<PAGE>
DIVERSIFICATION
FUND HAD A
TOTAL RETURN OF
20.9 PERCENT
DURING THE YEAR
THAT ENDED MAY
31, 1995.
TO SHAREHOLDERS
DIVERSIFICATION FUND HAD A TOTAL RETURN OF 20.9 PERCENT DURING THE YEAR THAT
ENDED MAY 31, 1995. That return represented a rise in net asset value per share
to $202.72 from $170.98, and the reinvestment of $2.22 in income dividends and
$1.145 in capital gain distributions. By comparison, the S&P 500, an unmanaged
index of common stocks, had a return of 20.2 percent during the same period.
IN GENERAL, THE STOCK MARKET PERFORMED WELL DURING THIS 12-MONTH PERIOD.
Interest rates stopped their rapid ascent in November and fears of runaway
inflation dissipated. The market's behavior was a positive response to the
prospect of slow growth without significant inflation. Many companies cut costs
and downsized to deal with the effects of the recession several years ago. They
now are better prepared to operate more efficiently during an economic slowdown.
The market also responded to changing economic prospects in another way: market
leadership shifted from cyclical stocks to other sectors less exposed to a
slowing economy.
THE TECHNOLOGY SECTOR WAS THE MARKET'S TOP PERFORMER DURING THIS PERIOD. The
performance of the Fund's holdings in technology and electronics stocks helped
account for a portion of the Fund's gains. However, past performance is no
guarantee of future returns.
INTEL CORP., THE FUND'S LARGEST HOLDING IN TERMS OF MARKET VALUE, SHOWED A PRICE
INCREASE OF NEARLY 74 PERCENT DURING THE YEAR, WHILE IBM WAS UP NEARLY 47
PERCENT. Health care stocks, led by the stocks of drug companies, were generally
strong during the year. In the Fund, Merck & Co., Inc. was up by 55 percent and
Warner-Lambert showed an increase of nearly 20 percent.
THE FUND ALSO WAS HELPED BY STRONG SHOWINGS IN ITS SECOND- AND THIRD-LARGEST
HOLDINGS, BOTH FROM THE BEVERAGE INDUSTRY. PepsiCo, Inc., the second-largest
position by market value, posted gains of 35 percent during the year, while
Coca-Cola Co. was up nearly 51 percent.
WHILE FINANCIAL STOCKS SHOWED MIXED RESULTS OVER THE PAST YEAR BECAUSE OF
INTEREST RATE CONCERNS, THE FUND'S HOLDINGS IN THIS SECTOR GENERALLY PERFORMED
WELL. General Re Corp was up 11 percent while St. Paul Cos., Inc. gained
30 percent.
MANY ECONOMISTS BELIEVE THAT INTEREST RATES WILL PEAK IN THE FIRST HALF OF 1995
AND THAT ECONOMIC GROWTH RATES WILL DECLINE. BUT OPINIONS ARE MIXED OVER WHETHER
THE ECONOMY WILL ACHIEVE THE DESIRED "SOFT LANDING." If a soft landing is
achieved, corporate profitability should be well maintained and could support
higher levels in the stock market for 1995 and beyond.
NO MATTER HOW ECONOMIC CONDITIONS MAY CHANGE, WE REMAIN CONVINCED THAT OVER THE
LONG TERM, INVESTING IN A SELECTED PORTFOLIO OF HIGH-QUALITY COMMON STOCKS IS
LIKELY TO DELIVER SOUND PERFORMANCE. That remains the strategy of
Diversification Fund, and we are confident the Fund will continue to participate
in the economy's ongoing growth.
Sincerely,
/S/ Landon T. Clay
LANDON T. CLAY
President
July 5, 1995
"NO MATTER HOW ECONOMIC CONDITIONS MAY CHANGE, INVESTING IN A SELECTED PORTFOLIO
OF HIGH-QUALITY COMMON STOCKS IS LIKELY TO DELIVER SOUND PERFORMANCE."
Photo of
Landon T. Clay
<PAGE>
DIVERSIFICATION FUND, INC.
MAY 31, 1995
(UNAUDITED)
VALUE
TEN LARGEST HOLDINGS (IN MILLIONS)
- ------------------------------------------------------------------------------
Intel Corp. $6.1
- ------------------------------------------------------------------------------
PepsiCo, Inc. 3.8
- ------------------------------------------------------------------------------
Coca-Cola Co. 3.7
- ------------------------------------------------------------------------------
Emerson Electric Co. 3.6
- ------------------------------------------------------------------------------
General Re Corp. 3.5
- ------------------------------------------------------------------------------
Mobil Corp. 2.8
- ------------------------------------------------------------------------------
Citizens Utilities Co., Class A 2.7
- ------------------------------------------------------------------------------
Anheuser-Busch Co., Inc. 2.5
- ------------------------------------------------------------------------------
St. Paul Cos., Inc. 2.1
- ------------------------------------------------------------------------------
Novell Inc. 2.1
- ------------------------------------------------------------------------------
PERCENTAGE OF
FIVE LARGEST INDUSTRY HOLDINGS NET ASSETS
- ------------------------------------------------------------------------------
Consumer Products 13.7%
- ------------------------------------------------------------------------------
Electronics 10.7
- ------------------------------------------------------------------------------
Insurance 9.9
- ------------------------------------------------------------------------------
Business Products and Services 6.8
- ------------------------------------------------------------------------------
Special Products and Services 6.5
- ------------------------------------------------------------------------------
<PAGE>
INVESTMENT CHANGES
SIX MONTHS ENDED MAY 31, 1995
- ------------------------------------------------------------------------------
Shares Owned
INCREASES 11/30/94 5/31/95
- ------------------------------------------------------------------------------
Gap, Inc. (The) -0- 20,000
- ------------------------------------------------------------------------------
Nanometrics, Inc. -0- 287,350
- ------------------------------------------------------------------------------
Novell Inc. 78,500 108,500
- ------------------------------------------------------------------------------
DECREASES*
- ------------------------------------------------------------------------------
Anheuser-Busch Co., Inc. 45,000 43,000
- ------------------------------------------------------------------------------
Champion International Corp. 50,314 42,984
- ------------------------------------------------------------------------------
Coca-Cola Co. 68,200 59,270
- ------------------------------------------------------------------------------
Digital Equipment Corp. 20,000 -0-
- ------------------------------------------------------------------------------
Emerson Electric Co. 59,546 53,076
- ------------------------------------------------------------------------------
General Re Corp. 26,500 25,500
- ------------------------------------------------------------------------------
Harcourt General Inc. 20,000 10,000
- ------------------------------------------------------------------------------
Intel Corp. 63,410 54,400
- ------------------------------------------------------------------------------
Lotus Development Corp. 41,250 30,250
- ------------------------------------------------------------------------------
Microsoft Corp. 12,000 -0-
- ------------------------------------------------------------------------------
Mobil Corp. 30,850 27,850
- ------------------------------------------------------------------------------
PepsiCo, Inc. 80,400 77,460
- ------------------------------------------------------------------------------
Sealed Air Corp. 40,000 35,000
- ------------------------------------------------------------------------------
Stride Rite Corp. 40,000 -0-
- ------------------------------------------------------------------------------
Tecumseh Products Co. Class A 35,850 32,850
- ------------------------------------------------------------------------------
Tecumseh Products Co. Class B 8,050 5,000
- ------------------------------------------------------------------------------
Telefonos de Mexico, S.A. de C.V. 12,000 -0-
- ------------------------------------------------------------------------------
Wellman Inc. 15,000 -0-
- ------------------------------------------------------------------------------
OTHER CHANGES
Shares
- ------------------------------------------------------------------------------
28,428 Cox Communications Class A, in a spinoff from Times Mirror
Class A.
- ------------------------------------------------------------------------------
7,098 Citizens Utilities Co., Class A in stock dividend of 1.5%.
- ------------------------------------------------------------------------------
*Includes investments paid in kind on redemptions.
<PAGE>
PORTFOLIO OF INVESTMENTS
MAY 31, 1995
- --------------------------------------------------------------------------
NAME OF COMPANY SHARES VALUE
- --------------------------------------------------------------------------
COMMON STOCKS - 95.3%
- --------------------------------------------------------------------------
BUSINESS PRODUCTS AND SERVICES - 6.8%
Banyan Systems Inc.* 40,000 $ 660,000
General Motors Corp. Class E 30,000 1,275,000
Lotus Development Corp.* 30,250 922,625
Novell Inc.* 108,500 2,095,406
-----------
$ 4,953,031
-----------
CHEMICALS - 3.2%
Dow Chemical Co. 11,331 $ 831,412
Nalco Chemical Co. 40,000 1,510,000
-----------
$ 2,341,412
-----------
CHEMICALS - SPECIALTY - 6.3%
Great Lakes Chemical Corp. 25,000 $ 1,525,000
International Specialty Products Inc. 50,000 400,000
Loctite Corp. 23,000 1,147,125
Sealed Air Corp.* 35,000 1,561,875
-----------
$ 4,634,000
-----------
COMMUNICATIONS - 0.6%
Cox Communications Inc., Class A* 28,428 $ 461,955
-----------
CONSUMER PRODUCTS - 13.7%
Anheuser-Busch Co., Inc. 43,000 $ 2,542,375
Coca-Cola Co. 59,270 3,667,331
PepsiCo, Inc. 77,460 3,795,540
-----------
$10,005,246
-----------
DRUGS & MEDICAL - 6.3%
Bausch & Lomb Inc. 40,000 $ 1,625,000
Merck & Co., Inc. 35,000 1,649,375
Warner-Lambert Co. 16,380 1,357,492
-----------
$ 4,631,867
-----------
ELECTRICAL EQUIPMENT - 5.0%
Emerson Electric Co. 53,076 $ 3,648,975
-----------
ELECTRONICS - 10.7%
Intel Corp. 54,400 $ 6,106,400
Nanometrics, Inc.* 287,350 1,688,181
-----------
$ 7,794,581
-----------
FOREST PRODUCTS - 5.3%
Champion International Corp. 42,984 $ 1,993,383
Weyerhaeuser Co. 42,250 1,853,719
-----------
$ 3,847,102
-----------
<PAGE>
PORTFOLIO OF INVESTMENTS (Continued)
- --------------------------------------------------------------------------
NAME OF COMPANY SHARES VALUE
- --------------------------------------------------------------------------
COMMON STOCKS (Continued)
- --------------------------------------------------------------------------
INSURANCE - 9.9%
General Re Corp. 25,500 $ 3,452,063
Kansas City Life Insurance Co. 35,400 1,663,800
St. Paul Cos., Inc. 41,400 2,106,225
-----------
$ 7,222,088
-----------
MACHINERY & EQUIPMENT - 2.4%
Tecumseh Products Co. Class A 32,850 $ 1,531,631
Tecumseh Products Co. Class B 5,000 231,250
-----------
$ 1,762,881
-----------
OFFICE EQUIPMENT - 1.6%
International Business Machines Corp. 12,570 $ 1,172,153
-----------
PETROLEUM - 6.0%
Atlantic Richfield Co. 14,003 $ 1,626,098
Mobil Corp. 27,850 2,795,444
-----------
$ 4,421,542
-----------
PETROLEUM SERVICES AND EQUIPMENT - 1.6%
Schlumberger Ltd. 18,086 $ 1,175,590
-----------
POWER AND LIGHT - 3.6%
Citizens Utilities Co., Class A* 241,979 $ 2,661,770
-----------
PUBLISHING AND PRINTING - 2.1%
Harcourt General Inc. 10,000 $ 421,250
Times Mirror Co., Class A 46,204 1,074,243
-----------
$ 1,495,493
-----------
RETAIL - 0.9%
Gap, Inc. (The) 20,000 $ 687,500
-----------
SPECIAL PRODUCTS AND SERVICES - 6.5%
Corning Inc. 35,000 $ 1,120,000
Millipore Corp. 30,000 1,968,750
Wheelabrator Technologies Inc.* 40,000 610,000
WMX Technologies, Inc. 37,930 1,033,593
-----------
$ 4,732,343
-----------
TRANSPORTATION - 2.8%
Union Pacific Corp. 36,790 $ 2,037,246
-----------
TOTAL COMMON STOCKS
(Identified cost, $16,776,257) $69,686,775
-----------
<PAGE>
- -----------------------------------------------------------------------------
FACE AMOUNT
NAME OF COMPANY (000 OMITTED) VALUE
- -----------------------------------------------------------------------------
SHORT-TERM OBLIGATION - 4.0%
- -----------------------------------------------------------------------------
Ford Motor Credit Corp.,
5.93%, due 6/01/95 $2,900 $ 2,900,000
----------
TOTAL INVESTMENTS
(Identified Cost, $19,676,257) -- 99.3% $72,586,775
OTHER ASSETS, LESS LIABILITIES -- 0.7% 509,995
----------
NET ASSETS -- 100% $73,096,770
===========
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------
May 31, 1995
- ----------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (identified cost,
$19,676,257) $72,586,775
Cash 171,192
Dividends receivable 144,119
Receivable for investments sold 368,500
-----------
Total assets $73,270,586
LIABILITIES:
Federal tax on undistributed net realized long-term
gain, payable on behalf of shareholders (Note 1B) $163,853
Payable for capital stock redeemed 1,825
Payable to affiliates --
Custodian fee 1,117
Directors' fees 1,003
Accrued expenses 6,018
--------
Total liabilities 173,816
-----------
NET ASSETS for 360,576 shares of capital stock outstanding $73,096,770
===========
SOURCES OF NET ASSETS:
Accumulated net realized gain on investment
transactions (computed on the basis of identified
cost), less the excess of cost of capital stock
redeemed over proceeds from sales of capital
stock (including shares issued to shareholders
electing to receive payment of distributions in
capital stock) $29,037,265
Unrealized appreciation of investments (computed on
the basis of identified cost) 52,910,518
Provision for federal tax on undistributed net
realized long-term capital gain (9,081,783)
Undistributed net investment income 230,770
-----------
Total $73,096,770
===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($73,096,770 / 360,576 shares of capital stock outstanding) $202.72
=======
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------
For the Year Ended May 31, 1995
- -----------------------------------------------------------------------------
INVESTMENT INCOME:
Income --
Dividends $ 1,282,818
Interest 109,937
-----------
Total income $ 1,392,755
Expenses --
Investment adviser fee (Note 4) $ 415,321
Compensation of Directors not members of the
Investment Adviser's organization 6,213
Custodian fee (Note 4) 37,170
Legal and accounting services 25,629
Printing and postage 19,832
Transfer and dividend disbursing agent fees 17,169
Miscellaneous 6,645
----------
Total expenses 527,979
-----------
Net investment income $ 864,776
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments, computed on the
basis of identified cost
($897,545 net gain as computed for federal
income tax purposes) $8,388,088
Increase in unrealized appreciation of
investments 3,792,149
----------
Net realized and unrealized gain on
investments 12,180,237
-----------
Net increase in net assets from operations $13,045,013
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS (Continued)
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------
YEAR ENDED MAY 31,
----------------------
1995 1994
----------- ------------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 864,776 $ 870,759
Net realized gain on investment transactions 8,388,088 9,054,172
Increase (decrease) in unrealized
appreciation of investments 3,792,149 (10,198,249)
----------- ------------
Increase (decrease) in net assets from
operations $13,045,013 $ (273,318)
----------- ------------
Undistributed net investment income included
in net asset value of shares redeemed
and issued $ -- $ (15,234)
----------- ------------
Distributions to shareholders --
From net investment income $ (840,438) $ (852,858)
From net realized gain on investments (429,393) --
----------- ------------
Total distributions to shareholders $(1,269,831) $ (852,858)
----------- ------------
Provision for federal tax on undistributed net
realized long-term gain (Note 1B) $ (163,853) $ (300,267)
----------- ------------
Net decrease from capital stock transactions
(exclusive of amounts allocated to
net investment income) $(7,718,214) $ (8,597,266)
----------- ------------
Net increase (decrease) in net assets $ 3,893,115 $(10,038,943)
NET ASSETS:
At beginning of year 69,203,655 79,242,598
----------- ------------
At end of year (including undistributed net
investment income of $230,770
and $206,432, respectively) $73,096,770 $ 69,203,655
=========== ============
See notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------
YEAR ENDED MAY 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
NET ASSET VALUE,
BEGINNING OF YEAR $ 170.980 $174.560 $159.820 $147.710 $135.280
-------- -------- -------- -------- --------
INCOME FROM
OPERATIONS:
Net investment
income $ 2.350 $ 2.011 $ 1.935 $ 1.876 $ 2.021
Net realized and
unrealized gain
(loss) on
investments 33.209 (2.899) 17.155 12.485 13.325
-------- -------- -------- -------- --------
Total income
(loss) from
operations $ 35.559 $ (0.888) $ 19.090 $ 14.361 $ 15.346
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net
investment
income $ (2.220) $ (1.950) $ (1.900) $ (1.900) $ (2.100)
From net realized
gain on
investments (1.145) -- (2.450) -- --
-------- -------- -------- -------- --------
Total
distributions $ (3.365) $ (1.950) $ (4.350) $ (1.900) $ (2.100)
-------- -------- -------- -------- --------
LESS PROVISION FOR
FEDERAL TAX ON
UNDISTRIBUTED NET
REALIZED LONG-TERM
GAIN (NOTE 1B) $ (0.454) $ (0.742) $ -- $ (0.351) $ (0.816)
-------- -------- -------- -------- --------
NET ASSET VALUE, END
OF YEAR $ 202.720 $170.980 $174.560 $159.820 $147.710
========= ======== ======== ======== ========
TOTAL RETURN<F1> 20.89% (0.93)% 12.10% 9.59% 11.00%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000's
omitted) $ 73,097 $ 69,204 $ 79,243 $ 76,697 $72,981
Ratio of expenses
to average net
assets 0.79% 0.78% 0.78% 0.82% 0.85%
Ratio of net
investment income to
average net assets 1.30% 1.17% 1.19% 1.24% 1.57%
PORTFOLIO TURNOVER 9% 8% 5% 5% 7%
- --------------
<F1>Total investment return is calculated assuming a purchase at the net asset
value on the first day and a sale at the net asset value on the last day
of each period reported. Dividends and distributions, if any, are assumed
to be reinvested at the net asset value on the payable date.
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end, management investment company. The following is a
summary of significant accounting policies consistently followed by the Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles.
A. INVESTMENT VALUATIONS -- Investments listed on security exchanges or in the
NASDAQ National Market are valued at closing sale prices. Listed or unlisted
investments for which closing sale prices are not available are valued at
closing bid prices. Short-term obligations, maturing in 60 days or less, are
valued at amortized cost, which approximates value.
B. FEDERAL TAXES -- The Fund's policy is to comply with the provisions of the
Internal Revenue Code available to regulated investment companies and to
distribute to shareholders each year all of its taxable income from dividends,
interest and net realized short-term capital gain. Accordingly, no provision
for federal income or excise tax is necessary on such income. The Fund
generally designates as undistributed any taxable net realized long-term gain
(but reserves the right to distribute such gain in any year) and pays the
federal tax thereon on behalf of shareholders. Provision for such tax is
recorded on the Fund's records on the last business day of the Fund's fiscal
year because the Internal Revenue Code provides that such tax is allocated
among shareholders of record on that date.
C. EQUALIZATION -- Prior to June 1, 1994, the Fund followed the accounting
practice known as equalization by which a portion of the proceeds from the
sales and costs of redemptions of Fund shares was allocated to undistributed
net investment income. As of June 1, 1994, the Fund discontinued the use of
equalization. This change had no effect on the Fund's net assets, net asset
value per share, or its net increase in net assets from operations.
Discontinuing the use of equalization results in a simpler and more meaningful
financial statement presentation.
D. DISTRIBUTIONS -- Generally accepted accounting principles require that
differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in over-
distributions for financial statement purposes are classified as distributions
in excess of net investment income or accumulated net realized gains.
E. OTHER -- Investment transactions are accounted for on a trade date basis.
Dividend income and dividends to shareholders are recorded on the ex-dividend
date.
- ------------------------------------------------------------------------------
(2) CAPITAL STOCK
At May 31, 1995, there were 4,395,355 shares of $1.00 par value capital stock
authorized. Transactions in capital stock were as follows:
YEAR ENDED MAY 31,
----------------------------------------------
1995 1994
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Redemptions (46,276) $(8,078,211) (50,280) $(8,781,339)
Issued to shareholders
electing to receive payment
of dividends in capital stock 2,096 359,997 1,076 184,073
----- --------- ----- ---------
Net decrease (44,180) $(7,718,214) (49,204) $(8,597,266)
======= =========== ======= ===========
<PAGE>
- --------------------------------------------------------------------------------
(3) INVESTMENT TRANSACTIONS
Purchases and sales of investments, other than short-term obligations,
aggregated $5,774,400 and $6,421,218, respectively. In addition, investments
having an aggregate market value of $7,959,304 at dates of redemption were
distributed in payment for capital stock redeemed.
- ------------------------------------------------------------------------------
(4) INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser fee, computed at the monthly rate of 5/96 of 1% (5/8
of 1% annually) of the Fund's average monthly net assets, was paid to Eaton
Vance Management (EVM) as compensation for management and investment advisory
services rendered to the Fund. Except as to directors of the Fund who are not
members of EVM's organization, officers and directors receive remuneration for
their services to the Fund out of such investment adviser fee. The custodian
fee was paid to Investors Bank & Trust Company (IBT), an affiliate of EVM, for
its services as custodian of the Fund. Pursuant to the custodian agreement,
IBT receives a fee reduced by credits which are determined based on the
average daily cash balances the Fund maintains with IBT. Certain of the
officers and directors of the Fund are officers and directors/trustees of the
above organizations. Directors of the Fund that are not affiliated with the
Investment Advisor may elect to defer receipt of all or a percentage of their
annual fees in accordance with the terms of the Trustees Deferred Compensation
Plan. For the year ended May 31, 1995, no significant amounts have been
deferred.
- ------------------------------------------------------------------------------
(5) LINE OF CREDIT
The Fund participates with other funds managed by EVM in a $120 million
unsecured line of credit agreement with a bank. The line of credit consists of
a $20 million committed facility and a $100 million discretionary facility.
Borrowings will be made by the Fund solely to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Interest is charged
to each fund based on its borrowings at an amount above either the bank's
adjusted certificate of deposit rate, a variable adjusted certificate of
deposit rate, or a federal funds effective rate. In addition, a fee computed
at an annual rate of 1/4 of 1% on the $20 million committed facility and on
the daily unused portion of the $100 million discretionary facility is
allocated among the participating funds at the end of each quarter. The Fund
did not have any significant borrowings or allocated fees during the year.
- ------------------------------------------------------------------------------
(6) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation/depreciation in value of the investments
owned at May 31, 1995, as computed on a federal income tax basis, are as
follows:
Aggregate cost $19,676,257
===========
Gross unrealized appreciation $53,066,633
Gross unrealized depreciation 156,115
----------
Net unrealized appreciation $52,910,518
===========
- ------------------------------------------------------------------------------
(7) DISTRIBUTIONS
On June 19, 1995, the Directors of the Fund declared a dividend from net
investment income of $0.55 per share payable June 30, 1995, to shareholders of
record on June 19, 1995.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Diversification Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Diversification Fund, Inc. as of
May 31, 1995, and the related statement of operations for the year then ended,
the statements of changes in net assets for the years ended May 31, 1995 and
1994, and the financial highlights for each of the years in the five-year
period ended May 31, 1995. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 1995, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Diversification
Fund, Inc. as of May 31, 1995, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 30, 1995
<PAGE>
DIVERSIFICATION
FUND, INC.
24 Federal Street
Boston, MA 02110
INVESTMENT MANAGEMENT
OFFICERS AND STAFF INDEPENDENT DIRECTORS
LANDON T. CLAY DONALD R. DWIGHT
President, Director President, Dwight Partners, Inc.
JAMES B. HAWKES Chairman, Newspapers of
Vice President New England, Inc.
ROBERT S. GOODOF SAMUEL L. HAYES, III
Vice President and Jacob H. Schiff Professor of
Portfolio Manager Investment Banking, Harvard University
JAMES L. O'CONNOR Graduate School of Business
Treasurer Administration
THOMAS OTIS NORTON H. REAMER
Clerk President and Director, United Asset
JAMES F. ALBAN Management Corporation
Assistant Treasurer JOHN L. THORNDIKE
JANET E. SANDERS Director, Fiduciary Company
Assistant Treasurer and Incorporated
Assistant Clerk JACK L. TREYNOR
A. JOHN MURPHY Investment Adviser and Consultant
Assistant Secretary
ERIC G. WOODBURY
Assistant Secretary
- ------------------------------------------------------------------------------
INVESTMENT ADVISER TRANSFER AND DIVIDEND
Eaton Vance Management DISBURSING AGENT
24 Federal Street The Shareholder
Boston, MA 02110 Services Group, Inc.
BOS725
CUSTODIAN P.O. Box 1559
Investors Bank & Trust Company Boston, MA 02104
24 Federal Street
Boston, MA 02110 AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
<PAGE>
DIVERSIFICATION FUND, INC.
PERFORMANCE RESULTS+
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(STANDARDIZED SEC PERFORMANCE DATA
FOR THE PERIODS ENDED MAY 31, 1995)
- ------------------------------------------------------------------------------
One year 20.9%
- ------------------------------------------------------------------------------
Five years 10.3%
- ------------------------------------------------------------------------------
Ten years 12.5%
- ------------------------------------------------------------------------------
Life of Fund (7/21/61) 9.2%
- ------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN
LIFE OF FUND
(7/21/61 TO 5/31/95)
- ------------------------------------------------------------------------------
Share value 801.4%
- ------------------------------------------------------------------------------
Share value plus cumulative
Federal taxes paid by Fund* 837.8%
- ------------------------------------------------------------------------------
Dow Jones Industrial Average 535.8%
- ------------------------------------------------------------------------------
Standard & Poor's 500 700.8%
- ------------------------------------------------------------------------------
*Realized capital gains are generally retained by the Fund and the Federal tax
thereon is paid on behalf of shareholders. Such taxes aggregated $8.165 per
share over the life of the Fund.
+Past performance is no guarantee of future results. Investment returns and
principal will fluctuate so that an investor's shares when redeemed may be
worth more or less than their original cost.
The Dow Jones Industrial Average and the Standard & Poor's 500 are unmanaged
lists of common stocks.
This report must be preceded or accompanied by a prospectus which contains
more complete information on the Fund including its distribution plan, sales
charge and expenses. Please read the prospectus carefully before investing.
DIVERSIFICATION FUND
An Eaton Vance
Exchange Fund
Annual Report
May 31, 1995
