[Pioneer Logo]
PIONEER
INTEREST SHARES
----------------------
ANNUAL REPORT 12/31/98
----------------------
<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 12
Notes to Financial Statements 16
Report of Independent Public Accountants 19
Trustees, Officers and Service Providers 20
Information on the Year 2000 21
</TABLE>
<PAGE>
PIONEER INTEREST SHARES
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LETTER FROM THE CHAIRMAN 12/31/98
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DEAR SHAREOWNER,
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I am pleased to introduce this annual report for Pioneer Interest
Shares, covering the year ended December 31, 1998. On behalf of your
investment team, I thank you for your interest and this opportunity
to comment on today's investing environment.
Before moving on to review the bond market, I'd like to announce a
recent addition to the Fund's management team. We are pleased that
Kenneth J. Taubes joined us in September, bringing with him 13 years
of experience as a portfolio manager. He and Sherman B. Russ, who has
worked with your Fund for 16 years, supervise the team of portfolio
managers and analysts responsible for the day-to-day management of
the Fund.
Economic news in the United States remained positive in 1998, with
low unemployment and no signs of inflation. The financial markets,
and especially U.S. government bonds, turned in impressive results
through the end of the year. The yield on the 30-year Treasury bond
fell to historic lows, which subsequently pushed bond prices higher
and increased total returns.
Although bond returns were again overshadowed by the returns of the
overall stock market, 1998 showed that bonds can play a vital role in
a well-balanced portfolio. Funds that hold a diversified portfolio of
bonds, such as Pioneer Interest Shares, can cushion some of the stock
market's volatility and often add much-needed income to a portfolio.
As you look ahead into 1999, we suggest you discuss your needs for
diversification with your investment professional.
I encourage you to read the pages that follow, including the
Portfolio Management Discussion where your team reviews Fund
performance. If you have any questions, please contact your
investment professional, or Pioneer at 1-800-225-6292.
Respectfully,
/s/ John F. Cogan, Jr.
John F. Cogan, Jr.
Chairman and President
1
<PAGE>
PIONEER INTEREST SHARES
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PORTFOLIO SUMMARY 12/31/98
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PORTFOLIO QUALITY
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(As a percentage of total investment portfolio)
[PORTFOLIO QUALITY PIE CHART]
Short-Term Cash Equivalents .......... 1%
U.S. Government and Agency............ 21%
A..................................... 14%
B..................................... 7%
BB.................................... 8%
BBB................................... 48%
CCC................................... 1%
PORTFOLIO MATURITY
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(Effective life as a percentage of total investment portfolio)
[PORTFOLIO MATURITY PIE CHART]
0-2 Years............................. 6%
2-5 Years............................. 34%
5-7 Years............................. 25%
7-10 Years............................ 10%
10-20 Years........................... 9%
20+ Years............................. 16%
10 LARGEST HOLDINGS
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(As a percentage of long-term holdings)
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1. Federal National Mortgage Association, 5.5%, 4/1/13 4.85%
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2. Hydro-Quebec, 9.75%, 1/15/18 4.69
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3. Tele-Communications, Inc., 9.25%, 1/15/23 4.14
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4. U.S. Treasury Bonds, 8.125%, 8/15/19 4.00
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5. Time Warner Inc., 9.15%, 2/1/23 3.98
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6. Delta Air Lines, Inc., 9.2%, 9/23/14 3.66
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7. News America Holdings, Inc., 10.125%, 10/15/12 3.55
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8. Ford Motor Credit Co., 9.14%, 12/30/14 3.50
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9. Georgia Pacific Corp., 9.875%, 11/1/21 3.42
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10. Gulf Canada Resources, Ltd., 9.625%, 7/1/05 3.13
Fund holdings will vary for other periods.
2
<PAGE>
PIONEER INTEREST SHARES
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PERFORMANCE UPDATE 12/31/98
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SHARE PRICES AND DISTRIBUTIONS
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NET ASSET VALUE
PER SHARE 12/31/98 12/31/97
$13.62 $13.74
MARKET PRICE
PER SHARE 12/31/98 12/31/97
$13.563 $14.000
DISTRIBUTIONS PER SHARE INCOME SHORT-TERM LONG-TERM
(12/31/97 - 12/31/98) DIVIDENDS CAPITAL GAINS CAPITAL GAINS
$1.040 - -
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.
-----------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(As of December 31, 1998)
NET ASSET MARKET
PERIOD VALUE PRICE
10 Years 8.82% 8.80%
5 Years 7.47 8.01
1 Year 7.09 4.66
-----------------------------------
* When net asset value (NAV) is lower than market price, dividends are
assumed to be reinvested at the treater of NAV or 95% of the market price. When
NAV is higher, dividends are assumed to be reinvested at market price.
Pioneer Lehman Brother Government/
Interest Shares* Corporation Bond Index
10000 10000
11163 11424
11275 12370
13855 14364
15545 15453
15815 17158
14630 16556
18254 19742
18852 20321
22213 22303
23248 24414
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.
<PAGE>
3
PIONEER INTEREST SHARES
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PORTFOLIO MANAGEMENT DISCUSSION 12/31/98
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Pioneer Interest Shares closed its fiscal year on December 31, 1998.
Bond markets reaped the benefits from the global financial crisis in
1998 as investors sought the safety and liquidity of U.S. Treasury
bonds. The increased demand sent yields on Treasurys - which move in
the opposite direction of bond prices - to historic lows. In spite of
the unsettled global economic picture, the U.S. enjoyed low interest
rates and solid economic growth.
In the following discussion, Sherman Russ, who leads the investment
team along with Ken Taubes, reviews the year's investment environment
and the strategies that shaped Fund performance. He also provides his
outlook for the bond market in the first half of 1999.
Q: HOW DID THE FUND PERFORM?
A: The Fund produced sound gains and good income. Because 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 its market price on any given day. On
December 31, 1998, the Fund's NAV was $13.62 per share. With its
market value at $13.56 per share, the Fund was trading at a 0.4%
"discount" compared to the value of the securities in its
portfolio.
The Fund generated a total return of 7.09% at NAV for the year,
4.66% at market price. In comparison, the Lehman Brothers
Government/Corporate Bond Index returned 9.47%. Total return
assumes the reinvestment of all distributions.
The Fund paid quarterly dividends ranging from $0.24 to $0.27 per
share and provided an attractive dividend yield of 7.96% based on
market price, and 7.93% based on NAV, at year-end. Much of the
movement in dividends was due to changes in interest rates.
Occasionally, though, the dividend was affected by investment
decisions that boosted the Fund's total return but, in the near
term, reduced income.
4
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PIONEER INTEREST SHARES
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Q: WHAT WAS THE INVESTMENT ENVIRONMENT LIKE?
A: It was a positive - but challenging - year. Long-term interest
rates declined to historical lows, pushing bond prices higher. The
environment in the first half of the year was very different than
the environment in the second half of the year, however. The first
half of the year was marked by robust economic growth, and many
investors were concerned that the Federal Reserve would raise
interest rates to halt any threat of inflation. During the summer,
though, global economies and financial markets became increasingly
unstable. The situation powered a flight to quality and
extraordinary worldwide demand for U.S. Treasurys. In contrast,
demand for other bonds diminished, as investors began to require
increasingly greater yield advantages as a trade off for greater
risk. In the final months of 1998 - after the Federal Reserve cut
the federal funds rate three times and foreign central bankers
made other interest rate cuts - the world's financial markets
began to regain stability. Interest rates in the United States
remained low, but rose from their extraordinarily depressed
levels.
Q: WHAT ROLE DOES ASSET ALLOCATION PLAY IN YOUR STRATEGY FOR MANAGING
THE FUND?
A: In the first half of the year, we maximized corporate securities,
including high yield bonds, in light of the healthy economic
climate. Typically, corporate bonds - and particularly high yield
bonds - perform well during periods of economic strength, and the
heavy weighting in these sectors increased the Fund's yield and
its potential for price appreciation. We cut back on the Fund's
exposure to high yield issues when we witnessed an extreme demand
for safety and liquidity, reinvesting assets in Treasurys during
the summer and early fall. The Fund's primary emphasis was on
corporate bonds, but the larger Treasury position helped cushion
against price declines in corporate bonds. In the last quarter, we
sold some Treasurys to buy high yield bonds - primarily B-rated
bonds - and mortgage-backed securities. (Ratings apply to
underlying securities, not Fund shares.) In fact, we increased the
Fund's position in mortgage-backed securities from about 1% of net
assets to 14%. With their exceptionally high quality,
mortgage-backed securities offered extremely attractive value and
considerable yield advantages over Treasurys.
<PAGE>
5
PIONEER INTEREST SHARES
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PORTFOLIO MANAGEMENT DISCUSSION 12/31/98 (CONTINUED)
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Q: WHAT OTHER STRATEGIES DID YOU USE TO INCREASE TOTAL RETURN?
A: We also added to the Fund's duration in the fourth quarter,
extending it when the "flight to quality" stopped. Expressed in
years, duration measures a portfolio's sensitivity to interest
rate changes. Lengthening duration increases a portfolio's
sensitivity to interest rate changes, building total return
potential when rates fall and raising the risk of price declines
when rates rise.
Q: WHAT IS YOUR OUTLOOK FOR U.S. BONDS OVER THE NEXT SIX MONTHS?
A: Favorable. We think economic growth will slow as the year moves on
and inflation will remain benign, which should provide a positive
background for bonds. If we are correct in our analysis, corporate
and mortgage-backed securities should outperform Treasurys and
post solid performance over the next few months. Typically,
corporate bonds do well in the early part of the year as investors
begin to put cash flows to work after having made asset-allocation
decisions. In the months ahead, we expect the yields of
mortgage-backed securities and many corporate bonds to
fall - pushing their prices higher - as they outperform their U.S.
government counterparts.
6
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PIONEER INTEREST SHARES
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SCHEDULE OF INVESTMENTS 12/31/98
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<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<S> <C> <C> <C>
INVESTMENT IN SECURITIES - 99.6%
BASIC MATERIALS - 16.7%
CHEMICALS - 2.3%
$2,000,000 BBB/Baa2 Hanna (M.A.) Co., 9.375%, 9/15/03 $ 2,269,800
------------
CONTAINERS & PACKAGING (PAPER) - 1.0%
1,000,000 B+/B1 Stone Container Corp., 10.75%,
10/2/02 $ 1,035,000
------------
IRON & STEEL - 4.9%
2,500,000 BBB-/Baa2 USX Corp., 9.375%, 2/15/12 $ 3,000,825
2,000,000 B/B2 Weirton Steel Corp., 11.375%,
7/1/04 1,840,000
------------
$ 4,840,825
------------
METALS MINING - 0.5%
500,000 B-/Caa1 AEI Resources, 11.5%, 12/15/06 $ 495,000
------------
PAPER & FOREST PRODUCTS - 8.0%
2,000,000 BB+/Baa3 Boise Cascade Corp., 9.9%, 3/15/00 $ 2,067,080
2,000,000 BBB/Baa2 Bowater, Inc., 9.375%, 12/15/21 2,435,540
3,000,000 BBB-/Baa2 Georgia Pacific Corp., 9.875%,
11/1/21 3,366,060
------------
$ 7,868,680
------------
TOTAL BASIC MATERIALS $ 16,509,305
------------
CAPITAL GOODS - 3.0%
ENGINEERING & CONSTRUCTION - 2.0%
250,000 B/B2 Metromedia Fiber Network, Inc.,
10.0%, 11/15/08 $ 256,875
1,500,000 BBB-/Baa3 Southdown, Inc., 10.0%, 3/1/06 1,672,650
------------
$ 1,929,525
------------
WASTE MANAGEMENT - 1.0%
1,000,000 BB/Ba2 Allied Waste NA, 7.625%, 1/1/06 $ 1,010,000
------------
TOTAL CAPITAL GOODS $ 2,939,525
------------
COMMUNICATION SERVICES - 1.9%
CELLULAR/ WIRELESS COMMUNICATIONS - 1.9%
1,750,000 BB+/Ba3 Comcast Cellular Corp., 9.5%,
5/1/07 $ 1,868,125
------------
TOTAL COMMUNICATION SERVICES $ 1,868,125
------------
</TABLE>
7. The accompanying notes are an integral part of these financial statements.
<PAGE>
PIONEER INTEREST SHARES
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SCHEDULE OF INVESTMENTS 12/31/98 (CONTINUED)
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<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<S> <C> <C> <C>
CONSUMER CYCLICALS - 6.9%
PUBLISHING (NEWSPAPERS) - 3.5%
$3,000,000 BBB-/Baa3 News America Holdings, Inc.,
10.125%, 10/15/12 $ 3,491,940
------------
RETAIL (DEPARTMENT STORES) - 1.5%
1,500,000 BB+/Baa3 Saks, Inc., 7.25%, 12/1/04 $ 1,496,760
------------
RETAIL (DISCOUNTERS) - 1.9%
1,500,000 BBB-/Baa3 Shopko Stores, Inc., 9.25%,
3/15/22 $ 1,846,290
------------
TOTAL CONSUMER CYCLICALS $ 6,834,990
------------
CONSUMER STAPLES - 13.4%
BROADCASTING (TELEVISION/RADIO/
CABLE) - 7.1%
2,500,000 BBB/Baa3 Continental Cablevision, Inc.,
9.5%, 8/1/13 $ 2,985,000
3,500,000 BBB-/Baa3 Tele-Communications, Inc., 9.25%,
1/15/23 4,072,775
------------
$ 7,057,775
------------
ENTERTAINMENT - 4.0%
3,000,000 BBB/Baa3 Time Warner Inc., 9.15%, 2/1/23 $ 3,920,640
------------
FOODS - 2.3%
500,000 B/B3 Agrilink Foods, 11.875%, 11/1/08 $ 507,500
2,000,000 B-/B3 AmeriServe Food Distribution,
Inc., 10.125%, 7/15/07 1,740,000
------------
$ 2,247,500
------------
TOTAL CONSUMER STAPLES $ 13,225,915
------------
ENERGY - 5.4%
OIL (DOMESTIC INTEGRATED) - 2.3%
2,000,000 A-/A3 Phillips Petroleum Co., 9.18%,
9/15/21 $ 2,258,680
------------
OIL & GAS (PRODUCTION/EXPLORATION) - 3.1%
3,000,000 BB-/Ba2 Gulf Canada Resources, Ltd.,
9.625%, 7/1/05 $ 3,078,150
------------
TOTAL ENERGY $ 5,336,830
------------
</TABLE>
8 The accompanying notes are an integral part of these financial statements.
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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>
FINANCIAL - 6.9%
CONSUMER FINANCE - 5.2%
$1,500,000 A/A1 Ford Capital BV, 10.125%, 11/15/00 $ 1,623,750
3,000,000 A/A1 Ford Motor Credit Co., 9.14%,
12/30/14 3,447,780
------------
$ 5,071,530
------------
FINANCIAL (DIVERSIFIED) - 1.7%
1,200,000 CCC+/Caa3 AMRESCO, Inc., 10.0%, 3/15/04 $ 864,000
1,000,000 B+/B3 Delta Financial Corp., 9.5%,
8/1/04 825,000
------------
$ 1,689,000
------------
TOTAL FINANCIAL $ 6,760,530
------------
HEALTHCARE - 1.3%
250,000 B+/B2 Biovail Corp., 10.875%, 11/15/05 $ 252,500
1,000,000 BB-/Ba3 Tenet Healthcare Corp., 8.125%,
12/1/08 1,032,500
------------
TOTAL HEALTHCARE $ 1,285,000
------------
TECHNOLOGY - 1.1%
COMPUTERS - 1.1%
1,000,000 BB-/Ba3 Unisys Corp., 12.0%, 4/15/03 $ 1,120,000
------------
TOTAL TECHNOLOGY $ 1,120,000
------------
TRANSPORTATION - 9.7%
AIRLINES - 7.5%
2,000,000 BBB-/Baa2 AMR Corp., 9.88%, 6/15/20 $ 2,531,660
3,000,000 BBB/Baa1 Delta Air Lines, Inc., 9.2%,
9/23/14 3,597,270
500,000 BB+/Baa3 United Air Lines Inc., 10.67%,
5/1/04 592,235
515,000 BB+/Baa3 United Air Lines Inc., 10.25%,
7/15/21 661,795
------------
$ 7,382,960
------------
RAILROADS - 2.2%
2,000,000 BBB-/Baa2 Kansas City Southern Industries,
Inc., 8.8%, 7/1/22 $ 2,221,560
------------
TOTAL TRANSPORTATION $ 9,604,520
------------
</TABLE>
The accompanying notes are an integral part of these financial statements. 9
<PAGE>
PIONEER INTEREST SHARES
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SCHEDULE OF INVESTMENTS 12/31/98 (CONTINUED)
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<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<S> <C> <C> <C>
UTILITIES - 7.2%
ELECTRIC COMPANIES - 2.2%
$2,000,000 A/A2 Virginia Electric and Power Co.,
8.75%, 4/1/21 $ 2,166,100
------------
NATURAL GAS - 5.0%
2,000,000 BBB-/Baa3 Coastal Corp., 9.625%, 5/15/12 $ 2,570,600
2,000,000 BBB/Baa2 Colorado Interstate Gas Co.,
10.0%, 6/15/05 2,418,180
------------
$ 4,988,780
------------
TOTAL UTILITIES $ 7,154,880
------------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS - 21.4%
2,200,000 Federal Home Loan Mortgage Corp.,
6.0%, 7/15/24 $ 2,221,758
4,836,429 Federal National Mortgage
Association, 5.5%, 4/1/13 4,771,428
891,607 Federal National Mortgage
Association, 9.0%, 7/1/19 950,676
2,012,576 Government National Mortgage
Association, 6.0%, 11/15/13 2,024,530
2,492,468 Government National Mortgage
Association, 6.5%, 10/15/28 2,516,620
1,973,309 Government National Mortgage
Association, REMIC Series
1998-24A, 6.5%, 11/20/24 1,997,581
2,000,000 U.S. Treasury Bonds, 6.25%,
1/31/02 2,090,220
500,000 U.S. Treasury Bonds, 9.375%,
2/15/06 637,500
2,950,000 U.S. Treasury Bonds, 8.125%,
8/15/19 3,938,073
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TOTAL U.S. GOVERNMENT AND AGENCY
OBLIGATIONS $ 21,148,386
------------
</TABLE>
10 The accompanying notes are an integral part of these financial statements.
<PAGE>
PIONEER INTEREST SHARES
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<TABLE>
<CAPTION>
S&P/MOODY'S
PRINCIPAL RATINGS
AMOUNT (UNAUDITED) VALUE
<S> <C> <C> <C>
FOREIGN GOVERNMENT SPONSORED -
4.7%
$4,000,000 A+/A2 Hydro-Quebec, 9.75%, 1/15/18 $ 4,613,440
------------
TOTAL FOREIGN GOVERNMENT SPONSORED $ 4,613,440
------------
TOTAL INVESTMENT IN SECURITIES
(Cost $93,924,839) $ 98,401,446
------------
TEMPORARY CASH INVESTMENT - 0.4%
COMMERCIAL PAPER - 0.4%
386,000 Ford Motor Credit Corp., 4.92%,
1/4/99 $ 386,000
------------
TOTAL TEMPORARY CASH INVESTMENT
(Cost $386,000) $ 386,000
------------
TOTAL INVESTMENT IN SECURITIES AND TEMPORARY
CASH INVESTMENT - 100%
(Cost $94,310,839)(a)(b) $ 98,787,446
============
(a) At December 31, 1998, the net unrealized gain on investments based on cost
for federal income tax purposes of $94,310,839 was as follows:
Aggregate gross unrealized gain for all investments in
which there is an excess of value over tax cost $ 5,676,551
Aggregate gross unrealized loss for all investments in
which there is an excess of tax cost over value (1,199,944)
------------
Net unrealized gain $ 4,476,607
============
(b) At December 31, 1998, the Fund had a capital loss carryforward of $8,561,628
which will expire between 1999 and 2004 if not utilized.
Purchases and sales of securities (excluding temporary cash investments) for the
year ended December 31, 1998 were as follows:
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Long-Term U.S. Government $17,945,425 $28,021,750
Other Long-Term Securities 36,002,363 22,551,226
</TABLE>
The accompanying notes are an integral part of these financial statements. 11
<PAGE>
PIONEER INTEREST SHARES
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BALANCE SHEET 12/31/98
----------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (including temporary
cash
investment of $386,000) (cost $94,310,839) $ 98,787,446
Interest receivable 2,052,731
Other 3,569
------------
Total assets $100,843,746
------------
LIABILITIES:
Due to affiliates $ 68,314
Due to bank 136,409
Accrued expenses 71,891
------------
Total liabilities $ 276,614
------------
NET ASSETS:
Paid-in capital $104,652,153
Accumulated net realized loss on investments (8,561,628)
Net unrealized gain on investments 4,476,607
------------
Total net assets $100,567,132
============
NET ASSET VALUE PER SHARE:
(50,000,000 shares authorized)
7,381,961 fund shares outstanding $ 13.62
============
</TABLE>
12 The accompanying notes are an integral part of these financial statements.
<PAGE>
PIONEER INTEREST SHARES
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STATEMENT OF OPERATIONS
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FOR THE YEAR ENDED 12/31/98
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 8,479,049
------------
EXPENSES:
Management fees $ 562,411
Transfer agent fees 86,891
Accounting 9,293
Custodian fees 28,203
Professional fees 43,821
Printing 41,418
Fees and expenses of nonaffiliated trustees 23,011
Miscellaneous 19,752
----------
Total expenses $ 814,800
Less fees paid indirectly (1,611)
------------
Net expenses $ 813,189
------------
Net investment income $ 7,665,860
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments $ 149,030
Change in net unrealized gain on investments (962,580)
------------
Net loss on investments $ (813,550)
------------
Net increase in net assets resulting from operations $ 6,852,310
============
</TABLE>
The accompanying notes are an integral part of these financial statements. 13
<PAGE>
PIONEER INTEREST SHARES
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STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------------------------------------------
FOR THE YEARS ENDED 12/31/98 AND 12/31/97
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/98 12/31/97
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 7,665,860 $ 7,777,181
Net realized gain on investments 149,030 708,016
Change in net unrealized gain on
investments (962,580) 1,937,545
------------ ------------
Net increase in net assets resulting from
operations $ 6,852,310 $ 10,422,742
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($1.04 and $1.07 per
share, respectively) $ (7,673,126) $ (7,895,607)
In excess of net investment income ($0.00 and
$0.01 per share, respectively) - (44,166)
------------ ------------
Total distributions to shareholders $ (7,673,126) $ (7,939,773)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Reinvestment of distributions $ 196,104 $ 208,527
------------ ------------
Net increase (decrease) in net assets $ (624,712) $ 2,691,496
NET ASSETS:
Beginning of year 101,191,844 98,500,348
------------ ------------
End of year (including accumulated
undistributed net investment income of $0 and
$0, respectively) $100,567,132 $101,191,844
============ ============
</TABLE>
<TABLE>
<CAPTION>
'98 SHARES '98 AMOUNT '97 SHARES '97 AMOUNT
<S> <C> <C> <C> <C>
Reinvestment of distributions 15,106 $196,104 15,177 $208,527
------ -------- ------ --------
Net increase 15,106 $196,104 15,177 $208,527
====== ======== ====== ========
</TABLE>
14 The accompanying notes are an integral part of these financial statements.
<PAGE>
PIONEER INTEREST SHARES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 12/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.74 $ 13.40 $ 13.67 $ 12.65 $ 14.29
-------- -------- ------- ------- -------
Increase (decrease) from investment operations:
Net investment income $ 1.04 $ 1.06 $ 1.07 $ 1.07 $ 1.12
Net realized and unrealized gain (loss) on investments (0.12) 0.36 (0.29) 1.03 (1.63)
-------- -------- ------- ------- -------
Net increase (decrease) from investment operations $ 0.92 $ 1.42 $ 0.78 $ 2.10 $ (0.51)
Distributions to shareholders:
Net investment income (1.04) (1.07) (1.05) (1.08) (1.13)
In excess of net investment income - (0.01) - - -
-------- -------- ------- ------- -------
Net increase (decrease) in net asset value $ (0.12) $ 0.34 $ (0.27) $ 1.02 $ (1.64)
-------- -------- ------- ------- -------
Net asset value, end of year $ 13.62 $ 13.74 $ 13.40 $ 13.67 $ 12.65
======== ======== ======= ======= =======
Market value, end of year $ 13.563 $ 14.000 $12.875 $13.500 $11.750
Total return* 4.66% 17.83% 3.27% 24.77% (7.54)%
Ratio of net expenses to average net assets 0.80%+ 0.87%+ 0.99%+ 0.98%+ 1.03%
Ratio of net investment income to average net assets 7.53%+ 7.81%+ 7.94%+ 8.04%+ 8.46%
Portfolio turnover rate 51% 27% 28% 49% 65%
Net assets, end of year (in thousands) $100,567 $101,192 $98,500 $99,989 $92,252
Ratios assuming no reduction for fees paid indirectly:
Net expenses 0.80% 0.87% 0.98% 0.97% -
Net investment income 7.53% 7.81% 7.95% 8.05% -
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* 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.
+ Ratio assuming no reduction for fees paid indirectly.
The accompanying notes are an integral part of these financial statements. 15
<PAGE>
PIONEER INTEREST SHARES
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NOTES TO FINANCIAL STATEMENTS 12/31/98
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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, to its shareholders. Therefore, no federal income tax
provision is required.
16
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PIONEER INTEREST SHARES
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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, 1998, the Fund reclassified from paid-in capital
$7,266 and $455,426 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 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.
<PAGE>
17
PIONEER INTEREST SHARES
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NOTES TO FINANCIAL STATEMENTS 12/31/98 (CONTINUED)
-----------------------------------------------------------------------
2. MANAGEMENT AGREEMENT
Pioneer Investment Management, Inc. (PIM) (formerly Pioneering
Management Corp.), 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 and administration agreements,
certain other services and costs, including accounting, regulatory
reporting, and insurance premiums, are paid by the Fund. At December
31, 1998, $50,980 was payable to PIM related to management fees,
administrative 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 $17,334 in transfer agent fees payable to PSC at
December 31, 1998.
4. EXPENSE OFFSETS
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, 1998, the Fund's expenses were reduced by $1,611 under
such arrangements.
18
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PIONEER INTEREST SHARES
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE SHAREOWNERS 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, 1998, and the related
statement of operations, the statements of changes in net assets, and the
financial highlights for the periods presented. 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.
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, 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 December 31, 1998, the results of its operations,
the changes in its net assets, and the financial highlights for the periods
presented, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 12, 1999
<PAGE>
19
PIONEER INTEREST SHARES
------------------------------------------------------------------------
TRUSTEES, OFFICERS AND SERVICE PROVIDERS
------------------------------------------------------------------------
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 John A. Boynton, Treasurer
David D. Tripple Joseph P. Barri, Secretary
Stephen K. West
John Winthrop
INVESTMENT ADVISER
Pioneer Investment Management, Inc.
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. Pioneer
Investment Management, Inc. (PIM) 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 PIM 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:
ACCOUNT INFORMATION 1-800-288-9541
TELECOMMUNICATIONS DEVICE FOR THE
DEAF (TDD) 1-800-231-5469
OR WRITE TO CHASEMELLON SHAREHOLDER SERVICES:
FOR WRITE TO
General inquiries, lost dividend checks P.O. Box 3315
South Hackensack, NJ
07606-1915
Change of address, account consolidation P.O. Box 3316
South Hackensack, NJ
07606-1916
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
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<S> <C> <C>
[PIONEER LOGO] PIONEER INVESTMENT MANAGEMENT, INC.
60 STATE STREET 0299-6093
BOSTON, MASSACHUSETTS 02109 (c)PIONEER FUNDS DISTRIBUTOR, INC.
www.pioneerfunds.com [LOGO FOR RECYCLED PAPER] PRINTED ON RECYCLED PAPER
</TABLE>
