-----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, Vu6wCHhYK2XlCg+zdgTnyj2ySXtP394gTA6befqLSTjLpvFGxXDfUU10OH4TREL1 tF8lZyhBm3ZGszCsY/j9/g== 0000866256-04-000024.txt : 20040823 0000866256-04-000024.hdr.sgml : 20040823 20040823133444 ACCESSION NUMBER: 0000866256-04-000024 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040823 DATE AS OF CHANGE: 20040823 EFFECTIVENESS DATE: 20040823 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: 04991400 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_ncsr06-2004.txt THE PARNASSUS INCOME TRUST - -------------------------------------------------------------------------------- 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) Jack Gee 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: June 30, 2004 ITEM 1: REPORTS TO SHAREHOLDERS THE PARNASSUS INCOME TRUST Equity Income Fund (PRBLX) Fixed-Income Fund (PRFIX) California Tax-Exempt Fund (PRCLX) SEMIANNUAL REPORT JUNE 30, 2004 ================================================================================ August 9, 2004 DEAR SHAREHOLDER: The Parnassus Funds will hold a shareholders meeting on Tuesday, October 5, 2004 at 6:00 p.m. at the Sheraton-Palace Hotel in San Francisco. The purpose of the meeting will be to elect four Trustees to the Funds' board and to vote on a proposal to reduce the mandatory retirement age of independent Trustees from 75 to 70. The idea behind lowering the retirement age is to prevent the board from getting too old. The current Trustees are all around 60 years old, so it wouldn't affect the current board for about ten years. This means that no current board member will take it personally. Although some people are vigorous well into their 70s, not everyone is. If approved, this proposal should minimize the chance that someone will have to undertake the unpleasant job of suggesting that a Trustee resign because of underperformance due to age. Four candidates have been nominated for the Trustee positions: Herbert A. Houston, Jeanie S. Joe, Jerome L. Dodson and Donald V. Potter. Herb Houston has served as a Trustee for the Parnassus Income Trust since 1992 and since 1998 for the Parnassus Fund. He is a graduate of California State University at Hayward and holds master's degrees in public health and public administration from the University of Southern California. From 1987 through 1998, Mr. Houston was chief executive officer of the Haight Ashbury Free Clinics. Since 1998, he has been a healthcare consultant and has owned and operated several small businesses. Donald Potter is a graduate of Notre Dame University and of Harvard Business School. His professional career has been in management consulting, having been a partner with McKinsey & Co. and President of Windermere Associates. He is the principal of StrategyStreet, a business strategy consulting firm. He has served as a Trustee of the Parnassus Fund and the Parnassus Income Trust since 2002. Jeanie Joe graduated in dietetics from the University of California at Berkeley and received a master's in public health from UCLA. She has worked as a clinical dietician. Since 1995, she has been President of Geo/Resource Consultants, a geotechnical and environmental consulting firm. There will be a reception at 6:00 pm on October 5 and the formal meeting will begin at 7:00 p.m. After the meeting, Todd Ahlsten, portfolio manager of the Parnassus Equity Income Fund, and I will answer questions until 8:30. If you're in the San Francisco Bay Area, we hope you will join us. You should have already received a formal mailing including a proxy statement. This contains more information about the meeting, but I wanted to remind you so you can mark your calendar. Your vote is important, so please mark your proxy ballot and send it back right away. You can also vote by telephone or on the Internet. I hope you will vote for me and the other three candidates, and I hope you will vote to lower the retirement age. Also, if you plan to attend the reception, please RSVP by marking the proxy ballot, so we will know how many people to expect. I hope to see you on October 5. 1 [PHOTO OMITTED] Above you will find a picture of the Trustees taken in the reception area of the Funds' offices. From left to right are Herb Houston, Jeanie Joe, Jerome Dodson and Donald Potter. PERSONNEL MATTERS Two new people have recently joined our staff. Jack Gee has joined us as our new chief financial officer. Jack is a certified public accountant (CPA) and holds a bachelor's degree in accounting from California State University at Hayward. He has served as chief financial officer at two other mutual fund groups: SIFE Trust Fund and Fremont Investment Advisors. Marc Mahon joins as Manager - Fund Administration. He holds a bachelor's degree in finance from Arizona State University and is an MBA candidate at California State University in Hayward. Previously, he worked at Barclays Global Investors and for Fremont Investment Advisors. Below you will find semiannual reports on each of the three funds in the Parnassus Income Trust. Todd Ahlsten wrote the reports on the Equity Income Fund and the Fixed-Income Fund, while co-managers Ben Liao and Stephen Dodson wrote the California Tax-Exempt Fund report. Yours truly, /s/ Jerome L. Dodson Jerome L. Dodson President 2 EQUITY INCOME FUND As of June 30, 2004, the net asset value per share (NAV) of the Equity Income Fund was $24.38, so after taking dividends into account, the total return for the first six months of the year was 2.84%. This compares to a gain of 3.44% for the S&P 500 and a gain of 3.15% for the average equity income fund followed by Lipper. While the Fund underperformed its last year because of our defensive strategy, its long-term returns remain excellent. The Fund's three, five and ten-year returns beat the Lipper average and S&P 500 for every period. We are pleased to report that our five-year return of 8.13%, which encompasses the three-year bear market and two bull-market years, beat the S&P 500's return by over 10% annually. Below is a table that compares 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 Parnassus Equity Lipper Equity Income S&P 500 for periods ended June 30, 2004 Income Fund Fund Average Index -------------------------------------------------------------------------------------- One Year 10.16% 18.27% 19.11% Three Years 6.42% 1.71% (0.68%) Five Years 8.13% 1.77% (2.19%) Ten Years 12.39% 10.42% 11.80% --------------------------------------------------------------------------------------
Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted, and current performance information is on the Parnassus website (www.parnassus.com). Before investing, an investor should consider the investment objectives, risks, charges and expenses of the Equity Income Fund and should read the prospectus which contains this information. The prospectus is on the Parnassus website or you can get one by calling (800) 999-3505. Investment return and principal value will fluctuate, so that 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. Index figures do not 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. On March 31, 1998 the Fund changed its investment objective from a balanced portfolio to and equity-income portfolio. MARKET RECAP Our return of 2.84% was essentially in line with the S&P 500's gain of 3.15% for the first half of 2004. However, during the first six months of the year, the stock market was like a bumpy airline flight. Soaring oil prices, violence in Iraq and uneven economic data provided a stiff headwind for stock prices. However, strong corporate profits and significant pockets of economic strength provided the lift required to push stocks higher by midyear. The year started strong as the S&P 500 was up 3% by January 27 due to strong corporate profits and optimism about the economic recovery. Unfortunately, this excitement faded fast and the S&P 500 plunged 5.6% from March 5 to March 24 due to investor concerns over higher interest rates, renewed inflation and soaring oil prices. We used this March decline to become fully invested after our defensive positioning of 2003. Being fully invested, we were pleased when the S&P 500 jumped 5.2% from March 25 to April 6 as oil prices fell, and investors looked forward to strong first quarter earnings. However, because of high oil prices and 3 weak economic data, this rally was also short-lived and the S&P 500 slid 5.3% to a new yearly low of 1076 by May 12. Fortunately, oil prices fell in June, and a renewed outlook for strong corporate profits ignited a rally which pushed our Fund's return to a positive 2.84% for the first half. STRATEGY While the market has been choppy this year, we remain focused on owning good companies for the long term. We look to buy stocks with price-earnings (P/E) multiples below 20, that have earnings growth of at least 10%, and have returns on equity of at least 15%. As of this writing, the Fund is fully invested with less than 3% cash. While the economic recovery has been uneven, I feel stock prices can rise during the second half of 2004 based on strong corporate profits and good economic data. While interest rates will likely increase during the second half of 2004, they are still very low in absolute terms, and this should keep the economy growing. Inflation also remains low which is a positive for the economy and stock prices. The S&P 500, valued at 21 times trailing earnings, is not a bargain, but we have found good companies to own that trade for 15-18 times earnings with solid growth prospects. To give you an example of the investment opportunities we are finding, I want to talk about one of our largest holdings, Gannett Corporation. Gannett is an international publisher that owns 101 daily newspapers including USA TODAY, the nation's largest-selling daily newspaper. The company also owns 22 television stations in major U.S. markets. Starting with the valuation and financials, Gannett fits our profile as the company trades at only 16 times estimated 2004 earnings, which is at the low end of its five-year P/E range of 14-27. In addition, Gannett has a five-year average return on equity of 21% and is run by a well regarded CEO named Douglas McCorkindale. Few executives can say they've worked for a company like Gannett that has increased earnings per share in 32 of the past 35 years. While the financial ratios are attractive, the most interesting part of the Gannett story is that there are several important catalysts that may move the stock higher. First and foremost, advertising budgets are finally rebounding due to the improving economy. Second, Gannett's sales will jump from major political advertising during the second half of this year. Finally, profits at Gannett's 13 NBC-affiliates will rise during the third quarter as they air the 2004 Summer Olympics. While 2004 will be strong, 2005 should be another record year for Gannett as the company will increase the price for USA TODAY from 50(cent) to 75(cent), which should add about $40 million to net income. Gannett owns great media properties, and with over $1.2 billion a year of free cash flow, the company has significant resources to either buy back stock or acquire other media companies. Management does a great job controlling costs, so revenue growth translates into good profit growth. Gannett is also a good corporate citizen. The company's Gannett Foundation has donated $96.5 million from 1991-2003 to charitable organizations. Gannett is also known for strong corporate governance and diversity as the company has had many prominent women on its board, including former first lady Roslyn Carter. I had a chance to speak with CFO Gracia Martore during March and was very impressed with her management skills. Gannett also has a remarkable record for diversity at the operating level. Each year, an executive's performance review is partially based on success in achieving diversity. I think Gannett's stock can rise 32% over the next year from $81 to $107 and boost the return of the Parnassus Equity Income Fund. My estimate is based on 20 times projected 2005 earnings of $5.35 per share. If the economy softens, I feel our downside risk is only 10%. 4 As of this writing, major industry weightings of the Fund include healthcare, financial services, insurance and publishing. These are industries where we have found undervalued businesses that can benefit from improving economic conditions. We have significantly reduced our investments in natural-gas utilities as those stocks typically fall when interest rates rise. We continue to own a few utility companies, because they either benefit from higher natural-gas prices or offer above-average growth potential. The SEC yield for June was 1.64%. LOSERS The Fund had three stocks which hurt the NAV by 4(cent) or more during the first half of 2004. The biggest loser was First Health Group, which is a full-service health benefits provider. First Health's stock plunged 19.8% from $19.46 to $15.61, which hurt the Fund's NAV by 9(cent). The company's earnings fell below plan as its network added fewer members than expected and was hit by intense price competition. We are holding onto our shares as the stock now trades for only 10 times earnings, and we feel First Health's preferred provider network has significant value. Hospital operator Health Management Associates (HMA) fell 9.2% from $24 to $21.80, our average selling price, which cost the Fund 5(cent). We sold our shares because of concerns about increasing bad debt and lower patient admission growth. TriQuint Semiconductor, a company that designs and makes computer chips for cell phones and communication equipment fell 33.9% from our average cost of $8.31 to our selling price of $5.49, which reduced our NAV by 4(cent). I made the mistake of buying a mediocre business that appeared set for recovery. Once it became clear TriQuint's new product wins weren't equating into a strong profit ramp, I sold the stock. WINNERS The Fund's biggest winner was Electro Scientific Industries (ESI), the Portland, Oregon-based maker of semiconductor capital equipment. The stock jumped 24.6% from our average cost of $22.60 to $28.31 which added 16(cent) to the NAV. In June, ESI announced that orders rose an amazing 310% versus last year as the company's customers began to add capacity after three years of depressed investment. Johnson & Johnson added 8(cent) to the NAV as its stock price increased 7.8% to $55.70 from $51.66. The company's stock price was depressed at the beginning of the year due to concerns about its weak drug pipeline and new competition in the drug-eluting stent market. Johnson & Johnson reported strong first-half earnings and the stock bounced back. Pitney Bowes, the leading maker of postage meters and mailing equipment, increased the NAV by 7(cent) as its stock rose 9.2% from our average cost of $40.94 to $44.25. The stock increased as investors expected the company to report stronger earnings because of higher sales of digital postal meters and other benefits from a stronger economy. Genuine Parts Corporation, the owner of Napa Auto Parts, added 6(cent) to the NAV as the stock rose 19.5% to $39.68 from $33.20. The company had a strong start to the year as sales increased 9% during the first quarter. Quest Diagnostics, the leading laboratory company, added 5(cent) to the NAV as its stock price climbed 16.1% from our average cost of $73.34 to $84.95. Earnings are strong based on new clinical tests, lower bad-debt expenses and stable pricing. 5 Dental-distribution company Patterson Dental also increased the NAV by 5(cent) as its stock rose 21.1% from $64.16 to our average selling price of $77.76. Patterson is a great company that is having another record year be-cause of market share gains and acquisitions. We did, however, sell the stock because it reached our calculated intrinsic value. COMPANY NOTES One of my favorite new investments in the Fund is called Trex Company, the largest manufacturer of composite decking products, or "imitation lumber," as our President Jerry Dodson likes to call it. Trex is a great example of "doing well by doing good" as the company essentially makes its sturdy composite lumber by blending reclaimed polyethylene (plastic grocery bags) with recycled wood chips. After hearing about the company from an industry contact at a Saturday morning brunch, I called Trex's headquarters to start the research process. I was quite pleased when Trex's CFO Paul Fletcher was willing to fly across the country from Winchester, Virginia to meet me in a little-known town called Fernley, Nevada to tour the company's west coast manufacturing operation. After a five hour drive, which took me from beautiful San Francisco to the tumbleweed terrain of the Nevada desert, I met Mr. Fletcher in the lobby of Trex's 250,000 square foot facility in Fernley. After an hour discussing the company's financial statements and business plan over a cup of coffee, Fletcher handed me goggles and a pair of earplugs. Along with the Fernley plant manager, we entered the manufacturing facility. I was amazed to see these huge bails of reclaimed polyethylene that were being unbundled and put into a grinding operation. Adjacent to the grinding operation was a sister process called the "hammermill" operation, where chips of waste wood (from crates, for example) were ground up like flour. These two ingredients, along with a few other additives for color, were then sent to one of eight manufacturing lines for mixing where the materials were heated to approximately 600 degrees and joined together. Once mixed, the batch was extruded into boards and put on a conveyor belt where they were left to cool for 12 hours. We then walked over to an embossing area where I watched a machine add grain to the boards to complete the manufacturing process for Trex's new "Accents" line. The plant employs about 130 people, and I was truly impressed with its efficiency and technology. After touring the main manufacturing site, Fletcher showed me an impressive quality-control room where Trex was testing boards for strength, texture and color. Most impressive was a special machine that simulated intense sunlight so they could determine if the boards met their "fade" criteria. In May, Trex made Business Ethics "100 Best Corporate Citizens" list, and in June, Trex was listed in Fortune's Small Business Magazine's 2004 List of "100 Fastest Growing Small Companies." Trex should boost the return of the Parnassus Equity Income Fund as the company has the potential to grow at least 20% annually over the next several years as more decks are built with composite lumber. If you are interested in seeing pictures of Trex's products, check out the company's website at www.trex.com. Thank you for investing in the Parnassus Equity Income Fund. Yours truly, /s/ Todd C. Ahlsten Todd C. Ahlsten Portfolio Manager 6 FIXED-INCOME FUND As of June 30, 2004, the net asset value per share (NAV) of the Fixed-Income Fund was $15.87, so after taking dividends into account, the total return for the first six months of the year was 0.16%. This compares to a loss of 0.19% for the Lehman Government/Corporate Bond Index and a loss of 0.18% for the average A-Rated bond fund followed by Lipper. The 30-day SEC yield for June was 2.25%. Below you will find a table that compares the performance of the Fixed-Income Fund with that of the Lehman Government/Corporate Bond Index and the Lipper A-Rated Bond Fund Average. The Parnassus Fixed-Income Fund had a good first half in 2004, as we were able to generate a slight gain of 0.16% versus a loss of 0.18% for our peers. As we anticipated, interest rates rose dramatically during the second quarter as the ten-year Treasury bond yield increased from 4.25% to 4.58%. While we underperformed our peers over the past year because of poor performance during the second half of 2003, our long-term returns remain excellent. The Fund's three, five and ten-year returns beat the Lipper A-Rated Average for every period.
---------------------------------------------------------------------------------------------- Average Annual Total Returns Parnassus Lipper A-Rated Bond Lehman Government/ for periods ended June 30, 2004 Fixed-Income Fund Fund Average Corporate Bond Index ---------------------------------------------------------------------------------------------- One Year (1.18%) 0.04% (0.72%) Three Years 6.96% 5.70% 6.74% Five Years 6.36% 6.09% 7.11% Ten Years 7.09% 6.74% 7.44% ----------------------------------------------------------------------------------------------
Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted, and current performance information is on the Parnassus website (www.parnassus.com). Before investing, an investor should consider the investment objectives, risks, charges and expenses of the Fixed-Income Fund and should read the prospectus which contains this information. The prospectus is on the Parnassus website, or you can get one by calling (800) 999-3505. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Lehman Government/Corporate Bond Index is a widely recognized, unmanaged index measuring the performance of bonds and other fixed-income securities, and it is not possible to invest directly in an index. Index figures do not 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. STRATEGY Our portfolio remains defensive as we expect higher interest rates during the second half of 2004. On June 30, the Federal Reserve announced its first rate hike in four years as it increased the federal funds rate by 0.25% to 1.25%. With an improving economy and four Federal Reserve meetings left this year, I'm expecting at least three, and potentially four, more quarter-point increases in the federal funds rate. This would place that rate at 2.00%-2.25% by year-end. Given this environment, our main strategy is to preserve capital by keeping a short duration. Duration essentially measures how much, in percentage terms, a bond price will change for a 1% movement in yield. As of this writing, our duration is only 1.5 years. This "short duration" strategy served us well during the second quarter as the Fund's loss of 0.97% was much less than the average Lipper A-Rated Fund, which fell 2.71%. 7 We have placed 11% of the Fund in convertible bonds and convertible preferred stock as those issues should rise in value with a stronger economy and rising stock prices. In addition, these investments should help the Fund's monthly dividend. However, based on our portfolio strategy, the Fund's dividend will remain low because short duration bonds offer lower yields. That said, as we saw during the second quarter, this strategy should cushion our portfolio should rates continue to increase. I anticipate we will maintain our defensive strategy for the next several months as we wait for interest rates to stabilize at a higher level. Once that happens, we will extend the portfolio's duration which will position the Fund for higher returns. Yours truly, /s/ Todd C. Ahlsten Todd C. Ahlsten Portfolio Manager CALIFORNIA TAX-EXEMPT FUND As of June 30, 2004, the net asset value per share (NAV) of the California Tax-Exempt Fund was $16.80. Taking dividends into account, the total return for the first half of 2004 was a negative 0.60%. The average California municipal-bond fund followed by Lipper, Inc. had a loss of 0.96%. This places us #25 out of the 128 funds followed by Lipper for year-to-date returns.* The results showed that our strategy of keeping the Fund defensively positioned paid off in the rising interest-rate environment of the past two quarters. Below you will find a table that compares our annual returns to various indices over the past one, three, five and ten-year periods. The 30-day SEC yield for June 2004 was 2.74%.
------------------------------------------------------------------------------------------------------------- Average Annual Total Returns Parnassus California Lipper California Municipal Lehman Municipal for periods ended June 30, 2004 Tax-Exempt Fund Bond Fund Average Bond Index ------------------------------------------------------------------------------------------------------------- One Year 0.19% 0.23% 0.76% Three Years 4.85% 4.49% 5.41% Five Years 5.21% 4.74% 5.87% Ten Years 6.07% 5.70% 6.44% -------------------------------------------------------------------------------------------------------------
Performance data quoted represent past performance and are no guarantee of future returns. Current performance may be lower or higher than the performance data quoted, and current performance information is on the Parnassus website (www.parnassus.com). Before investing, an investor should consider the investment objectives, risks, charges and expenses of the Fund and should read the prospectus which contains this information. The prospectus is on the Parnassus website or you can get one by calling (800) 999-3505. Investment return and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Returns shown in the table do not reflect the deduction of taxes a shareholder would pay on fund distributions or redemption of shares. 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. 8 * For the one, three, five, and ten-year periods ended 6/30/04, the Parnassus California Tax-Exempt Fund placed #65 of 128 funds, #33 of 110 funds, #21 of 96 funds, and #17 of 57 funds, respectively. On June 30, the Federal Reserve raised the federal-funds rate for the first time in four years, increasing the benchmark rate by 0.25% to 1.25%. While this decision was made at the end of the second quarter, the decision was very much expected since early in the year. Historically, the Fed had a policy of secrecy about its monetary-policy decisions, and investors spent a lot of time trying to figure out what the Fed would do next. Once the Fed announced its decision, markets would move decisively, causing joy or grief, depending on the direction and amount of the change in rates. The Fed has since adopted a policy of greater communication with the public and investors, giving the market more insight into how it arrives at its decision and what investors can anticipate in its next decision. In short, the bond market has been moving downward (with interest rates moving upward) long before the Fed's decision became official. But what does this all mean for us? Well, it means that the value of the bonds in our portfolio decreased over the first half of the year as the economy recovered and interest rates increased. As most of you have been aware of, we've been anticipating this since last year and adjusted our portfolio accordingly. We did adjust our portfolio a little too early, and that caused the Fund to underperform late last year. However, our portfolio was in good shape when rates finally rose this year. The Fund did lose 2.09% in the second quarter of 2004 as bond prices dropped, but we still managed to outperform the Lipper average, which lost 2.46% during the same period (the Fund ranked #22 of 128 funds in the second quarter). While we don't want to cheer when the fund loses money, we did outperform 80% of our peers in the first half of the year. California state bonds got a boost in May as Moody's Investors Services raised the bond rating one notch to A3 from Baa1. An improved economy and optimism about progress on a balanced state budget prompted the upgrade. The other two rating agencies, Standard & Poor's and Fitch Ratings, still have ratings two notches below Moody's rating. We anticipate that they will boost California's credit rating once they see more evidence of an economic recovery and fiscal austerity. OUTLOOK The Fed has said that they intend to increase rates at a "measured" pace. The economy is certainly recovering, but the rate of the recovery is slow, keeping inflation in check. This means that rates will continue to rise, but probably not very quickly. To continue generating good returns for our shareholders in this market, it comes down to a balancing act between keeping the Fund defensively positioned as rates increase and generating enough yield. And unfortunately, the two have a mathematically inverse relationship. We will continue balancing as we monitor economic data and make the appropriate adjustments to the portfolio as necessary. And as always, thank you for investing in the Fund. Yours truly, /s/ Ben Liao /s/ Stephen J. Dodson Ben Liao Stephen J. Dodson Co-Portfolio Manager Co-Portfolio Manager 9 THE PARNASSUS INCOME TRUST ================================================================================ EQUITY INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) Percent of Shares Common Stocks Net Assets Market Value - -------------------------------------------------------------------------------- APPAREL 500,000 Liz Claiborne, Inc. 2.5% $ 17,990,000 -------------- AUTO PARTS 250,000 Genuine Parts Company2 1.4% $ 9,920,000 -------------- BANKING 550,000 AmSouth Bancorporation2 14,008,500 70,000 Bank One Corporation 3,570,000 10,000 Golden West Financial Corp. 1,063,500 150,000 New York Community Bancorp 2,944,500 25,000 Washington Mutual Inc. 966,000 600,000 Wells Fargo & Company 34,338,000 -------------- Total 7.8% $ 56,890,500 -------------- BUILDING PRODUCTS 100,000 Elcor Corp. 2,394,000 216,100 Trex Company, Inc.1, 2 8,157,775 -------------- Total 1.4% $ 10,551,775 -------------- CHEMICAL 100,000 Calgon Carbon Corp. 0.1% $ 670,000 -------------- CONSUMER PRODUCTS 50,000 Colgate-Palmolive Company 0.4% $ 2,922,500 -------------- COMPUTERS 400,000 Flextronics International Ltd.1 6,380,000 38,200 RadiSys Corporation1, 2 709,374 -------------- Total 1.0% $ 7,089,374 -------------- ELECTRONIC INSTRUMENTS 225,000 Diebold, Inc. 11,895,750 150,000 Merix Corporation1 1,701,000 -------------- Total 1.8% $ 13,596,750 -------------- ENTERTAINMENT 70,500 Cedar Fair, L.P.2 0.3% $ 2,224,275 -------------- Percent of Shares Common Stocks Net Assets Market Value - -------------------------------------------------------------------------------- FINANCIAL SERVICES 275,000 Charles Schwab Corp. $ 2,642,750 10,000 Fannie Mae 713,600 10,000 Freddie Mac 633,000 50,000 GATX Corporation2 1,360,000 25,000 H&R Block, Inc. 1,192,000 275,000 SLM Corporation2 11,123,750 -------------- Total 2.4% $ 17,665,100 -------------- HEALTH CARE SERVICES 50,000 Apria Healthcare Group, Inc.1, 2 1,435,000 500,000 First Health Group Corp.1, 2 7,805,000 350,500 Laboratory Corporation of America Holdings1 13,914,850 15,000 Lincare Holdings, Inc.1, 2 492,900 52,200 Province Healthcare Company1 895,230 125,000 Quest Diagnostics2 10,618,750 30,000 UnitedHealth Group, Inc.2 1,867,500 -------------- Total 5.0% $ 37,029,230 -------------- INDUSTRIAL 100,000 Baldor Electric Company 2,335,000 117,234 WD-40 Company 3,509,986 -------------- Total 0.8% $ 5,844,986 -------------- INSURANCE 400,000 American Int'l Group, Inc. 28,512,000 125,000 HCC Insurance Holdings 4,176,250 14,389 Harleysville Group 271,233 100,000 Lincoln National Corporation 4,725,000 100,000 Montpelier Re Holdings 3,495,000 35,000 Nationwide Financial Services 1,316,350 186,500 RenaissanceRe Holdings 10,061,675 325,000 St. Paul Travelers Companies, Inc. 13,175,500 -------------- Total 9.0% $ 65,733,008 -------------- The accompanying notes are an integral part of these financial statements. 10 THE PARNASSUS INCOME TRUST ================================================================================ Percent of Shares Common Stocks Net Assets Market Value - -------------------------------------------------------------------------------- INSURANCE BROKERS 650,000 Arthur J. Gallagher 2.7% $ 19,792,500 -------------- MACHINERY 57,000 Snap-on Inc.2 0.3% $ 1,912,350 -------------- MEDICAL EQUIPMENT 25,000 Becton Dickinson 1,295,000 50,000 Guidant Corporation 2,794,000 125,000 Invitrogen Corp.1 8,998,750 100,000 Medtronic, Inc. 4,872,000 75,000 Sybron Dental Specialties, Inc.1 2,238,750 -------------- Total 2.7% $ 20,198,500 -------------- MICROELECTRONIC PRODUCTS 1,000,000 Credence Systems Corp.1, 2 13,800,000 100,000 Cymer, Inc.1, 2 3,744,000 500,000 Electro Scientific Industries Inc.1 14,155,000 -------------- Total 4.3% $ 31,699,000 -------------- OFFICE EQUIPMENT 500,000 Pitney Bowes Inc. 3.0% $ 22,125,000 -------------- PACKAGED FOODS 500,000 H.J. Heinz Company 19,600,000 33,800 The J.M. Smucker Company2 1,551,758 -------------- Total 2.9% $ 21,151,758 -------------- PHARMACEUTICALS 5,000 Forest Laboratories, Inc.1 283,150 450,000 Johnson & Johnson 25,065,000 300,000 Merck & Company 14,250,000 675,000 Pfizer Inc. 23,139,000 50,000 Pharmaceutical Products Development1 1,588,500 -------------- Total 8.8% $ 64,325,650 -------------- Percent of Shares Common Stocks Net Assets Market Value - -------------------------------------------------------------------------------- PRINTING 100,000 Banta Corp. $ 4,441,000 100,000 Ennis Business Forms 1,950,000 -------------- Total 0.9% $ 6,391,000 -------------- PUBLISHING 350,000 Gannett Co. 29,697,500 25,000 McGraw-Hill Companies, Inc. 1,914,250 150,000 Tribune Company 6,831,000 -------------- Total 5.2% $ 38,442,750 -------------- REAL ESTATE INVESTMENT TRUSTS 100,000 Alexandria Real Estate 5,678,000 400,000 Equity Office Properties Trust 10,880,000 100,000 The Rouse Company2 4,750,000 -------------- Total 2.9% $ 21,308,000 -------------- RESTAURANTS 91,945 Bob Evans Farms, Inc. 0.3% $ 2,517,454 -------------- RETAIL 725,000 Foot Locker, Inc. 17,646,500 30,000 The Home Depot, Inc. 1,056,000 300,000 Leapfrog Enterprises1, 2 5,967,000 125,000 Mattel, Inc. 2,281,250 35,000 The Nautilus Group2 682,850 125,000 Target Corporation2 5,308,750 -------------- Total 4.5% $ 32,942,350 -------------- SOFTWARE 125,000 Intuit Inc.1 4,822,500 50,000 Mentor Graphics Corporation1, 2 773,500 100,000 SunGard Data Systems, Inc.1 2,600,000 -------------- Total 1.1% $ 8,196,000 -------------- SERVICES 1,300,000 The ServiceMaster Company 2.2% $ 16,016,000 -------------- The accompanying notes are an integral part of these financial statements. 11 THE PARNASSUS INCOME TRUST ================================================================================ EQUITY INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) Percent of Shares Common Stocks Net Assets Market Value - -------------------------------------------------------------------------------- TELECOMMUNICATION EQUIPMENT 150,000 Cisco Systems, Inc.1 0.5% $ 3,555,000 -------------- TELECOMMUNICATION PROVIDER 125,000 Verizon Communications, Inc. 0.6% $ 4,523,750 -------------- UTILITIES 350,000 AGL Resources, Inc. 10,167,500 42,500 Cascade Natural Gas2 937,975 80,000 Energen Corporation 3,839,200 250,000 Kinder Morgan, Inc. 14,822,500 250,000 Keyspan Energy Corporation2 9,175,000 15,000 MDU Resources Group 360,450 350,000 ONEOK, Inc. 7,696,500 25,000 Questar Corporation 966,000 100,000 UGI Corporation 3,210,000 -------------- Total 7.0% $ 51,175,125 -------------- Total investment in common stocks (cost $571,070,804) 83.8% $ 614,399,685 -------------- Shares Preferred Stocks - -------------------------------------------------------------------------------- 55,439 First Republic Preferred 8.875%, Series B 1,414,249 55,000 Zions Bancorp Preferred 8.000%, due 09/01/32 1,432,750 -------------- Total investment in preferred stocks (cost $2,819,746) 0.4% $ 2,846,999 -------------- Convertible Percent of Shares Preferred Stocks Net Assets Market Value - -------------------------------------------------------------------------------- 275,000 Baxter International2 Preferred 7.000%, due 02/16/06 $ 15,664,000 10,000 Cummins, Inc.2 Preferred 7.000%, due 06/15/31 722,500 50,000 KeySpan Corp. Preferred 8.750%, due 05/16/05 2,585,000 325,000 ONEOK, Inc. Preferred 8.500%, due 02/16/06 9,421,750 125,000 St. Paul Co. Preferred 9.000%, due 08/16/05 9,252,500 35,000 TECO Energy Preferred 9.500%, due 01/15/05 452,900 225,000 Toys R Us2 Preferred 6.250%, due 08/01/06 10,251,000 -------------- Total investment in convertible preferred stocks (cost $42,707,314) 6.6% $ 48,349,650 -------------- The accompanying notes are an integral part of these financial statements. 12 THE PARNASSUS INCOME TRUST ================================================================================ Principal Percent of Amount $ Convertible Bonds Net Assets Market Value - -------------------------------------------------------------------------------- 2,000,000 Brocade Communications 2.000%, due 01/01/07 $ 1,810,000 20,000,000 Ciena Corp. 3.750%, due 02/01/08 17,575,000 2,000,000 ETrade Group 6.000%, due 02/01/07 2,047,500 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 5,662,545 10,000,000 TriQuint Semiconductor 4.000%, due 03/01/07 9,575,000 3,250,000 Vitesse Semiconductor Corporation 4.000%, due 03/15/05 3,254,062 -------------- Total investment in convertible bonds (cost $39,580,444) 5.6% $ 40,880,357 -------------- Total investment in stocks and convertible bonds (cost, $656,178,308) 96.4% $ 706,476,691 -------------- Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- Registered Investment Companies- Money Market Funds 83,402 Goldman Sachs FS Government Fund variable rate 1.000% $ 83,402 319,715 Janus Government Fund variable rate 1.070% 319,715 123,944 Scudder Government Fund variable rate 0.950% 123,944 -------------- Total (cost $527,061) 0.1% $ 527,061 -------------- Community Development Loan3 100,000 Vermont Community Loan Fund 2.000%, matures 04/16/05 (cost $100,000) 0.0% $ 95,249 -------------- Securities Purchased With Cash Collateral From Securities Lending Floating Rate Securities 2,500,000 CSFB Bank CD variable rate 1.150%, matures 08/06/04 2,502,065 10,000,000 First Tennessee Bank, MTN variable rate 1.080%, matures 06/07/05 9,997,980 5,000,000 Lehman Brothers MTN variable rate 1.590%, matures 05/16/05 5,000,000 5,000,000 Morgan Stanley Dean Witter CP variable rate 1.580%, matures 02/18/05 5,000,000 -------------- Total (cost $22,500,045) 3.1% $ 22,500,045 -------------- The accompanying notes are an integral part of these financial statements. 13 THE PARNASSUS INCOME TRUST ================================================================================ EQUITY INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) CONTINUED Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- Commercial Paper 5,000,000 Countrywide Home Loans CP 1.330% equivalent, matures 07/06/04 $ 4,998,707 5,000,000 Four Winds Funding DCP 1.750% equivalent, matures 07/01/04 4,999,757 -------------- Total (cost $9,998,464) 1.4% $ 9,998,464 -------------- Master Note 5,000,000 Bear Stearns & Co Master Note Agreement variable rate 1.650%, matures 07/07/04 (cost $5,000,000) 0.7% $ 5,000,000 -------------- Repurchase Agreements 14,465,554 Bank of America Securities LLC Triparty Repurchase Agreement (Repurchase agreement with The Bank of New York dated 06/30/04, effective yield is 1.550%, matures 07/01/04,Collateral: BofA CMO, 10.000%, 04/25/34; BofA CMO, 0.362%, 04/25/19; CSFB CMO, 4.815%, 05/25/34 total par value $38,759,141, total market value $15,187,191) 14,465,554 Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- 25,000,000 Dresdner Kleinwort Benson Triparty Repurchase Agreement (Repurchase agreement with JPMorgan Chase Bank dated 06/30/04, effective yield is 1.550%, matures 07/01/04, Collateral: Merrill Lynch MTN, 0.000%, 08/18/05; Merrill Lynch MTN, 0.000%, 07/11/05 total par value $26,230,000, total market value $26,254,754) $ 25,000,000 20,000,000 Lehman Brothers Triparty Repurchase Agreement (Repurchase agreement with JPMorgan Chase Bank dated 06/30/04, effective yield is 1.580%, matures 07/01/04, Collateral: FUNBC CMO, 6.460%, 01/12/43 GMACC 2002-C2 X1 CMO, 0.000%, 10/15/38; LBUBS 2003-C7 XCP CMO, 0.669%, 07/15/37; LBFRC 2003-C4A X1 CMO, 0.000%, 07/11/15; LBFRC 2003-C4A X2 CMO, 0.000%, 07/11/15; LBFRC 2003-C4A LFL CMO, 1.465%, 07/11/15; Salomon BRT CMO, 0.010%, 06/18/20; SASCO 02-11A 1-A2 CMO, 0.000%, 05/25/32 total par value $942,440,510, total market value $20,682,550) 20,000,000 -------------- Total (cost $59,465,554) 8.1% $ 59,465,554 -------------- The accompanying notes are an integral part of these financial statements. 14 THE PARNASSUS INCOME TRUST ================================================================================ Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- Total securities purchased with cash collateral from securities lending (cost $96,964,063) 13.2% $ 96,964,063 -------------- Total short-term securities (cost $97,591,124) 13.3% $ 97,586,373 -------------- Total securities (cost $753,769,432) 109.7% $ 804,063,064 Payable upon return of securities loaned -13.2% (96,964,063) Other assets and liabilities - net 3.5% 26,006,446 -------------- Total net assets 100.0% $ 733,105,447 ====== ============== 1 These securities are non-income producing. 2 This security or partial position of this security was on loan at June 30, 2004 (Note 1). The total value of securities on loan at June 30, 2004 was $93,613,677. 3 Market value adjustment has been made on this security to reflect early withdrawal/call penalties. Fund holdings will vary over time. Fund shares are not FDIC insured. EQUITY INCOME FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2004 (UNAUDITED) Assets Investments in securities, at market value (identified cost $656,178,308) (Note 1) $ 706,476,691 Temporary investments in short-term securities (identified cost $97,591,124) 97,586,373 Cash 17,102,062 Receivables: Dividends and interest 1,890,457 Securities sold 39,388,068 Capital shares sold 1,268,944 Other assets 277,236 -------------- Total assets $ 863,989,831 -------------- Liabilities Payable upon return of securities loaned 96,964,063 Capital shares redeemed 1,303,984 Fees payable to Parnassus Investments 423,095 Other liabilities 32,098,662 Accounts payable and accrued expenses 94,580 -------------- Total liabilities $ 130,884,384 -------------- Net assets (equivalent to $24.38 per share based on 30,067,401 shares of capital stock outstanding) $ 733,105,447 ============== Net assets consist of Undistributed net investment income 779,073 Unrealized appreciation on securities 50,293,632 Undistributed net realized gain 14,694,774 Capital paid-in 667,337,968 -------------- Total net assets $ 733,105,447 ============== Computation of net asset value and offering price per share Net asset value and offering price per share ($733,105,447 divided by 30,067,401 shares) $ 24.38 ============== The accompanying notes are an integral part of these financial statements. 15 THE PARNASSUS INCOME TRUST ================================================================================ EQUITY INCOME FUND STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) Investment income Dividends $ 7,351,467 Interest 1,913,275 Securities lending 74,767 Other income 1,150 -------------- Total investment income $ 9,340,659 -------------- Expenses Investment advisory fees (Note 5) 2,265,633 Transfer agent fees (Note 5) 131,141 Fund administrative expense (Note 5) 142,479 Service provider fees 495,998 Reports to shareholders 74,915 Registration fees and expenses 16,875 Custody fees 11,057 Professional fees 64,685 Trustee fees and expenses 28,960 Other expenses 45,880 -------------- Total expenses $ 3,277,623 -------------- Net investment income $ 6,063,036 -------------- Realized and unrealized gain on investments Realized gain from security transactions: Proceeds from sales 161,178,275 Cost of securities sold 145,952,377 -------------- Net realized gain $ 15,225,898 -------------- Change in unrealized appreciation (depreciation) of securities: Beginning of period 53,407,958 End of period 50,293,632 -------------- Net change in unrealized appreciation (depreciation) of securities $ (3,114,326) -------------- Net realized and unrealized gain on securities $ 12,111,572 -------------- Net increase in net assets resulting from operations $ 18,174,608 ============== STATEMENTS OF CHANGES IN NET ASSETS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, 2003 ------------- ----------------- From operations Net investment income $ 6,063,036 $ 8,804,899 Net realized gain from security transactions 15,225,898 5,870,431 Net change in unrealized appreciation (depreciation) of securities (3,114,326) 53,310,045 -------------- -------------- Increase in net assets resulting from operations $ 18,174,608 $ 67,985,375 Dividends to shareholders From net investment income (5,849,364) (10,160,220) From realized capital gains (3,015,028) -- Increase in net assets from capital share transactions 93,545,952 298,994,695 -------------- -------------- Increase in net assets $ 102,856,168 $ 356,819,850 Net assets Beginning of period 630,249,279 273,429,429 -------------- -------------- End of period (including undistributed net investment income of $779,073 in 2004 and $318,960 in 2003) $ 733,105,447 $ 630,249,279 ============== ==============
The accompanying notes are an integral part of these financial statements. 16 THE PARNASSUS INCOME TRUST ================================================================================ FIXED-INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) Principal Percent of Amount $ Corporate Bonds Net Assets Market Value - -------------------------------------------------------------------------------- FINANCIAL SERVICES 500,000 Bank One Corporation Notes, 6.000%, due 02/17/09 $ 531,440 500,000 Goldman Sachs Group Notes, 6.650%, due 05/15/09 544,378 500,000 Norwest Financial Inc. Notes, 6.850%, due 07/15/09 557,853 -------------- Total 4.5% $ 1,633,671 -------------- INSURANCE 700,000 International Lease Finance Corporation Notes, 5.625%, due 06/01/07 2.0% $ 734,593 -------------- RETAIL 400,000 Target Corporation Notes, 7.500%, due 08/15/10 1.2% $ 460,478 -------------- Total investment in corporate bonds (cost $2,586,968) 7.7% $ 2,828,742 -------------- Convertible Bond - -------------------------------------------------------------------------------- 1,000,000 Ciena Corp. 3.750%, due 02/01/08 (cost $834,306) 2.4% $ 878,750 -------------- 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 $ 967,025 2,000,000 Federal Home Loan Mortgage Corporation 6.375%, due 08/01/11 2,073,690 2,000,000 Federal Home Loan Mortgage Corporation 6.250%, due 03/15/12 2,095,408 1,000,000 Federal National Mortgage Association 5.500%, due 07/18/12 1,008,036 3,000,000 Federal National Mortgage Association 5.125%, due 04/22/13 2,969,745 -------------- Total investment in U.S. Government Agency securities (cost $9,215,983) 24.9% $ 9,113,904 -------------- Shares Convertible Preferred Stocks - -------------------------------------------------------------------------------- 23,000 St. Paul Company Preferred 9.000%, due 8/16/05 1,702,460 55,000 Oneok, Inc. Preferred 8.500%, due 02/16/06 1,594,450 -------------- Total investment in convertible preferred stocks (cost $3,379,872) 9.0% $ 3,296,910 -------------- Total investment in corporate bonds, convertible bond, U.S. Government Agency securities and convertible preferred stock (cost, $16,017,129) 44.0% $ 16,118,306 -------------- The accompanying notes are an integral part of these financial statements. 17 THE PARNASSUS INCOME TRUST ================================================================================ FIXED-INCOME FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) CONTINUED Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- U.S. Government Agency Discount Notes 2,200,000 Federal Home Loan Mortgage Corporation Zero Coupon, 1.581% equivalent, matures 08/19/04 $ 2,196,481 3,000,000 Federal Home Loan Mortgage Corporation Zero Coupon, 1.000% equivalent, matures 07/01/04 3,000,000 10,000,000 Federal Home Loan Mortgage Corporation Zero Coupon, 0.84% equivalent, matures 07/07/04 9,998,367 -------------- (cost $15,194,848) 41.5% $ 15,194,848 -------------- Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- Registered Investment Companies- Money Market Funds 1,274,443 Goldman Sachs FS Government Fund variable rate 1.000% $ 1,274,443 1,582,841 Janus Government Fund variable rate 1.070% 1,582,841 1,261 Scudder Government Fund variable rate 0.950% 1,261 -------------- (cost $2,858,545) 7.8% $ 2,858,545 -------------- Total investment in short-term securities (cost $18,053,393) 49.3% $ 18,053,393 -------------- Total securities (cost $34,070,522) 93.3% $ 34,171,699 Other assets and liabilities - net 6.7% 2,437,185 ------ -------------- Total net assets 100.0% $ 36,608,884 ====== ============== Fund holdings will vary over time. Fund shares are not FDIC insured. The accompanying notes are an integral part of these financial statements. 18 THE PARNASSUS INCOME TRUST ================================================================================ FIXED-INCOME FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2004 (UNAUDITED) Assets Investments in securities, at market value (identified cost $16,017,129) (Note 1) $ 16,118,306 Temporary investments in short-term securities (at cost which approximates market value) 18,053,393 Cash 2,235,779 Receivables: Interest 215,486 Capital shares sold 27,280 Other assets 721 -------------- Total assets $ 36,650,965 -------------- Liabilities Fees payable to Parnassus Investments 8,471 Distributions payable 31,306 Accrued expenses 2,304 -------------- Total liabilities $ 42,081 -------------- Net assets (equivalent to $15.87 per share based on 2,306,831 shares of capital stock outstanding) $ 36,608,884 ============== Net assets consist of Undistributed net investment income $ 20,759 Unrealized appreciation on securities 36,981 Accumulated net realized gain 224,551 Capital paid-in 36,326,593 -------------- Total net assets $ 36,608,884 ============== Computation of net asset value and offering price per share Net asset value and offering price per share ($36,608,884 divided by 2,306,831 shares) $ 15.87 ============== STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) Investment income Interest $ 403,118 Dividend 66,344 -------------- Total investment income $ 469,462 -------------- Expenses Investment advisory fees (Note 5) 89,178 Transfer agent fees (Note 5) 24,792 Fund administrative expense (Note 5) 7,713 Reports to shareholders 4,639 Registration fees and expenses 9,479 Professional fees 10,097 Custody fees 1,537 Trustee fees and expenses 1,587 Other expenses 13,637 -------------- Total expenses before fee waiver $ 162,659 Fees waived by Parnassus Investments (Note 5) (49,300) -------------- Net expenses $ 113,359 -------------- Net investment income $ 356,103 -------------- Realized and unrealized gain (loss) on investments Realized gain from security transactions: Proceeds from sales 1,329,888 Cost of securities sold 1,152,340 -------------- Net realized gain $ 177,548 -------------- Change in unrealized appreciation (depreciation) of securities: Beginning of period 529,093 End of period 36,981 -------------- Net change in unrealized appreciation (depreciation) of securities $ (492,112) -------------- Net realized and unrealized gain (loss) on securities $ (314,564) -------------- Net increase in net assets resulting from operations $ 41,539 ============== The accompanying notes are an integral part of these financial statements. 19 THE PARNASSUS INCOME TRUST ================================================================================ FIXED-INCOME FUND STATEMENTS OF CHANGES IN NET ASSETS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, 2003 ------------- ----------------- From operations Net investment income $ 356,103 $ 991,077 Net realized gain from security transactions 177,548 549,369 Net change in unrealized appreciation (depreciation) of securities (492,112) (289,739) -------------- -------------- Increase in net assets resulting from operations $ 41,539 $ 1,250,707 Dividends to shareholders From net investment income (350,085) (1,060,578) From realized capital gains -- (135,873) Increase in net assets from capital share transactions 2,819,613 14,951,960 -------------- -------------- Increase in net assets $ 2,511,067 $ 15,006,216 Net assets Beginning of period 34,097,817 19,091,601 -------------- -------------- End of period (including undistributed net investment income of $20,759 in 2004 and $0 in 2003) $ 36,608,884 $ 34,097,817 ============== ==============
The accompanying notes are an integral part of these financial statements. 20 THE PARNASSUS INCOME TRUST ================================================================================ CALIFORNIA TAX-EXEMPT FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) Principal Percent of Amount $ Municipal Bonds Net Assets Market Value - -------------------------------------------------------------------------------- EDUCATION 300,000 Folsom School District 5.650%, due 08/11/11 $ 332,961 450,000 Los Altos Unified School District 5.250%, due 08/01/10 495,513 440,000 Los Angeles Unified School District 5.500%, due 08/01/13 492,950 450,000 Morgan Hill Unified School District 4.900%, due 08/01/13 477,567 410,000 Sacramento Unified School District 5.750%, due 07/01/17 468,101 -------------- Total 9.1% $ 2,267,092 -------------- ENVIRONMENT 400,000 California Department of Water Resources - Central Valley Projects 5.125%, due 12/01/16 418,780 1,100,000 California Department of Water Resources - Power Supply Revenues 5.500%, due 05/01/09 1,201,485 500,000 Central Coast Water 5.000%, due 10/01/16 520,375 315,000 Los Angeles City Public Works - Parks 5.500%, due 10/01/12 344,106 200,000 Los Angeles Wastewater System 5.000%, due 06/01/11 214,566 1,000,000 San Francisco Public Utilities - Clean Water Revenue 5.000%, due 10/01/09 1,092,410 -------------- Total 15.1% $ 3,791,722 -------------- Principal Percent of Amount $ Municipal Bonds Net Assets Market Value - -------------------------------------------------------------------------------- GENERAL OBLIGATION 1,000,000 State of California 6.600%, due 02/01/09 $ 1,131,714 700,000 State of California 6.100%, due 10/01/09 787,962 1,000,000 State of California 5.000%, due 03/01/08 1,065,460 300,000 Oakland General Obligation 5.500%, due 12/15/11 329,928 -------------- Total 13.3% $ 3,315,064 -------------- HEALTH CARE 400,000 California Health Facilities - Kaiser Permanente 5.000%, due 10/01/08 434,740 415,000 Loma Linda Hospital 4.850%, due 12/01/10 448,333 -------------- Total 3.5% $ 883,073 -------------- HOUSING 1,000,000 ABAG Financing Authority 4.250%, due 11/15/12 990,380 275,000 Los Angeles Community Redevelopment 5.000%, due 07/01/13 291,833 -------------- Total 5.1% $ 1,282,213 -------------- The accompanying notes are an integral part of these financial statements. 21 THE PARNASSUS INCOME TRUST ================================================================================ CALIFORNIA TAX-EXEMPT FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY CLASSIFICATION, JUNE 30, 2004 (UNAUDITED) CONTINUED Principal Percent of Amount $ Municipal Bonds Net Assets Market Value - -------------------------------------------------------------------------------- INFRASTRUCTURE IMPROVEMENTS 500,000 CA Infrastructure & Economic Development 5.000%, due 10/01/12 $ 546,245 1,000,000 CA Public Works - UCLA Hospital 5.375%, due 10/01/13 1,095,830 960,000 CA Public Works - Community Colleges 5.500%, due 12/01/09 1,053,523 910,000 CA Statewide Communities Development - EAH-East Campus Apartments 4.500%, due 08/01/10 920,893 1,000,000 Indian Wells Redevelopment Agency 4.500%, due 09/01/11 1,056,960 600,000 La Quinta Redevelopment Agency 7.300%, due 09/01/11 735,138 350,000 Metro Water District - Southern California 5.250%, due 07/01/15 381,332 450,000 Oakland Redevelopment Agency 3.400%, due 09/01/09 446,270 860,000 Rialto Redevelopment Agency 4.000%, due 09/01/07 882,532 425,000 Rialto Redevelopment Agency 4.500%, due 09/01/13 426,823 -------------- Total 30.2% $ 7,545,546 -------------- Principal Percent of Amount $ Municipal Bonds Net Assets Market Value - -------------------------------------------------------------------------------- PUBLIC TRANSPORTATION 1,000,000 Contra Costa Transit Authority 4.000%, due 03/01/09 $ 1,041,840 325,000 Los Angeles Metro Transit Authority 5.500%, due 07/01/10 362,768 250,000 Los Angeles Metro Transit Authority 5.000%, due 07/01/13 264,578 1,000,000 San Francisco International Airport 5.000%, due 05/01/10 1,086,940 390,000 San Francisco Bay Area Rapid Transit 5.500%, due 07/01/07 423,813 400,000 San Francisco Bay Area Rapid Transit 5.250%, due 07/01/13 427,772 -------------- Total 14.4% $ 3,607,711 -------------- Total investments in municipal bonds (cost, $22,274,254) 90.7% $ 22,692,421 -------------- The accompanying notes are an integral part of these financial statements. 22 THE PARNASSUS INCOME TRUST ================================================================================ Principal Percent of Amount $ Short-term Investments Net Assets Market Value - -------------------------------------------------------------------------------- Registered Investment Companies- Money Market Funds 251,010 California Investment Trust Tax Free Fund variable rate 0.530% $ 251,010 302,129 Goldman Sachs California Tax-Exempt Fund variable rate 0.580% 302,129 771,291 Highmark California Tax-Exempt Fund variable rate 0.620% 771,291 -------------- (cost $1,324,430) 5.3% $ 1,324,430 -------------- Floating Rate Security 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 $2,024,430) 8.1% $ 2,024,430 -------------- Total securities 98.8% $ 24,716,851 Other assets and liabilities - net 1.2% 295,096 ------ -------------- Total net assets 100.0% $ 25,011,947 ====== ============== Fund holdings will vary over time. Fund shares are not FDIC insured. The accompanying notes are an integral part of these financial statements. 23 THE PARNASSUS INCOME TRUST ================================================================================ CALIFORNIA TAX-EXEMPT FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2004 (UNAUDITED) Assets Investments in securities, at market value (identified cost $22,274,254) (Note 1) $ 22,692,421 Temporary investments in short-term securities (at cost which approximates market value) 2,024,430 Receivables: Interest 322,409 Capital shares sold 10,272 Other assets 458 -------------- Total assets $ 25,049,990 -------------- Liabilities Fees payable to Parnassus Investments 10,190 Distributions payable 15,810 Accrued expenses 12,043 -------------- Total liabilities $ 38,043 -------------- Net assets (equivalent to $16.80 per share based on 1,489,101 shares of capital stock outstanding) $ 25,011,947 ============== Net assets consist of Undistributed net investment income $ 6,172 Unrealized appreciation on securities 418,167 Accumulated net realized gain 21,607 Capital paid-in 24,566,001 -------------- Total net assets $ 25,011,947 ============== Computation of net asset value and offering price per share Net asset value and offering price per share ($25,011,947 divided by 1,489,101 shares) $ 16.80 ============== STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) Investment income Interest $ 435,955 -------------- Total investment income $ 435,955 -------------- Expenses Investment advisory fees (Note 5) 63,025 Transfer agent fees (Note 5) 6,089 Fund administrative expense (Note 5) 5,610 Reports to shareholders 3,086 Registration fees and expenses 830 Professional fees 7,058 Custody fees 1,468 Trustee fees and expenses 1,129 Service provider fees 10,010 Other expenses 5,136 -------------- Total expenses before fee waiver $ 103,441 Fees waived by Parnassus Investments (Note 5) (22,304) -------------- Net expenses $ 81,137 -------------- Net investment income $ 354,818 -------------- Realized and unrealized gain (loss) on investments Realized gain from security transactions: Proceeds from sales -- Cost of securities sold -- -------------- Net realized gain $ -- -------------- Change in unrealized appreciation (depreciation) of securities: Beginning of period 934,576 End of period 418,167 -------------- Net change in unrealized appreciation (depreciation) of securities $ (516,409) -------------- Net realized and unrealized gain (loss) on securities $ (516,409) -------------- Net increase (decrease) in net assets resulting from operations $ (161,591) ============== The accompanying notes are an integral part of these financial statements. 24 THE PARNASSUS INCOME TRUST ================================================================================ STATEMENTS OF CHANGES IN NET ASSETS SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003 SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, 2003 ------------- ----------------- From operations Net investment income $ 354,818 $ 800,948 Net realized gain from security transactions -- 271,953 Net change in unrealized appreciation (depreciation) of securities (516,409) (84,210) -------------- -------------- Increase (decrease) in net assets resulting from operations $ (161,591) $ 988,691 Dividends to shareholders From net investment income (358,463) (807,627) From realized capital gains -- (250,346) Increase (decrease) in net assets from capital share transactions 707,473 (1,269,019) -------------- -------------- Increase (decrease) in net assets $ 187,419 $ (1,338,301) Net assets Beginning of period 24,824,528 26,162,829 -------------- -------------- End of period (including undistributed net investment income of $6,172 in 2004 and $9,817 in 2003) $ 25,011,947 $ 24,824,528 ============== ============== The accompanying notes are an integral part of these financial statements. 25 THE PARNASSUS INCOME TRUST - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 VALUATIONS: Short-term securities are money-market instruments and are valued at amortized cost, which approximates market value. A market-value adjustment is applied to certain short-term securities to reflect penalties for early withdrawal and early call. Equity securities that are listed or traded on a national securities exchange are stated at market value based on recorded closing sales on the exchange or on the Nasdaq's National Market System official closing price. In the absence of a recorded sale, and for over-the-counter securities, equity securities are stated at the mean between the last recorded bid and asked prices. Long-term fixed income securities are valued each business day using independent pricing services ("Services") approved by the Board of Trustees. For fixed-income securities with an active market, the pricing services value them at the "bid" price where such quotes are readily available from brokers and dealers and are representative of the actual market for such securities. Other fixed-income securities experiencing a less active market are valued as determined by the Services based on methods which include consideration of trading in securities of comparable yield, quality, coupon, maturity and type, as well as indications as to values from dealers and other market data without exclusive reliance upon quoted prices or over-the-counter prices, since such valuations are believed to reflect more accurately the value of such securities. Equity and fixed-income securities without an active market are priced at their fair value, in accordance with procedures established by the Trustees. In determining fair value, the trustees may consider a variety of information including but not limited to the following: price based upon a multiple of earnings or sales, a discount from the market value of a similar security, fundamental analytical data, and an evaluation of market conditions. FEDERAL INCOME TAXES: The Trust intends to comply with the requirements of the Internal Revenue Code applicable to regulated 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 annually. 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 recognized 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. 26 THE PARNASSUS INCOME TRUST - -------------------------------------------------------------------------------- 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 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 June 30, 2004, there were an unlimited number of authorized shares of capital stock, no par value. Paid-in capital aggregated $667,337,968. Transactions in capital stock (shares) were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, 2003 ---------------------------- ----------------------------- Shares Amount Shares Amount ---------- ------------- ---------- ------------ Shares sold 8,155,365 $ 199,019,334 21,806,608 $464,928,454 Shares issued through dividend reinvestment 339,453 8,287,148 416,260 9,370,176 Shares repurchased (4,689,914) (113,760,530) (8,855,314) (175,303,935) ---------- ------------- ---------- ------------ Net increase 3,804,904 $ 93,545,952 13,367,554 $298,994,695 ========== ============= ========== ============
FIXED-INCOME FUND: As of June 30, 2004, there was an unlimited number of authorized shares of capital stock, no par value. Paid-in capital aggregated $36,326,593. Transactions in capital stock (shares) were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, 2003 ---------------------------- ----------------------------- Shares Amount Shares Amount ---------- ------------- ---------- ------------ Shares sold 445,540 $ 7,147,207 1,416,444 $ 21,276,069 Shares issued through dividend reinvestment 18,658 298,089 63,100 1,017,411 Shares repurchased (288,630) (4,625,683) (550,524) (7,341,520) ---------- ------------- ---------- ------------ Net increase 175,568 $ 2,819,613 929,020 $ 14,951,960 ========== ============= ========== ============
27 THE PARNASSUS INCOME TRUST ================================================================================ NOTES TO FINANCIAL STATEMENTS (UNAUDITED) CONTINUED CALIFORNIA TAX-EXEMPT FUND: As of June 30, 2004, there was an unlimited number of authorized shares of capital stock, no par value. Paid-in capital aggregated $24,566,001. Transactions in capital stock (shares) were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, 2004 DECEMBER 31, 2003 ---------------------------- ----------------------------- Shares Amount Shares Amount ---------- ------------- ---------- ------------ Shares sold 153,314 $ 2,631,340 416,172 $ 7,158,418 Shares issued through dividend reinvestment 18,281 311,534 54,377 933,074 Shares repurchased (131,162) (2,235,401) (543,745) (9,360,511) ---------- ------------- ---------- ------------ Net increase (decrease) 40,433 $ 707,473 (73,196) $ (1,269,019) ========== ============= ========== ============
4. PURCHASES AND SALES OF SECURITIES EQUITY INCOME FUND: Purchases and sales of securities were $443,761,597 and $161,178,275, respectively, for the six months ended June 30, 2004. For federal income tax purposes, the aggregate cost of securities and unrealized appreciation as of June 30, 2004 were $654,376,226 and $52,100,465, respectively. Of the $52,100,465 of net unrealized appreciation as of June 30, 2004, $58,617,747 related to appreciation of securities and $6,517,282 related to depreciation of securities. FIXED-INCOME FUND: Purchases and sales of securities were $3,379,872 and $1,329,888, respectively, for the six months ended June 30, 2004. For federal income tax purposes, the aggregate cost of securities and unrealized appreciation as of June 30, 2004 were the same as for financial statement purposes. Of the $101,177 of net unrealized appreciation as of June 30, 2004, $289,089 related to appreciation of securities and $187,912 related to depreciation of securities. CALIFORNIA TAX-EXEMPT FUND: There were no purchases or sales of securities during the six months ended June 30, 2004. For federal income tax purposes, the aggregate cost of securities and unrealized appreciation as of June 30, 2004 were $22,562,499 and $129,922, respectively. Of the $129,922 of net unrealized appreciation as of June 30, 2004, $384,023 related to appreciation of securities and 254,101 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 $2,265,633 for the six months ended June 30, 2004. For the six months ended June 30, 2004, Parnassus Investments has contractually agreed to reduce its investment advisory 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 2004. For the Fixed-Income Fund, the investment advisory fee was 0.22%. Parnassus Investments received net advisory fees totaling $39,878 from the Fixed-Income Fund for the six months ended June 30, 2004. For the California Tax-Exempt Fund, the investment advisory fee was 0.32%. Parnassus Investments received net advisory fees totaling $40,721 from the California Tax-Exempt Fund for the six months ended June 30, 2004. 28 THE PARNASSUS INCOME TRUST ================================================================================ 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 $317,824 for the six months ended June 30, 2004. The transfer agent fee was $2.70 per month per account. The funds pay a monthly fee based on the number of accounts on record at month-end. The aggregate payment was $162,022 for the six months ended June 30, 2004. The fund administration fee was $25,967 per month in aggregate for all three Funds (this amount is allocated between the Funds based on net assets). The aggregate payment was $155,802 for the six months ended June 30, 2004. Jerome L. Dodson is the president of the Trust and is the president and 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 sub-divisions, 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 the six months ended June 30, 2004 and for each of the five years ended December 31 are as follows:
============================================================================================================================= JUNE 30, 2004 Equity Income Fund (unaudited) 2003 2002 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of year $ 24.00 $ 21.20 $ 22.50 $ 21.48 $ 23.13 $ 20.13 --------- --------- --------- -------- -------- -------- Income (loss) from investment operations: Net investment income 0.40 0.44 0.49 0.67 0.33 0.24 Net realized and unrealized gain (loss) on securities 0.28 2.85 (1.32) 1.43 1.06 4.26 --------- --------- --------- -------- -------- -------- Total income (loss) from investment operations 0.68 3.29 (0.83) 2.10 1.39 4.50 --------- --------- --------- -------- -------- -------- Distributions: Dividends from net investment income (0.20) (0.49) (0.29) (0.45) (0.36) (0.26) Distributions from net realized gains (0.10) -- (0.18) (0.63) (2.68) (1.24) --------- --------- --------- -------- -------- -------- Total distributions (0.30) (0.49) (0.47) (1.08) (3.04) (1.50) --------- --------- --------- -------- -------- -------- Net asset value at end of period $ 24.38 $ 24.00 $ 21.20 $ 22.50 $ 21.48 $ 23.13 ========= ========= ========= ======== ======== ======== Total return 2.84% 15.69% (3.69%) 9.97% 6.36% 22.78% Ratios/supplemental data: Ratio of gross expenses to average net assets* 0.95% 0.96% 1.03% 1.18% 1.15% 1.27% Ratio of net expenses to average net assets* 0.95% 0.95% 0.96% 1.00% 0.97% 1.08% Ratio of net investment income to average net assets* 1.76% 1.95% 2.29% 3.10% 1.34% 1.09% Portfolio turnover rate 12.39% 79.21% 42.01% 86.78% 97.42% 39.53% Net assets, end of period (000's) $ 733,105 $ 630,249 $ 273,429 $ 85,501 $ 55,421 $ 45,999
* Annualized for periods less that one year. 29 THE PARNASSUS INCOME TRUST ================================================================================ NOTES TO FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
============================================================================================================================= JUNE 30, 2004 Fixed-income Fund (unaudited) 2003 2002 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of year $ 16.00 $ 15.88 $ 14.94 $ 14.19 $ 14.49 $ 15.98 --------- --------- --------- -------- -------- -------- Income (loss) from investment operations: Net investment income 0.30 0.58 0.82 0.87 0.89 0.81 Net realized and unrealized gain (loss) on securities (0.27) 0.26 0.95 0.72 (0.29) (1.49) --------- --------- --------- -------- -------- -------- Total income (loss) from investment operations 0.03 0.84 1.77 1.59 0.60 (0.68) --------- --------- --------- -------- -------- -------- Distributions: Dividends from net investment income (0.16) (0.65) (0.83) (0.84) (0.90) (0.81) Distributions from net realized gains -- (0.07) -- -- -- -- --------- --------- --------- -------- -------- -------- Total distributions (0.16) (0.72) (0.83) (0.84) (0.90) (0.81) --------- --------- --------- -------- -------- -------- Net asset value at end of period $ 15.87 $ 16.00 $ 15.88 $ 14.94 $ 14.19 $ 14.49 ========= ========= ========= ======== ======== ======== Total return 0.16% 5.30% 12.20% 11.31% 4.32% (4.32%) Ratios/supplemental data: Ratio of gross expenses to average net assets* 0.91% 0.92% 1.08% 1.15% 1.13% 1.23% Ratio of net expenses to average net assets* 0.64% 0.62% 0.81% 0.83% 0.78% 0.87% Ratio of net investment income to average net assets* 2.00% 3.59% 5.36% 5.84% 6.18% 5.36% Portfolio turnover rate 3.71% 125.74% 59.00% 21.19% 19.19% 13.47% Net assets, end of period (000's) $ 36,609 $ 34,098 $ 19,092 $ 12,947 $ 10,309 $ 11,006
* Annualized for periods less that one year. 30 THE PARNASSUS INCOME TRUST ================================================================================
============================================================================================================================= JUNE 30, 2004 California Tax-exempt Fund (unaudited) 2003 2002 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of year $ 17.14 $ 17.19 $ 16.61 $ 16.90 $ 15.82 $ 16.88 --------- --------- --------- -------- -------- -------- Income (loss) from investment operations: Net investment income 0.45 0.53 0.59 0.70 0.72 0.72 Net realized and unrealized gain (loss) on securities (0.55) 0.12 0.83 (0.18) 1.10 (1.05) --------- --------- --------- -------- -------- -------- Total income (loss) from investment operations (0.10) 0.65 1.42 0.52 1.82 (0.33) --------- --------- --------- -------- -------- -------- Distributions: Dividends from net investment income (0.24) (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 (0.24) (0.70) (0.84) (0.81) (0.74) (0.73) --------- --------- --------- -------- -------- -------- Net asset value at end of period $ 16.80 $ 17.14 $ 17.19 $ 16.61 $ 16.90 $ 15.82 ========= ========= ========= ======== ======== ======== Total return (0.60%) 3.88% 8.66% 3.09% 11.75% (2.01%) Ratios/supplemental data: Ratio of gross expenses to average net assets* 0.82% 0.83% 0.95% 0.85% 0.77% 0.95% Ratio of net expenses to average net assets* 0.62% 0.62% 0.73% 0.65% 0.52% 0.70% Ratio of net investment income to average net assets* 2.81% 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 period (000's) $ 25,012 $ 24,825 $ 26,163 $ 18,891 $ 17,186 $ 7,777
* Annualized for periods less that one year. For the six months ended June 30, 2004, 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 six months ended June 30, 2004 and 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. DISCLOSURES Parnassus proxy voting policies and procedures are available on our website (www.parnassus.com), on the Securities and Exchange Commission's website (www.sec.gov), and by calling us at (800) 999-3505. On the Parnassus website, you can also find a record of our votes cast at shareholder meetings. 31 DISCLOSURES Parnassus proxy voting policies and procedures are available on our website (www.parnassus.com), on the Securities and Exchange Commission's website (www.sec.gov), and by calling us at (800) 999-3505. On the Parnassus website, you can also find a record of our votes cast at shareholder meetings. THE PARNASSUS INCOME TRUST One Market-Steuart Tower, Suite 1600 San Francisco, CA 94105 415.778.0200 800.999.3505 www.parnassus.com Investing with a conscience INVESTMENT ADVISER INDEPENDENT Parnassus Investments AUDITORS One Market-Steuart Tower Deloitte & Touche LLP Suite 1600 50 Fremont Street San Francisco, CA 94105 San Francisco, CA 94105 LEGAL COUNSEL DISTRIBUTOR Foley & Lardner LLP Parnassus Investments 777 E. Wisconsin Avenue One Market-Steuart Tower Milwaukee, WI 53202 Suite 1600 San Francisco, CA 94105 This report must be preceded or accompanied by a current prospectus. ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual reports. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual reports. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASES. Not applicable ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 10. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES 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. The Parnassus Income Trust By: /s/ Jerome L. Dodson ------------------------------------- Jerome L. Dodson, President Date: August 23, 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: August 23, 2004 By: /s/ Jack Gee ------------------------------------- Jack Gee, Chief Financial Officer Date: August 23, 2004 EX-99.CERT 2 pit_302cert062004.txt Item 11(a)(2). EXHIBIT 99. CERT SECTION 302 CERTIFICATIONS I, Jerome L. 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 a 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; 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 over financial reporting. August 23, 2004 /s/ Jerome L. Dodson ------------------------------------ Jerome L. Dodson President SECTION 302 CERTIFICATIONS I, Jack Gee, 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 a 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 officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; 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 over financial reporting. August 23, 2004 /s/ Jack Gee ------------------------------------ Jack Gee Chief Financial Officer EX-99.906 CERT 3 pit_906cert062004.txt Item 11(b). EXHIBIT 99.906 CERT SECTION 906 CERTIFICATION In connection with the Report on Form N-CSR for The Parnassus Income Trust, the undersigned hereby certifies, to the best of his knowledge, that: (1) the report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of The Parnassus Income Trust. August 23, 2004 /s/ Jerome L. Dodson ------------------------------------------- Jerome L. Dodson President August 23, 2004 /s/ Jack Gee ------------------------------------------- Jack Gee Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----