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LOGO
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Pioneer
Interest Shares
ANNUAL REPORT 12/31/96
<PAGE>
Table of Contents
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<TABLE>
<S> <C>
Letter from the Chairman 1
Portfolio Summary 2
Performance Update 3
Portfolio Management Discussion 4
Schedule of Investments 7
Financial Statements 10
Notes to Financial Statements 14
Report of Independent Public Accountants 17
Tax Treatment of Distributions 18
Trustees' Fees and Share Ownership 19
Results of Shareowner Meeting 20
Trustees, Officers and Service Providers 21
</TABLE>
<PAGE>
Pioneer Interest Shares
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LETTER FROM THE CHAIRMAN 12/31/96
Dear Shareowner,
- - ----------------------------------------------------------------
Welcome to this annual report on Pioneer Interest Shares, covering the year
ended December 31, 1996. I wish to welcome those of you who are new to the
Fund, and to thank continuing shareowners for casting your votes at the
Fund's annual shareowner meeting in June. (We've provided detailed voting
results on page 20.)
Flexibility was the key to Pioneer Interest Shares' success, since your
Fund's investment team has the ability to invest in a wide spectrum of
bonds. Without question, investors willing to venture into lower-quality
bonds were rewarded in 1996, as "junk" issues were the best-performing
segment of the bond market. High-quality issues, particularly U.S.
government securities, were far less popular with investors focused solely
on near-term results.
No one can predict with any accuracy when investor psychology will shift so
that today's "good" investment suddenly looks "bad," or vice versa. Even so,
the backdrop for bonds currently is favorable again, with interest rates
moving down and inflation holding at low levels. However, the benefits of a
flexible yet disciplined investment style should be even more apparent if
financial markets run into difficulty. In all, we think Pioneer Interest
Shares is positioned well to profit from a strong bond market, and its
diversity and attractive income stream should help buffer the Fund if 1997
turns out to be a difficult year for bonds.
Thank you for your continued support.
Respectfully,
/s/John F. Cogan, Jr.
John F. Cogan, Jr.,
Chairman and President
1
<PAGE>
Pioneer Interest Shares
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PORTFOLIO SUMMARY 12/31/96
Portfolio Quality
- - ----------------------------------------------------------------
(As a percentage of total investment portfolio)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Pioneer Interest Shares
<S> <C>
Portfolio Quality
U.S. Treasury/Agency 1%
AAA* 11%
AA 5%
A 16%
BBB 50%
BB 13%
B 4%
</TABLE>
*Includes 1% commercial paper
Portfolio Maturity
- - ----------------------------------------------------------------
(Effective life as a percentage of total investment portfolio)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Pioneer Interest Shares
<S> <C>
Portfolio Maturity
0-2 years 22%
2-5 years 30%
5-7 years 13%
7-10 years 6%
10-20 years 15%
20+ years 14%
</TABLE>
10 Largest Holdings
- - ----------------------------------------------------------------
(As a percentage of long-term holdings)
<TABLE>
<S> <C> <C>
---------------------------------------------------------------------
1. Rural Electric Cooperative (Deseret), 10.11%, 2017 5.70%
2. USX Corp., 9.375%, 2012 4.48
---------------------------------------------------------------------
3. Hydro-Quebec, 9.75%, 2018 4.70
4. BP America, Inc., 10.0%, 2018 4.59
---------------------------------------------------------------------
5. Big Rivers Electric Cooperative, 10.7%, 2017 4.56
6. News America Holdings, Inc., 10.125%, 2012 3.62
---------------------------------------------------------------------
7. Georgia Pacific Corp., 9.875%, 2021 3.53
8. NorAm Energy Corp., 10.0%, 2019 3.52
---------------------------------------------------------------------
9. Delta Air Lines, Inc., 9.20%, 2014 3.49
10. Time Warner, Inc., 9.15%, 2023 3.42
</TABLE>
Fund holdings will vary for other periods.
2
<PAGE>
Pioneer Interest Shares
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PERFORMANCE UPDATE 12/31/96
Share Prices and Distributions
- - ----------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Net Asset Value
per Share 12/31/96 12/31/95
$13.40 $13.67
Market Price
per Share $12.875 $13.500
Distributions per Share Income Short-Term Long-Term
(12/31/95-12/31/96) Dividends Capital Gains Capital Gains
$1.05 - -
</TABLE>
Investment Returns
- - ----------------------------------------------------------------
The mountain chart on the right shows the growth of a $10,000 investment
made in Pioneer Interest Shares, compared to the growth of the Lehman
Brothers Government/Corporate Bond Index.
<TABLE>
<CAPTION>
<S> <C> <C>
-
Average Annual Total
Returns*
(As of December 31, 1996)
Net
Asset Market
Period Value Price
10 Years 8.76% 6.55%
5 Years 7.35 6.34
1 Year 6.15 3.27
----------------------------
</TABLE>
* When net asset value (NAV) is lower than market price, dividends are
assumed to be reinvested at the greater of NAV or 95% of the market price.
When NAV is higher, dividends are assumed to be reinvested at market
price.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Lehman Brothers
<S> <C> <C>
Pioneer Interest Government/Corporate
Shares* Bond Index
12/31/86 10000 10,000
12/31/87 9366 10,230
12/31/88 10005 11,007
12/31/89 11169 12,574
12/31/90 11278 13,614
12/31/91 13868 15,806
12/31/92 15566 17,004
12/31/93 15822 18,884
12/31/94 14637 18,221
12/31/95 18263 21,729
12/31/96 18861 22,356
</TABLE>
The Lehman Brothers Government/Corporate Bond Index is an unmanaged,
composite index of the U.S. bond market. It contains Treasury and
government agency securities, investment-grade corporate bonds and Yankee
bonds. Index returns assume reinvestment of dividends and, unlike Fund
returns, do not reflect any fees, expenses or sales charges. You cannot
invest directly in the Index.
3
<PAGE>
Pioneer Interest Shares
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PORTFOLIO MANAGEMENT DISCUSSION 12/31/96
Dear Shareowner,
- - ----------------------------------------------------------------
We are pleased to update you on Pioneer Interest Shares' progress over the
year ended December 31, 1996. The bond market, coming off a strong year in
1995, faltered in early 1996 and then regained some ground as the year
progressed. Volatility increased as investors were alternately pleased and
disheartened by expectations for economic growth and inflation. Even in this
fast-changing environment, the Fund provided an attractive level of current
income by investing primarily in investment-grade bonds (those securities
rated BBB or better by Standard & Poor's Corp. or Moody's Investors
Service). Importantly, shareowners enjoyed a solid, positive total return
for the year.
Fast-Changing, Emotional Bond Market
Financial markets overall ended higher on December 31 than where they stood
when we last reported to you on June 30. Volatility was an issue throughout
the year, and some significant price swings were recorded by both stocks and
bonds - particularly during February, July and December. The declines in
December primarily stemmed from investors' unfavorable reaction to Federal
Reserve Chairman Greenspan's comments on the stock market's "irrational
exuberance," and the implied potential for an increase in interest rates.
In fact, most of the volatility we witnessed in 1996 was the result of
perceptions and emotions. Many investors tried to anticipate the Federal
Reserve's attitude about the economy, or whether it would raise or lower
short-term interest rates. As it turned out, the Fed made no changes to
interest rates after it reduced short-term rates by 0.25% on January 31,
1996. Reflecting the up-and-down pattern of the year, the yield on the
benchmark 30-year Treasury bond was 6.64% on December 31, 1996, versus 5.95%
one year earlier, after having hit a high for the period of 7.19% on July 5,
1996.
Your Fund's market price is another reflection of investor perceptions.
Because your Fund is a "closed end" fund, the actual value of the securities
it owns - its net asset value, or NAV - may be more or less
4
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
than is reflected in the market price of Fund shares on any given trading
day. At the end of the year, the Fund's NAV was $13.40 per share and its
market value was $12.875. In other words, the Fund was trading at a 3.9%
"discount" compared to the value of the securities in the Fund's portfolio.
At year-end, the Fund provided a yield of 7.46% based on market price and
7.16% based on net asset value.
Flexible Investment Strategy
While Treasury and other high-quality investments proved rewarding, they did
not match the performance of many lower-quality securities. With the economy
doing well and stock prices on the rise, many investors became more
aggressive, selecting lower-quality bonds. Because your Fund's portfolio is
flexible, it participated in this trend with about 20% of the portfolio
allocated to bonds rated below investment-grade. Make no mistake, however.
We do not "chase yield." Rather, we look at a bond's ability to contribute
to the Fund's total return, and we are very demanding when evaluating
potential reward against potential risk. As a result, the bulk of the Fund's
"high-yield" bonds are rated BB, and the average quality rating of the
securities in the portfolio is BBB.
Industrial issues stayed the most prominent within the portfolio's corporate
holdings, although we kept the Fund diversified across a variety of sectors.
We also mixed well-known, proven companies such as CATERPILLAR with those we
viewed as candidates for a ratings upgrade. Names in the latter category
include FREEPORT MCMORAN and VIACOM. When possible, we added "non-callable"
bonds to the portfolio that cannot be redeemed, or "called," early by their
issuers. Non-callable bonds help us manage the Fund's income stream and lock
in the potential for gains when interest rates are falling.
We adjusted the portfolio, trying to turn the volatility in bond prices to
the Fund's advantage. We continued to favor issues in the two-to-five year
range (currently 30% of the portfolio) since they generated more income than
their shorter-term counterparts, while still contributing to overall price
stability. Securities with fewer than five years to maturity comprised 52%
of the portfolio at the end of 1996, up from 43% a year ago. Periodically,
we used Treasury securities as a parking place for
5
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION 12/31/96 (CONTINUED)
money earmarked for corporate bonds, a strategy that provided income and the
opportunity to take advantage of short-term price declines. The Fund's
duration (which reflects the sensitivity of bond prices to changes in
interest rates) decreased slightly over the year to 5.06 years, reflecting
our conservative outlook for the bond market.
Moving Forward
As we look into 1997, we are encouraged by factors that affect bond
investing. Namely, we believe inflation will remain tame since signs of an
accelerated economy are, in our view, simply not apparent. The economy has
shown sustainable and good growth, without "over-heating" - an important
difference. The budget deficit is improving, and there are ongoing efforts
to achieve a balanced federal budget. We also expect that investors -
especially those who asset allocate - may look to rebalance their portfolios
with more bond investments, given the appreciation that stocks experienced
during the past year.
As more investors realize the actual state of the economy and inflation,
they may become less emotional, which could help lower the volatility we saw
in the bond market in 1996. Of course, whatever factors come into play, our
primary focus for your Fund remains unchanged: we will utilize the Fund's
flexibility in our pursuit of a steady stream of income. It is times like
these when many investors must summon the discipline to take a long-term
view. We already believe it is the best way to overcome volatility and
pursue financial goals.
Respectfully,
/s/ Sherman B. Russ
Sherman B. Russ,
Portfolio Manager
6
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
SCHEDULE OF INVESTMENTS 12/31/96
<TABLE>
<CAPTION>
S&P/Moody's
Principal Ratings
Amount (unaudited) Value
<C> <S> <C> <C>
INVESTMENT IN SECURITIES - 98.9%
Industrials - 70.1%
$2,000,000 BB+/Baa3 AMR Corp., 9.88%, 2020 $ 2,458,440
2,000,000 BBB-/Baa3 Boise Cascade Corp., 9.9%, 2000 2,127,380
2,000,000 BBB/Baa1 Bowater, Inc., 9.375%, 2021 2,390,880
4,000,000 AA/Aa2 BP America, Inc., 10.0%, 2018 4,363,480
2,000,000 A/A2 Caterpillar, Inc., 9.75%, 2019 2,191,820
2,000,000 A-/A3 Chrysler Corp., 10.95%, 2017 2,156,080
3,000,000 BBB/Baa1 Delta Air Lines, Inc., 9.2%, 2014 3,320,100
2,000,000 A-/Baa1 Federal Paper Board Co., 10.0%, 2011 2,476,680
1,000,000 BB+/Ba2 Freeport McMoRan, Inc., 8.75%, 2004 1,037,500
3,000,000 BBB-/Baa2 Georgia Pacific Corp., 9.875%, 2021 3,353,430
2,000,000 BB-/Ba3 Gulf Canada Resources, Ltd., 9.625%, 2005 2,165,000
1,000,000 BBB/Baa2 IMC Global, Inc., 9.45%, 2011 1,200,000
2,000,000 BBB/Baa2 Joy Technologies, Inc., 10.25%, 2003 2,205,000
2,000,000 BBB+/Baa2 Kansas City Southern Industries, Inc., 8.8%,
2022 2,111,240
2,000,000 BBB/Baa2 M.A. Hanna Co., 9.375%, 2003 2,202,700
3,000,000 BBB/Baa3 News America Holdings, Inc., 10.125%, 2012 3,440,430
2,000,000 A-/A3 Phillips Petroleum Co., 9.18%, 2021 2,201,880
2,000,000 BBB/Baa2 Shopko Stores, Inc., 9.25%, 2022 1,940,000
3,000,000 BB-/B1 Stone Container Corp., 10.75%, 2002 3,161,250
2,500,000 BBB-/Ba1 Tele-Communications, Inc., 9.25%, 2023 2,429,875
1,000,000 BBB-/Ba1 Tele-Communications, Inc., 8.75%, 2023 937,590
2,500,000 B+/Ba3 Tenet Healthcare Corp., 10.125%, 2005 2,768,750
3,000,000 BBB-/Ba1 Time Warner, Inc., 9.15%, 2023 3,251,970
1,500,000 B+/B1 Unisys Corp., 15.0%, 1997 1,567,500
4,000,000 BBB-/Baa3 USX Corp., 9.375%, 2012 4,641,560
2,000,000 BB-/B1 Viacom International, Inc., 10.25%, 2001 2,180,000
2,000,000 B/NR Weirton Steel Corp., 11.375%, 2004 2,030,000
1,000,000 BB/Ba1 Westinghouse Electric Corp., 8.625%, 2012 1,005,160
-----------
Total Industrials $67,315,695
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements. 7
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
SCHEDULE OF INVESTMENTS 12/31/96 (CONTINUED)
<TABLE>
<CAPTION>
S&P/Moody's
Principal Ratings
Amount (unaudited) Value
<C> <S> <C> <C>
Utilities - 23.1%
Electric Utilities - 14.7%
$4,000,000 NR/Aaa Big Rivers Electric Cooperative, 10.7%, 2017 $ 4,330,520
2,000,000 BBB/Baa2 Commonwealth Edison Co., 9.75%, 2020 2,214,040
5,000,000 AAA/Aaa Rural Electric Cooperative (Deseret), 10.11%,
2017 5,414,350
2,000,000 A/A2 Virginia Electric Power, 8.75%, 2021 2,144,060
-----------
Total Electric Utilities $14,102,970
-----------
Gas Utilities - 8.4%
2,000,000 BB+/Baa3 Coastal Corp., 9.625%, 2012 $ 2,384,820
2,000,000 BBB-/Baa2 Colorado Interstate Gas Co., 10.0%, 2005 2,360,340
3,000,000 BBB/Baa3 NorAm Energy Corp., 10.0%, 2019 3,341,880
-----------
Total Gas Utilities $ 8,087,040
-----------
Total Utilities $22,190,010
-----------
U.S. Government Obligations - 1.1%
1,000,000 U.S. Treasury Notes, 8.75%, 2000 $ 1,083,750
-----------
Total U.S. Government Obligations $ 1,083,750
-----------
Foreign Government and Government Sponsored - 4.6%
4,000,000 A+/A2 Hydro-Quebec, 9.75%, 2018 $ 4,470,720
-----------
Total Foreign Government and Government
Sponsored $ 4,470,720
-----------
TOTAL INVESTMENT IN SECURITIES
(Cost $91,558,533) $95,060,175
-----------
TEMPORARY CASH INVESTMENT - 1.1%
Commercial Paper - 1.1%
1,026,000 Household Finance Corp., 6.55%, 01/02/97 $ 1,026,000
-----------
TOTAL TEMPORARY CASH INVESTMENT
(Cost $1,026,000) $ 1,026,000
-----------
TOTAL INVESTMENT IN SECURITIES AND TEMPORARY
CASH INVESTMENT - 100%
(Cost $92,584,533) (a) (b) $96,086,175
-----------
</TABLE>
8 The accompanying notes are an integral part of these financial statements.
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
NR Not rated.
(a) At December 31, 1996, the net unrealized gain on investments
based on cost for federal income tax purposes of $92,584,533
was as follows:
Aggregate gross unrealized gain for all investments in which
there is an excess of value over tax cost $3,887,577
Aggregate gross unrealized loss for all investments in which
there is an excess of tax cost over value (385,935)
----------
Net unrealized gain $3,501,642
----------
(b) At December 31, 1996, the Fund had a capital loss carryforward
of $10,114,083 which will expire between 1997 and 2004 if not
utilized.
Purchases and sales of securities (excluding temporary cash investments) for
the year ended December 31, 1996 were as follows:
Purchases Sales
----------- -----------
Long-term U.S. Government $ 2,048,906 $ 7,104,672
Other Long-term Securities 24,883,209 20,418,353
The accompanying notes are an integral part of these financial statements. 9
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
BALANCE SHEET 12/31/96
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (including temporary cash
investment of $1,026,000) (cost $92,584,533) $ 96,086,175
Cash 41
Interest Receivable 2,479,897
Other 21,830
------------
Total assets $ 98,587,943
------------
LIABILITIES:
Due to affiliates $ 57,488
Accrued expenses 30,107
------------
Total liabilities $ 87,595
------------
NET ASSETS:
Paid-in capital $105,111,943
Accumulated undistributed net investment income 110,710
Accumulated net realized loss on investments (10,223,947)
Net unrealized gain on investments 3,501,642
------------
Total net assets $ 98,500,348
------------
NET ASSET VALUE PER SHARE:
(50,000,000 shares authorized)
7,351,678 fund shares outstanding $ 13.40
------------
</TABLE>
10 The accompanying notes are an integral part of these financial statements.
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED 12/31/96
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 8,769,948
-----------
EXPENSES:
Management fees $ 556,830
Transfer agent fees 146,671
Accounting 54,930
Custodian fees 27,830
Registration fees 13,410
Professional fees 102,849
Printing 19,220
Fees and expenses of nonaffiliated trustees 15,305
Miscellaneous 33,679
-----------
Total expenses $ 970,724
Less fees paid indirectly (10,189)
-----------
Net expenses $ 960,535
-----------
Net investment income $ 7,809,413
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments $ (377,499)
Change in net unrealized gain on investments (1,727,525)
-----------
Net loss on investments $(2,105,024)
-----------
Net increase in net assets resulting from
operations $ 5,704,389
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements. 11
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED 12/31/96 AND 12/31/95
<TABLE>
<CAPTION>
Year Ended Year Ended
FROM OPERATIONS: 12/31/96 12/31/95
<S> <C> <C> <C> <C>
Net investment income $ 7,809,413 $ 7,853,565
Net realized loss on investments (377,499) (2,239,237)
Change in net unrealized gain or loss on investments (1,727,525) 9,716,727
-------------- -------------
Net increase in net assets resulting from operations $ 5,704,389 $ 15,331,055
-------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income
($1.05 and $1.08 per share, respectively) $ (7,698,703) $ (7,856,132)
Tax return of capital
($0.00 and $0.00 per share, respectively) -- (35,747)
-------------- -------------
Total distributions to shareholders $ (7,698,703) $ (7,891,879)
-------------- -------------
FROM FUND SHARE TRANSACTIONS:
Reinvestment of distributions $ 505,266 $ 297,731
-------------- -------------
Net increase (decrease) in net assets $ (1,489,048) $ 7,736,907
-------------- -------------
NET ASSETS:
Beginning of year $ 99,989,396 $ 92,252,489
-------------- -------------
End of year (including accumulated undistributed net investment income of
$110,710 and $0, respectively) $ 98,500,348 $ 99,989,396
-------------- -------------
<CAPTION>
'96 Shares '96 Amount '95 Shares '95 Amount
<S> <C> <C> <C> <C>
Reinvestment of distributions 38,505 $ 505,266 22,993 $297,731
---------- -------------- -------------- -------------
Net increase 38,505 $ 505,266 22,993 $297,731
---------- -------------- -------------- -------------
</TABLE>
12 The accompanying notes are an integral part of these financial statements.
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 12/31/96
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/96 12/31/95 12/31/94 12/31/93(a) 12/31/92
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 13.67 $ 12.65 $ 14.29 $ 14.09 $ 14.15
--------------- ------------ -------------- --------------- --------------
Increase (decrease) from
investment operations:
Net investment income $ 1.07 $ 1.07 $ 1.12 $ 1.11 $ 1.15
Net realized and unrealized
gain (loss) on investments (0.29) 1.03 (1.63) 0.22 (0.06)
--------------- ------------ -------------- --------------- --------------
Net increase (decrease) from
investment operations $ 0.78 $ 2.10 $ (0.51) $ 1.33 $ 1.09
Distributions to shareholders:
Net investment income (1.05) (1.08) (1.13) (1.11) (1.15)
In excess of net investment
income -- -- -- (0.02) --
--------------- ------------ -------------- --------------- --------------
Net increase (decrease) in net
asset value $ (0.27) $ 1.02 $ (1.64) $ 0.20 $ (0.06)
--------------- ------------ -------------- --------------- --------------
Net asset value, end of year $ 13.40 $ 13.67 $ 12.65 $ 14.29 $ 14.09
--------------- ------------ -------------- --------------- --------------
Market Value, end of year $ 12.875 $ 13.500 $ 11.750 $ 13.875 $ 14.750
Total return* 3.27% 24.77% (7.54%) 1.57% 12.24%
Ratio of net expenses to
average net assets 0.99%+ 0.98%+ 1.03% 0.82% 0.82%
Ratio of net investment income
to average net assets 7.94%+ 8.04%+ 8.46% 7.60% 8.20%
Portfolio turnover rate 28% 49% 65% 61% 44%
Net assets, end of year (in
thousands) $ 98,500 $ 99,989 $ 92,252 $ 103,570 $ 100,596
Ratios assuming reduction for
fees paid indirectly:
Net expenses 0.98% 0.97% -- -- --
Net investment income 7.95% 8.05% -- -- --
</TABLE>
(a) Prior to the assumption of the management fee agreement on December 1,
1993 by Pioneering Management Corporation, the Fund was advised by Mutual
of Omaha Fund Management Company.
* Assumes initial investment at market value at the beginning of each
period, reinvestment of distributions, the complete redemption of the
investment at market value at the end of each period.
+ Ratio assuming no reduction for fees paid indirectly.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
NOTES TO FINANCIAL STATEMENTS 12/31/96
1. Organization and Significant Accounting Policies
Pioneer Interest Shares (the Fund), originally a Nebraska corporation, is
registered under the Investment Company Act of 1940 as a diversified,
closed-end management investment company. Effective August 1, 1996, the Fund
was reorganized as a Delaware business trust. The reorganization has no
effect on the Fund's operations. The investment objective of the Fund is to
provide interest income by investing in high quality debt obligations.
The Fund's financial statements have been prepared in conformity with
generally accepted accounting principles that require the management of the
Fund to, among other things, make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The following is a summary
of significant accounting policies consistently followed by the Fund, which
are in conformity with those generally accepted in the investment company
industry:
A. Security Valuation
Security transactions are recorded on trade date. Securities are valued
based on valuations furnished by independent pricing services that utilize
matrix systems. These matrix systems reflect such factors as security
prices, yields, maturities, and ratings, and are supplemented by dealer
and exchange quotations and fair market value information from other
sources, as required. Principal amounts of mortgage-backed securities are
adjusted for monthly paydowns. Premium and discount related to certain
mortgage-backed securities are amortized or accreted in proportion to the
underlying monthly paydowns. Market discount is accreted daily on a
straight-line basis. Interest income is recorded on the accrual basis.
Temporary cash investments are valued at amortized cost.
Gains and losses on sales of investments are calculated on the identified
cost method for both financial reporting and federal income tax purposes.
It is the Fund's practice to first select for sale those securities that
have the highest cost and also qualify for long-term capital gain or loss
treatment for tax purposes.
14
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
B. Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income and net realized capital gains, if
any, to its shareholders. Therefore, no federal income tax provision is
required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax
rules. Therefore, the source of the Fund's distributions may be shown in
the accompanying financial statements as either from or in excess of net
investment income or net realized gain on investment transactions, or from
paid-in capital, depending on the type of book/ tax differences that may
exist.
C. Dividend and Distribution Reinvestment Plan
All shareholders of the Fund are eligible to participate in the Dividend
and Distribution Reinvestment Plan (the Plan). Under the Plan,
participants will receive all dividends and distributions in full and
fractional shares of the Fund in lieu of cash when shares are trading at
or above net asset value. When shares are trading below net asset value,
dividends and distributions will be paid in cash. When the Fund declares
dividends or distributions, the number of shares to be credited to a
participant's account or the cash to be distributed to a participant,
determined as of the close of business of the New York Stock Exchange
(Exchange) on the Dividend Valuation Date, is computed as follows: (a) If
the last sales price of shares of the capital stock of the Fund is at or
above net asset value, the Fund will issue new full and fractional shares
(computed to three decimals) of capital stock at the greater of net asset
value or 95% of such last sales price, to be credited to the participant's
account; or (b) if the last sales price of shares of the capital stock of
the Fund is below the net asset value, the Agent will distribute the
dividends or distributions to the participant in cash. There are no
brokerage or service fees chargeable to participants in the Plan; however,
this Plan may be amended in the future to impose a service charge.
Participating in the Plan does not relieve shareholders from any federal,
state or local taxes which may be due on dividends and distributions paid
in any taxable year. Dividends and distributions to shareholders are
recorded as of the Dividend Valuation Date.
15
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
NOTES TO FINANCIAL STATEMENTS 12/31/96 (CONTINUED)
2. Management Agreement
Pioneering Management Corportation (PMC), the Fund's investment adviser,
manages the Fund's portfolio and is a wholly owned subsidiary of The Pioneer
Group, Inc. (PGI). Management fees are calculated daily at the annual rate
of 0.625% of the Fund's average daily net assets up to $50 million and 0.50%
of the excess over $50 million.
In addition, under the management agreement, certain other services and
costs, including accounting, regulatory reporting, and insurance premiums,
are paid by the Fund. At December 31, 1996, $53,869 was payable to PMC
related to management fees and certain other services.
3. Transfer Agent
Pioneering Services Corporation (PSC), a wholly owned subsidiary of PGI,
through a sub-transfer agency agreement with Chemical Mellon Shareholder
Services, provides substantially all transfer agent and shareholder services
to the Fund at negotiated rates. Included in due to affiliates is $3,619 in
transfer agent fees payable to PSC at December 31, 1996.
4. Expense Reductions
The Fund has entered into certain expense offset arrangements resulting in a
reduction in the Fund's total expenses. For the year ended December 31,
1996, the Fund's expenses were reduced by $10,189 under such arrangements.
16
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders and the Board of Trustees of
Pioneer Interest Shares:
We have audited the accompanying balance sheet of Pioneer Interest Shares,
including the schedule of investments, as of December 31, 1996, and the
related statement of operations, and the statements of changes in net assets
for the periods presented and financial highlights for each of the three
years ended December 31, 1996. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each
of the two years ended December 31, 1993 were audited by other auditors
whose report dated February 22, 1994 expressed an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Pioneer Interest Shares as of December 31, 1996, the results of its
operations, and the changes in its net assets for the periods presented and
financial highlights for each of the three years ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 3, 1997
17
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
TAX TREATMENT OF DISTRIBUTIONS
MADE DURING THE YEAR ENDED 12/31/96
During the year ended December 31, 1996, Pioneer Interest Shares paid the
following distributions per share:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Net
Record Payment Investment
Date Date Income
<S> <C> <C>
3/14/96 3/29/96 $ 0.270
6/13/96 6/28/96 0.270
9/19/96 9/30/96 0.270
12/19/96 12/31/96 0.240
-------
Total $ 1.050
=======
</TABLE>
For purposes of the dividend exclusion, none of the distributions per share
qualify for the exclusion.
18
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
TRUSTEES' FEES AND SHARE OWNERSHIP 12/31/96
Trustees' Fees, Principal Shareholders, and Share
Ownership of Trustees and Officers (unaudited)
The aggregate direct remuneration paid by the Fund to trustees and officers
during the year ended December 31, 1996 was $12,908, plus expenses incurred in
attending trustees meetings of $3,469. Fees of trustees who are affiliated with
or "interested persons" of Pioneering Management Corporation and Pioneer Funds
Distributor, Inc., investment adviser and principal underwriter, respectively,
of the Fund ($1,000 in 1996), are reimbursed to the Fund by Pioneering
Management Corporation in accordance with the management contract with the Fund.
19
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
RESULTS OF SHAREOWNER MEETING
On June 20, 1996, Pioneer Interest Shares, Inc. held a special meeting of
shareowners. (Voting on Proposal 2 was adjourned to July 9, 1996.) All
proposals were passed by shareowner vote. Following are the detailed results
of the vote for each Proposal presented.
Proposal 1 -- Reelect eight Directors to serve on the Board of Directors.
<TABLE>
<CAPTION>
Directors Affirmative Withheld
<S> <C> <C>
John F. Cogan, Jr. 6,218,194 165,870
Richard H. Egdahl, M.D. 6,154,341 229,723
Margaret B.W. Graham 6,165,322 218,742
John W. Kendrick 6,196,927 187,137
Marguerite A. Piret 6,212,425 171,639
David D. Tripple 6,213,378 170,686
Stephen K. West 6,213,542 170,522
John Winthrop 6,211,112 172,952
</TABLE>
Proposal 2 -- Approve an agreement and Plan of Reorganization to reorganize
the Fund as a Delaware business trust.
<TABLE>
<CAPTION>
Affirmative Against Abstain
<S> <C> <C>
4,950,572 307,637 236,831
</TABLE>
Proposal 3 -- Ratify the selection of Arthur Andersen LLP as the Fund's
independent public accountants for the fiscal year ending December 31, 1996.
<TABLE>
<CAPTION>
Affirmative Against Abstain
<S> <C> <C>
6,226,608 59,247 98,209
</TABLE>
20
<PAGE>
Pioneer Interest Shares
- - ------------------------------------------
TRUSTEES, OFFICERS AND SERVICE PROVIDERS
Trustees Officers
John F. Cogan, Jr. John F. Cogan, Jr., Chairman and
Richard H. Egdahl, M.D. President
Margaret B.W. Graham David D. Tripple, Executive Vice President
John W. Kendrick Sherman B. Russ, Vice President
Marguerite A. Piret William H. Keough, Treasurer
David D. Tripple Joseph P. Barri, Secretary
Stephen K. West
John Winthrop
Investment Adviser
Pioneering Management Corporation
Custodian
Brown Brothers Harriman & Co.
Independent Public Accountants
Arthur Andersen LLP
Principal Underwriter
Pioneer Funds Distributor, Inc.
Legal Counsel
Hale and Dorr LLP
Transfer Agent
Pioneering Services Corporation
Shareholder Services and Sub-Transfer Agent
ChaseMellon Shareholder Services
21
<PAGE>
- - ------------------------------------------
HOW TO CONTACT CHASEMELLON
We are pleased to offer a variety of convenient ways for you to contact
ChaseMellon for assistance or information.
<TABLE>
<S> <C>
You can call ChaseMellon Shareholder Services for:
Account information 1-800-288-9541
Telecommunications Device for the
Deaf (TDD) 1-800-231-5469
Or write to ChaseMellon Shareholder Services:
For: At:
General inquiries, lost dividend P.O. Box 590
checks, change of address, account Ridgefield Park, NJ
consolidation 07660
Lost stock certificates P.O. Box 467
Washington Bridge
Station
New York, NY 10033
Stock transfer P.O. Box 469
Washington Bridge
Station
New York, NY 10033
Dividend reinvestment plan (DRIP) P.O. Box 750
Pittsburgh, PA 15230
</TABLE>
Pioneer Interest Shares 0297-3939
---- 60 State Street -C- Pioneer Funds Distributor, Inc.
LOGO Boston, Massachusetts 02109 M Printed on Recycled Paper
----
