-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3I2HDs0wd6pMoqM28jJFA1rsQvnPCUbzWG1BoRpEwuE3R/M7ES3yIfiF2mQDKmP iFGRi1OeS0C3PKpcqEojfg== 0000866256-04-000010.txt : 20040308 0000866256-04-000010.hdr.sgml : 20040308 20040308162918 ACCESSION NUMBER: 0000866256-04-000010 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040308 EFFECTIVENESS DATE: 20040308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARNASSUS INCOME FUND CENTRAL INDEX KEY: 0000866256 IRS NUMBER: 946633178 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06673 FILM NUMBER: 04655063 BUSINESS ADDRESS: STREET 1: ONE MARKET STEUART TOWER STREET 2: SUITE 1600 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4157780200 MAIL ADDRESS: STREET 1: ONE MARKET STEUART TOWER STREET 2: SUITE 1600 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 N-CSR 1 pit_ncsr12-2003.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-06673 The Parnassus Income Trust - --------------------------------------------------- (Exact name of registrant as specified in charter) One Market--Steuart Tower #1600, San Francisco, California 94105 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Bryant Cherry The Parnassus Income Trust One Market--Steuart Tower #1600, San Francisco, California 94105 - ------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (415) 778-0200 Date of fiscal year end: December 31 Date of reporting period: December 31, 2003 Item 1: Reports to Shareholders - -------------------------------------------------------------------------------- THE PARNASSUS INCOME TRUST Annual Report December 31, 2003 - -------------------------------------------------------------------------------- February 16, 2004 Dear Shareholder: Enclosed is the annual report for the Parnassus Income Trust. The Trust has three funds, and the portfolio manager for each fund wrote the individual reports. Todd Ahlsten wrote the reports for the Equity Income Fund and the Fixed-Income Fund, while Stephen Dodson and Ben Liao co-authored the California Tax-Exempt Fund report. As you know, the Parnassus Income Trust issues two shareholder reports per year: an annual report and a semiannual report. We have decided to increase the frequency of our shareholder reports, so beginning this year, we will be reporting to you on a quarterly basis. This means you will be receiving reports four times a year. Our next report will be as of March 31, 2004. Yours truly, Jerome L. Dodson President NOTICE Parnassus proxy voting policies and procedures are now on our website (www.parnassus.com) and on the website of the Securities and Exchange Commission (www.sec.gov). You can also request a printed copy by calling (800) 999-3505. On the Parnassus website, you can also find a record of our votes cast at shareholder meetings. Equity Income Fund As of December 31, 2003, the net asset value per share (NAV) of the Equity Income Fund was $24.00, so after taking dividends into account, the total return for the year was 15.69%. This compares to a gain of 28.68% for the S&P 500 and a gain of 26.03% for the average equity income fund followed by Lipper. Despite giving up some ground in 2003, our long-term record continues to be outstanding. The Fund's three, five and ten-year returns beat the Lipper averages for every period. Below are a table and graph that compare the performance of the Fund with the S&P 500 and the average equity income fund followed by Lipper. Average annual total returns are for the one, three, five and ten-year periods.
- ------------------------------------------------------------------------------------------------------------------- Average Annual Total Returns Equity Income Lipper Equity Income S&P 500 for periods ended December 31, 2003 Fund Fund Average Index - ------------------------------------------------------------------------------------------------------------------- One Year 15.69% 26.03% 28.68% Three Years 7.01% 0.33% (4.02%) Five Years 9.86% 2.92% (0.56%) Ten Years 10.99% 9.54% 11.04% - ------------------------------------------------------------------------------------------------------------------- Past performance is no guarantee of future returns. Principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The S&P 500 is an unmanaged index of common stocks and it is not possible to invest directly in an index. An index doesn't take any expenses into account, but mutual fund returns do. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay on fund distributions or redemption of shares.
[INSERT GRAPH] Value on December 31, 2003 of $10,000 invested on December 31, 1993 - ---------------------------------------------------------------------- Equity Income Fund $28,366 Lipper Equity Income Fund Average $24,877 S&P 500 Index $28,508 Marks on the horizontal axis indicate end of year. Past performance is not predictive of future performance. Returns shown in the graph and table do not reflect the deduction of taxes a shareholder would pay on fund distributions or the redemption of fund shares. STRATEGY The goal of the Parnassus Equity Income Fund is to generate a long-term return that exceeds the S&P 500. We try to do this by investing in good businesses that are undervalued, are run by sound management, and have good growth prospects. At Parnassus Investments, we consider a "good business" to be a company that can generate a 15%+ return on equity and has a defendable market position and solid growth. To identify these stocks, our research team does intensive research, which includes speaking with executives, analysts, industry contacts, as well as performing in depth financial analysis to determine the merits of each company we analyze. The Fund will typically hold about 120 positions and at least 80% of them (by market value) will pay dividends or interest. Our aim is to have the Fund's yield (after expenses) exceed that of the S&P 500. The Parnassus Equity Income Fund also takes social factors into account. Our goal is to own ethical companies that are good places to work, have strong community involvement and sell products that have a positive social impact. ANALYSIS OF 2003 After four consecutive years of beating the S&P 500, the Equity Income Fund's winning streak came to an end in 2003. While in most years, I would be pleased to report a 15% return, it doesn't look too good this year compared to our benchmarks. We underperformed the S&P 500 by almost 13% in 2003 because we held an average of approximately 40% of our assets in cash and defensive convertible bonds during the year. The Fund began the year holding 19% in cash as the economy looked weak and the country faced a looming war in Iraq. By March 12th, the S&P 500 was down 11.8% for the year versus our loss of 5%, so our defensive strategy was working well. I held about 15% of the portfolio in cash as I felt the war would slow the economy's fragile recovery. The stock market began its big rally on March 13th, about a week before the war started, as investors suddenly became optimistic the conflict would be short and successful. By June 30th, the S&P 500 had leaped an amazing 21.2% versus 10% for the Fund. With 15% of the Fund in cash and another 15% in convertible bonds, our portfolio faced a stiff headwind. While corporate earnings were improving during the second quarter, most of the gains were due to cost cutting and currency gains -- not sustainable drivers of growth. As a result, many of our stocks became fully valued based on future profit projections. We began selling stocks that had reached our intrinsic value targets, and our cash position approached 40% by late June. Throughout the summer and into the fall, stocks continued to move higher as investors became increasingly bullish about the economy. By November, I was amazed when I read Barron's "Up and Down Wall Street" column one Saturday morning and saw management insiders were selling stock at a ferocious rate -- selling 61 times more stock in dollar terms than they were buying. At the same time, the S&P 500 was trading at a bubbly 28 times trailing earnings, so we continued to hold about 50% of the Fund in cash and convertible bonds. A steep market correction seemed imminent. The correction never came, and we finished the year lagging our peers. While I regret not being fully invested in 2003, the Fund stayed true to its "value discipline" of owning good companies at undervalued prices. I'm proud that over the past five years (which includes the "bubble year" of 1999, the "three-year" bear market and the boom of 2003) our Fund generated an annual return of 9.86% versus a loss of 0.56% for the S&P 500. The Fund won't outperform the S&P every year, but I'm confident our strategy of buying good companies at undervalued prices based on solid research will pay off over the long term. STRATEGY FOR 2004 While valuations remain high, the economy looks strong for 2004. Consumers are spending, interest rates remain low and companies are beginning to buy equipment. While I think there will be a market correction at some point in 2004, the economic outlook is strong, and stock prices could rise for some time. Based on this view, we plan to become fully invested over the next month or so. We're buying stocks that meet four main criteria. First, we look for businesses that generate a 15% return on equity. Second, we don't want to overpay so we're avoiding stocks with a PE ratios over 20 times forward earnings. Third, we want growth and good long-term business fundamentals. Finally, companies must be socially responsible. Areas where we're finding value include healthcare, pharmaceuticals, financial services and energy. These industries are poised for growth this year based on a strong economy. In addition, they have limited downside risk if the economic growth slows. We are avoiding technology as the NASDAQ trades at a bubble-like 131 times trailing earnings according to Bloomberg. If the stock market continues to rise, we should generate a nice return for our investors. If stock prices do experience a correction, the Fund may decline, but hopefully our loss would be less than the overall market because we're buying good, undervalued companies. LOSERS Only two stocks had a significant negative impact on the Fund. As I mentioned in the semiannual report in 2003, our investment in TECO Energy which owns Tampa Electric in Florida, reduced the Fund's NAV by 12 cents as the stock fell 33.7% from $15.47 to our average selling price of $10.26. We bought the stock because it offered a 12% dividend yield and a turnaround seemed to be at hand as insiders were buying a lot of stock. Unfortunately, further analysis showed the company had too much debt and would need to cut the dividend. We sold the stock for a loss, and this learning experience taught me to keep an even closer eye on balance sheets. Pharmaceutical giant Merck cost the Fund six cents as the stock fell 18.4% for the year from $56.61 to $46.20. During the fourth quarter, the company announced that three major drugs in its pipeline had failed in Phase III trials. While this was a big setback, Merck is still a great company, so we used this price decline as an opportunity to add to our position. WINNERS The Fund had a lot of winners in 2003. Unfortunately with such a large cash position, we didn't have enough homerun hitters in our line up. For the year, we had 10 stocks that added at least 10 cents to the NAV. Invitrogen, a major supplier of research tools and kits for biotechnology research, soared 123% from $31.33 to $70 and added 36 cents to the NAV. Demand has been strong for Invitrogen's drug research products, and a new CEO has boosted the growth rate with good acquisitions and cost control. Our investment in Baxter Corporation's convertible preferred stock rose 28.7% from $44.24 to $55.25 and added 20 cents to the NAV. The stock rose as investors anticipated a recovery in Baxter's blood therapy business, improved cash flow and better cost control. Synovus Financial, a bank holding company in the Southeast, added 16 cents to the NAV as its stock jumped 48.6% from our average cost of $19.22 to our selling price of $28.12. The stock rose as bank earnings were strong, and the company's investment in credit card processing firm, Total Systems, did well. Pfizer boosted the NAV by 15 cents as the stock rose 15.5% from $30.57 to $35.33. Earnings were strong in 2003 and should be boosted further in 2004 due to the company's Pharmacia acquisition. Longer term, Pfizer's pipeline of new products looks strong. Patterson Dental increased the NAV by 13 cents as the stock jumped 46.7% from $43.74 to $64.16. Patterson has great management and continues to gain market share in the dental distribution market. One of my favorite stocks in the portfolio, insurance broker A.J. Gallagher, also added 13 cents to the NAV as the company reported record earnings during 2003. The company has increased its dividend by a 20% annual rate since 1984, and I expect another big dividend increase later this month. Our convertible bond investment in Ciena, a networking equipment company, added 12 cents to the NAV as the bond price rose 16% to 92 from our cost of 83.37. Ciena reduced its negative cash flow during the year which improved its financial outlook. The bond also rose as interest rates declined. Cisco Systems increased the NAV by 12 cents as the stock jumped 85.4% to $24.29 from $13.10. While Cisco's sales didn't grow much in 2003, investors anticipated a big spending recovery for networking and enterprise system equipment. Mentor Graphics' convertible bond boosted the NAV 12 cents as the bond rose 37.3% from 80.83 to our average selling price of 100.07. The company reported strong orders for its chip design verification software which boosted profits. The Fund's Home Depot investment added 10 cents to the NAV as the stock jumped 70% from our average cost of $20.83 to $35.49. CEO Robert Nardelli improved Home Depot's store layout and marketing which pushed same store sales higher. SOCIAL NOTES The January 12th edition of Fortune magazine just hit the newsstands, and I'm pleased to report that six of our current holdings made their list of 100 Best Companies to Work For. In addition, eight "alumni" positions we owned last year also made the list. - -------------------------------------------------------------------------------- Current Holdings "2003 Alumni Holdings" - -------------------------------------------------------------------------------- Cisco Systems Adobe Software Genentech American Express J.M. Smucker Intel Medtronic Eli Lilly Merck IBM Xilinx Nvidia SEI Corporation Synovus Financial I also wanted to commend one of the companies mentioned above, medical device maker, Medtronic, for being recently selected by Business Week as having one of the ten best boards in corporate America. CEO Art Collins is the only member of management on the Board. In addition, he doesn't serve on any of Medtronic's Board committees or is he affiliated in any way with any of his Director's companies or institutions. In an era where too many corporate boards have acted as puppets to the CEO and failed their employees and shareholders, Medtronic's Board is independent and represents strong corporate governance. The results show as Medtronic has grown revenues 20% annually for the past ten years, generated a 20%+ return on equity and is a great place to work. All of us should be proud to be Medtronic shareholders. Thank you for investing in the Parnassus Equity Income Fund. Yours truly, Todd Ahlsten Portofolio Manager Fixed-Income Fund As of December 31, 2003, the net asset value per share (NAV) of the Fixed-Income Fund was $16.00, so after taking dividends into account, the total return for the year was 5.30%. This compares to a return of 5.23% for the Lehman Government/Corporate Bond Index and 5.03% for the average A-Rated bond fund followed by Lipper. The average 30-day Day SEC yield for the year was 3.09%. Below you will find a table and graph that compare the performance of the Fixed-Income Fund with that of the Lehman Government/Corporate Bond Index and the Lipper A-Rated Bond Fund Average. I'm pleased to report that our one, three, five and ten-year returns beat the Lipper A-Rated Bond Fund Average for every period. In fact, for the three-year period ended December 31, 2003, our annual return of 9.56% beats the Lipper average by over 2.6% annually and places us #3 out of 154 Funds in our category*. We underperformed the Lehman Government/Corporate Bond Index for the five and ten-year periods, but it is important to note that this index takes no expenses into account.
- ------------------------------------------------------------------------------------------------------------------- Average Annual Total Returns Fixed-Income Lipper A-Rated Bond Lehman Government/ for periods ended 12/31/03 Fund Fund Average Corporate Bond Index - ------------------------------------------------------------------------------------------------------------------- One Year 5.30% 5.03% 5.23% Three Years 9.56% 6.89% 8.23% Five Years 5.59% 5.52% 6.77% Ten Years 6.24% 6.19% 7.04% - ------------------------------------------------------------------------------------------------------------------- Past performance is no guarantee of future returns. Principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The Lehman Government/Corporate Bond Index is an unmanaged index of fixed-income securities, and it is not possible to invest directly in an index. An index doesn't take any expenses into account, but mutual fund returns do. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay on fund distributions or redemption of shares. * For the one, three, five, and ten-year periods ended 12/31/03, the Parnassus Fixed-Income Fund placed #61 of 200 funds, #3 of 154 funds, #60 out of 124 funds, and #27 out of 59 funds, respectively.
[INSERT GRAPH] Value on December 31, 2003 of $10,000 invested on December 31, 1993 ------------------------------------------------------------------- Fixed-Income Fund $18,325 Lipper A-Rated Bond Fund Average $18,229 Lehman Government/Corporate Bond Index $19,634 Marks on the horizontal axis indicate end of year. Past performance is not predictive of future performance. Returns shown in the graph and table do not reflect the deduction of taxes a shareholder would pay on fund distributions or the redemption of fund shares. ANALYSIS OF 2003 The Fund had a pretty good year in 2003 with a 5.30% return versus a 5.03% gain for our peers, but we could have done better. We began the year with duration of 4.4 years and 14.6% of the Fund in convertible bonds. This strategy worked well during the first half of 2003 as interest rates fell, which boosted our bond prices. In addition, our convertible bond investments soared based on a rising stock market, which added 3.1% to our return. As a result, the Fund was up 6.73% during the first half versus 4.73% for the Lipper A-Rated Bond Fund Average. Unfortunately, the Fund took a hit between mid-June and early September when the ten-year U.S. Treasury Bond yield jumped from 3.23% to 4.73% based on the outlook for better economic growth. Interest rates and bond prices are inversely related, so when interest rates rise, bond prices fall. While our duration on June 30th was relatively short at 5.3 years, we took a 2% NAV hit on four of our longer-duration bonds when rates spiked higher. (Duration is a measure of how much, in percentage terms, a bond price will change for a 1% change in yield. For example, a bond with duration of five years would drop 5% for every 1% increase in interest rates.) With the economic outlook improving and interest rates on the rise, we sold those positions and shortened our duration to approximately three years by the end of July. We made this move to reduce our downside risk, because longer maturity bond prices typically fall more than shorter duration bond prices when interest rates rise. Despite amazing growth of 8.2% for the third quarter, the yield for the ten-year U.S. Treasury Bond fell from 4.73% on September 3rd to 4.25% by year-end as inflation remained low. The fact that interest rates fell during that time was remarkable, because typically, high economic growth sparks inflation fears which push rates higher. Since our portfolio had such a short duration, our bond prices rose less than our peers, and we underperformed during the second half of the year. While I miscalculated the direction of interest rates during the second half of 2003, I'm pleased with the Fund's long-term returns. Our strategy of using yield curve analysis for our bond investments, in combination with buying attractive convertible securities to boost yield, has provided a good long-term return for our shareholders. OUTLOOK FOR 2004 As of this writing, we expect a strong economy in 2004 and higher interest rates. Based on this outlook, our duration is short at 2.87 years, and our 30-day SEC yield is low at 1.67%. Our current yield is low because of low interest rates, and our maturity is relatively short. However, this strategy should cushion the portfolio if rates rise. Over the next month or so, I plan to increase our convertible bond exposure from about 5% of the Fund to 20%. This portfolio strategy is targeted to boost our return as convertible bond prices should increase along with a better economy and higher stock prices. Thank you for investing in the Parnassus Fixed-Income Fund. Yours truly, Todd Ahlsten Portofolio Manager California Tax-Exempt Fund As of December 31, 2003, the net asset value per share (NAV) of the California Tax-Exempt Fund was $17.14. Taking dividends into account, the total return for 2003 was 3.88%. The average California municipal bond fund followed by Lipper had a return of 4.23%. The result was rather disappointing given that we had outperformed in the first three quarters of the year. Our long-term return numbers are still excellent, though, and the five and ten-year returns are still above the Lipper averages. Below you will find a table and a graph that compare our annual returns to various indices over the past one, three, five and ten-year periods. The 30-day SEC yield for December 2003 was 2.41%.
- ------------------------------------------------------------------------------------------------------------------- Average Annual Total Returns California Lipper California Municipal Lehman Municipal for periods ended 12/31/03 Tax-Exempt Fund Bond Fund Average Bond Index - ------------------------------------------------------------------------------------------------------------------- One Year 3.88% 4.23% 5.31% Three Years 5.18% 5.23% 6.66% Five Years 4.97% 4.61% 5.82% Ten Years 5.57% 5.30% 6.03% - ------------------------------------------------------------------------------------------------------------------- Past performance is no guarantee of future returns. Principal value will fluctuate and an investor's shares, when redeemed, may be worth more or less than their original cost. The Lehman Municipal Bond Index is an unmanaged index of fixed-income securities, and it is not possible to invest directly in an index. An index doesn't take expenses into account, but mutual fund returns do. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay on fund distributions or redemption of shares.
Value on December 31, 2003 of $10,000 invested on December 31, 1993 - ------------------------------------------------------------------------- CaliforniaTax-Exempt Fund $17,203 Lipper California Municipal Bond Fund Average $16,758 Lehman MunicipalBond Index $17,952 Marks on the horizontal axis indicate end of year. Past performance is not predictive of future performance. Returns shown in the graph and table do not reflect the deduction of taxes a shareholder would pay on fund distributions or the redemption of fund shares. While we outperformed our peers through the first nine months of the year, we gave back much of our earlier gains in the last three months. For better and then worse, the Fund's performance was tied to the health of the state of California. Because of its budget problems, California has to pay a higher rate of interest to its bondholders than other states. This is good for the yield on new purchases of bonds, but it's bad for our existing portfolio, because market value drops as interest rates rise. This strategy helped us outperform for three fourths of the year, but hurt us towards the end of the year, when political uncertainty in California became reality. Californians, acting on their political frustrations, voted out Governor Gray Davis in a recall election and elected Arnold Schwarzenegger as governor. Soon after taking office, he pledged to fulfill his campaign promise of repealing the unpopular increase in the vehicle license fees. While the repeal of the vehicle tax might have been popular with voters, the credit agencies felt this was fiscally irresponsible. Moody's downgraded California bonds to Baa1 from A3, just a few steps above junk status. The credit downgrade had a significant impact on the California General Obligation (G.O.) bonds. The three California G.O. bonds we own lost more than 2% of their value in the last three months. Since these three bonds account for about 12% of the portfolio, this loss was the primary reason for our poor quarter. Since we own a higher percentage of California G.O. bonds than the average California municipal bond fund, we underperformed our peers in the last quarter. OUTLOOK We continue to believe that California G.O. bonds are some of the best values in California municipal bonds and will generate superior returns over the long run. Naturally, there are still some concerns about the budgetary process, but nothing that would cause the state to default on its debt. The improved economy will also bring in higher tax revenue for the state and help alleviate the budget deficit. We are still anticipating interest rates to rise slowly, and holding shorter maturity bonds will expose us less to interest rate risk, since rising interest rates would lower the value of the bonds held by the Fund. The downside to this strategy is that it lowers the Fund's yield. Some shareholders have expressed concern, but we feel it's necessary to ensure good long-term performance. It's only a matter of time before interest rates rise, and we want to continue providing our shareholders good returns when that time comes. Thank you for investing in the Fund. Yours truly, Ben Liao Stephen J. Dodson Co-Portfolio Manager Co-Portfolio Manager THE PARNASSUS INCOME TRUST INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of The Parnassus Income Trust: We have audited the accompanying statements of assets and liabilities, including the portfolios of investments by industry classification, of The Parnassus Income Trust (the "Trust") (comprising the Equity Income Fund, Fixed-Income Fund and California Tax-Exempt Fund), as of December 31, 2003, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights (Note 7) for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust'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 auditing standards generally accepted in the United States of America. 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. Our procedures included confirmation of securities owned as of December 31, 2003, by correspondence with the custodian. 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, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the funds constituting The Parnassus Income Trust as of December 31, 2003, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP San Francisco, California February 20, 2004 THE PARNASSUS INCOME TRUST EQUITY INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 2003
- ------------------------------------------------------------------------------------------------------------------- Percent of Shares Common Stocks Net Assets Market Value AIR TRANSPORT 5,000 Southwest Airlines 2 0.0% $ 80,700 APPAREL 5,000 Ann Taylor Stores 1 195,000 2,400 Limited Brands 43,272 5,000 Liz Clairborne, Inc. 177,300 4,000 Russell Corporation 70,240 4,000 The Stride Rite Corporation 45,520 Total 0.1% $ 531,332 AUTO PARTS 250,000 Genuine Parts Company2 8,300,000 14,900 Modine Manufacturing Co. 402,002 Total 1.4% $ 8,702,002 BANKING 350,000 AmSouth Bancorporation 8,575,000 70,000 Bank One Corporation 3,191,300 3,000 Dime Bancorp - Warrant 510 10,000 Golden West Financial 1,031,900 1,500 Redwood Empire Bancorp 39,225 55,000 Wells Fargo & Company 3,238,950 Total 2.5% $ 16,076,885 BIOTECHNOLOGY 10,000 Genentech, Inc.1, 2 0.1% $ 935,700 BUILDING PRODUCTS 100,000 ElkCorp 0.4% $ 2,670,000 CHEMICAL 1,000 Air Products & Chemicals 52,830 100,000 Calgon Carbon Corp. 621,000 3,400 H.B. Fuller Company 101,116 1,000 Millipore Corporation 1 43,050 171,100 Wellman, Inc.2 1,746,931 Total 0.4% $ 2,564,927 COMPUTERS 38,200 RadiSys Corporation1, 2 0.1% $ 644,052 ENTERTAINMENT 70,500 Cedar Fair, L.P. 2 0.3% $ 2,167,875 FINANCIAL SERVICES 50,000 Automatic Data Processing 2 $ 1,980,500 25,000 First Data Corp.2 1,027,250 50,000 Charles Schwab Corp. 592,000 30,000 SLM Corporation 1,130,400 Total 0.8% $ 4,730,150 HEALTHCARE 50,000 Apria Healthcare Group, Inc.1, 2 1,423,500 125,000 First Health Group Corp.1 2,432,500 50,000 HCA Inc. 2,148,000 150,000 Health Management Associates, Inc. 3,600,000 24,120 Medco Health Solutions, Inc.1 819,839 86,535 MedQuist Inc.1 1,389,752 52,200 Province Healthcare Company1 835,200 30,000 UnitedHealth Group, Inc.2 1,745,400 Total 2.3% $ 14,394,191 HOME APPLIANCES 3,000 Maytag Corporation 83,550 1,000 Whirlpool Corporation 2 72,650 Total 0.0% $ 156,200 HOME PRODUCTS 700 Church & Dwight Co., Inc. 0.0% $ 27,720 INDUSTRIAL 100,000 Baldor Electric Company 2,285,000 85,000 Ryerson Tull, Inc. 973,250 10,000 Teleflex Incorporated 483,300 67,234 WD 40 Company 2,377,394 Total 1.0% $ 6,118,944 INSURANCE 1,000 Ambac Financial Group, Inc. $ 69,390 50,000 American Int'l Group, Inc. 3,314,000 100,000 Lincoln National Corp. 4,037,000 35,000 Nationwide Financial Services 1,157,100 5,100 SAFECO Corporation 198,543 175,000 St. Paul Companies, Inc.2 6,938,750 Total 2.5% $ 15,714,783 INSURANCE BROKERS 400,000 Arthur J. Gallagher 2 2.1% $ 12,996,000 MACHINERY 1,000 Black & Decker Corp.2 49,320 1,000 Deere & Company2 65,050 1,000 Illinois Tool Works, Inc.2 83,910 25,000 Regal-Beloit Corp. 550,000 57,000 Snap-on Inc. 1,837,680 11,200 The Stanley Works 424,144 Total 0.5% $ 3,010,104 MEDICAL EQUIPMENT 125,000 Baxter International Inc.2 3,815,000 15,000 Bausch & Lomb Inc. 778,500 100,000 Becton Dickinson 4,114,000 5,000 Invacare Corporation 201,850 165,000 Invitrogen Corp.1, 2 11,550,000 252,600 Laboratory Corporation of America Holdings1, 2 9,333,570 15,000 Lincare Holdings, Inc.1 450,450 100,000 Medtronic, Inc. 4,861,000 100,000 Patterson Dental Co.1 6,416,000 75,000 Sybron Dental Specialties, Inc.1 2,107,500 Total 6.9% $ 43,627,870 OIL 4,000 Sunoco, Inc.2 0.0% $ 204,600 PHARMACEUTICALS 5,000 Forest Laboratories, Inc.1, 2 $ 309,000 450,000 Johnson & Johnson 23,247,000 20,000 MedImmune, Inc.1 508,000 300,000 Merck & Company 13,860,000 700,000 Pfizer Inc. 24,731,000 Total 9.9% $ 62,655,000 PRINTING 100,000 Banta Corp. 4,050,000 98,800 Ennis Business Forms 1,511,640 10,000 John Harland 273,000 34,900 The Standard Register 587,367 Total 1.0% $ 6,422,007 PUBLISHING 1,000 Gannett Co.2 89,160 5,500 Knight-Ridder, Inc.1, 2 425,535 5,000 LEE Enterprises 218,250 25,000 McGraw-Hill Companies, Inc. 1,748,000 Total 0.4% $ 2,480,945 REAL ESTATE INVESTMENT TRUST 400,000 Equity Office Properties Trust2 1.8% $ 11,460,000 RESTAURANTS 91,945 Bob Evans Farms, Inc.2 0.5% $ 2,984,535 RETAIL 175,000 Department 56, Inc. 2,292,500 500 Ethan Allen Interiors, Inc. 20,940 30,000 The Home Depot, Inc. 1,064,700 67,700 Longs Drug Stores Corp. 1,674,898 125,000 Target Corporation 4,800,000 Total 1.6% $ 9,853,038 SEMICONDUCTORS 1,000 Xilinx, Inc.1, 2 0.0% $ 38,740 SOFTWARE 50,000 Mentor Graphics Corp.1 $ 727,000 5,000 PeopleSoft, Inc.1, 2 114,000 Total 0.1% $ 841,000 TELECOMMUNICATION EQUIPMENT 5,000 ADC Telecommunications1, 2 14,850 150,000 Cisco Systems, Inc.1 3,643,500 Total 0.6% $ 3,658,350 TELECOMMUNICATION PROVIDER 425,000 SBC Communications, Inc. 11,079,750 125,000 Verizon Communications, Inc. 4,385,000 Total 2.5% $ 15,464,750 UTILITIES 460,400 AGL Resources, Inc. 13,397,640 100,000 Atmos Energy 2,430,000 42,500 Cascade Natural Gas 896,325 80,000 Energen Corporation 3,282,400 17,600 IDACORP, Inc.2 526,592 250,000 Kinder Morgan, Inc. 14,775,000 225,000 Keyspan Energy Corporation 8,280,000 15,000 MDU Resources Group 357,150 110,000 National Fuel Gas 2,688,400 250,000 NiSource Inc.2 5,485,000 160,000 New Jersey Resources2 6,161,600 57,600 Northwest Natural Gas Co. 1,771,200 141,000 ONEOK Inc.2 3,113,280 72,600 Peoples Energy Corporation 3,052,104 7,812 Philadelphia Suburban 172,645 75,000 UGI Corporation 2,542,500 44,300 Vectren Corporation 1,091,995 Total 11.1% $ 70,023,831 Total common stocks (cost $ 277,051,425) 50.9% $ 321,236,231 Percent of Shares Preferred Stocks Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- 275,000 Baxter International Preferred 7.000%, due 02/16/06 2 $ 15,193,750 10,000 Cummins, Inc. Preferred 7.000%, due 06/15/312 627,500 55,439 First Republic Preferred 8.875%, Series B 1,455,274 50,000 KeySpan Corp. Preferred 8.750%, due 05/16/05 2,695,000 325,000 ONEOK, Inc. Preferred 8.500%, due 02/16/06 2 10,000,250 100,000 St. Paul Co. Preferred 9.000%, due 08/16/05 7,395,000 35,000 TECO Energy Preferred 9.500%, due 01/15/05 2 581,000 40,000 Zions Bancorp Preferred 8.000%, due 09/01/32 1,090,800 Total investment in preferred stocks (cost $ 33,919,982) 6.2% $ 39,038,574 Principal Percent of Amount $ Convertible Bonds Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- 2,000,000 Brocade Communications 2.000%, due 01/01/07 $ 1,802,500 18,000,000 Ciena Corp. 3.750%, due 02/01/08 16,560,000 2,000,000 ETrade Group 6.000%, due 02/01/07 2,045,000 4,602,000 Lam Research 4.000%, due 06/01/06 4,717,050 6,700,000 PMC-Sierra 3.750%, due 08/15/06 6,674,540 1,000,000 RadiSys Corporation 5.500%, due 08/15/07 956,250 5,691,000 RF Micro Devices 3.750%, due 08/15/05 5,676,773 801 TranSwitch Corporation 4.500%, due 09/12/05 712 103,125 TranSwitch Corporation 5.450%, due 09/30/07 102,094 3,000,000 TriQuint Semiconductor 4.000%, due 03/01/07 2,880,000 3,250,000 Vitesse Semiconductor Corporation 4.000%, due 03/15/05 3,217,500 Total investment in convertible bonds (cost $40,523,147) 7.1% $ 44,632,419 Total investment in stocks and convertible bonds (cost $351,494,554) 64.2% $404,907,224 Principal Percent of Amount $ Short-Term Investments Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- U.S. Government Agency Discount Notes 17,250,000 Federal Home Loan Mortgage Corporation Zero Coupon, 1.040% equivalent, matures 03/01/04 $ 17,220,100 10,000,000 Federal National Mortgage Association Zero Coupon, 1.060 equivalent, matures 01/09/04 9,997,644 31,000,000 Federal National Mortgage Association Zero Coupon, 1.050% equivalent, matures 01/21/04 30,981,917 33,000,000 Federal National Mortgage Association Zero Coupon, 1.075% equivalent, matures 02/25/04 32,945,802 31,750,000 Federal National Mortgage Association Zero Coupon, 1.050% equivalent, matures 03/24/04 31,673,139 (cost $122,818,602) 19.5% $ 122,818,602 Registered Investment Companies - Money Market Funds 20,148,645 Goldman Sachs FSGovernment Fund variable rate 0.910% 20,148,645 24,772,084 Janus Government Fund variable rate 0.970% 24,772,084 123,435 Scudder Government Fund variable rate 0.940% 123,435 (cost $45,044,164) 7.1% $ 45,044,164 Community Development Loans 3 100,000 Vermont Community Loan Fund $ 98,263 3.000%, matures 04/16/04 100,000 Boston Community Loan Fund 97,025 3.000%, matures 06/30/04 (cost $200,000) 0.0% $ 195,288 Securities Purchased with Cash Collateral from Securities Lending Certificate of Deposit 5,000,000 First Tennessee Bank, N.A. variable rate 1.090%, matures 01/29/04 (cost $5,000,000) 0.8% $ 5,000,000 Commercial Paper 2,500,000 Countrywide Home Loans 1.121%, matures 01/30/04 2,497,589 5,000,000 Concord Minutement Cap Co. A 1.122%, matures 01/22/04 4,992,222 5,000,000 General Electric Capital Corp. 1.092%, matures 02/10/04 4,990,614 4,000,000 Queens Health Systems 1.121%, matures 01/14/04 3,994,898 (cost $16,475,323) 2.6% $ 16,475,323 Repurchase Agreements 7,505,012 Bank of America Securities LLC Triparty RepurchaseAgreement (Repurchase agreement with The Bank of New York dated 12/31/03, effective yield is 1.050% matures 01/02/04,collateralized by Bank of America Mortgage Securities MARM par value $7,505,012, 10/25/33, total market value $7,880,263) $ 7,505,012 15,000,000 Lehman Bros. Triparty Repurchase Agreement (Repurchase agreement with The Bank of New York dated 12/31/03, effective yield is 1.080% matures 01/02/04, collateralized by Yorktown Capital Commercial Paper par value $ 15,000,000, 12/25/18, total market value $15,750,432) 15,000,000 (cost $22,505,012) 3.6% $ 22,505,012 Floating Rate Securities 6,000,000 Bear Stearns Co. Inc. FO MTN variable rate 2.259%, matures 02/03/04 6,002,955 2,500,000 CSFB Bank CD 08/06/04 variable rate 1.170%, matures 08/06/04 2,502,065 3,000,000 Washington Mutual Bank, FA FCD variable rate 1.170%, matures 01/16/04 $ 3,000,000 (cost $11,505,020) 1.8% $ 11,505,020 Master Note 5,000,000 Bear Stearns & Co. Master Note variable rate 1.150%, matures 01/07/04 (cost $5,000,000) 0.8% $ 5,000,000 Total securities lending (cost $60,485,355) 9.6% $ 60,485,355 Total short-term securities (cost $228,548,121) 36.3% $228,543,409 Total securities 100.5% $633,450,633 Payable upon return of securities loaned - 9.6% (60,485,355) Other assets and liabilities - net 9.1% 57,284,001 Total net assets 100.0% $630,249,279 1 These securities are non-income producing. 2 This security or partial position of this security is on loan at December 31, 2003 (Note 1). The total value of securities on loan at December 31, 2003 was $58,675,535. 3 Market value adjustments have been made on these securities to reflect early withdrawal/call penalties. Fund holdings will vary over time. Fund shares are not FDIC insured.
THE PARNASSUS INCOME TRUST EQUITY INCOME FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 Assets Investments in securities, at market value (identified cost $351,494,554) (Note 1) $404,907,224 Temporary investments in short-term securities (identified cost $228,548,121) 228,543,409 Cash 56,242,521 Receivables: Dividends and interest 1,464,120 Other assets 24,457 Total assets $ 691,181,731 Liabilities Payable upon return of securities loaned 60,485,355 Capital shares redeemed 56,791 Fees payable to Parnassus Investments 390,306 Total liabilities $ 60,932,452 Net assets (equivalent to $24.00 per share based on 26,262,497 shares of capital stock outstanding) $ 630,249,279 Net assets consist of Undistributed net investment income 318,960 Unrealized appreciation on securities 53,407,958 Undistributed net realized gain 2,483,904 Capital paid-in 574,038,457 Total net assets $ 630,249,279 Computation of net asset value and offering price per share Net asset value and redemption price per share ($630,249,279 divided by 26,262,497 shares) $ 24.00 THE PARNASSUS INCOME TRUST EQUITY INCOME FUND STATEMENT OF OPERATIONS DECEMBER 31, 2003 Investment Income Dividends $ 6,919,619 Interest 6,177,493 Total investment income $ 13,097,112 Expenses Investment advisory fees (Note 5) 2,959,382 Transfer agent fees (Note 5) 267,153 Fund administration (Note 5) 149,786 Service provider fees (Note 5) 619,189 Reports to shareholders (Note 5) 45,867 Registration fees and expenses 23,149 Custody fees (Note 5) 53,082 Professional fees (Note 5) 60,788 Trustee fees and expenses (Note 5) 7,065 Other expenses 162,143 Total expenses $ 4,347,604 Fees paid indirectly (Note 5) (55,391) Net expenses $ 4,292,213 Net investment income $ 8,804,899 Realized and Unrealized Gain on Investments Realized gain from security transactions: Proceeds from sales 242,760,562 Cost of securities sold 236,890,131 Net realized gain $ 5,870,431 Change in unrealized appreciation of securities: Beginning of period 97,913 End of period 53,407,958 Net change in unrealized appreciation of securities $ 53,310,045 Net realized and unrealized gain on securities $ 59,180,476 Net increase in net assets resulting from operations $ 67,985,375 THE PARNASSUS INCOME TRUST EQUITY INCOME FUND STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2003 AND 2002 YEAR ENDED YEAR ENDED DECEMBER 31, 2003 DECEMBER 31, 2002 - -------------------------------------------------------------------------------- From operations Net investment income $ 8,804,899 $ 3,717,813 Net realized (loss) gain from security transactions 5,870,431 (3,386,526) Net change in unrealized appreciation (depreciation) of securities 53,310,045 (6,048,288) Increase (decrease) in net assets resulting from operations $ 67,985,375 $ (5,717,001) Dividends to shareholders From net investment income (10,160,220) (2,512,266) From realized capital gains -- (1,660,312) Increase in net assets from capital share transactions 298,994,695 197,818,255 Increase (decrease) in net assets $ 356,819,850 $ 187,928,676 Net assets Beginning of period 273,429,429 85,500,753 End of period including undistributed net investment income of $318,960 in 2003 and $1,674,281 in 2002 $630,249,279 $ 273,429,429 THE PARNASSUS INCOME TRUST FIXED-INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 2003
Principal Percent of Amount $ Corporate Bonds Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES 500,000 Bank One Corporation Notes, 6.000%, due 02/17/09 $ 547,728 500,000 Goldman Sachs Group Notes, 6.650%, due 05/15/09 565,574 500,000 Norwest Financial Inc. Notes, 6.850%, due 07/15/09 572,976 Total 4.9% $ 1,686,278 INSURANCE 700,000 International Lease Finance Corporation Notes, 5.625%, due 06/01/07 2.2% $ 753,784 RETAIL 400,000 Target Corporation Notes, 7.500%, due 08/15/10 1.4% $ 474,333 Total investment in corporate bonds (cost $2,586,042) 8.5% $ 2,914,395 Convertible Bonds - ------------------------------------------------------------------------------------------------------------------- 1,000,000 Ciena Corp. 3.750%, due 02/01/08 $ 920,000 199 TranSwitch Corporation 4.500%, due 09/12/05 177 651,750 TranSwitch Corporation 5.450%, due 09/30/07 645,233 Total investment in convertible bonds (cost $1,398,299) 4.6% $ 1,565,410 Principal U.S. Government Percent of - ------------------------------------------------------------------------------------------------------------------- Amount $ Agency Securities Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- 1,000,000 Federal Home Loan Bank 5.000%, due 05/28/15 $ 987,964 2,000,000 Federal Home Loan Mortgage Corporation 6.375%, due 08/01/11 2,140,478 2,000,000 Federal Home Loan Mortgage Corporation 6.250%, due 03/15/12 2,146,372 1,000,000 Federal National Mortgage Association 5.500%, due 07/18/12 1,024,225 3,000,000 Federal National Mortgage Association 5.125%, due 04/22/13 3,013,256 Total investment in U.S. Government Agency securities (cost $9,278,666) 27.3% $ 9,312,295 Total investments in corporate bonds, convertible bondsand U.S. Government securities (cost $13,263,007) 40.4% $ 13,792,100 Principal U.S. Government Percent of - ------------------------------------------------------------------------------------------------------------------- Amount Short-Term Investments Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- U.S. Government Agency Discount Notes 1,500,000 Federal Home Loan Mortgage Corporation Zero Coupon, 1.020% equivalent, matures 02/24/04 1,497,620 3,200,000 Federal National Mortgage Association Zero Coupon, 1.050% equivalent, matures 01/21/04 3,198,133 8,500,000 Federal Home Loan Mortgage Corporation Zero Coupon, 1.080% equivalent, matures 02/24/04 $ 8,491,330 1,800,000 Federal National Mortgage Association Zero Coupon, 1.020% equivalent, matures 02/25/04 1,797,195 (cost $14,984,278) 43.9% $ 14,984,278 Registered Investment Companies - Money Market Funds 670,985 Goldman Sachs FS Government Fund variable rate 0.910% 670,985 1,236,874 Janus Government Fund variable rate 0.970% 1,236,874 1,255 Scudder Government Fund variable rate 0.940% 1,255 (cost $1,909,114) 5.6% $ 1,909,114 Total investment in short-term securities (cost $16,893,392) 49.5% $ 16,893,392 Total securities 90.0% $ 30,685,492 Other assets and liabilities - net 10.0% 3,412,325 Total net assets 100.0% $ 34,097,817 Fund holdings will vary over time. Fund shares are not FDIC insured.
THE PARNASSUS INCOME TRUST FIXED-INCOME FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 Assets Investments in securities, at market value (identified cost $13,263,007) (Note 1) $ 13,792,100 Temporary investments in short-term securities (at cost which approximates market value) 16,893,392 Cash 3,197,217 Receivables: Interest 234,794 Capital shares sold 423 Total assets $ 34,117,926 Liabilities Capital shares redeemed 3,957 Fees payable to Parnassus Investments 8,578 Accrued expenses 7,574 Total liabilities $ 20,109 Net assets (equivalent to $16.00 per share based on 2,131,263 shares of capital stock outstanding) $ 34,097,817 Net assets consist of Accumulated net investment income -- Unrealized appreciation on securities 529,093 Undistributed net realized gain 61,744 Capital paid-in 33,506,980 Total net assets $ 34,097,817 Computation of net asset value and offering price per share Net asset value and offering price per share ($34,097,817 divided by 2,131,263 shares) $ 16.00 THE PARNASSUS INCOME TRUST FIXED-INCOME FUND STATEMENT OF OPERATIONS DECEMBER 31, 2003 Investment income Interest $ 1,161,268 Total investment income $ 1,161,268 Expenses Investment advisory fees (Note 5) 138,162 Transfer agent fees (Note 5) 43,811 Fund administration (Note 5) 10,398 Reports to shareholders 6,309 Registration fees and expenses 16,301 Professional fees 9,216 Custody fees 3,234 Trustee fees and expenses 899 Other expenses 25,377 Total expenses before fee waiver $ 253,707 Fees waived by Parnassus Investments (Note 5) (83,516) Net expenses $ 170,191 Net investment income $ 991,077 Realized and Unrealized Gain on Investments Realized gain from security transactions: Proceeds from sales 25,902,558 Cost of securities sold 25,353,189 Net realized gain $ 549,369 Change in unrealized appreciation of securities: Beginning of period 818,832 End of period 529,093 Net change in unrealized appreciation of securities $ (289,739) Net realized and unrealized gain on securities $ 259,630 Net increase in net assets resulting from operations $ 1,250,707 THE PARNASSUS INCOME TRUST FIXED-INCOME FUND STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2003 AND 2002 year ended year ended December 31, 2003 December 31, 2002 - -------------------------------------------------------------------------------- From operations Net investment income $ 991,077 $ 836,212 Net realized gain from security transactions 549,369 58,908 Net change in unrealized appreciation of securities (289,739) 977,923 Increase in net assets resulting from operations $ 1,250,707 $ 1,873,043 Dividends to shareholders From net investment income (1,060,578) (847,626) From realized capital gains (135,873) -- Increase in net assets from capital share transactions 14,951,960 5,118,714 Increase in net assets $ 15,006,216 $ 6,144,131 Net assets Beginning of period 19,091,601 12,947,470 End of period (including accumulated net investment income of $0 in 2003 and $20,047 in 2002) $ 34,097,817 19,091,601 THE PARNASSUS INCOME TRUST CALIFORNIA TAX-EXEMPT FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, DECEMBER 31, 2003
Principal Percent of - ------------------------------------------------------------------------------------------------------------------- Amount $ Municipal Bonds Net Assets Market Value - ------------------------------------------------------------------------------------------------------------------- EDUCATION 300,000 Folsom School District 5.600%, due 08/01/11 $ 340,932 450,000 Los Altos Unified School District 5.250%, due 08/01/10 514,296 440,000 Los Angeles Unified School District 5.500%, due 07/01/13 514,562 450,000 Morgan Hill Unified School District 4.900%, due 08/01/13 493,871 410,000 Sacramento Unified School District 5.750%, due 07/01/17 487,400 Total 9.5% $ 2,351,061 ENVIRONMENT 400,000 California Department of Water Resources - Central Valley Projects 5.125%, due 12/01/16 433,040 1,100,000 California Department of Water Resources - Power Supply Revenues 5.500%, due 05/01/09 1,229,415 500,000 Central Coast Water 5.000%, due 10/01/16 533,770 315,000 Los Angeles City Public Works - Parks 5.500%, due 10/01/12 353,165 200,000 Los Angeles Wastewater System 5.000%, due 06/01/11 220,234 1,000,000 San Francisco Public Utilities - Clean Water Revenue 5.000%, due 10/01/09 1,131,540 Total 15.7% $ 3,901,164 GENERAL OBLIGATION 1,000,000 State of California 6.600%, due 02/01/09 $ 1,148,590 700,000 State of California 6.100%, due 10/01/09 796,432 1,000,000 State of California 5.000%, due 03/01/08 1,076,260 300,000 Oakland General Obligation 5.500%, due 12/15/11 340,614 Total 13.5% $ 3,361,896 HEALTH CARE 400,000 California Health Facilities-Kaiser Permanente 5.000%, due 10/01/08 447,496 415,000 Loma Linda Hospital 4.850%, due 12/01/10 465,319 Total 3.7% $ 912,815 HOUSING 1,000,000 ABAG Financing Authority 4.250%, due 11/15/12 1,014,960 275,000 Los Angeles Community Redevelopment 5.000%, due 07/01/13 299,354 Total 5.3% $ 1,314,314 INFRASTRUCTURE IMPROVEMENTS 500,000 CA Infrastructure & Economic Development 5.000%, due 10/01/12 564,215 1,000,000 CA Public Works - UCLA Hospital 5.375%, due 10/01/13 1,133,140 960,000 CA Public Works - Community Colleges 5.500%, due 12/01/09 1,065,226 910,000 CA Statewide Communities Development - EAH-East Campus Apartments 4.500%, due 08/01/10 960,196 1,000,000 Indian Wells Redevelopment Agency 4.500%, due 09/01/11 $ 1,087,750 600,000 La Quinta Redevelopment Agency 7.300%, due 09/01/11 763,620 350,000 Metro Water District - Southern California 5.250%, due 07/01/15 379,684 450,000 Oakland Redevelopment Agency 3.400%, due 09/01/09 458,721 860,000 Rialto Redevelopment Agy 4.000%, due 09/01/07 898,614 425,000 Rialto Redevelopment Agy 4.500%, due 09/01/13 433,346 Total 31.2% $ 7,744,512 PUBLIC TRANSPORTATION 1,000,000 Contra Costa Transit Authority 4.000%, due 03/01/09 1,075,840 325,000 Los Angeles Metro Transit Authority 5.500%, due 07/01/10 375,684 250,000 Los Angeles Metro Transit Authority 5.000%, due 07/01/13 271,615 1,000,000 San Francisco International Airport 5.000%, due 05/01/10 1,123,470 390,000 San Francisco Bay Area Rapid Transit 5.500%, due 07/01/07 435,742 400,000 San Francisco Bay Area Rapid Transit 5.250%, due 07/01/13 441,400 Total 15.0% $ 3,723,751 Total investments in municipal bonds (cost $22,374,937) 93.9% $ 23,309,513 - ------------------------------------------------------------------------------------------------------------------- Principal Percent of - ------------------------------------------------------------------------------------------------------------------- Amount $ Short-Term Investments Net Assets Market Value Registered Investment Companies - Money Market Funds 701,207 Highmark California Tax-Exempt Fund variable rate 0.620% $ 701,207 1,890 Goldman Sachs California Tax-Exempt Fund variable rate 0.580% 1,890 707 California Investment Trust Tax Free Fund variable rate 0.530% 707 (cost $703,804) 2.8% $ 703,804 Floating Rate Securities 700,000 California Department of Water Resources variable rate 1.250%, due 05/01/22 2.8% $ 700,000 Total investment in short-term securities (cost $1,403,804) 5.7% $ 1,403,804 Total securities 99.6% $ 24,713,317 Other assests and liabilities - net 0.4% 111,211 Total net assets 100.0% $ 24,824,528 Fund holdings will vary over time. Fund shares are not FDIC insured.
THE PARNASSUS INCOME TRUST CALIFORNIA TAX-EXEMPT FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 Assets Investments in securities, at market value (identified cost $22,374,937) (Note 1) $ 23,309,513 Temporary investments in short-term securities (at cost, which approximates market) 1,403,804 Receivables: Interest 330,427 Capital shares sold 15,645 Other assets 476 Total assets $ 25,059,865 Liabilities Capital shares redeemed 199,503 Fees payable to Parnassus Investments 8,835 Distributions payable 20,239 Accrued expenses 6,760 Total liabilities $ 235,337 Net assets (equivalent to $17.14 per share based on 1,448,668 shares of capital stock outstanding) $ 24,824,528 Net assets consist of Undistributed net investment income 9,817 Unrealized appreciation on investments 934,576 Undistributed net realized gain 21,607 Capital paid-in 23,858,528 Total net assets $ 24,824,528 Computation of net asset value and offering price per share Net asset value andoffering price per share ($24,824,528 divided by 1,448,668 shares) $ 17.14 THE PARNASSUS INCOME TRUST CALIFORNIA TAX-EXEMPT FUND STATEMENT OF OPERATIONS DECEMBER 31, 2003 Investment income Interest $ 962,072 Total investment income $ 962,072 Expenses Investment advisory fees (Note 5) 130,109 Transfer agent fees (Note 5) 12,514 Fund administrative expense (Note 5) 11,970 Reports to shareholders 8,227 Registration fees and expenses 1,701 Professional fees 14,025 Custody fees 2,508 Trustee fees and expenses 1,015 Service provider fees (Note 5) 27,719 Other expenses 7,337 Total expenses before fee waiver $ 217,125 Fees waived by Parnassus Investments (Note 5) (56,001) Total expenses $ 161,124 Net investment income $ 800,948 Realized and Unrealized Gain on Investments Realized gain from security transactions: Proceeds from sales 4,317,412 Cost of securities sold 4,045,459 Net realized gain $ 271,953 Change in unrealized appreciation of securities: Beginning of period 1,018,786 End of period 934,576 Net change in unrealized appreciation of securities $ (84,210) Net realized and unrealized gain on securities $ 187,743 Net increase in net assets resulting from operations $ 988,691 THE PARNASSUS INCOME TRUST CALIFORNIA TAX-EXEMPT FUND STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2003 AND 2002 year ended year ended - -------------------------------------------------------------------------------- December 31, 2003 December 31, 2002 - -------------------------------------------------------------------------------- From operations Net investment income $ 800,948 $ 773,722 Net realized gain from security transactions 271,953 325,194 Net change in unrealized appreciation of securities (84,210) 686,085 Increase in net assets resulting from operations $ 988,691 $ 1,785,001 Dividends to shareholders From net investment income (807,627) (761,866) From realized capital gains (250,346) (370,679) Increase (decrease) in net assets from capital share transactions (1,269,019) 6,619,410 Increase (decrease) in net assets $ (1,338,301) $ 7,271,866 Net assets Beginning of period 26,162,829 18,890,963 End of period (including undistributed net investment income of $9,817 in 2003 and $20,776 in 2002) $ 24,824,528 $ 26,162,829 THE PARNASSUS INCOME TRUST NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies The Parnassus Income Trust (the "Trust"), formerly The Parnassus Income 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 funds, each offering separate shares. The Equity Income Fund, formerly the Balanced Portfolio, changed its primary investment objective from current income and capital preservation to current income and capital appreciation; this change was effective on March 31, 1998. The Trust began operations on August 31, 1992. The following is a summary of significant accounting policies of the Trust. Securities Valuation: Investment securities are stated at market value based on recorded closing sales on a national securities exchange or on the Nasdaq's National Market System official closing price, or in the absence of a recorded sale, and for over-the-counter securities, at the mean between the last recorded bid and asked prices. Securities without an active market are priced at their fair value, in accordance with procedures established by the Trustees. Short-term securities are money market instruments and are valued at amortized cost, which approximates market value. Certain other 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 Trust intends to comply with the requirements of the Internal Revenue Code applicable toregulated investment companies and to distribute all of its taxable and tax-exempt income to shareholders; therefore, no federal income tax provision is required. Securities Transactions: Securities transactions are recorded 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 Equity Income Fund pays income dividends quarterly and capital gain dividends once a year. The Fixed-Income and California Tax-Exempt Funds pay income dividends monthly and capital gain dividends annually. Investment Income and Expenses: Dividend income is recognized on the ex-dividend date and interest income is recogniz-ed on an accrual basis. Discounts and premiums on securities purchased are amortized over the lives of the respective securities using the constant yield method, which approximates the interest method. Expenses are recorded on an accrual basis. Securities Lending: The Equity Income Fund lends its securities to approved financial institutions to earn additional income and receives cash and/or securities as collateral to secure the loans. Collateral is maintained at not less than 102% of the value of loaned securities. Although the risk of lending is mitigated by the collateral, this fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return them. Income from securities lending, in the amount of $77,492, is included in interest income on the Statement of Operations. Repurchase Agreements: Securities purchased with cash collateral held from securities lending may include investments in repurchase agreements secured by U.S. government obligations or other securities. Securities pledged as collateral for repurchase agreements are held by the Trust's custodian bank until maturity of the repurchase agreements. Provisions of the agreements ensure that the market value of the collateral is sufficient in the event of default; however, in the event of default or bankruptcy by the other party to the agreements, realization and/or retention of the collateral may be subject to legal proceedings. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Tax Matters and Distributions Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Trust, timing differences and differing characterization of distributions made by the Trust. Permanent differences incurred during the year ended December 31, 2003, resulting from differences in book and tax accounting, that have been reclassified at year-end to undistributed net investment income, undistributed net realized gain (loss) and capital paid-in were as follows:
Undistributed Net Undistributed Net Capital Fund Investment Income Realized Gain (Loss) Paid-in ------------------------------------------------------------------------------------------------------------------- The Parnassus Income Trust - Fixed-Income Fund $ 49,454 $ (49,454) $ -- ------------------------------------------------------------------------------------------------------------------- The Parnassus Income Trust - California Tax-Exempt Fund $ (4,280) $ -- $ 4,280 ------------------------------------------------------------------------------------------------------------------- Permanent book-tax differences, if any, are not included in ending undistributed net investment income (loss) for the purposes of calculating net investment income (loss) per share in the financial highlights.
3. Capital Stock Equity Income Fund: As of December 31, 2003, there were an unlimited number of authorized shares of capital stock, no par value. Paid-in capital aggregated $574,038,457. Transactions in capital stock (shares) were as follows:
- -------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2003 Year Ended December 31, 2002 Shares Amount Shares Amount - -------------------------------------------------------------------------------------------------------------- Shares sold 21,806,608 $464,928,454 11,026,793 $ 237,856,300 Shares issued through dividend reinvestment 416,260 9,370,176 180,091 3,803,779 Shares repurchased (8,855,314) (175,303,935) (2,112,055) (43,841,824) - ------------------------------------------------------------------------------------------------------------------- Net increase 13,367,554 $298,994,695 9,094,829 $ 197,818,255 - -------------------------------------------------------------------------------------------------------------------
Fixed-Income Fund: As of December 31, 2003, there was an unlimited number of authorized shares of capital stock, no par value. Paid-in capital aggregated $33,506,980. Transactions in capital stock (shares) were as follows: - -------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2003 Year Ended December 31, 2002 Shares Amount Shares Amount - -------------------------------------------------------------------------------------------------------------- Shares sold 1,416,444 $ 21,276,069 469,465 $ 7,147,110 Shares issued through dividend reinvestment 63,100 1,017,411 46,188 703,766 Shares repurchased (550,524) (7,341,520) (179,931) (2,732,162) - ------------------------------------------------------------------------------------------------------------------- Net increase 929,020$ $ 14,951,960 335,722 $ 5,118,714 - -------------------------------------------------------------------------------------------------------------------
California Tax-Exempt Fund: As of December 31, 2003, there was an unlimited number of authorized shares of capital stock, no par value. Paid-in capital aggregated $23,858,528. Transactions in capital stock (shares) were as follows: - -------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2003 Year Ended December 31, 2002 Shares Amount Shares Amount - -------------------------------------------------------------------------------------------------------------- Shares sold 416,172 $ 7,158,418 805,150 $ 13,182,672 Shares issued through dividend reinvestment 54,377 933,074 59,347 1,012,363 Shares repurchased (543,745) (9,360,511) (480,179) (7,575,625) - ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) (73,196) $ (1,269,019) 384,318 $ 6,619,410 - -------------------------------------------------------------------------------------------------------------------
4. Purchases and Sales of Securities Equity Income Fund: Purchases and sales of securities were $363,960,867 and $242,760,562, respectively, for the year ended December 31, 2003. For federal income tax purposes, the aggregate cost of securities and unrealized appreciation at December 31, 2003 were $352,026,410 and $52,880,814, respectively. Of the $52,880,814 of net unrealized appreciation at December 31, 2003, $54,128,116 related to appreciation of securities and $1,247,302 related to depreciation of securities. Fixed-Income Fund: Purchases and sales of securities were $23,501,870 and $25,902,558, respectively, for the year ended December 31, 2003. For federal income tax purposes, the aggregate cost of securities and unrealized depreciation at December 31, 2003 were the same as for financial statement purposes. Of the $529,093 of net unrealized appreciation at December 31, 2003, $546,318 related to appreciation of securities and $17,225 related to depreciation of securities. California Tax-Exempt Fund: Purchases and sales of securities were $6,657,139 and $4,317,412, respectively, for the year ended December 31, 2003. For federal income tax purposes, the aggregate cost of securities and unrealized appreciation at December 31, 2003 were $22,370,851 and $938,662, respectively. Of the $938,662 of net unrealized appreciation at December 31, 2003, $938,662 related to appreciation of securities and none 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 Trust, Parnassus Investments is entitled to receive fees payable monthly, based on the Trust's average daily net assets for the month, at the following annual rates: Equity Income Fund: 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 Fund and California Tax-Exempt Fund: 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. Fees paid by the Equity Income Fund to Parnassus Investments under the agreement totaled $2,959,382 for the year ended December 31, 2003. For the year ended December 31, 2003, Parnassus Investments agreed to reduce its investment advi-sory fee to the extent necessary to limit total operating expenses to 0.87% of net assets for the Fixed-Income Fund and 0.75% of net assets for the California Tax-Exempt Fund. As a result of this fee waiver, the following were actually charged in 2003. For the Fixed-Income Fund, the investment advisory fee was 0.20%. Parnassus Investments received net advisory fees totaling $54,646 from the Fixed-Income Fund for the year ended December 31, 2003. For the California Tax-Exempt Fund, the investment advisory fee was 0.29%. Parnassus Investments received net advisory fees totaling $74,108 from the California Tax-Exempt Fund for the year ended December 31, 2003. Under terms of a separate agreement which provides for furnishing transfer agent and fund administration services to the three funds, Parnassus Investments received fees paid by the Trust totaling $495,632 for the year ended December 31, 2003. The transfer agent fee was $2.70 per month per account (for an aggregate amount of $323,478 for the year ended December 31, 2003). The fund administration fee was $6,667 per month for the first seven months ending July 31, 2003. Beginning August 1, 2003, the fund administration fee became $25,097 per month. The aggregate amount of the fund administration fee was $172,154 for the year ending December 31, 2003. Equity Income Fund: Included in the statement of operations under the caption "Custody fees" are expenses totaling $17,805 for the year ended December 31, 2003. Included in the statement of operations under the caption "Reports to shareholders" are expenses totaling $17,478 for the year ended December 31, 2003. Included in the statement of operations under the caption "Professional fees" are expenses totaling $1,515 for the year ended December 31, 2003. Included in the statement of operations under the caption "Other expenses" are expenses totaling $18,593 for the year ended December 31, 2003. These amounts, in aggregate, are $55,391 and were paid for the Equity Income Fund by a third-party broker-dealer. Jerome L. Dodson is the President of the Trust and is the majority stockholder of Parnassus Investments. 6. Geographic and Industry Concentration Risk Factors The California Tax-Exempt Fund primarily invests in debt obligations issued by the State of California and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. There are certain risks arising from the concentration of investments in California municipal securities. The California Tax-Exempt Fund is more susceptible to factors adversely affecting issuers of California municipal securities than a fund that is not concentrated in these issuers to the same extent. Uncertain economic conditions or governmental developments may affect the ability of California municipal securities issuers to meet their financial obligations.
7. Financial Highlights Selected data for each share of capital stock outstanding, total return and ratios/supplemental data for each of the five years ended December 31 are as follows: - ---------------------------------------------------------------------------------------------------------- Equity Income Fund 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Net asset value at beginning of year $ 21.20 $22.50 $ 21.48 $23.13 $ 20.13 Income (loss) from investment operations: Net investment income 0.44 0.49 0.67 0.33 0.24 Net realized and unrealized gain on securities 2.85 (1.32) 1.43 1.06 4.26 Total income (loss) from investment operations 3.29 (0.83) 2.10 1.39 4.50 Distributions: Dividends from net investment income (0.49) (0.29) (0.45) (0.36) (0.26) Distributions from net realized gains .-- (0.18) (0.63) (2.68) (1.24) Total distributions (0.49) (0.47) (1.08) (3.04) (1.50) Net asset value at end of year $ 24.00 $ 21.20 $22.50 $21.48 $23.13 Total return 15.69% (3.69%) 9.97% 6.36% 22.78% Ratios/supplemental data: Ratio of expenses to average net assets (actual)* 0.95% 0.96% 1.00% 0.97% 1.08% Decrease reflected in the above expense ratios due to expenses waived by Parnassus Investments .-- .-- 0.18% 0.18% 0.19% Decrease reflected in the above expense ratios due to fees paid indirectly 0.01% 0.07% .-- .-- .-- Ratio of net investment income to average net assets 1.95% 2.29% 3.10% 1.34% 1.09% Portfolio turnover rate 79.21% 42.01% 86.78% 97.42% 39.53% Net assets, end of year (000's) $ 630,249 $273,429 $ 85,501 $ 55,421 $ 45,999 - ---------------------------------------------------------------------------------------------------------- Fixed-Income Fund 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Net asset value at beginning of year $ 15.88 $ 14.94 $14.19 $ 14.49 $ 15.98 Income (loss) from investment operations: Net investment income 0.58 0.82 0.87 0.89 0.81 Net realized and unrealized gain (loss) on securities 0.26 0.95 0.72 (0.29) (1.49) Total income (loss) from investment operations 0.84 1.77 1.59 0.60 (0.68) Distributions: Dividends from net investment income (0.65) (0.83) (0.84) (0.90) (0.81) Distributions from net realized gains (0.07) .-- .-- .-- .-- Total distributions (0.72) (0.83) (0.84) (0.90) (0.81) Net asset value at end of year $ 16.00 $15.88 $14.94 $ 14.19 $ 14.49 Total return 5.30% 12.20% 11.31% 4.32% (4.32%) Ratios/supplemental data: Ratio of expenses to average net assets (actual)* 0.62% 0.81% 0.83% 0.78% 0.87% Decrease reflected in the above expense ratios due to expenses waived by Parnassus Investments 0.30% 0.27% 0.32% 0.35% 0.36% Ratio of net investment income to average net assets 3.59% 5.36% 5.84% 6.18% 5.36% Portfolio turnover rate 125.74% 59.00% 21.19% 19.19% 13.47% Net assets, end of year (000's) $ 34,098 $ 19,092 $ 12,947 $ 10,309 $ 11,006 - ---------------------------------------------------------------------------------------------------------- California Tax-Exempt Fund 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Net asset value at beginning of year $ 17.19 $ 16.61 $16.90 $15.82 $ 16.88 Income (loss) from investment operations: Net investment income 0.53 0.59 0.70 0.72 0.72 Net realized and unrealized gain (loss) on securities 0.12 0.83 (0.18) 1.10 (1.05) Total income (loss) from investment operations 0.65 1.42 0.52 1.82 (0.33) Distributions: Dividends from net investment income (0.53) (0.59) (0.70) (0.71) (0.72) Distributions from net realized gains (0.17) (0.25) (0.11) (0.03) (0.01) Total distributions (0.70) (0.84) (0.81) (0.74) (0.73) Net asset value at end of year $ 17.14 $ 17.19 $16.61 $ 16.90 $ 15.82 Total return 3.88% 8.66% 3.09% 11.75% (2.01%) Ratios/supplemental data: Ratio of expenses to average net assets (actual)* 0.62% 0.73% 0.65% 0.52% 0.70% Decrease reflected in the above expense ratios due to expenses waived by Parnassus Investments 0.21% 0.22% 0.20% 0.25% 0.25% Ratio of net investment income to average net assets 3.08% 3.45% 4.19% 4.27% 4.42% Portfolio turnover rate 16.16% 41.73% 23.14% 8.13% 1.75% Net assets, end of year (000's) $ 24,825 $ 26,163 $ 18,891 $ 17,186 $ 7,777 For the year ended December 31, 2003, Parnassus Investments has agreed to a 0.87% limit on expenses for the Fixed-Income and 0.75% for the California Tax-Exempt Fund (See Note 5 for details). Certain fees were waived for the years ended December 31, 2003, 2002, 2001, 2000, and 1999 for the Fixed-Income Fund and the California Tax-Exempt Fund. For the Equity Income Fund, certain fees were waived for the years ended December 31, 2001, 2000, and 1999.
THE PARNASSUS INCOME TRUST TAX INFORMATION (UNAUDITED) YEAR ENDED DECEMBER 31, 2003 The following tax information represents disclosures of various tax benefits passed through to shareholders. Of the distributions made from net investment income in the California Tax-Exempt Fund, 100% is tax-exempt for regular federal income tax purposes. In accordance with the Code, the following Funds are designating the following amount of long-term capital gain dividends: Fixed-Income Fund $ 199,048 California Tax-Exempt Fund $ 271,953 THE PARNASSUS INCOME TRUST
INDEPENDENT TRUSTEES+ (UNAUDITED) Number of Portfolios in the Fund Term of Office Complex Name, Age and and Length of Overseen Other Directorships Address* Service Principal Occupation(s) During Past 5 Years by Trustee Held by Trustee - --------------------------------------------------------------------------------------------------------------------------- Herbert A. Houston Since 1998 Health care consultant and owner of several Four The Parnassus Fund Age 60 small businesses; Chief Executive Officer of the Haight Ashbury Free Clinics, Inc. from 1987 to 1998; Trustee of the Parnassus Fund since 1998 and the Parnassus Income Trust since inception. - --------------------------------------------------------------------------------------------------------------------------- Donald V. Potter Since 2002 President and owner of Windermere Four The Parnassus Fund Age 58 Associates, a consulting firm specializing Media Arts Group, Inc. in business strategy, since 1984; Partner in McKinsey & Company, an international consulting firm, from 1979 to 1984. - --------------------------------------------------------------------------------------------------------------------------- INTERESTED TRUSTEESS. (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------------- Jerome L. Dodson Since 1985 President and Trustee of the Parnassus Fund Four The Parnassus Fund Age 60 and the Parnassus Income Trust since their inceptions; President and Director of Parnassus Investments since June 1984; portfolio manager of the Parnassus Fund since its inception. - --------------------------------------------------------------------------------------------------------------------- + "Independent" trustees are trustees who are not deemed to be "interested persons" of the Funds as defined in the Investment Company Act of 1940. * Unless otherwise noted, the address of the Trustees is c/o Parnassus Investments, One Market-Steuart Tower, Suite 1600, San Francisco, CA 94105. ss. "Interested" trustee as defined in the Investment Company Act of 1940 because of his ownership in the Funds' investment adviser and because he is an officer of the Trusts. The Statement of Additional Information (SAI) contains further information about the Fund's trustees and is available without charge upon request. To request information, call Parnassus Investments toll free at (800) 999-3505.
The Parnassus Income Trust One Market-Steuart Tower, Suite 1600 San Francisco, CA 94105 415.778.0200 800.999.3505 www.parnassus.com Investment Adviser Parnassus Investments One Market-Steuart Tower Suite 1600 San Francisco, CA 94105 Legal Counsel Foley & Lardner 777 E. Wisconsin Avenue Milwaukee, WI 53202 Independent Auditors Deloitte & Touche LLP 50 Fremont Street San Francisco, CA 94105 Custodian Union Bank of California 475 Sansome Street San Francisco, CA 94111 Distributor Parnassus Investments One Market-Steuart Tower Suite 1600 San Francisco, CA 94105 This report must be preceded or accompanied by a current prospectus. Item 2: Code of Ethics As of the 12/31/03 the registrant has adopted a code of ethics that applies to the registrant's principal executive officer and principal financial officer. During the fiscal year ending 12/31/03 there were no amendments to any provisions of this code of ethics. Item 3: Audit Committee Financial Expert On July 22, 2003, the Board of Trustees of the Parnassus Funds determined that Donald Potter, Chairman of the Board's Audit Committee, qualified as an "audit committee financial expert" as defined by Form N-CSR. The Trustee's decision was based on Mr. Potter's understanding of generally accepted accounting principles (GAAP), experience applying GAAP, familiarity with internal controls and procedures for financial reporting and understanding of audit committee functions. He gained this knowledge from thirty years of experience as a strategy consultant for major corporations while working at McKinsey & Co. Management Consultants and at his own firm, Windermere Associates. He also spent four years working as a financial executive for a Fortune 500 company. He served as Chairman of the Audit Committee of Media Arts Group and has also served on the Audit Committees of DLJ Direct and Peer Foods. Mr. Potter is a graduate of Harvard Business School where he was named a Baker Scholar for finishing in the top 5% of his class. Mr. Potter is an independent trustee. Item 4: Principal Accountant Fees and Services (a) Audit Fees The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was $114,525. (b) Audit-Related Fees There were no fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item. (c) Tax Fees The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning was $27,560. (d) All Other Fees There were no fees billed in each of the last two fiscal years for products and services by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item. (e) (1) The Audit Committee's pre-approval policies and procedures for non-audit services are as follows: Explicit pre-approval by the Audit Committee Chair shall be required for any individual non-audit engagement to be performed by the independent accountants with estimated fees of $10,000 or less and the Audit Committee Chair shall report such approval to the full Audit Committee at the next regularly scheduled meeting. Explicit pre-approval by the full Audit Committee shall be required for any individual non-audit engagement to be performed by the independent accountants with estimated fees in excess of $10,000. Officers of the Funds shall furnish the Audit Committee at least annually with a listing of all fees paid to the independent accountants including non-audit services performed. (e) (2) 9.5%. (f) Not applicable. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser were $31,460, which amount includes the $27,560 set forth in 4(c). (h) The registrant's Audit Committee of the board of directors has not considered whether the provision of non-audit services that were rendered to the registrant's investment adviser for the amount of $3,900 by the registrant's principal accountant are compatible with maintaining the principal accountant's independence. Item 5: Not applicable. Item 6: Reserved. Item 7: Not applicable. Item 8: Reserved. Item 9: Controls and Procedures. (a) Based on the evaluation of the Parnassus Income Trust's disclosure controls and procedures as of February 27, 2004, these controls and procedures are effective in providing reasonable assurance, that the information required to be disclosed on Form N-CSR is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission. (b) There were no significant deficiencies or material weaknesses in the Parnassus Income Trust's (the Trust) internal controls subsequent to the date of evaluation. However, the Trust is in the midst of an accounting software change. As a result, internal controls are being evaluated and changed as necessary, on an ongoing basis as the system evolves. Item 10: Exhibits attached hereto. 10(a) Code of Ethics. 10(b)(1) Section 302 certification. 10(b)(2) Section 906 certification. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) The Parnassus Income Trust By: /s/ Jerome L. Dodson ---------------------------------- Jerome L. Dodson President Date: March 8, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Jerome L. Dodson -------------------------------- Jerome L. Dodson President Date: March 8, 2004 By: /s/ Bryant Cherry -------------------------------- Bryant Cherry Vice President Date: March 8, 2004 EX-99.CODE ETH 3 sar-ox_codeethics.txt 2 THE PARNASSUS FUNDS SARBANES-OXLEY CODE OF ETHICS FOR THE PRINCIPAL EXECUTIVE OFFICER, PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER (ADOPTED JULY 22, 2003) Introduction The Parnassus Fund and the Parnassus Income Trust (collectively the "Funds") expect all of their officers to maintain high ethical standards of conduct and to comply with applicable laws and governmental regulations. Officers include, without limitation, the Funds' principal executive officer, principal financial officer and principal accounting officer (the principal executive officer, principal financial officer and principal accounting officer of the Funds are collectively referred to herein as the "Senior Financial Officers"). (The Funds anticipate that most of the time the Senior Financial Officers will consist of only one or two persons.) In this regard, the Funds require all of its officers, including the Senior Financial Officers, to adhere to such other rules, codes and guidelines as the Funds may adopt from time to time, including, without limitation, the code of ethics adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940 (collectively, the "Fund Guidelines"). To deter wrongdoing and to promote honest and ethical conduct, compliance with applicable laws and regulations, avoidance of conflicts of interest and full, fair, accurate, timely and understandable disclosure in the Funds' public filings and communications, the Funds have approved this Sarbanes-Oxley Code of Ethics to codify certain standards to which the Senior Financial Officers will be held accountable and certain specific duties and responsibilities applicable to the Senior Financial Officers. As the professional and ethical conduct of the Senior Financial Officers is essential to the proper conduct and success of the Funds' business, the Senior Financial Officers must adhere to the standards, duties and responsibilities set forth in this Sarbanes-Oxley Code of Ethics in addition to adhering to the Fund Guidelines. To the fullest extent possible, the Fund Guidelines and this Sarbanes-Oxley Code of Ethics should be read to supplement one another. If there is a conflict between the Fund Guidelines and this Sarbanes-Oxley Code of Ethics, then this Sarbanes-Oxley Code of Ethics will control. Code of Ethics General Standards The Funds and the Funds' Board of Directors will hold each Senior Financial Officer accountable for adhering to and advocating the following standards to the best of his or her knowledge and ability: A. Act in an honest and ethical manner, including in connection with the handling and avoidance of actual or apparent conflicts of interest between personal and professional relationships; B. Comply with all applicable laws, rules and regulations of federal, state and local governments (both United States and foreign) and other applicable regulatory agencies (collectively, the "Laws"); C. Proactively promote full, fair, accurate, timely and understandable disclosure in reports and documents that the Funds file with, or submit to, the Securities and Exchange Commission (the "SEC") and in other public communications the Funds make; and D. Proactively promote ethical and honest behavior within the Funds, including, without limitation, the prompt reporting of violations of, and being accountable for adherence to, this Sarbanes-Oxley Code of Ethics. Specific Duties and Responsibilities In adhering to and advocating the standards set forth above, each Senior Financial Officer shall fulfill the following duties and responsibilities to the best of his or her knowledge and ability: 1. Each Senior Financial Officer shall handle all conflicts of interest between his or her personal and professional relationships in an ethical and honest manner, and shall disclose in advance to the Audit Committee of the Funds' Board of Directors ("Audit Committee") the relevant details of any transaction or relationship that reasonably could be expected to give rise to an actual or apparent conflict of interest between the Funds and such Senior Financial Officer. The Audit Committee shall thereafter take such action with respect to the conflict of interest as it shall deem appropriate. It is the general policy of the Funds that conflicts of interest should be avoided whenever practicable. For purposes of this Sarbanes-Oxley Code of Ethics, a "conflict of interest" will be deemed to be present when an individual's private interest interferes in any way, or even appears to interfere, with the interests of the Funds as a whole. 2. Each Senior Financial Officer will use his or her best efforts to ensure the timely and understandable disclosure of information that, in all material respects, is accurate, complete, objective and relevant in all reports and documents the Funds file with, or submit to, the SEC or in other public communications that the Funds make. As part of this undertaking, each Senior Financial Officer will periodically consider the adequacy and effectiveness of the Funds' "internal controls" and "disclosure controls and procedures" (as such terms are defined or used in rules proposed or adopted by the SEC). 3. Each Senior Financial Officer will use his or her best efforts to ensure compliance in all material respects by such Senior Financial Officer and the Funds with all applicable Laws. 4. Each Senior Financial Officer shall respect the confidentiality of information acquired in the course of his or her work and shall not disclose such information, except when the Senior Financial Officer believes he or she is authorized or legally obligated to disclose the information. No Senior Financial Officer may use confidential information acquired in the course of his or her work for his or her personal advantage. 5. No Senior Financial Officer may take or direct or allow any other person to take or direct any action to fraudulently influence, coerce, manipulate or mislead the Funds' independent auditing firm. 6. No Senior Financial Officer may engage the Funds' auditing firm to perform audit or non-audit services without the Audit Committee's (or its designee's) preapproval in accordance with the Audit Committee's charter. Reporting Violations If any person believes that a Senior Financial Officer has violated this Sarbanes-Oxley Code of Ethics or the Funds have or are about to violate a Law, or a Senior Financial Officer believes that he or she is being asked to violate this Sarbanes-Oxley Code of Ethics or any Law in the performance of his or her duties for the Funds, then the matter should be promptly reported to the Audit Committee. The Audit Committee will take appropriate steps to maintain the confidentiality of the reporting person's identity, to the extent consistent with the Funds' obligations to investigate and remedy the matter and, if appropriate, to report the matter to government officials. Persons may report violations of this Sarbanes-Oxley Code of Ethics on an anonymous basis. No retribution will be taken against a person for reporting, in good faith, a violation or suspected violation of this Sarbanes-Oxley Code of Ethics. Interpretation and Enforcement The Audit Committee is responsible for overseeing the interpretation and enforcement of this Sarbanes-Oxley Code of Ethics. When the Audit Committee considers any matter relating to this Sarbanes-Oxley Code of Ethics, it shall act in executive session. Each Senior Financial Officer will be held accountable for his or her adherence to this Sarbanes-Oxley Code of Ethics by the Funds' Board of Directors. A Senior Financial Officer's failure to adhere to this Sarbanes-Oxley Code of Ethics will be subject to appropriate disciplinary action, ranging from warnings to possible termination or removal. Only the Audit Committee may waive or amend this Sarbanes-Oxley Code of Ethics. All waivers and amendments of this Sarbanes-Oxley Code of Ethics must be publicly disclosed in a manner that complies with the requirements of the SEC and other applicable Laws. EX-99.CERT 4 pit_302cert12-2003.txt SECTION 302 CERTIFICATION EXHIBIT 99. CERT I, Bryant Cherry, certify that: 1. I have reviewed this report on Form N-CSR of the Parnassus Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c)presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of trustees: a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 8, 2004 Bryant Cherry Vice President EXHIBIT 99. CERT I, Jerome Dodson, certify that: 1. I have reviewed this report on Form N-CSR of the Parnassus Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act of 1940) for the registrant and have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c)presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of trustees: a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 8, 2004 Jerome L. Dodson President EX-99.906 CERT 5 pit_906cert12-2003.txt SECTION 906 CERTIFICATION EXHIBIT 99.906 CERT Certification Pursuant to Section 906 of the Sarbanes-Oxley Act Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of The Parnassus Income Trust, hereby certifies, to such officer's knowledge, that the report on Form N- CSR of The Parnassus Income Trust for the period ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of The Parnassus Income Trust. Jerome L. Dodson Chief Executive Officer, The Parnassus Income Trust March 8, 2004 Bryant Cherry Chief Financial Officer, The Parnassus Income Trust March 8, 2004 A signed original of this written statement required by Section 906 has been provided to The Parnassus Income Trust and will be retained by The Parnassus Income Trust and furnished to the SEC or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----