[PIONEER LOGO]
Pioneer
Interest Shares
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ANNUAL REPORT 12/31/97
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Table of Contents
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Letter from the Chairman 1
Portfolio Summary 2
Performance Update 3
Portfolio Management Discussion 4
Schedule of Investments 7
Financial Statements 11
Notes to Financial Statements 15
Report of Independent Public Accountants 18
Results of Shareowner Meeting 19
Trustees, Officers and Service Providers 20
The Pioneer Family of Mutual Funds 21
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Pioneer Interest Shares
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LETTER FROM THE CHAIRMAN 12/31/97
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Dear Shareowner,
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I am pleased to present this report for Pioneer Interest Shares, covering its
fiscal year ended December 31, 1997. On behalf of the Fund's investment team, I
thank you for your interest and this opportunity to comment briefly on today's
investing environment.
Since October, investors have shown increasing demand for U.S. bonds, as the
world's stock markets have been exceptionally volatile. Asian markets plunged in
the face of severe instability in currencies and economic growth. Here in the
United States, the Dow Jones Industrial Average experienced - in the space of
two days - both its biggest one-day point drop and its biggest one-day point
gain. Although it recovered, its pace has since been unsteady. European markets
bounced around, shaken by the drop in Asia and then heartened by the speedy U.S.
rebound. Even Latin American markets were affected, mostly in a chain reaction
from nervous investors.
After consecutive quarters of robust growth in stocks, this fast-paced change
forced individuals and institutions to rethink their investment strategy. Money
has poured into the bond market, driving prices up and yields down - to record
levels in the case of the 30-year U.S. Treasury bond. Many investors have moved
away from stocks and into U.S. fixed-income securities - like those held by your
Fund - to shelter their portfolio. We have always believed it is important to
allocate assets among both stocks and bonds, and recent market conditions
demonstrate this importance.
I encourage you to read on to learn more about your Fund. Please contact your
investment professional, or Pioneer at 1-800-225-6292, if you have questions
about Pioneer Interest Shares.
Respectfully,
/s/ John F. Cogan
John F. Cogan, Jr.,
Chairman and President
1
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Pioneer Interest Shares
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PORTFOLIO SUMMARY 12/31/97
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Portfolio Quality
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(As a percentage of total investment portfolio)
[The following table was originally a pie chart in the printed materials.]
Treasury/Agency 8%
AAA 10%
AA 4%
A 11%
BBB 45%
BB 11%
B 9%
Short-Term Cash Equivalents 2%
Portfolio Maturity
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(Effective life as a percentage of long-term holdings)
[The following table was originally a pie chart in the printed materials.]
0-2 Years 21%
2-5 Years 29%
5-7 Years 18%
7-10 Years 12%
10-20 Years 9%
20+ Years 11%
10 Largest Holdings
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(As a percentage of long-term holdings)
1. Rural Electric Cooperative (Deseret), 10.11%, 2017 5.48%
2. Hydro-Quebec, 9.75%, 2018 4.72
3. BP America, Inc., 10.0%, 2018 4.44
4. Big Rivers Electric Cooperative, 10.7%, 2017 4.41
5. Tele-Communications, Inc., 9.25%, 2023 4.12
6. Time Warner, Inc., 9.15%, 2023 3.85
7. Delta Air Lines, Inc., 9.2%, 2014 3.75
8. News America Holdings, Inc., 10.125%, 2012 3.64
9. Georgia Pacific Corp., 9.875%, 2021 3.55
10. USX Corp., 9.375%, 2012 3.27
Fund holdings will vary for other periods.
2
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Pioneer Interest Shares
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PERFORMANCE UPDATE 12/31/97
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Share Prices and Distributions
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Net Asset Value
per Share 12/31/97 12/31/96
$13.74 $13.40
Market Price
per Share 12/31/97 12/31/96
$14.000 $12.875
Distributions per Share Income Short-Term Long-Term
(12/31/96 - 12/31/97) Dividends Capital Gains Capital Gains
$1.080 -- --
Investment Returns
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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.
[boxed text]
Average Annual Total Returns*
(As of December 31, 1997)
Net Asset Market
Period Value Price
10 Years 9.33% 9.03%
5 Years 7.96 7.38
1 Year 11.11 17.83
* 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.
[The following table was originally a mountain chart in the printed materials.]
Growth of $10,000
Lehman Brothers
Government/
Pioneer Interest Corporate Bond
Shares* Index
- -------------------------------------------------------
12/31/87 10,000 10,000
10,682 10,758
12/31/89 11,925 12,290
12,042 13,307
12/31/91 14,807 15,453
16,620 16,625
12/31/93 16,894 18,459
15,628 17,811
12/31/95 19,500 21,238
20,138 21,861
12/31/97 23,728 23,993
The Lehman Brothers Government/Corporate Bond Index is an unmanaged measure of
the U.S. bond market. It contains Treasury and government agency securities,
investment-grade corporate bonds and Yankee bonds. Index returns are calculated
monthly, 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
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Pioneer Interest Shares
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PORTFOLIO MANAGEMENT DISCUSSION 12/31/97
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Pioneer Interest Shares closed its fiscal year on December 31, 1997. Over the
past 12 months, U.S. bonds rewarded investors with attractive total returns.
Demand for fixed-income securities fueled a rally that sent interest rates
dramatically lower and bond prices significantly higher.
The following discussion with Sherman B. Russ, your Fund's portfolio manager,
provides a detailed account of the investment environment and strategies that
influenced your Fund's performance over the past year, as well as his
expectations for 1998. An investment professional for more than 20 years, Mr.
Russ oversees the team that is responsible for the daily management of Pioneer
Interest Shares.
Q: How did the Fund perform over the past 12 months?
A: We were pleased with the Fund's performance. In addition to providing an
attractive level of current income, Pioneer Interest Shares generated a
solid total return. The Fund paid dividends of $0.27 per share each quarter,
for a total of $1.08 per share over the year.
Pioneer Interest Shares is a "closed-end" fund. The actual value of the
securities it owns - its net asset value (NAV) - may be more or less than is
reflected in the market price of Fund shares on any given trading day. As of
December 31, 1997, the Fund's NAV was $13.74 per share. Because its market
value was $14.00 per share, the Fund was trading at a 1.9% "premium"
compared to the value of the securities in its portfolio. On the same date,
the Fund provided a dividend yield of 7.71%, based on market price and 7.86%
based on NAV.
For the 12 months ended December 31, 1997, the Fund generated a total return
of 17.83% at market price and 11.11% at NAV. These figures assume
reinvestment of all dividends. For the same period, the Lehman Brothers
Government/Corporate Bond Index returned 9.75%. We attribute the Fund's
strong performance to its emphasis on lower-rated high-yield bonds, the
top-performing asset class in the U.S. fixed-income market over the past
year.
Q: What was the environment like for bonds this year?
A: Extremely favorable for most of the year. After rising early on, interest
rates fell, causing bond prices to rise considerably. The yield of the
4
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Pioneer Interest Shares
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benchmark 30-year U.S. Treasury bond peaked at 7.17% in April 1997 and later
declined to a four-year low of 5.87% in December 1997.
Several factors created the positive environment for bonds: moderate to
strong economic growth with minimal inflation, a declining federal budget
deficit and strong foreign demand. An increasing number of investors be-came
convinced that worldwide improvements in productivity and technology would
allow the economy to continue to grow with minimal inflation.
Throughout most of the year, demand was strong, particularly from overseas
investors. In the fourth quarter, especially, upheaval in Asia prompted
investors to seek a safe haven. This "flight to quality" translated into
greater demand for U.S. government securities, causing interest rates to
fall to levels of historical significance.
The rally marked a dramatic change from the early part of 1997. Then,
interest rates rose - and bond prices fell - on investors' expectations that
stronger economic growth would rekindle inflation. The Federal Reserve
affirmed those expectations when it raised the federal funds rate - the rate
at which banks lend to each other overnight and the benchmark for short-term
interest rates - from 5.25% to 5.50% in March 1997.
Q: What strategies did you use to manage the Fund?
A: We emphasized the Fund's ability to invest in lower-rated high-yield bonds.
High-yield credit selection was an important part of our port folio strategy
throughout 1997. At the end of the year, the Fund's average quality was BBB.
High-yield bonds generated the highest returns among U.S. fixed-income
sectors this year. Economic strength helped companies generate higher
profits and beef up their balance sheets. These improvements boosted the
prices of high-yield bonds even more than changes in interest rates.
Further, investors seeking higher yields while interest rates fell were
comfortable taking on additional credit risk, given the healthy economy.
In this environment, the prices of lower-rated bonds rose more than those of
higher-rated bonds. Demand was so strong that the addi-
5
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Pioneer Interest Shares
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PORTFOLIO MANAGEMENT DISCUSSION 12/31/97 (continued)
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tional yield lower-rated bonds provided compared to their higher-quality
counterparts fell to historically low levels. We selected issues that
provided high current yield and that, in our opinion, had the potential for
attractive price appreciation.
We also adjusted the Fund's maturity profile. This tactic influenced
performance in the early part of the year when interest rates reversed
course. We shortened the Fund's average effective maturity when interest
rates were rising, and lengthened it when we expected interest rates to
fall. Effective maturity reflects the time left until a bond matures or can
be called on demand by the issuer, whichever is sooner. This strategy
protected capital when interest rates rose and increased total return when
interest rates declined. As of December 31, the Fund's effective average
maturity was a medium-range 7.17 years.
Q: What is your outlook for the next six months?
A: We are optimistic that many of the positive trends we witnessed over the
past 12 months may continue. But we also recognize that the financial crisis
in Asia - and the degree to which it will affect the U.S. economy - is still
unknown. We expect inflation to remain low and the federal budget deficit to
continue to shrink. Further, while many factors point to steady economic
activity - such as brisk employment growth and high consumer confidence - we
believe a slowdown in Asia could reduce U.S. economic growth from
approximately 3% to 2% per year and lower inflation by 1%.
This potential for slower economic growth, as well as the current
relationships between yields of higher-quality and lower-quality bonds,
makes us somewhat cautious regarding the high-yield sector. We will continue
to actively review and manage the portfolio. With the credit-driven returns
that are typical of that sector, however, we are confident that
opportunities for price appreciation and attractive current income will
continue to exist, providing investors with solid performance results.
6
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Pioneer Interest Shares
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SCHEDULE OF INVESTMENTS 12/31/97
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<TABLE>
<CAPTION>
S&P/Moody's
Principal Ratings
Amount (unaudited) Value
<S> <C> <C> <C>
INVESTMENT IN SECURITIES - 98.0%
Basic Materials - 18.7%
Chemicals - 2.4%
$2,000,000 BBB/Baa2 Hanna (M.A.) Co., 9.375%, 2003 $ 2,281,820
------------
Construction - 1.7%
1,500,000 BB-/B1 Southdown, Inc., 10.0%, 2006 $ 1,665,000
------------
Iron & Steel - 5.3%
2,500,000 BBB-/Baa3 USX Corp., 9.375%, 2012 $ 3,128,975
2,000,000 B/B2 Weirton Steel Corp., 11.375%, 2004 2,085,000
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$ 5,213,975
Paper & Forest Products - 9.3%
2,000,000 BB+/Baa3 Boise Cascade Corp., 9.9%, 2000 $ 2,144,380
2,000,000 BBB/Baa1 Bowater, Inc., 9.375%, 2021 2,510,280
3,000,000 BBB-/Baa2 Georgia Pacific Corp., 9.875%, 2021 3,402,210
1,000,000 B+/B1 Stone Container Corp., 10.75%, 2002 1,042,500
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$ 9,099,370
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Total Basic Materials $ 18,260,165
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Capital Goods - 3.5%
Machinery 2.2%
2,000,000 A+/A2 Caterpillar, Inc., 9.75%, 2019 $ 2,178,000
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Waste Management - 1.3%
1,200,000 B/B2 Amresco, Inc., 10.0%, 2004 $ 1,242,000
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Total Capital Goods $ 3,420,000
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Communication Services - 1.6%
1,500,000 BB+/Ba3 Comcast Cellulare, 9.50%, 2007 $ 1,567,500
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Total Communication Services $ 1,567,500
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Consumer Cyclicals - 1.8%
Retail - 1.8%
1,500,000 BBB/Baa3 Shopko Stores, Inc., 9.25%, 2022 $ 1,799,445
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Total Consumer Cyclicals $ 1,799,445
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</TABLE>
The accompanying footnotes are an integral part of these financial statements.
7
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Pioneer Interest Shares
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SCHEDULE OF INVESTMENTS 12/31/97 (continued)
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<TABLE>
<CAPTION>
S&P/Moody's
Principal Ratings
Amount (unaudited) Value
<S> <C> <C> <C>
Consumer Staples - 18.8%
Broadcasting - 16.7%
$2,500,000 BBB+/Baa2 Continental Cablevision, Inc.,
9.5%, 2013 $ 2,967,825
3,000,000 BBB+/Baa3 News America Holdings, Inc.,
10.125%, 2012 3,490,950
3,500,000 BBB-/Ba1 Tele-Communications, Inc., 9.25%, 2023 3,950,905
3,000,000 BBB-/Ba1 Time Warner, Inc., 9.15%, 2023 3,692,250
2,000,000 BB-/B1 Viacom International, Inc., 10.25%, 2001 2,180,000
------------
$ 16,281,930
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Distributors (Food & Health) - 2.1%
2,000,000 B-/B3 Ameriserv Food Distributors,
10.125%, 2007 $ 2,100,000
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Total Consumer Staples $ 18,381,930
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Energy - 9.6%
Oil & Gas - 9.6%
4,000,000 AA/Aa2 BP America, Inc., 10.0%, 2018 $ 4,255,680
2,700,000 BB-/Ba2 Gulf Canada Resources, Ltd., 9.625%, 2005 2,919,969
2,000,000 A-/A3 Phillips Petroleum Co., 9.18%, 2021 2,242,600
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Total Energy $ 9,418,249
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Financial - 1.0%
1,000,000 B+/B1 Delta Financial, 9.5%, 2004 $ 1,000,000
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Total Financial $ 1,000,000
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Healthcare - 2.8%
2,500,000 BB/Ba1 Tenet Healthcare Corp., 9.625%, 2002 $ 2,693,750
------------
Total Healthcare $ 2,693,750
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Technology - 1.2%
Computers - 1.2%
1,000,000 B+/B1 Unisys Corp., 12.0%, 2003 $ 1,132,500
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Total Technology $ 1,132,500
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Transportation - 9.9%
2,000,000 BBB-/Baa3 AMR Corp., 9.88%, 2020 $ 2,604,020
3,000,000 BBB/BAA1 DELTA AIR LINES, INC., 9.2%, 2014 3,593,040
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
8
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Pioneer Interest Shares
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<TABLE>
<CAPTION>
S&P/Moody's
Principal Ratings
Amount (unaudited) Value
<S> <C> <C> <C>
Transportation - (continued)
$2,000,000 BBB-/Baa2 Kansas City Southern Industries, Inc.,
8.8%, 2022 $ 2,182,920
500,000 BB+/Baa3 United Air Lines, 10.67%, 2004 684,863
515,000 BB+/Baa3 United Air Lines, 10.25%, 2021 601,695
------------
Total Transportation $ 9,666,538
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Utilities - 17.0%
Electric Utilities - 12.0%
4,000,000 AAA/AAA Big Rivers Electric Cooperative,
10.7%, 2017 $ 4,225,680
5,000,000 AAA/AAA Rural Electric Cooperative (Deseret),
10.11%, 2017 5,253,000
2,000,000 A/A2 Virginia Electric and Power Co.,
8.75%, 2021 2,209,880
------------
$ 11,688,560
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Gas Utilities - 5.0%
2,000,000 BBB-/Baa3 Coastal Corp., 9.625%, 2012 $ 2,524,200
2,000,000 BBB-/Baa2 Colorado Interstate Gas Co., 10.0%, 2005 2,412,760
------------
$ 4,936,960
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Total Utilities $ 16,625,520
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Federal National Mortgage
Association - 1.5%
1,328,881 Federal National Mortgage Association,
9.0%, 2019 $ 1,435,324
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Total Federal National Mortgage
Association $ 1,435,324
------------
U.S. Government Obligations - 6.0%
2,500,000 U.S. Treasury Bond, 9.375%, 2006 $ 3,076,075
1,500,000 U.S. Treasury Bond, 9.125%, 2009 1,753,515
1,000,000 U.S. Treasury Notes, 8.75%, 2000 1,073,360
------------
Total U.S. Government Obligations $ 5,902,950
------------
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
9
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Pioneer Interest Shares
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SCHEDULE OF INVESTMENTS 12/31/97 (continued)
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<TABLE>
<CAPTION>
S&P/Moody's
Principal Ratings
Amount (unaudited) Value
<S> <C> <C> <C>
Foreign Government Sponsored - 4.6%
$4,000,000 A+/A2 Hydro-Quebec, 9.75%, 2018 $ 4,527,120
------------
Total Foreign Government Sponsored $ 4,527,120
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TOTAL INVESTMENT IN SECURITIES
(Cost $90,391,804) $ 95,830,991
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TEMPORARY CASH INVESTMENT - 2.0%
Commercial Paper - 2.0%
1,933,000 American Express Co., 6.65%, 01/02/98 $ 1,933,000
------------
TOTAL TEMPORARY CASH INVESTMENT
(Cost $1,933,000) $ 1,933,000
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TOTAL INVESTMENT IN SECURITIES AND
TEMPORARY CASH INVESTMENT - 100%
(Cost $92,324,804) (a) (b) $ 97,763,991
============
</TABLE>
(a) At December 31, 1997, the net unrealized gain on investments
based on cost for federal income tax purposes of $92,324,804
was as follows:
Aggregate gross unrealized gain for all investments in which
there is an excess of value over tax cost $ 5,721,687
Aggregate gross unrealized loss for all investments in which
there is an excess of tax cost over value (282,500)
Net unrealized gain $ 5,439,187
===========
(b) At December 31, 1997, the Fund had a capital loss carryforward of $9,166,084
which will expire between 1998 and 2004 if not utilized.
Purchases and sales of securities (excluding temporary cash investments) for the
year ended December 31, 1997 were as follows:
Purchases Sales
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Long-term U.S. Government $ 6,786,495 $ 599,828
Other Long-term Securities 19,714,887 27,785,790
The accompanying footnotes are an integral part of these financial statements.
10
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Pioneer Interest Shares
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BALANCE SHEET 12/31/97
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ASSETS:
Investment in securities, at value (including temporary cash
investment of $1,933,000) (cost $92,324,804) $ 97,763,991
Cash 1,104,351
Interest receivable 2,398,450
Other 22,583
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Total assets $101,289,375
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LIABILITIES:
Due to affiliates $ 61,713
Accrued expenses 35,818
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Total liabilities $ 97,531
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NET ASSETS:
Paid-in capital $104,918,741
Accumulated net realized loss on investments (9,166,084)
Net unrealized gain on investments 5,439,187
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Total net assets $101,191,844
============
NET ASSET VALUE PER SHARE:
(50,000,000 shares authorized)
7,366,855 fund shares outstanding $ 13.74
============
The accompanying notes are an integral part of these financial statements.
11
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Pioneer Interest Shares
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STATEMENT OF OPERATIONS
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For the Year Ended 12/31/97
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 8,645,187
-----------
Total investment income $ 8,645,187
------------
EXPENSES:
Management fees $ 560,309
Transfer agent fees 97,078
Accounting 56,934
Custodian fees 24,799
Professional fees 45,799
Printing 28,764
Fees and expenses of nonaffiliated trustees 14,902
Miscellaneous 44,230
-----------
Total expenses $ 872,815
Less fees paid indirectly (4,809)
------------
Net expenses $ 868,006
------------
Net investment income $ 7,777,181
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments $ 708,016
Change in net unrealized gain on investments 1,937,545
------------
Net gain on investments $ 2,645,561
------------
Net increase in net assets resulting from operations $ 10,422,742
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
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Pioneer Interest Shares
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STATEMENTS OF CHANGES IN NET ASSETS
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For the Years Ended 12/31/97 and 12/31/96
<TABLE>
<CAPTION>
Year Ended Year Ended
FROM OPERATIONS: 12/31/97 12/31/96
<S> <C> <C>
Net investment income $ 7,777,181 $ 7,809,413
Net realized gain (loss) on investments 708,016 (377,499)
Change in net unrealized gain on investments 1,937,545 (1,727,525)
------------- -------------
Net increase in net assets resulting from operations $ 10,422,742 $ 5,704,389
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($1.07 and $1.05 per
share respectively): $ (7,895,607) $ (7,698,703)
In excess of net investment income
($0.01 and $0.00, respectively) (44,166) --
------------- -------------
Total distributions to shareholders $ (7,939,773) $ (7,698,703)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Reinvestment of distributions $ 208,527 $ 505,266
------------- -------------
Net increase (decrease) in net assets $ 2,691,496 $ (1,489,048)
------------- -------------
NET ASSETS:
Beginning of year 98,500,348 99,989,396
End of year (including accumulated
undistributed net investment income of $0 and
$110,710, respectively) $ 101,191,844 $ 98,500,348
============= =============
</TABLE>
'97 Shares '97 Amount '96 Shares '96 Amount
Reinvestment of distributions 15,177 $ 208,527 38,505 $ 505,266
------ --------- ------ ---------
Net increase 15,177 $ 208,527 38,505 $ 505,266
====== ========= ====== =========
The accompanying notes are an integral part of these financial statements.
13
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Pioneer Interest Shares
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FINANCIAL HIGHLIGHTS 12/31/97
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<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93(a)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.40 $ 13.67 $ 12.65 $ 14.29 $ 14.09
-------- -------- -------- -------- --------
Increase (decrease) from investment operations:
Net investment income $ 1.06 $ 1.07 $ 1.07 $ 1.12 $ 1.11
Net realized and unrealized gain (loss)
on investments 0.36 (0.29) 1.03 (1.63) 0.22
-------- -------- -------- -------- --------
Net increase (decrease) from investment
operations $ 1.42 $ 0.78 $ 2.10 $ (0.51) $ 1.33
Distributions to shareholders:
Net investment income (1.07) (1.05) (1.08) (1.13) (1.11)
In excess of net investment income (0.01) -- -- -- (0.02)
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value $ 0.34 $ (0.27) $ 1.02 $ (1.64) $ 0.20
-------- -------- -------- -------- --------
Net asset value, end of year $ 13.74 $ 13.40 $ 13.67 $ 12.65 $ 14.29
======== ======== ======== ======== ========
Market value, end of year $ 14.000 $ 12.875 $ 13.500 $ 11.750 $ 13.875
Total return* 17.83% 3.27% 24.77% (7.54)% 1.57%
Ratio of net expenses to average net assets 0.87%+ 0.99%+ 0.98%+ 1.03% 0.82%
Ratio of net investment income to average
net assets 7.81%+ 7.94%+ 8.04%+ 8.46% 7.60%
Portfolio turnover rate 27% 28% 49% 65% 61%
Net assets, end of year (in thousands) $101,192 $ 98,500 $ 99,989 $ 92,252 $103,570
Ratios assuming no waiver of management fees
and assumption of expenses by PMC
and no reduction for fees paid indirectly:
Net expenses 0.87% 0.98% 0.97% -- --
Net investment income 7.81% 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 Omaha Fund
Management Company.
* Assumes initial investment at market value at the beginning of each period,
reinvestment of distributions, and the complete redemption of the investment
at market value at the end of each period.
** Annualized.
+ Ratio assuming no reduction for fees paid indirectly.
The accompanying notes are an integral part of these financial statements.
14
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Pioneer Interest Shares
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NOTES TO FINANCIAL STATEMENTS 12/31/97
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1. Organization and Significant Accounting Policies
Pioneer Interest Shares (the Fund) is a Delaware business trust registered under
the Investment Company Acts of 1940 as a diversified, closed-end management
investment company. The investment objective of the Fund is to provide interest
income.
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 an independent pricing service that
utilizes 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.
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NOTES TO FINANCIAL STATEMENTS 12/31/97 (continued)
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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.
At December 31, 1997, the Fund reclassified $51,882 and $349,847 from
paid-in capital to distributions in excess of net investment income and
accumulated net realized loss on investments, respectively. The
reclassification has no impact on the net asset value of the Fund and is
designed to present the Fund's capital accounts on a tax basis.
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
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Pioneer Interest Shares
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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.
2. Management Agreement
Pioneering Management Corporation (PMC), the Fund's investment advisor, 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, 1997, $60,256 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 ChaseMellon Shareholder Services, provides
substantially all transfer agent and shareholder services to the Fund at
negotiated rates. Included in due to affiliates is $1,457 in transfer agent fees
payable to PSC at December 31, 1997.
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, 1997,
the Fund's expenses were reduced by $4,809 under such arrangements.
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Pioneer Interest Shares
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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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, 1997, and the related
statement of operations, and statements of changes in net assets for the periods
presented and financial highlights for the four years ended December 31, 1997.
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 the year 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, 1997 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, 1997, the results of its operations,
and the changes in its net assets for the periods presented, and financial
highlights for each of the four years ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 1998
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Pioneer Interest Shares
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RESULTS OF SHAREOWNER MEETING
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On September 16, 1997, Pioneer Interest Shares, Inc. held a special meeting of
shareowners. Both proposals were passed by shareowner vote. Following are the
detailed results of the vote for each Proposal presented.
Proposal 1 -- Elect nine Trustees to serve on the Board of Trustees until their
successors have been duly elected and qualified.
Directors Affirmative Withheld
John F. Cogan, Jr. 6,092,145 104,203
Mary K. Bush 6,072,463 123,885
Richard H. Egdahl, M.D. 6,093,892 102,456
Margaret B.W. Graham 6,070,314 126,034
John W. Kendrick 6,074,840 121,508
Marguerite A. Piret 6,089,815 106,533
David D. Tripple 6,094,769 101,579
Stephen K. West 6,098,150 98,198
John Winthrop 6,095,815 100,533
Proposal 2 -- Ratify the selection of Arthur Andersen LLP as the Fund's
independent public accountants for the fiscal year ending December 31, 1997.
Affirmative Against Abstain
6,073,574 57,959 64,814
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Pioneer Interest Shares
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TRUSTEES, OFFICERS AND SERVICE PROVIDERS
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Trustees Officers
John F. Cogan, Jr. John F. Cogan, Jr., Chairman and President
Mary K. Bush David D. Tripple, Executive Vice President
Richard H. Egdahl, M.D. Sherman B. Russ, Vice President
Margaret B.W. Graham William H. Keough, Treasurer
John W. Kendrick Joseph P. Barri, Secretary
Marguerite A. Piret
David D. Tripple
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
Shareowner Services and Sub-Transfer Agent
ChaseMellon Shareholder Services
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THE PIONEER FAMILY OF MUTUAL FUNDS
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For information about any Pioneer mutual fund, please contact your investment
representative, or call Pioneer at 1-800-225-6292. Ask for a free fund
information kit, which includes a fund prospectus. Please read the prospectus
carefully before you invest or send money.
Growth Funds Income Funds
Global/International Taxable
Pioneer Emerging Markets Fund Pioneer America Income Trust
Pioneer Europe Fund Pioneer Bond Fund
Pioneer Gold Shares Pioneer Short-Term Income Trust*
Pioneer India Fund
Pioneer International Growth Fund Tax-Exempt
Pioneer World Equity Fund Pioneer Intermediate Tax-Free Fund
Pioneer Tax-Free Income Fund
United States
Pioneer Capital Growth Fund Money Market Fund
Pioneer Growth Shares Pioneer Cash Reserves Fund
Pioneer Micro-Cap Fund*
Pioneer Mid-Cap Fund
Pioneer Small Company Fund
Growth and Income Funds
Pioneer Balanced Fund
Pioneer Equity-Income Fund
Pioneer Fund
Pioneer Real Estate Shares
Pioneer II
*0ffers Class A and B Shares only
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HOW TO CONTACT PIONEER
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We are pleased to offer a variety of convenient ways for you to contact
ChaseMellon for assistance or information.
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 checks, P.O. Box 590
change of address, account consolidation Ridgefield Park, NJ 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
[PIONEER LOGO]
Pioneer Funds Distributor, Inc.
60 State Street
Boston, Massachusetts 02109
www.pioneerfunds.com
0298-4811
(C) Pioneer Funds Distributor, Inc.
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