UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-02281
THE HARTFORD INCOME SHARES FUND, INC.
(Exact name of registrant as specified in charter)
P. O. Box 2999, Hartford, Connecticut 06104-2999
(Address of Principal Executive Offices)
Kevin J. Carr, Esquire
Life Law Unit
The Hartford Financial Services Group, Inc.
200 Hopmeadow Street
Simsbury, Connecticut 06089
(Name and Address of Agent for Service)
Registrant's telephone number, including area code: (860) 843-4586
Date of fiscal year end: July 31st
Date of reporting period: August 1, 2003 - July 31, 2004
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
[PICTURE]
JULY 31, 2004
THE HARTFORD
INCOME SHARES FUND, INC.
----------------------------------------------
Annual Report
[THE HARTFORD MUTUAL FUNDS LOGO]
THE HARTFORD INCOME SHARES FUND, INC. ANNUAL REPORT
CONTENTS
LETTER TO SHAREHOLDERS 1
SCHEDULE OF INVESTMENTS 2
STATEMENT OF ASSETS AND
LIABILITIES 6
STATEMENT OF OPERATIONS 6
STATEMENTS OF CHANGES IN NET
ASSETS 7
NOTES TO FINANCIAL STATEMENTS 8
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 11
DIRECTORS AND OFFICERS 12
- - TOLL-FREE PERSONAL ASSISTANCE
-Customer Service
-(888) 843-7824
- 7:00 a.m. to 6:00 p.m. CT,
Monday thru Thursday
7:00 a.m. to 5:00 p.m. CT, Friday
- - TOLL-FREE INFORMATION LINE
- For daily account balances, transaction activity or net asset value
information
-(888) 843-7824 x14344
-24 hours a day
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities and a record of how the Fund
voted any proxies for the period July 1, 2003 to June 30, 2004 is available (1)
without charge, upon request, by calling 888-843-7824 and (2) on the Securities
and Exchange Commission's website at http://www.sec.gov.
HOW TO USE THIS REPORT
For a quick overview of the Fund's performance during the past twelve months,
refer to the Highlights box below. The letter from the portfolio manager
provides a more detailed analysis of the fund and financial markets.
The charts alongside the letter are useful because they provide more information
about your investments. The top holdings chart shows the types of securities in
which the Fund invests, and the pie chart shows a breakdown of the Fund's assets
by sector. Additional information concerning Fund performance and policies can
be found in the Notes to Financial Statements.
This report is just one of several tools you can use to learn more about your
investment in The Hartford Income Shares Fund, Inc. Your investment
representative, who understands your personal financial situation, can best
explain the features of your investment and how it's designed to help you meet
your financial goals.
HIGHLIGHTS
<Table>
<Caption>
THE HARTFORD
INCOME SHARES FUND,
INC.
-------------------
JULY 31, 2004
TOTAL NET ASSETS (000'S OMITTED)................... $102,993
MARKET PRICE PER SHARE............................. $ 7.33
SHARES OUTSTANDING (000'S OMITTED)................. 12,986
FOR THE YEAR ENDED JULY 31, 2004:
NET ASSET VALUE PER SHARE:
Beginning of year................................ $ 7.63
End of year...................................... $ 7.93
DISTRIBUTIONS FROM NET INVESTMENT INCOME:
Total dividends paid (000's Omitted)............. $ 7,173
Dividends per share.............................. $ 0.55
</Table>
MONTHLY DIVIDENDS PAID
<Table>
<Caption>
DATE AMOUNT
---- ------------
August 2003............................................... 0.046 Income
September 2003............................................ 0.046 Income
October 2003.............................................. 0.046 Income
November 2003............................................. 0.046 Income
December 2003............................................. 0.046 Income
January 2004.............................................. 0.046 Income
February 2004............................................. 0.046 Income
March 2004................................................ 0.046 Income
April 2004................................................ 0.046 Income
May 2004.................................................. 0.046 Income
June 2004................................................. 0.046 Income
July 2004................................................. 0.046 Income
</Table>
PORTFOLIO COMPOSITION BY SECTOR AS
OF 7/31/2004
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
<Caption>
CORPORATE BONDS ASSET BACKED
CORPORATE BONDS - INVESTMENT -NON-INVESTMENT CASH U.S. GOVERNMENT AND COMMERCIAL
GRADE GRADE EQUIVALENTS/RECEIVABLES U.S. TREASURIES AGENCIES MORTGAGE
- ---------------------------- --------------- ----------------------- --------------- --------------- --------------
68.8 25.90 2.20 1.00 0.80 0.80
<Caption>
CORPORATE BONDS - INVESTMENT
GRADE COMMON STOCK
- ---------------------------- ------------
68.8 0.50
</Table>
TOP 10 HOLDINGS AS OF 7/31/2004
Percent of
Bonds Net Assets
- --------------------------------------------------------------------------------
1. Ford Motor Co. (7.45%) 2031 3.7%
2. Farmers Exchange Capital (7.20%) 2048 2.8%
3. General Motors Acceptance Corp.
(8.00%) 2031 2.6%
4. Time Warner Entertainment Co. L. P.
(8.375%) 2033 2.1%
5. Tele-Communications, Inc.
(9.80%) 2012 1.8%
6. News America Holdings, Inc.
(8.875%) 2023 1.8%
7. AT&T Wireless Services, Inc.
(8.75%) 2031 1.8%
8. AT&T Corp. (8.75%) 2031 1.7%
9. Union Carbide Corp. (7.75%) 2096 1.7%
10. Columbia Energy Group (7.62%) 2025 1.5%
HOW DID THE FUND PERFORM?
The Hartford Income Shares Fund, Inc. placed in the 27th percentile of its
Lipper peer group (at NAV) for the 12 months ended July 31, 2004, with a net
return of 11.69% at net asset value and 12.75% at market versus the 8.97% return
at net asset value of the Lipper BBB-Rated Corporate Debt Closed-End Funds
Universe.
WHY DID THE FUND PERFORM THIS WAY?
For the one year period, the Fund generated 680 basis points of out-performance
relative to its benchmark, the Lehman Aggregate Index. The most significant
contribution to performance was the Fund's overweight to investment grade and
high yield corporate debt. As measured by the Lehman Broad High Yield Index, the
high yield market generated slightly over 13% of total return in the last year,
easily outpacing the Lehman Aggregate's total return of 4.84% during the same
period. While the performance of investment grade corporates was not nearly as
dramatic as high yield, the Fund's concentration in the automotive sector in
investment grade corporates made a significant contribution to its total return.
The rally in these areas reflected the improving corporate credit fundamentals
experienced over the past year. This is evidenced by the fact that the second
quarter of 2004 represented the fourth consecutive quarter that year-over-year
earnings increases for the S&P 500 exceeded 20% (only the second time in 25
years that this has occurred). For many corporations, free cash flow relative to
debt and overall cash balances are also at levels not experienced in many years.
Reflective of this underlying improvement in fundamentals, the trailing 12 month
default rate on high yield corporate issuers compiled by Moody's Investor
Services has fallen to 2.9% (having peaked at 10.7% in January 2002), the first
dip below 3% for a trailing 12 month period since 1999.
The Fund's underweight to mortgage-backed securities was the largest detriment
to performance. Given the extreme volatility in interest rates over the last
year and the related concerns over how swings in mortgage pre-payments will
affect securities' valuations, we have generally avoided this sector. We did not
feel that the yields offered on mortgage-backed securities were compensation
enough for these risks.
We have purchased a number of longer-dated securities in order to pick up
greater yield. As a result, the Fund's net asset value is more sensitive to
movements in interest rates and yield spreads than its benchmark. We have been
working to bring the portfolio's duration down over the last year in an effort
to reduce our sensitivity to a rising rate environment. In addition, the high
yield allocation is at its maximum, in part, because interest rate sensitivity
tends to play a smaller role in the valuation of these securities relative to
other fixed income alternatives.
WHAT IS YOUR OUTLOOK?
In light of the Fund's yield orientation, our focus remains on the high yield
and investment grade corporate sectors, as the incremental yield offered by
these sectors is generally significantly higher than many of the other fixed
income alternatives. We currently remain comfortable with corporate fundamentals
and the technical picture has seldom been more supportive. We do, however, have
some concerns. Among our chief concerns for investment grade bonds, (apart from
macro considerations such as spiking oil prices and the related issue of softer
economic growth), is the potential for equity-oriented activities, such as
dividend increases, share repurchase programs and leveraged buy-outs, to begin
to erode corporate credit quality. In addition, the high yield sector has
experienced a significant amount of new issuance over the last two years, which
gives rise to the potential that credit-underwriting standards have been
compromised and setting the stage for an increase in defaults when these loans
become "seasoned" two to three years hence.
In an effort to diversify our holdings, we have had some small measure of
success in finding attractive investments in asset-backed securities (ABS) and
Treasury Inflation Protected Securities (TIPS). We will continue to look for
other diversification opportunities in the context of the yield requirements of
the portfolio.
THE HARTFORD INCOME SHARES FUND, INC.
Schedule of Investments
July 31, 2004
(000's Omitted)
ASSET BACKED AND COMMERCIAL MORTGAGE SECURITIES - 0.8%
- --------------------------------------------------------------------------------
<Table>
<Caption>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Value(c)
- --------- ----------- --------
FINANCE - 0.4%
$ 365 AQ Finance CEB Trust, FRN, Ser 2003-CE1A 8-25-2033 (f)(h)... BBB $ 361
TRANSPORTATION - 0.4%
500 Delta Air Lines, Inc., 7.57%, Series 2000-1, Class A-2
5-18-2012................................................... BBB- 452
-------
TOTAL ASSET BACKED AND COMMERCIAL MORTGAGE SECURITIES (COST
$872)....................................................... $ 813
=======
</Table>
CORPORATE BONDS: INVESTMENT GRADE - 68.8%
- --------------------------------------------------------------------------------
<Table>
<Caption>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Value(c)
- --------- ----------- --------
BASIC MATERIALS - 5.1%
$ 500 Newmont Mining Corp., 8.625%, 5-15-2011..................... BBB $ 613
250 Noranda, Inc., 8.375%, 2-15-2011 (d)........................ BBB- 286
300 Olin Corp., 9.125%, 12-15-2011.............................. BBB- 365
685 Phelps Dodge Corp., 8.75%, 6-1-2011......................... BBB- 819
250 Phelps Dodge Corp., 9.50%, 6-1-2031......................... BBB- 344
2,000 Union Carbide Corp., 7.75%, 10-1-2096....................... BBB- 1,725
1,000 Westvaco Corp., 8.20%, 1-15-2030............................ BBB 1,142
-------
5,294
-------
CAPITAL GOODS - 1.5%
170 Briggs & Stratton Corp., 8.875%, 3-15-2011.................. BBB- 199
1,250 Tyco International Group S.A., 7.00%, 6-15-2028............. BBB 1,343
-------
1,542
-------
CONSUMER CYCLICAL - 10.7%
1,000 Albertson's, Inc., 8.70%, 5-1-2030.......................... BBB 1,231
1,000 Federated Department Stores, Inc., 8.50%, 6-1-2010.......... BBB+ 1,207
4,000 Ford Motor Co., 7.45%, 7-16-2031............................ BBB- 3,804
1,000 Ford Motor Co., 7.70%, 5-15-2097............................ BBB- 913
1,000 General Motors Corp., 8.25%, 7-15-2023...................... BBB 1,039
1,000 General Motors Corp., 8.375%, 7-15-2033..................... BBB 1,045
500 May Department Stores Co., 8.50%, 6-1-2019.................. BBB 607
1,000 TRW, Inc., 7.75%, 6-1-2029.................................. BBB 1,179
-------
11,025
-------
ENERGY - 6.9%
850 Burlington Resources, Inc., 9.125%, 10-1-2021............... BBB+ 1,105
1,500 Columbia Energy Group, 7.62%, Ser G 11-28-2025.............. BBB 1,579
1,000 ConocoPhillips Holding Co., 6.95%, 4-15-2029................ A- 1,113
750 Halliburton Co., 5.625%, 12-1-2008.......................... BBB 775
1,000 Occidental Petroleum Corp., 8.45%, 2-15-2029................ BBB+ 1,291
1,000 Valero Energy Corp., 8.75%, 6-15-2030....................... BBB 1,262
-------
7,125
-------
FINANCE - 15.4%
200 Aon Corp., 8.205%, 1-1-2027................................. BBB 222
500 Bombardier Capital, Inc., 6.125%, 6-29-2006 (d)(f).......... BBB- 499
500 Bombardier Capital, Inc., 7.45%, 5-1-2034 (d)(f)............ BBB- 424
500 Capital One Bank, 8.25%, 6-15-2005.......................... BBB- 523
1,000 CNA Financial Corp., 7.25%, 11-15-2023...................... BBB- 1,016
1,000 EOP Operating L.P., 7.50%, 4-19-2029........................ BBB+ 1,072
1,000 ERAC USA Finance Co., 8.00%, 1-15-2011 (f).................. BBB+ 1,172
3,000 Farmers Exchange Capital, 7.20%, 7-15-2048 (f).............. BBB+ 2,907
2,650 General Motors Acceptance Corp., 8.00%, 11-1-2031........... BBB 2,691
500 Household Finance Corp., 7.00%, 5-15-2012................... A 557
250 Liberty Mutual Group, 7.00%, 3-15-2034 (f).................. BBB 247
1,000 Mony Group, Inc., 8.35%, 3-15-2010.......................... A 1,174
1,000 ReliaStar Financial Corp., 8.00%, 10-30-2006................ A+ 1,104
1,000 Spieker Properties, Inc., 7.50%, 10-1-2027.................. BBB+ 1,081
1,000 Travelers Property Casualty Corp., 7.75%, 4-15-2026......... BBB+ 1,157
-------
15,846
-------
SERVICES - 10.6%
1,000 Belo Corp., 7.25%, 9-15-2027................................ BBB- 1,068
750 Clear Channel Communications, Inc., 7.65%, 9-15-2010........ BBB- 848
1,000 Comcast Cable Communications, Inc., 8.50%, 5-1-2027......... BBB 1,227
1,000 Cox Enterprises, Inc., 8.00%, 2-15-2007 (f)................. BBB 1,103
750 Electronic Data Systems Corp., 7.45%, 10-15-2029............ BBB- 711
1,000 FedEx Corp., 7.84%, Ser 1996-B2 1-30-2018................... BBB+ 1,068
1,000 Hearst-Argyle Television, Inc., 7.00%, 1-15-2018............ BBB- 1,093
750 Hilton Hotels Corp., 8.25%, 2-15-2011....................... BBB- 847
1,500 News America Holdings, Inc., 8.875%, 4-26-2023.............. BBB- 1,886
</Table>
2
The accompanying notes are an integral part of this financial statement.
CORPORATE BONDS: INVESTMENT GRADE - CONTINUED
- --------------------------------------------------------------------------------
<Table>
<Caption>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Value(c)
- --------- ----------- --------
$ 500 USA Networks, Inc., 6.75%, 11-15-2005....................... BBB- $ 519
500 USA Waste Management, Inc., 7.125%, 12-15-2017.............. BBB 548
-------
10,918
-------
TECHNOLOGY - 13.2%
1,750 AT&T Corp., 8.75%, 11-15-2031............................... BBB 1,742
1,500 AT&T Wireless Services, Inc., 8.75%, 3-1-2031............... BBB 1,867
1,130 Computer Associates International, Inc., 6.375%, Ser B
4-15-2005................................................... BBB- 1,160
500 Cox Communications, Inc., 6.80%, 8-1-2028................... BBB 508
1,000 Raytheon Co., 7.20%, 8-15-2027.............................. BBB- 1,102
270 Rogers Cable, Inc., 6.25%, 6-15-2013 (d).................... BBB- 260
250 Sprint Capital Corp., 6.00%, 1-15-2007...................... BBB- 263
1,500 Sprint Capital Corp., 6.875%, 11-15-2028.................... BBB- 1,493
1,500 Tele-Communications, Inc., 9.80%, 2-1-2012.................. BBB 1,898
400 TELUS Corp., 8.00%, 6-1-2011 (d)............................ BBB 457
700 Time Warner Companies, Inc., 6.625%, 5-15-2029.............. BBB+ 691
1,800 Time Warner Entertainment Co. L.P., 8.375%, 7-15-2033....... BBB+ 2,129
@@ VoiceStream Wireless Corp., 10.375%, 11-15-2009 (e)......... BBB+ @@
@@ VoiceStream Wireless Corp., (Baby Bonds) 10.375%, 11-15-2009
(e)......................................................... BBB+ @@
-------
13,570
-------
TRANSPORTATION - 1.2%
1,000 Norfolk Southern Corp., 8.625%, 5-15-2010................... BBB 1,196
-------
UTILITIES - 4.2%
1,000 American Electric Power Co., Inc., 6.125%, Ser A
5-15-2006................................................... BBB 1,050
1,000 CMS Panhandle Holding Co., 7.00%, 7-15-2029................. BBB 1,008
750 FirstEnergy Corp., 6.45%, Ser B 11-15-2011.................. Baa3* 793
1,400 TXU Corp., 6.375%, Ser J 6-15-2006.......................... BBB- 1,475
-------
4,326
-------
TOTAL CORPORATE BONDS: INVESTMENT GRADE (COST $61,215)...... $70,842
=======
</Table>
CORPORATE BONDS: NON-INVESTMENT GRADE - 25.9%
- --------------------------------------------------------------------------------
<Table>
<Caption>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Value(c)
- --------- ----------- --------
BASIC MATERIALS - 3.0%
$1,000 Abitibi-Consolidated, Inc., 8.85%, 8-1-2030 (d)............. BB $ 979
750 Equistar Chemicals L.P., 10.125%, 9-1-2008.................. B+ 822
500 Hercules, Inc., 11.125%, 11-15-2007......................... BB- 585
235 Nova Chemicals Corp., 7.00%, 5-15-2006 (d).................. BB+ 244
250 Stone Container Corp., 9.75%, 2-1-2011...................... B 276
163 United States Steel LLC, 10.75%, 8-1-2008................... BB- 189
-------
3,095
-------
CAPITAL GOODS - 0.2%
200 Jorgensen (Earle M.) Co., 9.75%, 6-1-2012................... B- 221
-------
CONSUMER CYCLICAL - 1.9%
500 Delhaize America, Inc., 9.00%, 4-15-2031.................... BB+ 562
120 Dillard's, Inc., 6.625%, 1-15-2018.......................... BB 108
85 Dillard's, Inc., 7.13%, 8-1-2018............................ BB 79
225 Navistar International Corp., 9.375%, Ser B 6-1-2006........ BB- 242
1,000 Toys R Us, Inc., 7.375%, 10-15-2018......................... BB 950
-------
1,941
-------
ENERGY - 1.5%
500 Williams Companies, Inc., 7.125%, 9-1-2011.................. B+ 520
1,000 Williams Companies, Inc., 7.625%, 7-15-2019................. B+ 1,010
-------
1,530
-------
FINANCE - 0.8%
100 IPC Acquisition Corp., 11.50%, 12-15-2009................... B- 110
750 Qwest Capital Funding, Inc., 6.50%, 11-15-2018.............. B 555
115 Western Financial Bank, 9.625%, 5-15-2012................... BB- 126
-------
791
-------
HEALTH CARE - 1.6%
540 Select Medical Corp., 9.50%, 6-15-2009...................... B 578
925 Tenet Healthcare Corp., 5.00%, 7-1-2007..................... B- 930
150 United Surgical Partners International, Inc., 10.00%,
12-15-2011.................................................. B 170
-------
1,678
-------
SERVICES - 4.9%
250 Mandalay Resort Group, 7.625%, 7-15-2013.................... BB- 251
1,000 MGM Mirage, Inc., 8.50%, 9-15-2010.......................... BB+ 1,105
</Table>
3
THE HARTFORD INCOME SHARES FUND, INC.
Schedule of Investments
July 31, 2004
(000's Omitted)
CORPORATE BONDS: NON-INVESTMENT GRADE - CONTINUED
- --------------------------------------------------------------------------------
<Table>
<Caption>
Standard
& Poor's
Principal Rating Market
Amount (Unaudited) Value(c)
- --------- ----------- --------
$1,250 Park Place Entertainment Corp., 8.50%, 11-15-2006........... BB+ $ 1,359
750 Service Corp. International, 6.50%, 3-15-2008............... BB 765
650 Six Flags, Inc., 9.50%, 2-1-2009............................ B- 635
750 Starwood Hotels & Resorts Worldwide, Inc., 7.375%,
5-1-2007.................................................... BB+ 791
150 Stewart Enterprises, Inc., 10.75%, 7-1-2008................. B+ 167
-------
5,073
-------
TECHNOLOGY - 7.8%
675 Charter Communications Holdings LLC, 10.00%, 5-15-2011...... CCC- 506
260 Charter Communications Holdings LLC, 8.25%, 4-1-2007........ CCC- 229
500 Citizens Communications Co., 9.00%, 8-15-2031............... BB+ 490
750 Dobson Communications Corp., 10.875%, 7-1-2010.............. CCC+ 653
500 EchoStar DBS Corp., 10.375%, 10-1-2007...................... BB- 531
375 Hyperion Telecommunications, 12.25%, Ser B 9-1-2004
(g)(j)...................................................... NR 247
250 Level 3 Communications, Inc., 11.00%, 3-15-2008............. CC 200
595 Level 3 Communications, Inc., 11.25%, 3-15-2010............. CC 437
145 Level 3 Communications, Inc., 9.125%, 5-1-2008.............. CC 108
1,500 Lucent Technologies, Inc., 6.45%, 3-15-2029................. B 1,144
87 Marconi Corp. plc, 8.00%, 4-30-2008 (d)..................... NR 94
99 MCI, Inc., 5.908%, 5-1-2007................................. NR 96
99 MCI, Inc., 6.688%, 5-1-2009................................. NR 91
85 MCI, Inc., 7.735%, 5-1-2014................................. NR 77
310 Nextel Communications, Inc., 9.375%, 11-15-2009............. BB 331
650 Nortel Networks Corp., 6.875%, 9-1-2023 (d)................. B- 574
650 Nortel Networks Ltd., 6.125%, 2-15-2006 (d)................. B- 649
500 PanAmSat Corp., 6.875%, 1-15-2028........................... BB+ 410
100 Qwest Corp., 6.875%, 9-15-2033.............................. BB- 83
1,000 Rogers Cantel, Inc., 9.75%, 6-1-2016 (d).................... BB+ 1,132
-------
8,082
-------
TRANSPORTATION - 1.3%
170 CP Ships Ltd., 10.375%, 7-15-2012 (d)....................... BB+ 195
1,200 Delta Air Lines, Inc., 10.50%, 4-30-2016 (e)................ B- 725
500 NWA Trust, 13.875%, Ser D 6-21-2008......................... Ba3* 410
-------
1,330
-------
UTILITIES - 2.8%
115 Calpine Corp., 7.875%, 4-1-2008............................. CCC+ 71
310 Calpine Corp., 8.50%, 2-15-2011............................. CCC+ 194
1,000 El Paso Corp., 8.05%, 10-15-2030............................ Caa1* 823
720 Sierra Pacific Power Co., 8.00%, Ser A 6-1-2008............. BB 774
1,000 TECO Energy, Inc., 7.20%, 5-1-2011.......................... BB 1,027
-------
2,889
-------
TOTAL CORPORATE BONDS: NON-INVESTMENT GRADE (COST
$25,978).................................................... $26,630
=======
</Table>
U.S. GOVERNMENT AND AGENCIES SECURITIES - 1.8%
- --------------------------------------------------------------------------------
<Table>
<Caption>
PRINCIPAL Market
AMOUNT Value(c)
- --------- --------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.2%
$ 23 9.00% 2022.................................................. $ 26
42 10.50% 2017................................................. 48
28 11.25% 2010................................................. 31
19 11.50% 2015................................................. 22
37 11.75% 2010................................................. 41
-------
168
-------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.4%
157 8.00% 2024-2025............................................. 172
97 10.50% 2017-2020............................................ 108
98 11.00% 2011-2018............................................ 111
17 12.00% 2014................................................. 19
29 12.50% 2015................................................. 33
-------
443
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.2%
136 9.00% 2021.................................................. 153
81 9.50% 2020.................................................. 91
-------
244
-------
U.S. TREASURY SECURITIES - 1.0%
760 4.25% 2010 (i).............................................. 981
-------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES (COST
$1,770)..................................................... $ 1,836
=======
</Table>
4
The accompanying notes are an integral part of this financial statement.
THE HARTFORD INCOME SHARES FUND, INC.
Schedule of Investments
July 31, 2004
(000's Omitted)
COMMON STOCK - 0.5%
- --------------------------------------------------------------------------------
<Table>
<Caption>
Market
Shares Value(c)
- ------ --------
CONSUMER CYCLICAL - 0.0%
1 Hosiery Corp. of America, Inc., Class A (a)(e)(g)........... $ @@
--------
TECHNOLOGY - 0.5%
1 AboveNet, Inc. (a)(e)(g).................................... 35
1 AboveNet, Inc. (Warrants) (a)(e)(g)......................... 5
1 AboveNet, Inc. (Warrants) (a)(e)(g)......................... 5
2 Global Crossing Ltd. (a)(d)................................. 29
13 MCI, Inc. (with rights) (a)................................. 197
7 McLeod USA, Inc. (Warrants) (a)............................. 1
1 Minorplanet Systems USA, Inc. (Warrants) (a)(e)(g).......... @@
5 NTL, Inc. (with rights) (a)................................. 262
--------
TOTAL COMMON STOCK (COST $440).............................. $ 534
========
</Table>
PREFERRED STOCKS - 0.0%
- --------------------------------------------------------------------------------
<Table>
<Caption>
Market
Shares Value(c)
- ------ --------
TECHNOLOGY - 0.0%
3 McLeod USA, Inc. Conv. Pfd. 2.50% Ser A 4-18-2012 (a)....... $ 7
--------
TOTAL PREFERRED STOCKS (COST $21)........................... $ 7
--------
TOTAL INVESTMENTS IN SECURITIES (COST $90,313) (b).......... $100,662
========
</Table>
- --------------------------------------------------------------------------------
Note: Percentage of investments as shown is the ratio of the total market value
to total net assets.
Ratings in effect at July 31, 2004.
(a) Presently non-income producing.
(b) At July 31, 2004, the cost of securities for federal income tax purposes was
$90,371 and the aggregate gross unrealized appreciation and depreciation
based on that cost was:
<Table>
Unrealized appreciation..................................... $12,172
Unrealized depreciation..................................... (1,881)
-------
Net unrealized appreciation................................. $10,291
-------
</Table>
(c) See Note 2b of accompanying Notes of Financial Statements regarding
valuation of securities.
(d) Market value of investments in foreign securities represents 5.65% of total
net assets as of July 31, 2004.
(e) The following securities are considered illiquid:
<Table>
<Caption>
YEAR ACQUIRED SHARES/PAR SECURITY COST BASIS
- ------------- ---------- -------- ----------
1996 1,200 Delta Air Lines, Inc. due 2016.............................. $1,405
1994 1 Hosiery Corp. of America, Inc. Class A -- 144A.............. 8
1998 1 Minorplanet Systems USA, Inc. (Warrants) -- 144A............ 5
1998 @@ VoiceStream Wireless Corp., due 2009........................ 1
2001 @@ VoiceStream Wireless Corp., due 2009........................ @@
2004 1 AboveNet, Inc. (Warrants)................................... @@
2004 1 AboveNet, Inc. (Warrants)................................... @@
2004 1 AboveNet, Inc............................................... 43
</Table>
The aggregate value of these securities at July 31, 2004, was $770 which
represents 0.75% of total net assets.
(f) Securities issued within terms of a private placement memorandum, exempt
from registration under Section 144A of the Securities Act of 1933, as
amended, and may be sold only to dealers in that program or to other
"accredited investors". Pursuant to guidelines adopted by the Board of
Directors, these issues are determined to be liquid. The aggregate value of
these securities at July 31, 2004, was $6,713, which represents 6.52% of
total net assets.
(g) Securities are valued at fair value under guidelines established and
approved by the Board of Directors. Total fair valued securities had a value
of $292, which represents 0.28% of total net assets at July 31, 2004. See
Note 2b of accompanying Notes to Financial Statements.
(h) Variable Rate Securities; the yield reported is the rate in effect as of
July 31, 2004.
(i) U.S. Treasury inflation-protection securities (TIPS) are securities in which
the principal amount is adjusted for inflation and the semiannual interest
payments equal a fixed percentage of the inflation-adjusted principal
amount.
(j) Debt security in default due to bankruptcy.
@@ Due to the presentation of the financial statements in thousands, the
number of shares and/or dollars round to zero.
* Moody's Rating.
The accompanying notes are an integral part of this financial statement.
5
THE HARTFORD INCOME SHARES FUND, INC.
Statement of Assets and Liabilities
July 31, 2004
(000's Omitted)
- --------------------------------------------------------------------------------
<Table>
ASSETS
Investments in securities, as detailed in the accompanying
schedule, at market (cost $90,313) (Note 2)............. $100,662
Cash on deposit with custodian............................ 209
Receivables:
Investment securities sold.............................. 943
Interest and dividends.................................. 1,806
Other receivables......................................... 12
--------
TOTAL ASSETS................................................ 103,632
--------
LIABILITIES
Dividend payable ($0.046 per share)....................... 597
Payable for investment advisory and management fees (Note
3)...................................................... 6
Accounts payable and accrued expenses..................... 36
--------
TOTAL LIABILITIES........................................... 639
--------
NET ASSETS.................................................. $102,993
========
COMPOSITION OF NET ASSETS
Net proceeds of capital stock, par value $.01 per
share-authorized 15,000 shares; 12,986 shares
outstanding............................................. 118,024
Unrealized appreciation of investments.................... 10,349
Distributions in excess of net investment income.......... (160)
Accumulated net realized loss from sale of investments.... (25,220)
--------
TOTAL NET ASSETS............................................ $102,993
========
NET ASSET VALUE PER SHARE................................... $ 7.93
========
</Table>
THE HARTFORD INCOME SHARES FUND, INC.
Statement of Operations
For the year ended July 31, 2004
(000's Omitted)
- --------------------------------------------------------------------------------
<Table>
NET INVESTMENT INCOME:
Interest income........................................... $ 8,240
-------
EXPENSES:
Investment advisory and management fees (Note 3).......... 633
Legal and auditing fees................................... 91
Custodian fees............................................ 5
Shareholders' notices and reports......................... 92
Directors' fees and expenses.............................. 1
Exchange listing fees..................................... 25
Other..................................................... 10
-------
Total expenses............................................ 857
-------
Fees paid indirectly (Note 3)............................. (4)
-------
Total net expenses........................................ 853
-------
NET INVESTMENT INCOME....................................... 7,387
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments.......................... (1,738)
Net change in unrealized appreciation of investments...... 5,413
-------
NET GAIN ON INVESTMENTS..................................... 3,675
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $11,062
=======
</Table>
The accompanying notes are an integral part of this financial statement.
6
THE HARTFORD INCOME SHARES FUND, INC.
Statement of Changes in Net Assets
(000's Omitted)
- --------------------------------------------------------------------------------
<Table>
<Caption>
For the Year Ended For the Year Ended
July 31, 2004 July 31, 2003
------------------ ------------------
OPERATIONS:
Net investment income..................................... $ 7,387 $ 7,519
Net realized loss on investments.......................... (1,738) (6,297)
Net change in unrealized appreciation of investments...... 5,413 19,151
-------- -------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ 11,062 20,373
-------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (7,173) (7,751)
-------- -------
CAPITAL SHARE TRANSACTIONS:
Proceeds from 7 and 92 shares issued as a result of
reinvested dividends, respectively...................... 59 651
-------- -------
TOTAL INCREASE IN NET ASSETS................................ 3,948 13,273
NET ASSETS:
Beginning of year......................................... 99,045 85,772
-------- -------
End of year............................................... $102,993 $99,045
======== =======
Distributions in excess of net investment income............ $ (160) $ (314)
======== =======
</Table>
The accompanying notes are an integral part of this financial statement.
7
THE HARTFORD INCOME SHARES FUND, INC.
Notes to Financial Statements
July 31, 2004
($000's Omitted)
- --------------------------------------------------------------------------------
1. ORGANIZATION: The Hartford Income Shares Fund, Inc. (formerly Fortis
Securities, Inc.), ("the fund") is a closed-end diversified management
investment company. The primary investment objective of the fund is to seek a
high level of current income through investment in a diversified portfolio of
debt securities, some of which may be privately placed and some of which may
have equity features. Capital appreciation is a secondary objective.
INDEMNIFICATIONS: Under the fund's organizational documents, its directors and
officers are indemnified against certain liabilities arising out of the
performance of their duties to the fund. In addition, the fund enters into
contracts that contain a variety of indemnifications. The fund's maximum
exposure under these arrangements is unknown. However, the fund has not had
prior claims or losses pursuant to these contracts and expects the risk of
loss to be remote.
2. SIGNIFICANT ACCOUNTING POLICIES: The following is a summary of significant
accounting policies of the fund, which are in accordance with U.S. generally
accepted accounting principles:
(a) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME -- Security
transactions are accounted for on the trade date. Interest income including
level-yield amortization of premium and discount is recorded on the accrual
basis. Realized security gains and losses are determined using the identified
cost method. For the year ended July 31, 2004, the cost of purchases and
proceeds from sales of securities (other than short-term securities) were as
follows.
<Table>
Cost of purchases excluding U.S. Government
obligations: $ 9,607
Sales proceeds excluding U.S. Government
obligations: $10,829
Cost of purchases for U.S. Government
obligations: $ 3,919
Sales proceeds for U.S. Government obligations: $ 2,995
</Table>
(b) SECURITY VALUATION -- Debt securities (other than short-term obligations)
are valued on the basis of valuations furnished by an unaffiliated pricing
service, which determines valuations for normal institutional size trading
units of debt securities. Mortgage securities are valued at the bid price.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term
investments purchased with a maturity of more than 60 days when purchased are
valued based on market quotations until the remaining days to maturity becomes
less than 61 days. From such time until maturity, the investments are valued
at amortized cost.
Equity securities are valued at the last sales price reported on the principal
securities exchange on which such securities are traded (domestic or foreign)
or on the principal over-the counter market on which such securities are
traded, as of the close of business on the day the securities are being
valued. If no sale took place on a particular day then securities are valued
at the mean between the bid and asked prices. For securities traded on the
NASDAQ National Market System, the fund utilizes the NASDAQ Official Closing
Price, which compares the last trade to the bid/ask range of a security. If
the last trade falls within the bid/ask range, then that price will be the
closing price. If the last trade is outside the bid/ask range and falls above
the ask, the ask will be the closing price. If the last price is below the
bid, the bid will be the closing price. The difference between cost and market
value for debt and equity securities is recorded on the Statement of
Operations and accumulated in net assets.
The fund uses market prices in valuing portfolio securities, but may use fair
value estimates, as determined under procedures established by the Board of
Directors, if reliable market prices are unavailable. Fair value pricing may
be used by a fund when current market values are unavailable or when an event
occurs after the close of the exchange on which the fund's portfolio
securities are principally traded that is likely to have changed the value of
the securities. Price movements in futures contracts and ADRs, and various
other indices, may be reviewed in the course of making a good faith
determination of a security's fair value. The use of fair value pricing by a
fund may cause the net asset value of its shares to differ significantly from
the net asset value that would be calculated using prices from the independent
pricing service.
Securities for which prices are not available from an independent pricing
service, but where an active market exists, are valued using market quotations
obtained from one or more dealers that make markets in the securities or from
an approved quotation system.
(c) REPURCHASE AGREEMENTS -- A repurchase agreement is an agreement by which
the seller of a security agrees to repurchase the security sold at a mutually
agreed upon time and price. At the time the fund enters into a repurchase
agreement, the value of the underlying collateral security (ies), including
accrued interest, will be equal to or exceed the value of the repurchase
agreement. Securities that serve to collateralize the repurchase agreement are
held by the fund's custodian in book entry form in the custodial account of
the fund. Repurchase agreements are valued at cost plus accrued interest
receivable. All repurchase agreements are executed through the fund's
custodian, State Street Bank. As of July 31, 2004, the fund had no outstanding
repurchase agreements.
(d) CREDIT RISK -- Credit risk depends largely on the perceived financial
health of bond issuers. In general, lower rated bonds have higher credit
risks. High yield bond prices can fall on bad news about the economy, an
industry or a company. Share price, yield and total return may fluctuate more
than with less aggressive bond funds.
(e) SECURITIES PURCHASED ON A WHEN-ISSUED BASIS -- Delivery and payment for
securities that have been purchased by the fund on a forward commitment or
when-issued basis can take place a month or more after the transaction date.
During this period, such securities are subject to market fluctuations and the
fund maintains, in a segregated account with its custodian, assets with a
market value equal to the amount of its purchase commitments. As of July 31,
2004, the fund had no outstanding when-issued or forward commitments.
(f) FEDERAL INCOME TAXES -- For federal income tax purposes, the fund intends
to continue to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code by distributing substantially all of its taxable net
investment income and net realized capital gains to its shareholders and
otherwise complying with the requirements of regulated investment companies.
Accordingly, no provision for federal income taxes has been made in the
accompanying financial statements. On a calendar year basis, the fund is
subject to a 4% federal excise tax to the extent it does not distribute
substantially all of its net investment income and realized gains, if any.
Net investment income and net realized gains differ for financial statement
and tax purposes. The character of distributions made during the year from net
investment income or net realized gains may therefore differ from their
ultimate characterization for federal income tax purposes. Also, due to the
timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or realized gains
(losses) were recorded by the fund.
8
THE HARTFORD INCOME SHARES FUND, INC.
Notes to Financial Statements
July 31, 2004
($000's Omitted)
- --------------------------------------------------------------------------------
On the Statement of Assets and Liabilities, as a result of permanent
book-to-tax differences, mainly attributable to expiration of capital loss
carryovers, paid-in-capital has been decreased by $6,984, distributions in
excess of net investment income was decreased by $60, and accumulated net
realized loss was increased by $7,044.
The tax character of distributions paid for the year ended July 31, 2004 and
2003, was ordinary income in the amounts of $7,173 and $7,751, respectively.
As of July 31, 2004, the components of distributable earnings (deficit) on a
tax basis are as follows:
<Table>
<Caption>
July 31,
2004
--------
Undistributed ordinary income................. $ 454
Accumulated gain(loss)........................ (25,162)
Unrealized appreciation (depreciation)........ 10,291
--------
Total distributable earnings (deficit)........ $(14,417)
--------
</Table>
The difference between book-basis and tax-basis unrealized appreciation is
attributable to tax deferral of wash sales and differing treatments for the
interest accrual on defaulted securities.
For federal income tax purposes, the fund had capital loss carryovers of
$23,203 at July 31, 2004, which, if not offset by subsequent capital gains,
will expire in 2005 through 2012, as follows:
<Table>
<Caption>
Carryover Year Expires
--------- ------------
$ 287...................................... 2005
993...................................... 2007
5,416..................................... 2008
5,061..................................... 2009
4,710..................................... 2010
1,710..................................... 2011
5,026..................................... 2012
</Table>
The fund elected to defer its realized capital losses for the period
subsequent to October 31 in the amount of $1,959. These losses will be
recognized on the first day of the next fiscal year.
(g) RESTRICTED SECURITIES -- At July 31, 2004, investments in securities for
the fund included issues that are illiquid. The fund currently limits
investments in illiquid securities to 15% of net assets, at market value, at
the date of purchase. The aggregate value of such securities at July 31, 2004,
was $770, which represents 0.75% of net assets. Pursuant to guidelines adopted
by the Board of Directors, certain unregistered securities are determined to
be liquid and are not included in the 15% limitation specified above.
(h) DIVIDEND REINVESTMENT PLAN -- A shareholder may choose to have his or her
dividends and capital gains distributions reinvested in additional whole or
fractional shares. Although reinvested, this distribution will still be
taxable. Under this plan, when the market price is greater than the net asset
value, the reinvestment price will be the greater of 95 percent of the
month-end market price (plus brokerage commissions) or the month-end net asset
value. When the market price is less than the net asset value, the
reinvestment price will be the market price (plus brokerage commissions) to
the extent that shares can be purchased in the open market.
Shareholders will automatically receive their dividends and capital gains
distributions in cash, unless they inform the fund in writing that they desire
to have their distributions reinvested in additional shares. This may be done
by contacting Hartford Administrative Services Company (See page 13). Notice
to initiate or to terminate this plan must be received by Hartford
Administrative Services 15 days prior to the dividend date for which it is to
become effective.
(i) USE OF ESTIMATES -- The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the reported
amounts of income and expenses during the period. Operating results in the
future could vary from the amounts derived from management's estimates.
3. EXPENSES:
(a) PAYMENTS TO RELATED PARTIES -- Hartford Investment Financial Services
LLC, ("HIFSCO") is the investment adviser for the fund. Investment advisory
and management fees are computed at the annual rate of .45% for the first
$100 million of average monthly net assets and at the annual rate of .40% of
average monthly net assets over $100 million, plus 2% of investment income.
As adviser for the fund, HIFSCO has retained Hartford Investment Management
Company ("Hartford Investment") to provide investment advice and, in general,
to conduct the management investment program of the fund, subject to the
general control of HIFSCO and the fund's Board of Directors. Pursuant to the
sub-advisory agreement, Hartford Investment will regularly provide the fund
with investment research, advice and supervision and furnish an investment
program consistent with the fund's investment objectives and policies,
including the purchase, retention and disposition of securities.
The Hartford Financial Services Group, Inc. ("The Hartford") and its
subsidiaries provide facilities and office equipment and perform certain
services for the fund, including fund accounting and financial reporting.
Certain officers of the fund are directors and/or officers of HIFSCO, Hartford
Investment and /or The Hartford or its subsidiaries. No officer of the fund
receives any compensation directly from the fund. Hartford Administrative
Services Company ("HASCO") a wholly owned subsidiary of The Hartford, provides
transfer agent services to the fund.
(b) EXPENSE OFFSET -- The fund's custodian bank has agreed to reduce its fees
when the fund maintains cash on deposit in the non-interest-bearing custody
account. For the year ended July 31, 2004, the custodian fee offset
arrangement reduced expenses by $4. The total expense reduction represents an
effective annual rate of 0.004% of the fund's average total net assets. This
amount is included on the fees paid indirectly line of the Statement of
Operations.
9
THE HARTFORD INCOME SHARES FUND, INC.
Notes to Financial Statements
July 31, 2004
($000's Omitted)
- --------------------------------------------------------------------------------
4. FINANCIAL HIGHLIGHTS: Selected per share historical data was as follows:
<Table>
<Caption>
-------- Year Ended July 31,
-------------------------------------------------------------
2004 2003 2002 2001@@ 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year.......................... $ 7.63 $ 6.66 $ 7.95 $ 8.17 $ 8.60
-------- ------- ------- -------- --------
Operations:
Investment income - net................................... .56 .58 .64 .67 .70
Net realized and unrealized gain (loss) on investments.... .29 .99 (1.29) (.20) (.44)
-------- ------- ------- -------- --------
Total from operations....................................... .85 1.57 (.65) .47 .26
-------- ------- ------- -------- --------
Distributions to shareholders:
From investment income - net.............................. (.55) (.60) (.64) (.69) (.69)
-------- ------- ------- -------- --------
Net asset value, end of year................................ $ 7.93 $ 7.63 $ 6.66 $ 7.95 $ 8.17
-------- ------- ------- -------- --------
Per-share market value, end of year......................... $ 7.33 $ 6.99 $ 6.80 $ 7.94 $ 7.63
Total investment return, market value @..................... 12.75% 11.63% (6.72%) 13.55% (1.59%)
Total investment return, net asset value @@................. 11.69% 24.36% (8.75%) 6.18% 4.10%
Net Assets end of year (000s omitted)....................... $102,993 $99,045 $85,772 $101,319 $103,464
Ratio of gross expenses to average monthly net assets....... .82% .86% .80% .77% .77%
Ratio of net expenses to average monthly net assets......... .82% .86% .80% .77% .77%
Ratio of net investment income to average monthly net
assets.................................................... 7.05% 7.93% 8.45% 8.38% 8.42%
Portfolio turnover rate..................................... 13% 34% 23% 57% 65%
</Table>
@ Total investment return, market value, is based on the change in market price
of a share during the year and assumes reinvestment of distributions at
actual prices pursuant to the fund's dividend reinvestment plan.
@@ Total investment return, net asset value, is based on the change in net
asset value of a share during the year and assumes reinvestment of
distributions at actual prices pursuant to the fund's dividend reinvestment
plan.
@@ Effective April 2, 2001, the investment adviser was changed from Fortis
Advisers, Inc. to Hartford Investment Financial Services, LLC.
10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE HARTFORD INCOME SHARES FUND,
INC.
We have audited the accompanying statement of assets and liabilities of The
Hartford Income Shares Fund, Inc. (the Fund), including the schedule of
investments, as of July 31, 2004, and the related statement of operations for
the year then ended and changes in net assets and financial highlights for each
of the two years in the period then ended. 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
periods presented through July 31, 2002, were audited by other auditors whose
report dated September 6, 2002, expressed an unqualified opinion on those
financial statements and financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free from material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of securities owned as of July 31, 2004, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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 audited by us
as referred to above present fairly, in all material respects, the financial
position of The Hartford Income Shares Fund, Inc. at July 31, 2004, the results
of its operations for the year then ended and the changes in its net assets and
its financial highlights for each of the two years in the period then ended in
conformity with U.S. generally accepted accounting principles.
-s- Ernst & Young LLP
Minneapolis, Minnesota
August 27, 2004
11
DIRECTORS AND OFFICERS (UNAUDITED)
The Board of Directors is responsible for protecting the interests of
shareholders and overseeing the management of the fund. The Board may exercise
all powers of the fund, except those powers that are conferred solely upon or
reserved to the shareholders. Directors may serve until they resign, retire or
are removed by vote of shareholders or of the directors.
Directors and officers who are employed by or who have a substantial financial
interest in The Hartford are considered "interested" persons of the fund
pursuant to the Investment Company Act of 1940. Each officer and two of the
fund's directors, as noted in the chart below, are "interested" persons of the
fund. Except for Mr. Znamierowski, each director serves as a director for The
Hartford Mutual Funds, Inc., The Hartford Mutual Funds II, Inc., The Hartford
Income Shares Fund, Inc., Hartford Series Fund, Inc. and Hartford HLS Series
Fund II, Inc., which collectively consist of 76 funds. Mr. Znamierowski oversees
58 funds and serves as a director only for The Hartford Mutual Funds, Inc. and
Hartford Series Fund, Inc. Currently, all of the funds have the same officers.
Correspondence may be sent to directors and officers c/o The Hartford Income
Shares Fund, P.O. Box 2999, Hartford, CT 06104-2999, except that correspondence
to Ms. Fagely and Mr. Beltz may be sent to 500 Bielenberg Dr., Woodbury, MN
55125.
The table below sets forth, for each director and officer, his or her name, age,
current position with the fund and date first elected or appointed, principal
occupation, and, for directors, other directorships held.
NON-INTERESTED DIRECTORS
LYNN S. BIRDSONG (age 58) Director since 2003
From 1979 to 2002, Mr. Birdsong was a managing director of Zurich Scudder
Investments, an investment management firm. In 2003, Mr. Birdsong became an
independent director of the Atlantic Whitehall Funds and The Japan Fund;
during his employment with Scudder, he was an interested director of The
Japan Fund. Since 1981, Mr. Birdsong has been a partner in Birdsong
Company, an advertising specialty firm.
WINIFRED E. COLEMAN (age 71) Director since 2002
Ms. Coleman has served as President of Cashel House, Ltd. (retail) since
1985, and President of Saint Joseph College from 1991 through 2004.
ROBERT M. GAVIN, JR. (age 64) Director since 1986, Chairman of the Litigation
Committee
Dr. Gavin is an educational consultant. Prior to September 1, 2001, he was
President of Cranbrook Education Community; and prior to July 1996, he was
President of Macalester College, St. Paul, Minnesota. Dr. Gavin served as
interim President of the Science Museum of Minnesota from June 2003 until
February 2004.
DUANE E. HILL (age 59) Director since 2002, Chairman of the Nominating Committee
Mr. Hill is Partner Emeritus and a founding partner of TSG Capital Group, a
private equity investment firm that serves as sponsor and lead investor in
leveraged buyouts of middle market companies. Mr. Hill is also a Partner of
TSG Ventures L.P., a private equity investment company that invests
primarily in minority-owned small businesses.
PHILLIP O. PETERSON (age 59) Director since 2000, Chairman of the Audit
Committee
Mr. Peterson is a mutual fund industry consultant. He has served as
independent president of the Strong Mutual Funds since January 2004. Mr.
Peterson was a partner of KPMG LLP until July 1999.
MILLARD H. PRYOR, JR. (age 71) Director 2002, Lead Director since 2004
Mr. Pryor has served as Managing Director of Pryor & Clark Company (real
estate investment), Hartford, Connecticut, since June 1992. Mr. Pryor is a
Director of Infodata Systems, Inc. (software company) and CompuDyne
Corporation (security products and services).
INTERESTED DIRECTORS AND OFFICERS
THOMAS M. MARRA (age 46) Director since 2002, Chairman of the Board
Mr. Marra is President and Chief Operating Officer of Hartford Life, Inc.
He is also a member of the Board of Directors and a member of the Office of
the Chairman for The Hartford Financial Services Group, Inc. ("The
Hartford"), the parent company of Hartford Life. Mr. Marra was named
President of Hartford Life in 2001 and COO in 2000, and served as Director
of Hartford Life's Investment Products Division from 1998 to 2000. He was
head of the company's Individual Life and Annuities Division from 1994 to
1998 after being promoted to Senior Vice President in 1994 and to Executive
Vice President in 1996. Mr. Marra is also a Managing Member and President
of Hartford Investment Financial Services, LLC ("HIFSCO") and HL Investment
Advisors, LLC ("HL Advisors"). Mr. Marra is a member of the Board of
Directors of The Hartford.
LOWNDES A. SMITH (age 65) Director since 2002
Mr. Smith served as Vice Chairman of The Hartford from February 1997 to
January 2002, as President and Chief Executive Officer of Hartford Life,
Inc. from February 1997 to January 2002, and as President and Chief
Operating Officer of The Hartford Life Insurance Companies from January
1989 to January 2002. Mr. Smith has served as a Director of White Mountain
Insurance Group since November 2003.
12
OTHER OFFICERS
DAVID M. ZNAMIEROWSKI (age 44) President since 2001
Mr. Znamierowski currently serves as President of Hartford Investment
Management Company ("Hartford Investment") and Executive Vice President and
Chief Investment Officer of Hartford Life Insurance Company, HIFSCO, HL
Advisors and The Hartford.
ROBERT W. BELTZ, JR. (age 55) Vice President, 1993
Mr. Beltz currently serves as Vice President, Securities Operations of
Hartford Administrative Services Company ("HASCO"). Since December 2001, he
has served as Assistant Vice President of Hartford Life Insurance Company.
KEVIN J. CARR (age 50) Vice President and Secretary, 2001
Mr. Carr has served as The Hartford's Assistant General Counsel since 1999,
and previously served as Counsel (1996-1999) and Associate Counsel
(1995-1996). Mr. Carr is also Vice President and Assistant Secretary of HL
Advisors and HIFSCO and Assistant Secretary of Hartford Investment.
WILLIAM H. DAVISON, JR. (age 47) Vice President, 2002
Mr. Davison is a Managing Director and Director of the Funds Management
Group of Hartford Investment. Mr. Davison is also a Senior Vice President
of HIFSCO and HL Advisors.
TAMARA L. FAGELY (age 46) Vice President, Controller and Treasurer, 1993
Ms. Fagely has been a Vice President of HASCO since 1998. Prior to 1998,
she was Second Vice President of HASCO. Since December 2001, she has served
as Assistant Vice President of Hartford Life Insurance Company. In
addition, she is Controller of HIFSCO.
BRUCE FERRIS (age 48) Vice President, 2002
Mr. Ferris serves as Senior Vice President and a Director of Sales and
Marketing in the Investment Products Division of Hartford Life Insurance
Company. He is also a Managing Member of HL Advisors.
MARY JANE FORTIN (age 40) Vice President, 2003
Ms. Fortin is Senior Vice President and Director of Mutual Funds and 529
Programs for Hartford Life. Previously, Ms. Fortin served as Senior Vice
President and Chief Accounting Officer of Hartford Life. She joined
Hartford Life in 1997.
GEORGE R. JAY (age 52) Vice President, 2001
Mr. Jay serves as Assistant Vice President of Hartford Life Insurance
Company and as Director of Broker-Dealer Compliance.
STEPHEN T. JOYCE (age 45) Vice President, 2001
Mr. Joyce currently serves as Senior Vice President and Director of the
Institutional Products Group for Hartford Life Insurance Company. Mr. Joyce
is also Senior Vice President of HL Advisors. Previously, he served as Vice
President (1997-1999) and Assistant Vice President (1994-1997) of Hartford
Life Insurance Company.
DAVID N. LEVENSON (age 38) Vice President, 2001
Mr. Levenson serves as Senior Vice President of Hartford Life Insurance
Company's Retail Product Management Group and is responsible for all retail
product management and profitability. Mr. Levenson is also a Senior Vice
President of HIFSCO and HL Advisors. He joined The Hartford in 1995.
JOHN C. WALTERS (age 42) Vice President, 2001
Mr. Walters serves as Executive Vice President and Director of the
Investment Products Division of Hartford Life Insurance Company. He is also
a Managing Member and Executive Vice President of HIFSCO and HL Advisors.
Previously, Mr. Walters was with First Union Securities.
<Table>
INVESTMENT ADVISER Hartford Investment Financial Services, LLC
P.O. Box 1744, Hartford, CT 06144-1744
DIVIDEND DISBURSING AGENT Hartford Administrative Services Company
P.O. Box 64387, St. Paul, MN 55164
REGISTRAR Wells Fargo Bank, N.A.
Minneapolis, Minnesota
CUSTODIAN State Street Bank and Trust Company
Boston, Massachusetts
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP
Minneapolis, Minnesota
</Table>
MARKET PRICE The Hartford Income Shares Fund, Inc. is listed on
the New York Stock Exchange with the Ticker symbol
"HSF". The market price is carried daily in the
financial pages of most newspapers and carried on
Monday in the "Closed-End Funds" table which sets
forth on a per share basis the previous week's net
asset value, market price and the percentage
difference between net asset value and market price
for the fund under the name "HrtfrdIncoFd".
13
UNDERWRITTEN AND DISTRIBUTED THROUGH
Hartford Investment Financial Services, LLC
200 Hopmeadow Street
Simsbury, CT 06070
INVESTMENT MANAGER
Hartford Investment Financial Services, LLC
200 Hopmeadow Street
Simsbury, CT 06070
INVESTMENT SUB-ADVISER
Hartford Investment Management Company
55 Farmington Avenue
Hartford, CT 06105
- --------------------------------------------------------------------------------
THE HARTFORD INCOME SHARES FUND, INC.
P.O. Box 64387 PRESORTED
St. Paul, MN 55164-0387 STANDARD
U.S. POSTAGE PAID
FARMINGDALE, NY
PERMIT NO.225
[THE HARTFORD MUTUAL FUNDS LOGO]
HTFDINC-8-04 Printed in U.S.A.(c)2004 The Hartford, Hartford, CT 06115
ITEM 2. CODE OF ETHICS.
Registrant has adopted a code of ethics that applies to Registrant's
principal executive officer, principal financial officer, and controller, which
is attached as an exhibit.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the Registrant has designated Phillip O.
Peterson as an Audit Committee Financial Expert. Mr. Peterson is considered by
the Board to be an independent director.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item is incorporated by reference from
Registrant's definitive proxy statement which involves the election of directors
and which will be filed within 120 days after the end of Registrant's fiscal
year.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Registrant has a separately designated standing Audit Committee comprised of all
independent directors and the Board of Directors. The members of the Audit
Committee are listed below.
Lynn S. Birdsong
Winifred E. Coleman
Robert M. Gavin
Duane E. Hill
Phillip O. Peterson
Millard H. Pryor Jr.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of the annual report filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Registrant has delegated the authority to vote proxies to Hartford
Investment Management Company, Registrant's sub-adviser. The policies of
Hartford Investment Management Company are attached as an exhibit.
ITEM 8, PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
INCOME SHARES FUND
Total Average Shares purchased Maximum number of
SHARES Price Paid as part of public of shares that may
Period PURCHASED per share announced plan yet be purchased
- --------- --------- ----------- ----------------- ------------------
8/1/2003 13,352 7.1148 0 0
9/2/2003 13,129 7.2357 0 0
10/2/2003 12,714 7.472 0 0
11/3/2003 12,508 7.595 0 0
12/1/2003 12,325 7.7073 0 0
1/2/2004 12,257 7.7505 0 0
2/2/2004 11,930 7.8787 0 0
3/1/2004 11,868 7.9203 0 0
4/1/2004 11,414 8.0596 0 0
5/3/2004 12,877 7.1445 0 0
6/1/2004 12,275 7.4949 0 0
7/7/2004 12,425 7.404 0 0
------- --- ---
Total 149,074 0 0
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Nominating Committee of the Board of Directors of the Fund has adopted
the following policy.
The Nominating Committee of the Board of Directors will consider nominees
for non-interested director recommended by shareholders if a vacancy among the
non-interested directors occurs and if the nominee meets the Committee's
criteria. Shareholders wishing to submit recommendations for nominees must send
a letter to the chairperson of the Nominating Committee, in care of the
Secretary of the applicable Company at 55 Farmington Avenue, 11th Floor,
Hartford, CT 06105, and must include, at a minimum: (i) the shareholder's
contact information; (ii) the nominee's contact information, the nominee's
resume or curriculum vitae, and the number of applicable Fund shares owned by
the proposed nominee; (iii) a statement as to whether the nominee is an
"interested person" of the applicable Fund as defined in Section 2(a)(19) of the
1940 Act, and appropriate documentation to support the statement; (iv) all
information regarding the nominee that would be required to be disclosed in
solicitations of proxies for elections of directors required by Regulation 14A
of the Securities Exchange Act of 1934; and (v) a notarized letter executed by
the nominee, stating his or her intention to serve as a nominee and be named in
the applicable Fund's proxy statement, if so designated by the Nominating
Committee and the Fund's Board of Directors. A shareholder nominee
recommendation must be received by the Nominating Committee within a reasonable
time period prior to the proxy submission. A shareholder or shareholder group
may not submit for consideration a nominee whom the Nominating Committee has
previously considered. Candidates submitted by shareholders are evaluated
according to the same criteria as other non-interested director candidates.
Care is given to insure that the individual members of the Board bring to
their deliberations education, work and personal experiences that would improve
the value provided to the shareholders. The following criteria for nominees
should be considered as a minimum requirement for consideration as a
non-interested director:
- - Fifteen (15) years business or academic experience in a management,
administrative, or other oversight capacity;
- - College degree or business experience equivalent to a college degree;
- - At least one non-interested director should have an investment background
and at least one director should have a financial/accounting background;
- - Personal accomplishments that would provide ready acceptance by
shareholders that the individual was capable of representing their
interests;
- - An ability to invest in Hartford funds;
- - A person able to think through and discuss complicated regulatory and
financial issues and arrive at reasonable decisions on these issues on
behalf of the shareholders;
- - A person of high ethical standards;
- - Must meet minimum standards set out in the Fund's audit committee charter;
and
- - Must be "financially literate" as that term is defined under New York
Stock Exchange rules. For these purposes, this means the ability to read
and understand fundamental financial statements, including a company's
balance sheet, income statement, and cash flow statement. Directors who
have limited familiarity with finance can achieve such "literacy" through
Fund-sponsored training programs.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the Registrant's Disclosure Controls and
Procedures as of a date within 90 days of the filing date of this
report, the Disclosure Controls and Procedures are effectively
designed to ensure that information required to be disclosed by the
Registrant is recorded, processed, summarized and reported by the
date of this report, including ensuring that information required to
be disclosed in the report is accumulated and communicated to the
Registrant's management, including the Registrant's officers, as
appropriate, to allow timely decisions regarding required
disclosure.
(b) There was no change in the Registrant's internal control over
financial reporting that occurred during the Registrant's last
fiscal half year that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
ITEM 11. EXHIBITS.
11(a)(1) Code of Ethics
(a)(2) Proxy Voting Policy
(a)(3) Section 302 certifications of the principal executive officer and
principal financial officer of Registrant.
(b) Section 906 certification.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE HARTFORD INCOME SHARES FUND, INC.
Date: September 9, 2004 By: /s/ David M. Znamierowski
-------------------------------
David M. Znamierowski
Its: President
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: September 9, 2004 By:/s/ David M. Znamierowski
--------------------------------
David M. Znamierowski
Its: President
Date: September 9, 2004 By:/s/ Tamara L. Fagely
--------------------------------
Tamara L. Fagely
Its: Vice President, Controller
and Treasurer
EXHIBIT LIST
11(a)(1) Code of Ethics
11(a)(2) Proxy Voting Policy
99.CERT 11(a)(3) Certifications
(i) Section 302 certification of principal executive officer
(ii) Section 302 certification of principal financial officer
99.906CERT 11(b) Section 906 certification of principal executive officer and
principal financial officer