known, though, is that utility
stocks behave in a manner similar to bonds. Since utilities pay a fairly
consistent dividend over time, many people invest in these stocks as a
substitute for bonds. Because of this phenomenon, utility stocks are worth more
when interest rates are lower and theyre worth less when interest rates are
higher. During 1995, the wind was at our back and utilities did excep-tionally
well with the sharp drop in interest rates.
Eastern Enterprises, the parent of Boston Gas Company and Midland
Enterprises, a river barge company, had a terrific year as its stock increased
34%, going from $26.25 to $35.25. Colder temperatures in Boston meant more gas
sales and increased demand for river freight gave a boost to earnings.
3
<PAGE>
CILCORP is the holding company for the Central Illinois Light Company that
supplies gas and electricity to the area encompassing Peoria and Springfield. It
also does environmental consulting work through its ESE subsidiary. The stock
moved up 32% as it went from $32.13 to $42.38. Natural gas earnings have been
strong. A rate increase, better cost control and an overhaul of the companys
Springfield pipeline should help to keep income growing.
Atlanta Gas Light provides natural gas services to 228 Georgia
municipalities and surrounding areas including Atlanta, Augusta and Savannah. It
also operates the Chattanooga Gas Company in Tennessee. The stock increased 32%
during the year as cost-cutting increased earnings. Prospects for the future
look good because of cost-control and growth in its service area--especially in
Atlanta.
The Brooklyn Union Gas Company, a very community-oriented utility that also
operates a neighborhood development credit union, saw its stock rise 31% during
the year, going from $22.25 to $29.25. This utility is well-managed and does a
good job controlling expenses and persuading building owners to convert to
natural gas from other energy sources.
Other utilities that helped our performance were MCN (up 29%), Idaho Power
(up 28%), Washington Water Power (up 27%), ONEOK (up 27%), Washington Gas Light
(up 22%) and Peoples Energy Corporation (up 22%).
The third area that was important to our 1995 performance was undervalued
situations. These companies were selling far below their intrinsic worth at the
beginning of 1995 and we reaped gains from their appreciation.
Merck & Co., the big pharmaceutical company that practices good corporate
citizenship, increased its value by 72% as the share price climbed from $38.13
to $65.63. Merck is a very well managed company and its stock price had dropped
down to ridiculously low levels because of fears that health care reform would
hurt its earnings. These fears have now dissipated and the stock has had strong
appreciation.
Longs Drug Stores had its share price increase 51% during the year as it
went from $31.75 to $47.88. Like Merck, Longs was way undervalued at the
beginning of the year. Investors shunned the stock because of the weak
California economy where most Longs stores are located. Longs' earnings have
improved as the California economy recovers and the company reaps the benefits
from its new inventory control and reorder system.
Jostens was another company that was quite undervalued at the beginning of
the year and then gained 30% during the period as its stock went from $18.63 to
$24.25. The company makes school products such as class rings, yearbooks and
pictures as well as recognition products for individual and educational
achievement. Jostens Learning, the companys computerized instruction subsidiary,
has been sold off and this has eliminated the major source of losses in previous
years. By focussing on its core businesses, Jostens has had much better results.
Two other companies were way undervalued at the beginning of the year and
made strong comebacks to help our performance. We purchased Maytag at $16.45
during the year and it gained 23%. Liz Claiborne went up an amazing 75% from our
cost of $15.70.
4
<PAGE>
COMPANY NOTES
Merck & Co. recently established a non-profit organization called the Bone
Measurement Institute to increase awareness of osteoporosis and debilitating
bone fractures. The institute will help inform doctors about the value of bone
measurement technologies and make measurement devices more affordable for
health-care companies. Merck was also named one of the ten best companies for
working mothers in terms of pay, advancement opportunities, support for child
care and family-friendly benefits. The article in Working Mother magazine was
researched and written by Milton Moskowitz, a longtime Parnassus shareholder.
FIXED-INCOME PORTFOLIO
As of December 31, 1995, the net asset value per share (NAV) of the
Fixed-Income Portfolio was $15.73. Taking into account dividends paid during the
year, total return for 1995 was 21.58%. This compares to a total return of
18.47% for the Lehman Aggregate Bond Index and 18.45% for the average A-rated
bond fund followed by Lipper Analytical Services. So for the year, we beat the
averages by a substantial margin. The Fixed-Income Portfolio finished seventh
out of the 107 A-rated bond funds tracked by Lipper.
Below you will find a graph and a table comparing the performance of the
Fixed-Income Portfolio with that of the Lehman Aggregate Bond Index and the
average A-rated bond fund. You can see that the Portfolio has outperformed both
indices since its inception on September 1, 1992.
-----------------------
Value on
December 31, 1995
-----------------------
Fixed-Income
Portfolio $12,898
Lehman
Aggregate
Bond Index $12,807
Lipper
A-Rated Bond
Fund Average $12,691
Note: The 30-day SEC
yield in December for
the Fixed-Income
Portfolio was 5.54%.
5
<PAGE>
- - - --------------------------------------------------------------------------------
Fixed-Income Lehman Aggregate Lipper A-Rated
Average Annual Total Returns Portfolio Bond Index Bond Fund Average
- - - --------------------------------------------------------------------------------
One Year 21.58% 18.47% 18.45%
Three Years 7.83% 8.07% 8.06%
Life of the Fund 7.95% 7.71% 7.41%
- - - --------------------------------------------------------------------------------
Most bond funds did very well in 1995 because of the sharp decline in
interest rates, but we did better than most. As we discussed in the Balanced
Portfolio section, the yield on the 30-year Treasury bond dropped almost 2%
during the year (from 7.88% to 5.95%) while the yield on the 10-year Treasury
bond fell 2.26% (from 7.83% to 5.57%). This remarkable decline in rates fueled
our good performance as well as the performance of the bond market in general.
There was one additional factor, though, that helped the Fixed-Income
Portfolio beat the bond market: upgrades in the credit ratings of our corporate
debentures (bonds). Two examples I would like to discuss are Digital Equipment
Corporation (DEC) and Delta Air Lines.
We own some DEC bonds with a coupon of 7.75% that are due in 2023 so they
have a maturity of 27 years which is quite long. The longer a bond's maturity
is, the more it moves in response to interest rate changes. A long bond
appreciates more than a short one does when interest rates drop. The DEC bond's
long maturity contributed a substantial amount to its increase in market value
during the year.
There was another factor at work, though, in the DEC bonds' big gains in
market value. We bought these bonds when they were still investment grade. At
the time, Standard & Poors (S&P) rated the bond BBB-, the lowest investment
grade rating. In 1993, S&P dropped the rating to BB, below investment grade.
Last September, S&P increased the rating to BB+ or just a hair under investment
grade.
DEC's prospects have greatly improved in 1995 as earnings have increased
considerably due to a massive re-structuring that lowered costs. The companys
products are also doing better in the marketplace. Although S&P has not yet
restored the company's investment grade rating, the market has done so. DEC's
bonds have increased substantially in value. During 1995, DEC's bonds increased
33.3% in value and they paid interest at 7.75%. This made a substantial
contribution to the Fixed-Income Portfolio's excellent returns in 1995.
Delta Air Lines helped as well. We own several issues of Delta's bonds, but
I would like to use the 9.75% coupon rate due in 2021 as an example. This bond
was rated BBB- (lowest investment grade) when we bought it. During 1993, S&P
downgraded it to BB. Although Parnassus cannot buy a bond if it isnt investment
grade, we can hold a bond if it drops below investment grade after purchase.
During 1995, Delta's prospects have improved with better cost control and
higher income from better capacity utilization. The bond market has recognized
this and its debentures have increased in value. Unlike DEC, Delta hasnt
received a formal upgrade from S&P, but it should in the near future. Improved
credit ratings are seen in the market before the ratings agencies make a change.
6
<PAGE>
The Delta bonds increased in market value by 31.9% during the year while
paying interest at 9.75%. Total return was over 40% for the year which really
helped our performance.
Another aspect of our 1995 performance that I would like to discuss is the
curious case of the CMOs. CMOs or collateralized mortgage obligations are
mortgage-backed securities. Think of them as being the mortgage on your house
combined with the mortgages of your neighbors and all placed into a pool so an
investor can buy a mortgage-backed security to receive consolidated interest and
principal payments.
At the beginning of the year, half our portfolio was in CMOs. We invested
in them because (1) they met a social criterion of financing housing (2) their
yield was higher than Treasury bonds or similar corporate bonds and (3) they
were guaranteed by an agency of the federal government such as the Federal
National Mortgage Association (Fannie Mae), the Government National Mortgage
Association (Ginnie Mae) or the Federal Home Loan Mortgage Association (Freddie
Mac).
At the time of purchase, these three factors seemed compelling and I
invested heavily in CMOs. What I only dimly realized at the time was that
although there was virtually no credit risk to these instruments (i.e. guarantee
of a government agency), there was a lot of market risk. During 1994, the
Fixed-Income Portfolio underperformed the market. The primary cause of this was
our heavy position in CMOs.
As long as interest rates stay relatively constant, CMOs are a pretty good
investment because of their good credit risk and their attractive yields. When
interest rates move up sharply, though, CMOs are a very bad investment because
their value drops even more than the bond market as a whole. When theyre good,
theyre very, very good, but when theyre bad, they're atrocious.
To explain why this is so, I have to tell you a little more about
maturities and the bond market. Most of you know that when interest rates go up,
the market value of bonds goes down and when interest rates go down, the bond
market goes up. A corollary to this phenomenon is that the longer the maturity,
the more a bond moves with changes in interest rates. For example, a 30-year
bond would move much more with a change in interest rates than a 10-year bond. A
5-year note would move much less than a 10-year instrument.
If a fixed-income investor could accurately predict interest rates, he or
she would invest in longer maturity instruments when interest rates are starting
to go down. This would be a fool-proof way of making lots of money, but
unfortunately, I don't know anyone (myself included) who can forecast interest
rates with any degree of accuracy.
Getting back to CMOs, I would like to point out that they are extremely
tricky since their maturity is not fixed. No one knows how long a CMO will last
since the length is determined by how fast homeowners pay off their mortgages.
Sometimes, a CMO will have a short maturity because homeowners are refinancing
or selling their houses. At other times, CMOs have a longer maturity since
homeowners are staying put for a long time and not paying off their home loans.
7
<PAGE>
Although we never know the exact maturity of a CMO, we have determined
through observation that their maturities lengthen when interest rates go up and
they shorten when interest rates go down. When interest rates are low,
homeowners refinance and more sales take place.
Given this situation, you can see how an investor gets whipsawed. As
interest rates go up, prepayments get slower and a CMO's maturity gets longer.
As a result, the market value of the CMO plunges even more than an ordinary
bond.
What happens when interest rates go down? Well, an investor gets some of
the benefits of falling rates and the value of a CMO will go up somewhat, but
not as much as a normal bond. The reason is that the maturity of the CMO will
get shorter because homeowners are prepaying their mortgages through home sales
and refinancings. Since shorter maturity bonds move less than longer maturity
bonds, a CMO wont go up as much as a normal bond during a period of falling
interest rates. So you can see that a CMO has good yield characteristics and
good credit characteristics, but when interest rates change--either up or down
by a substantial margin--a CMO is not a good security to hold.
After the debacle of 1994, I was tempted to sell off all our CMOs since
they had declined so much in value and we had underperformed the averages. When
I went to sell them, though, I discovered that because of the psychology of
fear, we couldnt sell them for very much. The interest rate rise of 1994 had
depressed the price of CMOs way down below their intrinsic value. I figured that
sanity would return before long so I decided to wait for a while.
As interest rates started falling in early 1995, rationality returned to
the CMO market and the value of these instruments bounced back. After our CMOs
returned to normal valuations, I decided that this wasnt a game I wanted to play
any more. We sold off most of our CMOs in the Fixed-Income Portfolio and in the
fixed-income portion of the Balanced Portfolio. Although the Portfolio could
gain a little bit of yield from CMOs, they are just too sensitive to interest
rate changes. So I appreciate the gains that CMOs gave us in 1995, but for now
were deemphasizing them in the Portfolio.
This analysis of the Fixed-Income Portfolio applies to the fixed-income
portion of the Balanced Portfolio as well. Fixed-Income holdings of both
Portfolios were similar during the year.
OUTLOOK AND STRATEGY
We are in a very different position at the beginning of 1996 than we were
at the beginning of 1995. Interest rates are much lower and Im not as confident
that interest rates will drop as I was in 1995. For that reason, I have decided
to shorten the maturities in our fixed-income portfolios and increase the level
of cash.
This policy will hurt yields a bit, but I think its worth it to provide
protection against an unforeseen increase in rates. Besides, yields are not
substantially higher for longer maturities. For example, the 5-year Treasury
yielded
8
<PAGE>
5.37% at year-end while the 10-year yielded only 5.57% not much difference. The
30-year was yielding 5.94% which is somewhat more, but not enough to tempt me
into lengthening the portfolio maturity.
Although I expect inflation to remain under control in 1996 and I expect
interest rates to stay relatively low, I dont plan to buy longer term
maturities. Should interest rates surprise me and go up during the year, we
would buy more long-term bonds.
Finally, I would like to announce a change in our dividend policy. A number
of shareholders have written or called to complain about fluctuations in the
amount of dividends they receive each month. The reason we had these
fluctuations is because of rounding and because of changes in our yield.
For example, let's assume for the sake of argument that the income earned
by the Fixed-Income Portfolio amounts to 7.7 cents per share. Our previous idea
was to round-off the dividend rate so in this case, the Trustees would declare a
dividend of 8 cents per share. Since we would only be earning 7.7 cents per
share, a deficit of 0.3 cents per share per month would build up. At some point,
we would have to change the dividend rate to 7 cents or even 6 cents per share
per month. Even a one cent change per share would amount to a noticeable
difference.
Compounding this effect is the fact that interest rates have been declining
as of late. While the Portfolio's share price has been rising, the yield per
share has been declining. This situation makes it more difficult for us to
forecast earnings and determine a dividend that will pay out the exact amount of
interest the Fund received. All this is by way of explanation and we apologize
for confusing you.
The Trustees have adopted a new policy. Each month, we will calculate the
interest earned and pay out a dividend of exactly that amount rounded to the
nearest tenth of a cent. For example, the monthly dividend on the Fixed-Income
Portfolio might be 6.3 cents per share.
With this change, we think dividends will be more consistent over time. Of
course, theres no way to prevent any fluctuation at all. Changes have to be made
over time as interest rates go up or down or when our portfolio changes its
composition. Its just that in the future, these changes will be much smoother.
I am happy that the Parnassus Income Fund was able to give its shareholders
excellent returns in 1995.
Jerome L. Dodson
President
9
<PAGE>
CALIFORNIA TAX-EXEMPT PORTFOLIO
February 12, 1996
Dear Shareholder:
As of December 31, 1995 the net asset value (NAV) of the California
Tax-Exempt Portfolio was $16.06. The total return for the Portfolio in 1995 was
18.60%. In comparison, the Lehman Municipal Bond Index posted a 17.45% return
and the average California municipal bond fund gained 18.32% as measured by
Lipper Analytical Services.
The table below shows that the Portfolio has outperformed the Lehman index
and the average California municipal bond fund for the last three years as well.
For the life of the fund, we lead the average California municipal bond fund,
but we lag slightly behind the Lehman index.
-----------------------
Value on
December 31, 1995
-----------------------
Lehman
Municipal
Bond Index $12,817
California
Tax-Exempt
Portfolio $12,766
Lipper
California
Municipal
Bond Fund
Average $12,578
10
<PAGE>
<TABLE>
- - - -----------------------------------------------------------------------------------------------------
<CAPTION>
California Tax-Exempt Lehman Municipal Lipper California Municipal
Average Annual Total Returns Portfolio Bond Index Bond Fund Average
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 18.60% 17.45% 18.32%
Three Years 7.87% 7.74% 7.31%
Life of the Fund 7.62% 7.73% 7.13%
- - - -----------------------------------------------------------------------------------------------------
</TABLE>
Municipal bonds bounced back in 1995 after a dismal year in 1994.
California's municipal bonds generally did a little better in 1995 than
municipal bonds across the nation. California bonds had suffered more in 1994
because of the Orange County bankruptcy. After no further Orange County-type
fiascoes emerged and it became clear that the California economy was recovering,
California bonds posted stronger returns in 1995.
As a final performance-related note, I was pleased to see the California
Tax-Exempt Portfolio featured as an "All-Star" municipal bond fund in the
January 1996 issue of Mutual Funds magazine. The article's author chose our
portfolio because it was no-load, had low expenses and provided "among the best
returns" consistent with its risk.
OUTLOOK AND STRATEGY
Moderate economic growth in 1995 finally convinced the bond market that low
inflation was likely to persist. Sustainable growth and low inflation should
continue in the upcoming year. Interest rates already reflect this outlook so I
would expect bonds to finish the year little changed.
Interest rates are now about where they were at the 1993 bond market peak.
Does this similarity mean that another bond market crash like the one in 1994 is
coming?
In 1993, speculators drove long-term rates down by investing huge amounts
of borrowed money in long-term bonds. Since long-term bond rates were
significantly higher than short-term borrowing rates, speculators profited by
the difference between the short rate and the long rate. This speculative aspect
is not present in todays markets since short-term borrowing rates are close to
long-term rates. This market is not ripe for a speculative collapse like the one
that took place in 1994.
Flat tax proposals are getting much press lately. There will be no action
on any of these proposals until after the 1996 presidential election. Even after
the election, I believe enactment of a flat tax faces considerable political and
economic barriers.
These proposals have added some uncertainty to municipal bond markets.
Under some of these proposals, all interest would be exempt from federal income
tax. Demand for municipal bonds might suffer since these bonds would no longer
be the only way to earn tax-exempt interest. The market has already factored in
tax reform by marking down municipal bond prices in anticipation of a flat tax.
If a flat tax does not get enacted after the election, municipal bond prices
could rally.
11
<PAGE>
For now, though, tax reform talk has driven municipal bond prices down and
made tax-exempt municipal bond yields quite high compared with taxable Treasury
bond yields. Municipal bonds that normally yield 81% as much as a Treasury bond,
now are yielding 88% as much as a Treasury bond.
Consequently, taxable-equivalent yields are currently quite attractive. For
December, the Portfolios 30-day yield was 4.77%. A married couple with taxable
income between $49,038 and $61,974 filing a joint return would have to earn
7.20% on a taxable investment to equal the Portfolios yield after taxes.
We have not sacrificed portfolio credit quality to increase yield. The
average rating for the Portfolio is AA. Good yields are available from excellent
credit quality bonds, so there is no reason to buy lower quality bonds.
The best values in municipal bonds continue to be around the fifteen year
maturity level, so we will continue to focus our new purchases in this area.
Bonds of this maturity are less sensitive to interest rate fluctuations than
longer bonds and yields are not that much lower. This strategy allows us to
maximize yield while limiting risk.
Thank you for investing with us. Your investment funds positive social
purposes such as education, public transportation and environmental
preservation--improving California as well as providing you with tax-exempt
income and good returns.
Yours truly,
David Pogran
Portfolio Manager
12
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1995
<TABLE>
<CAPTION>
Percentage of Percent of Market
Shares Common Stocks Net Assets Market Value Shares Common Stocks Net Assets Value
- - - ----------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
APPLIANCES PHARMACEUTICALS
20,000 Maytag Corporation 1.5% $ 405,000 28,000 Merck & Company 6.9% $ 1,837,500
----------- -----------
PUBLISHING/PRINTING
APPAREL 45,000 Jostens 4.1% 1,091,250
7,000 Liz Claiborne 0.7% 192,500 -----------
----------- RECREATIONAL PRODUCTS
32,300 Handleman Company 0.7% 185,725
BANKING -----------
40,000 Great Western RETAIL
Financial Corporation 1,015,000 4,000 J.C. Penney Company 190,500
40,000 H.F. Ahmanson & Company 1,060,000 8,500 Longs Drug Stores 406,938
----------- -----------
Total 7.7% 2,075,000 Total 2.2% 597,438
----------- -----------
DIVERSIFIED SERVICE TELECOMMUNICATIONS
AND SUPPLY 9,000 BCE 1.2% 310,500
12,000 Chemed Corporation 1.7% 466,500 -----------
----------- WATER UTILITY
ELECTRIC UTILITIES 30,000 Philadelphia Suburban 2.3% 622,500
15,000 CILCORP 635,625 -----------
23,000 Idaho Power 690,000
10,000 LG&E Energy Corporation 422,500 Total Common Stocks 62.4% 16,725,513
30,000 Washington Water Power 525,000 -----------
----------
Total 8.5% 2,273,125
----------- Principal
FINANCIAL SERVICES Amount Corporate Bond
5,000 Student Loan Marketing --------------------------------------------------------------
Association 1.2% 330,000 AIR TRANSPORT
----------- $ 330,000 Delta Airlines
FOOD-WHOLESALE 9.750%, due 05/15/21 398,396
5,000 Fleming Companies 0.4% 103,125 30,042 Delta Airlines
----------- 8.540%, due 01/02/07 32,834
NATURAL GAS 23,461 Delta Airlines
24,000 Atlanta Gas Light 474,000 8.540%, due 01/02/07 25,652
25,000 Brooklyn Union Gas 731,250 100,000 Delta Airlines
7,000 Connecticut Energy 155,750 10.375%, due 02/01/11 123,585
23,000 Eastern Enterprises 810,750 40,000 Delta Airline
10,000 Energen Corporation 241,250 9.250%, due 03/15/22 46,416
15,000 MCN Corporation 348,750 150,000 Federal Express
33,000 ONEOK 754,875 9.650%, due 06/15/12 187,574
14,000 Peoples Energy 444,500 20,000 Southwest Airlines
55,000 UGI Corporation 1,141,250 7.875%, due 09/01/07 22,096
11,200 Washington Gas Light Company 229,600 -----------
----------- Total 3.1% 836,553
Total 19.9% 5,331,975 -----------
-----------
PETROLEUM REFINING
& MARKETING
33,000 Sun Company 3.4% 903,375
-----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1995 (CONTINUED)
<CAPTION>
Principal Percent of Principal Community Percent of
Amount Corporate Bonds Net Assets Market Value Amount Development Loans Net Assets Market Value
- - - --------------------------------------------------------------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BANKING $ 100,000 Boston Community
$ 80,000 Home Savings of America Loan Fund $ 100,000
10.500%, due 06/12/97 0.3% $ 80,715 100,000 Institute for Community
---------- Economics Loan Fund 100,000
COMPUTERS 100,000 Low Income Housing
350,000 Digital Equipment Fund 100,000
Corporation -----------
7.750%, due 04/01/23 1.3% 347,893 Total Community
---------- Development Loans 1.1% 300,000
-----------
INURANCE
950,000 Aetna Life and Casualty
6.750%, due 09/15/13 3.5% 925,793 Total Investment
---------- in Securities
PUBLISHING (Cost, $17,882,318) 78.7% 21,079,260
220,000 Knight-Ridder -----------
9.875%, due 04/15/09 1.1% 288,787
----------
RETAIL Short-Term Investments
25,000 Dayton Hudson -----------------------------------------------------------------
8.500%, due 12/01/22 26,742 Bank of California
114,000 Dayton Hudson Money Market Fund,
7.875%, due 06/15/23 114,541 variable rate - 5.130% 2,487,084
550,000 J.C. Penney Goldman Sachs
7.125%, due 11/15/23 573,413 Government
---------- Portfolio - 5.550% 924,198
Total 2.7% 714,696 Goldman Sachs Treasury
---------- Portfolio - 5.520% 1,112,904
Federal Home Loan Bank
Total Corporate Bonds 12.0% 3,194,437 Discount Bill - 5.720% 999,850
---------- ----------
Total Short-Term
U.S. Government Investments
Agency Bonds cost, $5,524,036) 20.6% 5,524,036
- - - ------------------------------------------------------------------- ----------
175,000 Federal National
Mortgage Association Total Investments
6.930%, due 08/23/02 183,419 (cost, $23,406,354) 99.3% 26,603,296
Federal Farm Credit Bank
5.810%, due 11/10/03 200,380 Other Assets and
Federal Home Loan Bank Liabilities - Net 0.7% 175,961
5.850%, due 12/15/03 301,677 ------ -----------
Federal Home Loan Bank NET ASSETS 100.0% $26,779,257
8.170%, due 12/16/04 173,834 ====== ===========
----------
Total U.S. Government
Agency Bonds 3.2% 859,310
----------
<FN>
The accompanying notes are an integral part of these financial statemets.
</FN>
</TABLE>
14
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
<TABLE>
BALANCED PORTFOLIO
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS
DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995
<S> <C> <C> <C>
Assets: Investment Income:
Investments in securities, at market value Dividends $ 742,634
(identified cost $17,882,318) (Note 1) $21,079,260 Interest 440,394
Temporary investments in short term securities -----------
(at cost, which approximates market) 5,524,036 Total investment income 1,183,028
Cash 21,110 -----------
Receivables:
Dividends and interest 146,536 Expenses (Note 5):
Capital shares sold 62,754 Investment advisory fees (Note 5) 161,826
Other assets 1,383 Transfer agent fees (Note 5) 68,671
------------ Fund administration expense (Note 5) 33,500
Total assets 26,835,079 Reports to shareholders 18,966
------------ Registration fees and expenses 17,586
Professional fees 7,037
Liabilities: Custody fees 5,226
Accounts payable and accrued expenses 55,822 Trustee fees and expenses 5,634
------------ Other expenses 14,043
Total liabilities 55,822 Fees waived by Parnassus Investments (Note 5) (177,582)
------------ -----------
Total expenses 154,905
Net Assets (equivalent to $19.58 -----------
per share based on 1,367,634.394 Net Investment Income 1,028,123
shares of capital stock outstanding) $ 26,779,257 -----------
============
Net assets consist of: Realized and Unrealized Gain on Investments:
Distributions in excess of Realized gain from security transactions:
net investment income $ (16,044) Proceeds from sales 3,142,823
Unrealized appreciation on investments 3,196,942 Cost of securities sold (2,980,321)
Undistributed net realized gain 4,309 -----------
Capital paid-in 23,594,050 Net realized gain 162,502
------------ -----------
Total Net Assets $ 26,779,257 Unrealized appreciation (depreciation)
============ of investments:
Beginning of year (1,294,71)
Computation of net asset value and End of year 3,196,942
offering price per share: -----------
Net asset value and offering price Unrealized appreciation
per share ($26,779,257 divided by during year 4,491,653
1,367,634.394 shares) $ 19.58 -----------
============
Net Realized and Unrealized
Gain on Investments 4,654,155
-----------
Net Increase in Net Assets Resulting
from Operations $ 5,682,278
===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
15
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
BALANCED PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- ----------
From Operations:
Net investment income $ 1,028,123 $ 834,589
Net realized gain (loss) from
security transactions 162,502 (70,331)
Net unrealized appreciation
(depreciation) during
the year 4,491,653 (1,560,895)
----------- ----------
Increase (decrease) in
net assets derived from
operations 5,682,278 (796,637)
Dividends to shareholders:
From net investment income (1,050,322) (835,099)
From realized capital gains (91,363) 0
Increase in Net Assets from
Capital Share Transactions 5,151,794 7,176,425
----------- ----------
Increase in Net Assets 9,692,387 5,544,689
Net Assets:
Beginning of year 17,086,870 11,542,181
----------- ----------
End of year
[(including undistributed
(distributions in excess of)
net investment income of
$(16,044) in 1995 and
$6,155 in 1994)] $26,779,257 $17,086,870
=========== ===========
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1995
<TABLE>
<CAPTION>
Principal Percent of Principal Percent of
Amount Corporate Bonds Net Assets Market Value Amount Corporate Bonds Net Assets Market Value
- - - ------------------------------------------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AIR TRANSPORT INSURANCE
$ 71,000 Delta Airlines $350,000 Aetna Life and Casualty
Debentures, 10.375%, Notes, 6.750%,
due 02/01/11 $ 87,745 due 09/15/13 $ 341,082
40,000 Delta Airlines 31,000 Aetna Life and Casualty
Debentures, 9.250%, Notes, 8.000%,
due 03/15/22 46,416 due 01/15/16 33,306
174,000 Delta Airlines ----------
Debentures, 9.750%, Total 5.7% 374,388
due 05/15/21 210,063 ----------
65,717 Delta Airlines PUBLISHING
Notes 8.540%, 80,000 Knight-Ridder
due 01/02/07 71,823 Notes, 9.875%,
147,000 Federal Express due 04/15/09 1.6% 105,014
Debentures, 9.650%, ----------
due 06/15/12 183,822 RETAIL
20,000 Federal Express 60,000 Dayton Hudson
Senior Notes, 10.000%, Debentures, 9.250%,
due 04/15/99 22,405 due 11/15/16 63,006
-------- 15,000 Dayton Hudson
Total 9.5% 622,274 Debentures, 9.625%,
--------- due 02/01/08 18,631
100,000 Dayton Hudson
COMPUTERS Notes, 7.875%,
25,000 Digital Equipment due 06/15/23 100,475
Corporation 65,000 Dayton Hudson
Notes, 7.125%, due 10/15/02 25,231 Notes, 8.500%,
130,000 Digital Equipment due 12/01/22 69,528
Corporation 10,000 Dayton Hudson
Notes, 8.625%, due 11/01/12 141,187 Debentures, 9.500%,
178,000 Digital Equipment due 10/15/16 10,489
Corporation 325,000 J.C. Penney
Notes, 7.750%, due 04/01/23 176,928 Debentures, 7.125%,
-------- due 11/15/23 338,835
Total 5.2% 343,346 200,000 The Limited
-------- Notes, 7.500%,
due 03/15/23 191,026
HOME APPLIANCES ---------
130,000 Whirlpool Corporation Total 12.0% 791,990
Notes, 9.100%, ---------
due 02/01/08 2.4% 159,544
-------- Total Corporate Bonds 36.4% 2,396,556
---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
17
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1995 (CONTINUED)
<CAPTION>
Principal U.S. Government Percent of Percent of
Amount Agency Securities Net Assets Market Value Short-Term Investments Net Assets Market Value
- - - ---------------------------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 400,000 FHLMC Bank of California
CMO 1530-N Money Market Fund,
7.000%, due 06/15/23 $ 390,960 variable rate - 5.130% $ 627,237
3,108 FHLMC Goldman Sachs
CMO Class 1066-M Government Portfolio -
9.000%, due 08/15/19 3,108 5.500% 266,820
105,000 Federal National Goldman Sachs Treasury
Mortgage Association Portfolio - 5.520% 266,783
6.930%, due 08/23/02 110,052 Federal Farm Credit Bank
450,000 Federal National Discount Bill - 5.440% 1,975,690
Mortgage Association Federal Farm Credit Bank
7.350%, due 03/18/05 496,967 Discount Bill - 5.320% 494,235
----------- -------------
Total U.S. Government
Agency Securities 15.2% 1,001,087 Total Short-Term
----------- Investments
(cost, $3,630,765) 55.1% 3,630,765
Total Investments in -------------
Securities
(cost, $3,204,078) 51.6% 3,397,643 Total Investments
----------- (cost, $6,834,843) 106.7% 7,028,408
Other Assets and
Liabilities - Net (6.7%) (443,839)
----- -------------
TOTAL NET ASSETS 100.0% $ 6,584,569
===== =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
18
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
<TABLE>
FIXED-INCOME PORTFOLIO
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS
DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995
<S> <C> <C> <C>
Investment Income:
Assets: Interest $384,546
Investments in securities, at market value --------
(identified cost $3,204,078) (Note 1) $3,397,643 Total investment income 384,546
Temporary investments in short term securities ---------
(at cost, which approximates market) 3,630,765 Expenses (Note 5):
Receivables: Investment advisory fees (Note 5) 27,258
Dividends and interest 58,137 Transfer agent fees (Note 5) 18,895
Other assets 1,231 Fund administration expense (Note 5) 9,000
--------- Reports to shareholders 5,550
Total assets 7,087,776 Registration fees and expenses 14,257
--------- Professional fees 2,445
Custody fees 423
Liabilities: Trustee fees and expenses 1,497
Accounts payable 10,118 Other expenses 9,310
Overdraft 493,089 Fees waived by Parnassus Investments (Note 5) (39,923)
--------- ----------
Total liabilities 503,207 Total expenses 48,712
--------- ----------
Net Assets (equivalent to $15.73 Net Investment Income 335,834
per share based on 418,466.902 ----------
shares of capital stock outstanding) $6,584,569
========== Realized and Unrealized
Gain (Loss) on Investments:
Net assets consist of: Realized loss from security transactions:
Distributions in excess of Proceeds from sales 2,207,280
net investment income $ (3,206) Cost of securities sold (2,272,386)
Unrealized appreciation on investments 193,565 ----------
Accumulated net realized loss (69,432) Net realized loss (65,106)
Capital paid-in 6,463,642 ----------
----------
Total Net Assets $6,584,569 Unrealized appreciation (depreciation)
========== of investments:
Computation of net asset value and Beginning of year (553,202)
offering price per share: End of year 193,565
Net asset value and offering price ----------
per share ($6,584,569 divided by Unrealized appreciation
418,466.902 shares) $ 15.73 during year 746,767
========== ----------
Net Realized and Unrealized
Gain on Investments 681,661
----------
Net Increase in Net Assets Resulting
from Operations $1,017,495
==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
19
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
FIXED-INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- -----------
From Operations:
Net investment income $ 335,834 $ 326,090
Net realized loss from
security transactions (65,106) (2,624)
Net unrealized appreciation
(depreciation) during
the year 746,767 (651,608)
----------- -----------
Increase (decrease) in
net assets derived from
operations 1,017,495 (328,142)
Dividends to shareholders:
From net investment income (338,316) (332,264)
Increase in Net Assets from
Capital Share Transactions 1,360,035 1,046,261
----------- -----------
Increase in Net Assets 2,039,214 385,855
Net Assets:
Beginning of year 4,545,355 4,159,500
----------- -----------
End of year
(including distributions
in excess of net investment
income of $3,206 in 1995
and $724 in 1994) $ 6,584,569 $ 4,545,355
=========== ===========
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1995
<CAPTION>
Principal Percent of Principal Percent of
Amount Municipal Bonds Net Assets Market Value Amount Municipal Bonds Net Assets Market Value
- - - ----------------------------------------------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EDUCATION $ 130,000 San Francisco
$ 50,000 State of California Unified School District
6.000%, due 01/01/21 $ 52,226 6.200%, due 06/15/11 $139,849
150,000 State of California 110,000 Santa Monica Unified
6.125%, due 10/01/11 165,210 School District
205,000 California Education 5.400%, due 08/01/11 111,449
Facilities - California ---------
Institute of Technology Total 44.6% 2,000,739
6.000%, due 01/01/21 211,078 ---------
110,000 California Public Works - HEALTH CARE
University of California 60,000 California Health Facilities-
at San Diego Facilities Feedback Foundation
7.375%, due 04/01/06 123,555 6.500%, due 12/01/22 1.4% 62,360
100,000 California Public Works - ---------
Community College Projects PUBLIC TRANSPORTATION
5.500%, due 12/01/06 102,415 200,000 Los Angeles County
130,000 California Public Works - Transportation Commission
University of California 6.250%, due 07/01/16 200,820
5.400%, due 06/01/08 130,111 70,000 City of Sacramento -
175,000 California Public Works - Light Rail
California State University 6.000%, due 07/01/12 72,585
6.200%, due 10/01/08 186,438 110,000 San Diego Mass Transit
100,000 Franklin-McKinsey Authority
School District 5.000%, due 06/01/07 110,694
5.600%, due 07/01/07 104,375 ---------
120,000 Fresno Unified School Total 8.6% 384,099
District ---------
5.300%, due 10/01/07 120,073 HOUSING
100,000 Kern High School District 205,000 Belmont Redevelopment
5.600%, due 08/01/13 103,084 Agency
100,000 Los Angeles Municipal 6.400%, due 08/01/09 220,158
Improvement - Central 55,000 California Housing Finance -
Library Projects, Multi-Family
5.200%, due 06/01/07 99,996 6.750%, due 02/01/09 55,086
100,000 Natomas Unified 100,000 Glendale Redevelopment
School District Agency
5.750%, due 09/01/13 104,324 5.500%, due 12/01/12 102,337
110,000 Pasadena Recreational/ 50,000 Los Angeles Community
Library Improvements Redevelopment
5.750%, due 01/01/13 111,088 6.000%, due 07/01/17 52,250
130,000 Pomona Unified 175,000 San Jose Redevelopment
School District Agency
5.500%, due 08/01/11 135,468 6.000%, due 08/01/15 194,010
---------
Total 13.9% 623,841
---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
21
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT PORTFOLIO
<TABLE>
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1995 (CONTINUED)
<CAPTION>
Principal Percent of Short-Term Percent of
Amount Municipal Bonds Net Assets Market Value Investments Net Assets Market Value
- - - ------------------------------------------------------------------ ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INFRASTRUCTURE Highmark California
IMPROVEMENTS Tax-Exempt Fund,
variable rate - 3.140%
90,000 East Bay Municipal (cost $64,779) 1.4% $64,779
----------
Utility District
6.000%, due 06/01/20 $93,396 Total Investments
200,000 Pomona Public Financing (cost, $4,211,491) 98.5% 4,414,388
Authority
6.000%, due 10/01/06 216,723 Other Assests and
150,000 San Francisco Public Liabilities - Net 1.5% 68,761
Safety Improvement ----- ----------
5.750%, due 06/15/12 154,682 Net Assets 100.0% $4,483,149
---------- ===== ==========
Total 10.4% 464,801
----------
ENVIRONMENT
80,000 Burbank Waste Disposal
5.300%, due 05/01/09 80,890
75,000 California Pollution
Control - North County
Recycling Center
6.750%, due 07/01/17 76,592
125,000 California Public Works -
Energy Efficiency
5.250%, due 05/01/08 126,603
235,000 Northern California
Geothermal Project
5.800%, due 07/01/09 254,142
50,000 East Bay Regional Park
5.750%, due 09/01/12 50,901
50,000 East Bay Regional Park
6.300%, due 09/01/09 53,307
125,000 Los Angeles City
Public Works - Parks
6.100%, due 10/01/09 133,635
35,000 Midpeninsula Regional
Open Space District
6.250%, due 07/01/08 37,699
----------
Total 18.2% 813,769
----------
Total Investments in
Securities
(cost, $4,146,712) 97.1% $4,349,609
----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS
DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995
<CAPTION>
<S> <C> <C> <C>
Assets: Investment Income:
Investments in securities, at market value Interest $250,235
(identified cost $4,146,712) (Note 1) $4,349,609 --------
Temporary investments in short term securities Total investment income 250,235
(at cost, which approximates market) 64,779 --------
Receivables: Expenses (Note 5):
Interest receivable 75,684 Investment advisory fees (Note 5) 21,769
Other assets 1,114 Transfer agent fees (Note 5) 8,522
---------- Fund administration expense (Note 5) 7,500
Total assets 4,491,186 Reports to shareholders 3,350
---------- Registration fees and expenses 1,016
Professional fees 2,510
Liabilities: Custody fees 316
Accounts payable and accrued expenses 8,037 Trustee fees and expenses 1,208
---------- Other expenses 5,420
Total liabilities 8,037 Fees waived by Parnassus
---------- Investments (Note 5) (30,472)
Net Assets (equivalent to $16.06 --------
per share based on 279,063.414 Total expenses 21,139
shares of capital stock outstanding) $4,483,149 --------
========== Net Investment Income 229,096
--------
Net assets consist of: Realized and Unrealized Gain on Investments:
Distributions in excess of Realized gain from security transactions:
net investment income $ (2,976) Proceeds from sales 553,554
Unrealized appreciation on investments 202,897 Cost of securities sold (546,432)
Accumulated net realized loss (33,385) --------
Capital paid-in 4,316,613 Net realized gain 7,122
---------- --------
Total Net Assets $4,483,149
Computation of net asset value and ========== Unrealized appreciation (depreciation)
offering price per share: of investments:
Net asset value and offering price Beginning of year (287,866)
per share ($4,483,149 divided by End of year 202,897
279,063.414 shares) $ 16.06 --------
========== Unrealized appreciation
during year 490,763
--------
Net Realized and Unrealized
Gain on Investments 497,885
-------
Net Increase in Net Assets Resulting
from Operations $726,981
========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
23
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---------- ----------
From Operations:
Net investment income $ 229,096 $ 205,468
Net realized gain (loss) from
security transactions 7,122 (40,980)
Net unrealized appreciation
(depreciation) during
the year 490,763 (409,837)
---------- ----------
Increase (decrease) in
net assets derived from
operations 726,981 (245,349)
Dividends to shareholders:
From net investment income (230,274) (207,894)
Increase in Net Assets from
Capital Share Transactions 84,751 1,098,539
---------- ----------
Increase in Net Assets 581,458 645,296
Net Assets:
Beginning of year 3,901,691 3,256,395
---------- ----------
End of year
(including distributions in
excess of net investment
income of $2,976 in 1995
and $1,798 in 1994) $4,483,149 $3,901,691
========== ==========
24
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Parnassus Income Fund (the Fund), organized on August 8, 1990 as a
Massachusetts Business Trust, is registered under the Investment Company Act
of 1940 as a diversified, open-end investment management company comprised of
three separate portfolios each offering separate shares. The Fund began
operations on June 1, 1992. The following is a summary of significant
accounting policies of the fund.
Securities valuation: The Fund's investments are valued each business day by
independent pricing services ("Services") approved by the Board of Trustees.
Investments are valued at the mean between the "bid" and "ask" prices where
such quotes are readily available and are representative of the actual market
for such securities. Other investments are carried at fair value as
determined by the Services based on methods which include consideration of
(1) yields or prices of securities of comparable quality, coupon, maturity
and type (2) indications as to values from dealers and (3) general market
conditions.
Federal income taxes: The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its income to shareholders; therefore, no federal income
tax provision is required.
Security transactions: In accordance with industry practice, securities
transactions are accounted for on the date the securities are purchased or
sold (trade date). Realized gains and losses on securities transactions are
determined on the basis of first-in, first-out for both financial statement
and federal income tax purposes. Interest income, adjusted for amortization
of premium and, when appropriate, discount on investments, is earned from
settlement date and recognized on the accrual basis.
Dividends to shareholders: Distributions to shareholders are recorded on the
record date. The Balanced Portfolio pays income dividends quarterly and
capital gain dividends once a year, usually in December. The Fixed-Income and
California Tax-Exempt Portfolios pay income dividends monthly and capital
gain dividends annually (no capital gain dividends were paid in 1995 or
1994).
Investment income and expenses: Dividend income is recorded on the
ex-dividend date. Interest income is accrued daily.
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. Dividends To Shareholders
Balanced Portfolio: The Portfolio declared the following dividends during the
year ended December 31, 1995.
Dividend per share: $0.18 $0.18 $0.23 $0.337*
Record date: 3/30/95 6/29/95 9/28/95 12/28/95
Ex-dividend date: 3/31/95 6/30/95 9/29/95 12/29/95
Payment date: 3/31/95 6/30/95 9/29/95 12/29/95
* Includes $0.032 capital gain dividend
25
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fixed-Income Portfolio: The Portfolio declared the following dividends during
the year ended December 31, 1995.
Dividend per share: $0.11 $0.09 $0.09 $0.09 $0.09 $.09
Record date: 1/30/95 2/27/95 3/30/95 4/27/95 5/30/95 6/29/95
Ex-dividend date: 1/31/95 2/28/95 3/31/95 4/28/95 5/31/95 6/30/95
Payment date: 1/31/95 2/28/95 3/31/95 4/28/95 5/31/95 6/30/95
Dividend per share: $0.08 $0.08 $0.08 $0.05 $0.05 $.055
Record date: 7/28/95 8/30/95 9/28/95 10/30/95 11/29/95 12/28/95
Ex-dividend date: 7/31/95 8/31/95 9/29/95 10/31/95 11/30/95 12/29/95
Payment date: 7/31/95 8/31/95 9/29/95 10/31/95 11/30/95 12/29/95
California Tax-Exempt Portfolio: The Portfolio declared the following
dividends during the year ended December 31, 1995.
Dividend per share: $0.08 $0.07 $0.07 $0.07 $0.07 $.07
Record date: 1/30/95 2/27/95 3/30/95 4/27/95 5/30/95 6/29/95
Ex-dividend date: 1/31/95 2/28/95 3/31/95 4/28/95 5/31/95 6/30/95
Payment date: 1/31/95 2/28/95 3/31/95 4/28/95 5/31/95 6/30/95
Dividend per share: $0.06 $0.06 $0.06 $0.06 $0.06 $.091
Record date: 7/28/95 8/30/95 9/28/95 10/30/95 11/29/95 12/28/95
Ex-dividend date: 7/31/95 8/31/95 9/29/95 10/31/95 11/30/95 12/29/95
Payment date: 7/31/95 8/31/95 9/29/95 10/31/95 11/30/95 12/29/95
3. Capital Stock
Balanced Portfolio: As of December 31, 1995, there were an unlimited number
of shares of no par value capital stock authorized and capital paid-in
aggregated $23,594,050. Transactions in capital stock (shares) for the years
ended December 31, 1995 and 1994 were as follows:
1995 1994
------------------------ -------------------------
Shares Amount Shares Amount
-------- ---------- -------- -----------
Shares sold 376,434 $6,807,100 605,744 $10,055,653
Shares issued through
dividend reinvestment 55,666 1,026,896 50,155 792,334
Shares repurchased (152,479) (2,682,202) (228,984) (3,671,562)
-------- ---------- -------- -----------
Net Increase 279,621 $5,151,794 426,915 $ 7,176,425
======== ========== ======== ===========
26
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fixed-Income Portfolio: As of December 31, 1995, there were an unlimited
number of shares of no par value capital stock authorized and capital paid-in
aggregated $6,463,642. Transactions in capital stock (shares) for the years
ended December 31, 1995 and 1994 were as follows:
1995 1994
------------------------ -------------------------
Shares Amount Shares Amount
-------- ---------- -------- -----------
Shares sold 127,963 $1,947,590 146,445 $ 2,209,645
Shares issued through
dividend reinvestment 16,561 247,954 19,802 286,873
Shares repurchased (55,674) (835,509) (98,345) (1,450,257)
-------- ---------- -------- -----------
Net Increase 88,850 $1,360,035 67,902 $ 1,046,261
======== ========== ======== ===========
California Tax-Exempt Portfolio: As of December 31, 1995, there were an
unlimited number of shares of no par value capital stock authorized and
capital paid-in aggregated $4,316,613. Transactions in capital stock (shares)
for the years ended December 31, 1995 and 1994 were as follows:
1995 1994
------------------------ -------------------------
Shares Amount Shares Amount
-------- ---------- -------- -----------
Shares sold 53,578 $ 824,076 112,773 $ 1,721,940
Shares issued through
dividend reinvestment 12,059 185,861 12,822 191,081
Shares repurchased (59,847) (925,186) (54,602) (814,482)
-------- ---------- -------- -----------
Net Increase 5,790 $ 84,751 70,993 $ 1,098,539
======== ========== ======== ===========
4. Purchases and Sales of Securities
Balanced Portfolio: Purchases and sales of securities for the year ended
December 31, 1995 were $2,766,514 and $2,980,321 respectively. For federal
income tax purposes, the aggregate cost of securities and unrealized
appreciation at December 31, 1995 are the same as for financial statement
purposes. Of the $3,196,942 of net unrealized appreciation at December 31,
1995, $3,566,116 related to appreciation of securities and $(369,174) related
to depreciation of securities.
Fixed-Income Portfolio: Purchases and sales of securities for the year ended
December 31, 1995 were $467,719 and $2,272,386 respectively. For federal
income tax purposes, the aggregate cost of securities and unrealized
appreciation at December 31, 1995 are the same as for financial statement
purposes. Of the $193,565 of net unrealized appreciation at December 31,
1995, $215,460 related to appreciation of securities and $(21,895) related to
depreciation of securities.
California Tax-Exempt Portfolio: Purchases and sales of securities for the
year ended December 31, 1995 were $773,837 and $546,432 respectively. For
federal income tax purposes, the aggregate cost of securities and unrealized
appreciation at December 31, 1995 are the same as for financial statement
purposes. Of the $202,897 of net unrealized appreciation at December 31,
1995, $204,681 related to appreciation of securities and $(1,784) related to
depreciation of securities.
27
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Investment Advisory Agreement And Transactions With Affiliates
Under terms of an agreement which provides for furnishing investment
management and advice to the Fund, Parnassus Invest-ments is entitled to
receive fees computed monthly, based on the Funds average daily net assets
for the month, at the following annual rates:
Balanced Portfolio--0.75% of the first $30,000,000, 0.70% of the next
$70,000,000 and 0.65% of the amount above $100,000,000.
Fixed Income Portfolio and California Tax-Exempt Portfolio--0.50% of the
first $200,000,000, 0.45% of the next $200,000,000 and 0.40% of the amount
above $400,000,000.
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 $108,963 for the year ended December
31, 1995. The transfer agent fee is $2.30 per month per account ($2.22 per
month prior to December, 1995) and a fund administration fee is $4,167 per
month.
Parnassus Investments has agreed to reduce its investment advisory fee to the
extent necessary to limit total operating expenses to 1.25% of net assets for
the Balanced Portfolio and 1.00% of net assets for the Fixed-Income and
California Tax-Exempt Portfolios.
Parnassus Investments waived the investment advisory fee for all three
portfolios in 1995. For the Fixed-Income and California Tax-Exempt
Portfolios, the transfer agent fee was reduced to $1.00 per month per account
from January through June 1995. The Fund administration fee prior to October
1, 1995 was reduced to $1,000 per month for the Balanced Portfolio and was
waived for the Fixed-Income and California Tax-Exempt Portfolios during such
nine month period.
Jerome L. Dodson is the President of the Fund and is the sole stockholder of
Parnassus Investments.
During 1995, the Fund incurred legal fees of $2,261 to Richard D. Silberman,
counsel for the Fund. Mr. Silberman is also the Secretary of the Fund.
6. Deferred Organization Expenses
Deferred organization expenses have been amortized over a period of three
years commencing July 1, 1992 as follows:
10%-July 1, 1992-June 30, 1993
30%-July 1, 1993-June 30, 1994
60%-July 1, 1994-June 30, 1995
28
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
7. Financial Highlights
Selected data for each share of capital stock outstanding, total returns and
ratios/supplemental data for the years ended December 31, 1995, 1994, 1993
and for the seven month period ended December 31, 1992 are as follows:
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 1995 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at begining of period $15.70 $17.46 $16.17 $0.00
------ ------ ------ ------
Income from investment operations:
Net investment income 0.88 0.80 1.20 0.17
Net realized and unrealized gain (loss) on securities 3.93 (1.75) 1.36 16.15
------ ------ ------ ------
Total from investment operations 4.81 (0.95) 2.56 16.32
------ ------ ------ ------
Distributions:
Dividends from net investment income (0.90) (0.81) (1.21) (0.15)
Distributions from net realized gain on securities (0.03) 0.00 (0.06) 0.00
------ ------ ------ ------
Total distributions (0.93) (0.81) (1.27) (0.15)
------ ------ ------ ------
Net asset value at end of period $19.58 $15.70 $17.46 $16.17
====== ====== ====== ======
Total Return* 31.13% (5.39%) 15.91% 8.58%
Ratios/Supplemental Data:
Ratio of expenses to average net assets (actual)** 0.72% 0.83% 0.81% 0.0
Decrease reflected in the above expense ratios due to
undertakings by the manager 0.82% 0.88% 1.24% 1.14%
Ratio of net investment income to average net assets 4.76% 5.15% 4.94% 2.44%
Portfolio turnover rate 15.36% 6.50% 33.40% 23.54%
Net assets, end of period (000's) $26,779 $17,087 $11,542 $3,241
- - - ------------------------------------------------------------------------------------------------------------------------------------
Fixed-Income Portfolio 1995 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at begining of period $13.79 $15.89 $15.33 $0.00
------ ------ ------ ------
Income from investment operations:
Net investment income 0.95 1.02 1.03 0.36
Net realized and unrealized gain (loss) on securities 1.95 (2.08) 0.57 15.32
------ ------ ------ ------
Total from investment operations 2.90 (1.06) 1.60 15.68
------ ------ ------ ------
Distributions:
Dividends from net investment income (0.96) (1.04) (1.03) (0.35)
Distributions from net realized gain on securities 0.00 0.00 (0.01) 0.00
------ ------ ------ ------
Total distributions (0.96) (1.04) (1.04) (0.35)
------ ------ ------ ------
Net asset value at end of period $15.73 $13.79 $15.89 $15.33
====== ====== ====== ======
Total Return* 21.58% (6.76%) 10.59% 2.87%
Ratios/Supplemental Data:
Ratio of expenses to average net assets (actual)** 0.90% 0.81% 0.68% 0.0
Decrease reflected in the above expense ratios due to
undertakings by the manager 0.73% 0.98% 1.00% 1.18%
Ratio of net investment income to average net assets 6.20% 7.00% 6.43% 3.20%
Portfolio turnover rate 12.10% 5.20% 10.90% 15.29%
Net assets, end of period (000's) $6,585 $4,545 $4,160 $2,093
</TABLE>
29
<PAGE>
<TABLE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<CAPTION>
- - - ------------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Portfolio 1995 1994 1993 1992
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at begining of period $14.28 $16.10 $15.06 $0.00
------ ------ ------ ------
Income from investment operations:
Net investment income 0.82 0.80 0.77 0.19
Net realized and unrealized gain (loss) on securities 1.78 (1.81) 1.16 15.05
------ ------ ------ ------
Total from investment operations 2.60 (1.01) 1.93 15.24
------ ------ ------ ------
Distributions:
Dividends from net investment income (0.82) (0.81) (0.78) (0.18)
Distributions from net realized gain on securities 0.00 0.00 (0.11) 0.00
------ ------ ------ ------
Total distributions (0.82) (0.81) (0.89) (0.18)
------ ------ ------ ------
Net asset value at end of period $16.06 $14.28 $16.10 $15.06
====== ====== ====== ======
Total Return* 18.60% (6.36%) 13.03% 1.70%
Ratios/Supplemental Data:
Ratio of expenses to average net assets (actual)** 0.50% 0.39% 0.48% 0.0
Decrease reflected in the above expense ratios due to
undertakings by the manager 0.69% 0.87% 0.99% 2.10%
Ratio of net investment income to average net assets 5.30% 5.37% 4.89% 2.10%
Portfolio turnover rate 13.10% 12.00% 20.46% 0.00%
Net assets, end of period (000's) $4,483 $3,902 $3,256 $1,061
<FN>
* 1992 ratios reflect returns for seven months of operation and are not
annualized.
** Parnassus Investments has agreed to a 1.25% limit on expenses for the
Balanced Portfolio and 1% limit for the Fixed-Income and California
Tax-Exempt Portfolios (See note 5 for details). Certain fees were waived
for the years ended December 31, 1995, 1994 and 1993. All expenses were
waived for the seven-month period ended December 31, 1992; therefore, the
actual ratio of expenses to average net assets for each portfolio was 0%.
</FN>
</TABLE>
30
<PAGE>
THE PARNASSUS INCOME FUND
- - - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of The Parnassus Income Fund:
We have audited the accompanying statements of assets and liabilities of
the portfolios comprising The Parnassus Income Fund (Balanced Portfolio,
Fixed-Income Portfolio, and California Tax-Exempt Portfolio) (the "Fund"),
including the portfolios of investments by industry classification, as of
December 31, 1995, the related statements 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 three years in
the period then ended and for the period from June 1, 1992 (commencement of
operations) through December 31, 1992. These financial statements and financial
highlights are the responsibility of the Funds 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, 1995 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, 1995, 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.
San Francisco, California
January 29, 1996
31
<PAGE>
- - - ---------------------------------------
INVESTMENT ADVISER
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105 THE
PARNASSUS
LEGAL COUNSEL INCOME FUND
Richard D. Silberman, Esq.
465 California Street, #1020 --------------------------------------
San Francisco, California 94104
AUDITORS
Deloitte & Touche LLP
50 Fremont Street
San Francisco, California 94105
CUSTODIAN
Bank of California
475 Sansome Street
San Francisco, California 94111
DISTRIBUTOR
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
--------------------------------------
ANNUAL REPORT
DECEMBER 31, 1995
Printed on recycled paper.
- - - ---------------------------------------
