THE PARNASSUS INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1997
February 10, 1998
Dear Shareholder:
Here is your 1997 annual report for The Parnassus Income Fund. There's good
news inside since all three Portfolios beat their respective benchmarks. As
portfolio manager for the Balanced and Fixed-Income Portfolios, I wrote those
reports. As manager of the California Tax-Exempt Portfolio, David Pogran wrote
that report.
By now, all of you who were shareholders as of January 5 should have
received the mailing about the Shareholders' Meeting on March 26. There will be
a reception at 6:00 p.m. at the Sheraton Palace Hotel in San Francisco followed
by the meeting at 7:00 p.m. If you live in the San Francisco Bay Area or are
visiting here, I hope you will be able to attend. Since we will need to know how
many people to prepare for, we are asking you to RSVP by calling (800) 999-3505
if you plan to attend.
There will be a discussion period after the meeting which I think
shareholders will find interesting. I will answer questions on the Fund and on
any other subject you may wish to raise. Regardless of whether you plan to
attend in person or not, I would like to ask you to vote and sign your proxy
card and send it in as soon as possible. The Fund can save money by avoiding
follow-up costs if you promptly send in your proxy card.
One of the important items on the meeting agenda is a proposal to change
the investment objective of the Balanced Portfolio. This proposal would
eliminate the requirement to have 25% of assets in fixed-income securities. We
think this would help shareholders because stocks have a better rate of return
than bonds over the long-term. If this proposal is approved, the name would be
changed from the Balanced Portfolio to the Equity Income Fund. (The name of The
Parnassus Income Fund would be changed to The Parnassus Income Trust and each
Portfolio would be called a "Fund." This would be shorter and easier to
understand since each portfolio is actually a "mutual fund.")
For those who still wanted a balanced portfolio, they could invest some
money in the new Equity Income Fund and some money in the Fixed-Income
Portfolio. The Trustees have approved the change and recommended that
shareholders vote for this proposal.
Balanced Portfolio
As of December 31, 1997, the net asset value per share (NAV) of the
Balanced Portfolio was $20.68. Taking into account dividends paid, the total
return for the year was 20.15% compared to 19.00% for the average balanced fund
according to Lipper Analytical Services.
Below you will find a graph and table 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 on a long-term basis.
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, three and five-year periods and
since inception.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Balanced S&P 500 Lipper Balanced Lehman Government/
Average Annual Total Returns Portfolio Index Fund Average Corporate Bond Index
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 20.15% 33.36% 19.00% 9.76%
Three Years 19.05% 31.15% 19.50% 10.43%
Five Years 13.10% 20.27% 12.68% 7.61%
Since Inception 9/1/92 13.97% 20.23% 12.96% 7.12%
</TABLE>
-----------------------------------------------------------------
Value on December 31, 1997
-----------------------------------------------------------------
S&P 500 Index $26,718
Balanced Portfolio $20,093
Lipper Balanced Fund Average $19,155
Lehman Government/Corporate Bond Index $14,434
----------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Equity S&P 500 Lipper Lehman
Income Fund Index Balanced Government
Fund Corporate
Average Bond Index
<S> <C> <C> <C> <C>
9/1/92 10,000.00 10,000.00 10,000.00 10,000.00
12/31/92 10,858.00 10,625.80 10,544.43 10,002.00
11,968.77 11,089.55 10,954.15 10,468.09
12,314.67 11,142.60 11,124.58 10,782.76
12,714.90 11,429.56 11,516.82 11,140.21
12/31/93 12,586.48 11,694.84 11,650.01 11,108.15
11,880.38 11,252.00 11,271.38 10,758.77
11,413.48 11,299.27 11,141.76 10,625.77
11,887.14 11,851.10 11,479.36 10,678.90
12/31/94 11,908.53 11,848.59 11,351.93 10,718.23
12,743.32 13,000.97 12,042.13 11,252.34
13,808.66 14,240.42 12,899.53 11,981.87
14,598.52 15,371.35 13,612.88 12,211.21
12/31/95 15,616.04 16,296.12 14,188.70 12,780.31
15,472.37 17,170.54 14,543.42 12,481.20
16,074.24 17,940.18 14,891.01 12,539.82
16,231.77 18,494.84 15,296.04 12,761.68
12/31/96 16,723.59 20,035.10 16,108.26 13,151.69
16,457.69 20,573.39 16,108.26 13,037.48
17,668.97 24,162.50 17,749.69 13,512.04
18,737.95 25,972.84 18,937.15 13,984.97
12/31/97 20,092.70 26,718.41 19,154.93 14,433.88
</TABLE>
I must say that I was surprised that the Balanced Portfolio beat the
average balanced fund this year. As you may recall, we trailed the average most
of the year and sometimes by a wide margin. What happened was that we had a
burst of growth in the last quarter that pushed us ahead of the average balanced
fund by a little over 1%. Falling interest rates and rising prices for utility
stocks were the underlying causes.
As veteran shareholders know, bond prices go up when interest rates go down
and vice-versa. The interest rate on the 30-year government bond is now close to
an all-time low (around 5.81% as this is being written in late January) so this
helped the fixed-income portion of the Portfolio increase in value during the
last quarter.
The other force at work was the utility sector. Even though utility stocks
are equities, they behave like bonds. When interest rates drop, utility stocks
go up and when interest rates rise, utility stocks go down. The reason for this
is that utilities pay out most of their income in the form of dividends and this
makes them income vehicles that tend to behave like bonds. Having quite a few
utility stocks in the Portfolio helped our fourth quarter performance.
Earlier in the year, we lagged most balanced funds because our Portfolio
has a higher concentration of income securities like bonds and utility stocks.
Most other balanced funds don't have the same income emphasis we do and since
stocks were doing better than bonds, the other funds were leaving us in the
dust. It was like the race between the tortoise and the hare and you remember
who won that contest.
Despite our success this year with the Balanced Portfolio, the Trustees are
recommending a change of investment objective. Although the Balanced Portfolio
has a good long-term track record (we're up about a full percent per year over
the Lipper balanced average since the Portfolio's inception), we think we can
provide better returns for our shareholders by changing our emphasis.
If shareholders approve the proposal at the Shareholders' meeting, we would
still be an income-oriented fund, but we would pay more attention to capital
appreciation than we have in the past. There would no longer be a requirement
for at least 25% fixed-income securities in the Portfolio so we could eliminate
all the bonds. Most of the stocks we would invest in, though, would still pay a
dividend so it would still be an income fund. The name of the Portfolio would
change to the Equity Income Fund. Since stocks tend to outperform bonds, this
would be in the long-run interest of shareholders.
I also think our timing is right in this regard.For bonds and utility
stocks to go up a lot more, interest rates would have to continue falling. Given
how low long-term interest rates are now, I don't think they can go too much
lower.
<PAGE>
INDIVIDUAL ISSUES
Turning to individual issues, we find that the top performer for the year
was a utility, IPALCO Enterprises, that went up 51.5%, climbing from $27.73 to
$42.00. It is a well-managed company that is in good shape for the coming
deregulation of the electric power industry.
Sun Oil gained 45.7% from the first of the year (when it was at $24.38)
until we sold it (at $35.53) during the second half of the year. Better refining
margins and improved cost control helped the stock increase in value.
ONEOK, a natural gas transmission, distribution and marketing company went
from $30.00 to $40.31 a share for a gain of 34.4%. The company formed a
strategic alliance with Western Resources in 1997 which nearly doubled the
number of customers it serves.
CILCORP, an electric utility in central Illinois, went up 33.6% as the
stock climbed from $36.63 to $48.94. The company is a low-cost power producer
and, like IPALCO, is well-positioned for deregulation.
The share price of UGI went up 31.6%, going from $22.38 to $29.44. The
company, which markets propane and natural gas, posted its highest earnings
since 1988 because of favorable pricing and cost control.
Energen, a holding company with a natural gas utility and an exploration
and development unit, gain-ed 31.4% as its stock went from $30.25 to $39.75.
Exploration and production earnings doubled in 1997.
Washington Water Power, an electric and gas utility, went from $18.63 to
$24.44 for a gain of 31.2%. The company has a large supply of low-cost
hydroelectric power and has very efficient operations.
For a report on the fixed-income portion of the Balanced Portfolio, see the
next section on the Fixed-Income Portfolio. The bond portion of the Balanced
Portfolio is managed in the same way as the Fixed-Income Portfolio.
<PAGE>
Fixed-Income Portfolio
As of December 31, 1997, the net asset value per share (NAV) of the
Fixed-Income Portfolio was $16.04. Taking into account dividends paid during the
year, the total return for 1997 was 10.60%. This compares to a return of 9.76%
for the Lehman Government/Corporate Bond Index and 9.17% for the average A-rated
bond fund followed by Lipper Analytical Services. We beat the averages by a
substantial margin and we also placed 11th out of the 137 A-rated bond funds
followed by Lipper.*
As you can see from 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>
---------------------------------------------------------------------------------------------------
Lehman
Fixed-Income Government/Corporate Lipper A-Rated
Average Annual Total Returns Portfolio Bond Index Bond Fund Average
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 10.60% 9.76% 9.17%
Three Years 11.86% 10.43% 9.79%
Five Years 7.61% 7.61% 7.00%
Since Inception 9/1/92 7.69% 7.12% 6.78%
---------------------------------------------------------------------------------------------------
<FN>
* For the five-year period ending December 31, 1997, the Fixed-Income Portfolio
ranked 16th out of 59 funds and since inception on September 1, 1992, it
ranked 11th out of 54 funds.
</FN>
</TABLE>
---------------------------------------------------------------
Value on December 31, 1997
---------------------------------------------------------------
Fixed-Income Portfolio $14,847
Lehman Government/Corporate Bond Index $14,434
Lipper A-Rated Bond Fund Average $14,190
---------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Fixed Lehman Lipper
Income Government/ A-Rated
Fund Corporate Bond Fund
Bond Index Average
-----------------------------------
<S> <C> <C> <C>
9/1/92 10,000.00 10,000.00 10,000.00
12/31/92 10,286.60 10,002.00 10,118.99
10,804.84 10,468.09 10,601.98
11,046.33 10,782.76 10,913.19
11,463.77 11,140.21 11,286.10
12/31/93 11,375.73 11,108.15 11,243.22
11,013.98 10,758.77 10,866.57
10,526.06 10,625.77 10,674.23
10,553.43 10,678.90 10,700.92
12/31/94 10,608.30 10,718.23 10,723.39
11,336.03 11,252.34 11,230.61
12,187.37 11,981.87 11,920.17
12,445.74 12,211.21 12,140.69
12/31/95 12,897.52 12,780.31 12,690.66
12,674.40 12,481.20 12,373.40
12,787.20 12,539.82 12,400.62
12,972.61 12,761.68 12,613.91
12/31/96 13,424.06 13,151.69 13,006.20
13,271.02 13,037.48 12,894.35
13,841.68 13,512.04 13,353.39
14,403.65 13,984.97 13,815.41
12/31/97 14,847.28 14,433.88 14,189.81
</TABLE>
ANALYSIS
Not only did the Portfolio beat the average A-rated bond fund, but we also
beat the Lehman Government/Corporate Bond Index which is a standard measure of
return for bonds. However, the Lehman index doesn't include expenses that a
mutual fund must pay. In our case, the expense ratio of 0.82% is relatively high
for a bond fund because our assets are less than $10 million. (As assets
increase, the expense ratio should come down, so tell your friends about the
Fixed-Income Portfolio.) We beat the Lehman index even with a handicap of 0.82%.
If you look at the graph, you can see that we beat the averages in every
year except 1994. That year, interest rates shot up sharply and the Portfolio
had a lot of mortgage-backed bonds. When interest rates go up, fixed-income
securities with longer maturities go down more than securities with shorter
terms. (In general, the value of bonds go up when interest rates drop and go
down when interest rates rise.) What happened in 1994 was that the expected term
of our mortgage-backed bonds increased because fewer people pay off their
mortgages when interest rates increase.
After our terrible experience in 1994, we stopped investing in
mortgage-backed bonds because of their uncertainty. We also reduced our
long-term bond holdings (15-30 years) and invested in bonds with 10-year
maturities. As you can see from the graph, this strategy has worked well for us.
Another thing that helped us was timing. Interest rates moved up and down
during the year. Each time interest rates shot up, we bought more bonds to get
the higher yield. Each time interest rates dropped, we sold bonds to capture the
capital gain. This helped our return and enabled us to beat the averages. The
Portfolio also benefited from interest rates that dropped sharply during the
second half of the year. The drop in interest rates increased the value of our
bonds and contributed substantially to our total return.
As this is being written in late January, the yield on the 30-year bond is
at a historic low. The 30-year government bond yield is now 5.81% and it was
around 5.70% a week ago. These are the lowest levels in 20 years. Absence of
inflation has caused interest rates to plunge.
However, not all interest rates have declined equally. Short-term rates are
high compared to long-term rates. While the capital markets set long-term
interest rates, short-term interest rates are set by Chairman Alan Greenspan and
the Federal Reserve Board. They have kept short-term rates relatively high.
While the 30-year bond yield is 5.81%, the 10-year rate is 5.53% and the
three-month Treasury bill rate is 5.01%. So there's only a half of a percentage
point difference between the 10-year rate and the 3-month rate and there's less
than a third of a percentage point difference between the 10-year and the
30-year rates.
What this means to me is that there's no reason to buy longer-term bonds.
We can get almost as much yield by investing in 3-month securities. While it's
true that we will be giving up some yield, more important is the fact that if
interest rates rise, we will be protected from falling bond values since our
maturities will be short.
Right now, over half the Portfolio is invested in securities with
maturities of less than one year. If interest rates fall or stay low, we'll
continue to sell off more of our 10-year bonds. Should interest rates rise, we
would buy more 10-year bonds to get the higher yield.
Yours truly,
Jerome L. Dodson
President
<PAGE>
California Tax-Exempt Portfolio
February 5, 1998
Dear Shareholder:
As of December 31, 1997, the net asset value (NAV) of the California
Tax-Exempt Portfolio was $16.72. Including dividend reinvestment, the 1997 total
return for the Portfolio was 9.33%. For the same period, the Lehman Municipal
Bond Index posted a 9.19% return and the average California municipal bond fund
gained 9.15%.
<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 9.33% 9.19% 9.15%
Three Years 10.76% 10.24% 10.21%
Five Years 7.53% 7.36% 7.01%
Since Inception 9/1/92 7.39% 7.38% 6.98%
---------------------------------------------------------------------------------------------------------------
<FN>
* For the five-year period ending December 31, 1997, the California Tax-Exempt
Portfolio ranked 39th out of 103 funds and since inception on September 1,
1992, it ranked 11th out of 48 funds.
</FN>
</TABLE>
--------------------------------------------------------------
Value on December 31, 1997
--------------------------------------------------------------
California Tax-Exempt Portfolio $14,623
Lehman Municipal Bond Index $14,617
Lipper California Municipal Bond Fund Average $14,221
--------------------------------------------------------------
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
California Lehman Lipper
Tax-Exempt Municipal California
Fund Bond Index Municipal
Bond Fund
Average
-----------------------------------
<S> <C> <C> <C>
9/1/92 10,000.00 10,000.00 10,000.00
12/31/92 10,170.00 10,248.24 10,233.92
10,602.23 10,628.54 10,654.78
10,931.95 10,976.30 11,013.17
11,369.23 11,347.07 11,406.03
12/31/93 11,495.43 11,506.35 11,514.06
10,841.34 10,874.73 10,841.64
10,904.22 10,995.10 10,873.08
10,964.19 11,070.34 10,925.27
12/31/94 10,764.65 10,911.36 10,646.68
11,626.89 11,682.85 11,469.66
11,848.97 11,964.99 11,672.68
12,167.70 12,309.12 11,952.82
12/31/95 12,766.36 12,816.77 12,577.95
12,597.84 12,662.18 12,302.50
12,696.10 12,759.26 12,399.69
13,023.66 13,053.01 12,718.36
12/31/96 13,376.60 13,385.62 13,035.05
13,349.85 13,354.56 12,943.80
13,805.08 13,813.96 13,400.72
14,208.19 14,231.14 13,838.92
12/31/97 14,623.07 14,616.81 14,220.87
</TABLE>
As you can see from the graph and table above, the Portfolio outperformed
the average California municipal bond fund. For the five years ended December
31, 1997, our performance ranked 11th of 51 California municipal bond funds
followed by Lipper Analytical Services.** The Portfolio also outperformed the
Lehman Municipal Bond Index for every measurement period although the difference
appears small for the life of the Portfolio. When comparing a managed fund to an
index, remember that an index has no expenses while the Portfolio does. For
example, expenses reduced our performance by 0.67% in 1997. Even with an expense
handicap, we managed to beat the index.
For December 1997, our 30-day yield was 4.25%. For the twelve months of
1997, our average 30-day yield was 4.55%. A single individual with taxable
income between $25,484 and $32,207 would have to get a yield of 6.87% on a
taxable investment to equal the Portfolio's 1997 average 30-day yield after
taxes. We did not sacrifice credit quality to achieve these attractive yields.
Our portfolio's average credit rating is AA. At our website, www.parnassus.com,
we have a new interactive calculator you can use to calculate taxable equivalent
yield based upon your income and filing status.
<PAGE>
ANALYSIS
Low inflation and a surge in the bond market resulting from the Asian
financial crisis contributed to excellent returns for California Tax-Exempt
Portfolio investors. In December, the annual change in the Consumer Price Index
(CPI) fell to 1.7%, its lowest reading in 11 years. In the third quarter, the
Gross Domestic Product Implicit Price Deflator, a broader measure of inflation
than the CPI, came in at 1.4%, the lowest report in 33 years.
The Asian financial crisis had two effects on the bond market. First, The
U.S. dollar and economy are very strong and stable compared to many Asian
markets, so investors sold their Asian investments and many of them bought U.S.
bonds, particularly Treasuries. These purchases drove up U.S. bond prices which
decreased yields. The second effect is on inflation prospects. Cash-starved
Asian companies will aggressively reduce prices on their exports to earn
revenues. Lower prices for imported goods will help keep inflation low in 1998.
California's continuing economic rebound helped California's municipal
bonds outperform the nationwide municipal market in 1998. A stronger economy
improves California's credit quality. Moody's and S&P credit rating agencies
still rate California A1 and A+, respectively. However, the market now prices
California State bonds as if the State is a AA credit. If history is any guide,
the credit rating agencies will soon follow the market's lead and upgrade the
State's credit rating.
Even though municipal bonds posted good returns in 1997, they
underperformed the taxable bond market. Treasury bonds benefited most from
"flight to safety" investors fleeing Asian markets. Municipal bonds were dragged
along with the Treasuries and other taxable bonds as they rallied, but the
municipal market did not see direct investments from investors seeking a safe
haven. Since foreigners don't pay U.S. taxes, they get no advantage from
investing in tax-exempt municipal bonds. As a result, municipal price gains
lagged Treasury and taxable bond gains.
Municipals now look like a bargain compared to taxable bonds. Right now,
municipal yields are up to 84% of Treasury yields. When non-taxable bond yields
are that close to taxable bond yields, it is usually a good time to buy
municipals since municipal taxable equivalent yields become more attractive.
With municipal yields relatively high, a relative drop in their yields would
mean an increase in market value. (The market value of bonds go up when yields
fall.)
OUTLOOK & STRATEGY
When we started this Portfolio a little over five years ago, my analysis
led me to believe municipal bonds with a maturity around 15 years were most
attractive. There simply was little reward in additional yield for extending
maturities longer than that. Today, there still isn't enough additional yield to
justify buying longer bonds. So, I will continue to focus my bond purchases
around the 15 year maturity mark. Low inflation and the relative undervaluation
of municipals make me optimistic for another good year in 1998.
<PAGE>
NEW HOLDINGS
In 1994, your Portfolio invested in a Los Angeles County Park and Open
Space offering. After the success of the 1994 projects, the County went back to
the voters to approve a small increase in the assessment for more park and open
space projects. Voters approved the original assessment with a 63.9% majority.
The additional assessment received even stronger support with 65.1% voting in
favor.
The Portfolio purchased $315,000 of the new L.A. County Park and Open Space
offering in November. Although the typical homeowner's assessment of $19 per
year is small, the money raised is substantial. Altogether, $340 million of
projects will be funded by the recent bond offering. These projects include open
space and wildlife habitat acquisition, as well as development and enhancement
of parks and recreational facilities. Although there are hundreds of individual
projects, some of the larger ones include:
o $8 million for Santa Monica Bay restoration and clean-up
o $20 million for Exposition Park acquisition and development
o $18 million for Griffith Observatory improvements
I am very pleased that the Portfolio has been able to help fund such
beneficial public projects as these as well as achieve above average returns for
our shareholders. Thank you for investing with us.
Yours truly,
David Pogran
Portfolio Manager
<PAGE>
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, 1997, 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 five 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, 1997 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, 1997, 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 16, 1998
<PAGE>
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTry Classification, December 31, 1997
Percent of
Shares Common Stocks Net Assets Market Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DIVERSIFIED SERVICE
AND SUPPLY
40,000 Chemed Corporation 4.3% $ 1,665,000
------------
ELECTRIC UTILITIES
30,000 CILCORP 1,468,125
12,000 Ipalco Enterprises 504,000
50,000 LG & E Energy Corporation 1,234,375
85,000 Washington Water Power 2,077,188
-----------
Total 13.6% 5,283,688
-----------
NATURAL GAS
35,000 Black Hills Corporation 1,238,125
55,000 Energen Corporation 2,186,250
30,000 Enron 1,245,000
30,000 Equitable Resources 1,061,250
45,000 KeySpan Energy 1,656,562
15,000 Northwest Natural Gas 465,000
55,000 ONEOK 2,217,188
40,000 People's Energy 1,577,500
45,000 UGI Corporation 1,324,688
10,000 Wicor, Inc. 465,625
----------
Total 34.5% 13,437,188
----------
RESTAURANT
80,000 Luby's Cafeterias, Inc. 3.6% 1,405,000
----------
RETAIL
10,000 J.C. Penney Company, Inc. 1.6% 602,500
----------
TECHNOLOGY
25,000 Eastman Kodak 1,520,312
85,000 Helix Technology 1,657,500
---------
Total 8.2% 3,177,812
---------
Total Common Stocks 65.8% 25,571,188
----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Percent of
Amount Corporate Bonds Net Assets Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIR TRANSPORT
$ 27,733 Delta Airlines
8.540%, due 01/02/07 $ 30,311
21,648 Delta Airlines
8.540%, due 01/02/07 23,673
20,000 Southwest Airlines
7.875%, due 09/01/07 21,954
------------
Total 0.2% 75,938
------------
FOOD-PROCESSING
650,000 Quaker Oats Company
9.280%, due 12/08/09 2.0% 801,716
------------
HOME APPLIANCES
122,000 Whirlpool
9.100%, due 02/01/08 0.4% 144,021
------------
INSURANCE
950,000 Aetna Life and Casualty
6.750%, due 09/15/13 2.4% 934,031
------------
RETAIL
605,000 Dayton Hudson
9.625%, due 02/01/08 736,781
350,000 Reebok International
6.750%, due 09/15/05 345,635
------------
Total 2.8% 1,082,416
------------
TELECOMMUNICATIONS
350,000 U.S. West Capital Funding
6.350%, due 02/06/08 0.9% 339,990
------------
Total Corporate Bonds 8.7% 3,378,112
------------
<PAGE>
Principal U.S. Government Percent of
Amount Agency Bonds Net Assets Market Value
-----------------------------------------------------------------------------------
$ 200,000 Federal Farm Credit Bank
5.810%, due 11/10/03 $ 198,858
300,000 Federal Home Loan Bank
5.850%, due 12/15/03 298,827
1,000,000 Federal Home Loan Bank
6.840%, due 05/01/06 1,052,670
150,000 Federal Home Loan Bank
8.170%, due 12/16/04 168,416
1,000,000 Federal Home Loan
Mortgage Corporation
5.825%, due 02/06/06 987,150
1,150,000 Federal National
Mortgage Association
6.770%, due 09/01/05 1,203,646
500,000 Federal National
Mortgage Association
6.140%, due 11/25/05 504,375
1,000,000 Federal National
Mortgage Association
5.800%, due 02/22/06 985,520
----------
Total U.S. Government
Agency Bonds 13.9% 5,399,462
----------
Principal Community Percent of
Amount Development Loans Net Assets Market Value
- --------------------------------------------------------------------------------------
$ 100,000 Boston Community Loan Fund $ 100,000
100,000 Cascadia Revolving 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 1.0% 400,000
----------
Total Investment
in Securities
(Cost, $29,442,686) 89.4% 34,748,762
----------
<PAGE>
Percent of
Short-Term Investments Net Assets Market Value
----------------------------------------------------------------------
Union Bank of California
Money Market Fund,
variable rate - 5.010% $ 1,128,258
Goldman Sachs
Government Portfolio - 5.230% 1,120,279
Goldman Sachs
Treasury Portfolio - 5.180% 1,712,815
-----------
Total Short-Term
Investments 10.2% 3,961,352
-----------
Total Investments 99.6% 38,710,114
Other Assets and
Liabilities - Net 0.4% 137,383
------ -----------
Total Net Assets 100.0% $38,847,497
====== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
BALANCED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Assets:
Investments in securities, at market value
(identified cost $29,442,686) (Note 1) $34,748,762
Temporary investments in short term securities
(at cost, which approximates market) 3,961,352
Receivables:
Dividends and interest 274,492
Capital shares sold 68,736
Other assets 3,710
----------
Total assets 39,057,052
----------
Liabilities:
Dividends payable 151,902
Accounts payable and accrued expenses 57,653
----------
Total liabilities 209,555
----------
Net Assets (equivalent to $20.68
per share based on 1,878,697.424
shares of capital stock outstanding) $38,847,497
===========
Net assets consist of:
Distributions in excess of
net investment income $ (1,462)
Unrealized appreciation on investments 5,306,076
Undistributed net realized gain 8,799
Capital paid-in 33,534,084
-----------
Total Net Assets $38,847,497
===========
Computation of net asset value and offering price per share:
Net asset value and offering price per share
($38,847,497 divided by 1,878,697.424 shares) $ 20.68
===========
<PAGE>
BALANCED PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Investment Income:
Dividends $ 1,011,097
Interest 764,809
-----------
Total investment income 1,775,906
-----------
Expenses:
Investment advisory fees (Note 5) 261,492
Transfer agent fees (Note 5) 90,052
Fund administrative expense (Note 5) 35,042
Reports to shareholders 28,021
Registration fees and expenses 18,700
Professional fees 11,791
Custody fees 8,882
Trustee fees and expenses 6,405
Other expenses 10,116
-----------
Subtotal of expenses before fee waiver 470,501
Fees waived by Parnassus Investments (Note 5) (103,991)
-----------
Total expenses 366,510
-----------
Net Investment Income 1,409,396
-----------
Realized and Unrealized Gain
on Investments:
Realized gain from security transactions:
Proceeds from sales 14,012,919
Cost of securities sold (12,676,968)
-----------
Net realized gain 1,335,951
-----------
Unrealized appreciation of investments:
Beginning of year 1,485,452
End of year 5,306,076
-----------
Unrealized appreciation during year 3,820,624
-----------
Net Realized and Unrealized
Gain on Investments 5,156,575
-----------
Net Increase in Net Assets Resulting
from Operations $ 6,565,971
===========
<PAGE>
BALANCED PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
-------------- -------------
From Operations:
Net investment income $ 1,409,396 $ 1,396,812
Net realized gain from
security transactions 1,335,951 2,473,597
Net unrealized appreciation
(depreciation) during
the year 3,820,624 (1,711,490)
Increase in net assets
resulting from operations 6,565,971 2,158,919
Dividends to shareholders:
From net investment income (1,407,411) (1,384,215)
From realized capital gains (1,335,937) (2,469,121)
Increase in Net Assets from
Capital Share Transactions 1,663,068 8,276,966
Increase in Net Assets 5,485,691 6,582,549
Net Assets:
Beginning of year 33,361,806 26,779,257
End of year
(including distributions in
excess of net investment
income of $1,462 in 1997
and $3,447 in 1996) $ 38,847,497 $ 33,361,806
<PAGE>
FIXED-INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1997
Principal Percent of
Amount Corporate Bonds Net Assets Market Value
-----------------------------------------------------------------------------
AIR TRANSPORT
$ 60,665 Delta Airlines
Notes, 8.540%,
due 01/02/07 0.7% $ 66,305
----------
COMPUTERS
25,000 Digital Equipment Corporation
Notes, 7.125%,
due 10/15/02 0.3% 25,236
----------
ELECTRONICS
400,000 Polaroid Corporation
Notes, 7.250%,
due 01/15/07 4.3% 418,704
----------
FINANCIAL SERVICES
300,000 BankAmerica Corporation
Notes, 7.125%,
due 03/01/09 3.2% 312,381
----------
FOOD-PROCESSING
350,000 Quaker Oats Company
Notes, 9.280%,
due 12/08/09 4.4% 431,694
----------
HOME APPLIANCES
300,000 Whirlpool Corporation
Debentures, 9.100%,
due 02/01/08 3.7% 354,150
----------
INSURANCE
350,000 Aetna Life and Casualty
Notes, 6.750%,
due 09/15/13 344,117
150,000 Cigna Corporation
Notes, 7.400%,
due 05/17/07 157,440
----------
Total 5.2% 501,557
----------
<PAGE>
RETAIL
90,000 Dayton Hudson
Debentures, 9.625%,
due 02/01/08 109,604
350,000 Reebok International
Debentures, 6.750%,
due 09/15/05 345,635
----------
Total 4.7% 455,239
----------
TELECOMMUNICATIONS
350,000 U.S. West Capital Funding
Notes, 6.350%,
due 02/06/08 3.5% 339,990
----------
Total Corporate Bonds 30.0% 2,905,256
----------
Principal U.S. Government Percent of
Amount Agency Securities Net Assets Market Value
-----------------------------------------------------------------------------
$ 500,000 Federal Home Loan Bank
6.840%, due 05/01/06 $ 526,335
500,000 Federal Home Loan
Mortgage Corp.
6.400%, due 12/13/06 513,315
300,000 Federal National
Mortgage Association
6.720%, due 08/01/05 312,972
850,000 Federal National
Mortgage Association
6.770%, due 09/01/05 889,652
500,000 Federal National
Mortgage Association
6.140%, due 11/25/05 504,375
500,000 Federal National
Mortgage Association
5.800%, due 02/22/06 492,760
450,000 Federal National
Mortgage Association
7.350%, due 03/28/05 485,375
Total U.S. Government
Agency Securities 38.5% 3,724,784
----------
Total Investments in Securities
(Cost, $6,251,995) 68.5% $ 6,630,040
----------
Percent of
Short-Term Investments Net Assets Market Value
- --------------------------------------------------------------------------------
Union Bank of California
Money Market Fund,
variable rate - 5.010% 386,056
Goldman Sachs
Government Portfolio -
5.230% 412,229
Goldman Sachs
Treasury Portfolio -
5.180% 409,966
Federal Farm Credit
Discount Note 5.620%,
due 02/28/98 1,486,418
----------
Total Short-Term
Investments 27.8% 2,694,669
----------
Total Investments 96.3% 9,324,709
Other Assets and
Liabilities - Net 3.7% 358,780
------ -----------
Total Net Assets 100.0% $ 9,683,489
====== ===========
<PAGE>
FIXED-INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Assets:
Investments in securities, at market value
(identified cost $6,251,995) (Note 1) $ 6,630,040
Temporary investments in short term securities
(at cost, which approximates market) 2,694,669
Interest receivable 135,713
Other assets 249,154
----------
Total assets 9,709,576
----------
Liabilities:
Accounts payable and accrued expenses 26,087
----------
Total liabilities 26,087
----------
Net Assets (equivalent to $16.04
per share based on 603,851.950
shares of capital stock outstanding) $ 9,683,489
===========
Net assets consist of:
Undistributed net investment income $ 8,222
Unrealized appreciation on investments 378,045
Accumulated net realized loss (1,658)
Capital paid-in 9,298,880
-----------
Total Net Assets $ 9,683,489
===========
Computation of net asset value and offering price per share:
Net asset value and offering price per share
($9,683,489 divided by 603,851.950 shares) $ 16.04
===========
<PAGE>
FIXED-INCOME PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Investment Income:
Interest $ 578,033
----------
Total investment income 578,033
----------
Expenses:
Investment advisory fees (Note 5) 43,731
Transfer agent fees (Note 5) 23,589
Fund administrative expense (Note 5) 8,812
Reports to shareholders 7,300
Registration fees and expenses 14,000
Professional fees 4,258
Custody fees 900
Trustee fees and expenses 1,608
Other expenses 4,919
----------
Subtotal of expenses before fee waiver 109,117
Fees waived by Parnassus Investments (Note 5) (37,064)
----------
Total expenses 72,053
----------
Net Investment Income 505,980
----------
Realized and Unrealized Gain
on Investments:
Realized gain from security transactions:
Proceeds from sales 2,094,723
Cost of securities sold (1,986,054)
----------
Net realized gain 108,669
----------
Unrealized appreciation of investments:
Beginning of year 100,680
End of year 378,045
----------
Unrealized appreciation during year 277,365
----------
Net Realized and Unrealized
Gain on Investments 386,034
----------
Net Increase in Net Assets Resulting
from Operations $ 892,014
==========
<PAGE>
FIXED-INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---------- ----------
From Operations:
Net investment income $ 505,980 $ 430,512
Net realized gain
from security transactions 108,669 2,712
Net unrealized appreciation
(depreciation) during
the year 277,365 (92,885)
---------- ----------
Increase in net assets
resulting from operations 892,014 340,339
Dividends to shareholders:
From net investment income (500,716) (424,348)
From realized capital gains (43,607) 0
Increase in Net Assets from
Capital Share Transactions 952,103 1,883,135
---------- ----------
Increase in Net Assets 1,299,794 1,799,126
Net Assets:
Beginning of year 8,383,695 6,584,569
---------- ----------
End of year
(including undistributed
net investment income
of $8,222 in 1997
and $2,958 in 1996) $ 9,683,489 $ 8,383,695
=========== ===========
<PAGE>
CALIFORNIA TAX-EXEMPT PORTFOLIO
PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 1997
Principal Percent of
Amount Municipal Bonds Net Assets Market Value
----------------------------------------------------------------------------
EDUCATION
$ 50,000 State of California
6.000%, due 01/01/21 $ 53,824
170,000 State of California
6.125%, due 10/01/11 194,783
250,000 California Education
Facilities - California
Institute of Technology
6.000%, due 01/01/21 259,960
105,000 California Public Works -
University of California
at San Diego Facilities
7.375%, due 04/01/06 119,321
100,000 California Public Works -
Community College Projects
5.500%, due 12/01/06 107,136
130,000 California Public Works -
University of California
5.400%, due 06/01/08 139,494
175,000 California Public Works -
California State University
6.200%, due 10/01/08 194,460
300,000 Folsom School District
5.650%, due 08/11/11 326,526
100,000 Franklin-McKinsey
School District
5.600%, due 07/01/07 106,744
100,000 Kern High School District
5.600%, due 08/01/13 109,407
100,000 Los Angeles Municipal
Improvement - Central
Library Projects,
5.200%, due 06/01/07 104,401
250,000 Murrieta Valley Unified
School District
5.500%, due 09/01/10 265,787
<PAGE>
100,000 Natomas Unified
School District
5.750%, due 09/01/13 106,974
300,000 Oakland General
Obligation
5.500%, due 12/15/11 321,690
110,000 Pasadena Recreational/
Library Improvements
5.750%, due 01/01/13 113,771
130,000 Pomona Unified
School District
5.500%, due 08/01/11 141,703
130,000 San Francisco
Unified School District
6.200%, due 06/15/11 143,360
110,000 Santa Monica Unified
School District
5.400%, due 08/01/11 114,447
---------
Total 44.9% 2,923,788
---------
HEALTH CARE
200,000 California Health Facilities-
Cedar Sinai Medical Center
5.125%, due 08/01/17 199,624
60,000 California Health Facilities-
Feedback Foundation
6.500%, due 12/01/22 65,285
---------
Total 4.1% 264,909
---------
PUBLIC TRANSPORTATION
70,000 City of Sacramento -
Light Rail
6.000%, due 07/01/12 73,956
110,000 San Diego Mass
Transit Authority
5.000%, due 06/01/07 114,501
125,000 San Francisco Bay Area
Rapid Transit
5.650%, due 07/01/10 134,241
---------
Total 4.9% 322,698
---------
<PAGE>
HOUSING
205,000 Belmont Redevelopment
Agency
6.400%, due 08/01/09 225,047
55,000 California Housing
Finance - Multi-Family
6.750%, due 02/01/09 55,088
100,000 Glendale Redevelopment
Agency
5.500%, due 12/01/12 105,173
50,000 Los Angeles Community
Redevelopment
6.000%, due 07/01/17 53,694
275,000 Pasadena Community
Development
6.000%, due 08/01/14 294,107
175,000 San Jose Redevelopment
Agency
6.000%, due 08/01/15 198,396
200,000 University Of California
Housing
5.500%, due 11/01/10 211,606
---------
Total 17.5% 1,143,111
---------
INFRASTRUCTURE
IMPROVEMENTS
90,000 East Bay Municipal
Utility District
6.000%, due 06/01/20 95,338
150,000 Los Angeles City
General Obligation
5.250%, due 09/01/11 154,209
200,000 Los Angeles Wastewater
System
5.500%, due 06/01/12 209,862
200,000 Pomona Public Financing
Authority
6.000%, due 10/01/06 224,406
---------
Total 10.5% 683,815
---------
<PAGE>
ENVIRONMENT
80,000 Burbank Waste Disposal
5.300%, due 05/01/09 83,003
75,000 California Pollution
Control-North County
Recycling Center
6.750%, due 07/01/17 84,829
125,000 California Public Works -
Energy Efficiency
5.250%, due 05/01/08 131,191
235,000 Northern California
Geothermal Project
5.800%, due 07/01/09 251,166
50,000 East Bay Regional Park
5.750%, due 09/01/12 51,887
50,000 East Bay Regional Park
6.300%, due 09/01/09 53,462
315,000 Los Angeles City
Public Works - Parks
5.500%, due 10/01/12 332,706
35,000 Midpeninsula Regional
Open Space District
6.250%, due 07/01/08 38,208
---------
Total 15.7% 1,026,452
---------
Total Investments in Securities
(Cost, $5,910,053) 97.6% 6,364,773
---------
Short-Term Percent
Investments Net Assets Market Value
----------------------------------------------------------------
Highmark California
Tax-Exempt Fund,
variable rate - 3.510% 0.9% 56,076
---------
Total Investments 98.5% 6,420,849
Other Assests and
Liabilities - Net 1.5% 98,906
------ ------------
Total Net Assets 100.0% $ 6,519,755
====== ============
<PAGE>
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Assets:
Investments in securities, at market value
(identified cost $5,910,053) (Note 1) $ 6,364,773
Temporary investments in short term securities
(at cost, which approximates market) 56,076
Interest receivable 105,626
Other assets 1,252
---------
Total assets 6,527,727
---------
Liabilities:
Accounts payable and accrued expenses 7,972
---------
Total liabilities 7,972
---------
Net Assets (equivalent to $16.72
per share based on 389,854.737
shares of capital stock outstanding) $ 6,519,755
===========
Net assets consist of:
Undistributed net investment income $ 3,633
Unrealized appreciation on investments 454,720
Accumulated net realized loss (3,906)
Capital paid-in 6,065,308
-----------
Total Net Assets $ 6,519,755
===========
Computation of net asset value and offering price per share:
Net asset value and offering price per share
($6,519,755 divided by 389,854.737 shares) $ 16.72
===========
<PAGE>
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Investment Income:
Interest $ 331,820
---------
Total investment income 331,820
---------
Expenses:
Investment advisory fees (Note 5) 30,932
Transfer agent fees (Note 5) 8,331
Fund administrative expense (Note 5) 6,133
Reports to shareholders 3,970
Registration fees and expenses 1,674
Professional fees 3,503
Custody fees 600
Trustee fees and expenses 1,124
Other expenses 5,347
---------
Subtotal of expenses before fee waiver 61,614
Fees waived by Parnassus Investments (Note 5) (20,021)
---------
Total expenses 41,593
---------
Net Investment Income 290,227
---------
Realized and Unrealized Gain
on Investments:
Realized gain from security transactions:
Proceeds from sales 626,711
Cost of securities sold 597,232
---------
Net realized gain 29,479
---------
Unrealized appreciation of investments:
Beginning of year 208,529
End of year 454,720
---------
Unrealized appreciation during year 246,191
---------
Net Realized and Unrealized
Gain on Investments 275,670
---------
Net Increase in Net Assets Resulting
from Operations $ 565,897
==========
<PAGE>
CALIFORNIA TAX-EXEMPT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
---------- ----------
From Operations:
Net investment income $ 290,227 $ 259,435
Net realized gain from
security transactions 29,479 0
Net unrealized appreciation
during the year 246,191 5,632
---------- ----------
Increase in net assets
resulting from operations 565,897 265,067
Dividends to shareholders:
From net investment income (286,574) (256,479)
Increase in Net Assets from
Capital Share Transactions 405,391 1,343,304
---------- ----------
Increase in Net Assets 684,714 1,351,892
Net Assets:
Beginning of year 5,835,041 4,483,149
---------- ----------
End of year
[including undistributed
(distributions in excess of)
net investment income
of $3,633 in 1997 and
($20) in 1996] $ 6,519,755 $ 5,835,041
============ ============
<PAGE>
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
using 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 using 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 taxable income to shareholders; therefore, no federal
income tax provision is required.
As of December 31, 1997 the California Tax-Exempt Portfolio has available for
federal income tax purposes an unused capital loss carryover of $5,760 which
will expire in 2002.
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.
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.
Investment income and expenses: Dividend income is recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Interest income, adjusted for amortization of premium and, when appropriate,
discount on investments, is earned from settlement date and recognized on the
accrual basis.
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.
<PAGE>
2. Dividends To Shareholders
Balanced Portfolio: The Portfolio declared the following dividends during the
year ended December 31, 1997.
Dividend per share: $0.205 $0.21 $0.26 $0.8515
Record date: 3/28/97 6/27/97 9/29/97 12/29/97
Ex-dividend date: 3/31/97 6/30/97 9/30/97 12/30/97
Payment date: 3/31/97 6/30/97 9/30/97 12/30/97
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fixed-Income Portfolio: The Portfolio declared the following dividends during
the year ended December 31, 1997.
Dividend per share: $0.077 $0.085 $0.085 $0.100 $0.078 $0.083
Record date: 1/30/97 2/27/97 3/28/97 4/29/97 5/29/97 6/27/97
Ex-dividend date: 1/31/97 2/28/97 3/31/97 4/30/97 5/30/97 6/30/97
Payment date: 1/31/97 2/28/97 3/31/97 4/30/97 5/30/97 6/30/97
Dividend per share: $0.078 $0.066 $0.070 $0.060 $0.060 $0.1251
Record date: 7/30/97 8/28/97 9/29/97 10/30/97 11/27/97 12/30/97
Ex-dividend date: 7/31/97 8/29/97 9/30/97 10/31/97 11/28/97 12/31/97
Payment date: 7/31/97 8/29/97 9/30/97 10/31/97 11/28/97 12/31/97
California Tax-Exempt Portfolio: The Portfolio declared the following
dividends during the year ended December 31, 1997.
Dividend per share: $0.066 $0.070 $0.063 $0.069 $0.063 $0.064
Record date: 1/30/97 2/27/97 3/28/97 4/29/97 5/29/97 6/27/97
Ex-dividend date: 1/31/97 2/28/97 3/31/97 4/30/97 5/30/97 6/30/97
Payment date: 1/31/97 2/28/97 3/31/97 4/30/97 5/30/97 6/30/97
Dividend per share: $0.064 $0.062 $0.065 $0.060 $0.059 $0.0485
Record date: 7/30/97 8/28/97 9/29/97 10/30/97 11/27/97 12/30/97
Ex-dividend date: 7/31/97 8/29/97 9/30/97 10/31/97 11/28/97 12/31/97
Payment date: 7/31/97 8/29/97 9/30/97 10/31/97 11/28/97 12/31/97
<PAGE>
3. Capital Stock
Balanced Portfolio: As of December 31, 1997, there were an unlimited number
of shares of no par value capital stock authorized and capital paid-in
aggregated $33,534,084. Transactions in capital stock (shares) for the years
ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
Shares Amount Shares Amount
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 243,713 $ 4,709,089 485,421 $ 9,526,654
Shares issued through dividend reinvestment 124,257 2,482,385 190,947 3,587,500
Shares repurchased (287,159) (5,528,406) (246,116) (4,837,188)
----------- ----------- ---------- -----------
NET INCREASE 80,811 $ 1,663,068 430,252 $ 8,276,966
=========== =========== ========== ===========
</TABLE>
Fixed-Income Portfolio: As of December 31, 1997, there were an unlimited
number of shares of no par value capital stock authorized and capital paid-in
aggregated $9,298,880. Transactions in capital stock (shares) for the years
ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
Shares Amount Shares Amount
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 154,187 $ 2,410,292 221,021 $ 3,333,554
Shares issued through dividend reinvestment 24,386 379,889 19,702 300,611
Shares repurchased (117,962) (1,838,078) (115,949) (1,751,030)
----------- ----------- ---------- -----------
NET INCREASE 60,611 $ 952,103 124,774 $ 1,883,135
=========== =========== ========== ===========
</TABLE>
California Tax-Exempt Portfolio: As of December 31, 1997, there were an
unlimited number of shares of no par value capital stock authorized and
capital paid-in aggregated $6,065,308. Transactions in capital stock (shares)
for the years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
Shares Amount Shares Amount
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold 72,701 $ 1,163,383 95,909 $ 1,509,468
Shares issued through dividend reinvestment 12,758 206,661 12,131 191,716
Shares repurchased (59,924) (964,653) (22,783) (357,880)
---------- ----------- ---------- ------------
Net Increase 25,535 $ 405,391 85,257 $ 1,343,304
========== =========== ========== ============
</TABLE>
<PAGE>
4. Purchases of Securities
Balanced Portfolio: Purchases of securities for the year ended December 31,
1997 were $10,460,459. For federal income tax purposes, the aggregate cost of
securities and unrealized appreciation at December 31, 1997 were the same as
for financial statement purposes. Of the $5,306,076 of net unrealized
appreciation at December 31, 1997, $5,719,398 related to appreciation of
securities and $413,322 related to depreciation of securities.
Fixed-Income Portfolio: Purchases of securities for the year ended December
31, 1997 were $1,322,436. For federal income tax purposes, the aggregate cost
of securities and unrealized appreciation at December 31, 1997 were the same
as for financial statement purposes. Of the $378,045 of net unrealized
appreciation at December 31, 1997, $378,045 related to appreciation of
securities and $0 related to depreciation of securities.
California Tax-Exempt Portfolio: Purchases of securities for the year ended
December 31, 1997 were $1,115,866. For federal income tax purposes, the
aggregate cost of securities and unrealized appreciation at December 31, 1997
were the same as for financial statement purposes. Of the $454,720 of net
unrealized appreciation at December 31, 1997, $454,720 related to
appreciation of securities and $0 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.
Fixed Income Portfolio and California Tax-Exempt Portfolio: 0.50% of the
first $200,000,000, 0.45% of the next $200,000,000 and 0.40% of the amount
above $400,000,000.
However, the following were actually charged in 1997. For the Balanced
Portfolio, the investment advisory fee was 0.30% for the first three months
of 1997. Beginning April 1, 1997, this fee was increased to 0.50%. Parnassus
Investments received net advisory fees totaling $157,501 from the Balanced
Portfolio for the year ended December 31, 1997. For the Fixed-Income
Portfolio, Parnassus Investments waived the investment advisory fee for the
first three months of 1997. Beginning April 1, 1997 an investment advisory
fee of 0.10% was charged to the Fixed Income Portfolio. Parnassus Investments
received net advisory fees totaling $6,667 from the Fixed Income Portfolio
for the year ended December 31, 1997. For the California Tax-Exempt
Portfolio, the investment advisory fee was 0.10% for the first three months
of 1997. Beginning April 1, 1997, this fee was increased to 0.20%. Parnassus
Investments received net advisory fees totaling $10,911 from the California
Tax-Exempt Portfolio for the year ended December 31, 1997.
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.
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 $171,959 for the year ended December
31, 1997. 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.
<PAGE>
6. Financial Highlights
Selected data for each share of capital stock outstanding, total return and
ratios/supplemental data for the years ended December 31, 1997, 1996, 1995,
1994, 1993 and for the seven month period ended December 31, 1992 are as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 1997 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 18.56 $ 19.58 $ 15.70 $ 17.46 $ 16.17 $ 0.00
Income from investment operations:
Net investment income 0.79 0.98 0.88 0.80 1.20 0.17
Net realized and unrealized gain (loss) on securities 2.86 0.37 3.93 (1.75) 1.36 16.15
Total from investment operations 3.65 1.35 4.81 (0.95) 2.56 16.32
Distributions:
Dividends from net investment income (0.79) (0.97) (0.90) (0.81) (1.21) (0.15)
Distributions from net realized gain on securities (0.74) (1.40) (0.03) 0.00 (0.06) 0.00
Total distributions (1.53) (2.37) (0.93) (0.81) (1.27) (0.15)
Net asset value at end of period $ 20.68 $ 18.56 $ 19.58 $ 15.70 $ 17.46 $ 16.17
Total Return* 20.15% 7.09% 31.13% (5.39%) 15.91% 8.58%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (actual)** 1.05% 0.80% 0.72% 0.83% 0.81% 0.00%
Decrease reflected in the above expense ratios due to
undertakings by Parnassus Investments 0.30% 0.60% 0.82% 0.88% 1.24% 1.14%
Ratio of net investment income to average net assets 4.04% 4.56% 4.76% 5.15% 4.94% 2.44%
Portfolio turnover rate 34.12% 47.80% 15.36% 6.50% 33.40% 23.54%
Average commission per share+ $ 0.061 $ 0.069 .-- .-- .-- .--
Net assets, end of period (000's) $38,847 $33,362 $26,779 $17,087 $11,542 $ 3,241
-----------------------------------------------------------------------------------------------------------------------------
Fixed-Income Portfolio 1997 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 15.43 $ 15.73 $ 13.79 $ 15.89 $ 15.33 $ 0.00
Income from investment operations:
Net investment income 0.90 0.92 0.95 1.02 1.03 0.36
Net realized and unrealized gain (loss) on securities 0.67 (0.31) 1.95 (2.08) 0.57 15.32
Total from investment operations 1.57 0.61 2.90 (1.06) 1.60 15.68
Distributions:
Dividends from net investment income (0.89) (0.91) (0.96) (1.04) (1.03) (0.35)
Distributions from net realized gain on securities (0.07) 0.00 0.00 0.00 (0.01) 0.00
Total distributions (0.96) (0.91) (0.96) (1.04) (1.04) (0.35)
Net asset value at end of period $ 16.04 $ 15.43 $ 15.73 $ 13.79 $ 15.89 $ 15.33
Total Return* 10.60% 4.08% 21.58% (6.76%) 10.59% 2.87%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (actual)** 0.82% 0.83% 0.90% 0.81% 0.68% 0.00%
Decrease reflected in the above expense ratios due to
undertakings by Parnassus Investments 0.43% 0.50% 0.73% 0.98% 1.00% 1.18%
Ratio of net investment income to average net assets 5.79% 5.98% 6.20% 7.00% 6.43% 3.20%
Portfolio turnover rate 17.15% 2.80% 12.10% 5.20% 10.90% 15.29%
Net assets, end of period (000's) $ 9,683 $ 8,384 $ 6,585 $ 4,545 $ 4,160 $ 2,093
<PAGE>
-----------------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Portfolio 1997 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 16.02 $ 16.06 $ 14.28 $ 16.10 $ 15.06 $ 0.00
Income from investment operations:
Net investment income 0.74 0.08 0.82 0.80 0.77 0.19
Net realized and unrealized gain (loss) on securities 0.71 (0.06) 1.78 (1.81) 1.16 15.05
Total from investment operations 1.45 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 (0.75) 0.00 0.00 0.00 (0.11) 0.00
Total distributions (0.75) (0.78) (0.82) (0.81) (0.89) (0.18)
Net asset value at end of period $ 16.72 $ 16.02 $ 16.06 $ 14.28 $ 16.10 $ 15.06
Total Return* 9.33% 4.78% 18.60% (6.36%) 13.03% 1.70%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (actual)** 0.67% 0.54% 0.50% 0.39% 0.48% 0.00%
Decrease reflected in the above expense ratios due to
undertakings by Parnassus Investments 0.32% 0.46% 0.69% 0.87% 0.99% 2.10%
Ratio of net investment income to average net assets 4.69% 4.96% 5.30% 5.37% 4.89% 2.10%
Portfolio turnover rate 10.00% 0.00% 13.10% 12.00% 20.46% 0.00%
Net assets, end of period (000's) $ 6,520 $ 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, 1997, 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 for
1992 was 0%.
+ Average commission rate is calculated for the periods beginning January 1,
1996 and apply only to portfolios with equity holdings.
</FN>
</TABLE>
<PAGE>
THE PARNASSUS INCOME FUND
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
www.parnassus.com
This report must be preceded or accompanied by a current prospectus.
Printed on recycled paper.
