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SEMIANNUAL REPORT 6/30/98
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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 11
Notes to Financial Statements 15
Report of Independent Public Accountants 18
Results of Shareowner Meeting 19
Trustees, Officers and Service Providers 20
Information on the Year 2000 21
</TABLE>
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN 6/30/98
DEAR SHAREOWNER,
-----------------------------------------------------------------------------
Fixed-income markets, in particular U.S. Treasury bonds, produced
strong results over the past six months as the powerful combination
of low interest rates and low inflation pushed bond prices higher.
Holders of a diverse combination of bonds, like those owned by
Pioneer Interest Shares, enjoyed the best of both worlds - high
yields with stable or rising prices. As conditions changed throughout
the period, your Fund's portfolio management team adjusted both the
portfolio's duration and diversification to manage risk and produce
solid returns.
Predicting the short-term direction of financial markets is almost
always a futile exercise, as the first six months of 1998 reminded
many investors. While stock and bond markets produced solid returns,
concerns about the Asian economic crisis and its effect on corporate
earnings prompted periods of volatility. What can you as an investor
do? I encourage you to periodically review your financial goals and
strategy with your investment professional. It's a simple step to
make sure you will be better prepared to weather the inevitable
swings in the market.
Please read on to learn more about how your Fund is being managed. If
you have questions about Pioneer Interest Shares, please contact your
investment professional, or ChaseMellon Shareholder Services at
1-800-288-9541.
Respectfully,
/s/ John F. Cogan, Jr.
John F. Cogan, Jr.,
Chairman and President
1
<PAGE>
PIONEER INTEREST SHARES
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PORTFOLIO SUMMARY 6/30/98
PORTFOLIO QUALITY
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(As a percentage of total investment portfolio)
<TABLE>
<S> <C>
AA 4%
Short-Term Cash Equivalents 5%
B 7%
Treasury/Agency 11%
BB 12%
A 17%
BBB 44%
</TABLE>
PORTFOLIO MATURITY
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(Effective life as a percentage of total investment portfolio)
<TABLE>
<S> <C>
0-2 Years 18%
2-5 Years 31%
5-7 Years 14%
7-10 Years 16%
10-20 Years 10%
20+ Years 11%
</TABLE>
10 LARGEST HOLDINGS
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(As a percentage of long-term holdings)
<TABLE>
<C> <S> <C>
1. U.S. Treasury Bond, 9.375%, 2/15/06 6.33%
2. Hydro-Quebec, 9.75%, 1/15/18 4.65
3. BP America, Inc., 10.0%, 7/1/18 4.30
4. Tele-Communications, Inc., 9.25%, 1/15/23 4.10
5. Time Warner Inc., 9.15%, 2/1/23 3.89
6. Delta Air Lines, Inc., 9.2%, 9/23/14 3.76
7. U.S. Treasury Bond, 9.125%, 5/15/09 3.60
8. Ford Motor Credit Co., 9.14%, 12/30/14 3.57
9. News America Holdings, Inc., 10.125%, 10/15/12 3.56
10. Georgia Pacific Corp., 9.875%, 11/1/21 3.46
</TABLE>
Fund holdings will vary for other periods.
2
<PAGE>
PIONEER INTEREST SHARES
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PERFORMANCE UPDATE 6/30/98
SHARE PRICES AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET ASSET VALUE
PER SHARE 6/30/98 12/31/97
<S> <C> <C> <C>
$13.78 $13.74
MARKET PRICE
PER SHARE 6/30/98 12/31/97
$13.063 $14.000
DISTRIBUTIONS PER SHARE INCOME SHORT-TERM LONG-TERM
(12/31/97 - 6/30/98) DIVIDENDS CAPITAL GAINS CAPITAL GAINS
$0.510 - -
</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.
[CHART]
GROWTH OF $10,000
<TABLE>
<CAPTION>
LEHMAN BROTHERS GOVERNMENT/
PIONEER INTEREST SHARES* CORPORATE BOND INDEX
- ------------------------ ---------------------------
<S> <C>
10,000 10,000
10,525 11,234
10,378 12,032
12,294 13,262
14,464 15,141
16,044 17,132
15,364 16,881
16,470 19,036
17,723 19,927
19,471 21,471
20,826 23,894
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(As of June 30, 1998)
<TABLE>
<CAPTION>
NET ASSET MARKET
PERIOD VALUE PRICE
<S> <C> <C>
10 Years 9.07% 7.61%
5 Years 7.43 5.36
1 Year 11.13 6.96
</TABLE>
[GRAPH]
* When net asset value (NAV) is
lower than market price, dividends
are assumed to be reinvested at
the greater NAV or 95% of the
market price. When NAV is higher,
dividends are assumed to be
reinvested at market price.
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
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION 6/30/98
The first half of your Fund's fiscal year ended on June 30, 1998.
During that time, the vigorous economic and fiscal health in the
United States, and continued problems in Asia, created strong
demand for U.S. bonds, sending interest rates lower and prices
higher. Pioneer Interest Shares capitalized on this environment by
emphasizing total return and relative value.
The following discussion with Sherman B. Russ, your Fund's
portfolio manager, details the investment environment and the
strategies that affected your Fund's performance. An investment
professional for more than 20 years, Mr. Russ oversees the team
responsible for the daily management of Pioneer Interest Shares.
Q: HOW DID PIONEER INTEREST SHARES PERFORM OVER THE PAST SIX MONTHS?
A: It performed well, at least on a net asset value (NAV) basis.
Pioneer Interest Shares is a "closed-end" fund. The actual value
of the securities it owns - its NAV - may be more or less than is
reflected in the market price of Fund shares on any given trading
day. As of June 30, the Fund's NAV was $13.78 per share. Because
its market value was $13.06 per share, the Fund was trading at a
5.2% "discount" compared to the value of the securities in its
portfolio. On the same date, the Fund provided a dividend yield of
7.35%, based on market price, 6.97% based on NAV.
For the six months ending June 30, the Fund generated a competitive
total return of 4.13% at NAV and -3.12% at market price. In
comparison, the Lehman Brothers Government/Corporate Bond Index
returned 4.17%. Total return assumes the reinvestment of all
dividends.
During the period, the Fund's dividend came down a bit, from $0.27
per share to $0.24 per share. In large part, this was because of
the ongoing decline in interest rates. There were instances,
however, when decisions we made to help the Fund's total return
had the effect of reducing income, at least in the near term.
4
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PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
Q: WHAT WAS THE INVESTMENT ENVIRONMENT LIKE FOR BONDS OVER THE PAST
SIX MONTHS?
A: Very positive. Strong demand pushed bond prices higher and
long-term interest rates lower. The yield on the benchmark 30-year
U.S. Treasury bond fell from 5.92% on December 31, 1997 to 5.63%
on June 30. Bond prices rose accordingly.
In the United States, strong domestic labor and housing markets
propelled economic growth, inflation remained low and the dollar
strengthened. The economy's strength generated rising tax
receipts, which helped produce the first federal budget surplus in
nearly 30 years. The government's positive fiscal situation
reduced its need to issue debt, and a smaller supply tends to be
positive for bond prices.
Q: HOW DID THE SITUATION IN ASIA AFFECT U.S. INTEREST RATES AND
BONDS?
A: The uncertainty of the Asian crisis kept interest rates and bond
prices within a narrow range for most of the period. It also
sparked a "flight to quality." Generally, investors waited for new
developments and evidence of the situation's effect on the U.S.
economy. When the crisis worsened this spring, investors sought
the safety and security of U.S. Treasurys. This demand again
pushed up bond prices and lowered interest rates.
Asia's problems held down U.S. interest rates for yet another
reason. Many investors were concerned that our strong economy
eventually might stimulate inflation and lead the Federal Reserve
to raise interest rates; however, since the United States and Asia
are such active trading partners, slowing Asian economies could
lessen U.S. economic growth. This would ease inflationary
pressures and reduce the Fed's impetus to change rates. This
possibility gave investors more confidence in government
securities. Nevertheless, concern about Asia's problems spilling
over to U.S. businesses hurt the prices of many corporate bonds.
Q: WHAT STRATEGIES DID YOU USE TO MANAGE THE FUND?
A: We emphasized total return, yield and relative value. We
maintained a substantial position in securities rated "B" or
higher by the major recognized bond services. In addition to
providing
5
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PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION 6/30/98 (CONTINUED)
higher yields, these bonds had the potential for attractive price
appreciation. The economy's strength should translate into better
financial status for the issuers, which should result in a higher
credit rating. This potential for credit improvement often
strengthened investor demand, which resulted in substantial
increases in price. Many high-yield bonds also benefited from
positive events such as tender offers, when efforts to retire
outstanding debt prompted issuers to pay prices that were
considerably higher than the bonds' value in the open market. We
accepted many of these offers.
In the last three months, corporate bond prices began to slow,
because of investors' concerns about the effect of the Asian
crisis on U.S. corporate profits and the heavy supply of corporate
bonds. We capitalized on their improved yield advantage over
Treasury bonds and added to the Fund's position in both A-rated
and BBB-rated bonds. With an attractive blend of quality and
yield, we believed these issues offered the best relative value.
On June 30, the Fund's average quality stood at "BBB."
We adjusted the Fund's maturity as interest rates moved up and
down. On December 31, 1997, portfolio holdings had a moderate
average effective life of 7.17 years, which we increased slightly
to 7.49 years at the end of the period. (Effective maturity takes
into account the time left until a bond matures or can be called
on demand by the issuer, whichever is sooner.)
Q: WHAT IS YOUR OUTLOOK FOR BONDS OVER THE NEXT SIX MONTHS?
A: We think bonds will benefit from many trends that existed this
year. We expect the domestic economy to remain solid, and
developments regarding the federal budget surplus to be positive.
We also believe the uncertainty in Asia will continue to affect the
U.S. bond market. Near term, we think investors will prefer
quality and liquidity, which should particularly benefit U.S.
Treasurys and support the U.S. dollar. Looking out further, we
expect that Asia will have a powerful influence on interest
rates - if there is a significant spillover into the U.S. economy,
interest rates could remain stable or even move moderately lower.
6
<PAGE>
PIONEER INTEREST SHARES
SCHEDULE OF INVESTMENTS 6/30/98
<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
INVESTMENT IN SECURITIES - 95.1%
BASIC MATERIALS - 17.8%
CHEMICALS - 2.2%
$2,000,000 BBB/Baa2 Hanna (M.A.) Co., 9.375%, 9/15/03 $ 2,280,780
------------
CONSTRUCTION - 1.7%
1,500,000 BBB-/Baa2 Southdown, Inc., 10.0%, 3/1/06 $ 1,672,500
------------
IRON & STEEL - 5.1%
2,500,000 BBB-/Baa2 USX Corp., 9.375%, 2/5/12 $ 3,077,625
2,000,000 B/B2 Weirton Steel Corp., 11.375%,
7/1/04 2,142,500
------------
$ 5,220,125
------------
PAPER & FOREST PRODUCTS - 8.8%
2,000,000 BBB-/Baa3 Boise Cascade Corp., 9.9%, 3/15/00 $ 2,112,460
2,000,000 BBB/Baa2 Bowater, Inc., 9.375%, 12/15/21 2,510,020
3,000,000 BBB-/Baa2 Georgia Pacific Corp., 9.875%,
11/1/21 3,374,070
1,000,000 B+/B1 Stone Container Corp., 10.75%,
10/1/02 1,061,250
------------
$ 9,057,800
------------
TOTAL BASIC MATERIALS $ 18,231,205
------------
CAPITAL GOODS - 2.1%
MACHINERY (DIVERSIFIED) - 2.1%
2,000,000 A+/A2 Caterpillar, Inc., 9.75%, 6/1/19 $ 2,150,420
------------
TOTAL CAPITAL GOODS $ 2,150,420
------------
COMMUNICATION SERVICES - 1.8%
1,750,000 BB+/Ba3 Comcast Cellular Corp., 9.50%,
5/1/07 $ 1,828,750
------------
TOTAL COMMUNICATION SERVICES $ 1,828,750
------------
CONSUMER CYCLICALS - 1.8%
RETAIL - 1.8%
1,500,000 BBB-/Baa3 Shopko Stores, Inc., 9.25%,
3/15/22 $ 1,879,110
------------
TOTAL CONSUMER CYCLICALS $ 1,879,110
------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 7
<PAGE>
PIONEER INTEREST SHARES
SCHEDULE OF INVESTMENTS 6/30/98 (CONTINUED)
<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
CONSUMER STAPLES - 18.0%
BROADCASTING - 16.0%
$2,500,000 BBB/Baa3 Continental Cablevision, Inc.,
9.50%, 8/1/13 $ 2,976,000
3,000,000 BBB-/Baa3 News America Holdings, Inc.,
10.125%, 10/15/12 3,472,380
3,500,000 BBB-/Baa3 Tele-Communications, Inc., 9.25%,
1/15/23 3,999,415
3,000,000 BBB-/Baa3 Time Warner Inc., 9.15%, 2/1/23 3,801,060
2,000,000 BB-/B1 Viacom International Inc., 10.25%,
9/15/01 2,215,000
------------
$ 16,463,855
------------
DISTRIBUTORS (FOOD &
HEALTH) - 2.0%
2,000,000 B-/B3 Ameriserve Food Distribution,
Inc., 10.125%, 7/15/07 $ 2,057,500
------------
TOTAL CONSUMER STAPLES $ 18,521,355
------------
ENERGY - 9.4%
OIL & GAS - 9.4%
4,000,000 AA/Aa2 BP America, Inc., 10.0%, 7/1/18 $ 4,198,400
3,000,000 BB-/Ba2 Gulf Canada Resources, Ltd.,
9.625%, 07/1/05 3,267,870
2,000,000 A-/A3 Phillips Petroleum Co., 9.18%,
9/15/21 2,207,160
------------
TOTAL ENERGY $ 9,673,430
------------
FINANCIAL - 8.6%
1,200,000 B/B2 Amresco, Inc., 10.0%, 3/15/04 $ 1,248,000
1,000,000 B+/B1 Delta Financial Corp., 9.5%,
8/1/04 995,000
3,000,000 A/A1 Ford Motor Credit Co., 9.14%,
12/30/14 3,480,750
3,000,000 A-/A3 Hartford National Corp., 9.85%,
6/1/99 3,107,430
------------
TOTAL FINANCIAL $ 8,831,180
------------
HEALTHCARE - 1.0%
1,000,000 BB-/Ba3 Tenet Healthcare Corp., 8.125%,
12/1/08 $ 1,005,000
------------
TOTAL HEALTHCARE $ 1,005,000
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
PIONEER INTEREST SHARES
<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
TECHNOLOGY - 1.1%
COMPUTERS - 1.1%
$1,000,000 BB-/Ba3 Unisys Corp., 12.0%, 4/15/03 $ 1,127,500
------------
TOTAL TECHNOLOGY $ 1,127,500
------------
TRANSPORTATION - 11.6%
2,000,000 BBB-/Baa3 AMR Corp., 9.88%, 6/15/20 $ 2,682,320
3,000,000 BBB/Baa1 Delta Air Lines, Inc., 9.2%,
9/23/14 3,668,280
2,000,000 BBB/Baa2 Federal Express Corp., 10.0%,
4/15/99 2,058,840
2,000,000 BBB-/Baa2 Kansas City Southern Industries,
Inc., 8.8%, 7/1/22 2,200,480
500,000 BB+/Baa3 United Air Lines, Inc., 10.67%,
5/1/04 601,920
515,000 BB+/Baa3 United Air Lines, Inc., 10.25%,
7/15/21 712,466
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TOTAL TRANSPORTATION $ 11,924,306
------------
UTILITIES - 6.9%
ELECTRIC COMPANIES - 2.1%
2,000,000 A/A2 Virginia Electric and Power Co.,
8.75%, 4/1/21 $ 2,131,560
------------
NATURAL GAS - 4.8%
2,000,000 BBB-/Baa3 Coastal Corp., 9.625%, 5/15/12 $ 2,534,900
2,000,000 BBB/Baa2 Colorado Interstate Gas Co.,
10.0%, 6/15/05 2,403,640
------------
$ 4,938,540
------------
TOTAL UTILITIES $ 7,070,100
------------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS - 10.6%
1,091,279 Federal National Mortgage
Association, 9.0%, 7/1/19 $ 1,164,265
5,000,000 U.S. Treasury Bond, 9.375%,
2/15/06 6,177,850
3,000,000 U.S. Treasury Bond, 9.125%,
5/15/09 3,514,620
------------
TOTAL U.S. GOVERNMENT AND AGENCY
OBLIGATIONS $ 10,856,735
------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 9
<PAGE>
PIONEER INTEREST SHARES
SCHEDULE OF INVESTMENTS 6/30/98 (CONTINUED)
<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<C> <S> <C> <C>
FOREIGN GOVERNMENT SPONSORED -
4.4%
$4,000,000 A+/A2 Hydro-Quebec, 9.75%, 1/15/18 $ 4,536,080
------------
TOTAL FOREIGN GOVERNMENT SPONSORED $ 4,536,080
------------
TOTAL INVESTMENT IN SECURITIES
(Cost $91,801,059) $ 97,635,171
------------
TEMPORARY CASH INVESTMENT - 4.9%
COMMERCIAL PAPER - 4.9%
5,070,000 Texaco Inc., 6.05%, 7/1/98 $ 5,070,000
------------
TOTAL TEMPORARY CASH INVESTMENT
(Cost $5,070,000) $ 5,070,000
------------
TOTAL INVESTMENT IN SECURITIES AND
TEMPORARY
CASH INVESTMENT - 100%
(Cost $96,871,059) (a)(b) $102,705,171
============
</TABLE>
(a) At June 30, 1998, the net unrealized gain on investments based on cost for
federal income tax purposes of $96,871,059 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized gain for all investments in
which there is an excess of value over tax cost $ 6,062,392
Aggregate gross unrealized loss for all investments in
which there is an excess of tax cost over value (228,280)
------------
Net unrealized gain $ 5,834,112
============
</TABLE>
(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
six months ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Long-Term U.S. Government $10,961,797 $ 7,393,727
Other Long-Term Securities 12,314,910 14,332,750
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
BALANCE SHEET 6/30/98
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (including temporary
cash investment of $5,070,000) (cost $96,871,059) $102,705,171
Cash 240,010
Interest receivable 2,299,203
Other 18,345
------------
Total assets $105,262,729
------------
LIABILITIES:
Payable for investment securities purchased $ 3,397,479
Due to affiliates 84,321
Accrued expenses 68,341
------------
Total liabilities $ 3,550,141
------------
NET ASSETS:
Paid-in capital $105,126,009
Accumulated undistributed net investment income 64,161
Accumulated net realized loss on investments (9,311,694)
Net unrealized gain on investments 5,834,112
------------
Total net assets $101,712,588
============
NET ASSET VALUE PER SHARE:
(50,000,000 shares authorized)
7,381,961 fund shares outstanding $ 13.78
============
</TABLE>
The accompanying notes are an integral part of these financial statements. 11
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED 6/30/98
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 4,294,478
------------
EXPENSES:
Management fees $ 284,006
Transfer agent fees 58,745
Accounting 24,727
Custodian fees 15,337
Professional fees 24,597
Printing 34,610
Fees and expenses of nonaffiliated trustees 8,153
Miscellaneous 20,152
----------
Total expenses $ 470,327
Less fees paid indirectly (713)
------------
Net expenses $ 469,614
------------
Net investment income $ 3,824,864
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments $ (145,610)
Change in net unrealized gain on investments 394,925
------------
Net gain on investments $ 249,315
------------
Net increase in net assets resulting from
operations $ 4,074,179
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED 6/30/98 AND THE YEAR ENDED 12/31/97
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
6/30/98 12/31/97
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,824,864 $ 7,777,181
Net realized gain (loss) on investments (145,610) 708,016
Change in net unrealized gain on investments 394,925 1,937,545
------------ ------------
Net increase in net assets resulting from
operations $ 4,074,179 $ 10,422,742
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($0.51 and $1.07 per
share, respectively) $ (3,760,703) $ (7,895,607)
In excess of net investment income ($0.00 and
$0.01 per share, respectively) - (44,166)
------------ ------------
Total distributions to shareholders $ (3,760,703) $ (7,939,773)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Reinvestment of distributions $ 207,268 $ 208,527
------------ ------------
Net increase in net assets $ 520,744 $ 2,691,496
NET ASSETS:
Beginning of period 101,191,844 98,500,348
------------ ------------
End of period (including accumulated
undistributed net investment income of
$64,161 and $0, respectively) $101,712,588 $101,191,844
============ ============
</TABLE>
<TABLE>
<CAPTION>
'98 SHARES '98 AMOUNT '97 SHARES '97 AMOUNT
<S> <C> <C> <C> <C>
Reinvestment of distributions 15,106 $207,268 15,177 $208,527
-------- --------- -------- ---------
Net increase 15,106 $207,268 15,177 $208,527
======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements. 13
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 6/30/98
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
6/30/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93(a)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.74 $ 13.40 $ 13.67 $ 12.65 $ 14.29 $ 14.09
---------- ---------- ---------- ---------- ---------- -----------
Increase (decrease) from investment
operations:
Net investment income $ 0.52 $ 1.06 $ 1.07 $ 1.07 $ 1.12 $ 1.11
Net realized and unrealized gain (loss)
on investments 0.03 0.36 (0.29) 1.03 (1.63) 0.22
---------- ---------- ---------- ---------- ---------- -----------
Net increase (decrease) from investment
operations $ 0.55 $ 1.42 $ 0.78 $ 2.10 $ (0.51) $ 1.33
Distributions to shareholders:
Net investment income (0.51) (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 $ 0.04 $ 0.34 $ (0.27) $ 1.02 $ (1.64) $ 0.20
---------- ---------- ---------- ---------- ---------- -----------
Net asset value, end of period $ 13.78 $ 13.74 $ 13.40 $ 13.67 $ 12.65 $ 14.29
========== ========== ========== ========== ========== ===========
Market value, end of period $ 13.063 $ 14.000 $12.875 $13.500 $11.750 $ 13.875
Total return* (3.12)% 17.83% 3.27% 24.77% (7.54)% 1.57%
Ratio of net expenses to average net assets 0.93%**+ 0.87%+ 0.99%+ 0.98%+ 1.03% 0.82%
Ratio of net investment income to average
net assets 7.56%**+ 7.81%+ 7.94%+ 8.04%+ 8.46% 7.60%
Portfolio turnover rate 45%** 27% 28% 49% 65% 61%
Net assets, end of period (in thousands) $101,713 $101,192 $98,500 $99,989 $92,252 $103,570
Ratios assuming reduction for fees paid
indirectly:
Net expenses 0.93%** 0.87% 0.98% 0.97% - -
Net investment income 7.56%** 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 Mutual of
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
<PAGE>
PIONEER INTEREST SHARES
NOTES TO FINANCIAL STATEMENTS 6/30/98
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Pioneer Interest Shares (the Fund), a Delaware business trust, is
registered under the Investment Company Act 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 at prices supplied by independent pricing services, which
consider such factors as Treasury spreads, yields, maturities and
ratings and valuations may be supplemented by dealers and 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 and premium is accreted or amortized 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.
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,
15
<PAGE>
PIONEER INTEREST SHARES
NOTES TO FINANCIAL STATEMENTS 6/30/98 (CONTINUED)
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 Fund is at or above net asset value, the Fund will
issue new full and fractional shares (computed to three decimals) 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 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.
2. MANAGEMENT AGREEMENT
Pioneering Management Corporation (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.
16
<PAGE>
PIONEER INTEREST SHARES
In addition, under the management agreement, certain other services and
costs, including accounting, regulatory reporting and insurance
premiums, are paid by the Fund. At June 30, 1998, $55,996 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 $28,325 in transfer agent fees payable to PSC at June
30, 1998.
4. EXPENSE REDUCTIONS
The Fund has entered into certain expense offset arrangements resulting
in a reduction in the Fund's total expenses. For the six months ended
June 30, 1998, the Fund's expenses were reduced by $713 under such
arrangements.
17
<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 June 30, 1998, and the related
statement of operations and the statements of changes in net assets for the
periods presented and the financial highlights for the six months ended June 30,
1998 and for each of 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 June
30, 1998, 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 June 30, 1998, the results of its operations and
the changes in its net assets for the periods presented, and the financial
highlights for the six months ended June 30, 1998 and for each of the four years
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 7, 1998
18
<PAGE>
PIONEER INTEREST SHARES
RESULTS OF SHAREOWNER MEETING
On June 23, 1998, Pioneer Interest Shares held a special meeting of
shareowners. All proposals were passed by shareowner vote. Following
are detailed results of the votes.
PROPOSAL 1 - ELECT NINE TRUSTEES TO SERVE ON THE BOARD OF TRUSTEES.
<TABLE>
NOMINEE AFFIRMATIVE WITHHELD
<S> <C> <C>
Mary K. Bush 5,965,051.392 96,821.947
John F. Cogan, Jr. 5,962,716.998 99,156.341
Richard H. Egdahl, M.D. 5,962,468.455 99,404.884
Margaret B.W. Graham 5,978,059.130 83,814.209
John W. Kendrick 5,941,390.109 120,483.230
Marguerite A. Piret 5,977,511.427 84,361.912
David D. Tripple 5,975,981.575 85,891.764
Stephen K. West 5,972,262.424 89,610.915
John Winthrop 5,978,198.331 83,675.008
</TABLE>
PROPOSAL 2 - RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS THE FUND'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31,
1998.
<TABLE>
<CAPTION>
AFFIRMATIVE AGAINST ABSTAIN
<S> <C> <C>
5,941,534.256 59,277.491 161,061.592
</TABLE>
19
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
TRUSTEES, OFFICERS AND SERVICE PROVIDERS
<TABLE>
<S> <C>
TRUSTEES OFFICERS
John F. Cogan, Jr. John F. Cogan, Jr., Chairman and
Mary K. Bush President
Richard H. Egdahl, M.D. David D. Tripple, Executive Vice
Margaret B.W. Graham 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
</TABLE>
INVESTMENT ADVISER
Pioneering Management Corporation
CUSTODIAN
Brown Brothers Harriman & Co.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
LEGAL COUNSEL
Hale and Dorr LLP
TRANSFER AGENT
Pioneering Services Corporation
SHAREOWNER SERVICES AND SUB-TRANSFER AGENT
ChaseMellon Shareholder Services
20
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
INFORMATION ON THE YEAR 2000
Certain information technology experts currently predict the possibility of a
widespread failure of computer systems and certain other equipment which will be
triggered on or after certain dates - primarily January 1, 2000 - due to a
system inability to process date-related information. This scenario, commonly
known as the "Year 2000 Problem," could have an adverse impact on individuals
and businesses, including mutual funds and financial organizations. Pioneering
Management Corporation (PMC) and its affiliates are taking steps believed to be
adequate to address the Year 2000 Problem with respect to the systems and
equipment controlled by the Fund's investment advisor, broker-dealer and
transfer agent. In addition, other entities providing services to the Fund and
shareowners are being asked to provide assurances that they have undertaken
similar measures with respect to their systems and equipment. Although PMC is
not expecting an adverse impact to it or its clients from the Year 2000 Problem,
it cannot provide complete assurances that its efforts or the efforts of its key
vendors will be successful.
21
<PAGE>
- --------------------------------------------------------------------------------
HOW TO CONTACT PIONEER
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:
<TABLE>
<S> <C>
ACCOUNT INFORMATION 1-800-288-9541
TELECOMMUNICATIONS DEVICE FOR
THE DEAF (TDD) 1-800-231-5469
</TABLE>
OR WRITE TO CHASEMELLON SHAREHOLDER SERVICES:
<TABLE>
<S> <C>
FOR: AT:
General inquiries, lost dividend checks P.O. Box 3315
South Hackensack, NJ
07060-1915
Change of address, account consolidation P.O. Box 3316
South Hackensack, NJ
07060-1916
Lost stock certificates P.O. Box 3317
South Hackensack, NJ
07606-1917
Stock transfer P.O. Box 3312
South Hackensack, NJ
07606-1912
Dividend reinvestment plan (DRIP) P.O. Box 3338
South Hackensack, NJ
07606-1938
</TABLE>
<TABLE>
<S> <C> <C> <C>
[PIONEER LOGO] PIONEER FUNDS DISTRIBUTOR, INC. 0898-5434
60 STATE STREET (C) Pioneer Funds Distributor, Inc.
BOSTON, MASSACHUSETTS 02109 [RECYCLE LOGO] Printed on Recycled Paper
WWW.PIONEERFUNDS.COM
</TABLE>
