<TABLE>
<CAPTION>
THE PARNASSUS INCOME FUND
Cross Reference Index
<S> <C> <C>
ITEM REFERENCE
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); Portfolio
Practices 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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<PAGE>
THE PARNASSUS INCOME FUND
PROSPECTUS-MAY 1, 1997 AS REVISED DECEMBER 8, 1997
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 (SAI) dated May 1, 1997
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. Parnassus 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.
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of the
Fund will incur.
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------
CALIFORNIA
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) 0.50% 0.10% 0.20%
12b-1 Fees None None None
Other expenses (after expense reimbursement) 0.65% 0.83% 0.51%
Total Fund Operating Expenses 1.15%* 0.93%* 0.71%*
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 YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
Balanced Portfolio $12 $37 $63 $140
Fixed-income Portfolio 9 30 51 114
California Tax-Exempt Portfolio 7 23 40 88
The expenses shown above are cumulative--not ones you pay every year. For
example, the $140 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-11
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 compensates 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 1996,
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 1.40%, 1.33% and 1.00%
respectively.
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
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<CAPTION>
Selected data for each share of capital stock outstanding, total return and ratios/supplemental data
the years ended December 31, 1996, 1995, 1994, 1993 and seven month period ended December 31, 1992 are
as follows:
- -------------------------------------------------------------------------------------------------------------
Balanced Portfolio 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
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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
- -------------------------------------------------------------------------------------------------------------
Fixed-Income Portfolio 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
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 period $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
- -------------------------------------------------------------------------------------------------------------
California Tax-Exempt Portfolio 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $16.06 $14.28 $16.10 $15.06 $ 0.00
----- ----- ----- ----- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.80 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 relfect 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% for the Fixed-Income and California Tax-Exempt
Portfolios (See Note 5 for details). Certain fees were waived for years 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 periods beginning January 1,
1996 and applies only to portfolios with equity holdings.
</FN>
</TABLE>
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, the Greek 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 <PAGE>
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,
<PAGE>
however, 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
<PAGE>
or Moody's Investors Service. Securities in the lowest of these four categories
are considered in-vestment 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 of
the issuer and considered
<PAGE>
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 negative social or environmental impact as determined by the
Trustees
<PAGE>
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 industrial 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 Port-folio 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 may 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
<PAGE>
revenue to pay their bond obligations. California voters have approved
amendments to the State constitution which limit property taxes as well as the
ability of taxing entities to raise other types of 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. From mid-1990
to late 1993, California suffered the worst economic, fiscal and budget
conditions since the 1930's. The weak economy lowered tax revenues and increased
the need for social welfare expenditures causing recurring budget deficits. Due
to budgetary and fiscal stress, between October 1991 and July 1994, ratings on
the State's general obligation bonds were reduced from AAA to A by S&P, from Aaa
to A1 by Moody's and from AAA to A by Fitch. As of June 30, 1996, the economic
recovery that began in late 1993 has helped eliminate the State's budget
deficit. In 1996, S&P and Fitch upgraded ratings on California's general
obligation bonds from A to A+. The governor's budgets for 1996-1997 and
1997-1998 are balanced as proposed. However, these proposed budgets are based on
revenue and expenditure assumptions. If these assumptions are not met, future
budget deficits could materialize.
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
<PAGE>
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) re-purchase 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.
<PAGE>
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
The Fund may also advertise its cumulative total return for prior periods and
compare its performance to the performance of other selected mutual funds,
selected market indicators such as the Standard & Poor's 500 stock index or
non-market indices or averages of mutual fund industry groups.
The Fund may quote its performance rankings and/or other information as
published by recognized independent mutual funds statistical services or by
publications of general interest. In connection with a ranking, the Fund may
provide additional information, such as the particular category to which it
relates, the number of funds in that category, the criteria upon which the
ranking is based, and the effect of sales charges, fee waivers and/or expenses
reimbursements.
All Fund performance information is historical and is not intended to
represent or guarantee future results. The value of Fund shares when redeemed
may be more or less than their orginal cost.
<TABLE>
<CAPTION>
PERFORMANCE FIGURES
- ----------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------------------------------------------------------------
BALANCED FIXED-INCOME CALIFORNIA TAX-EXEMPT
FOR PERIODS ENDING DECEMBER 31, 1996 PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 7.09% 4.08% 4.78%
Three Years 9.93% 5.67% 5.18%
Life of Fund (date of inception was 9/1/92) 12.59% 7.03% 6.94%
</TABLE>
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
<PAGE>
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, and President of the
Portland Housing Authority. He has also served as a Director of the Social
Investment Forum. Mr. Shapiro is a graduate of the University of Washington. He
is no relation to Joan Shapiro.
Joan Shapiro, Trustee, is Executive Vice President of The South Shore Bank of
Chicago. 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.
David Pogran, Portfolio Manager, has managed the California Tax Exempt
Portfolio since its inception in September 1992. He has been director of
research at Parnassus Investments, since 1989. He received his MBA from the
University of California at Berkeley, and his undergraduate studies were at the
University of Wisconsin at Madison. Prior to receiving his MBA, David spent
eight years in retail management.
*Denotes "interested trustee" as defined in the Investment Company Act of
1940
<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 brokerage and portfolio
transactions.
(Paragraph deleted)
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
<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) and accounts
opened pursuant to the Uniform Gift to Minor's Act (UGMA) 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, UGMA accounts, 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 Fund 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 as of 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 is 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.
<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. You may also send
your redemption instructions by FAX to (415) 778-0228 if the redemption is less
than $25,000. 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. If you wish to have the redemption
proceeds sent by wire transfer or by overnight mail, there will be a charge of
$10 per transaction. 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.
<PAGE>
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 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 $500 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.
<PAGE>
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.
The Fund may be required to impose backup withholding at a rate of 31% from
any income dividend and capital gain distribution upon payment of redemption
proceeds. Shareholders can eliminate any backup withholding requirements by
furnishing certification of taxpayer identification numbers and reporting
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.
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.
<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.
<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
<PAGE>
