The Parnassus Income Fund
Annual Report
December 31, 1996
February 5, 1997
Dear Shareholder:
Enclosed is your 1996 annual report for the Parnassus Income Fund. As the
portfolio manager for the Balanced and Fixed-Income Portfolios, I wrote those
sections. As manager of the California Tax-Exempt Portfolio, David Pogran wrote
that report.
BALANCED PORTFOLIO
As of December 31, 1996, the net asset value per share (NAV) of the
Balanced Portfolio was $18.56. Taking into account dividends paid, the total
return for the year was 7.09% compared to 13.76% for the average balanced fund
according to Lipper Analytical Services. We did not do as well as most other
balanced funds for 1996, but our longer-term performance continues to be above
the average.
Below you will find a graph comparing the Balanced Portfolio with the S&P
500, the Lehman Government/Corporate Bond Index and the Lipper Balanced Fund
average. You will notice that the Balanced Portfolio continues to perform above
the Lipper average for balanced funds.
The graph also contains the dollar amount an investor would have after
investing $10,000 at the inception of the Portfolio. Below the graph is a table
showing average annual total returns for one and three-year periods and since
inception.
<TABLE>
<CAPTION>
----------------------
Value on
December 31, 1996
----------------------
<S> <C>
S&P 500
Index $20,035
Balanced
Portfolio $16,724
Lipper
Balanced
Fund Average $16,108
Lehman
Government/
Corporate
Bond Index $13,152
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------
Balanced S&P 500 Lipper Balanced Lehman Government/
Average Annual Total Return Portfolio Index Fund Average Corporate Bond Index
<S> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------
One Year 7.09% 22.96% 13.76% 2.90%
Three Years 9.93% 19.68% 11.41% 5.79%
Since Inception 9/1/92 12.59% 17.39% 11.63% 6.52%
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
For 1996, we changed one of the indices we used for our comparison table.
The fixed-income index we used for 1996 and that we'll use in the future will be
the Lehman Government/Corporate Index. It replaces the Lehman Aggregate Bond
Index. The reason for the change is because the Lehman Government/Corporate
Index more closely resembles our portfolio because we now have no
mortgage-backed securities in the Portfolio. The table below compares the
performance for the two indices. As you can see, the differences are not
substantial.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
Lehman Aggregate Lehman Government/
Bond Index Corporate Index
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year Total Return 3.63% 2.90%
Three Year Annualized Total Return 6.02% 5.79%
Life of the Fund Annualized Total Return 6.74% 6.52%
Value of a $10,000 investment at Fund inception on 12/31/96 $13,270 $13,152
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
WHY THE BALANCED PORTFOLIO UNDERPERFORMED
The reason the Portfolio didn't perform as well as the average balanced
fund in 1996 is because of our income orientation. While all balanced funds have
a portion of their portfolios in bonds and other fixed-income securities, the
Parnassus Balanced Portfolio is somewhat unusual in that our stocks have to pay
a dividend that is at least equal to the average dividend of the S&P 500. Most
balanced funds don't have that restriction. They can invest in stocks that pay a
lower dividend or even no dividend at all.
Stocks that pay a high dividend--especially utilities--tend to behave as if
they have some of the characteristics of bonds, i.e. they tend to do better in a
period when interest rates are falling and worse when interest rates are rising.
During 1996, the interest rate on the 30-year Treasury bond went from 5.95% to
6.64% which made the price of that bond drop by 3.5%.
By comparison, the stock market as a whole went up 23.0% as measured by the
S&P 500 while the Lehman Government/Corporate Bond Index had a return of only
2.90% and the Dow Jones Utility Index went up only 9.08%. Other balanced funds
with non-dividend paying and low-dividend paying stocks did much better than our
Balanced Portfolio. Although our long-term record is ahead of the balanced fund
average (12.59% vs. 11.63% since inception), the income orientation of the
Portfolio will hold us back in years like 1996. Although our total return for
the year was not strong, our income yield continues to be quite attractive. For
the 30-day period ending December 31, 1996, the Balanced Portfolio's yield was
4.98%.
INDIVIDUAL ISSUES
In terms of the equity portion of the Portfolio, five companies made the
biggest impact in terms of holding down our total return. CILCORP, an electric
utility in central Illinois, dropped 13.6% as it went from $42.38 to $36.63 a
share. The stock declined because of decreasing revenue from its electric
utility business. Because of deregulation, some of CILCORP's large industrial
customers bought their electric power elsewhere and all CILCORP did was deliver
it. The company's costs are relatively low so CILCORP should eventually do well
in the new deregulated environment. The company also pays a handsome dividend of
6.7%.
Josten's, the maker of class rings and other school memorabilia, declined
12.5% from the beginning of the year until the time we sold it. Although there
was a decline in 1996, on an overall basis, we earned 14.4% from the time we
bought it until the time we sold it.
Similarly, Great Western, the California Savings Bank, declined 11.1% from
the start of 1996 to the time we sold it because of concerns about the direction
of interest rates. Overall, though, we had a positive return from the company of
30.2% over the multi-year holding period.
Luby's Cafeterias dropped 11.1% from the time we bought it in 1996 until
the end of the year. The stock went from $22.36 to $19.88. A principal reason
for the decline was the fact that the company was dropped from the S&P 500 and
many index funds were forced to sell the stock. Luby's is now in the S&P 600
Small Cap Index. Also contributing to the stock price decline were heavy
expenses associated with the acquisition of 15 Wyatt's Restaurants in October.
This hurt short-term earnings. At 4.03% though, the company has a very nice
yield. Luby's has strong management and a good operation so we're holding onto
the stock for future gains.
The Sun Company dropped 11.0% during the year as its stock went from $27.38
to $24.38. The price of crude oil increased during the year, but the cost of
gasoline didn't increase as much thus lowering the spread that an oil refiner
receives for processing crude (the "crack spread"). Since Sun doesn't produce
crude oil anymore, the company was caught in a margin squeeze.
The two companies that had the most positive impact on the Portfolio were
ONEOK and Energen. Although both companies are primarily gas utilities, growth
in non-utility businesses moved their stocks up. Increased revenues and profits
from ONEOK's gas marketing division helped move the stock up 31.1% as the price
went from $22.88 to $30.00 per share. Energen shares appreciated 25.4%, going
from $24.13 to $30.25 due to better earnings from their exploration and
production arm.
LG&E, a Louisville, Kentucky gas and electric utility, went up 16.0% as its
stock went from $21.13 to $24.50. Strong management and increased earnings
helped the stock move upward.
Oregon Steel increased 12.4% as it went from $14.90 to $16.75. The company
has made a major investment in renovating its steel mill and this will greatly
improve the efficiency of its operations.
The Deluxe Corporation, a well-known producer of checks, gained 8.5%, going
from $30.18 to $32.75 a share. The company is closing a number of its older,
less efficient plants and restructuring its operations.
FIXED-INCOME PORTION OF THE BALANCED PORTFOLIO
Because stocks did so much better than bonds in 1996, the fixed-income
securities held back the overall performance of the Portfolio. Since interest
rates moved up during the year, prices generally moved down. Regarding our own
bond portfolio, the issues doing the worst were J.C. Penney and Digital
Equipment Corporation because of weak operating results at both companies. Doing
the best for us were issues of the Federal Home Loan Mortgage Corporation
(Freddie Mac), the Federal National Mortgage Association (Fannie Mae) and Quaker
Oats. The following section on the Fixed-Income Portfolio will give you more
information on our bond strategy.
FIXED-INCOME PORTFOLIO
As of December 31, 1996, the net asset value per share (NAV) of the
Fixed-Income Portfolio was $15.43. Taking into account dividends paid during the
year, the total return for 1996 was 4.08%. This compares to 2.90% for the Lehman
Government/Corporate Bond Index and 2.49% for the average A-rated bond fund
followed by Lipper Analytical Securities. We beat the averages by a substantial
margin and we also placed tenth out of the 110 A-rated bond funds followed by
Lipper Analytical Securities.
As you can see by the graph below, we have also outperformed the averages
on a longer-term basis as well. The graph and table compare the performance of
the Fixed-Income Portfolio with that of the Lehman Government/ Corporate Bond
Index and the Lipper A-rated Bond Fund Average.
<TABLE>
<CAPTION>
----------------------
Value on
December 31, 1996
----------------------
<S> <C>
Fixed-Income
Portfolio $13,424
Lehman
Government/
Corporate
Bond Index $13,152
Lipper
A-Rated Bond
Fund Average $13,006
</TABLE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
Fixed-Income Lehman Lipper A-Rated
Average Annual Total Returns Portfolio Government/Corporate Index Bond Fund Average
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 4.08% 2.90% 2.49%
Three Years 5.67% 5.79% 4.98%
Since Inception 9/1/92 7.03% 6.52% 6.25%
- - -----------------------------------------------------------------------------------------------------
</TABLE>
For 1996, we changed the index we used for our comparison table from the
Lehman Aggregate Bond Index to the Lehman Government/Corporate Bond Index. The
latter more closely resembles our portfolio since we now have very few
mortgage-backed securities. We will continue to use the Lehman
Government/Corporate Index in the future for comparison purposes. The table
below compares the performance of the two indices. As you can see, the
differences are not substantial.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------
Lehman Aggregate Lehman Government/
Bond Index Corporate Index
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year Total Return 3.63% 2.90%
Three Year Annualized Total Return 6.02% 5.79%
Life of the Fund Annualized Total Return 6.74% 6.52%
Value of a $10,000 investment at Fund inception on 12/31/96 $13,270 $13,152
- - -------------------------------------------------------------------------------------------------------
</TABLE>
WHY OUR STRATEGY SUCCEEDED
1996 was a difficult year for bonds because interest rates rose during the
year. Nevertheless, we were able to eke out a respectable return. If you look at
the graph above, you will see that we have been able to beat the benchmarks over
time except in 1994. That was an extremely difficult year since interest rates
shot upward--much more than last year. The Portfolio in 1994 was hurt even more
than the average bond fund because of our high percentage of mortgage-backed
securities. As discussed in the shareholder reports of that period, high rates
wreaked havoc with mortgage-backed securities because of their volatility and
unpredictability.
Given that situation, we decided to reduce our commitment to
mortgage-backed securities. That decision has greatly helped the Portfolio.
Although one can earn a bit more interest with those securities, it does not
compensate an investor for the added risk and unpredictability of those issues.
So, the virtual absence of mortgage-backed securities was one of the factors
helping us in 1996.
Our current strategy is to concentrate on 10-year issues--both corporate
issues and government agencies. We pick the agencies instead of Treasury bonds
because of their social purpose. For example, the bond issues of the Federal
National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac) and the Federal Home Loan Bank all finance housing.
We also chose the ten-year time frame because it is the best combination of
yield and stability. For example, the Portfolio gets a better yield from the
ten-year than, say, a five-year note and the risk is less than that of a 30-year
issue. It's true that we give up a bit of yield with the ten-year compared with
the 30-year, but we think the added safety is worth the sacrifice. This strategy
has worked well for us in 1996.
The corporate bond strategy has the same rationale. We pick ten-year issues
of corporations that meet our social screen. The Portfolio also earns a bit more
interest from the corporate issues than from the government agencies. Yield for
the Fixed-Income Portfolio for the 30 days ending December 31, 1996 was 5.96%.
Another thing that helped our total return was the timing of our
investments. We invested only after an upsurge in interest rates. This locked in
higher yields and helped to protect us from declines in market value during
interest rate spikes. We may have lost a bit of yield from this strategy, but it
helped our total return.
For example, with 10-year rates at 6.6% and money market rates at 5.6%, we
might not choose to invest our cash in 10-year bonds. It's true that we would
temporarily earn 1% less in interest. However, if we invested in a 10-year bond
and interest rates spiked up, we would lose principal as the bond's price
dropped. (A short-term, money market investment would not lose any market value
if rates jumped up.) By waiting until the 10-year yield hits a more attractive
6.9% we can lock in a higher, long-term yield and also provide added protection
to principal. This strategy worked well for us in 1996.
I am happy that the Fixed-Income Portfolio was able to give shareholders a
respectable return in 1996.
Yours truly,
Jerome L. Dodson
President
P.S. We now have a website. The address is http://networth.galt.com/parnassus.
CALIFORNIA TAX-EXEMPT PORTFOLIO
February 5, 1997
Dear Shareholder:
As of December 31, 1996 the net asset value per share (NAV) of the
California Tax-Exempt Portfolio was $16.02. Including dividend reinvestment, the
total return for the Portfolio in 1996 was 4.78%. In comparison, the Lehman
Municipal Bond Index posted a 4.43% return and the average California municipal
bond fund gained 3.65% during the same period. So, we not only outperformed the
index, but we also beat the average California municipal bond fund by over 1%.
The Portfolio ranked 11th out of the 95 California municipal bond funds followed
by Lipper Analytical Services.
<TABLE>
<CAPTION>
----------------------
Value on
December 31, 1996
----------------------
<S> <C>
Lehman
Municipal
Bond Index $13,386
California
Tax-Exempt
Portfolio $13,377
Lipper
California
Municipal
Bond Fund
Average $13,035
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
California Tax-Exempt Lehman Municipal Lipper California Municipal
Average Annual Total Returns Portfolio Bond Index Bond Fund Average
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 4.78% 4.43% 3.65%
Three Years 5.18% 5.17% 4.22%
Since Inception 9/1/92 6.94% 6.96% 6.31%
- - --------------------------------------------------------------------------------------------------------
</TABLE>
As you can see from the graph and table above, the Portfolio substantially
outperformed the average California municipal bond fund and has beaten or at
least kept pace with the Lehman Municipal Bond Index for the last three years
and the life of the fund. For the three years ending December 31, 1996, we
ranked 12th out of the 65 California municipal bond funds followed by Lipper.
In comparing our returns with the Lehman index, keep in mind that a managed
portfolio has expenses while an index does not. Our 1996 total return figure of
4.78% is after reducing gross returns by 0.54% in expenses. So if we beat or
equal the Lehman index, that means that our gross investment return has exceeded
the index by at least the amount of our expenses.
For December 1996, our 30-day yield is an attractive 4.69%. For the year,
our average 30-day yield was 4.96%. A single individual with taxable income
between $25,083 and $31,700 would have to earn 7.49% on a taxable investment to
equal the Portfolio's 1996 average 30-day yield after taxes.
ANALYSIS
During the first half of 1996, investors were concerned that the economy
might grow too fast and increase the rate of inflation. This anxiety made
interest rates spike upwards and bond prices drop. Bond prices always drop when
interest rates go up. Concern subsided in the second half as the economy slowed
and no signs of inflation appeared. However, as the table below shows, rates
never got back down to the levels at which they started the year. Consequently,
bond prices finished down for the year.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
30-Year 30-Year AAA 30-Year California
Bond Rate Comparison Treasury Bond Municipal Bond General Obligation
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 5.95% 5.28% 5.54%
June 30, 1996 6.89% 5.77% 5.89%
December 31, 1996 6.64% 5.39% 5.57%
- - ---------------------------------------------------------------------------------------------------
<FN>
Source: Bloomberg L.P.
</FN>
</TABLE>
You may wonder how we could post a positive total return if bond prices
went down for the year. It is important to remember that total return has two
components: price change and income. For the Portfolio, lower bond prices did
reduce total return by 0.37%. However, reinvested income from the Portfolio's
yield more than made up for that loss, contributing 5.15% to total return.
Together, price change and income gave us our 1996 total return of 4.78%.
The yield table above also shows that AAA municipal bond yields didn't go
up as much as taxable Treasury yields. 30-year municipal bond yields increased
only 11 basis points, while 30-year Treasury yields jumped 69 basis points in
1996 (1 basis point = 1/100 of a percent). Of course, this means that municipal
prices did not fall as much as Treasury prices. At the start of the year,
investors were worried that tax reform might eliminate the tax-exempt advantage
enjoyed by municipal bonds. As a result, municipal bond buyers required higher
yields to compensate for tax reform risk. During the year, President Clinton's
re-election made tax reform much less likely. As the likelihood of tax reform
decreased, municipals outperformed Treasuries because bond buyers stopped
demanding extra yield to offset tax reform risk.
The last column on our comparative yields table shows that California
municipals outperformed the nationwide municipal market. The yield on a 30-year
California State General Obligation (G.O.) went up only 3 basis points in 1996.
This compared favorably to the AAA municipal bond's 11 basis point increase.
California bonds outperformed because the state's continuing economic rebound
boosted credit ratings. Credit rating agencies Fitch and Standard & Poors
upgraded California's bond ratings from A to A+ during 1996.
OUTLOOK & STRATEGY
Although experts are divided over the economic growth outlook for 1997,
most agree that inflation is likely to remain moderate. This is good news for
bond owners. High inflation hurts bond prices. I expect interest rates in
December 1997 to be close to today's rates because inflation should stay under
control.
For next year, I intend to maintain the strategy that has worked so well
for us to date: focusing on bonds with 15-year maturities. In the graph below,
you can see how the yield curve "flattens out" past 15 years. An investor
doesn't get much extra yield for buying bonds with maturities greater than 15
years. In fact, a 15-year maturity bond gets 96% of the yield earned by a
30-year bond. At the same time, a 15-year bond has less interest rate risk than
a 30-year bond.
Also, notice how steeply the yield curve drops off to the left of the
15-year mark. Consider a 15-year bond purchased today. A year from today, it
will be a 14-year bond. If the yield curve retains its steepness between 14 and
15 years, total return on that bond will get a boost because the yield on a
14-year bond is about 10 basis points lower than a 15-year bond. Another way of
looking at it is that our 14-year bond will earn more than a newly-purchased 14
year bond because we purchased our bond when it was a higher-yielding 15-year
bond. Bond managers call this strategy "rolling down the yield curve." The buyer
of a 30-year bond gets very little benefit from rolling down the yield curve
since the yield on a 29-year bond is just about the same as a 30-year bond. Over
the years, this strategy has helped your portfolio outperform peer funds that
focus more on 30-year bonds.
ISSUER NOTES
The East Bay Municipal Utility District (EBMUD) is the water utility for
most of the communities on the eastern side of San Francisco Bay, including my
home town of Oakland. Since the Portfolio owns EBMUD bonds, I was pleased to see
that the Northern California Supplier Development Council named EBMUD
"Corporation of the Year" for supporting businesses owned by women and
minorities.
Additionally, EBMUD's East Bay Watershed Master Plan won the 1996 Education
Project Award from the Northern Section of the California Chapter of the
American Planning Association. EBMUD preserves and manages 28,000 acres of
permanent open space to protect East Bay watersheds. The association noted that
the EBMUD watershed plan, "established a new standard of resource responsibility
on the part of a traditional utility company."
One element of the plan involves EBMUD employees and community volunteers
planting trees to control erosion around watershed creeks. A recent project used
100 scout volunteers to plant hundreds of trees along Simas Creek. As these
trees grow, they'll protect the water and its denizens including rare native
steelhead trout and red-legged frogs. As an avid fly-fisher, it warms my heart
when companies preserve and enhance trout habitat.
The progressive policies of EBMUD are a good example of what your
investments in the California Tax-Exempt Portfolio foster. I will continue to
seek investments in issuers and projects that improve the environment, education
and housing in California. Thank you for investing with us.
Yours truly,
David Pogran
Portfolio Manager
<TABLE>
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1996
<CAPTION>
Percent of
Shares Common Stocks Net Assets Market Value
-------------------------------------------------------------------
<S> <C> <C> <C>
DIVERSIFIED SERVICE
AND SUPPLY
5,000 Chemed Corporation 0.5% $ 182,500
-----------
ELECTRIC UTILITIES
30,000 CILCORP 1,098,750
50,000 Idaho Power 1,556,250
50,000 LG & E Energy Corporation 1,225,000
85,000 Washington Water Power 1,583,125
Total 16.4% 5,463,125
-----------
FOOD - PROCESSING
25,000 Heinz (H.J.) 2.7% 893,750
-----------
NATURAL GAS
45,000 Brooklyn Union Gas 1,355,625
42,000 Connecticut Energy 892,500
55,000 Energen Corporation 1,663,750
55,000 ONEOK 1,650,000
45,000 People's Energy 1,524,375
10,000 UGI Corporation 223,750
70,000 Washington Gas
Light Company 1,583,750
-----------
Total 26.7% 8,893,750
-----------
PETROLEUM REFINING
& MARKETING
70,000 Sun Company 5.1% 1,706,250
-----------
PRINTING
45,000 Deluxe Corporation 1,473,750
5,000 John H. Harland Company 165,000
-----------
Total 4.9% 1,638,750
-----------
RESTAURANT
60,000 Luby's Cafeterias, Inc. 3.6% 1,192,500
-----------
RETAIL
30,000 J.C. Penney Company, Inc. 4.4% 1,462,500
-----------
STEEL
56,200 Oregon Steel Mills, Inc. 2.8% 941,350
-----------
Total Common Stocks 67.1% 22,374,475
-----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Principal Percent of
Amount Corporate Bonds Net Assets Market Value
----------------------------------------------------------------------
<S> <C> <C> <C>
AIR TRANSPORT
$330,000 Delta Airlines
9.750%, due 05/15/21 $ 393,103
28,935 Delta Airlines
8.540%, due 01/02/07 30,505
22,592 Delta Airlines
8.540%, due 01/02/07 23,822
100,000 Delta Airlines
10.375%, due 02/01/11 123,022
40,000 Delta Airlines
9.250%, due 03/15/22 45,523
150,000 Federal Express
9.650%, due 06/15/12 179,053
20,000 Southwest Airlines
7.875%, due 09/01/07 21,111
---------
Total 2.4% 816,139
---------
COMPUTERS
350,000 Digital Equipment
Corporation
7.750%, due 04/01/23 0.9% 306,488
---------
FOOD-PROCESSING
650,000 Quaker Oats Company
9.280%, due 12/08/09 2.3% 767,345
---------
HOME APPLIANCES
122,000 Whirlpool
9.100%, due 02/01/08 0.4% 140,681
---------
INSURANCE
950,000 Aetna Life and Casualty
6.750%, due 09/15/13 2.7% 893,037
---------
PUBLISHING
220,000 Knight-Ridder, Inc.
9.875%, due 04/15/09 0.8% 272,098
---------
RETAIL
605,000 Dayton Hudson
9.625%, due 02/01/08 713,017
25,000 Dayton Hudson
8.500%, due 12/01/22 25,910
114,000 Dayton Hudson
7.875%, due 06/15/23 110,501
550,000 J.C. Penney Company, Inc.
7.125%, due 11/15/23 523,864
350,000 Reebok International
6.750%, due 09/15/05 335,549
---------
Total 5.1% 1,708,841
---------
TELECOMMUNICATIONS
350,000 U.S. West Capital Funding
6.350%, due 02/06/08 1.0% 325,759
---------
Total Corporate Bonds 15.6% 5,230,388
U.S. Government
Agency Bonds
- - -----------------------------------------------------------------------
200,000 Federal Farm Credit Bank
5.810%, due 11/10/03 192,328
300,000 Federal Home Loan Bank
5.850%, due 12/15/03 288,987
1,000,000 Federal Home Loan Bank
6.840%, due 05/01/06 1,011,420
150,000 Federal Home Loan Bank
8.170%, due 12/16/04 164,412
1,000,000 Federal Home Loan
Mortgage Corporation
5.825%, due 02/06/06 942,920
1,150,000 Federal National
Mortgage Association
6.770%, due 09/01/05 1,156,624
500,000 Federal National
Mortgage Association
6.140%, due 11/25/05 481,410
1,000,000 Federal National
Mortgage Association
5.800%, due 02/22/06 940,940
---------
Total U.S. Government
Agency Bonds 15.5% 5,179,041
---------
Community
Development Loans
- - -----------------------------------------------------------------------
100,000 Boston Community
Loan Fund 100,000
100,000 Institute for Community
Economics Loan Fund 100,000
100,000 Low Income Housing Fund 100,000
---------
Total Community
Development Loans 0.9% 300,000
---------
Total Investment
in Securities
(Cost, $31,598,452) 99.1% 33,083,904
----------
Short-Term Investments
- - -----------------------------------------------------------------------
Goldman Sachs
Government
Portfolio - 5.050% 11,443
Goldman Sachs
Treasury Portfolio - 5.050% 11,464
Albina Community Bank -
4.950% 100,000
Wainwright Bank -
5.400% 100,000
---------
Total Short-Term
Investments
(Cost, $222,907) 0.7% 222,907
---------
TOTAL INVESTMENTS
(Cost, $31,821,359) 99.8% 33,306,811
OTHER ASSETS AND
LIABILITIES - Net 0.2% 54,995
----------
TOTAL NET ASSETS 100.0% $33,361,806
-----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
BALANCED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<CAPTION>
<S> <C>
Assets:
Investments in securities, at market value
(identified cost $31,598,452) (Note 1) $ 33,083,904
Temporary investments in short term securities
(at cost, which approximates market) 222,907
Receivables:
Dividends and interest 277,563
Capital shares sold 16,889
Other assets 3,600
-----------
Total assets 33,604,863
-----------
Liabilities:
Overdraft 22,846
Accounts payable and accrued expenses 220,211
-----------
Total liabilities 243,057
-----------
Net Assets (equivalent to $18.56
per share based on 1,797,886.461
shares of capital stock outstanding) $ 33,361,806
-----------
Net assets consist of:
Distributions in excess of
net investment income $ (3,447)
Unrealized appreciation on investments 1,485,452
Undistributed net realized gain 8,785
Capital paid-in 31,871,016
-----------
Total Net Assets $ 33,361,806
-----------
Computation of net asset value and
offering price per share:
Net asset value and offering price per share
($33,361,806 divided by 1,797,886.461 shares) $ 18.56
-----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
BALANCED PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<CAPTION>
<S> <C>
Investment Income:
Dividends $ 890,507
Interest 751,595
----------
Total investment income 1,642,102
----------
Expenses:
Investment advisory fees (Note 5) 229,785
Transfer agent fees (Note 5) 84,796
Fund administrative expense (Note 5) 35,529
Reports to shareholders 23,644
Registration fees and expenses 18,778
Professional fees 13,671
Custody fees 10,870
Trustee fees and expenses 5,835
Other expenses 4,526
----------
Subtotal of expenses before fee waiver 427,434
Fees waived by Parnassus Investments (Note 5) (182,144)
----------
Total expenses 245,290
----------
Net Investment Income 1,396,812
----------
Realized and Unrealized Gain (Loss)
on Investments:
Realized gain from security transactions:
Proceeds from sales 15,425,621
Cost of securities sold (12,952,024)
----------
Net realized gain 2,473,597
----------
Unrealized appreciation (depreciation)
of investments:
Beginning of year 3,196,942
End of year 1,485,452
----------
Unrealized depreciation during year (1,711,490)
----------
Net Realized and Unrealized Gain
on Investments 762,107
----------
Net Increase in Net Assets Resulting
from Operations $ 2,158,919
----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
BALANCED PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
From Operations:
Net investment income $ 1,396,812 $ 1,028,123
Net realized gain from
security transactions 2,473,597 162,502
Net unrealized appreciation
(depreciation) during
the year (1,711,490) 4,491,653
------------ ------------
Increase in net assets
resulting from operations 2,158,919 5,682,278
Dividends to shareholders:
From net investment income (1,384,215) (1,050,322)
From realized capital gains (2,469,121) (91,363)
Increase in Net Assets from
Capital Share Transactions 8,276,966 5,151,794
----------- -----------
Increase in Net Assets 6,582,549 9,692,387
Net Assets:
Beginning of year 26,779,257 17,086,870
----------- -----------
End of year
(including distributions in
excess of net investment
income of $3,447 in 1996
and $16,044 in 1995 $ 33,361,806 $ 26,779,257
----------- -----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
FIXED-INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1996
<CAPTION>
Principal Percent of
Amount Corporate Bonds Net Assets Market Value
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
AIR TRANSPORT
$ 71,000 Delta Airlines
Debentures, 10.375%,
due 02/01/11 $ 87,346
40,000 Delta Airlines
Debentures, 9.250%,
due 03/15/22 45,523
174,000 Delta Airlines
Debentures, 9.750%,
due 05/15/21 207,272
63,295 Delta Airlines
Notes 8.540%,
due 01/02/07 66,729
147,000 Federal Express
Debentures, 9.650%,
due 06/15/12 175,472
20,000 Federal Express
Senior Notes, 10.000%,
due 04/15/99 21,467
--------
Total 7.2% 603,809
--------
COMPUTERS
25,000 Digital Equipment
Corporation
Notes, 7.125%, due 10/15/02 24,043
130,000 Digital Equipment
Corporation
Notes, 8.625%, due 11/01/12 129,817
178,000 Digital Equipment
Corporation
Notes, 7.750%, due 04/01/23 155,871
--------
Total 3.7% 309,731
--------
FOOD-PROCESSING
350,000 Quaker Oats Company
Notes, 9.280%,
due 12/08/09 4.9% 413,186
--------
HOME APPLIANCES
300,000 Whirlpool Corporation
Debentures, 9.100%,
due 02/01/08 4.1% 345,936
--------
INSURANCE
350,000 Aetna Life and Casualty
Notes, 6.750%,
due 09/15/13 329,014
31,000 Aetna Life and Casualty
Notes, 8.000%,
due 01/15/16 30,971
--------
Total 4.3% 359,985
--------
PUBLISHING
80,000 Knight-Ridder, Inc.
Notes, 9.875%,
due 04/15/09 1.2% 98,945
--------
RETAIL
13,000 Dayton Hudson
Debentures, 9.250%,
due 11/15/16 13,589
90,000 Dayton Hudson
Debentures, 9.625%,
due 02/01/08 106,069
100,000 Dayton Hudson
Notes, 7.875%,
due 06/15/23 96,931
65,000 Dayton Hudson
Notes, 8.500%,
due 12/01/22 67,366
325,000 J.C. Penney Company, Inc.
Debentures, 7.125%,
due 11/15/23 309,556
200,000 The Limited, Inc.
Notes, 7.500%,
due 03/15/23 180,070
350,000 Reebok International
Debentures, 6.750%,
due 09/15/05 335,548
---------
Total 13.2% 1,109,129
---------
TELECOMMUNICATIONS
350,000 U.S. West Capital Funding
Notes, 6.350%,
due 02/06/08 3.9% 325,759
---------
Total Corporate Bonds 42.5% 3,566,480
---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Principal U.S. Government Percent of
Amount Agency Securities Net Assets Market Value
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
$ 400,000 Federal Home Loan
Mortgage Corporation
CMO 1530-N
7.000%, due 06/15/23 $ 384,424
500,000 Federal Home Loan Bank
6.840%, due 05/01/06 505,710
300,000 Federal National
Mortgage Association
6.720%, due 08/01/05 299,871
850,000 Federal National
Mortgage Association
6.770%, due 09/01/05 854,896
500,000 Federal National
Mortgage Association
6.140%, due 11/25/05 481,410
500,000 Federal National
Mortgage Association
5.800%, due 02/22/06 470,470
450,000 Federal National
Mortgage Association
7.350%, due 03/28/05 469,053
---------
Total U.S. Government
Agency Securities 41.3% 3,465,834
---------
Total Investments in
Securities
(Cost, $6,931,634) 83.8% 7,032,314
---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Percent of
Short-Term Investments Net Assets Market Value
---------------------------------------------------------
<S> <C> <C>
Union Bank of California
Money Market Fund,
variable rate - 4.500% $ 1,136,252
Goldman Sachs
Government Portfolio -
5.050% 54,211
Goldman Sachs
Treasury Portfolio -
5.050% 13,120
FMC Discount
Note 5.550% - due 1/30/97 995,221
----------
Total Short-Term
Investments
(Cost, $2,198,804) 26.2% 2,198,804
----------
TOTAL INVESTMENTS
(Cost, $9,130,438) 110.0% 9,231,118
Other Assets and
Liabilities - Net (10.0%) (847,423)
------- ----------
TOTAL NET ASSETS 100.0% $ 8,383,695
------- ----------
</TABLE>
<TABLE>
FIXED-INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<CAPTION>
<S> <C>
Assets:
Investments in securities, at market value
(identified cost $6,931,634) (Note 1) $ 7,032,314
Temporary investments in short term securities
(at cost, which approximates market) 2,198,804
Receivables:
Interest receivable 136,037
Other assets 11,620
---------
Total assets 9,378,775
---------
Liabilities:
Overdraft 971,638
Accounts payable and accrued expenses 23,442
---------
Total liabilities 995,080
---------
Net Assets (equivalent to $15.43
per share based on 543,241.223
shares of capital stock outstanding) $ 8,383,695
---------
Net assets consist of:
Undistributed net investment income $ 2,958
Unrealized appreciation on investments 100,680
Accumulated net realized loss (66,720)
Capital paid-in 8,346,777
---------
Total Net Assets $ 8,383,695
---------
Computation of net asset value and
offering price per share:
Net asset value and offering price per share
($8,383,695 divided by 543,241.223 shares) $ 15.43
---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<S> <C>
Investment Income:
Interest $ 490,080
----------
Total investment income 490,080
----------
Expenses:
Investment advisory fees (Note 5) 36,016
Transfer agent fees (Note 5) 22,862
Fund administrative expense (Note 5) 8,383
Reports to shareholders 5,745
Registration fees and expenses 13,656
Professional fees 4,513
Custody fees 691
Trustee fees and expenses 1,384
Other expenses 2,334
----------
Subtotal of expenses before fee waiver 95,584
----------
Fees waived by Parnassus Investments (Note 5) (36,016)
----------
Total expenses 59,568
----------
Net Investment Income 430,512
----------
Realized and Unrealized
Gain (Loss) on Investments:
Realized gain from security transactions:
Proceeds from sales 164,481
Cost of securities sold (161,769)
----------
Net realized gain 2,712
----------
Unrealized appreciation (depreciation)
of investments:
Beginning of year 193,565
End of year 100,680
----------
Unrealized depreciation during year (92,885)
----------
Net Realized and Unrealized
Loss on Investments (90,173)
----------
Net Increase in Net Assets Resulting
from Operations $ 340,339
----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
<S> <C> <C>
From Operations:
Net investment income $ 430,512 $ 335,834
Net realized gain (loss)
from security transactions 2,712 (65,106)
Net unrealized appreciation
(depreciation) during
the year (92,885) 746,767
---------- ----------
Increase in net assets
resulting from operations 340,339 1,017,495
Dividends to shareholders:
From net investment income (424,348) (338,316)
Increase in Net Assets from
Capital Share Transactions 1,883,135 1,360,035
---------- ----------
Increase in Net Assets 1,799,126 2,039,214
Net Assets:
Beginning of year 6,584,569 4,545,355
---------- ----------
End of year
(including undistributed
(distributions in excess of )
net investment income
of $2,958 in 1996
and $(3,206) in 1995) $ 8,383,695 $ 6,584,569
---------- ----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1996
Principal Percent of
Amount Municipal Bonds Net Assets Market Value
<S> <C> <C> <C>
EDUCATION
$ 50,000 State of California
6.000%, due 01/01/21 $ 51,540
170,000 State of California
6.125%, due 10/01/11 185,766
250,000 California Education
Facilities - California
Institute of Technology
6.000%, due 01/01/21 253,710
110,000 California Public Works -
University of California
at San Diego Facilities
7.375%, due 04/01/06 119,828
100,000 California Public Works -
Community College Projects
5.500%, due 12/01/06 102,977
130,000 California Public Works -
University of California
5.400%, due 06/01/08 131,119
175,000 California Public Works -
California State University
6.200%, due 10/01/08 187,488
100,000 Franklin-McKinsey
School District
5.600%, due 07/01/07 104,162
120,000 Fresno Unified School
District
5.300%, due 10/01/07 120,065
100,000 Kern High School District
5.600%, due 08/01/13 103,535
100,000 Los Angeles Municipal
Improvement - Central
Library Projects,
5.200%, due 06/01/07 99,916
250,000 Murrieta Valley Unified
School District
5.500%, due 09/01/10 253,630
100,000 Natomas Unified
School District
5.750%, due 09/01/1 102,563
110,000 Pasadena Recreational/
Library Improvements
5.750%, due 01/01/13 110,220
130,000 Pomona Unified
School District
5.500%, due 08/01/11 133,478
130,000 San Francisco
Unified School District
6.200%, due 06/15/11 138,675
110,000 Santa Monica Unified
School District
5.400%, due 08/01/11 110,376
---------
Total 39.6% 2,309,048
---------
HEALTH CARE
60,000 California Health Facilities-
Feedback Foundation
6.500%, due 12/01/22 1.1% 63,905
---------
PUBLIC TRANSPORTATION
200,000 Los Angeles County
Transportation Commission
6.250%, due 07/01/16 200,092
70,000 City of Sacramento -
Light Rail
6.000%, due 07/01/12 71,375
110,000 San Diego Mass Transit
Authority
5.000%, due 06/01/07 110,708
125,000 San Francisco Bay Area
Rapid Transit
5.650%, due 07/01/10 128,844
---------
Total 8.8% 511,019
---------
HOUSING
205,000 Belmont Redevelopment
Agency
6.400%, due 08/01/09 218,588
55,000 California Housing Finance -
Multi-Family
6.750%, due 02/01/09 55,080
100,000 Glendale Redevelopment
Agency
5.500%, due 12/01/12 101,154
50,000 Los Angeles Community
Redevelopment
6.000%, due 07/01/17 51,690
275,000 Pasadena Community
Development
5.600%, due 08/01/1 276,579
175,000 San Jose Redevelopment
Agency
6.000%, due 08/01/15 188,174
200,000 University of California
Housing
5.500%, due 11/01/10 202,706
---------
Total 18.7% 1,093,971
---------
INFRASTRUCTURE
IMPROVEMENTS
90,000 East Bay Municipal
Utility District
6.000%, due 06/01/20 92,237
200,000 Los Angeles Wastewater
System
5.500%, due 06/01/12 201,262
200,000 Pomona Public Financing
Authority
6.000%, due 10/01/06 215,828
150,000 San Francisco Public
Safety Improvement
5.750%, due 06/15/12 152,766
---------
Total 11.3% 662,093
---------
ENVIRONMENT
80,000 Burbank Waste Disposal
5.300%, due 05/01/09 80,657
75,000 California Pollution
Control-North County
Recycling Center
6.750%, due 07/01/17 84,051
125,000 California Public Works -
Energy Efficiency
5.250%, due 05/01/08 126,801
150,000 Los Angeles City
General Obligation
5.250%, due 09/01/11 149,004
235,000 Northern California
Geothermal Project
5.800%, due 07/01/09 248,841
50,000 East Bay Regional Park
5.750%, due 09/01/12 50,754
50,000 East Bay Regional Park
6.300%, due 09/01/09 53,148
125,000 Los Angeles City
Public Works - Parks
6.100%, due 10/01/09 132,721
35,000 Midpeninsula Regional
Open Space District
6.250%, due 07/01/08 37,519
---------
Total 16.5 963,496
---------
Total Investments
in Securities
(Cost, $5,395,003) 96.0% 5,603,532
---------
Short-Term Investments
Highmark California
Tax-Exempt Fund,
variable rate - 3.100%
(Cost $114,922) 2.0% 114,922
---------
TOTAL INVESTMENTS
(Cost, $5,509,925) 98.0% 5,718,454
OTHER ASSESTS AND
LIABILITIES - NET 2.0% 116,587
------ ---------
Total Net Assets 100.0% $5,835,041
------ ---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<S> <C>
Assets:
Investments in securities, at market value
(identified cost $5,395,003) (Note 1) $ 5,603,532
Temporary investments in short term securities
(at cost, which approximates market) 114,922
Cash
Receivables: 50
Interest receivable 102,189
Other assets 21,184
-----------
Total assets 5,841,877
-----------
Liabilities:
Accounts payable and accrued expenses 6,836
-----------
Total liabilities 6,836
-----------
Net Assets (equivalent to $16.02
per share based on 364,319.933
shares of capital stock outstanding) $ 5,835,041
-----------
Net assets consist of:
Distributions in excess of net investment income $ (20)
Unrealized appreciation on investments 208,529
Accumulated net realized loss (33,385)
Capital paid-in 5,659,917
-----------
Total Net Assets $ 5,835,041
-----------
Computation of net asset value and
offering price per share:
Net asset value and offering price per share
($5,835,041 divided by 364,319.933 shares) $ 16.02
-----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<S> <C>
Investment Income:
Interest $ 287,516
----------
Total investment income 287,516
----------
Expenses:
Investment advisory fees (Note 5) 26,177
Transfer agent fees (Note 5) 8,510
Fund administrative expense (Note 5) 6,088
Reports to shareholders 2,904
Registration fees and expenses 644
Professional fees 3,315
Custody fees 504
Trustee fees and expenses 973
Other expenses 3,710
----------
Subtotal of expenxes before fee waive 52,825
----------
Fees waived by Parnassus Investments (Note 5) (24,744)
----------
Total expenses 28,081
----------
Net Investment Income 259,435
----------
Unrealized Gain on Investments:
Unrealized appreciation of investments:
Beginning of year 202,897
End of year 208,529
----------
Unrealized appreciation during year 5,632
----------
Net Unrealized Gain on Investment 5,632
----------
Net Increase in Net Assets Resulting
from Operations $ 265,067
----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
<S> <C> <C>
From Operations:
Net investment income $ 259,435 $ 229,096
Net realized gain from
security transactions -- 7,122
Net unrealized appreciation
during the year 5,632 490,763
---------- ----------
Increase in net assets
resulting from operations 265,067 726,981
Dividends to shareholders:
From net investment income (256,479) (230,274)
Increase in Net Assets from
Capital Share Transactions 1,343,304 84,751
---------- ----------
Increase in Net Assets 1,351,892 581,458
Net Assets:
Beginning of year 4,483,149 3,901,691
---------- ----------
End of year
(including distributions in
excess of net investment
income of $20 in 1996
and $2,976 in 1995) $ 5,835,041 $ 4,483,149
---------- ----------
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Parnassus Income Fund (the Fund), organized on August 8, 1990 as a
Massachusetts Business Trust, is registered under the Investment Company Act
of 1940 as a diversified, open-end investment management company comprised of
three separate portfolios each offering separate shares. The Fund began
operations on June 1, 1992. The following is a summary of significant
accounting policies of the fund.
Securities valuation: The Fund's investments are valued each business day by
independent pricing services ("Services") approved by the Board of Trustees.
Investments are valued at the mean between the "bid" and "ask" prices where
such quotes are readily available and are representative of the actual market
for such securities. Other investments are carried at fair value as
determined by the Services based on methods which include consideration of
(1) yields or prices of securities of comparable quality, coupon, maturity
and type (2) indications as to values from dealers and (3) general market
conditions.
Federal income taxes: The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its income to shareholders; therefore, no federal income
tax provision is required.
Security transactions: In accordance with industry practice, securities
transactions are accounted for on the date the securities are purchased or
sold (trade date). Realized gains and losses on securities transactions are
determined on the basis of first-in, first-out for both financial statement
and federal income tax purposes. Interest income, adjusted for amortization
of premium and, when appropriate, discount on investments, is earned from
settlement date and recognized on the accrual basis.
Dividends to shareholders: Distributions to shareholders are recorded on the
record date. The Balanced Portfolio pays income dividends quarterly and
capital gain dividends once a year, generally in December. The Fixed-Income
and California Tax-Exempt Portfolios pay income dividends monthly and capital
gain dividends annually (no capital gain dividends were paid in 1996 or
1995).
Investment income and expenses: Dividend income is recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
<TABLE>
<CAPTION>
2. Dividends To Shareholders
Balanced Portfolio: The Portfolio declared the following dividends during the year ended December 31, 1996.
<S> <C> <C> <C> <C>
Dividend per share: $0.230 $0.206 $0.203 $1.736*
Record date: 3/28/96 6/27/96 9/27/96 12/30/96
Ex-dividend date: 3/29/96 6/28/96 9/30/96 12/31/96
Payment date: 3/29/96 6/28/96 9/30/96 12/31/96
<FN>
* Includes $1.402 capital gain dividend
</FN>
</TABLE>
<TABLE>
<CAPTION>
Fixed-Income Portfolio: The Portfolio declared the following dividends during the year ended December 31, 1996.
<S> <C> <C> <C> <C> <C> <C>
Dividend per share: $0.073 $0.076 $0.071 $0.078 $0.078 $0.077
Record date: 1/30/96 2/28/96 3/28/96 4/29/96 5/30/96 6/27/96
Ex-dividend date: 1/31/96 2/29/96 3/29/96 4/30/96 5/31/96 6/28/96
Payment date: 1/31/96 2/29/96 3/29/96 4/30/96 5/31/96 6/28/96
Dividend per share: $0.080 $0.085 $0.071 $0.075 $0.080 $0.062
Record date: 7/30/96 8/29/96 9/27/96 10/30/96 11/28/96 12/30/96
Ex-dividend date: 7/31/96 8/30/96 9/30/96 10/31/96 11/29/96 12/31/96
Payment date: 7/31/96 8/30/96 9/30/96 10/31/96 11/29/96 12/31/96
</TABLE>
<TABLE>
<CAPTION>
California Tax-Exempt Portfolio: The Portfolio declared the following dividends during the year ended December
31, 1996.
<S> <C> <C> <C> <C> <C> <C>
Dividend per share: $0.068 $0.068 $0.065 $0.064 $0.064 $0.063
Record date: 1/30/96 2/28/96 3/28/96 4/29/96 5/30/96 6/27/96
Ex-dividend date: 1/31/96 2/29/96 3/29/96 4/30/96 5/31/96 6/28/96
Payment date: 1/31/96 2/29/96 3/29/96 4/30/96 5/31/96 6/28/96
Dividend per share: $0.067 $0.067 $0.066 $0.063 $0.067 $0.057
Record date: 7/30/96 8/29/96 9/27/96 10/30/96 11/28/96 12/30/96
Ex-dividend date: 7/31/96 8/30/96 9/30/96 10/31/96 11/29/96 12/31/96
Payment date: 7/31/96 8/30/96 9/30/96 10/31/96 11/29/96 12/31/96
</TABLE>
<TABLE>
3. Capital Stock
Balanced Portfolio: As of December 31, 1996, there were an unlimited number
of shares of no par value capital stock authorized and capital paid-in
aggregated $31,871,016. Transactions in capital stock (shares) for the years
ended December 31, 1996 and 1995 were as follows:
<CAPTION>
1996 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 485,421 $ 9,526,654 376,434 $ 6,807,100
Shares issued through dividend reinvestment 190,947 3,587,500 55,666 1,026,896
Shares repurchased (246,116) (4,837,188) (152,479) (2,682,202)
----------- ------------ ----------- ------------
NET INCREASE 430,252 $ 8,276,966 279,621 $ 5,151,794
----------- ------------ ----------- ------------
</TABLE>
<TABLE>
Fixed-Income Portfolio: As of December 31, 1996, there were an unlimited
number of shares of no par value capital stock authorized and capital paid-in
aggregated $8,346,777. Transactions in capital stock (shares) for the years
ended December 31, 1996 and 1995 were as follows:
<CAPTION>
1996 1995
--------------------------- --------------------------
Shares Amount Shares Amount
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 221,021 $ 3,333,554 127,963 $ 1,947,590
Shares issued through dividend reinvestment 19,702 300,611 16,561 247,954
Shares repurchased (115,949) (1,751,030) (55,674) (835,509)
----------- ------------ ----------- ------------
NET INCREASE 124,774 $ 1,883,135 88,850 $ 1,360,035
----------- ------------ ----------- ------------
</TABLE>
<TABLE>
California Tax-Exempt Portfolio: As of December 31, 1996, there were an
unlimited number of shares of no par value capitalstock authorized and
capital paid-in aggregated $5,659,917. Transactions in capital stock (shares)
for the years ended December 31, 1996 and 1995 were as follows:
<CAPTION>
1996 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 95,909 $ 1,509,468 53,578 $ 824,076
Shares issued through dividend reinvestment 12,131 191,716 12,059 185,861
Shares repurchased (22,783) (357,880) (59,847) (925,186)
----------- ------------ ----------- ------------
NET INCREASE 85,257 $ 1,343,304 5,790 $ 84,751
----------- ------------ ----------- ------------
</TABLE>
4. Purchases of Securities
Balanced Portfolio: Purchases of securities for the year ended December 31,
1996 were $26,660,526. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at December 31, 1996 were the same as
for financial statement purposes. Of the $1,485,452 of net unrealized
appreciation at December 31, 1996, $2,161,180 related to appreciation of
securities and $675,728 related to depreciation of securities.
Fixed-Income Portfolio:
Purchases of securities for the year ended December 31, 1996 were $3,894,157.
For federal income tax purposes, the aggregate cost of securities and
unrealized appreciation at December 31, 1996 were the same as for financial
statement purposes. Of the $100,680 of net unrealized appreciation at
December 31, 1996, $188,662 related to appreciation of securities and $87,982
related to depreciation of securities.
California Tax-Exempt Portfolio:
Purchases of securities for the year ended December 31, 1996 were $1,247,755.
For federal income tax purposes, the aggregate cost of securities and
unrealized appreciation at December 31, 1996 were the same as for financial
statement purposes. Of the $208,529 of net unrealized appreciation at
December 31, 1996, $215,077 related to appreciation of securities and $6,548
related to depreciation of securities.
5. Investment Advisory Agreement And Transactions With Affiliates
Under terms of an agreement which provides for furnishing investment
management and advice to the Fund, Parnassus Investments is entitled to
receive fees computed monthly, based on the Fund's average daily net assets
for the month, at the following annual rates:
Balanced Portfolio: 0.75% of the first $30,000,000, 0.70% of the next
$70,000,000 and 0.65% of the amount above $100,000,000.
FixedIncome Portfolio and California Tax-Exempt Portfolio: 0.50% of the first
$200,000,000, 0.45% of the next $200,000,000 and 0.40% of the amount above
$400,000,000.
Parnassus Investments has agreed to reduce its investment advisory fee to the
extent necessary to limit total operating expenses to 1.25% of net assets for
the Balanced Portfolio and 1.00% of net assets for the Fixed-Income and
California Tax-Exempt Portfolios.
For the Balanced Portfolio, the investment advisory fee was waived for the
first four months of 1996. Beginning May 1, 1996, an investment advisory fee
of 0.20% was charged to the Balanced Portfolio. This fee was increased to
0.30% on November 1, 1996. Parnassus Investments received net advisory fees
totaling $47,641 from the Balanced Portfolio for the year ended December 31,
1996. For the Fixed-Income Portfolio, Parnassus Investments waived the
investment advisory fee. For the California Tax-Exempt Portfolio, the
investment advisory fee was waived for the first nine months of 1996.
Beginning October 1, 1996, an investment advisory fee of 0.10% is charged to
the California Tax-Exempt Portfolio. Parnassus Investments received net
advisory fees totaling $1,433 from the California Tax-Exempt Portfolio for
the year ended December 31, 1996.
Under terms of a separate agreement which provides for furnishing transfer
agent and fund administration services to the Fund, Parnassus Investments
received fees paid by the Fund totaling $166,168 for the year ended December
31, 1996. The transfer agent fee is $2.30 per month per account and the fund
administration fee is $4,167 per month.
Jerome L. Dodson is the President of the Fund and is the sole stockholder of
Parnassus Investments.
During 1996, the Fund incurred legal fees of $2,448 to Richard D. Silberman,
counsel for the Fund. Mr. Silberman is also the Secretary of the Fund.
<TABLE>
6. Financial Highlights
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for the years ended December 31, 1996, 1995, 1994,
1993 and for the seven month period ended December 31, 1992 are as follows:
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 19.58 $ 15.70 $ 17.46 $ 16.17 $ 0.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.98 0.88 0.80 1.20 0.17
Net realized and unrealized gain (loss) on securities 0.37 3.93 (1.75) 1.36 16.15
------- ------- ------- ------- -------
Total from investment operations 1.35 4.81 (0.95) 2.56 16.32
------- ------- ------- ------- -------
DISTRIBUTIONS:
Dividends from net investment income (0.97) (0.90) (0.81) (1.21) (0.15)
Distributions from net realized gain on securities (1.40) (0.03) 0.00 (0.06) 0.00
------- ------- ------- ------- -------
Total distributions (2.37) (0.93) (0.81) (1.27) (0.15)
------- ------- ------- ------- -------
Net asset value at end of period $ 18.56 $ 19.58 $ 15.70 $ 17.46 $ 16.17
------- ------- ------- ------- -------
TOTAL RETURN* 7.09% 31.13% (5.39%) 15.91% 8.58%
RATIOS / SUPPLEMENTAL DATA:
Ratio of expenses to average net assets (actual)** 0.80% 0.72% 0.83% 0.81% 0.00%
Decrease reflected in the above expense ratios due to
undertakings by Parnassus Investments 0.60% 0.82% 0.88% 1.24% 1.14%
Ratio of net investment income to average net assets 4.56% 4.76% 5.15% 4.94% 2.44%
Portfolio turnover rate 47.80% 15.36% 6.50% 33.40% 23.54%
Average commission per share+ $ 0.069 .-- .-- .-- .--
Net assets, end of period (000's) $33,362 $26,779 $17,087 $11,542 $3,241
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Fixed-Income Portfolio 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 15.73 $ 13.79 $ 15.89 $ 15.33 $ 0.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.92 0.95 1.02 1.03 0.36
Net realized and unrealized gain (loss) on securities (0.31) 1.95 (2.08) 0.57 15.32
------- ------- ------- ------- -------
Total from investment operations 0.61 2.90 (1.06) 1.60 15.68
------- ------- ------- ------- -------
DISTRIBUTIONS:
Dividends from net investment income (0.91) (0.96) (1.04) (1.03) (0.35)
Distributions from net realized gain on securities 0.00 0.00 0.00 (0.01) 0.00
------- ------- ------- ------- -------
Total distributions (0.91) (0.96) (1.04) (1.04) (0.35)
------- ------- ------- ------- -------
Net asset value at end of perio $ 15.43 $ 15.73 $ 13.79 $ 15.89 $ 15.33
------- ------- ------- ------- -------
TOTAL RETURN* 4.08% 21.58% (6.76%) 10.59% 2.87%
RATIOS / SUPPLEMENTAL DATA:
Ratio of expenses to average net assets (actual)** 0.83% 0.90% 0.81% 0.68% 0.00%
Decrease reflected in the above expense ratios due to
undertakings by Parnassus Investments 0.50% 0.73% 0.98% 1.00% 1.18%
Ratio of net investment income to average net assets 5.98% 6.20% 7.00% 6.43% 3.20%
Portfolio turnover rate 2.80% 12.10% 5.20% 10.90% 15.29%
Net assets, end of period (000's) $ 8,384 $ 6,585 $ 4,545 $4,160 $2,093
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Portfolio 1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 16.06 $ 14.28 $ 16.10 $ 15.06 $ 0.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.08 0.82 0.80 0.77 0.19
------- ------- ------- ------- -------
Net realized and unrealized gain (loss) on securities (0.06) 1.78 (1.81) 1.16 15.05
------- ------- ------- ------- -------
Total from investment operations 0.74 2.60 (1.01) 1.93 15.24
------- ------- ------- ------- -------
DISTRIBUTIONS:
Dividends from net investment income (0.78) (0.82) (0.81) (0.78) (0.18)
Distributions from net realized gain on securities 0.00 0.00 0.00 (0.11) 0.00
------- ------- ------- ------- -------
Total distributions (0.78) (0.82) (0.81) (0.89) (0.18)
------- ------- ------- ------- -------
Net asset value at end of period $ 16.02 $ 16.06 $ 14.28 $ 16.10 $ 15.06
------- ------- ------- ------- -------
TOTAL RETURN* 4.78% 18.60% (6.36%) 13.03% 1.70%
RATIOS / SUPPLEMENTAL DATA:
Ratio of expenses to average net assets (actual)** 0.54% 0.50% 0.39% 0.48% 0.00%
Decrease reflected in the above expense ratios due to
undertakings by Parnassus Investments 0.46% 0.69% 0.87% 0.99% 2.10%
Ratio of net investment income to average net assets 4.96% 5.30% 5.37% 4.89% 2.10%
Portfolio turnover rate 0.00% 13.10% 12.00% 20.46% 0.00%
Net assets, end of period (000's) $5,835 $4,483 $3,902 $3,256 $1,061
<FN>
* 1992 ratios reflect returns for seven months of operation and are not annualized.
** Parnassus Investments has agreed to a 1.25% limit on expenses for the
Balanced Portfolio and 1% limit for the Fixed-Income and California Tax-Exempt
Portfolios (See note 5 for details). Certain fees were waived for the years
ended December 31, 1996, 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%.
+ Average commission rate is calculated for the period beginning January 1, 1996 and apply only to portfolios with equity
holdings.
</FN>
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of The Parnassus Income Fund:
We have audited the accompanying statements of assets and liabilities of
the portfolios comprising The Parnassus Income Fund (Balanced Portfolio,
Fixed-Income Portfolio, and California Tax-Exempt Portfolio) (the "Fund"),
including the portfolios of investments by industry classification, as of
December 31, 1996, the related statements of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended and the financial highlights (Note 6) for each of the four years in
the period then ended and for the period from June 1, 1992 (commencement of
operations) through December 31, 1992. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned at December 31, 1996 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Fund as of December 31, 1996, the results of its operations, the changes in its
net assets and financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
January 17, 1997
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
http://networth.galt.com/parnassus
