1933 Act File No.: 33-36065
1940 Act File No.: 811-6673
Securities and Exchange Commission
Washington, DC 20549
Form N-1A
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 5
and/or
REGISTRATION UNDER THE INVESTMENT ACT OF 1940
Amendment No. 7
THE PARNASSUS INCOME FUND
(Exact Name of Registrant as Specified in Charter)
One Market
Steuart Tower - Suite #1600
San Francisco, CA 94105
(Address of Principal Executive Office)
Registrant's Telephone Number including Area Code: (415) 778-0200
Jerome L. Dodson
One Market
Steuart Tower - Suite #1600
San Francisco, CA 94105
(Name and Address of Agent for Service)
It is proposed that this filing will become effective on May 1, 1996 pursuant
to paragraph (b) of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has registered an indefinite number of shares of beneficial interest under the
Securities Act of 1933 and the Rule 24f-2 notice for issuer's fiscal year ending
December 31, 1995 was filed on February 26, 1996.
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THE PARNASSUS INCOME FUND
Cross Reference Index
ITEM REFERENCE
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Part A. Information Required in a Prospectus
Item 1. Cover Page Cover Page
Item 2. Synopsis; Fee Information Fund Expenses (p.2)
Item 3. Financial Highlights Financial Highlights (p.3)
Item 4. General Description of Investment Objective (p.5)
Registrant Other Investment Policies
(p.10);
General Information (p.19)
Item 5. Management of the Fund Management (p.13); The
Adviser(p.14)
General Information (p.19)
Item 6. Capital Stock and other Dividends and Taxes (p.17);
Securities How to Purchase Shares (p.14)
Management (p.13)
Item 7. Purchase of Securities Being How to Purchase Shares (p.14)
Offered
Item 8. Redemption or Repurchase How to Redeem Shares (p.16)
Item 9. Legal Proceedings None
Part B Information Required in a Statement of Additional Information
Item 10. Cover Page Cover Page (B-1)
Item 11. Table of Contents Table of Contents (B-1)
Item 12. General Information & History General (B-14)
Item 13. Investment Objective & Policies Investment Objectives
& Policies (B-2)
Item 14. Management of the Registrant Management (B-8)
Item 15. Control Person & Principal Control Persons (B-9)
Holders of Securities
Item 16. Investment Advisory & Other The Adviser (B-11)
Services
Item 17. Brokerage Allocation & Other The Adviser (B-11); Portfo-
Practices lio Transactions and
Brokerage (B-11)
Item 18. Capital Stock & Other Securities General (B-14)
Item 19. Purchase, Redemption & Pricing Net Asset Value (B-13)
of Securities Being Offered
Item 20. Tax Status Prospectus (p.17)
Item 21. Underwriters Portfolio Transactions and
Brokerage (B-11)
Item 22. Calculation of Performance Data Performance Advertising and
Calculation of Total Return
and Yield (B-10); Yield of
Fixed-Income and California
Tax-Exempt Portfolio(B-10);
Effective Yield (B-10)
Item 23. Financial Statements Financial Statements (B-15)
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THE PARNASSUS INCOME FUND
PROSPECTUS-MAY 1, 1996
The Parnassus Income Fund (the "Fund") is a "no load," diversified, open-end
series management investment company managed by Parnassus Investments (the
"Adviser"). The Adviser chooses the Fund's investments for all portfolios
according to social standards described in this Prospectus. In general, the
Adviser will choose investments that it believes will have a
positive social impact.
The Fund has three portfolios. The Balanced Portfolio invests in both stocks and
bonds and its investment objective is both current income and capital gains. The
Fixed-Income Portfolio invests primarily in bonds and other fixed-income
investments and its investment objective is current income and preservation of
capital. The California Tax-Exempt Portfolio (for California residents only) has
as its investment objective a high level of current income exempt from federal
and California personal income taxes consistent with prudent investment
management. This Prospectus provides you with the basic information you should
know before investing in the Fund. You should read it and keep it for future
reference. A Statement of Additional Information dated May 1, 1996 containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is incorporated by reference in this Prospectus in its
entirety. You may obtain a copy of the Statement of Additional Information
without charge by calling the Fund at (800) 999-3505.
TABLE OF CONTENTS
Fund Expenses 2 Management 13
Financial Highlights 3 The Adviser 14
The Legend of Mt. Par 4 How to Purchase Shares 14
Investment Objective and Policies 5 How to Redeem Shares 16
Other Investment Policies 10 Dividends and Taxes 17
Performance Information 11 General Information 19
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of the
Fund will incur.
Shareholder Transaction Expenses
Balanced Fixed-Income Tax-Exempt
Portfolio Portfolio Portfolio
Maximum Sales load Imposed on Purchases
(as a percentage of offering price) None None None
Redemption Fees None None None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after fee waiver) 0% 0% 0%
12b-1 Fees None None None
Otherexpenses(after expense reimbursement) 0.72% 0.90% 0.50%
Total Fund Operating Expense 0.72%* 0.90%* 0.50%*
The purpose of this table is to assist the investor in understanding the various
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The following example illustrates the expenses that you would pay on
a $1000 investment over various time periods assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period. As noted in the table
above, the Fund charges no redemption fees of any kind.
One Year Three Year Five Years Ten Years
Balanced Portfolio $7 $23 $40 $89
Fixed-income Portfolio 9 29 50 111
California Tax-Exempt Portfolio 5 16 28 63
The expenses shown above are cumulative--#not ones you pay every year. For
example, the $89 figure for ten years with the Balanced Portfolio is not the
annual expense, but the total cumulative expenses a shareholder would have paid
for the entire ten-year period. This example should not be considered a
representation of past or future expenses or performance. Actual expenses may be
greater or less than those shown. From time to time, the Fund may direct
brokerage commissions to firms that may pay certain expenses of the Fund subject
to "best execution." This is done only when brokerage costs are reasonable and
the Fund determines that the reduction of expenses is in the best interest of
the shareholders. See page B-7 of the SAI for more information. Since this
happens on an irregular basis, the effect on the expense ratios cannot be
calculated with any degree of certainty. * The Fund will compensate Parnassus
Investments for its services as Transfer Agent and Accounting Agent in the form
of fixed fees, which are not based upon a percentage of the average net assets
of the Fund. The Adviser has agreed to reduce its management 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. For 1995, Parnassus Investments reduced its fees and
reimbursed expenses so that the expense ratios were even lower than these
limits. Had there been no expense reimbursement or fee waiver, total expense
ratios for the Balanced, Fixed-Income and California Tax-Exempt Portfolios would
have been 1.54%, 1.63% and 1.19% respectively.
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FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for the years ended December 31, 1995, 1994 and 1993
and the seven-month period ended December 31, 1992 are as follows:
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Balanced Portfolio 1995 1994 1993 1992
Net asset value at beginning 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
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Fixed-Income Portfolio 1995 1994 1993 1992
Net asset value at beginning 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
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California Tax-Exempt Portfolio 1995 1994 1993 1992
Net asset value at beginning 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
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* 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%. Note: This information
is taken from audited financial statements that were published in the Fund's
annual reports and was audited by Deloitte & Touche llp.
THE LEGEND OF MT. PARNASSUS
Parnassus is a mountain in central Greece whose twin peaks rise more than 8,000
feet above sea level. A dense forest covers the slopes of Mt. Parnassus, but the
summit is rocky and, most of the time, covered with snow. The mountain plays a
prominent role in Greek mythology because on its southern slope, overlooking the
Gulf of Corinth, lies Delphi, site of the famous oracle.
Originally, the oracle belonged to Gaia, the earth goddess. Later, Mother
Earth was worshipped under the name Delphyne and she controlled the oracle
along with her serpent-son, Python, and her priestess-daughters who controlled
the rites. Eventually, theGreek god, Apollo, took over the site, doing away
with Python, but keeping the priestesses.
The most "Greek" of the gods, Apollo represented enlightenment and
civilization and presided over the establishment of cities. Identified with the
development of Greek codes of law, Apollo was also the god of light, a master
musician and a skilled archer. Legend has it that Python, an enormous serpent
raised in the caves of Mt. Parnassus, controlled the site of Delphi. When
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Apollo, representing civilization, challenged Python, representing anarchy,
there was a heroic struggle, but the god finally killed the dragon by shooting a
hundred arrows into its body.
There were many oracles in ancient Greece, but only the one at Delphi
achieved a record of reliability. Apollo's temple at Delphi soon became an
enormous storehouse of treasures that were gifts of those who had consulted
the oracle. The oracle communicated through the voice of a priestess who
spoke while in a trance. The priests of Delphi, who interpreted
the sayings of the priestess, obtained a great deal of knowledge and information
from talking to the people who came from all over the Greek world to consult at
the shrine of Apollo. Quite often, the oracle went against the prevailing wisdom
of the time and frequently, the proud were humbled and the lowly were justified.
INVESTMENT OBJECTIVE AND POLICIES
SOCIAL POLICY
The Adviser will look for certain social policies in the companies in which it
invests. These social policies are: (1) treating employees fairly (2) sound
environmental protection policies (3) a good equal employment opportunity policy
(4) quality products and services (5) sensitivity to the communities where they
operate and (6) ethical business practices. Obviously, no company will be
perfect in all categories, but the Adviser will make value judgements in
deciding which companies best meet the criteria. The Adviser will also consider
social factors other than these six (as discussed under the investment
objectives of each of the three portfolios).
Although the Fund will emphasize positive reasons for investing in a company,
our operating policies call for excluding companies that manufacture alcohol
or tobacco products or are involved with gambling. The Fund also screens out
weapons contractors and those that generate electricity from nuclear power.
The social criteria of the Parnassus Income Fund limit the availability of
investment opportunities. However, the Trustees and the Adviser believe that
there are sufficient investments available that can meet the Fund's social
criteria and still provide a competitive rate of return.
BALANCED PORTFOLIO
The primary objective of the Balanced Portfolio is current income and capital
preservation. Capital appreciation is a secondary objective. The Fund will try
to achieve this objective by investing in a diversified portfolio of
fixed-income and equity securities. There is no predetermined allocation of
assets for the Balanced Portfolio. The Adviser will determine the mix of
investments depending upon its view of the economic outlook and market
conditions. This portfolio will, however, maintain at least 25% of its assets in
fixed-income securities at all times.
The Balanced Portfolio may invest in both common and preferred stocks as well
as securities that are convertible into these instruments. A common stock
issue selected for this portfolio, however,
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must pay a dividend at least equal to that paid by the average stock in the S&P
500. Issuers of equity securities must meet the social criteria stated in this
prospectus. The Balanced Portfolio will have the same criteria for its
fixed-income investments as the Fixed-income Portfolio. For details, see the
description of the Fixed-income Portfolio below. The Balanced Portfolio may also
invest up to 10% of its assets in community development loan funds such as those
that provide financing for small business and low and moderate income housing.
The Fund will not make loans to a project itself, but rather will invest money
in an intermediary community loan fund. With projects having a strong, positive
social impact, this portfolio may lend money at below market interest rates.
Generally speaking, there will be no secondary market for these loans and thus,
there will be no liquidity for these investments. Although the Fund may make
concessions on interest rate and liquidity, no concessions will be made on
standards of creditworthiness. In general, the Fund will work with community
organizations that have had a successful record in making these kinds of loans.
RISK FACTORS
As with all investments, there are a number of risk factors associated with the
Balanced Portfolio. The equity portion of the Balanced Portfolio poses a risk in
that an individual enterprise may fall on hard times and operate with little or
no profits; this would depress the price of its stock. There are also risks
associated with the economic cycle (e.g. a recession) as well as market risks
that might sharply reduce the valuation of all stocks or stocks in a specific
industry. Since the Balanced Portfolio will invest only in stocks that pay a
dividend, the equity portion of the portfolio will be invested in larger, more
mature companies. These companies tend to be safer and less volatile than those
companies that don't pay a dividend. With preferred stock and higher-yielding
common stocks such as utilities, a major risk will be increased interest rates
that will decrease the market value of the securities in question. For a fuller
description of interest rate risk, see the Risk Factors section under
Fixed-income Portfolio. The discussion of risk factors in that section also
applies to the fixed- income portion of the Balanced Portfolio. There are also
special risks involved with community development loans which may comprise as
much as 10% of this portfolio. These loans do not have liquidity and community
loan funds don't have the same kind of financial resources as do large
commercial enterprises. Moreover, there is no publicly available track record
for community loan funds so it is hard to assess the history of these kinds of
loans. In fact, one of the social objectives of the Parnassus Income Fund is to
establish a publicly available track record for community development loans.
FIXED-INCOME PORTFOLIO
The investment objective of the Fixed-income Portfolio is a high level of
current income consistent with safety and capital preservation. The Adviser will
try to achieve this objective by investing in a diversified portfolio of bonds
and other fixed-income instruments that are rated investment grade. "Investment
grade" means receiving a rating within the four highest categories as determined
by a nationally-recognized rating service such as Standard and Poor's
Corporation
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or Moody's Investors Service. Securities in the lowest of these four
categories are considered investment grade, but they may have speculative
elements about them. The Fixed-Income Portfolio will have at least 65% of its
net assets in securities rated "A" or better. See the Appendix in the Statement
of Additional Information for a description of bond ratings. Obligations issued
or guaranteed by the United States Government, its agencies or instrumentalities
need not have a rating. The fixed-income securities may be long-term,
intermediate-term or short-term or any combination thereof, depending on market
conditions. They may also have floating or variable interest rates. Securities
in this Portfolio may include preferred stock, convertible preferred stock and
convertible bonds. The Fixed-income Portfolio will invest only in investment
grade securities. We will not invest in "high-yield" or "junk" bonds. Because of
this emphasis on quality and safety, the yield may not be as high as it
otherwise might be. One of the social objectives of this portfolio is long-term
support for housing. In this regard, the Fund expects that a substantial portion
of the Fixed-income Portfolio will be invested in obligations of the Federal
Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"), the Federal National
Mortgage Association (FNMA or "Fannie Mae") and the Government National Mortgage
Association (GNMA or "Ginnie Mae"). Other fixed-income securities that the
Adviser may choose from that have a positive social impact include obligations
of the Student Loan Marketing Association (higher education) and the Federal
Farm Credit System (family farms). This Portfolio may also invest up to 10% of
its assets in community development loan funds. See the section on the Balanced
Portfolio for details.
RISK FACTORS
The Adviser anticipates that the Fixed-income Portfolio's average weighted
maturity will be between 5 and 20 years. Because of this relatively long
maturity, the value of this portfolio will vary inversely with changes in
interest rates. As interest rates go up, the net asset value (NAV) will go down
and as interest rates drop, the NAV of this Portfolio will go up. The
Fixed-income Portfolio is intended for investors who can accept the fact that
there will be principal fluctuations. The NAV of the Portfolio may also be
affected by things other than interest rates such as credit risk and general
market factors.
CALIFORNIA TAX-EXEMPT PORTFOLIO
The investment objective of the California Tax-Exempt Portfolio is to provide
high current income exempt from both federal and California personal income tax
while choosing a portfolio that will have a positive social and environmental
impact. The Adviser will pursue this objective by investing in a diversified
portfolio of tax-exempt, investment grade securities issued by California state
and local governments and by other public authorities. This Portfolio is for
California residents only. David Pogran is the portfolio manager for the
California Tax-Exempt Portfolio.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are backed by the taxing power
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of the issuer and considered the safest type of municipal bond. Revenue
bonds are backed by the revenue from a specific project and may be backed by the
credit and security of a private user. Investments in revenue bonds have more
potential risk. While interest on private activity revenue bonds may be tax-
exempt, it may be treated as a tax preference item for taxpayers subject to the
alternative minimum tax. The California Tax-Exempt Portfolio will minimize
its investment in such bonds and no more than 20% of the Portfolio's assets
will be invested in bonds whose income is treated as a tax preference item
under the federal alternative minimum tax. The Portfolio may also purchase
a right to sell a security held by the Fund back to the issuer of the security
or another party at an agreed upon price at any time during a stated period
or on a certain date. These rights are referred to as "demand features" or
"puts." The Portfolio may also purchase floating or variable rate obligations
(including participations) as well as variable rate demand notes (VRDNs)
which feature interest rates that float with an index and a "put" feature.
For temporary purposes, the Portfolio may invest up to 10% of its assets
in no-load, open-end investment companies which invest in tax-exempt
securities with maturities of less than one year ("tax exempt money market
funds") but the Portfolio will put no more than 5% of its assets into any one
fund. Normally, the Portfolio will have all its assets invested in tax-exempt
securities, but may temporarily invest in short-term taxable money market
instruments. Temporary investments will be limited to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities,
prime commercial paper or deposits with federally-insured financial
institutions.
The California Tax-Exempt Portfolio will contain only investment
grade securities, i.e. those that have been rated at the time of purchase in one
of the four highest categories by Moody's, Standard & Poor's Corporation or
Fitch Investors Service, or if unrated, being similar in quality, in the
Adviser's opinion, to the top four categories. These are considered "investment
grade" securities although bonds in the fourth highest category ("Baa") are
regarded as having an adequate capacity to pay principal and interest, but with
greater vulnerability to adverse economic conditions; they also have some
speculative characteristics. (An Appendix to the Statement of Additional
Information contains a description of the ratings of Moody's, Fitch and Standard
& Poor's.) The Portfolio will not invest more than 20% of its total assets in
securities rated in the fourth highest category. If the rating on an issue held
by the Portfolio falls below investment grade after purchase, the Adviser will
consider such an event in its evaluation of a specific security, but it will not
necessarily result in an automatic sale of that security. The Portfolio does,
however, have an operating policy that no more than 5% of its assets may consist
of securities which were rated investment grade at the time of purchase, but
subsequently drop below investment grade. Because the California Tax-Exempt
Portfolio will emphasize safety and avoid junk bonds and other securities below
investment grade, the yield may not be as high as it otherwise might be.
Examples of activities which the Trustees have determined have a positive social
and environmental impact include financing for schools, libraries, hospitals,
mass transit, low and moderate income housing, pollution control facilities,
renewable energy resources, energy conservation projects, park development and
open space acquisition. The Portfolio will not finance activities with a
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negative social or environmental impact as determined by the Trustees and the
Adviser.
Examples of activities with a negative social or environmental impact
include generating electricity from nuclear power, constructing freeways when
mass transit is more appropriate and building large-scale dams or other water
projects that encourage waste. For all activities not listed above, the Adviser
will make a determination on a case-by-case basis as to whether or not the
activity in question has a positive social and environmental impact.
Some municipal securities (usually ndustrial development bonds)are issued to
finance privately-operated sports facilities, convention centers, airports,
parking structures, factories or commercial developments. In these situations,
the Adviser will make decisions on a case-by-case basis as to the social value
of the project in question. For example, the Adviser would probably refrain from
investing in securities that financed a fast-food operation, but probably would
invest in an issue used to construct a plant that provided substantial benefits
to the local community and had no negative environmental consequences. In the
case of a project benefiting a specific company, the Portfolio will apply the
social criteria listed under the "Social Policy" heading in this Prospectus. In
the case of a sports facility, it might have positive benefits such as jobs,
community pride, economic development and family activities. On the other hand,
a new sports facility might have negative environmental consequences or put too
much demand on community financial resources for the benefit of a sports
franchise owner to the detriment of more important community needs. Another
important consideration in a sports stadium might be whether it encouraged
public transit or caused more traffic jams. In all cases such as a sports
facility where the Trustees have not determined whether an activity has a
positive or negative social/environmental impact, the Adviser will balance all
the relevant factors and make a determination if a given security meets the
Fund's social criteria. As a fundamental policy, with respect to 75% of its net
assets, the California Tax-Exempt Portfolio will not purchase a security if, as
a result of the investment, more than 5% of its assets would be in the
securities of any single issuer. (For this purpose, each political subdivision,
agency or instrumentality and each multi-state agency which issues industrial
development bonds on behalf of a private entity, will be regarded as a separate
issuer for determining the diversification of the California Tax-Exempt
Portfolio). Under normal circumstances, the California Tax-Exempt Portfolio
intends to invest 100% of its assets in California municipal obligations. As a
matter of fundamental investment policy, the Portfolio will invest at least 80%
of its assets in municipal obligations, the interest on which will be free from
federal income taxation . As an operating policy, the Portfolio will invest at
least 65 % of its assets in California municipal obligations. Usually, the
Portfolio will substantially exceed these minimum requirements, but the
Portfolio does intend to invest up to 20% of assets in private activity bonds
that may be subject to the federal alternative minimum tax.
RISK FACTORS
Since the California Tax-Exempt Portfolio will invest primarily in California
municipal securities, there are special risks involved because of recent changes
in the State constitution and other laws that raise questions about the ability
of State and municipal issuers to obtain sufficient revenue to pay their bond
obligations. California voters have approved an amendment to the State
constitution known as Proposition 13 which limits ad valorem taxes on real
property and restricts the ability of taxing entities to increase real property
taxes. In addition, another constitutional amendment, popularly known as the
Gann Initiative, limits increases in revenue appropriations. Federal legislative
proposals have threatened the tax-exempt status or use of municipal securities.
Recently, there has also been an overall decrease in tax revenue which has
caused the State of California difficulty in balancing the budget. On July 6,
1992, Moody's Investors Service lowered its ratings on California's general
obligation bonds from Aa1 to Aa and on July 15, 1992 Standard & Poor's
Corporation lowered its ratings on such debt from AA to A+. In announcing the
downgrade, each rating organization cited California's continued weak financial
position and failure to enact a new fiscal year budget when due and criticized
the State's widespread use of registered warrants, a form of IOU, to meet its
normal and recurring payment obligations. In 1994, continuing budget deficits
resulted in Moody's lowering California's credit rating to A1 and Standard and
Poor's lowering the State's rating to A. The Portfolio will invest in securities
with maturities of more than one year and the average maturity of all securities
will usually be five years or more. If the Adviser determines that market
conditions warrant a shorter average maturity, the Portfolio will be adjusted
accordingly. Since the value of debt obligations typically varies inversely with
changes in interest rates, the net asset value per share (NAV) of the Portfolio
will also fluctuate in this manner. As interest rates go up, the NAV will go
down and as interest rates drop, the NAV will go up. The California Tax-Exempt
Portfolio is intended for investors who can accept the fact that there will be
principal fluctuations. (See the Statement of Additional Information for a
further discussion of risk factors involved with investing in California
tax-exempt securities.)
OTHER INVESTMENT POLICIES
Under normal circumstances, each portfolio of the Fund will have its assets
invested according to its stated investment objective. However, for temporary
defensive purposes or pending the investment of the proceeds of sales of Fund
shares or portfolio securities, all or part of the assets may be invested in
money market instruments or in repurchase agreements. In these situations, the
Fund's portfolios will not be following their investment objectives. Repurchase
agreements involve the purchase by the Fund of debt securities and their resale
at an agreed-upon price. In order to minimize risk, the Fund will enter into
repurchase agreements only with recognized securities dealers and banks that
present minimal credit risk and, in all instances, the agreements will be
collateralized by U.S. Government securities with a value equal to the total
repurchase price. Repurchase agreements are always for periods of less than one
year and no more than 5% of a portfolio's assets may be invested in repurchase
agreements. The Fund is subject to certain investment restrictions which are
fundamental policies that cannot be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. An operating policy
of the Fund or a Portfolio is one that can be changed by the Board of Trustees.
Each investment policy set forth in this Prospectus is fundamental unless
specifically described as an operating policy. The investment objective of each
portfolio is a fundamental policy as are restrictions that provide that each
portfolio may not (i) with respect to 75% of a portfolio's net assets, invest
more than 5% of the value of its net assets in securities of any one issuer
(other than obligations issued or guaranteed by the United States Government,
its agencies or instrumentalities); (ii) with respect to 75% of a portfolio's
net assets, purchase more than 10% of the outstanding voting securities or of
any class of securities of any issuer; (iii) invest more than 25% of the value
of its total assets in securities of issuers in any one industry; or (iv) borrow
money except from banks for temporary or emergency purposes in amounts not
exceeding 10% of each portfolio's total assets. (A portfolio may not make
additional investments while any borrowings are outstanding.) It is possible for
the Fund to make limited investments in the securities of other investment
companies. See the Statement of Additional Information for more details on the
Fund's investment restrictions. An operating (although not fundamental) policy
of the Fund is that it should not make an investment if, thereafter, more than
15% of a portfolio's net assets would be illiquid. If the Fund finds itself with
more than 15% of a portfolio's net assets so invested, it will take action to
bring the portfolio's illiquid assets below 15%. Illiquid assets include (i)
those which are restricted, i.e. those which cannot be freely sold for legal
reasons (which the Fund does not expect to own); (ii) fixed time deposits
subject to withdrawal penalties (other than overnight time deposits); (iii)
repurchase agreements having a maturity of more than seven days; and (iv)
investments for which market quotations are not readily available. However, the
15% limit does not include obligations which are payable at principal amount
plus accrued interest within seven days after purchase.
PERFORMANCE INFORMATION
YIELD OF PORTFOLIOS
From time to time, the Balanced, the Fixed-income and the California Tax-Exempt
Portfolios may advertise their yields including current yield, effective yield
and tax equivalent yield. Current yield refers to the income generated by an
investment over a specific time period which is then annualized (i.e. the amount
of income generated during a seven-day period is assumed to be generated each
week over a 52-week period and is shown as a percentage of the principal).
Effective yield is calculated in a similar manner, but when annualized, the
income earned from the investment is assumed to be reinvested. Effective yield
differs from current yield because of the compounding effect of reinvestment.
The California Tax-Exempt Portfolio may also advertise its tax equivalent yield.
The Portfolio calculates this by taking the tax-exempt current (or effective)
yield and dividing it by one minus the maximum income tax rate for California
residents (both federal and state) and adding it to that portion (if any) of the
Portfolio's yield that is not tax-exempt. TOTAL RETURN The Balanced Portfolio,
the Fixed-income Portfolio and the California Tax- Exempt Portfolio may each
advertise "total return." Total return refers to the total change in value of an
investment in the portfolio over a specific time period. It differs from yield
in that yield figures measure only the income component of the Portfolio's
investments while total return measures both income and any change in principal
(net asset value). For more information on how we calculate yield and total
return, please see the Statement of Additional Information. Total return is
historical in nature and is not intended to indicate future performance. The
Fund will quote total return for the most recent one-year period and the average
annual total return will be quoted for the most recent five and ten-year
periods, or for the life of the Portfolio, if shorter.
COMPARISON OF FUND PORTFOLIOS
From time to time, a portfolio may quote its relative performance in sales
literature or advertisements in newspapers, magazines or other publications. The
source for these quotations will be Lipper Analytical Services, Morningstar
Mutual Fund Values, Wiesenberger Investment Companies, Schabacker Investment
Management, Barron's, Money and Forbes. The Fund will either quote a portfolio's
relative performance compared to all funds followed by the independent source or
a portfolio's relative performance in its respective category. Performance
Figures
Average Annual Total Return
Balanced Fixed-Income California Tax-
For Periods Ending December 31, 1995 Portfolio Portfolio Exempt Portfolio
One Year 21.42% 11.81% 8.36%
Life of Fund
(date of inception was 9/1/92) 12.98% 6.85% 6.67%
The Fund's annual report contains additional performance information including a
discussion by management. You may obtain a copy of the annual report without
charge by calling or writing the Fund.
MANAGEMENT
The Fund's Board of Trustees decides on matters of general policy and supervises
the activities of the Fund's Adviser. The Fund's officers conduct and supervise
the daily business operations of the Fund. The Trustees and officers are listed
below together with their principal occupations during at least the past five
years.
Jerome L. Dodson*, President and Trustee, is also President of the
Parnassus Fund and of Parnassus Investments, the Adviser. From 1975 to 1982, Mr.
Dodson served as President and Chief Executive Officer of Continental Savings of
America. From 1982 to 1984, he was President and Trustee of Working Assets Money
Fund and he also served as a Trustee from 1988 through 1991. He is a graduate of
the University of California at Berkeley and of Harvard University's Graduate
School of Business Administration. Mr. Dodson is the portfolio manager for both
the Balanced Portfolio and the Fixed-Income Portfolio.
Herbert A. Houston,
Trustee, is the Chief Executive Officer of the Haight Ashbury Free Clinics, Inc.
Previously, he worked as Development Director for the National Association for
Sickle Cell Disease, Vice President of the Bay Area Black United Fund and as an
executive for the Combined Federal Campaign and the United Way of the Bay Area.
He is a graduate of California State University at Hayward and holds a Master's
degree in Public Administration & Health Services from the University of
Southern California.
Howard M. Shapiro, Trustee, is a consultant to non-profit
organizations specializing in marketing, fund-raising and organizational
structure. Previously, he worked for 28 years in marketing, advertising and
public relations. He is a Trustee of the Portland Art Museum, a Director of the
Social Investment Forum and a Commissioner of the Portland Housing Authority.
Mr. Shapiro is a graduate of the University of Washington. He is no relation to
Joan Shapiro.
Joan Shapiro, Trustee, is Senior Vice President of The South Shore
Bank of Chicago and its holding company, Shorebank Corporation. She is a former
President of The Social Investment Forum, the national trade association of the
social investment movement. She is also a Director of the New Israel Fund and a
Governor of International House at the University of Chicago. She is a graduate
of Cornell University. Ms. Shapiro is no relation to Howard Shapiro.
Howard Fong*, Vice President and Treasurer, is also Vice President of the
Parnassus Fund and of Parnassus Investments. Mr. Fong began his career as an
examiner with the California Department of Savings and Loan. In 1979, he
joined Continental Savings where he worked until 1988, most recently as Senior
Vice President and Chief Financial Officer. He joined the Parnassus Fund
in 1988. Mr. Fong graduated from San Francisco State University with a
degree in business administration .
Richard D. Silberman, Secretary, is an attorney specializing in
business law. He has been general counsel to the Parnassus Income Fund since its
inception. He holds bachelor's degrees in business administration and law from
the University of Wisconsin and a Master of Laws from Stanford University. He is
a member of both the Wisconsin and California Bars.
*Denotes "interested person" as defined in the Investment Company Act of 1940
9
<PAGE>
THE ADVISER
Parnassus Investments (the "Adviser"), One Market-Steuart Tower #1600, San
Francisco, California 94105 acts as investment adviser to the Fund subject to
the control of the Fund's Board of Trustees, and as such, supervises and
arranges the purchase and sale of securities held in the Fund's portfolios. The
Adviser has been the investment manager of the Parnassus
Fund since 1985 and the Parnassus Income Fund since 1992.
For its services, the Fund, under an Investment Advisory Agreement (the
"Agreement") be-tween the Fund and the Adviser, pays the Adviser a fee, computed
and payable at the end of each month, at the following annual percentages of
each portfolio's average daily net assets; the Balanced Portfolio, 0.75% of the
first $30 million, 0.70% of the next $70 million and 0.65% of the amount above
$100 million. For the Fixed-income Portfolio and the California Tax-Exempt
Portfolio, the fee is 0.50% of the first $200 million, 0.45% of the next $200
million and 0.40% of the amount above $400 million. In addition to the fee
payable to the Adviser, the Fund is responsible for its operating expenses,
including: (i) interest and taxes; (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses of its Trustees other than those
affiliated with the Adviser; (v) legal and audit expenses; (vi) fees and
expenses of the Fund's custodian, transfer agent and accounting services agent;
(vii) expenses incident to the issuance of its shares, including issuance on the
payment of or reinvestment of dividends; (viii) fees and expenses incident to
the registration under federal or state securities laws of the Fund or its
shares; (ix) expenses of preparing, printing and mailing reports and notices and
proxy material to shareholders of the Fund; (x) all other expenses incidental to
holding meetings of the Fund's shareholders; (xi) dues or assessments of or
contributions to the Investment Company Institute, the Social Investment Forum
or any successor; (xii) such nonrecurring expenses as may arise, including
litigation affecting the Fund and the legal obligations which the Fund may have
to indemnify its officers and Trustees with respect thereto. In allocating
brokerage transactions, the investment advisory agreement states that the
Adviser may consider research provided by brokerage firms or whether those firms
sold shares of the Fund. See page B-11 of the SAI for more information on
directed brokerage.
HOW TO PURCHASE SHARES
DIRECT PURCHASE OF SHARES
To purchase shares, an investor should complete and mail the application form
along with a check payable to The Parnassus Income Fund. It should be sent to
the Fund at the following address.
The Parnassus Income Fund
One Market-Steuart Tower #1600
San Francisco, California 94105
10
<PAGE>
An initial investment must be at least $2,000 except for certain employee
benefit plans or tax qualified retirement plans (e.g. IRA, SEP) which have a
$500 minimum. Subsequent investments for all accounts must be at least $50. With
subsequent investments, shareholders should write the name and number of the
account on the check. Checks do not need to be certified, but are accepted
subject to collection and must be drawn in United States dollars on United
States banks. If received before 1:00 p.m. San Francisco time, the investment
will be processed at the net asset value calculated on the same business day it
is received. If the investment is received after 1:00 p.m. San Francisco time,
it will be processed the next business day.
OTHER INFORMATION
The Fund also offers additional services to investors including plans for the
systematic investment and withdrawal of money as well as IRA and SEP plans.
Information about these plans is available from the Distributor. The minimum
initial investment in the Fund is $2,000 and the minimum subsequent investment
is $50, except for retirement plans, and Parnassus Automatic Investment Accounts
(PAIP) which have a $500 minimum. The distributor reserves the right to reject
any order. There is no sales charge for any portfolio of the Fund, but investors
may be charged a transaction or other fee in connection with purchases or
redemptions of Fund shares on their behalf by an investment adviser, a brokerage
firm or other financial institution.
PURCHASES VIA PARNASSUS AUTOMATIC INVESTMENT PLAN (PAIP) After making an
initial investment to open an account($500 minimum), a shareholder may purchase
additional shares ($50 minimum) via the Parnassus Automatic Investment Plan
PAIP). On a monthly or quarterly basis, your money will automatically be
transferred from your bank account to your Fund account on the day of your
choice (3rd or 18th day of the month). You can elect this option by filling out
the PAIP section on the new account form. For further information, call the
und and ask for the free brochure called "Automatic Investing and Dollar
Cost Averaging.
" NET ASSET VALUE The Fund's net asset value per share is determined at
4:00 p.m. Eastern time on each day that the New York Stock Exchange is open
for trading ("business day") and on any other day that there is a sufficient
degree of trading in investments held by the Fund to affect the net asset
value. The net asset value may not be determined on any day that there are no
transactions in shares of the Fund. The net asset value per share is the value
of the Fund's assets, less its liabilities, divided by the number of shares
of the Fund outstanding. The value of the Fund's portfolio securities will
be the market value of such securities. However, securities and other assets
for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Adviser under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Trustees. See the Statement of Additional Information for
details.
11
<PAGE>
HOW TO REDEEM SHARES
You may sell or redeem your Fund shares by offering them for "repurchase" or
"redemption" directly to the Fund. To sell your shares to the Fund (that is, to
redeem your shares), you must send your instructions to the Fund at One
Market-Steuart Tower #1600, San Francisco, California 94105. Your shares will be
redeemed at the net asset value next determined after receipt by the Fund of
your instructions in proper form. Give your account number and indicate the
number of shares you wish to redeem. All owners of the account must sign unless
the account application form states that only one signature is necessary for
redemptions. All redemption checks must be sent to the address of record on the
account. The Fund must have a change-of-address on file for 30 days before we
send redemption or distribution checks to the new address. Otherwise, we require
a signature guarantee or the check must be sent to the old address. The Fund
usually requires additional documents when shares are registered in the name of
a corporation, agent or fiduciary or if you are a surviving joint owner. In the
case of a corporation, we usually require a corporate resolution signed by the
secretary. In the case of an agent or fiduciary, we usually re-quire an
authorizing document. In the case of a surviving joint owner, we usually require
a copy of the death certificate. Contact the Fund by phone at (800) 999-3505 if
you have any questions about requirements for redeeming your shares. If the Fund
has received payment for the shares you wish to redeem and you have provided the
instructions and any other documents needed in correct form, the Fund will
promptly send you a check for the proceeds from the sale. Ordinarily, the Fund
must send you a check within seven days unless the New York Stock Exchange is
closed for days other than weekends or holidays. However, payment may be delayed
for any shares purchased by check for a reasonable time (not to exceed 15 days
from the date of such purchase) necessary for the Fund to determine that the
purchase check will be honored. Exchange Privileges. The proceeds of a
redemption of shares from a portfolio of the Fund can be used to purchase shares
of another portfolio of the Fund. The proceeds of a redemption of shares from
the Fund can also be used to purchase shares of the Parnassus Fund, but if no
sales charge was paid on the shares being redeemed from the Income Fund, those
shares will be subject to a sales charge when they are invested into the
Parnassus Fund. If shares are redeemed from the Parnassus Fund and invested in
the Income Fund, there will be no additional sales charge if those shares are
transferred back into the Parnassus Fund. There is no limit on the number of or
dollar amount of exchanges. The Fund reserves the right to modify or eliminate
this exchange privilege in the future. The exchange privilege is only available
in states where the exchange may be legally made. The exchange of shares is
treated as a sale and an exchanging shareholder may, therefore, realize a
taxable gain or loss. Telephone Transfers. Shareholders who elect to use
telephone transfer privileges must so indicate on the account application form.
The telephone transfer privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in another one of the Parnassus
Funds (e.g. The Parnassus Fund). Neither the Fund nor Parnassus Investments will
be liable for following instructions communicated by telephone reasonably
15
<PAGE>
believed to be genuine; a loss to the shareholder may result due to an
unauthorized transaction. The Fund and the transfer agent will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Procedures may include one or more of the following: recording all telephone
calls requesting telephone exchanges, verifying authorization and requiring some
form of personal identification prior to acting upon instructions and sending a
statement each time a telephone exchange is made. The Fund and Parnassus
Investments may be liable for any losses due to un-authorized or fraudulent
instructions only if such reasonable procedures are not followed. Of course,
shareholders are not obligated in any way to authorize telephone transfers and
may choose to make all exchanges in writing. The telephone exchange privilege
may be modified or discontinued by the Fund at any time upon 60 days' written
notice to shareholders. Redemption of Small Accounts. The Trustees may, in order
to reduce the expenses of the Fund, redeem all of the shares of any shareholder
whose account is worth less than $1,000 as a result of a redemption order. This
will be done at the net asset value determined as of the close of business on
the business day preceding the sending of such notice of redemption. The Fund
will give shareholders whose shares are being redeemed 60 days' prior written
notice in which to purchase sufficient shares to avoid such redemption.
DIVIDENDS AND TAXES
The Balanced Portfolio normally declares and pays dividends from net investment
income ("income dividends") on a quarterly basis. The Fixed-income Portfolio and
the California Tax Exempt Portfolio normally declare and pay income dividends on
a monthly basis. Dividends from long-term capital gains ("capital gains
dividends") are paid once a year (usually in mid-December) for all portfolios of
the Fund. Shareholders can have dividends paid in additional shares and
reinvested or paid out in cash. If an investor purchases shares just before the
dividend date, he or she will be taxed on the distribution even though it's a
return of capital.
TAXATION OF THE FUND
By paying out substantially all its net investment income (among other things),
the Fund believes it qualifies as a regulated investment company under
Subchapter M of the Internal Revenue Code. The Fund intends to continue to
qualify and, if so, it will not pay income taxes on either its net investment
income or on its capital gains. Instead, each shareholder will be responsible
for his or her own taxes.
TAXATION OF SHAREHOLDERS
For the Balanced Portfolio and the Fixed-income Portfolio, all dividends from
net investment income together with distribution of short-term capital gains
(collectively, "income dividends") will be taxable as ordinary income to
shareholders even though paid in additional shares. Any net long-term capital
gains ("capital gains dividends") are taxable as such to shareholders.
Tax-exempt shareholders, of course, will not be required to pay taxes on any
amount paid to them. (This includes IRAs and other tax-deferred retirement
accounts.) Annually, shareholders will receive on Form 1099 the dollar amount
and tax status of all dividends received. Under the Interest and Dividend Tax
Compliance Act of 1983, the Fund may be required to impose backup withholding at
a rate of 20% from any income dividend and capital gain distribution upon
payment of redemption proceeds. Shareholders can eliminate any backup
withholding requirements by complying with provisions of that Act relating to
the furnishing and certification of taxpayer identification numbers and
reporting of dividends. To the extent that income dividends are derived from
qualifying dividends paid by domestic corporations whose shares are owned by the
Fund, such dividends, in the hands of the Fund's corporate shareholders, will be
eligible for the 70% dividends received deduction. Individuals do not qualify
for this deduction--#only corporations.
CALIFORNIA TAX-EXEMPT PORTFOLIO
This Portfolio is for California residents only. Dividends derived from interest
on state and local obligations constitute "exempt-interest" dividends on which
shareholders are not subject to federal income tax. To the extent that income
dividends are derived from earnings attributable to California state and local
obligations, they will be exempt from federal and California personal income
tax. Such dividends may be subject to California franchise taxes and corporate
income taxes if received by a corporation subject to such taxes. Dividends
attributable to interest on certain private activity bonds issued after August
7, 1986 must be included in federal alternative minimum taxable income for the
purpose of determining liability (if any) for the alternative minimum tax (AMT)
for individuals and for corporations for taxable years beginning after December
31, 1986. Dividends derived from taxable interest and any distributions of
short-term capital gains are taxable to shareholders as ordinary income.
Distributions of long-term capital gains, if any, are taxable to shareholders as
a long-term capital gain regardless of how long their shares of the Portfolio
have been held except that losses on certain shares held less than six months
will be treated as long-term capital losses to the extent of the long-term
capital gains dividends received on such shares. The Portfolio will notify
shareholders each January as to the federal and California tax status of
dividends paid during the previous calendar year.
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<PAGE>
GENERAL INFORMATION
The Fund was organized as a Massachusetts business trust on August 8,1990. The
Declaration of Trust provides the Trustees will not be liable for errors of
judgement or mistakes of fact or law, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Shareholders are entitled to one vote for each full share held (and fractional
votes for fractional shares) and may vote in the election of Trustees and on
other matters submitted to meetings of shareholders. In matters pertaining to
only one series of the Trust (i.e. one Portfolio), only holders of that series
are entitled to vote, so matters that require the approval of outstanding shares
must be approved by the holders of a majority of each series that will be
affected by the matter. On issues related to the Fund as a whole, specifically
including election of Trustees and ratification of the Fund's principal
underwriter and selection of the Fund's independent public accountants, holders
of all series will vote. It is not contemplated that regular annual meetings of
shareholders will be held. The Declaration of Trust provides that the Fund's
shareholders have the right, upon the declaration in writing or vote of more
than two-thirds of its outstanding shares, to remove a Trustee. The Trustees
will call a meeting of shareholders to vote on the removal of a Trustee upon
written request of the record holders of ten percent of its shares. In addition,
ten shareholders holding the lesser of $25,000 worth or one percent of Fund
shares may advise the Trustees in writing that they wish to communicate with
other shareholders for the purpose of requesting a meeting to remove a Trustee.
The Trustees will then, if requested by the applicant, mail at the applicants'
expense the applicant's communication to all other shareholders. No amendment
may be made to the Declaration of Trust without the affirmative vote of the
holders of more than 50% of our outstanding shares, or upon liquidation and
distribution of its assets, if approved by the vote of the holders of more than
50% of our outstanding shares. If not so terminated, the Fund will continue
indefinitely. Deloitte & Touche llp, 50 Fremont Street, San Francisco, CA 94105
has been selected as the Fund's independent auditors. Union Bank of California,
475 Sansome Street, San Francisco, CA 94111, has been selected as the custodian
of the Fund's assets. Shareholder inquiries should be directed to the Fund.
Parnassus Investments, One Market-Steuart Tower #1600, San Francisco, California
94105, is the Fund's transfer agent and accounting agent. As transfer agent,
Parnassus Investments receives a fee of $2.30 per account per month. As
accounting agent, Parnassus Investments receives a fee of $50,000 per year.
Jerome L. Dodson, the Fund's President, is the sole stockholder of Parnassus
Investments.
16
<PAGE>
INVESTMENT ADVISER
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
LEGAL COUNSEL
Richard D. Silberman, Esq.
465 California Street #1020
San Francisco, California 94104
AUDITORS
Deloitte & Touche llp
50 Fremont Street
San Francisco, California 94105
CUSTODIAN
Union Bank of California
475 Sansome Street
San Francisco, California 94111
DISTRIBUTOR
Parnassus Investments
One Market-Steuart Tower #1600
San Francisco, California 94105
12
<PAGE>
The Parnassus Income Fund
One Market
Steuart Tower - Suite #1600
San Francisco, CA 94105
(415) 778-0200
STATEMENT OF ADDITIONAL INFORMATION DATED May 1, 1996
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Fund's Prospectus dated May 1, 1996, a copy of which may
be obtained by calling or writing the Fund at the address listed above.
TABLE OF CONTENTS
Cross-reference to
Page page in prospectus
Investment Objective and Policies B-2 5
Investment Restrictions B-2 10
Repurchase Agreements B-4 10
Special Risk Factors B-5 6,7,9
Management B-8 13
Performance B-9 11
Net Asset Value B-13 15
Shareholder Services B-13 14
General B-14 19
Financial Statements B-15
Appendix B-16
17
<PAGE>
Investment Objectives and Policies
The main investment objective of the Fund is to provide shareholders
with current income by investing in securities that have a positive impact on
society. The Fund offers investors a choice of three portfolios: a Balanced
Portfolio, a Fixed-Income Portfolio and a California Tax-Exempt Portfolio. The
Fund's Prospectus describes its strategy with respect to the composition of each
portfolio.
Investment Restrictions
The Fund has adopted the following restrictions (in addition to those
indicated in the Prospectus) as fundamental policies which may not be changed
without the approval of the holders of a "majority" (as defined in the
Investment Company Act of 1940) of the Fund's outstanding shares. A vote of the
holders of a "majority" (as so defined) of the Fund's outstanding shares means a
vote of the holders of the lesser of (i) 67% of the shares present or
represented by proxy at a meeting at which more than 50% of the outstanding
shares are represented or (ii) more than 50% of the outstanding shares.
The Fund may not:
(1)With respect to 75% of its total net assets, purchase the securities
of any one issuer other than obligations of the U.S. Government, its agencies or
instrumentalities, if as a result: (i) more than 5% of a portfolio's total net
assets (taken at current value) would then be invested in securities of a single
issuer or (ii) a portfolio would hold more than 10% of any class of securities
of an issuer (taking all common stock issues as a single class) or more than 10%
of the outstanding voting securities of an issuer.
(2)Purchase any security if as a result any portfolio would have 25% or
more of its net assets (at current value) would be invested in a single
industry.
(3)Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions).
(4)Make short sales of securities, purchase on margin or purchase puts,
calls, straddles or spreads.
(5)Issue senior securities, borrow money or pledge its assets except
that each portfolio may borrow from a bank for temporary or emergency purposes
in amounts not exceeding 10% (taken at the lower of cost or current value) of
its net assets (not including the amount borrowed) and pledge its assets to
secure such borrowings. The portfolio will not make additional purchases while
any borrowings are outstanding.
B-2
<PAGE>
(6)Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or Trustee of the Fund or officer or director of the Adviser owns
more than one-half of 1% of the outstanding securities of such issuer and such
officers and Trustees who own more than one-half of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer.
(7)Buy or sell commodities or commodity contracts including futures contracts or
real estate, real estate limited partnerships or other interests in real estate
although it may purchase and sell securities of companies which invest or deal
in real estate.
(8)Act as underwriter except to the extent that in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. (9)Make investments for the purpose of
exercising a controlling influence over the management or policies of a company,
except that the Fund may seek to influence the social policies of the companies
it invests in.
(10) Participate on a joint or joint and several basis in any trading
account in securities.
(11)Purchase any security restricted as to disposition under federal
securities laws.
(12)Invest in securities of other registered investment companies except that
each portfolio may invest up to 10% of its assets (taken at current value) in
money market funds, but no more than 5% of its assets in any one fund and no
portfolio may own more than 3% of the outstanding voting shares of any one fund.
The Adviser will waive its management fee on any portion of the Fund's assets
that are invested in another registered investment company. This restriction,
however, does not apply to a transaction that is a part of a merger,
consolidation or other acquisition.
(13)Invest in interests in oil, gas or other mineral exploration or development
programs or in oil, gas or other mineral leases although it may invest in the
common stocks of companies which invest in or sponsor such programs.
(14)Invest more than 5% of the Balanced Portfolio or more than 5% of the
Fixed-Income Portfolio in foreign securities. The California Tax-Exempt
Portfolio may not invest in foreign securities or currencies.
(15)Purchase warrants, if as a result, a Portfolio would then have more than 5%
of its total assets (taken at current value) invested in warrants. Included
within that amount, but not to exceed 2% of the value of a Portfolio's assets,
may be warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange.
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(16)Make loans except through repurchase agreements. Each portfolio,
though, may invest no more than 5% of its assets in repurchase agreements. The
Balanced Portfolio and the Fixed-Income Portfolio, however, may lend up to 10%
of each Portfolio's assets to community loan funds as described in the
Prospectus. The Fund will not make loans directly to a project itself, but
rather will invest in an intermediary community loan fund.
(17)Invest more than 5% of the assets of any one portfolio in the
securities of unseasoned issuers (i.e. those with less than three
years of continuous operation).
Repurchase Agreements
The Fund may purchase the following securities subject to repurchase
agreements: certificates of deposit, certain bankers' acceptances and securities
which are direct obligations of, or that are fully guaranteed as to principal,
by the United States or any agency or instrumentality of the United States. A
repurchase transaction occurs when at the time the Fund purchases a security,
the Fund also resells it to the vendor (normally a commercial bank or a
broker-dealer) and must deliver the security (and/or securities substituted for
them under the repurchase agreement) to the vendor on an agreed-upon date in the
future. Such securities, including any securities so substituted, are referred
to as the "Resold Securities". The Adviser will consider the creditworthiness of
any vendor of repurchase agreements and continuously monitor the collateral so
that it never falls below the resale price. The resale price is in excess of the
purchase price in that it reflects an agreed-upon market interest rate effective
for the period of time during which the Fund's money is invested in the Resold
Securities. The majority of these transactions run from day to day and the
delivery pursuant to the resale typically will occur within one to five days of
the purchase. The Fund's risk is limited to the ability of the vendor to pay the
agreed-upon sum upon the delivery date.
If there is a default, the Resold Securities constitute security for the
repurchase obligation and will be promptly sold by the Fund. However, there may
be delays and costs in establishing the Fund's rights to the collateral and the
value of the collateral may decline. The Fund will bear the risk of loss in the
event that the other party to the transaction defaults on its obligation and the
Fund is delayed or prevented from exercising its right to dispose of the
underlying securities, including the risk of a possible decline in the value of
the underlying securities during the period in which the Fund seeks to assert
its rights.
Repurchase agreements can be considered as loans "collateralized" by the
Resold Securities (such agreements being defined as "loans" in the 1940 Act.)
The return on such "collateral" may be more or less than that from the
repurchase agreement. The Resold Securities will be marked to market every
business day so that the value of the "collateral" is at least equal to the
value of the loan including the accrued interest earned thereon. All Resold
Securities will be held by the Fund's custodian either directly or through a
securities depository.
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SPECIAL RISK FACTORS AFFECTING CALIFORNIA MUNICIPAL SECURITIES
Changes in California could adversely affect the market values,
marketability (the ability to sell or buy), or result in a default on municipal
securities issued in the State. The economic condition of the State affects tax
revenues and could have an adverse effect on municipal obligations. What follows
is a discussion of some of the more important legal and financial trends. This
discussion is based on information drawn from official prospectuses and
statements of the State of California.
Limitations on Taxes and Appropriations
Some municipal securities held in the portfolio may depend wholly or
partially on property taxes as a revenue source for payment of interest and
principal. Article XIIIA, popularly known as Proposition 13, limits ad valorem
property taxes (property taxes based on the property's value) to 1% of full cash
value of the property and limits increases in assessments to 2% per year except
in the case of new construction or a change in ownership. However, if voters
approve a bond issue, property taxes may be raised above the 1% level to pay
debt service on that bond.
In 1986, voters approved Proposition 62 which imposed limits on a
locality's raising or levying general taxes. Although major portions of this
initiative were initially overturned in court in November 1995, the California
Supreme Court made a ruling supporting Proposition 62.
Article XIIIB (known as the Gann Initiative), enacted in 1979 via a
voter initiative, subjects State and local governments to annual spending
limitations. These limitations are adjusted annually to reflect changes in cost
of living and population and only apply to the appropriation of "proceeds of
taxes." Spendable funds exempted from these appropriation limits include the
proceeds of bond issues and revenue from user fees. Debt service on bonds issued
prior to January 1, 1979 or subsequently authorized by voters is not subject to
these limitations.
Article XIIIB's appropriation limitations did not constrain most
California governmental entities until the mid and late 1980's when many of
these entities approached their Article XIIIB spending limits. The passage of
Proposition 111 in 1990 allowed for greater increases in appropriation levels.
In November 1988, voters approved Proposition 98, a combined initiative
constitutional amendment and statute guaranteeing minimum State funding for K-
12 school districts and community college districts at a level equal to the
greater of (a) the same percentage of general fund revenues as the percentage
appropriated to such districts in 1986-87 or (b) the amount actually
appropriated to such districts from the general fund in the previous fiscal year
adjusted for growth in enrollment and changes in cost of living.
In June 1990, California voters approved Proposition 111 which allowed
for some increase in appropriation levels, but provided that one-half of all
revenues in excess of the state's appropriation limit must be allocated to
public schools and community colleges. Since Proposition 98 and 111 allocated
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a minimum funding level to schools, this could potentially reduce the resources
available for other State programs and put pressure on issuers of municipal
obligations.
Proposition 13, the Gann Initiative, Proposition 98 and Proposition 111
were adopted as measures that qualified for the ballot pursuant to California's
initiative process. Other initiatives or similar measures affecting the
availability of revenue to pay California municipal obligations could be adopted
in the future.
State Financial Condition
State General Fund revenues are principally derived from California
personal income tax (44% of total revenues), sales tax (35%), corporate tax
(12%) and the gross premium tax on insurance (3%). All of these revenue sources
have been negatively affected during the recession that ended in 1993. The
resulting revenue shortfall has been a key factor in the recurring problems
California has experienced balancing its annual budgets. Growth in expenditures
compounded the revenue shortfall problem.
As of June 30, 1995, the state's deficit was estimated at $350 million.
The deficit was reduced over the previous twelve months as the economic recovery
that began in 1993 produced higher tax revenues. The Governor's budget proposal
plans to eliminate the accumulated deficit by June 30, 1996.
If the revenue assumptions of the current budget are not met, more
negotiation on reducing expenditures or increasing revenues could be needed to
balance the budget and eliminate the accumulated deficit.
Since the passage of Proposition 13, property tax revenues received by
local governments have dropped by over 50%. In response, the California
Legislature has provided substantial additional revenue for local governments.
Because of budgetary pressure and limits on allocations of tax revenues,
California's state government has been shifting program responsibilities from
the state to county and city governments. To date, most changes in program
responsibilities from the state to local governments have been balanced with
increases in funding. However, cuts in state aid that are not balanced by
funding increases could hurt financially stressed local government entities,
particularly counties. Certain California municipal securities may be
obligations of issuers which rely in whole or in part on California state
revenues for payment of these obligations. The proportion of the State's general
fund that will be distributed in the future to counties, cities and their
various entities, is unclear.
Revenues of Health Care Institutions
Certain California tax-exempt securities may be obligations which are
payable solely from the revenues of health care institutions. Certain measures
taken under federal or California law to reduce health care costs may adversely
affect revenues of health care institutions and, consequently, payment on those
municipal obligations.
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Revenues Secured by Deeds of Trust
Some California municipal securities may be obligations which are
secured in whole or in part by a mortgage or deed of trust on real property. An
example would be bonds issued to finance low and moderate income housing.
Because of provisions of California law, the effective minimum period for
foreclosing on a mortgage could be in excess of seven months from the time of
initial default. This delay could disrupt the flow of revenue available to an
issuer for payment of debt service if such defaults occur with respect to a
substantial number of mortgages or deeds of trust. Other aspects of California
law could further delay foreclosure proceedings in the event of a default and
disrupt payments on municipal obligations.
Assessment Bonds (Mello-Roos Bonds)
Typically, these bonds are secured by land undeveloped as of the
issuance. The plan is for the land to be developed using funds from the
issuance. Declining real estate values or a drop in real estate sales activity
can result in canceled or delayed development along with increased default risk.
The special assessments or taxes securing these bonds are not the personal
liability of the owner of the property assessed, so the lien on the property is
the only security for these bonds. Furthermore, in the event of delinquency in
payment of assessments or taxes on the properties involved, the issuer is not
required to make payments on the bonds, except in some instances where there is
a reserve account for bond payments.
Redevelopment Agency Debt
"Tax Allocation" bonds issued by redevelopment agencies can be affected
by property tax limitations because these bonds are secured by the increase in
assessed valuation expected after a redevelopment project is completed. Should
the project not be completed, perhaps because of a natural disaster like an
earthquake, there could be no increase in assessed property values to pay off
the bonds. Moody's and S&P stopped rating tax allocation bonds after the passage
of Articles XIIIA and XIIIB, and since have only resumed rating selected bonds
of this nature.
Seismic Activity
California is a geologically active area subject to earthquakes. Any
California municipal security could be adversely affected by a catastrophic
earthquake. For example, a project might not be completed or might suffer an
interruption in revenue-generating capacity, or property values might drop
resulting in reduced tax assessments.
The October 1989 Loma Prieta earthquake resulted in an estimated $2
billion reduction in personal income statewide and was offset by reconstruction
activity. The Federal Government provided $3.5 billion in earthquake aid and the
State Legislature passed a temporary sales tax increase to fund earthquake
relief. The earthquake did not materially affect the California economy.
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The January 1994 Northridge (Los Angeles) earthquake caused an
estimated $20 billion or more in property damage. The state's share of the loss
after federal aid and insurance is estimated at $1.9 billion. Costs will be
covered from the state's general fund and borrowing from the federal government.
The state's ability to pay principal and interest on its bonds was not affected.
Although isolated instances of damage to some bond-financed facilities occurred,
reserves and insurance should be sufficient to ensure payment of principal and
interest according to all the major credit rating agencies. No credit rating on
any bond in the earthquake area was changed as a consequence of the Northridge
earthquake.
Orange County Default
In December of 1994, Orange County declared bankruptcy after
discovering that its Treasurer had invested in risky derivative securities which
caused enormous losses to the county's investment fund. Estimates of the losses
approximate $1.7 billion. This bankruptcy disturbed the California municipal
bond market and the market value of uninsured Orange County bonds dropped
sharply. Because the portfolio held no uninsured Orange County bonds, it was not
substantially affected by the Orange County bankruptcy. However, other
California municipalities may mismanage their investment funds and, in the
future, they may also suffer losses which might have an effect on the Portfolio
in that the market value of some municipal securities might drop substantially.
MANAGEMENT
The Trustees and Officers of the Fund are as follows:
Name and Address
Position with Fund Principal Occupation
During Past Five Years
Jerome L. Dodson*
The Parnassus Income Fund
One Market
Steuart Tower #1600
San Francisco, CA 94105
President and Trustee President of the Parnassus
Fund and President and
Director of Parnassus
Investments since June of
1984; President and Trustee of
Working Assets Money Fund from
June 1982 until June 1984 and
Trustee from June 1988 until
December 1991. President of
Continental Savings of America
1976 until 1982.
Herbert A. Houston
The Parnassus Income Fund
One Market
Steuart Tower #1600
San Francisco, CA 94105
Trustee
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Chief Executive Officer of the
Haight Ashbury Free Clinics,
Inc. 1987-Present; Development
Director, National Association
for Sickle Cell Disease, 1983
to 1987.
Joan Shapiro
The Parnassus Income Fund
One Market
Steuart Tower #1600
San Francisco, CA 94105
Trustee Senior Vice President of
The South Shore Bank of
Chicago.
Howard Shapiro
The Parnassus Income Fund
One Market
Steuart Tower #1600
San Francisco, CA 94105
Trustee
Consultant to non-profit
organizations specializing in
marketing, advertising, fund-
raising and organizational
structure.
Richard D. Silberman
465 California St., #1020
San Francisco, CA 9410 Secretary Attorney specializing in
business law. Private
practice.
Howard Fong
The Parnassus Income Fund
One Market
Steuart Tower #1600
San Francisco, CA 94105
Vice President and
Treasurer
Senior Vice President and Chief Financial Officer of Continental Savings of
America from 1979 through June of 1988; Vice President and Treasurer of
Parnassus Investments since December of 1988.
The Fund expects to pay each of its Trustees who is not affiliated with
the Adviser or the Distributor annual fees of $1500 in addition to reimbursement
for certain out-of-pocket expenses.
*"Interested" Trustee as defined in the 1940 Act.
CONTROL PERSONS
As of March 31, 1996, no shareholder owned more than 5% of the voting
securities of the Balanced or Fixed-Income Portfolios of the Fund. One
fiduciary, however, Charles Schwab & Co., did own 6.39% of the voting shares of
the Balanced Portfolio. This account, though, represented many shareholders.
MIFLA & Co., a trust, owned 7.22% of the voting securities of the California
Tax-Exempt Portfolio. Trustees and Officers of the Parnassus Income Fund owned
less than 1% of the outstanding securities of the Balanced Portfolio, of the
Fixed-Income Portfolio and of the California Tax-Exempt Portfolio.
PERFORMANCE ADVERTISING
From time to time, the Fund may quote the relative performance of one
or more of its Portfolios in sales literature or advertisements in newspapers,
magazines or other publications. The source for these quotations will be
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Lipper Analytical Services, Morningstar Mutual Fund Values, Wiesenberger
Investment Companies, Schabacker Investment Management, Barron's, Money or
Forbes. The Fund will either quote our relative performance compared to all
funds followed by the source or the relative performance compared to other funds
in the same category. Each portfolio of the Fund may advertise "total return."
The Fund calculates total return by taking the total number of shares purchased
with a hypothetical $1000 investment, adding all additional shares purchased
within the period with reinvested dividends, calculating the value of those
shares at the end of the period and dividing the result by the initial $1000
investment. For periods of more than one year, the cumulative total return is
then adjusted for the number of years, taking compounding into account to
calculate average annual total return during that period.
Total return is computed according to the following formula:
n
P(1 + T) = ERV
where P = a hypothetical initial payment of $1000, T = total return, n = number
of years and ERV = ending redeemable value. Total return is historical
information and is not intended to indicate future performance.
Yield of Balanced, Fixed-Income and California Tax-Exempt Portfolios
The Balanced, Fixed-Income and California Tax-Exempt Portfolios may
also advertise their yield from time to time. Yield quotations are historical
and are not intended to indicate future performance. Yield quotations refer to
the aggregate imputed yield-to-maturity of each of the Portfolio's investments
based on the market value as of the last day of a given thirty-day or one-month
period less accrued expenses (net of reimbursements) divided by the average
daily number of outstanding shares entitled to receive dividends times the net
asset value on the last day of the period, compounded on a "bond equivalent," or
semiannual basis. The yield is computed according to the following formula:
6
Yield = 2 [(a-b + 1) - 1]
cd
where a = dividends and interest earned during the period using the aggregate
imputed yield to maturity for each of the Portfolio's investments as noted
above: b = expenses accrued for the period (net of reimbursement); c = the
average daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the net asset value per share on the last day of
the period.
Effective Yield
The Portfolio may also quote a tax equivalent yield which demonstrates
the taxable yield necessary to produce an after-tax yield equivalent to that
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of a fund which invests in tax-exempt obligations. Such yield is computed by
dividing that portion of our yield (computed as indicated above) which is
tax-exempt by one minus the highest applicable income tax rate and adding the
product to that portion of our yield that is not tax-exempt.
THE ADVISER
Parnassus Investments acts as the Fund's investment adviser. Under its
contract with the Fund, the Adviser acts as investment adviser and subject to
the supervision of the Board of Trustees, directs the investments of the Fund in
accordance with its investment objective, policies and limitations. The Adviser
also provides the Fund with all necessary office facilities and personnel for
servicing the Fund's investments and pays the salaries and fees of all officers
and all Trustees of the Fund who are "interested persons" and all personnel
performing research relating to research and investment activities. The Adviser
also provides the management and administrative services necessary for the
operation of the Fund including supervising relations with the custodian,
transfer agent, independent accountants and attorneys. The Adviser also prepares
all shareholder communications, maintains the Fund's records, registers the
Fund's shares under state and federal laws and does the staff work for the Board
of Trustees. Jerome L. Dodson owns all the outstanding stock of the Adviser and,
thus, can be considered the "control person" of the Adviser.
For its services, the Fund, under an Investment Advisory Agreement (the
"Agreement") between the Fund and the Adviser, pays the Adviser a fee, computed
and payable at the end of each month, at the following annual percentages of
each portfolio's average daily net assets: the Balanced Portfolio, 0.75% of the
first $30 million, 0.70% of the next $70 million and 0.65% of the amount above
$100 million. For the Fixed-Income Portfolio and the California Tax-Exempt
Portfolio, the fee is 0.50% of the first $200 million, 0.45% of the next $200
million and 0.40% of the amount above $400 million.
The Agreement provides that the Adviser shall not be liable to the Fund
for any loss sustained by reason of the purchase, sale or retention of any
security, whether or not such purchase, sale or retention shall have been based
upon its own investigation and research or upon investigation and research made
by any other individual, firm or corporation, if such purchase, sale or
retention shall have been made and such other individual, firm or corporation
shall have been selected in good faith. Nothing contained therein shall,
however, be construed to protect the Adviser against any liability to the Fund
or its security holders by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under this agreement.
Portfolio Transactions and Brokerage
The Agreement states that in connection with its duties to arrange for
the purchase and the sale of securities held in the portfolio of the Fund by
placing purchase and sale orders for the Fund, the Adviser shall select such
broker-dealers ("brokers") as shall, in the Adviser's judgement, implement the
policy of the Fund to achieve "best execution", i.e. prompt and efficient
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<PAGE>
execution at the most favorable securities price. In making such selection, the
Adviser is authorized in the Agreement to consider the reliability, integrity
and financial condition of the broker. The Adviser is also authorized to
consider whether the broker provides brokerage and/or research services to the
Fund and/or other accounts of the Adviser. The Agreement states that the
commissions paid to such brokers may be higher than another broker would have
charged if a good faith determination is made by the Adviser that the commission
is reasonable in relation to the services provided, viewed in terms of either
that particular transaction or the Adviser's overall responsibilities as to the
accounts as to which it exercises investment discretion and that the Adviser
shall use its judgement in determining that the amount of commissions paid are
reasonable in relation to the value of brokerage and research services provided
and need not place or attempt to place specific dollar value on such services or
on the portion of commission rates reflecting such services.
The Agreement provides that to demonstrate that such determinations
were in good faith and to show the overall reasonableness of commissions paid,
the Adviser shall be prepared to show that commissions paid were (i) for
purposes contemplated by the Agreement; (ii) not allocated or paid for products
or services which were readily and customarily available and offered to the
public on a commercial basis; and (iii) within a reasonable range as compared to
the rates charged by qualified brokers to other institutional investors as such
rates may become known from available information. The Fund recognizes in the
Agreement that, on any particular transaction, a higher than usual commission
may be paid due to the difficulty of the transaction in question. The Adviser is
also authorized in the Agreement to consider sales of shares of the Parnassus
Funds as a factor in the selection of brokers to execute brokerage and principal
transactions, subject to the requirements of "best execution", as defined above.
The research services discussed above may be in written form or through
direct contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas and
information assisting the Fund in the valuation of its investments. The research
which the Adviser receives for the Fund's brokerage commissions, whether or not
useful to the Fund may be useful to the Adviser in managing the accounts of the
Adviser's other advisory clients. Similarly, the research received for the
commissions of such accounts may be useful to the Fund.
The Adviser may also use brokerage commissions to reduce certain
expenses of the Fund subject to "best execution." For example, the Adviser may
enter into an agreement to have a brokerage firm pay part or all of the Fund's
custodian fee since this benefits the Fund's shareholders. Similarly, the
Adviser may use brokerage commissions to acquire computer software and hardware
(including peripherals) for use with the Fund's transfer agent and fund
accounting work if such use benefits fund shareholders by reducing expenses. If
a certain piece of equipment is used for both Fund purposes and for non-Fund
purposes by the Adviser (e.g. marketing), the Adviser will allocate the cost on
a pro rata basis. Recognizing the inherent conflicts in such an allocation
process, the Adviser will exercise its best judgement in fairly apportioning the
costs.
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<PAGE>
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission although the price of the security usually includes a profit
to the dealer. Money market instruments usually trade on a "net" basis as well.
On occasion, certain money market instruments may be purchased directly from an
issuer in which case no commissions or discounts are paid. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
During 1993, 1994 and 1995, the Balanced Portfolio paid $11,165,
$19,908 and $10,983 respectively in brokerage commissions. Of these amounts, the
following was paid in conjunction with research services: $11,165 in 1993,
$19,908 in 1994 and $10,983 in 1995. Neither the Fixed-Income Portfolio nor the
California Tax-Exempt Portfolio paid commissions in 1993, 1994 or 1995 since
these portfolios buy their securities on a "net" basis that includes the dealer
mark-up.
NET ASSET VALUE
In determining the net asset value of the Fund's shares, common stocks
and bonds that are listed on national securities exchanges are valued at the
last sale price on the exchange on which each stock is principally traded as of
the close of the New York Stock Exchange (which is currently 4:00 pm New York
time) or, in the absence of recorded sales, at the average of readily available
closing bid and asked prices on such exchanges. Securities traded on the NASD
National Market System are also valued at the last recorded sale price as of
4:00 pm New York time. Other unlisted securities are valued at the quoted bid
prices in the over-the-counter market. Securities and other assets for which
market quotations are not readily available are valued at their fair value as
determined in good faith by the Adviser under procedures established by and
under the general supervision and responsibility of the Fund's Board of
Trustees. Short-term investments which mature in less than 60 days are valued at
amortized cost (unless the Board of Trustees determines that this method does
not represent fair value) if their original maturity was 60 days or less or by
amortizing the value as of the 61st day prior to maturity if their original term
to maturity exceeded 60 days.
SHAREHOLDER SERVICES
Systematic Withdrawal Plan
A Systematic Withdrawal Plan (the "Plan") is available for shareholders
having shares of the Fund with a minimum value of $10,000. The plan provides for
monthly checks in an amount not less than $100 or quarterly checks in an amount
not less than $200.
Dividends and capital gains distributions on shares held under the Plan
are invested in additional full and fractional shares at net asset value.
Withdrawal payments should not be considered as dividends, yield or income. If
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<PAGE>
periodic withdrawals continuously exceed reinvested dividends and capital gains
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares and any
gain or loss realized must be recognized for federal income tax purposes.
Although the shareholder may invest $10,000 or more in a Systematic Withdrawal
Plan, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to the purchase of
additional shares.
Tax-Sheltered Retirement Plans
Through the Distributor, retirement plans are available: Individual
Retirement Accounts (IRAs) and Simplified Employee Pension Plans (SEPs).
Adoption of such plans should be on advice of legal counsel or tax adviser.
Retirement accounts have a minimum initial investment of $500 and each
subsequent investment must be at least $50. For further information regarding
plan administration, custodial fees and other details, investors should contact
the Distributor.
GENERAL
The Fund's Declaration of Trust permits the Fund to issue an unlimited
number of full and fractional shares of beneficial interest and to divide or
combine the shares to a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in the Fund. Each share
represents an interest in the Fund proportionately equal to the interest of each
other share. Certificates representing shares will not be issued. Instead, each
shareholder will receive an annual statement and an additional statement each
time there is a transaction in the account. These statements will be evidence of
ownership. Upon the Fund's liquidation, all shareholders would share pro rata in
the net assets available for distribution to shareholders. If additional classes
designated as "Series" were created, shares of each class would be entitled to
vote as a class only to the extent required by the Investment Company Act of
1940 or as permitted by the Trustees. Operating expenses will be allocated
fairly among the classes, generally on the basis of relative net asset value.
This paragraph applies to all three portfolios.
The Declaration of Trust contains an express disclaimer of shareholder
liability for its acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or its Trustees. The Declaration of Trust provides for
indemnification and reimbursement of expenses out of the Fund's property for any
shareholder held personally liable for its obligations. The Declaration of Trust
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgement thereon. Thus, while Massachusetts law permits a shareholder of a
trust such as this to be held personally liable as a partner under certain
circumstances, the risk of a shareholder incurring financial loss on account of
shareholder liability is highly unlikely and is limited to
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<PAGE>
the relatively remote circumstances in which the Fund would be unable to meet
its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgement or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Financial Statements
The Fund's Annual Report to shareholders dated December 31, 1995 is
expressly incorporated by reference and made a part of this Statement of
Additional Information. A copy of the Annual Report which contains the Fund's
audited financial statements for the year ending December 31, 1995 may be
obtained free of charge by writing or calling the Fund.
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APPENDIX
CORPORATE BOND RATINGS
Moody's Investors Service
Aaa: Best quality. These bonds carry the smallest degree of investment
risk and are generally referred to as "gilt-edge". Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa: High quality by all standards. Together with the Aaa group, they
comprise what are generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities, fluctuations of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat greater than in Aaa securities.
A: Upper-medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Medium-grade obligations; neither highly protected, nor poorly
secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Standard & Poor's Corporation:
AAA: Highest grade obligations. They possess the ultimate degree of
protection as to principal and interest. Marketwise, they move with interest
rates and hence provide the maximum safety on all counts.
AA: High-grade obligations. In the majority of instances, they differ
from AAA issues only in a small degree. Here, too, prices move with the long-
term money market.
B-16
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A: Upper-medium grade. They have considerable investment strength, but
are not entirely free from adverse effects of changes in economic and trade
conditions. Interest and principal are regarded as safe. They predominantly
reflect money rates in their market behavior but, to some extent, also economic
conditions.
BBB: Medium-grade; borderline between definitely sound obligations and
those where the speculative element begins to predominate. These bonds have
adequate asset coverage and normally are protected by satisfactory earnings.
Their susceptibility to changing conditions, particularly to depressions,
necessitates constant watching. Marketwise, the bonds are more responsive to
business and trade conditions than to interest rates. This group is the lowest
which qualifies for commercial bank investment.
BB, B, CCC, CC: Debt rated BB, B, CCC, and CC is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. MOTA indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
MUNICIPAL BOND RATINGS
Moody's Investors Service:
Aaa: Municipal bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Municipal bonds which are rated Aa are judged to be a high quality
by all standards. Together with the Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
B-17
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unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-ranking; and
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's Corporation
AAA: Municipal bonds rated AAA are highest grade obligations. They
possess the ultimate degree of protection as to principal and interest. In the
market, they move with interest rates and, hence, provide the maximum safety on
all counts.
AA: Municipal bonds rated AA also qualify as high-grade obligations
and, in the majority of instances, differ from AAA issues only in small degree.
Here, too, prices move with the long-term money market.
A: Municipal bonds rated A are regarded as upper medium grade. They
have considerable investment strength but are not entirely free from adverse
effects of changes in economic and trade conditions. Interest and principal are
regarded as safe. They predominantly reflect money rates in their market
behavior, but also to some extent, economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project being financed by the bonds being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default
B-18
35
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upon failure of, such completion. The investor should exercise his own judgement
with respect to such likelihood and risk.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Fitch Investor's Service
AAA: Bonds and notes rated AAA are regarded as being of the highest
quality, with the obligor having an extraordinary ability to pay interest and
repay principal which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds and notes rated AA are regarded as high quality obligations.
The obligor's ability to pay interest and repay principal is strong, but may be
more vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
A: Bonds and notes rated A are regarded as being of good quality. The
obligor's ability to pay interest and repay principal is strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds and notes with higher ratings.
BBB: Bonds and notes rated BBB are regarded as being of satisfactory
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to weaken this ability than bonds with higher ratings.
Note: Fitch ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories. These are
refinements more closely reflecting strengths and weaknesses, and are not to be
used as trend indicators.
B-19
36
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(i) Selected financial highlights from June 1, 1992 (commencement of operations)
through December 31, 1995 appears in Part A.
(ii) Audited financial statements as of December 31, 1995 are incorporated by
reference. These statements appear in the annual report dated December 31, 1995
and are on file with the Commission. Financial statements include statement of
assets and liabilities, statement of operations, statement of changes in net
assets, Portfolio of Investments by Industry Classification, notes to financial
statements and independent auditors' report.
(b) Exhibits
(1)Declaration of Trust: on file
(2) By-laws: on file
(3) Not applicable
(4) Not applicable
(5) Investment advisory contract: on file
(6)Distribution agreement and dealer agreement: on
file
(7) Not applicable
(8) Custodian agreement: on file
(9) Custodian agreement: on file
(10) Opinion and Consent of Counsel: on file
(11) Consent of Deloitte & Touche LLP: included
(12) Not applicable
(13) Investment letters: on file
(14)Individual Retirement Account Form: on file;
Simplified Employee Pension Plan: on file
37
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(15) Not applicable
(16) Schedule for computation of each performance
quote: included
Item 25.Persons Controlled by or under Common Control with Registrant:
Registrant is not controlled by or under common control with any other person.
Item 26.Number of Holders of Securities as of March 31, 1996
Title of Class Number of Record Holders
Balanced Portfolio 2933
Fixed-Income Portfolio 793
California Tax-Exempt
Portfolio 308
Item 27.Indemnification
Under the provisions of the Fund's Declaration of Trust, the Fund is
permitted to indemnify its present or former Trustees, officers, employees and
certain other agents against liability incurred in such capacity except that no
indemnification may be paid to protect such a person from liability resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office ("disabling conduct").
Indemnification therefore requires a determination that the indemnitee had not
engaged in disabling conduct. The required determination may be made by the
final decision of the court or other body before which the proceeding was
brought or, lacking such a decision, by the reasonable determination of the
Fund's Trustees, based upon a review of the facts that is made by (a) the vote
of a majority of a quorum of Trustees who are neither "interested persons" nor
parties to the proceeding or (b) an independent legal counsel in a written
opinion.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the registrant
38
<PAGE>
in the successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28.Business Connection of Investment Adviser
Parnassus Investments serves as the investment adviser to
the Parnassus Fund and also has individual portfolio
clients.
Item 29. Principal Underwriter:
(a)Parnassus Investments is the distributor of both the
Parnassus Fund and the Parnassus Income Fund.
The officers and directors of Parnassus Investments are
as follows:
Name and Principal
Business Address Position with
Distributor Position with
Registrant
Jerome L. Dodson
One Market
Steuart Tower #1600
San Francisco, CA 94105
President and
Director President and
Trustee
Howard Fong
One Market
Steuart Tower #1600
San Francisco, CA 94105
Treasurer Vice President and
Treasurer
Thao N. Dodson
One Market
Steuart Tower#1600
San Francisco, CA 94105
Director None
Susan Loughridge
One Market
Steuart Tower#1600
San Francisco, CA 94105
Secretary None
(c) None
Item 30.Location of Accounts and Records: All accounts, books and records are in
the physical possession of Jerome L. Dodson at Registrant's headquarters at One
Market-Steuart Tower #1600, San Francisco, CA 94105 .
39
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Item 31.Management Services: Discussed in Part A.
Item 32.Not applicable
40
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485 (b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City and County of San Francisco and the State of California
on the twenty-fourth day of April, 1996.
The Parnassus Income Fund (Registrant)
By:
Jerome L. Dodson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signature
Title
Date
Jerome L. Dodson
Principal Executive
Officer and Trustee
Herbert A. Houston
Trustee
Howard Shapiro
Joan Shapiro
Trustee
Trustee
Howard Fong
Principal Financial
and Accounting
Officer
41
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List of Exhibits
Exhibit 9 - Shareholder Servicing Plan and Agreement
Exhibit 11 - Consent of Deloitte & Touche LLP
Exhibit 16 - Schedule for Computation of Performance Quotes
42
<PAGE>
Deloitte & Touche LLP
50 Fremont Street
San Francisco, CA 94105-2230
Telephone: (415) 247-4000
Facsimile: (415) 247-4329
INDEPENDENT AUDITORS' CONSENT
The Parnassus Income Fund:
We consent to (a) the incorporation by reference in this Post-Effective
Amendment No. 5 to Registration Statement No. 33-36065 of the Parnassus Income
Fund on Form N-1A of our report dated January 29, 1996 appearing in the Fund's
1995 Annual Report to Shareholders in the Statement of Additional Information,
which is part of such Registration Statement, (b) the reference to us under the
heading "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement, and (c) the reference to us under the heading "General
Information" in such Prospectus.
Deloitte & Touche, LLP
April 29, 1996
43
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Exhibit 16
Calculation of Parnassus Income Fund Total Return
SEC regulations provide for calculating the one, five and ten year average
annual total return figures for the Fund. However, the Parnassus Income Fund has
only been operating for three years and four months so we calculate only the
one-year and life-of-the-fund average annual total returns. The Fund calculates
its average annual total return quotations for the periods ended on the date of
the most recent balance sheet included in the registration statement by finding
the average annual compounded rates of return that would equate the initial
amount invested to the ending redeemable value according to the following
formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV =ending redeemable value of a hypothetical $1,000
payment made at the beginning of the periods (or
fractional portion thereof);
These calculations incorporate the following assumptions:
1. The maximum sales load (or other charges deducted from payments) is deducted
from the initial $1,000 payment.
2. All dividends and distributions by the Fund are reinvested at the price
stated in the prospectus on the reinvestment dates during the period, i.e., any
sales load charged upon reinvestment of dividends would be reflected.
3. All recurring fees, if any, charged to all shareholder accounts are
included.
4. The ending redeemable value assumes a complete redemption at the end of the
year periods and the deduction of all nonrecurring charges deducted at the end
of each period.
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BALANCED PORTFOLIO
One Year SEC Total Return Calculation:
Starting NAV: $15.70
Ending NAV: $19.58
Assuming reinvestment of all dividends
On 12/31/95, $1,000.00 invested on 12/31/94 would be worth: $1,311.30
Average Annual Total Return: 31.13%
Life of the Fund SEC Total Return Calculation:
Starting NAV: $15.03
Ending NAV: $19.58
Assuming reinvestment of all dividends
On 12/31/95, $1,000 invested on 9/1/92 would be worth: $1,561.14
Average Annual Total Return: 14.34%
FIXED INCOME PORTFOLIO
One Year SEC Total Return Calculation:
Starting NAV: $13.79
Ending NAV: $15.73
Assuming reinvestment of all dividends
On 12/31/95, $1,000.00 invested on 12/31/94 would be worth: $1,215.80
Average Annual Total Return: 21.58%
Life of the Fund SEC Total Return Calculation:
Starting NAV: $15.21
Ending NAV: $15.73
Assuming reinvestment of all dividends
On 12/31/95, $1,000 invested on 9/1/92 would be worth: $1,289.60
Average Annual Total Return: 7.95%
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CALIFORNIA TAX-EXEMPT PORTFOLIO
One Year SEC Total Return Calculation:
Starting NAV: $14.28
Ending NAV: $16.06
Assuming reinvestment of all dividends
On 12/31/95, $1,000.00 invested on 12/31/94 would be worth: $1,186.00
Average Annual Total Return: 18.60%
Life of the Fund SEC Total Return Calculation:
Starting NAV: $14.99
Ending NAV: $16.06
Assuming reinvestment of all dividends
On 12/31/95, $1,000 invested on 9/1/92 would be worth: $1,276.60
Average Annual Total Return: 7.62%
