<PAGE>
-------------------------------------
TO SHAREHOLDERS
DIVERSIFICATION FUND HAD A TOTAL RETURN OF 23.1% DURING THE YEAR ENDED MAY 31,
1996. That return represented a rise in net asset value per share to $240.77
from $202.72, and the reinvestment of $2.38 per share in income dividends. By
comparison, the S&P 500 Index, an unmanaged index of common stocks, had a total
return of 28.4% during the same period.
THE FUND HAD A TOTAL RETURN OF 23.1% DURING THE YEAR ENDED MAY 31, 1996.
OVER THE PAST YEAR, THE FEDERAL FUNDS RATE - A KEY SHORT-TERM INTEREST RATE
BAROMETER - HAS BEEN CUT REPEATEDLY. With economic growth advancing at a
moderate pace and inflation remaining under control, the Federal Reserve
successfully engineered its soft landing. Employment continued to rise, with the
service and trade areas providing the bulk of new jobs growth, while the
manufacturing sector continued to post job losses.
THE RELATIVELY LOW INTEREST RATE ENVIRONMENT, WHICH HAD DRIVEN STOCKS HIGHER
THROUGH MUCH OF 1995, provided a favorable backdrop for the equity markets early
in 1996. With large-cap stocks pacing the market, major market indices extended
their reach into record territory.
HOWEVER, TOWARD THE END OF THE REPORTING PERIOD, THE MARKET ENCOUNTERED
INCREASED VOLATILITY. The failure of budget deficit reduction talks and concerns
over a possible reigniting of inflation pushed interest rates higher. While
stocks registered further gains, the market was increasingly characterized by
sector rotation, with market leadership shifting among industry groups. With
momentum slowing somewhat, investors worried over the strength of corporate
earnings. According to Standard & Poor's, corporate profits registered an
average gain of 7.3% in the first quarter of 1996 versus a robust 23% gain in
the same period a year earlier.
AMONG THE FUND'S TEN LARGEST HOLDINGS, INTEL CORP., THE LEADING MANUFACTURER OF
MICROPROCESSORS, ROSE 34.5%. Intel has been boosted by its industry-standard
Pentium chip in the past year and by continuing strength in sales of personal
computers. In the consumer non-durable sector, PepsiCo Inc., the Fund's second
largest holding, rose 36%, while rival Coca-Cola Company rose 49%. The two
companies continue to gain global beverage market share, especially in the
emerging Asian nations.
"BY INVESTING IN A PORTFOLIO OF STOCKS OF COMPANIES THAT ARE FINANCIALLY SOUND
AND LEADERS IN THEIR INDUSTRIES, DIVERSIFICATION FUND SHOULD CONTINUE TO DELIVER
SOUND LONG-TERM PERFORMANCE FOR ITS SHAREHOLDERS."
[Photo of Landon T. Clay]
IN THE PETROLEUM SECTOR, MOBIL CORP. ROSE 13.4%, AS OIL PRICES SHOWED SIGNS OF
FIRMING LATE IN THE PERIOD AND INVESTORS RETURNED TO THE LONG-NEGLECTED GROUP.
Energy prices gained ground amid rising demand from emerging market economies.
In addition, seasonal domestic demand rose as the summer driving season began.
Finally, energy supplies were caught short by the failure of Iraqi oil to return
to the market as expected.
<PAGE>
UNEXPECTED STRENGTH IN THE EMPLOYMENT NUMBERS FOR THE FIRST FIVE MONTHS OF 1996
SUGGESTS THAT THE ECONOMY MAY BE GATHERING STEAM. The market could, therefore,
undergo further short-term volatility if interest rates move higher. However, an
ongoing, ample labor supply and increasing global competitiveness should keep
inflation in check. Meanwhile, history has demonstrated time and again that a
long-term approach to investing provides the best results. Naturally, past
performance is no guarantee of future results. But by investing in a portfolio
of stocks of companies that are financially sound and leaders in their
industries, Diversification Fund should continue to deliver sound long-term
performance for its shareholders.
Sincerely,
/s/ Landon T. Clay
Landon T. Clay
President
July 10, 1996
<PAGE>
-------------------------------------
DIVERSIFICATION FUND, INC.
MAY 31, 1996
VALUE
TEN LARGEST HOLDINGS (IN MILLIONS)
- ------------------------------------------------------------------------------
Intel Corp. $5.7
- ------------------------------------------------------------------------------
PepsiCo, Inc. 5.2
- ------------------------------------------------------------------------------
Coca-Cola Co. 5.0
- ------------------------------------------------------------------------------
Emerson Electric Co. 4.5
- ------------------------------------------------------------------------------
General Re Corp. 3.7
- ------------------------------------------------------------------------------
Mobil Corp. 3.1
- ------------------------------------------------------------------------------
Anheuser-Busch Co., Inc. 3.1
- ------------------------------------------------------------------------------
Millipore Corp. 2.6
- ------------------------------------------------------------------------------
Union Pacific Corp. 2.6
- ------------------------------------------------------------------------------
Citizens Utilities Co., Class A 2.6
- ------------------------------------------------------------------------------
PERCENTAGE OF
FIVE LARGEST INDUSTRY HOLDINGS NET ASSETS
- ------------------------------------------------------------------------------
Consumer Products 15.6%
- ------------------------------------------------------------------------------
Insurance 11.0
- ------------------------------------------------------------------------------
Drugs & Medical 8.5
- ------------------------------------------------------------------------------
Petroleum 7.2
- ------------------------------------------------------------------------------
Electronics 6.8
- ------------------------------------------------------------------------------
<PAGE>
INVESTMENT CHANGES
SIX MONTHS ENDED MAY 31, 1996 (UNAUDITED)
- ------------------------------------------------------------------------------
SHARES OWNED
INCREASES 11/30/95 5/31/96
- ------------------------------------------------------------------------------
Anadarko Petroleum Corp. 15,000 25,000
- ------------------------------------------------------------------------------
Enron Oil & Gas Co. -0- 50,000
- ------------------------------------------------------------------------------
MGIC Investment -0- 25,000
- ------------------------------------------------------------------------------
Motorola, Inc. -0- 20,000
- ------------------------------------------------------------------------------
Nokia Corp. -0- 25,000
- ------------------------------------------------------------------------------
DECREASES*
- ------------------------------------------------------------------------------
Banyan Systems Inc. 85,000 -0-
- ------------------------------------------------------------------------------
Citizens Utilities Co., Class A* 235,428 217,563
- ------------------------------------------------------------------------------
Gap, Inc. (The) 20,000 -0-
- ------------------------------------------------------------------------------
Harcourt General Inc. 10,000 -0-
- ------------------------------------------------------------------------------
Houghton Mifflin Co. 8,000 -0-
- ------------------------------------------------------------------------------
Intel Corp.* 97,990 75,750
- ------------------------------------------------------------------------------
International Specialty Products Inc. 50,000 -0-
- ------------------------------------------------------------------------------
Novell Inc. 38,500 -0-
- ------------------------------------------------------------------------------
Wabash National Corp. 15,000 -0-
- ------------------------------------------------------------------------------
Wheelabrator Technologies Inc. 40,000 -0-
- ------------------------------------------------------------------------------
OTHER CHANGES
SHARES
- ------------------------------------------------------------------------------
55,960 Coca-Cola Co., in a 2 for 1 stock split less 7,010
shares paid in kind on redemptions.
- ------------------------------------------------------------------------------
1,720 Earthgrains Co., in a spinoff from Anheuser-Busch Cos., Inc.
- ------------------------------------------------------------------------------
77,460 PepsiCo, Inc., in a 2 for 1 stock split.
- ------------------------------------------------------------------------------
16,380 Warner-Lambert Co., in a 2 for 1 stock split.
- ------------------------------------------------------------------------------
*Includes investments paid in kind on redemptions.
<PAGE>
--------------------------------------------
PORTFOLIO OF INVESTMENTS
MAY 31, 1996
- ------------------------------------------------------------------------------
NAME OF COMPANY SHARES VALUE
- ------------------------------------------------------------------------------
COMMON STOCKS - 96.1%
- ------------------------------------------------------------------------------
BUSINESS PRODUCTS AND SERVICES - 2.0%
General Motors Corp. Class E 30,000 $ 1,691,250
-----------
CHEMICALS - 2.6%
Dow Chemical Co. 11,331 $ 947,555
Nalco Chemical Co. 40,000 1,270,000
-----------
$ 2,217,555
-----------
CHEMICALS-SPECIALTY - 6.2%
Great Lakes Chemical Corp. 25,000 $ 1,612,500
Loctite Corp. 23,000 1,147,125
Sealed Air Corp.* 70,000 2,485,000
-----------
$ 5,244,625
-----------
COMMUNICATIONS - 1.4%
Cox Communications Inc., Class A* 28,428 $ 639,630
Ericsson (L.M.) Telephone Co. 22,000 507,375
-----------
$ 1,147,005
-----------
COMMUNICATIONS EQUIPMENT - 2.9%
Motorola, Inc. 20,000 $ 1,335,000
Nokia Corp. 25,000 1,087,500
-----------
$ 2,422,500
-----------
CONSUMER PRODUCTS - 15.6%
Anheuser-Busch Co., Inc. 43,000 $ 3,063,750
Coca-Cola Co. 108,220 4,978,120
PepsiCo, Inc. 154,920 5,151,090
-----------
$13,192,960
-----------
DRUGS & MEDICAL - 8.5%
Astra AB - ADR Ser. B 30,000 $ 1,352,931
Bausch & Lomb Inc. 40,000 1,720,000
Merck & Co., Inc. 35,000 2,261,875
Warner-Lambert Co. 32,760 1,834,560
-----------
$ 7,169,366
-----------
ELECTRICAL EQUIPMENT - 5.4%
Emerson Electric Co. 53,076 $ 4,544,632
-----------
ELECTRONICS - 6.8%
Intel Corp. 75,750 $ 5,719,125
-----------
ENERGY - 1.6%
Andarko Petroleum Corp. 25,000 $ 1,343,750
-----------
FOOD PROCESSING - 0.0%
Earthgrains Co. 1,720 $ 61,920
-----------
FOREST PRODUCTS - 4.5%
Champion International Corp. 42,984 $ 1,896,669
Weyerhaeuser Co. 42,250 1,917,094
-----------
$ 3,813,763
-----------
INSURANCE - 11.0%
General Re Corp. 25,500 $ 3,723,000
Kansas City Life Insurance Co. 35,400 1,947,000
MGIC Investment 25,000 1,468,750
St. Paul Cos., Inc. 41,400 2,189,025
-----------
$ 9,327,775
-----------
MACHINERY & EQUIPMENT - 3.9%
Memtec Ltd. 38,750 $ 1,181,875
Tecumseh Products Co. Class A 32,850 1,856,025
Tecumseh Products Co. Class B 5,000 271,250
-----------
$ 3,309,150
-----------
OFFICE EQUIPMENT - 1.6%
International Business Machines Corp. 12,570 $ 1,341,847
-----------
PETROLEUM - 7.2%
Atlantic Richfield Co. 14,003 $ 1,675,109
Enron Oil & Gas Co. 50,000 1,262,500
Mobil Corp. 27,850 3,143,569
-----------
$ 6,081,178
-----------
PETROLEUM SERVICES AND EQUIPMENT - 1.8%
Schlumberger Ltd. 18,086 $ 1,507,920
-----------
POWER AND LIGHT - 3.0%
Citizens Utilities Co., Class A* 217,563 $ 2,556,368
-----------
PUBLISHING AND PRINTING - 2.4%
Times Mirror Co., Class A 46,204 $ 2,015,649
-----------
SPECIAL PRODUCTS AND SERVICES - 4.7%
Millipore Corp. 60,000 $ 2,632,500
WMX Technologies, Inc. 37,930 1,337,033
-----------
$ 3,969,533
-----------
TRANSPORTATION - 3.0%
Union Pacific Corp. 36,790 $ 2,579,899
-----------
TOTAL COMMON STOCKS
(Identified Cost, $17,630,553) $81,257,770
-----------
- -----------------------------------------------------------------------------
FACE AMOUNT
NAME OF COMPANY (000 OMITTED) VALUE
- -----------------------------------------------------------------------------
SHORT-TERM OBLIGATION - 3.4%
- -----------------------------------------------------------------------------
Ford Motor Credit Co., 5.29%, due 6/5/96 $2,900 $ 2,898,295
-----------
TOTAL INVESTMENTS
(Identified Cost, $20,528,848) - 99.5% $84,156,065
OTHER ASSETS, LESS LIABILITIES - 0.5% 439,977
-----------
NET ASSETS - 100% $84,596,042
===========
*Non-income producing security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
May 31, 1996
- ------------------------------------------------------------------------------
ASSETS:
Investments, at value (Note 1A) (identified cost,
$20,528,848) $84,156,065
Cash 125,293
Dividends receivable 176,381
Other receivable 150,288
-----------
Total assets $84,608,027
LIABILITIES:
Payable to affiliate --
Directors' fees $ 1,117
Accrued expenses 10,868
-------
Total liabilities 11,985
-----------
NET ASSETS for 351,352 shares of capital stock outstanding $84,596,042
===========
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) $29,795,993
Unrealized appreciation of investments (computed on
the basis of identified cost) 63,627,217
Provision for federal tax on undistributed net
realized long-term capital gain (9,081,783)
Undistributed net investment income 254,615
-----------
Total $84,596,042
===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($84,596,042 / 351,352 shares of capital stock outstanding) $240.77
=======
See notes to financial statements
<PAGE>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------
For the Year Ended May 31, 1996
- ------------------------------------------------------------------------------
INVESTMENT INCOME:
Income --
Dividends (net of foreign withholding tax of
$3,226) $ 1,288,012
Interest 204,906
-----------
Total income $ 1,492,918
Expenses --
Investment adviser fee (Note 4) $ 492,320
Compensation of Directors not members of the
Investment Adviser's organization 6,294
Custodian fees (Note 4) 47,747
Legal and accounting services 29,254
Printing and postage 23,873
Transfer and dividend disbursing agent fees 15,968
Miscellaneous 7,186
----------
Total expenses 622,642
Deduct --
Reduction of custodian fees (Note 4) 4,856
----------
Net expenses 617,786
-----------
Net investment income $ 875,132
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments, computed on the
basis of identified cost
($2,000,465 net gain as computed for federal
income tax purposes) $4,802,443
Increase in unrealized appreciation of
investments 10,716,699
----------
Net realized and unrealized gain on
investments 15,519,142
-----------
Net increase in net assets from operations $16,394,274
===========
See notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
YEAR ENDED MAY 31,
------------------------
1996 1995
---------- -----------
INCREASE (DECREASE) IN NET ASSETS:
From operations --
Net investment income $ 875,132 $ 864,776
Net realized gain on investment transactions 4,802,443 8,388,088
Increase in unrealized appreciation of
investments 10,716,699 3,792,149
----------- -----------
Increase in net assets from operations $16,394,274 $13,045,013
----------- -----------
Distributions to shareholders --
From net investment income $ (851,287) $ (840,438)
From net realized gain on investments (1,950,763) (429,393)
----------- -----------
Total distributions to shareholders $(2,802,050) $(1,269,831)
----------- -----------
Provision for federal tax on undistributed net
realized long-term gain (Note 1B) $ -- $ (163,853)
---------- -----------
Net decrease from capital stock transactions
(Note 2) $(2,092,952) $(7,718,214)
----------- -----------
Net increase in net assets $11,499,272 $ 3,893,115
NET ASSETS:
At beginning of year 73,096,770 69,203,655
----------- -----------
At end of year (including undistributed net
investment income of $254,615
and $230,770, respectively) $84,596,042 $73,096,770
=========== ===========
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------
YEAR ENDED MAY 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $202.720 $170.980 $174.560 $159.820 $147.710
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS:
Net investment income $ 2.465 $ 2.350 $ 2.011 $ 1.935 $ 1.876
Net realized and unrealized
gain (loss) on investments 43.430 33.209 (2.899) 17.155 12.485
-------- -------- -------- -------- --------
Total income (loss) from
operations $ 45.895 $ 35.559 $ (0.888) $ 19.090 $ 14.361
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income $ (2.380) $ (2.220) $ (1.950) $ (1.900) $ (1.900)
From net realized gain on
investments (5.465) (1.145) -- (2.450) --
-------- -------- -------- -------- --------
Total distributions (7.845) $ (3.365) $ (1.950) $ (4.350) $ (1.900)
-------- -------- -------- -------- --------
LESS PROVISION FOR FEDERAL TAX ON
UNDISTRIBUTED NET REALIZED LONG-TERM
GAIN (NOTE 1B) $ -- $ (0.454) $ (0.742) $ -- $ (0.351)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $240.770 $202.720 $170.980 $174.560 $159.820
======== ======== ======== ======== ========
TOTAL RETURN(1) 23.10% 21.16% (0.50)% 12.10% 9.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000's omitted) $ 84,596 $ 73,097 $ 69,204 $ 79,243 $ 76,697
Ratio of expenses to average
net assets(3) 0.79% 0.79% 0.78% 0.78% 0.82%
Ratio of net expenses to
average net assets after
custodian fee reduction 0.78% -- -- -- --
Ratio of net investment
income to average net assets 1.11% 1.30% 1.17% 1.19% 1.24%
PORTFOLIO TURNOVER 13% 9% 8% 5% 5%
AVERAGE PER SHARE RATE OF
COMMISSION PAID(2) $ 0.06 -- -- -- --
- ----------
<FN>
(1) 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.
(2) Average per share rate of commission paid is computed by dividing the total dollar amount of commissions paid
during the fiscal year by the total number of shares purchased and sold during the fiscal year for which
commissions were charged.
(3) The expense ratio for the year ended May 31, 1996 has been adjusted to reflect a change in reporting
requirements. The new reporting guidelines require the Fund to increase its expense ratio by the effect of any
expense offset arrangements with its service providers. The expense ratios for the periods ended on or before
May 31, 1995 have not been adjusted to reflect this change.
</TABLE>
See notes to financial statements
<PAGE>
(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. 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.
D. OTHER -- Investment transactions are accounted for on a trade date basis.
Dividend income and dividends to shareholders are recorded on the ex-dividend
date.
E. USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the reporting period. Actual results could
differ from those estimates.
- ------------------------------------------------------------------------------
(2) CAPITAL STOCK
At May 31, 1996, 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,
--------------------------------------------------
1996 1995
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Redemptions (13,299) $(2,973,523) (46,276) $(8,078,211)
Issued to shareholders
electing to receive
payment of dividends
in capital stock 4,075 880,571 2,096 359,997
----- ----------- ------- -----------
Net decrease (9,224) $(2,092,952) (44,180) $(7,718,214)
===== =========== ======= ===========
- ------------------------------------------------------------------------------
(3) INVESTMENT TRANSACTIONS
Purchases and sales of investments, other than short-term obligations,
aggregated $9,380,609 and $10,426,025, respectively. In addition, investments
having an aggregate market value of $2,902,732 at dates of redemption were
distributed in payment for capital stock redeemed, resulting in a realized gain
of $2,801,978, for book purposes.
- ------------------------------------------------------------------------------
(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) for its services as
custodian of the Fund. One of the Directors of the Fund owns approximately 13%
of the voting stock of Investors Financial Services Corp., the parent company
of IBT. Prior to November 10, 1995, IBT was an affiliate of EVM. 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. All significant credit balances used to reduce the Fund's custodian fees
are reported as a reduction of expenses in the Statement of Operations.
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, 1996, 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 period.
- ------------------------------------------------------------------------------
(6) FEDERAL INCOME TAX BASIS OF INVESTMENTS
The cost and unrealized appreciation/depreciation in value of the investments
owned at May 31, 1996, as computed on a federal income tax basis, are as
follows:
Aggregate cost $20,528,848
===========
Gross unrealized appreciation $63,627,217
Gross unrealized depreciation --
-----------
Net unrealized appreciation $63,627,217
===========
- ------------------------------------------------------------------------------
(7) SUBSEQUENT EVENT
On June 1, 1996, the Fund transferred substantially all of its investable
assets to the Tax-Managed Growth Portfolio (the Portfolio) for an interest in
the Portfolio. In addition, the Fund changed its fiscal year end to October 31.
- ------------------------------------------------------------------------------
(8) SPECIAL MEETING OF STOCKHOLDERS (UNAUDITED)
Diversification Fund, Inc. (the "Fund") held a special meeting of stockholders
on March 15, 1996. On January 31, 1996, the record date of the meeting, the
Fund had 356,080.260 shares outstanding, of which 296,527.521 shares were
represented at the meeting. The votes at the meeting were as follows:
Item 1. To adopt a new investment policy to authorize the Fund to invest its
investable assets in a specific corresponding open-end management
investment company having substantially the same investment objective,
policies and restrictions as the Fund, and to supplement investment
restrictions to permit such investment.
<PAGE>
NUMBER OF SHARES
----------------
Affirmative 278,295.595
Against 13,634.847
Abstain 1,366.079
Item 2. To approve an Amendment to the By-Laws of the Fund to change the
fiscal year end of the Fund to October 31.
NUMBER OF SHARES
----------------
Affirmative 281,519.739
Against 13,634.847
Abstain 1,372.935
Item 3. To approve the revision of the Fund's investment objective and certain
of the Fund's investment policies as follows:
A. Reclassification and amendment of the investment objective.
NUMBER OF SHARES
----------------
Affirmative 259,481.609
Against 15,231.156
Abstain 18,583.756
B. Eliminate the restriction concerning investment in other
investment companies.
NUMBER OF SHARES
----------------
Affirmative 258,507.284
Against 16,143.378
Abstain 18,645.859
C. Eliminate the restriction concerning pledging.
NUMBER OF SHARES
----------------
Affirmative 256,576.138
Against 17,482.579
Abstain 19,237.804
D. Reclassify the restriction concerning investment in unseasoned
issuers.
NUMBER OF SHARES
----------------
Affirmative 257,472.556
Against 17,162.302
Abstain 18,661.663
E. Reclassify the restriction concerning investing for control.
NUMBER OF SHARES
----------------
Affirmative 256,756.598
Against 17,878.260
Abstain 18,661.663
F. Amend the restriction concerning diversification.
NUMBER OF SHARES
----------------
Affirmative 259,561.155
Against 14,509.847
Abstain 19,225.519
G. Amend the restriction concerning borrowing and senior securities.
NUMBER OF SHARES
----------------
Affirmative 258,056.988
Against 15,979.069
Abstain 19,260.464
H. Amend the restriction concerning lending.
NUMBER OF SHARES
----------------
Affirmative 258,323.305
Against 16,304.697
Abstain 18,668.519
I. Amend the restriction concerning real estate and commodities.
NUMBER OF SHARES
----------------
Affirmative 258,323.305
Against 16,304.697
Abstain 18,668.519
Item 4. To approve an amendment to the Articles of Organization.
NUMBER OF SHARES
----------------
Affirmative 259,214.109
Against 15,429.697
Abstain 18,652.715
<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, 1996, and the related statement of operations for the year then ended,
the statements of changes in net assets for the years ended May 31, 1996 and
1995, and the financial highlights for each of the years in the five-year
period ended May 31, 1996. 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, 1996 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, 1996, 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 26, 1996
<PAGE>
--------------------------------------------
INVESTMENT MANAGEMENT
DIVERSIFICATION OFFICERS AND STAFF INDEPENDENT DIRECTORS
FUND, INC.
24 Federal Street LANDON T. CLAY DONALD R. DWIGHT
Boston, MA 02110 President, Director President, Dwight
Partners, Inc.
JAMES B. HAWKES Chairman, Newspapers of
Vice President New England, Inc.
DUNCAN W. RICHARDSON SAMUEL L. HAYES, III
Vice President and Jacob H. Schiff Professor
Portfolio Manager of Investment Banking,
Harvard University
JAMES L. O'CONNOR Graduate School of
Treasurer Business Administration
THOMAS OTIS NORTON H. REAMER
Clerk President and Director,
United Asset
Management Corporation
JOHN L. THORNDIKE
Director, Fiduciary
Company Incorporated
JACK L. TREYNOR
Investment Adviser and
Consultant
----------------------------------------------------------
INVESTMENT ADVISER TRANSFER AND DIVIDEND
Eaton Vance DISBURSING AGENT
Management First Data
24 Federal Street Investor Services
Boston, MA 02110 Group, Inc.
BOS725
CUSTODIAN P.O. Box 1559
Investors Bank & Boston, MA 02104
Trust Company
89 South Street INDEPENDENT AUDITORS
P.O. Box 1537 Deloitte & Touche LLP
Boston, MA 02205-1537 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, 1996)
- ------------------------------------------------------------------------------
One year 23.1%
- ------------------------------------------------------------------------------
Five years 12.6%
- ------------------------------------------------------------------------------
Ten years 12.0%
- ------------------------------------------------------------------------------
Life of Fund (7/27/61) 9.5%
- ------------------------------------------------------------------------------
Cumulative Total Return
Life of Fund
(7/27/61 to 5/31/96)
- ------------------------------------------------------------------------------
Diversification Fund 2,287.2%
- ------------------------------------------------------------------------------
Dow Jones Industrial Average 3,213.1%
- ------------------------------------------------------------------------------
Standard & Poor's 500 3,544.3%
- ------------------------------------------------------------------------------
+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 charges
and expenses. Please read the prospectus carefully before investing.
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EATON VANCE
The Boston Tradition
Funds offered through
Eaton Vance Distributors, Inc.
24 Federal Street, Boston, Massachusetts 02110
7/96
DIVERSIFICATION FUND
An Eaton Vance
Exchange Fund
Annual Report
May 31, 1996
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