-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PeN7802O70jfxXDF+QeNKjd23PpIndbbrTvE+Y2ABwB1fPeNFTKBGzg01+X8JVJf CfAg2QcnsxWCLsBt9TypHA== 0000950135-07-005892.txt : 20070927 0000950135-07-005892.hdr.sgml : 20070927 20070927143124 ACCESSION NUMBER: 0000950135-07-005892 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070731 FILED AS OF DATE: 20070927 DATE AS OF CHANGE: 20070927 EFFECTIVENESS DATE: 20070927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTFORD INCOME SHARES FUND INC CENTRAL INDEX KEY: 0000086317 IRS NUMBER: 410988154 STATE OF INCORPORATION: MN FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-02281 FILM NUMBER: 071139043 BUSINESS ADDRESS: STREET 1: P O BOX 2999 CITY: HARTFORD STATE: CT ZIP: 06104-2999 BUSINESS PHONE: 860-843-9934 MAIL ADDRESS: STREET 1: 200 HOPMEADOW STREET CITY: SIMSBURY STATE: CT ZIP: 06089 FORMER COMPANY: FORMER CONFORMED NAME: FORTIS SECURITIES INC DATE OF NAME CHANGE: 19930518 FORMER COMPANY: FORMER CONFORMED NAME: AMEV SECURITIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL SECURITIES INC DATE OF NAME CHANGE: 19860428 N-CSR 1 b66918a1nvcsr.txt THE HARTFORD INCOME SHARES FUND, INC. 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) Edward P. Macdonald, 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) 843-9934 Date of fiscal year end: July 31st Date of reporting period: August 1, 2006 - July 31, 2007 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. (GRAPHIC) JULY 31, 2007 The Hartford Income Shares Fund, Inc. Annual Report (THE HARTFORD MUTUAL FUNDS LOGO) THE HARTFORD INCOME SHARES FUND, INC. ANNUAL REPORT CONTENTS MANAGER DISCUSSION 1 SCHEDULE OF INVESTMENTS 3 STATEMENT OF ASSETS AND LIABILITIES 8 STATEMENT OF OPERATIONS 8 STATEMENTS OF CHANGES IN NET ASSETS 9 NOTES TO FINANCIAL STATEMENTS 10 FINANCIAL HIGHLIGHTS 13 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 14 DIRECTORS AND OFFICERS 15 IMPORTANT TAX INFORMATION 17 - - TOLL-FREE PERSONAL ASSISTANCE -Customer Service -(888) 843-7824 - 7:00 a.m. to 6:00 p.m. CT, Monday through Thursday 8:15 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 -24 hours a day 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. (the "Fund"). 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
THE HARTFORD INCOME SHARES FUND, INC. ------------------- JULY 31, 2007 TOTAL NET ASSETS (000'S OMITTED)................... $102,096 MARKET PRICE PER SHARE............................. $ 7.43 SHARES OUTSTANDING (000'S OMITTED)................. 13,059 FOR THE YEAR ENDED JULY 31, 2007: NET ASSET VALUE PER SHARE: Beginning of year................................ $ 7.70 End of year...................................... $ 7.82 DISTRIBUTIONS FROM NET INVESTMENT INCOME: Total dividends paid (000's Omitted)............. $ 7,193 Dividends per share.............................. $ 0.55
CERTIFICATIONS In December 2006, the Fund's principal executive officer submitted his annual certification as to compliance with the New York Stock Exchange (NYSE) Corporate Governance Listing Standards pursuant to Section 303A.12(a) of the NYSE Listed Company Manual. The Fund's principal executive and principal financial officer certifications pursuant to Rule 30a-2 under the Investment Company Act of 1940 are filed with the Fund's Form N-CSR filings and are available on the SEC's website at http://www.sec.gov. HOW TO OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICIES AND PROXY VOTING RECORD 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 twelve month period ended June 30, 2007, is available (1) without charge, upon request, by calling 1-888-843-7824 and (2) on the SEC's website at http://www.sec.gov. QUARTERLY PORTFOLIO HOLDINGS INFORMATION The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q is available (1) without charge, upon request, by calling 1-888-843-7824 and (2) on the SEC's website at http://www.sec.gov. The Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. THE HARTFORD INCOME SHARES FUND, INC. (Subadvised by Hartford Investment Management Company) Portfolio Managers Mark Niland Jeffrey S. MacDonald, CFA Charles Moon PORTFOLIO COMPOSITION BY SECTOR AS OF 7/31/2007 (PORTFOLIO COMPOSITION PIE CHART) Corporate Bonds - Investment Grade 62.5 Corporate Bonds - Non-Investment Grade 22.8 Asset and Commercial Mortgage Backed Securities 10.5 U.S. Government Securities 0.9 U.S. Government Agencies 0.6 Cash and other assets, net of liabilities 2.7
TOP 10 HOLDINGS AS OF 7/31/2007 Percent of Bonds Net Assets - -------------------------------------------------------------------------------- 1. General Motors Acceptance Corp. (8.00%) 2031 3.4% 2. Time Warner Entertainment Co., L.P. (8.38%) 2033 2.9% 3. CCH I Holdings LLC (10.00%) 2014 2.8% 4. Farmers Exchange Capital (7.20%) 2048 2.8% 5. American Airlines, Inc. (7.86%) 2011 2.6% 6. ILFC E-Capital Trust II (6.25%) 2065 2.4% 7. Metlife, Inc. (6.40%) 2036 2.3% 8. JP Morgan Chase Capital XX (6.55%) 2036 2.3% 9. Continental Airlines, Inc. (8.05%) 2020 2.2% 10. Union Carbide Corp. (7.75%) 2096 2.0% HOW DID THE FUND PERFORM? The Hartford Income Shares Fund, Inc. (the "Fund") gained 8.77% at Net Asset Value (NAV) and 10.13% at market price for the one-year period ended July 31, 2007, outperforming the Lehman Brothers Aggregate Bond Index, a benchmark for domestic investment grade bonds, which returned 5.58% over the same period. The Fund outperformed the 5.54% return of the Lipper Closed End Corporate BBB Rated Debt Funds peer group, a group of funds with investment strategies similar to those of the Fund. WHY DID THE FUND PERFORM THIS WAY? One of the main drivers of the Fund's performance relative (i.e. performance of the Fund as measured against the benchmark) to its benchmark and its peer group was its allocation to high-yield corporate bonds. During the one-year period, approximately one-fourth of the Fund was allocated to this sector. This allocation generated a 12.92% total return, compared to the 6.56% return posted by the Lehman Brothers U.S. Corporate High Yield Index. Some of the Fund's larger high-yield bond positions that benefited performance were in Charter Communications, General Motors Acceptance Corporation, Ford and Intelsat. The Fund also benefited from the settlement of securities litigation involving WorldCom. The proceeds from this settlement with WorldCom underwriters enhanced the Fund's return by roughly 45 basis points. Of nearly equal importance was the Fund's overweight (i.e. the Fund's sector position was greater than the benchmark position) to investment-grade corporate bonds. The average allocation to this sector was just over 68% of the portfolio during the fiscal reporting year, compared to the benchmark index weighting of 21.8%. The Fund's investment-grade corporate holdings posted a 5.91% total return for the period, slightly outperforming the benchmark high-grade corporate component's return of 5.46%. The Fund's holdings in the sector proved largely well insulated from much of the negative "event risk" (i.e. the sharp deterioration in an issuer's credit quality and the secondary trading levels of its debt securities resulting from a leveraged buyout of its investment-grade credit) that gripped portions of the market during the recent wave of leveraged buy-outs. In fact, of particular importance to returns were holdings in Equity Office Properties, which were tendered at a substantial premium in the wake of its acquisition by The Blackstone Group due to the fact that our securities had protective covenants. The Fund's holdings in asset-backed securities also contributed significantly to returns. One highlight was the fact that the Fund was the beneficiary of a substantial windfall in an airline enhanced equipment trust certificate issued by Northwest Airlines. Our bond had an indenture provision that proved extremely valuable to the company in its efforts to reduce its debt servicing costs upon emergence from bankruptcy, and we were able to sell the position at a very large premium. This sale contributed approximately 100 basis points to the Fund's total return for the period. Although the aforementioned sector allocations had a significant role in the Fund's positive performance, a considerable underweight (i.e. the Fund's sector position was less than the benchmark position) to mortgage-backed securities partially offset these benefits. The Fund's allocation to the sector was less than 1%. In comparison, the benchmark's allocation to the sector was nearly 36% and returned 5.6% for the overall period. As such, the Fund's underweight here dampened relative returns. The Fund was also underweighted in U.S. Treasury securities, with a less than 1% allocation to the sector versus the benchmark's allocation to the sector of over 24%. Given the fact that the treasury sub-index generated a solid return of 5.92%, the Fund's underweight here also somewhat diminished its relative return. WHAT IS YOUR OUTLOOK? We are currently in the midst of a period of correction in all credit markets, especially in the asset-backed market due to another bout of problems in the sub-prime mortgage sector. Unlike the previous episode earlier this year, this version appears more virulent, as a number of institutions are disclosing problems in this area. As a result, there has been more volatility in other credit sectors, as investors reassess underwriting standards and credit pricing in the effort to forestall the emergence of similar problems. It's important to note that the fund's exposure to home equity loans, which is less than 3% of holdings, has all been internally underwritten by our asset-backed team. (We do not rely on the rating agencies for the underwriting of any security.) In addition, this exposure is in fixed-rate securities and as such, is not subject to the rate reset shock that is currently adversely affecting some borrowers. Of particular concern to our position as mainly a corporate creditor is the pipeline of deals related to pending leveraged buy-out financing. The underwriters of this financing are currently struggling to find a willing investor base in which to ultimately transfer this exposure. In the meantime, these institutions have been actively hedging their exposures, which has served to increase volatility in the market. The obvious near-term effect has been a general downward re-pricing of all risk assets. At this point, we are not anticipating that a more fundamental problem will arise out of this volatility in the form of liquidity and solvency concerns that can sometimes precipitate a large spike in corporate defaults. The Federal Reserve's lowering of the discount rate shortly after the end of the period, on August 17, appears targeted toward forestalling such a development. Nonetheless, this is clearly a risk that we are closely monitoring, as are the credit quality exposures at the major financial institutions themselves, particularly in the area of residential mortgages. We are inclined to view the current tightening of underwriting standards as a necessary and welcome development that will ultimately afford creditors a higher level of protection in the future, albeit at the cost of some interim volatility. September 14, 2007 2 THE HARTFORD INCOME SHARES FUND, INC. Schedule of Investments July 31, 2007 (000's Omitted) COMMON STOCK - 0.0% - --------------------------------------------------------------------------------
Market Shares Value # - --------- -------- CONSUMER CYCLICAL - 0.0% 1 Hosiery Corp. of America, Inc. Class A (A)(D)(H)............ $ -- -------- TECHNOLOGY - 0.0% 2 Global Crossing Ltd. (D).................................... 27 -- XO Holdings, Inc. (D)(H).................................... -- -------- 27 -------- TOTAL COMMON STOCK (COST $60)............................... $ 27 ========
WARRANTS - 0.0% - --------------------------------------------------------------------------------
Market Shares Value # - --------- -------- TECHNOLOGY - 0.0% -- XO Holdings, Inc. (D)(H).................................... -- -------- TOTAL WARRANTS (COST $0).................................... $ -- ========
ASSET & COMMERCIAL MORTGAGE BACKED SECURITIES - 10.5% - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- FINANCE - 5.8% Bayview Commercial Asset Trust $4,927 7.00%, 07/25/2037 (H)(P).................................. $ 706 8,332 7.18%, 01/25/2037 (H)(P).................................. 866 500 Bayview Financial Acquisition Trust 7.47%, 05/28/2037 (H)(L)...................................................... 497 CBA Commercial Small Balance Commercial Mortgage 4,988 7.25%, 07/25/2039 (H)(P).................................. 479 4,732 9.75%, 01/25/2039 (H)(P).................................. 473 95 Credit-Based Asset Servicing and Securitization 5.59%, 05/25/2036 (H)(L)........................................... 93 1,000 Option One Mortgage Loan Trust 6.99%, 03/25/2037 (H)........ 867 2,500 Renaissance Home Equity Loan Trust 7.50%, 04/25/2037-06/25/2037 (H)................................... 1,997 -------- 5,978 -------- TRANSPORTATION - 4.7% Continental Airlines, Inc. 1,031 6.80%, 08/02/2018......................................... 990 1,458 7.71%, 04/02/2021......................................... 1,545 2,113 8.05%, 11/01/2020......................................... 2,277 -------- 4,812 -------- TOTAL ASSET & COMMERCIAL MORTGAGE BACKED SECURITIES (COST $10,673).................................................... $ 10,790 ========
CORPORATE BONDS: INVESTMENT GRADE - 62.5% - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- BASIC MATERIALS - 3.9% $ 500 Newmont Mining Corp. 8.63%, 05/15/2011...................... $ 554 Olin Corp. 234 6.75%, 06/15/2016......................................... 231 66 9.13%, 12/15/2011......................................... 74 2,000 Union Carbide Corp. 7.75%, 10/01/2096....................... 2,087 1,000 Westvaco Corp. 8.20%, 01/15/2030............................ 1,027 -------- 3,973 -------- CAPITAL GOODS - 2.5% 1,000 Northrop Grumman Space & Mission Systems Corp. 7.75%, 06/01/2029.................................................. 1,187 1,250 Tyco International Group S.A. 7.00%, 06/15/2028............. 1,346 -------- 2,533 -------- CONSUMER CYCLICAL - 1.6% 500 Delhaize America, Inc. 9.00%, 04/15/2031.................... 552 1,000 Federated Department Stores, Inc. 8.50%, 06/01/2010......... 1,070 -------- 1,622 -------- ENERGY - 4.3% 235 Anadarko Petroleum Corp. 6.45%, 09/15/2036.................. 227 850 Burlington Resources, Inc. 9.13%, 10/01/2021................ 1,092 1,000 ConocoPhillips Holding Co. 6.95%, 04/15/2029................ 1,090 750 Halliburton Co. 5.63%, 12/01/2008........................... 751 1,000 Valero Energy Corp. 8.75%, 06/15/2030....................... 1,225 -------- 4,385 --------
3 The accompanying notes are an integral part of this financial statement. THE HARTFORD INCOME SHARES FUND, INC. Schedule of Investments July 31, 2007 (000's Omitted) CORPORATE BONDS: INVESTMENT GRADE - CONTINUED - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- FINANCE - 19.7% $ 86 AMBAC Financial Group, Inc. 6.15%, 02/15/2037............... $ 70 735 American Express Credit Corp. 6.80%, 09/01/2066............. 751 885 Ameriprise Financial, Inc. 7.52%, 06/01/2066................ 896 494 Capital One Capital IV 6.75%, 02/17/2037.................... 429 1,000 CNA Financial Corp. 7.25%, 11/15/2023....................... 1,017 937 Comerica Capital Trust II 6.58%, 02/20/2037 (L)............. 858 1,000 ERAC USA Finance Co. 8.00%, 01/15/2011 (I).................. 1,066 3,000 Farmers Exchange Capital 7.20%, 07/15/2048 (I)#............. 2,821 333 Financial Security Assurance Holdings 6.40%, 12/15/2066 (I)(L)...................................................... 292 500 HSBC Finance Corp. 7.00%, 05/15/2012........................ 525 2,585 ILFC E-Capital Trust II 6.25%, 12/21/2065 (I)(L)#........... 2,491 2,535 JP Morgan Chase Capital XX 6.55%, 09/29/2036 #.............. 2,322 250 Liberty Mutual Group, Inc. 7.00%, 03/15/2034 (I)............ 237 2,620 Metlife, Inc. 6.40%, 12/15/2036............................. 2,343 1,000 Mony Group, Inc. 8.35%, 03/15/2010.......................... 1,068 350 Residential Capital Corp. 5.86%, 06/09/2008 (L)............. 336 360 State Street Capital Trust IV 6.36%, 06/15/2037 (L)......... 359 1,000 Travelers Property Casualty Corp. 7.75%, 04/15/2026......... 1,166 1,000 Washington Mutual Preferred Funding 6.53%, 12/29/2049 (I)... 972 115 Western Financial Bank 9.63%, 05/15/2012.................... 123 -------- 20,142 -------- SERVICES - 12.2% 1,500 Belo Corp. 7.25%, 09/15/2027................................ 1,374 750 Clear Channel Communication, Inc. 7.65%, 09/15/2010......... 748 1,500 COX Communications, Inc. 6.80%, 08/01/2028.................. 1,477 750 Electronic Data Systems Corp. 7.45%, 10/15/2029............. 752 1,000 FedEx Corp. 7.84%, 01/30/2018............................... 1,133 1,000 Hearst-Argyle Television, Inc. 7.00%, 01/15/2018............ 1,028 1,500 News America Holdings, Inc. 8.88%, 04/26/2023 #............. 1,773 2,550 Time Warner Entertainment Co., L.P. 8.38%, 07/15/2033....... 2,951 700 Time Warner, Inc. 6.63%, 05/15/2029......................... 678 500 Waste Management, Inc. 7.13%, 12/15/2017.................... 530 -------- 12,444 -------- TECHNOLOGY - 11.5% 1,750 AT&T Corp. 8.00%, 11/15/2031................................ 2,086 1,500 Cingular Wireless Services, Inc. 8.75%, 03/01/2031.......... 1,856 1,000 Comcast Cable Communications, Inc. 8.50%, 05/01/2027........ 1,168 2,000 Embarq Corp. 8.00%, 06/01/2036.............................. 1,975 1,000 Raytheon Co. 7.20%, 08/15/2027.............................. 1,122 1,500 Sprint Capital Corp. 6.88%, 11/15/2028...................... 1,405 1,500 Tele-Communications, Inc. 9.80%, 02/01/2012................. 1,726 400 Telus Corp. 8.00%, 06/01/2011............................... 428 -------- 11,766 -------- TRANSPORTATION - 4.9% 2,500 American Airlines, Inc. 7.86%, 10/01/2011 #................. 2,644 1,000 Continental Airlines, Inc. 7.92%, 05/01/2010................ 1,035 1,000 Norfolk Southern Corp. 8.63%, 05/15/2010.................... 1,082 250 Royal Caribbean Cruises Ltd. 7.00%, 06/15/2013.............. 241 -------- 5,002 -------- UTILITIES - 1.9% 1,000 CMS Panhandle Holding Co. 7.00%, 07/15/2029................. 1,020 750 FirstEnergy Corp. 6.45%, 11/15/2011......................... 774 140 Kinder Morgan Energy Partners L.P. 6.50%, 02/01/2037........ 133 -------- 1,927 -------- TOTAL CORPORATE BONDS: INVESTMENT GRADE (COST $58,844)...... $ 63,794 ========
CORPORATE BONDS: NON-INVESTMENT GRADE - 22.8% - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- BASIC MATERIALS - 2.0% $ 429 Equistar Chemicals L.P. 10.13%, 09/01/2008.................. $ 444 500 Hercules, Inc. 11.13%, 11/15/2007........................... 507 Phelps Dodge Corp. 685 8.75%, 06/01/2011......................................... 759 250 9.50%, 06/01/2031......................................... 324 -------- 2,034 -------- CAPITAL GOODS - 0.2% 170 Briggs & Stratton Corp. 8.88%, 03/15/2011................... 179 --------
4 The accompanying notes are an integral part of this financial statement. THE HARTFORD INCOME SHARES FUND, INC. Schedule of Investments July 31, 2007 (000's Omitted) CORPORATE BONDS: NON-INVESTMENT GRADE - CONTINUED - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- CONSUMER CYCLICAL - 2.2% Dillard's, Inc. $ 120 6.63%, 01/15/2018......................................... $ 110 85 7.13%, 08/01/2018......................................... 80 2,000 Ford Capital B.V. 9.50%, 06/01/2010......................... 1,960 -------- 2,150 -------- FINANCE - 6.3% Ford Motor Credit Co. 1,000 9.75%, 09/15/2010......................................... 1,010 150 9.81%, 04/15/2012 (L)..................................... 155 3,650 General Motors Acceptance Corp. 8.00%, 11/01/2031 #......... 3,428 385 Hub International Holdings, Inc. 10.25%, 06/15/2015 (I)..... 331 750 Qwest Capital Funding, Inc. 6.50%, 11/15/2018............... 609 1,000 Realogy Corp. 10.50%, 04/15/2014 (I)........................ 925 -------- 6,458 -------- SERVICES - 2.9% 750 Hilton Hotels Corp. 8.25%, 02/15/2011....................... 780 1,000 Liberty Media Corp. 8.50%, 07/15/2029....................... 988 250 Mandalay Resort Group 7.63%, 07/15/2013..................... 224 1,000 MGM Mirage, Inc. 8.50%, 09/15/2010.......................... 1,010 -------- 3,002 -------- TECHNOLOGY - 6.2% 3,250 CCH I Holdings LLC 10.00%, 05/15/2014....................... 2,876 500 Citizens Communications Co. 9.00%, 08/15/2031............... 465 1,000 Intelsat Bermuda Ltd. 11.25%, 06/15/2016.................... 1,045 1,500 Lucent Technologies, Inc. 6.45%, 03/15/2029................. 1,282 650 Nortel Networks Corp. 6.88%, 09/01/2023..................... 520 100 PanAmSat Corp. 6.88%, 01/15/2028............................ 84 100 Qwest Corp. 6.88%, 09/15/2033............................... 87 -------- 6,359 -------- TRANSPORTATION - 0.6% 625 Delta Air Lines, Inc. 10.50%, 04/30/2016 (H)................ 614 -------- UTILITIES - 2.4% 1,000 El Paso Corp. 8.05%, 10/15/2030............................. 992 500 Kinder Morgan, Inc. 7.25%, 03/01/2028....................... 460 1,000 TECO Energy, Inc. 7.20%, 05/01/2011......................... 1,020 -------- 2,472 -------- TOTAL CORPORATE BONDS: NON-INVESTMENT GRADE (COST $22,733).................................................... $ 23,268 ========
U.S. GOVERNMENT AGENCIES - 0.6% - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.1% MORTGAGE BACKED SECURITIES: $ 11 9.00%, 2022............................................... $ 11 22 10.50%, 2017.............................................. 24 4 11.25%, 2010.............................................. 4 8 11.50%, 2015.............................................. 9 10 11.75%, 2010.............................................. 11 -------- 59 -------- FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.2% MORTGAGE BACKED SECURITIES: 64 8.00%, 2024-2025.......................................... 67 20 10.50%, 2017-2020......................................... 22 35 11.00%, 2011-2018......................................... 39 12 12.00%, 2014.............................................. 13 13 12.50%, 2015.............................................. 14 -------- 155 -------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.1% MORTGAGE BACKED SECURITIES: 64 9.00%, 2021............................................... 69 69 9.50%, 2020............................................... 75 -------- 144 -------- OTHER GOVERNMENT AGENCIES - 0.2% SMALL BUSINESS ADMINISTRATION PARTICIPATION CERTIFICATES: 225 5.54%, 2026............................................... 226 -------- TOTAL U.S. GOVERNMENT AGENCIES (COST $565).................. $ 584 --------
5 The accompanying notes are an integral part of this financial statement. THE HARTFORD INCOME SHARES FUND, INC. Schedule of Investments July 31, 2007 (000's Omitted) U.S. GOVERNMENT SECURITIES - 0.9% - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- U.S. TREASURY SECURITIES - 0.9% U.S. TREASURY NOTES: $ 937 4.63%, 2012-2017.......................................... $ 936 -------- TOTAL U.S. GOVERNMENT SECURITIES (COST $939)................ $ 936 -------- TOTAL LONG-TERM INVESTMENTS (COST $93,814).................. $ 99,399 --------
SHORT-TERM INVESTMENTS - 0.4% - --------------------------------------------------------------------------------
Principal Market Amount Value # - --------- -------- U.S. TREASURY BILLS - 0.4% $ 400 4.61%, 09/20/2007 (M)(S).................................. $ 397 -------- TOTAL SHORT-TERM INVESTMENTS (COST $397).................... $ 397 --------
TOTAL INVESTMENTS (COST $94,211) (C)........................ 97.7% $ 99,796 OTHER ASSETS AND LIABILITIES................................ 2.3% 2,300 ----- -------- TOTAL NET ASSETS............................................ 100.0% $102,096 ===== ========
- -------------------------------------------------------------------------------- Note: Percentage of investments as shown is the ratio of the total market value to total net assets. Market value of investments in foreign securities represents 4.40% of total net assets at July 31, 2007. (C) At July 31, 2007, the cost of securities for federal income tax purposes was $94,269 and the aggregate gross unrealized appreciation and depreciation based on that cost were:
Unrealized Appreciation............................................................................................ $ 7,095 Unrealized Depreciation............................................................................................ (1,568) ------- Net Unrealized Appreciation........................................................................................ $ 5,527 -------
# This security, or a portion of this security, has been segregated to cover funding requirements on investment transactions settling in the future. (A) The aggregate value of securities valued in good faith at fair value as determined in good faith under policies and procedures established by and under the supervision of the Fund's Board of Directors at July 31, 2007, rounds to zero. (D) Currently non-income producing. (I) 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 qualified institutional buyers. 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, 2007 was $9,135, which represents 8.95% of total net assets. (L) Variable rate securities; the rate reported is the coupon rate in effect at July 31, 2007. (M) The interest rate disclosed for these securities represents the effective yield on the date of acquisition. (P) The interest rates disclosed for interest only strips represent effective yields based upon estimated future cash flows at July 31, 2007.
(H) The following securities are considered illiquid. Illiquid securities are often purchased in private placement transactions, are not registered under the Securities Act of 1933 and may have contractual restrictions on resale. A security may also be considered illiquid if the security lacks a readily available market or if its valuation has not changed for a certain period of time.
PERIOD ACQUIRED SHARES/PAR SECURITY COST BASIS - --------------- ---------- -------- ---------- 05/2007 4,927 Bayview Commercial Asset Trust, 7.00%, 07/25/2037 -- 144A... $ 703 12/2006 8,332 Bayview Commercial Asset Trust, 7.18%, 01/25/2037 -- 144A... 890 04/2007 500 Bayview Financial Acquisition Trust, 7.47%, 05/28/2037...... 500 05/2007 4,988 CBA Commercial Small Balance Commercial Mortgage, 7.25%, 471 07/25/2039 -- 144A.......................................... 11/2006 4,732 CBA Commercial Small Balance Commercial Mortgage, 9.75%, 464 01/25/2039 -- 144A.......................................... 07/2007 95 Credit-Based Asset Servicing and Securitization, 5.59%, 93 05/25/2036 -- 144A.......................................... 10/1996 625 Delta Air Lines, Inc., 10.50%, 04/30/2016................... 678 10/1994 1 Hosiery Corp. of America, Inc. Class A -- 144A.............. 8 03/2007 1,000 Option One Mortgage Loan Trust, 6.99%, 03/25/2037........... 867 05/2007 2,500 Renaissance Home Equity Loan Trust, 7.50%, 2,071 04/25/2037 -- 06/25/2037.................................... 05/2006 -- XO Holdings, Inc. .......................................... -- 05/2006 -- XO Holdings, Inc. Warrants.................................. --
The aggregate value of these securities at July 31, 2007 was $6,592 which represents 6.46% of total net assets.
6 The accompanying notes are an integral part of this financial statement. THE HARTFORD INCOME SHARES FUND, INC. Schedule of Investments July 31, 2007 (000's Omitted) (S).. Security pledged as initial margin deposit for open futures contracts at July 31, 2007.
OPEN FUTURES CONTRACTS AT JULY 31, 2007
NUMBER OF EXPIRATION UNREALIZED DESCRIPTION CONTRACTS* POSITION MONTH DEPRECIATION ----------- ---------- -------- ----------- ------------ 10 Year U.S. Treasury Bond.................................. 128 Short Sept., 2007 $113 ----
* The number of contracts does not omit 000's. # See Note 2b of accompanying Notes to Financial Statements regarding valuation of securities.
DISTRIBUTION BY CREDIT QUALITY (UNAUDITED) AS OF JULY 31, 2007
RATING PERCENTAGE OF LONG-TERM HOLDINGS* - ------------------------------------------------------------------- AAA 3.9% AA 3.4 A 16.8 BBB 52.3 BB 13.0 B 4.9 CCC 4.9 NR 0.8 - ------------------------------------------------------------------- Total 100.0% ===================================================================
* Split rated bonds are categorized using the highest rating. 7 The accompanying notes are an integral part of this financial statement. THE HARTFORD INCOME SHARES FUND, INC. Statement of Assets and Liabilities July 31, 2007 (000's Omitted) - -------------------------------------------------------------------------------- ASSETS Investments in securities, as detailed in the accompanying schedule, at market (cost $94,211) (see Note 2b)........ $ 99,796 Cash on deposit with custodian............................ 1,509 Receivables: Investment securities sold.............................. 2 Interest and dividends.................................. 1,818 -------- TOTAL ASSETS................................................ 103,125 -------- LIABILITIES Dividend payable ($.046 per share)........................ 601 Payables: Investment securities purchased......................... 336 Investment advisory and management fees (see Note 3).... 3 Variation margin........................................ 26 Accounts payable and accrued expenses..................... 63 -------- TOTAL LIABILITIES........................................... 1,029 -------- NET ASSETS.................................................. $102,096 ======== COMPOSITION OF NET ASSETS Net proceeds of capital stock, par value $.001 per share-authorized 1,000,000 shares; 13,059 shares outstanding............................................. $118,309 Unrealized appreciation of investments and futures........ 5,472 Accumulated net realized loss from sale of investments and futures................................................. (21,685) -------- TOTAL NET ASSETS............................................ $102,096 ======== NET ASSET VALUE PER SHARE................................... $ 7.82 ========
THE HARTFORD INCOME SHARES FUND, INC. Statement of Operations For the Year Ended July 31, 2007 (000's Omitted) - -------------------------------------------------------------------------------- NET INVESTMENT INCOME: Interest income........................................... $ 7,909 ------- EXPENSES: Investment advisory and management fees (see Note 3)...... 627 Legal and auditing fees................................... 82 Custodian fees............................................ 6 Shareholders' notices and reports......................... 44 Directors' fees and expenses.............................. 2 Exchange listing fees..................................... 25 Other..................................................... 7 ------- Total expenses............................................ 793 ------- Fees paid indirectly (see Note 3)......................... (6) ------- Total net expenses........................................ 787 ------- NET INVESTMENT INCOME....................................... 7,122 ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES Net realized gain on investments.......................... 4,376 Net realized gain on futures.............................. 294 Net change in unrealized appreciation of investments...... (3,001) Net change in unrealized depreciation of futures.......... (113) ------- NET GAIN ON INVESTMENTS AND FUTURES......................... 1,556 ------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 8,678 =======
The accompanying notes are an integral part of this financial statement. 8 THE HARTFORD INCOME SHARES FUND, INC. Statements of Changes in Net Assets (000's Omitted) - --------------------------------------------------------------------------------
For the Year Ended For the Year Ended July 31, 2007 July 31, 2006 ------------------ ------------------ OPERATIONS: Net investment income..................................... $ 7,122 $ 7,256 Net realized gain (loss) on investments and futures....... 4,670 (1,045) Net change in unrealized appreciation of investments and futures................................................. (3,114) (5,038) -------- -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ 8,678 1,173 -------- -------- DISTRIBUTIONS TO SHAREHOLDERS: From net investment income................................ (7,193) (7,162) -------- -------- CAPITAL SHARE TRANSACTIONS: Proceeds from 45 and 25 shares issued as a result of reinvested dividends, respectively..................... 370 196 -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS..................... 1,855 (5,793) NET ASSETS: Beginning of year......................................... 100,241 106,034 -------- -------- End of year............................................... $102,096 $100,241 ======== ======== Accumulated undistributed net investment income............. $ -- $ 74 ======== ========
The accompanying notes are an integral part of this financial statement. 9 THE HARTFORD INCOME SHARES FUND, INC. Notes to Financial Statements July 31, 2007 ($000's Omitted) - -------------------------------------------------------------------------------- 1. ORGANIZATION: The Hartford Income Shares Fund, 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 any 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. Dividend income is recorded on the ex-dividend date. Realized security gains and losses are determined on the basis of identified cost. For the year ended July 31, 2007, the cost of purchases and proceeds from sales of securities (including maturities but excluding short-term securities) were as follows: Cost of purchases excluding U.S. Government obligations: $33,302 Sales proceeds excluding U.S. Government obligations: $28,644 Cost of purchases for U.S. Government obligations: $ 7,780 Sales proceeds for U.S. Government obligations: $10,406
(B) SECURITY VALUATION AND INVESTMENT INCOME -- The Fund generally uses market prices in valuing portfolio securities. If market quotations are not readily available or are deemed unreliable, the Fund will use the fair value of the security as determined in good faith under policies and procedures established by and under the supervision of the Fund's Board of Directors. Market prices may be deemed unreliable, for example, if a security is thinly traded or if an event has occurred after the close of the exchange on which a portfolio security is primarily traded but before the close of the New York Stock Exchange (the "Exchange") (normally 4:00 p.m. Eastern Time, referred to as the "Valuation Time") that is expected to affect the value of the portfolio security. The circumstances in which the Fund may use fair value pricing include, among others: (i) the occurrence of events that are significant to a particular issuer, such as mergers, restructuring or defaults; (ii) the occurrence of events that are significant to an entire market, such as natural disasters in a particular region or governmental actions; (iii) trading restrictions on securities; (iv) thinly traded securities and (v) market events such as trading halts and early market closings. In addition, with respect to the valuation of securities principally traded on foreign markets, the Fund uses a fair value pricing service approved by the Fund's Board of Directors which employs quantitative models to adjust for "stale" prices caused by the movement of other markets and other factors occurring after the close of the foreign markets but before the close of the Exchange. Securities that are primarily traded on foreign markets may trade on days that are not business days of the Fund. Because the NAV of the Fund's shares is determined only on business days of the Fund, the value of the portfolio securities of the Fund, if it is invested in foreign securities, may change on days when a shareholder will not be able to purchase or redeem shares of the Fund. Fair value pricing is subjective in nature and the use of fair value pricing by the Fund may cause the net asset value of the respective shares to differ significantly from the net asset value that would have been calculated using prevailing market prices at the close of the exchange on which a portfolio is primarily traded but before the close of the Exchange. There can be no assurance that the Fund could obtain the fair value assigned to a security if the Fund were to sell the security at approximately the time at which the Fund determines its net asset value per share. Debt securities (other than short-term investments held by the Fund) 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. 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 securities or from a widely-used quotation system in accordance with procedures established by the Fund's Board of Directors. Generally, the Fund may use fair valuation in regards to debt securities when the Fund holds defaulted or distressed securities or securities in a company in which a reorganization is pending. Short term investments with a maturity of more than 60 days when purchased are valued based on market quotations until the remaining days to maturity become less than 61 days. Investments that will mature in 60 days or less are valued at amortized cost, which approximates market value. Futures contracts shall be valued at the final settlement price reported by the applicable futures exchange. If there were no trades as of the valuation day, then the contract shall be valued at the closing bid price as of the Valuation Time. (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 or physical form in the custodial account of the Fund or in a third-party custodial account. Repurchase agreements are valued at cost plus accrued interest receivable. As of July 31, 2007, there were no outstanding repurchase agreements. 10 THE HARTFORD INCOME SHARES FUND, INC. Notes to Financial Statements July 31, 2007 ($000's Omitted) - -------------------------------------------------------------------------------- (D) FUTURES TRANSACTIONS -- The Fund may invest in futures contracts in order to gain exposure to or protect against changes in the market. A futures contract is an agreement between two parties to buy and sell a security at a set price on a future date. When the Fund enters into a futures contract, it is required to deposit with a futures commission merchant an amount of initial margin of cash, commercial paper or U.S. Treasury Bills. Subsequent payments, called variation margin, to and from the broker, are made on a daily basis as the price of the underlying security fluctuates, making the long and short positions in the futures contract more or less valuable (i.e., mark-to-market), which results in an unrealized gain or loss to the Fund. At any time prior to the expiration of the futures contract, the Fund may close the position by taking an opposite position, which would effectively terminate the position in the futures contract. A final determination of maintenance margin is then made, additional cash is required to be paid by or released to the Fund and the Fund realizes a gain or loss. The use of futures contracts involves elements of market risk, which may exceed the amount recognized in the Fund's Statement of Assets and Liabilities. Changes in the value of the futures contracts may decrease the effectiveness of the Fund's strategies and potentially result in loss. (E) CREDIT RISK -- Credit risk depends largely on the perceived financial health of bond issuers. In general, lower rated bonds have higher credit risk. High yield bond prices can fall on bad news about the economy, an industry or a company. The share price, yield and total return of a fund which holds securities with higher credit risk may fluctuate more than with less aggressive bond funds. (F) SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED-DELIVERY BASIS -- Delivery and payment for securities that have been purchased by the Fund on a when-issued or delayed-delivery 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 will identify securities segregated in its records with values at least equal to the amount of the commitment. As of July 31, 2007, there were no outstanding when-issued or delayed-delivery purchase commitments. (G) 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. The Fund has distributed substantially all of its income and capital gains in prior years and intends to distribute substantially all of its income and capital gains by December 31, 2007. 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. Distributions from short-term capital gains are treated as ordinary income distributions for federal income tax purposes. Net investment income and net realized gains may 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. On the Fund's Statement of Assets and Liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been decreased by $3, and accumulated net realized loss was increased by $3. The tax character of distributions paid for the fiscal years ended July 31, 2007 and 2006 were ordinary income in the amounts of $7,191 and $7,160, respectively. As of July 31, 2007, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income................. $ 601 Accumulated gain (loss)....................... (21,740) Unrealized appreciation (depreciation)*....... 5,527 -------- Total accumulated earnings**.................. $(15,612) --------
* The difference between book-basis and tax-basis unrealized appreciation is attributable to tax deferral of wash sales. ** The primary difference between book and tax basis accumulated earnings (deficit) relates to dividends payable to shareholders at year end. For federal income tax purposes, the Fund had capital loss carryovers of $21,740 at July 31, 2007, which, if not offset by subsequent capital gains, will expire in 2008 through 2014 as follows:
Carryover Year Expires --------- ------------ $2,941 ....................................... 2008 5,061 ....................................... 2009 4,710 ....................................... 2010 1,710 ....................................... 2011 5,026 ....................................... 2012 1,768 ....................................... 2013 524 ....................................... 2014
(H) ILLIQUID AND RESTRICTED SECURITIES -- The Fund is permitted to invest up to 15% of its net assets in illiquid securities. "Illiquid Securities" are those that may not be sold or disposed of in the ordinary course of business within seven days, at approximately the price used to determine the Fund's net asset value per share. The Fund may not be able to sell illiquid securities or other investments when its sub-adviser considers it desirable to do so or may have to sell such securities or investments at a price that is lower than the price that could be obtained if the securities or investments were more liquid. A sale of illiquid securities or other investments may require more time and may result in higher dealer discounts and other selling expenses than does the sale of those that are liquid. Illiquid securities and investments also may be more difficult to value, due to the 11 THE HARTFORD INCOME SHARES FUND, INC. Notes to Financial Statements July 31, 2007 ($000's Omitted) - -------------------------------------------------------------------------------- unavailability of reliable market quotations for such securities or investments, and investments in them may have an adverse impact on net asset value. The Fund may also purchase certain restricted securities, commonly known as Rule 144A securities, that can be resold to institutions and which may be determined to be liquid pursuant to policies and guidelines established by the Fund's Board of Directors. (I) DIVIDEND REINVESTMENT PLAN -- The Fund intends to distribute income dividends on a monthly basis and capital gains on an annual basis, if any. Such distributions to shareholders are recorded on the ex-dividend date. A shareholder may choose to have his or her dividends and capital gains distributions reinvested in additional whole or fractional shares of the Fund. 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 ("HASCO") (See page 17). Notice to initiate or to terminate this plan must be received by HASCO 15 days prior to the dividend date for which it is to become effective. (J) 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 year. Operating results in the future could vary from the amounts derived from management's estimates. (K) FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 48 -- On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing a Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than not threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years at the effective date. At this time, management is evaluating the implications of FIN 48 and its impact on the Fund's financial statements has not yet been determined. (L) FINANCIAL ACCOUNTING STANDARDS BOARD FINANCIAL ACCOUNTING STANDARDS NO. 157 -- In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"). This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. FAS 157 is effective for the Fund's financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. As of July 31, 2007, the Fund does not believe the adoption of FAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Fund's Statement of Operations for a fiscal period. 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 0.45% for the first $100 million of average monthly net assets and at the annual rate of 0.40% 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 Management") 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 Management 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 Management and/or The Hartford or its subsidiaries. No officer of the Fund receives any compensation directly from the Fund. HASCO, a wholly owned subsidiary of The Hartford, provides transfer agent services to the Fund. Transfer agent fees are paid by HIFSCO. For the year ended July 31, 2007, The Hartford was reimbursed $20 for legal expenses on behalf of 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 fiscal year ended July 31, 2007, the custodian fee offset arrangement reduced expenses by $6. The total expense reduction represents an effective annual rate of 0.006% of the Fund's average daily net assets. This amount is included on the fees paid indirectly line of the Fund's Statement of Operations. 12 THE HARTFORD INCOME SHARES FUND, INC. Financial Highlights - --------------------------------------------------------------------------------
YEAR ENDED JULY 31, ------------------------------------------------------ 2007 2006 2005 2004 2003 - -------------------------------------------------------------------------------------------------------------------- Net asset value, beginning of year.......................... $ 7.70 $ 8.16 $ 7.93 $ 7.63 $ 6.66 Operations: Investment income -- net.................................. .55 .56 .56 .56 .58 Net realized and unrealized gain (loss) on investments.... .12 (.47) .22 .29 .99 -------- -------- -------- -------- ------- Total from operations....................................... .67 .09 .78 .85 1.57 -------- -------- -------- -------- ------- Distributions to shareholders: From investment income -- net............................. (.55) (.55) (.55) (.55) (.60) -------- -------- -------- -------- ------- Net asset value, end of year................................ $ 7.82 $ 7.70 $ 8.16 $ 7.93 $ 7.63 -------- -------- -------- -------- ------- Per-share market value, end of year......................... $ 7.43 $ 7.23 $ 7.88 $ 7.33 $ 6.99 Total investment return, market value @..................... 10.13% (1.40%) 15.42% 12.75% 11.63% Total investment return, net asset value @@................. 8.77% 1.36% 10.46% 11.69% 24.36% Net assets end of year (000s omitted)....................... $102,096 $100,241 $106,034 $102,993 $99,045 Ratio of gross expenses to average monthly net assets....... .76% .78% .76% .82% .86% Ratio of net expenses (includes fees paid indirectly) to average monthly net assets................................ .76% .77% .75% .82% .86% Ratio of net investment income to average monthly net assets.................................................... 6.80% 7.12% 6.89% 7.05% 7.93% Portfolio turnover rate..................................... 39% 20% 17% 13% 34%
@ 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. 13 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, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five 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. 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 of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2007, by correspondence with the custodian and brokers. 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 The Hartford Income Shares Fund, Inc. at July 31, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles. (ERNST & YOUNG LLP SIGNATURE) Minneapolis, Minnesota September 07, 2007 14 DIRECTORS AND OFFICERS (UNAUDITED) The Board of Directors appoints officers who are responsible for the day-to-day operations of the Fund. Each Director serves until his or her death, resignation, or retirement or until the next annual meeting of shareholders is held or until his or her successor is elected and qualifies. Directors and officers who are employed by or who have a financial interest in The Hartford are considered "interested" persons of the Fund pursuant to the Investment Company Act of 1940, as amended. Each officer and three of the Fund's directors, as noted in the chart below, are "interested" persons of the Fund. Each director serves as a director of 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 89 funds. Correspondence may be sent to directors and officers c/o The Hartford Income Shares Fund, Inc., P.O. Box 2999, Hartford, Connecticut 06104-2999, except that correspondence to Ms. Fagely, Ms. Fleege and Ms. Settimi may be sent to 500 Bielenberg Dr., Woodbury, Minnesota 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 60) Director since 2003, Chairman of the Litigation Committee; Co-Chairman of the Investment Committee Since 1981, Mr. Birdsong has been a partner in Birdsong Company, an advertising specialty firm. Since 2003, Mr. Birdsong has been an independent director of The Japan Fund. From 2003 to March 2005, Mr. Birdsong was an independent director of the Atlantic Whitehall Funds. From 1979 to 2002, Mr. Birdsong was a managing director of Zurich Scudder Investments, an investment management firm. During his employment with Scudder, Mr. Birdsong was an interested director of The Japan Fund. ROBERT M. GAVIN, JR. (age 66) Director since 1986, Chairman of the Board since 2004 Dr. Gavin is an educational consultant. Prior to September 1, 2001, he was President of Cranbrook Education Community. Prior to July 1996, he was President of Macalester College, St. Paul, Minnesota. DUANE E. HILL (age 61) Director since 2002, Chairman of the Nominating Committee Mr. Hill is a Partner of TSG Ventures L.P., a private equity investment company that invests primarily in minority-owned small businesses. Mr. Hill is a former Partner of TSG Capital Group, a private equity investment firm that serves as sponsor and lead investor in leveraged buyouts of middle market companies. SANDRA S. JAFFEE (age 65) Director since 2005 Ms. Jaffee is Chief Executive Officer of Fortent (formerly Searchspace Group), a leading provider of compliance/regulatory technology to financial institutions. Ms. Jaffee served as an Entrepreneur in Residence with Warburg Pincus, a private equity firm, from August 2004 to August 2005. From September 1995 to July 2004, Ms. Jaffee served as Executive Vice President at Citigroup, where she was President and Chief Executive Officer of Citibank's Global Securities from 1995 to 2003. WILLIAM P. JOHNSTON (age 62) Director since 2005, Chairman of the Compliance Committee In June 2006, Mr. Johnston was appointed as Senior Advisor to The Carlyle Group, a global private equity investment firm. In May 2006, Mr. Johnston was elected to the Supervisory Board of Fresenius Medical Care AG & Co. KGaA, after its acquisition of Renal Care Group, Inc. in March 2006. Mr. Johnston joined Renal Care Group in November 2002 as a member of the Board of Directors and served as Chairman of the Board from March 2003 through March 2006. From September 1987 to December 2002, Mr. Johnston was with Equitable Securities Corporation (and its successors, SunTrust Equitable Securities and SunTrust Robinson Humphrey) serving in various investment banking and managerial positions, including Managing Director and Head of Investment Banking, Chief Executive Officer and Vice Chairman. PHILLIP O. PETERSON (age 62) Director since 2000, Chairman of the Audit Committee Mr. Peterson is a mutual fund industry consultant. Mr. Peterson joined William Blair Funds in February 2007 as a member of their board of trustees. From January 2004 to April 2005, Mr. Peterson served as Independent President of the Strong Mutual Funds. Mr. Peterson was a partner of KPMG LLP (an accounting firm) until July 1999. LEMMA W. SENBET (age 60) Director since 2005 Dr. Senbet is the William E. Mayer Chair Professor of Finance at the University of Maryland, Robert H. Smith School of Business. He was chair of the Finance Department during 1998-2006. Previously he was an endowed professor of finance at the University of Wisconsin-Madison. Also, Dr. Senbet was director of the Fortis Funds from March 2000 until July 2002. Professor Senbet served the finance profession in various capacities, including as director of the American Finance Association and President of the Western Finance Association. INTERESTED DIRECTORS AND OFFICERS THOMAS M. MARRA (age 49) Director since 2002 Mr. Marra is President and Chief Operating Officer of The Hartford Financial Services Group, Inc. ("The Hartford"). He is also a member of the Board of Directors for The Hartford. Mr. Marra was named President and COO of The Hartford in 2007. He served as COO of Hartford Life, Inc. ("Hartford Life") from 2000 to 2007, as President of Hartford Life from 2001 to 2007, and as Director of Hartford Life's Investment Products Division from 1998 to 2000. Mr. Marra is also Chairman of the Board of Hartford Investment Financial Services, LLC ("HIFSCO"). 15 LOWNDES A. SMITH (age 67) Director since 2002, Co-Chairman of the Investment Committee Mr. Smith served as Vice Chairman of The Hartford from February 1997 to January 2002, as President and Chief Executive Officer of Hartford Life 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 Mountains Insurance Group since November 2003. DAVID M. ZNAMIEROWSKI (age 46) Director since 2007(1), President since 2001, Chief Executive Officer since 2005 Mr. Znamierowski currently serves as President of Hartford Investment Management Company ("Hartford Investment") and Executive Vice President and Chief Investment Officer for The Hartford, Hartford Life and Hartford Life Insurance Company. Mr. Znamierowski is also Chief Investment Officer for Hartford Administrative Services Company (HASCO"). ROBERT M. ARENA, JR. (age 38) Vice President since 2006 Mr. Arena serves as Senior Vice President of Hartford Life Insurance Company and heads its Retail Product Management Group in the U.S. Wealth Management Division. He is also Senior Vice President of HASCO, Manager and Senior Vice President of HIFSCO, and Manager and Senior Vice President of HL Investment Advisors, LLC ("HL Advisors"). Prior to joining The Hartford in 2004, he was Senior Vice President in charge of Product Management for American Skandia/ Prudential in the individual annuities division. Mr. Arena joined American Skandia in 1996. TAMARA L. FAGELY (age 49) Vice President since 1996, Controller since 2001 and Treasurer since 1993 Ms. Fagely has been a Vice President of HASCO since 1998 and Chief Financial Officer since 2006. Currently, Ms. Fagely is a Vice President of Hartford Life Insurance Company. She served as Assistant Vice President of Hartford Life from December 2001 through March 2005. In addition, she is Controller and Chief Financial Officer of HIFSCO. SUSAN FLEEGE (age 47) AML Compliance Officer since 2005 Ms. Fleege has served as Chief Compliance Officer for HASCO since 2005 and Hartford Investor Services Company, LLC since 2006. Prior to joining Hartford Life in 2005, Ms. Fleege was Counsel for Ameriprise Financial Corporation from 2000 to 2005. THOMAS D. JONES III (age 42) Vice President and Chief Compliance Officer since 2006 Mr. Jones serves as Chief Compliance Officer for the Hartford Mutual Funds and Vice President and Director of Securities Compliance for The Hartford. He is also Vice President of HIFSCO, HL Advisors, and Hartford Life Insurance Company. Mr. Jones joined The Hartford in 2006 from SEI Investments, where he served as Chief Compliance Officer for its mutual funds and investment advisers. Prior to joining SEI, Mr. Jones was First Vice President and Compliance Director for Merrill Lynch Investment Managers (Americas) ("MLIM"), where he worked from 1992-2004. At MLIM, Mr. Jones was responsible for the compliance oversight of various investment products, including mutual funds, wrap accounts, institutional accounts and alternative investments. EDWARD P. MACDONALD (age 40) Vice President, Secretary and Chief Legal Officer since 2005 Mr. Macdonald serves as Assistant General Counsel and Assistant Vice President of The Hartford and Chief Legal Officer and Vice President of HIFSCO. He also serves as Vice President of HASCO, Assistant Vice President of Hartford Life Insurance Company, and Chief Legal Officer, Secretary, and Vice President of HL Advisors. Prior to joining The Hartford in 2005, Mr. Macdonald was Chief Counsel, Investment Management for Prudential Financial (formerly American Skandia Investment Services, Inc.). He joined Prudential in April 1999. VERNON J. MEYER (age 43) Vice President since 2006 Mr. Meyer serves as Senior Vice President (as of 8/7/07) of Hartford Life Insurance Company and Director of its Investment Advisory Group in the U.S. Wealth Management Division. He also serves as Senior Vice President of HIFSCO and HL Advisers. Prior to joining The Hartford in 2004, Mr. Meyer was with MassMutual which he joined in 1987. DENISE A. SETTIMI (age 46) Vice President since 2005 Ms. Settimi currently serves as Chief Operating Officer and Assistant Vice President of HASCO. She is also Assistant Vice President of HIFSCO and Hartford Life Insurance Company. Previously, Ms. Settimi was with American Express Financial Advisors, where she was Director of Retirement Plan Services from 1997 to 2003. JOHN C. WALTERS (age 45) Vice President since 2001 Mr. Walters serves as Co-Chief Operating Officer of Hartford Life Insurance Company. He is also a Managing Member, Chief Executive Officer and Executive Vice President of HIFSCO and a Managing Member and Executive Vice President of HL Advisors. Previously, Mr. Walters was with First Union Securities. (1) Elected by shareholders on January 9, 2007 16 INVESTMENT MANAGER 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
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". IMPORTANT TAX INFORMATION (UNAUDITED) The information needed by shareholders for income tax purposes will be sent in early 2008. MONTHLY DIVIDENDS PAID
DATE AMOUNT - ---- ------- August 2006................................................. $0.046 Income September 2006.............................................. 0.046 Income October 2006................................................ 0.046 Income November 2006............................................... 0.046 Income December 2006............................................... 0.046 Income January 2007................................................ 0.046 Income February 2007............................................... 0.046 Income March 2007.................................................. 0.046 Income April 2007.................................................. 0.046 Income May 2007.................................................... 0.046 Income June 2007................................................... 0.046 Income July 2007................................................... 0.046 Income ------- $0.552 =======
INFORMATION APPLICABLE TO FOREIGN SHAREHOLDERS ONLY: Pursuant to Internal Revenue Code Section 871(k)(1)(C), the percent of the Fund's ordinary income distributions that are designated as interest-related dividends is 92.39%. 17 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 St. Paul, MN 55164-0387 ----------------- PRESORTED STANDARD U.S. POSTAGE PAID FARMINGDALE, NY PERMIT NO. 225 ----------------- MFHTFDINC-8-07 Printed in U.S.A. (C) 2007 The Hartford, Hartford, CT 06115 (THE HARTFORD MUTUAL FUNDS LOGO) 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. (a) Audit Fees: $36,500 for the fiscal year ended July 31, 2006; $39,300 for the fiscal year ended July 31, 2007. (b) Audit Related Fees: No fees were billed by Ernst & Young for professional services rendered that are related to the audit of the Company's annual financial statements but not reported under "Audit-Fees" above for the fiscal years ended July 31, 2006 and 2007. Aggregate fees in the amount of $27,221 for the fiscal year ended July 31, 2006 and $28,500 for the fiscal year ended July 31, 2007 were billed by Ernst & Young to HIFSCO, or an affiliate thereof that provides ongoing services to the Company, relating to the operations and financial reporting of the Company. These fees relate to an annual review of internal controls, as required by regulation, for HASCO, an affiliate which provides transfer agency services to the Company and over 40 other mutual funds in the Hartford Fund family. (c) Tax Fees: The aggregate fees billed by Ernst & Young for professional services rendered for tax compliance, tax advice and tax planning for the fiscal years ended July 31, 2006 and 2007 were $3,350 and $3,650, respectively. No fees were billed by Ernst & Young for such services rendered to HIFSCO, or an affiliate thereof that provides ongoing services to the Company and subject to pre-approval by the Audit Committee for the fiscal years ended July 31, 2006 and 2007. (d) All Other Fees: $0 for the fiscal years ended July 31, 2006 and July 31, 2007. (e)(1) A copy of the Audit Committee's pre-approval policies and procedures is attached as an exhibit. (e)(2) One hundred percent of the services described in items 4(a) through 4(d) were approved in accordance with the Audit Committee's Pre-Approval Policy. As a result, none of such services was approved pursuant to paragraph (c) (7) (i) (c) of Rule 2-01 of Regulation S-X. (f) None of the hours expended on the principal accountant's engagement to audit the Registrant's financial statements for the year ended July 31, 2007 were attributed to work performed by persons other than the principal accountant's full-time permanent employees. (g) Non-Audit Fees: $732,894 for fiscal year ended July 31, 2006; $969,519 for fiscal year ended July 31, 2007. (h) The registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Registrant has a separately designated standing Audit Committee comprised of the independent directors listed below: Robert M. Gavin Sandra S. Jaffee William P. Johnston Phillip O. Peterson 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a)(1) Mark Niland, CFA, Executive Vice President of Hartford Investment Management, has served as portfolio manager of the fund since April 2001. Mr. Niland joined Hartford Investment Management in 1989 and has been an investment professional involved in trading and portfolio management since that time. Prior to joining the firm, Mr. Niland was a credit officer at Shawmut National Corp. Jeffrey S. MacDonald, CFA, Vice President of Hartford Investment Management, has served as a portfolio manager of the fund since August 2006. Mr. MacDonald joined Hartford Investment Management in 2005 and serves as a portfolio manager in the multi-sector portfolio management team, which manages Core, Core Plus, Intermediate Core and other broad based fixed income styles. Mr. MacDonald is also a member of the Investment Strategy Committee. Prior to joining the firm, he was a portfolio analyst at Wellington Management Company, LLC (2000-2005). He began his career with Fidelity Investments as a fixed income trader and lead systems analyst (1992-2000). Charles Moon, Executive Vice President and member of the Investment Strategy Committee of Hartford Investment Management, has served as a portfolio manager of the fund since August 2006. Mr. Moon joined Hartford Investment Management in 2006, and serves as the head of the Investment Grade Credit Sector and as a Senior Portfolio Manager for investment grade credit strategies. Prior to joining the firm, he served as a portfolio manager and co-head of Investment Grade Credit at OFI Institutional Asset Management (Oppenheimer Funds) (2002-2006). Previously, Mr. Moon was Executive Director of Fixed Income at Morgan Stanley Asset Management (Miller Anderson & Sherrerd) (1999-2002), serving as portfolio manager and analyst. Prior to joining Morgan Stanley, he served in various positions at Citicorp and its affiliates, including Global Analyst, Divisional Controller, and Portfolio Analyst (1993-1999). (a)(2) The following table lists the number and types of other accounts sub-advised by the Hartford Investment Management managers and assets under management in those accounts as of July 31, 2007:
REGISTERED INVESTMENT COMPANY ASSETS POOLED ASSETS OTHER PORTFOLIO MANAGER ACCOUNTS MANAGED ACCOUNTS MANAGED ACCOUNTS ASSETS MANAGED - ----------------- ---------- ----------- -------- ---------- -------- -------------- Mark Niland 3 995,806,000 2 43,833,000 4 2,360,165,000 Jeffrey S. MacDonald 2 468,857,000 4 279,555,000 Charles Moon 1 279,718,000 4 29,256,832,000
CONFLICTS OF INTEREST BETWEEN THE FUNDS SUB-ADVISED BY HARTFORD INVESTMENT MANAGEMENT PORTFOLIO MANAGERS AND OTHER ACCOUNTS In managing other portfolios (including affiliated accounts), certain potential conflicts of interest may arise. Portfolio managers, including assistant portfolio managers, at Hartford Investment Management manage multiple portfolios for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions such as pension funds, insurance companies, foundations), commingled trust accounts, and other types of funds. The portfolios managed by portfolio managers may have investment objectives, strategies and risk profiles that differ from those of the Fund. Portfolio managers make investment decisions for each portfolio, including the Fund, based on the investment objectives, policies, practices and other relevant investment considerations applicable to that portfolio. Consequently, the portfolio managers may purchase securities for one portfolio and not another portfolio. Securities purchased in one portfolio may perform better than the securities purchased for another portfolio, and vice versa. A portfolio manager or other investment professional at Hartford Investment Management may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions that are similar to those made for the Fund, both of which have the potential to adversely impact the Fund depending on market conditions. In addition, some of these portfolios have fee structures that are or have the potential to be higher, in some cases significantly higher, than the fees paid by the Fund to Hartford Investment Management. Because a portfolio manager's compensation is affected by revenues earned by Hartford Investment Management, the incentives associated with any given Fund may be significantly higher or lower than those associated with other accounts managed by a given portfolio manager. Hartford Investment Management's goal is to provide high quality investment services to all of its clients, while meeting its fiduciary obligation to treat all clients fairly. Hartford Investment Management has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, that it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Hartford Investment Management monitors a variety of areas, including compliance with primary Funds' guidelines, the allocation of securities, and compliance with Hartford Investment Management's Code of Ethics. Furthermore, senior investment and business personnel at Hartford Investment Management periodically review the performance of Hartford Investment Management's portfolio managers. Although Hartford Investment Management does not track the time a portfolio manager spends on a single portfolio, Hartford Investment Management does periodically assess whether a portfolio manager has adequate time and resources to effectively manage the portfolio manager's overall book of business. Material conflicts of interest may arise when allocating and/or aggregating trades. Hartford Investment Management may aggregate into a single trade order several individual contemporaneous client trade orders for a single security, absent specific client directions to the contrary. It is the policy of Hartford Investment Management that when a decision is made to aggregate transactions on behalf of more than one account (including the Fund or other accounts over which it has discretionary authority), such transactions will be allocated to all participating client accounts in a fair and equitable manner in accordance with Hartford Investment Management's trade allocation policy, which is described in Hartford Investment Management's Form ADV. Hartford Investment Management's compliance unit monitors block transactions to assure adherence to the trade allocation policy, and will inform Hartford Investment Management's Issue Resolution Council of any non-compliant transactions. (a)(3) COMPENSATION OF HARTFORD INVESTMENT MANAGEMENT PORTFOLIO MANAGERS Hartford Investment Management's portfolio managers are generally responsible for multiple accounts with similar investment strategies. Portfolio managers are compensated on the performance of the aggregate group of similar accounts rather than for a specific Fund. The compensation package for portfolio managers consists of three components, which are fixed base pay, annual incentive and long-term incentive. The base pay program provides a level of base pay that is competitive with the marketplace and reflects a portfolio manager's contribution to Hartford Investment Management's success. The annual incentive plan provides cash bonuses dependent on both Hartford Investment Management's overall performance and individual contributions. A portion of the bonus pool is determined based on the aggregate portfolio pre-tax performance results over three years relative to peer groups and benchmarks, and the remaining portion is based on current year operating income relative to the operating plan. Bonuses for portfolio managers vary depending on the scope of accountability and experience level of the individual portfolio manager. An individual's award is based upon qualitative and quantitative factors including the relative performance of their assigned portfolios compared to a peer group and benchmark. A listing of the Fund and the benchmark by which such Fund is measured can be found below and is primarily geared to reward top quartile performance on a trailing three-year basis. Qualitative factors such as leadership, teamwork and overall contribution made during the year are also considered. The long-term incentive plan provides an opportunity for portfolio managers and other key contributors to Hartford Investment Management to be rewarded in the future based on the continued profitable growth of Hartford Investment Management. A designated portion of Hartford Investment Management's net operating income will be allocated to long-term incentive awards each year. The size of actual individual awards will vary greatly. The awards will vest over three years for most participants and five years for Hartford Investment Management's Managing Directors. The value of the awards will increase at the growth rate of operating income each year during the vesting period. Awards will be paid in cash at the end of the vesting period. All portfolio managers are eligible to participate in The Hartford's standard employee health and welfare programs, including retirement. The benchmark by which the Fund's performance is measured for compensation purposes is as follows: Lehman Brothers Aggregate Bond Index. (a)(4) The dollar ranges of equity securities beneficially owned by the Hartford Investment Management portfolio managers in the Fund, are as follows for the fiscal year ended July 31, 2007:
DOLLAR RANGE OF EQUITY SECURITIES PORTFOLIO MANAGER FUND SUB-ADVISED / MANAGED BENEFICIALLY OWNED - ----------------- ------------------------------------- ----------------- Mark Niland The Hartford Income Shares Fund, Inc. None Jeffrey S. MacDonald The Hartford Income Shares Fund, Inc. None Charles Moon The Hartford Income Shares Fund, Inc. None
ITEM 9. 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 - ------ --------- ---------- ----------------- ------------------ 8/1/2006 11,820 7.3599 0 0 9/1/2006 11,130 7.8166 0 0 10/2/2006 11,005 7.9049 0 0 11/1/2006 10,760 7.9854 0 0 12/1/2006 10,220 8.1213 0 0 1/2/2007 3,210 8.0500 0 0 2/1/2007 -- -- 0 0 3/1/2007 -- -- 0 0 4/2/2007 10,000 8.0998 0 0 5/1/2007 3,300 8.1385 0 0 6/1/2007 -- -- 0 0 7/2/2007 10,090 7.9284 0 0 Total 81,535 0 0
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors since registrant last provided disclosure in response to this requirement. ITEM 11. 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 12. EXHIBITS. 12(a)(1) Code of Ethics 12(a)(2) Proxy Voting Policy 12(a)(3) Audit Committee Pre-Approval Policies and Procedures 12(a)(4) 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 5, 2007 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 5, 2007 By: /s/ David M. Znamierowski ------------------------------------- David M. Znamierowski Its: President Date: September 5, 2007 By: /s/ Tamara L. Fagely ------------------------------------- Tamara L. Fagely Its: Vice President, Controller and Treasurer EXHIBIT LIST 12(a)(1) Code of Ethics 12(a)(2) Proxy Voting Policy 12(a)(3) Audit Committee Pre-Approval Policies and Procedures 99.CERT 12(a)(4) Certifications (i) Section 302 certification of principal executive officer (ii) Section 302 certification of principal financial officer 99.906CERT 12(b) Section 906 certification of principal executive officer and principal financial officer EX-99.12(A)(1) 2 b66918a1exv99w12xayx1y.txt CODE OF ETHICS THE HARTFORD MUTUAL FUNDS, INC. THE HARTFORD MUTUAL FUNDS II, INC. THE HARTFORD INCOME SHARES FUND, INC. HARTFORD SERIES FUND, INC. HARTFORD HLS SERIES FUND II, INC. CODE OF ETHICS I. INTRODUCTION The Boards of Directors of 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. (each, a "Fund") have established this Code of Ethics ("Code") in accordance with the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. This Code does not supersede or otherwise affect the separate code of ethics that the Fund has adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940, as amended ("1940 Act"). This Code is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that the Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; (iii) compliance with applicable governmental laws, rules, and regulations; (iv) the prompt internal reporting of violations of the Code to an appropriate person or persons; and (v) accountability for adherence to the Code. The Code applies to each Fund's Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer (collectively, "Covered Officers"). For the purposes of this Code, the Compliance Officer is Ned Watkins. II. PRINCIPLES OF HONEST AND ETHICAL CONDUCT A. General Objectives The Fund expects all Covered Officers to adhere to the highest possible standards of honest and ethical conduct. All Covered Officers are expected to handle actual or apparent conflicts of interest between personal and professional relationships in a manner that is above reproach. B. Conflicts of Interest All Covered Officers should be scrupulous in avoiding a conflict of interest with regard to the Fund's interests. A conflict of interest occurs when an individual's private interest interferes in any way -- or even appears to interfere -- with the interests of the Fund. A conflict situation can arise when a Covered Officer takes actions or has interests that may make it difficult to perform his or her work for the Fund objectively and effectively. Conflicts of interest also arise when a Covered Officer, or a member of his or her family, receives improper benefits as a result of his or her position with the Fund, whether such benefits are received from the Fund or a third party. ANY CONFLICT OF INTEREST THAT ARISES IN A SPECIFIC SITUATION OR TRANSACTION MUST BE DISCLOSED BY THE COVERED OFFICER AND RESOLVED BEFORE TAKING ANY ACTION. Conflicts of interest may not always be evident, and Covered Officers should consult with the Compliance Officer or the Fund's legal counsel if they are uncertain about any situation. Examples of possible conflicts of interest include: 1. Outside Employment or Activities Covered Officers may not engage in any outside employment or activity that interferes with their performance or responsibilities to the Fund or is otherwise in conflict with or prejudicial to the Fund. A Covered Officer must disclose to the Compliance Officer any outside employment or activity that may constitute a conflict of interest. 2. Gifts Covered Officers and their immediate families shall not accept any benefit, gift, personal favor, discount, remuneration or entertainment the nature of which goes beyond those courtesies usually associated with accepted business practice or which raise any implication that could be construed as affecting their judgment or decision-making process on behalf of the Fund or any person connected therewith. 3. Other Situations Because other conflicts of interest may arise, it would be impractical to attempt to list all possible situations in this Code. If a proposed transaction or situation raises any questions or doubts, a Covered Officer should consult with the Compliance Officer or Fund counsel. C. Corporate Opportunities Covered Officers may not exploit for their own personal gain opportunities that are discovered through the use of Fund property, information, or position, unless the opportunity is disclosed fully in writing to the Board of Directors and the Board of Directors declines to pursue such opportunity. III. FULL, FAIR, ACCURATE, TIMELY, AND UNDERSTANDABLE DISCLOSURE IN FUND DISCLOSURE AND REPORTING DOCUMENTS. As a registered investment company, it is of critical importance that the Fund's public communications, reports, and SEC filings contain full, fair, accurate, timely, and understandable disclosure. Accordingly, Covered Officers are expected to consider it central to their roles as officers of the Fund to promote full, fair, accurate, timely, and understandable disclosure in the Fund's public communications and reports, and in the documents that the Fund files with, or submits to, the SEC. Depending on his or her position with the Fund, a Covered Officer may be called upon to provide necessary information to make the Fund's public reports, communications, and SEC filings and submissions complete, fair, and understandable. The Fund expects Covered Officers to take this responsibility very seriously and to provide prompt and accurate answers to inquiries related to the Fund's public disclosure requirements. Covered Officers may be asked to certify the accuracy of all responses and information provided for inclusion in the Fund's public reports, communications, and SEC filings and submissions. IV. COMPLIANCE WITH APPLICABLE GOVERNMENTAL RULES AND REGULATIONS. The Fund expects its Covered Officers to comply with all laws, rules, and regulations applicable to the Fund's operations and business. Covered Officers should seek guidance whenever they are in doubt as to the applicability of any law, rule, or regulation, or regarding any contemplated course of action. Covered Officers should also make use of the various guidelines which the Fund and its service providers have prepared on specific laws and regulations. IF IN DOUBT ON A COURSE OF ACTION, A GOOD GUIDELINE IS "ALWAYS ASK FIRST, ACT LATER" - -- IF YOU ARE UNSURE OF WHAT TO DO IN ANY SITUATION, SEEK GUIDANCE BEFORE YOU ACT. 2 As a registered investment company, the Fund is subject to regulation by the SEC and must comply with Federal securities laws and regulations, as well as other applicable laws. The Fund insists on strict compliance with the spirit and the letter of these laws and regulations. Each Covered Officer shall cooperate with Fund counsel, the Fund's independent accountants, and the Fund's other service providers with the goal of maintaining the Fund's material compliance with applicable governmental rules and regulations. Covered Officers are encouraged to attend courses and seminars for the purpose of keeping themselves apprised of developments relating to those governmental statutes, rules, and regulations applicable to the Fund. Upon obtaining knowledge of any material violation of any applicable law, rule, or regulation by the Fund or a person acting with or on behalf of the Fund, a Covered Officer shall report such violation to the Compliance Officer, Fund counsel, or both. (See Section VI of the Code for a discussion of reporting Code violations.) Each Covered Officer shall cooperate or take such steps as may be necessary or appropriate to remedy any such material violation. V. CONFIDENTIALITY Covered Officers must maintain the confidentiality of information entrusted to them by the Fund, except when disclosure is authorized by Fund counsel or required by laws or regulations. Whenever possible, Covered Officers should consult with Fund counsel if they believe they have a legal obligation to disclose confidential information. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Fund or its shareholders, if disclosed. The obligation to preserve confidential information continues even after employment as a Covered Officer ends. VI. PROMPT INTERNAL REPORTING OF VIOLATIONS OF THE CODE; EVALUATION OF POSSIBLE VIOLATIONS; DETERMINATION OF SANCTIONS A. Reporting to Compliance Officer. A Covered Officer shall promptly report knowledge of any material violation of this Code to the Compliance Officer. Any such report shall be in writing, and shall describe in reasonable detail the conduct that such Covered Officer believes to have violated this Code. The Compliance Officer shall also have the authority to draft a report of a suspected material violation of the Code, if no report is made by a Covered Officer. B. Evaluation of Reports. The Compliance Officer shall then consult with Fund counsel to the extent necessary to determine whether the reported conduct actually violates the Code, and, if there has been a violation of the Code, whether the violation causes, in the reasonable judgment of the Compliance Officer, a material adverse impact upon the Fund. 1. No Material Adverse Impact on the Fund. If the Compliance Officer determines that the violation has not caused a material adverse impact upon the Fund, the Compliance Officer shall determine what sanctions, if any, may be appropriate for the violation. (See Section VIII of the Code for a discussion of possible sanctions.) 2. Material Adverse Impact on the Fund. If the Compliance Officer determines that the violation has caused a material adverse impact upon the Fund, the Compliance Officer shall promptly notify the Board of such violation. The Board shall be entitled to consult with independent legal counsel to determine whether the violation actually has had a material adverse impact upon the Fund; to formulate sanctions, if any, appropriate for the violation; or for any other purpose that the Board, in its business judgment, determines to be necessary or advisable. (See Section VIII of the Code for a discussion of possible sanctions.) 3 C. Periodic Reports by Compliance Officer to Board of Directors. The Compliance Officer shall report to the Board at each regularly scheduled Board meeting all violations of the Code (whether or not they caused a material adverse impact upon the Fund) and all sanctions imposed. VII. WAIVERS OF PROVISIONS OF THE CODE A. Waivers. A waiver of a provision of this Code shall be requested whenever there is a reasonable likelihood that a contemplated action will violate the Code. Waivers will not be granted except under extraordinary or special circumstances. The process of requesting a waiver shall consist of the following steps: a. The Covered Officer shall set forth a request for waiver in writing. The request shall describe the conduct, activity, or transaction for which the Covered Officer seeks a waiver, and shall briefly explain the reason for engaging in the conduct, activity, or transaction. b. The determination with respect to the waiver shall be made in a timely fashion by the Compliance Officer, in consultation with Fund counsel, and submitted to the Board for ratification. c. The decision with respect to the waiver request shall be documented and kept in the Fund's records for the appropriate period mandated by applicable law or regulation. B. Disclosure of Waivers. To the extent required by applicable law, waivers (including "implicit waivers") shall be publicly disclosed on a timely basis. An "implicit waiver" is defined as the Fund's failure to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an "executive officer" of the Fund. For this purpose, an "executive officer" is a Fund's President or Chief Executive Officer, Vice President (who is in charge of a principal policymaking function), or any other person who performs similar policymaking functions for the Fund. VIII. ACCOUNTABILITY FOR ADHERENCE TO THE CODE The matters covered in this Code are of the utmost importance to the Fund and its shareholders, and are essential to the Fund's ability to conduct its business in accordance with its stated values. Covered Officers are expected to adhere to these rules in carrying out their duties for the Fund. The Fund will, if appropriate, take action against any Covered Officer whose actions are found to violate this Code. Sanctions for violations of the Code may include, among other things, a requirement that the violator undergo training related to the violation, a letter of sanction, and/or suspension or termination of the employment of the violator. Where the Fund has suffered a loss because of violations of this Code or applicable laws, regulations, or rules, it may pursue its remedies against the individuals or entities responsible. IX. RECORDKEEPING A. General. The Fund requires accurate recording and reporting of information in order to make responsible business decisions. All of the Fund's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Fund's transactions and must conform both to applicable legal requirements and to the Fund's system of internal controls. 4 B. Code of Ethics Records. A copy of this Code, any amendments hereto, and any reports or other records created in relation to waivers of or amendments to provisions of this Code shall be kept as records of the Fund for six years from the end of the fiscal year in which such document was created. Such records shall be furnished to the SEC or its staff upon request. X. AMENDMENTS TO THE CODE The Covered Officers and the Compliance Officer are encouraged to recommend improvements to this Code to the Board, and the Board may amend the Code in its discretion. In connection with any amendment to the Code, the Compliance Officer shall prepare a brief description of the amendment, in order that this description may be disclosed in accordance with applicable law and regulations. ADOPTED: MAY 13, 2003 5 EX-99.12(A)(2) 3 b66918a1exv99w12xayx2y.txt PROXY VOTING POLICY PROXY VOTING POLICIES AND PROCEDURES The Board of Directors believes that the voting of proxies with respect to securities held by the Fund is an important element of the overall investment process. The Fund has delegated the responsibility to vote such proxies to the Fund's investment manager subject to the continuing oversight of the Board of Directors. The investment manager has delegated to the sub-adviser the responsibility to vote proxies. The sub-adviser has a duty to vote or not vote such proxies in the best interests of the Fund and its shareholders, and to avoid the influence of conflicts of interest. The policies and procedures used by the sub-adviser to determine how to vote certain proxies relating to portfolio securities are described below. In addition to a summary description of such policies and procedures, included below are descriptions of how such policies and procedures apply to various topics. However, the following are descriptions only and more complete information should be obtained by reviewing the sub-adviser's policies and procedures, as well as the Fund's voting records. For a complete copy of the sub-adviser's proxy voting policies and procedures, as well as any separate guidelines it utilizes, please refer to www.hartfordinvestor.com/mutualfunds/proxyvotingpolicies. Information on how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available (1) without charge, upon request, by calling 1-888-843-7824 and (2) on the SEC's website at www.sec.gov. HARTFORD INVESTMENT MANAGEMENT COMPANY The Fund has granted to Hartford Investment Management Company ("Hartford Investment Management") the authority to vote proxies on its behalf with respect to the assets managed by Hartford Investment Management. Hartford Investment Management votes proxies in what it believes are the best economic interests of its clients and in accordance with its Proxy Policies and Procedures. Hartford Investment Management's Proxy Committee is responsible for the review and approval of the Hartford Investment Management's Proxy Policies and Procedures. Day-to-day administration of the proxy voting process at Hartford Investment Management is the responsibility of the portfolio manager of the relevant client account. Although Hartford Investment Management has established its own Proxy Guidelines setting forth general guidelines for voting proxies, Hartford Investment Management personnel evaluate all proxies and vote proxies based on their assessment of the merits of each proposal. Absent a material conflict of interest, the applicable portfolio manager has the authority to determine the final vote for securities held in the account for which he or she serves as the designated manager. Hartford Investment Management votes proxies solicited by an investment company in the same proportion as the vote of the investment company's other shareholders (sometimes called "mirror" or "echo" voting). Hartford Investment Management maintains procedures designed to identify and address material conflicts of interest in voting proxies. Proxy votes for which an apparent conflict of interest is identified are reviewed by the Proxy Committee to resolve the conflict and direct the vote. Hartford Investment Management may be unable to vote or may determine not to vote a proxy on behalf of the Fund due to, for example, the existence of securities lending arrangements, lack of adequate information, and untimely receipt of proxy materials. In order to facilitate the proxy voting process, Hartford Investment Management has retained Glass Lewis & Company ("Glass Lewis") as experts in the proxy voting and corporate governance area. Glass Lewis specializes in providing a variety of fiduciary-level proxy advisory and voting services. These services include in-depth research, analysis and voting recommendations as well as vote execution, reporting, auditing and consulting assistance for the handling of proxy voting responsibility and corporate governance-related efforts. While Hartford Investment Management will rely upon Glass Lewis research and recommendations in voting proxies (and will often follow such recommendations), Hartford Investment Management may deviate from Glass Lewis's recommendations on general policy issues or specific proxy proposals. Glass Lewis provides comprehensive summaries of proxy proposals, publications discussing key proxy voting issues and specific vote recommendations regarding portfolio company proxies to assist in the proxy research process. Upon request, portfolio managers may receive any or all of the above-mentioned research materials to assist in the vote determination process. The final authority and responsibility for proxy voting decisions remains with Hartford Investment Management. MATERIAL CONFLICT OF INTEREST IDENTIFICATION AND RESOLUTION PROCESSES Hartford Investment Management's functional lines of responsibility serve to minimize the number of, but not prevent, material conflicts of interest it faces in voting proxies. The portfolio manager or his or her designee reviews each proxy to assess the extent to which there may be a potential conflict of interest. Some of these potential conflicts of interest may include: - The issuer that is soliciting Hartford Investment Management's proxy vote is also a client of Hartford Investment Management or an affiliate; - A Hartford Investment Management employee has acquired non-public information about an issuer that is soliciting proxies; - A Hartford Investment Management employee has a business or personal relationship with, or financial interest in, the issuer or officer or Board member of the issuer; and - A Hartford Investment Management employee is contacted by management or board member of a company regarding an upcoming proxy vote. All personnel are required to contact Investment Compliance about any apparent conflicts of interest, including apparent conflicts of interest involving personal relationships. In cases of apparent conflicts of interest, the proxy will be voted according to the recommendations set forth by Glass Lewis. Should Investment Compliance believe other considerations should be taken into account for a particular proxy with an apparent conflict of interest, the Proxy Committee will be consulted to review such potential conflict and the special considerations raised by Investment Compliance. The Proxy Committee will then resolve the conflict and direct the vote. In order to avoid even the appearance of impropriety, the Proxy Committee will not take Hartford Investment Management's relationship with a company into account, and will vote the company's proxies in the best interest of Hartford Investment Management's clients, in accordance with the Proxy Voting Policies and Procedures. Notwithstanding the foregoing, all proxy votes solicited by an Affiliated Underlying Fund will be voted by Hartford Investment Management in the same proportion as the vote of the Affiliated Underlying Fund's other shareholders (sometimes called "mirror" or "echo" voting). Any Proxy Committee member who is himself or herself subject to the identified conflict will not participate in the Proxy Committee's proxy voting activities regarding and any discussions of the particular proxy, including the decision on whether and how to vote the proxy in question. Investment Compliance will record and maintain minutes for the Proxy Committee meetings to document the factors that were considered to evidence that there was a reasonable basis for the Proxy Committee's decision. SITUATIONS IN WHICH HARTFORD INVESTMENT MANAGEMENT MAY NOT VOTE PROXIES In certain instances, Hartford Investment Management may be unable to vote or may determine not to vote a proxy on behalf of one or more clients. While not exhaustive, the following list of considerations highlights some potential instances in which a proxy vote might not be entered: - Securities Lending - Hartford Investment Management's mutual funds and third party (client) accounts may have a securities lending agent. In this case, Hartford Investment Management may be unable to vote proxies when the underlying securities have been lent out pursuant to such securities lending program. In general, Hartford Investment Management does not know when securities have been lent out and are therefore unavailable to be voted. - Lack of Adequate Information or Untimely Receipt of Proxy - Hartford Investment Management may be unable to enter an informed vote in certain circumstances due to the lack of information provided in the proxy statement or by the issuer or other resolution sponsor, and may abstain from voting in those instances. Proxy materials not delivered in a timely fashion may prevent analysis or entry of a vote by voting deadlines. GLASS LEWIS PROXY VOTING GUIDELINES SUMMARY ANTI-TAKEOVER MEASURES Poison Pills (Shareholder Rights Plans). Typically Glass Lewis recommends that shareholders vote against these plans to protect their financial interests and ensure that they have the opportunity to consider any offer for their shares, especially those at a premium. In certain limited circumstances, Glass Lewis will support a limited poison pill to accomplish a particular objective, such as the closing of an important merger, or a pill that contains what Glass Lewis believes to be a reasonable 'qualifying offer' clause. Right of Shareholders to Call a Special Meeting. In order to prevent abuse and waste of corporate resources by a minority of shareholders, Glass Lewis believes that such rights should be limited to a minimum threshold of at least 15% of the shareholders requesting such a meeting. However, when proposals are presented to allow shareholders the opportunity to call special meetings that do not specify a minimum threshold, Glass Lewis will support them because the possible abuse of the right to call shareholder meetings is outweighed by the benefit to shareholders of having that right. Shareholder Action by Written Consent. In order to prevent abuse and waste of corporate resources by a minority of shareholders, Glass Lewis believes that such rights should be limited to a minimum threshold of at least 15% of the shareholders requesting action by written consent. However, when proposals are presented to allow shareholders the opportunity to act by written consent without specifying a minimum threshold, Glass Lewis will support them based on the belief that shareholders are better off with this right than without it, and because the possible abuse of the right to act by written consent is outweighed by the benefit to shareholders of having that right. Advance Notice Requirements for Shareholder Ballot Proposals. Glass Lewis typically recommends that shareholders vote against these proposals. Cumulative Voting. Glass Lewis reviews these proposals on a case-by-case basis factoring in the independence of the board and the status of the company's governance structure. However, Glass Lewis typically finds that these proposals are on ballots at companies where independence is lacking and where the appropriate checks and balances that favor shareholders are not in place. In those instances Glass Lewis typically recommends in favor of cumulative voting. Supermajority Vote Requirements. Glass Lewis believes that supermajority vote requirements act as impediments to shareholder action on ballot items that are critical to shareholder interests. ELECTION OF DIRECTORS Voting Recommendation on the Basis of Independence: Glass Lewis looks at each director nominee and examines his or her relationships with the company, the company's executives and with other directors. The purpose of this inquiry is to determine whether pre-existing personal, familial or financial relationships (apart from compensation as a director) are likely to impact the decisions of that director. Glass Lewis believes the existence of personal, familial or financial relationships makes it difficult for a director to put the interests of the shareholders whom she is elected to serve above her own interests or those of the related party. Glass Lewis also believes that a director who owns more than 20% of a company can exert disproportionate influence on the board and, in particular, the audit committee. In general, Glass Lewis feels that a board will be most effective in protecting shareholders' interests if at least two-thirds of the members of the board should consist of independent directors. In the event that more than one third of the members are affiliated or inside directors, Glass Lewis typically(1) recommends withholding votes from some of the inside and/or affiliated directors in order to satisfy the two-thirds threshold it believes is appropriate. Glass Lewis believes that only independent directors should serve on a company's audit, compensation, nominating and governance committees.(2) Glass Lewis typically recommends that shareholders withhold their votes for any affiliated or inside director seeking appointment to an audit, compensation, nominating or governance committee or who has served in that capacity in the past year. Voting Recommendation on the Basis of Performance: Glass Lewis disfavors directors who have a track record of poor performance in fulfilling their responsibilities to shareholders at any company where they have held a board or executive position. See full guidelines for criteria. Voting Recommendation on the Basis of Experience: Glass Lewis typically recommends that shareholders withhold votes from directors who have served on boards or as executives of companies with track records of poor performance, overcompensation, audit or accounting related issues and/or other indicators of mismanagement or actions against the interests of shareholders. Voting Recommendation on the Basis of Other Considerations: Glass Lewis recommends shareholders withhold votes from certain types of affiliated or inside directors under nearly all circumstances. APPOINTMENT OF AUDITORS Glass Lewis generally supports management's recommendation regarding the selection of an auditor except in cases where Glass Lewis believes the independence of an auditor or the integrity of the audit has been compromised. Where the board has not allowed shareholders to exercise their right and responsibility to review and ratify the auditor, Glass Lewis typically recommends withholding votes from the chairman of the audit committee of the board and when there have been material restatements of annual financial statements or material weakness in internal controls reported, from the entire audit committee. Glass Lewis typically supports audit related proposals regarding mandatory auditor rotation when the proposal uses a reasonable period of time (usually not less than 5-7 years). CHANGES TO CAPITAL STRUCTURE When analyzing a request for additional shares, Glass Lewis typically reviews four common reasons why a company might need additional capital stock beyond what is currently available: - Stock Split - Glass Lewis typically considers three metrics when evaluating whether Glass Lewis thinks a stock split is likely or necessary. First, Glass Lewis looks at the historical stock pre-split price, if any. Second, Glass Lewis considers the current share price relative to the price in the prior 52 weeks to assess the current price relative to the Company's most common trading price over that period. Finally, Glass Lewis considers some absolute limits on stock price that in Glass Lewis' view either always make a stock split appropriate if desired by management or conversely would almost never be a reasonable price at which to split a stock. - ---------- (1) In the case of a staggered board, if the affiliates or insiders that we believe should not be on the board are not standing for election, Glass Lewis will express our concern regarding those directors, but Glass Lewis will not recommend withholding from the affiliates or insiders who are up for election just to achieve two-thirds independence. (2) Glass Lewis will recommend withholding votes from any member of the audit committee who owns 20% or more of the company's stock and Glass Lewis believes that there should be a maximum of one director (or no directors if the committee is comprised of less than three directors) who owns 20% or more of the company's stock on the compensation, nominating and governance committees. - Shareholder Defenses - Additional authorized shares could be used to bolster the efficacy of takeover defenses such as a "poison pill." The fact that the additional shares could be used to defend or discourage a hostile takeover is often discussed as a reason for a requested increase in the proxy. Glass Lewis is typically against such defenses and, therefore, will oppose actions intended to increase the efficacy of such defenses. - Financing for Acquisitions - Glass Lewis looks to see whether the company has a history of using stock for acquisitions and attempts to determine what levels of stock have typically been required to accomplish such transactions. Likewise, Glass Lewis looks to see whether this is discussed as a reason for additional shares in the proxy. - Financing for Operations - Glass Lewis reviews the company's cash position and its ability to secure financing through borrowing or other means. Glass Lewis looks at the company's history of capitalization and whether or not the company has had to use stock in the recent past as a means of raising capital. Issuing additional shares can dilute existing holders in limited circumstances. Further, the availability of additional shares, where the board has discretion to implement a poison pill, can often serve as a deterrent to interested suitors. Accordingly, where Glass Lewis finds that the company has not detailed a plan for use of the proposed shares, or where the number of shares far exceeds those needed to accomplish a detailed plan, Glass Lewis typically recommends against the authorization of additional shares. While Glass Lewis thinks that having adequate shares to allow management to make quick decisions and effectively operate the business is critical, Glass Lewis prefers that, for significant transactions, management come to shareholders to justify their use of additional shares rather than providing a blank check in the form of a large pool of unallocated shares available for any purpose. EQUITY BASED COMPENSATION PLANS Glass Lewis evaluates option and other equity-based compensation plans with a detailed model and analyst review. Glass Lewis believes that equity compensation awards are a useful tool, when not abused, for retaining and incentivizing employees to engage in conduct that will improve the performance of the Company. Glass Lewis' analysis is quantitative and focused on the cost of the plan as compared to the operating metrics of the business. Glass Lewis runs twenty different analyses, comparing the program with both absolute limits Glass Lewis believes are key to equity value creation and with a carefully chosen peer group. In general, Glass Lewis' model seeks to determine whether the proposed plan is either absolutely excessive or is more than one standard deviation away from the average plan for the peer group on a range of criteria, including dilution to shareholders and the projected annual cost relative to the company's financial performance. Each of the twenty analyses (and their constituent parts) is weighted and the plan is scored in accordance with that weight. Option Exchanges. Glass Lewis views option repricing plans and option exchange programs with great skepticism. Shareholders have substantial risk in owning stock and, as a general matter, Glass Lewis believes that the employees, officers and directors that receive stock options should be similarly situated to align interests optimally. Performance Based Options. Glass Lewis believes in performance-based equity compensation plans for senior executives. Glass Lewis feels that executives should be compensated with equity when their performance and that of the company warrants such rewards. While Glass Lewis does not believe that equity-based compensation plans for all employees need to be based on overall company performance, Glass Lewis does support such limitations for grants to senior executives (although some equity-based compensation of senior executives without performance criteria is acceptable, such as in the case of moderate incentive grants made in an initial offer of employment or in emerging industries). Glass Lewis generally recommends that shareholders vote in favor of performance based option requirements. Linking Pay with Performance. Glass Lewis strongly believes that executive compensation should be linked directly with the performance of the business the executive is charged with managing. Glass Lewis has a proprietary pay-for-performance model that evaluates compensation of the top five executives at every company in the Russell 3000. Glass Lewis' model benchmarks the compensation of these executives compared with their performance using three peer groups for each company: an industry peer group, a smaller sector peer group and a geographic peer group. Using a forced curve and a school letter-grade system, Glass Lewis ranks companies according to their pay-for-performance. Glass Lewis uses this analysis to inform Glass Lewis' voting decisions on each of the compensation issues that arise on the ballot. Likewise, Glass Lewis uses this analysis in Glass Lewis' evaluation of the compensation committee's performance. 162(m) Plans. Section 162(m) of the Internal Revenue Code allows companies to deduct compensation in excess of $1 million for the CEO and the next four most highly compensated executive officers upon shareholder approval of the excess compensation. Glass Lewis recognizes the value of executive incentive programs and the tax benefit of shareholder-approved incentive plans. Glass Lewis believes the best practice for companies is to provide reasonable disclosure to shareholders so that they can make sound judgments about the reasonableness of the proposed compensation plan. To allow for meaningful shareholder review, they prefer that the proposals include: specific performance goals, a maximum award pool, and a maximum award amount per employee. They also believe it is important to analyze the estimated grants to see if they are reasonable and in line with the company's peers. Glass Lewis typically recommends against a 162(m) plan where: a company fails to provide at least a list of performance targets; a company fails to provide one of either a total pool or an individual maximum; or the proposed plan is excessive when compared with the plans of the company's peers. However, where a company has a record of reasonable pay relative to business performance, Glass Lewis is not typically inclined to recommend against a plan even if the plan caps seem large relative to peers because they recognize the value in special pay arrangements for continued exceptional performance. Director Compensation Plans. Glass Lewis believes that non-employee directors should receive compensation for the time and effort they spend serving on the board and its committees. In particular, Glass Lewis supports compensation plans that include option grants or other equity-based awards, which help to align the interests of outside directors with those of shareholders. Director fees should be competitive in order to retain and attract qualified individuals. However, excessive fees represent a financial cost to the company and threaten to compromise the objectivity and independence of non-employee directors. Therefore, a balance is required. Limits on Executive Compensation. As a general rule, Glass Lewis believes that shareholders should not be involved in setting executive compensation. Such matters should be left to the board's compensation committee. Glass Lewis views the election of compensation committee members as the appropriate mechanism for shareholders to express their disapproval or support of board policy on this issue. Further, Glass Lewis believes that companies whose pay-for-performance is in line with its peers should be able to compensate their executives in a manner that drives growth and profit without destroying ethical values, giving consideration to their peers' comparable size and performance. However, Glass Lewis favors performance-based compensation as an effective means of motivating executives to act in the best interests of shareholders. Performance-based compensation may be limited if a CEO's pay is capped at a low level rather than flexibly tied to the performance of the Company. Limits on Executive Stock Options. Glass Lewis typically recommends that Glass Lewis' clients oppose caps on executive stock options. Linking Pay to Social Criteria. Glass Lewis believes that ethical behavior is an important component of executive performance and should be taken into account when evaluating performance and determining compensation. Glass Lewis also believes, however, that the board and specifically its compensation committee are in the best position to set policy on management compensation. Shareholders can hold the board's compensation committee accountable for the compensation awarded through the election of directors. Full Disclosure of Executive Compensation. Glass Lewis believes that complete, timely and transparent disclosure of information regarding compensation is critical to allowing shareholders to evaluate the extent to which a company's pay is keeping pace with its performance. However, Glass Lewis is concerned when a proposal goes too far in the level of detail that it requests for executives other than the most high-ranking leaders of the company. While Glass Lewis is in favor of full disclosure for senior executives and Glass Lewis views information about compensation at the aggregate level (e.g. number of employees being paid over a certain amount or in certain categories) potentially very useful, Glass Lewis does not believe that shareholders need or will benefit from detailed reports about individual management employees other than the most senior executives. SOCIAL AND CORPORATE RESPONSIBILITY Glass Lewis believes that disclosure regarding how a company uses its funds is an important component of corporate accountability to shareholders. Some campaign contributions are heavily regulated by federal, state and local laws. Most jurisdictions have detailed disclosure laws so that information on some contributions is publicly available. Other than where a company does not adequately disclose information about its contributions to shareholders or where a company has a history of abuse in the donation process, Glass Lewis believes that the mechanism for disclosure and the standards for giving are best left to the board. However, Glass Lewis will consider supporting shareholder proposals seeking greater disclosures of political giving if in cases where additional company disclosure is nonexistent or limited and there is some evidence or credible allegation that the company is mismanaging corporate funds through political donations or has a record of doing so. Glass Lewis believes that labor and human resource policies are typically best left to management and the board, absent a showing of egregious or illegal conduct that might threaten shareholder value. It is Glass Lewis' opinion that management is in the best position to determine appropriate practices in the context of its business. Glass Lewis will hold directors accountable for company decisions related to labor and employment issues. However, in situations where there is clear evidence of practices resulting in significant economic exposure to the company, Glass Lewis will support shareholders proposals that seek to address labor policies. Non-Discrimination Policies. Glass Lewis believes that human resource policies are best left to management and the board, absent a showing of egregious or illegal conduct that might threaten shareholder value. Management is in the best position to determine which policies will promote the interests of the firm across its various businesses. Board members are accountable to shareholders for the decisions they make about these issues when they face re-election. Military and US Government Business Policies. Glass Lewis believes that disclosure to shareholders of information on key company endeavors is important. However, Glass Lewis generally does not support resolutions that call for shareholder approval of policy statements for or against government programs that are subject to thorough review by the Federal Government and elected officials at the national level. Foreign Government Business Policies. Glass Lewis believes that worldwide business policies are best left to management and the board, absent a showing of egregious or illegal conduct that might threaten shareholder value. Glass Lewis believes that board members can be held accountable for these issues when they face re-election. Environmental Policies. Glass Lewis believes that when management and the board have displayed disregard for environmental risks, have engaged in egregious or illegal conduct, or have failed to adequately respond to current or imminent environmental risks that threaten shareholder value, board members should be held accountable when they face reelection. They believe that part of the board's role is to ensure that management conducts a complete risk analysis of company operations, including those that have environmental implications, and that directors should monitor management's performance in mitigating the environmental risks attendant with relevant operations in order to eliminate or minimize the risks to the company and shareholders. Glass Lewis may recommend that votes be withheld from responsible members of the governance committee when a substantial environmental risk has been ignored or inadequately addressed, and may in some cases recommend that votes be withheld from all directors who were on the board when the substantial risk arose, was ignored or was not mitigated. EX-99.12(A)(3) 4 b66918a1exv99w12xayx3y.txt AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES THE HARTFORD MUTUAL FUNDS, INC. THE HARTFORD MUTUAL FUNDS II, INC. HARTFORD SERIES FUND, INC. HARTFORD HLS SERIES FUND II, INC. THE HARTFORD INCOME SHARES FUND, INC. AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES The Sarbanes-Oxley Act of 2002 ("Act")(1) and rules adopted by the Securities and Exchange Commission ("SEC") ("Rules")(2) require that the Audit Committee for the above-referenced companies (each a "Fund" and together the "Funds") pre-approve all audit services and non-audit services provided to the Fund by its independent registered public accounting firm ("Independent Auditor"), as well as all non-audit services provided by the Independent Auditor to the Fund's investment adviser and its Service Affiliates(3) if the services directly impact the Fund's operations and financial reporting. The following policies and procedures govern the ways in which the Audit Committee will pre-approve audit and various categories of non-audit services that the Independent Auditor provides to the Fund and to Service Affiliates. These policies and procedures do not apply in the case of audit services that the Independent Auditor provides to Service Affiliates, nor do they apply to services that an audit firm other than the Independent Auditor provides to such entities. These policies and procedures comply with the requirements for pre-approval, but also provide a mechanism by which management of the Fund may request and secure pre-approval of audit and non-audit services in an orderly manner with minimal disruption to normal business operations. Pre-approval of non-audit services may be achieved through a combination of the procedures described in Sections C and D below. A. General 1. The Audit Committee must pre-approve all audit services and non-audit services that the Independent Auditor provides to the Fund. - ------------------- (1) Pub. L. 107-204, 116 Stat. 745 (2002). (2) Sec. Act Rel. No. 8183 (Mar. 20, 2003). (3) A "Service Affiliate" is any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Fund. 2. The Audit Committee must pre-approve any engagement of the Independent Auditor to provide non-audit services to any Service Affiliate during the period of the Independent Auditor's engagement to provide audit services to the Fund, if the non-audit services to the Service Affiliate directly impact the Fund's operations and financial reporting. B. Pre-Approval of Audit Services to the Fund 1. The Audit Committee shall approve the engagement of an Independent Auditor to audit the Fund's financial statements for each fiscal year (the "Engagement"). The approval of the Engagement shall not be delegated to a Designated Member. (See Section D below.) In approving the Engagement, the Audit Committee shall obtain, review and consider sufficient information concerning the proposed Independent Auditor to enable the Audit Committee to make a reasonable evaluation of the Independent Auditor's qualifications and independence. The Audit Committee also shall consider the Independent Auditor's proposed fees for the engagement, in light of the scope and nature of the audit services that the Fund will receive. Where the proposed fees have not been determined at the time of approval, the Audit Committee may consider a fee estimate or range as provided by the Independent Auditor. 2. The Audit Committee shall report to the Board of Directors (the "Board") regarding its approval of the Engagement and of the proposed fees for the Engagement, and the basis for such approval. 3. Unless otherwise in accordance with applicable law, the Engagement, in any event, shall require that the Independent Auditor be selected by the vote, cast in person, of a majority of the members of the Fund's Board who are not interested persons of the Fund (as defined in Section 2(a)(19) of the Investment Company Act of 1940) ("Independent Directors"). C. Pre-Approval of Non-Audit Services to the Fund and to Service Affiliates -- by Types of Services 1. The Audit Committee shall pre-approve types of non-audit services to the Fund and its Service Affiliates pursuant to this Section C. 2. Annually, at such time as the Audit Committee considers the Engagement of the Independent Auditor, management of the Fund, in consultation with the Independent Auditor, shall provide to the Audit Committee, for its consideration and action, the following: (a) a list of those types of non-audit services, if any, that the Fund may request from the Independent Auditor during the fiscal year; and (b) a list of those types of non-audit services directly impacting the Fund's operations and financial reporting that Service Affiliates may request from the Independent Auditor during the fiscal year. 2 3. The lists submitted to the Audit Committee shall describe the types of non-audit services in reasonable detail and shall include an estimated budget (or budgeted range) of fees where possible and such other information as the Audit Committee may request. 4. The Audit Committee's pre-approval of the types of non-audit services submitted pursuant to this Section C shall constitute authorization for management of the Fund to utilize the Independent Auditor for the types of non-audit services so pre-approved, if needed or desired during the fiscal year. 5. A list of the types of non-audit services pre-approved by the Audit Committee pursuant to this Section C will be distributed to the Fund's investment adviser and Service Affiliates and the appropriate partners of the Independent Auditor. Periodically, the Independent Auditor will discuss with the Audit Committee those non-audit services that have been or are being provided pursuant to this Section C. D. Pre-Approval of Non-Audit Services to the Fund and to Service Affiliates -- Project-by-Project Basis 1. The Audit Committee also may pre-approve non-audit services on a project-by-project basis pursuant to this Section D. 2. Management of the Fund, in consultation with the Independent Auditor, may submit either to the Audit Committee or to the Designated Member, as provided in this Section D, for their consideration and action, a pre-approval request identifying one or more non-audit service projects. The request so submitted shall describe the project or projects in reasonable detail and shall include an estimated budget (or budgeted range) of fees and such other information as the Audit Committee or Designated Member shall request. 3. The Audit Committee, from time to time, may designate one or more of its members who are Independent Directors (each a "Designated Member") to consider, on the Audit Committee's behalf, any non-audit services, whether to the Fund or to any Service Affiliate, that have not been pre-approved by the Audit Committee. The Designated Member also shall review, on the Audit Committee's behalf, any proposed material change in the nature or extent of any non-audit services previously approved. The Fund's management, in consultation with the Independent Auditor, shall explain why such non-audit services or material change in non-audit services are necessary and appropriate and the anticipated costs thereof. 4. The Designated Member will review the requested non-audit services or proposed material change in such services and will either: (a) pre-approve, pre-approve subject to conditions, or disapprove any such requested services, or any proposed material change in services, whether to the Fund or to a Service Affiliate; or 3 (b) refer such matter to the full Audit Committee for its consideration and action. In considering any requested non-audit services or proposed material change in such services, the Designated Member shall not authorize services which would exceed $50,000 in fees for such services. 5. The Designated Member's pre-approval (or pre-approval subject to conditions) of the requested non-audit service or proposed material change in service pursuant to this Section D shall constitute authorization for the management of the Fund or the Service Affiliate, as the case may be, to utilize the Independent Auditor for the non-audit services so pre-approved. Any action by the Designated Member in approving a requested non-audit service shall be reported to the Audit Committee not later than at its next scheduled meeting. If the Designated Member does not approve the Independent Auditor providing the requested non-audit service, the matter may be presented to the full Audit Committee for its consideration and action. E. Amendment; Annual Review 1. The Audit Committee may amend these procedures from time to time. 2. These procedures shall be reviewed annually by the Audit Committee. F. Recordkeeping 1. The Fund shall maintain a written record of all decisions made by the Audit Committee or by a Designated Member pursuant to these procedures, together with appropriate supporting material. 2. In connection with the approval of any non-audit service pursuant to the de minimis exception provided in the Act and the Rules,(4) a record shall be made indicating that each of the conditions for this exception, as set forth in the Act and the Rules, has been satisfied. - ------------------- (4) Section 202 of the Act (Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended) and Rule 2-01(c)(7) under Regulation S-X. Pre-approval by the Audit Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to a Fund constitutes not more than 5% of the total amount of revenues paid by the Fund, its investment adviser, and the Service Affiliates to the Independent Auditor during the fiscal year in which the permissible non-audit services are provided; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved prior to the completion of the audit by the Committee or its delegate(s). 4 3. A copy of these Procedures and of any amendments to these Procedures shall be maintained and preserved permanently in an easily accessible place. The written records referred to in paragraphs 1 and 2 of this Section F shall be maintained and preserved for six years from the end of the fiscal year in which the actions recorded were taken, for at least the first two years in an easily accessible location. G. Prohibited and Conditionally Prohibited Non-Audit Services The Independent Auditor may not provide (except as described below) any of the following services to the Fund, the Fund's investment adviser, the Service Affiliates or any other member of the investment company complex. For purposes of this policy, "investment company complex" includes: 1) any entity controlling or controlled by the Fund's investment adviser/sponsor, 2) any other investment adviser under common control with the Fund's investment adviser/sponsor, and 3) any investment companies advised by any investment adviser in the investment company complex. 1. Conditionally Prohibited Non-Audit Services The following services may be provided if the Fund and the Audit Committee can reasonably conclude that the result of the service would not be subject to audit procedures in connection with the audit of the Fund's financial statements: - Bookkeeping; - Financial information systems design and implementation; - Appraisal or valuation services, fairness opinions, or contribution-in-kind reports; - Actuarial services; and - Internal audit outsourcing services. 2. Prohibited Non-Audit Services - Management functions or human resources; - Broker or dealer, investment adviser or investment banking services; - Legal services and expert services unrelated to the audit; and - Any other service that the Public Company Accounting Oversight Board determines, by regulation, is prohibited. Approved on May 9, 2006 5 EX-99.CERT 5 b66918a1exv99wcert.txt SECTION 302 CERTIFICATIONS CERTIFICATION I, David M. Znamierowski, certify that: 1. I have reviewed this report on Form N-CSR of The Hartford Income Shares Fund, Inc. (File Number 811-02281 CIK Number 0000086317); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information, and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 5, 2007 /s/ David M. Znamierowski ---------------------------------------- David M. Znamierowski President CERTIFICATION I, Tamara L. Fagely, certify that: 1. I have reviewed this report on Form N-CSR of The Hartford Income Shares Fund, Inc. (File Number 811-02281 CIK Number 0000086317); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information, and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 5, 2007 /s/ Tamara L. Fagely ---------------------------------------- Tamara L. Fagely Vice President, Controller and Treasurer EX-99.906CERT 6 b66918a1exv99w906cert.txt CERTIFICATIONS OF CEO AND PFO CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of The Hartford Income Shares Fund, Inc. does hereby certify, to such officer's knowledge, that: The annual report on Form N-CSR of The Hartford Income Shares Fund, Inc. for the period ended July 31, 2007 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Fund. Date: September 5, 2007 By: /s/ David M. Znamierowski --------------------------- David M. Znamierowski Its: President Date: September 5, 2007 By: /s/ Tamara L. Fagely --------------------------- Tamara L. Fagely Its: Vice President, Controller and Treasurer A signed original of this written statement required by Section 906 has been provided to The Hartford Income Shares Fund, Inc. and will be retained by The Hartford Income Shares Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----