UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-05723
Name of Fund: Merrill Lynch Developing Capital Markets Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Developing Capital Markets Fund, Inc., 800
Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box
9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 06/30/06
Date of reporting period: 07/01/05 - 12/31/05
Item 1 - Report to Stockholders
Merrill Lynch
Developing Capital Markets
Fund, Inc.
Semi-Annual Report
December 31, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is not authorized for use as an offer of sale or a solicitation
of an offer to buy shares of the Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance results shown in this report
should not be considered a representation of future performance. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Statements and
other information herein are as dated and are subject to change.
Investing in emerging market securities involves a number of risk factors and
special considerations, including restrictions on foreign investments and on
repatriation of capital invested in emerging markets, currency fluctuations,
and potential price volatility and less liquidity of securities traded in
emerging markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those to which U.S. companies are subject.
Therefore, the Fund is designed as a long-term investment for investors
capable of assuming the risks of investing in emerging markets. The Fund
should be considered as a vehicle for diversification and not as a complete
investment program. Please refer to the prospectus for details.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent 12-
month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Developing Capital Markets Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS LOGO)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
Merrill Lynch Developing Capital Markets Fund, Inc.
Portfolio Information as of December 31, 2005
Percent of
Ten Largest Equity Holdings Net Assets
Samsung Electronics Co., Ltd. 6.3%
Kookmin Bank 4.1
Petroleo Brasileiro SA 3.8
Companhia Vale do Rio Doce Class A 2.5
Wintek Corp. 2.3
Corp GEO SA de CV Series B 1.9
America Movil SA de CV 1.9
ABSA Group Ltd. 1.9
Pro Mos Technologies Inc. 1.9
Industrial Bank of Korea 1.8
Percent of
Total
Geographic Allocation Investments
South Korea 21.4%
Taiwan 17.0
Brazil 16.1
Russia 8.0
South Africa 7.4
Mexico 5.4
India 5.1
Thailand 4.3
China 3.3
Indonesia 2.3
Turkey 2.2
Egypt 1.5
Poland 1.5
Israel 1.1
Lebanon 0.7
Malaysia 0.5
Oman 0.5
Panama 0.5
Philippines 0.5
Chile 0.4
Sri Lanka 0.3
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC'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.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
On balance, 2005 was a year of "muddling through" for the U.S. financial
markets, as oil prices reached new record highs, the Federal Reserve Board
(the Fed) increased the target federal funds rate from 2.25% to 4.25%, the
housing market and the consumer finally showed some signs of slowing, and
Hurricanes Katrina and Rita ravaged the Gulf Coast, causing yet untold
economic damage.
Although they struggled, stocks managed to post their third straight year of
positive performance. The year was equally uncertain for fixed income
markets, which were bemused by a flattening yield curve and a number of
significant credit events that brought a slowdown in high yield market
returns. Notably, the one-year results for the major asset classes - stocks,
bonds and cash - were the closest they have been in more than 100 years. For
the 12- and six-month periods ended December 31, 2005, most of the major
market indexes managed to land in positive territory:
Total Returns as of December 31, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.77% + 4.91%
Small-cap U.S. equities (Russell 2000 Index) + 5.88 + 4.55
International equities (MSCI Europe Australasia Far East Index) +14.88 +13.54
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.08 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.60 + 3.51
High yield bonds (Credit Suisse First Boston High Yield Index) + 1.48 + 2.26
In hindsight, these numbers are reasonably good given the headwinds facing
the markets in 2005. U.S. equities found support in strong corporate earnings,
low core inflation and healthy company balance sheets. Strength in the
global economy and non-U.S. equity markets helped, as did robust dividend-
distribution, share-buyback and merger-and-acquisition activity. International
stocks had an excellent year, with many markets benefiting from strong
economic statistics, trade surpluses and solid finances. In the U.S. bond
market, long-term yields remained low and, at year-end, the Treasury curve
appeared ready to invert.
As 2006 begins, the largest question marks center on the Fed's future moves,
the U.S. consumer's ability (or inability) to continue spending, the direction
of the U.S. dollar following a year of appreciation and the potential for
continued strong economic and corporate earnings growth. As you turn the
calendar and consider how these factors might impact your investments, remember
that the new year is a good time to meet with your financial advisor to review
your financial goals, and to make portfolio changes where necessary. For
investing insights and timely "food for thought" for investors, we also invite
you to visit Shareholder magazine at www.mlim.ml.com/shareholdermagazine.
As always, we thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the new year
and beyond.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
A Discussion With Your Fund's Portfolio Manager
The Fund provided highly competitive double-digit returns for the period, with
significant contributions from holdings in Brazil, Taiwan, India, South Korea
and Russia.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended December 31, 2005, Merrill Lynch Developing
Capital Markets Fund, Inc.'s Class A, Class B, Class C and Class I Shares had
total returns of +29.37%, +28.86%, +28.92% and +29.49%, respectively. (Fund
results shown do not reflect sales charges and would be lower if sales charges
were included. Complete performance information can be found on pages 6 and 7
of this report to shareholders.) For the same period, the benchmark Morgan
Stanley Capital International Emerging Markets (MSCI EM) Index returned
+26.62% and the Lipper Emerging Markets Funds category posted an average
return of +25.40%. (Funds in this Lipper category invest at least 65% of their
total assets in emerging market equity securities, where "emerging market" is
defined by a country's gross national product per capita or other economic
measures.)
Over the course of the period, already high global oil prices were pushed to
new peaks by hurricane damage in the U.S. Gulf Coast region before settling
back in the latter half of the period. The easing of oil prices, combined with
signs that the U.S. interest rate cycle could be nearing its peak, was met
with generally favorable market reaction, with investors demonstrating
increased risk tolerance. The end result was a positive environment for global
emerging markets, in which they outperformed their developed counterparts.
In the emerging Europe, Middle East and Africa (EMEA) region, Russia proved to
be the strongest performer of the major markets represented in the MSCI EM
Index. Russia was up more than 50% for the six-month period as robust oil
prices and diminished political uncertainty continued to push the market
higher. In Latin America, Brazil was up nearly 40% on the strength of the
domestic economy, and supportive commodity exports continued to boost that
market. South Korea was the strongest-performing major market in Asia, driven
by domestic liquidity and continued positive economic data.
We significantly increased our exposures in Brazil, Taiwan and India over the
six-month period on the basis of individual stock selection decisions. In
Brazil, mid cap domestically focused stocks performed well, particularly in
the consumer and real estate sectors. As part of this trend, the Fund's
holdings in Lojas Renner SA (clothing retail), Lojas Americanas SA (non-food
retail) and Cyrela Brazil Realty SA (real estate) made positive contributions
to performance. We continue to believe the Brazilian market is trading at very
compelling valuations over the medium term, and we have confidence in the
strength of the country's economy. Brazil continues to be the largest
overweight in the portfolio relative to the MSCI EM Index.
Taiwanese information technology (IT) companies continued to perform well for
the Fund, including a stock price increase of nearly 40% by LCD manufacturer
Wintek Corp. early in the period. Over the next several months, the sector was
hit by a heavy sell-off, but fundamentals remained sound despite investor
concerns. By period-end, Taiwanese IT stocks had become very attractively
valued, and share prices rose on the back of benign U.S. macro data and
evidence of a seasonal pick-up in sales. Elsewhere in Asia, our Indian
infrastructure positions all performed well as the country's beneficial
business environment was very supportive of those sectors geared toward the
domestic economy. Specifically, our holdings in Bharat Heavy Electricals Ltd.
(power generation) and Bharti Tele-Ventures Ltd. (telecommunications) each
rose more than 40% during the period, and Jaiprakash Associates (construction)
doubled.
What changes were made to the portfolio during the period?
We reduced our overall exposure to the emerging EMEA region over the six-month
period, primarily by taking profits in South Africa and Israel, as well as
making a complete exit from the Czech Republic. Stocks in these markets had
performed well for the portfolio, but their valuations were no longer
sufficiently attractive. These sales were partially offset by a sizable
increase in our allocation to Russia, where the strength of the oil industry
combined with reduced political risk to significantly enhance the
attractiveness of the market.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
In Asia, we significantly increased our exposure to South Korea, where local
investors continued to drive the market higher. We also added to our Brazilian
holdings as we continue to be impressed by that country's beneficial macro
environment and the relative cheapness of its market as a whole.
How would you characterize the Fund's position at the close of the period?
We maintained an overweight position in Brazil based on our continued belief
that the market offers a combination of very compelling valuations over the
medium-term and economic strength.
In China, excess capacity in manufacturing continues to be a significant issue
hampering corporate profit margins, and we cannot foresee any reason to expect
significant improvement in profitability for most manufacturers in China. Some
consumption-related Chinese stocks have become more interesting, but weak
corporate profits will likely continue to reinforce our commitment to an
underweight position.
South Korea continues to demonstrate strong domestic capital flows into the
stock market and an improving economic situation, prompting us to maintain an
overweight position. We also have built an overweight position in Taiwan,
since extremely bearish investor sentiment on that market has driven down
valuations in the IT sector to increasingly attractive levels. Finally, the
robust nature of Russia's overall economy, and the strength of its energy
sector in particular, has led us to maintain an overweight exposure there.
The Fund's current allocations are the result of our continued focus on
companies that are likely to benefit from strong domestic economies, rather
than global cyclical stocks.
Nicholas Moakes
Vice President and Portfolio Manager
January 17, 2006
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of 5.25%
and an account maintenance fee of 0.25% per year (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales charge of
4% declining to 0% after six years. In addition, Class B Shares are subject to
a distribution fee of 0.75% per year and an account maintenance fee of 0.25%
per year. These shares automatically convert to Class A Shares after
approximately eight years. (There is no initial sales charge for automatic
share conversions.) All returns for periods greater than eight years reflect
this conversion.
* Class C Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
* Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or account
maintenance fees and are available only to eligible investors. Had the sales
charge been included, the Fund's Class I Shares' performance would have been
lower.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to
the most recent month-end. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. The Fund may charge a 2% redemption fee for sales or exchanges of
shares within 30 days of purchase or exchange. Performance data does not
reflect this potential fee. Figures shown in each of the following tables
assume reinvestment of all dividends and capital gain distributions, if any,
at net asset value on the ex-dividend date. Investment return and principal
value of shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class of shares
will vary because of the different levels of account maintenance, distribution
and transfer agency fees applicable to each class, which are deducted from the
income available to be paid to shareholders.
Recent Performance Results
6-Month 12-Month 10-Year
As of December 31, 2005 Total Return Total Return Total Return
Merrill Lynch Developing Capital Markets Fund Class A Shares* +29.37% +34.79% +87.01%
Merrill Lynch Developing Capital Markets Fund Class B Shares* +28.86 +33.69 +75.33
Merrill Lynch Developing Capital Markets Fund Class C Shares* +28.92 +33.78 +72.61
Merrill Lynch Developing Capital Markets Fund Class I Shares* +29.49 +35.13 +91.72
Morgan Stanley Capital International Emerging Markets Index** +26.62 +34.54 +96.42
* Investment results shown do not reflect sales charges; results shown would be lower if a
sales charge was included. Cumulative total investment returns are based on changes in net
asset values for the periods shown, and assume reinvestment of all dividends and capital gain
distributions at net asset value on the ex-dividend date.
** This unmanaged Index measures the total returns of emerging foreign stock markets in Europe,
Asia and the Far East.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 12/31/05 +34.79% +27.71%
Five Years Ended 12/31/05 +17.57 +16.31
Ten Years Ended 12/31/05 + 6.46 + 5.89
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
Return Return
Without CDSC With CDSC**
Class B Shares*
One Year Ended 12/31/05 +33.69% +29.69%
Five Years Ended 12/31/05 +16.62 +16.40
Ten Years Ended 12/31/05 + 5.78 + 5.78
* Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
** Assuming payment of applicable contingent deferred sales
charge.
Return Return
Without CDSC With CDSC**
Class C Shares*
One Year Ended 12/31/05 +33.78% +32.78%
Five Years Ended 12/31/05 +16.63 +16.63
Ten Years Ended 12/31/05 + 5.61 + 5.61
* Maximum contingent deferred sales charge is 1% and is reduced
to 0% after one year.
** Assuming payment of applicable contingent deferred sales
charge.
Class I Shares Return
One Year Ended 12/31/05 +35.13%
Five Years Ended 12/31/05 +17.87
Ten Years Ended 12/31/05 + 6.73
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses
related to transactions, including sales charges, redemption fees and exchange
fees; and (b) operating expenses including advisory fees, distribution fees
including 12b-1 fees, and other Fund expenses. The following example (which
is based on a hypothetical investment of $1,000 invested on July 1, 2005 and
held through December 31, 2005) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during
the period covered by this report, shareholders can divide their account value
by $1,000 and then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders'
ongoing costs only and do not reflect any transactional expenses, such as
sales charges, redemption fees or exchange fees. Therefore, the second table
is useful in comparing ongoing expenses only, and will not help shareholders
determine the relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would have been
higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value July 1, 2005 to
July 1, December 31, December 31,
2005 2005 2005
Actual
Class A $1,000 $1,293.70 $10.24
Class B $1,000 $1,288.60 $14.71
Class C $1,000 $1,289.20 $14.71
Class I $1,000 $1,294.90 $ 8.80
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,016.14 $ 9.00
Class B $1,000 $1,012.21 $12.93
Class C $1,000 $1,012.22 $12.93
Class I $1,000 $1,017.40 $ 7.74
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.78% for Class A, 2.56% for Class B, 2.56% for Class C and 1.53% for Class I ), multiplied
by the average account value over the period, multiplied by 183/365 (to reflect the one-half
year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days
in the most recent fiscal half year divided by 365.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Schedule of Investments (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Africa
South Africa--7.4%
Commercial Banks--1.9%
ABSA Group Ltd. 285,934 $ 4,553,305
Food & Staples Retailing--1.0%
Mvelaphanda Group Ltd. 1,872,342 2,391,166
Metals & Mining--1.0%
AngloGold Ashanti Ltd. 49,750 2,462,988
Oil, Gas & Consumable
Fuels--0.4%
Sasol Ltd. 28,750 1,026,705
Paper & Forest Products--0.5%
Sappi Ltd. 96,659 1,105,044
Specialty Retail--1.0%
Lewis Group Ltd. 342,510 2,534,871
Wireless Telecommunication
Services--1.6%
MTN Group Ltd. 386,550 3,787,794
Total Common Stocks in Africa--7.4% 17,861,873
Europe
Poland--1.5%
Oil, Gas & Consumable
Fuels--1.5%
Polski Koncern Naftowy Orlen SA 190,970 3,675,882
Total Common Stocks in Poland 3,675,882
Russia--7.9%
Diversified Telecommunication
Services--0.9%
AFK Sistema (a)(b) 97,800 2,298,300
Metals & Mining--1.7%
MMC Norilsk Nickel (b) 44,170 4,156,397
Oil, Gas & Consumable
Fuels--4.4%
LUKOIL (b) 72,418 4,308,871
OAO Gazprom (b) 34,390 2,465,763
Surgutneftegaz (b) 52,585 3,904,763
-------------
10,679,397
Wireless Telecommunication
Services--0.9%
Mobile Telesystems (b) 58,200 2,037,000
Total Common Stocks in Russia 19,171,094
Turkey--2.2%
Commercial Banks--1.4%
Denizbank AS 297,501 1,926,107
Turkiye Is Bankasi-C 166,170 1,438,542
-------------
3,364,649
Industrial Conglomerates--0.8%
Enka Insaat Ve Sanayi AS 149,942 1,863,874
Total Common Stocks in Turkey 5,228,523
Total Common Stocks in Europe--11.6% 28,075,499
Shares
Industry Common Stocks Held Value
Latin America
Brazil--16.1%
Airlines--1.2%
Gol--Linhas Aereas Inteligentes SA (b) 99,700 $ 2,812,537
Commercial Banks--2.4%
Banco Bradesco SA (b) 103,888 3,028,335
Uniao de Bancos Brasileiros SA (b) 41,460 2,635,612
-------------
5,663,947
Diversified Telecommunication
Services--0.8%
Tele Norte Leste Participacoes SA 87,630 1,999,863
Electric Utilities--0.7%
Cia Energetica de Minas Gerais (b) 49,737 1,833,306
Household Durables--0.7%
Cyrela Brazil Realty SA 118,627 1,625,375
Independent Power Producers
& Energy Traders--0.6%
Tractebel Energia SA 234,720 1,512,540
Metals & Mining--3.1%
Companhia Vale do Rio Doce
Class A (b) 168,056 6,092,030
Usinas Siderurgicas de Minas
Gerais SA Preferred Class A 54,000 1,285,549
-------------
7,377,579
Multiline Retail--1.4%
Lojas Americanas SA 60,990,000 1,866,913
Lojas Renner SA 47,276 1,517,974
-------------
3,384,887
Oil, Gas & Consumable
Fuels--3.8%
Petroleo Brasileiro SA (b) 142,105 9,147,299
Transportation
Infrastructure--1.4%
All America Latina Logistica SA 36,404 1,554,827
Cia de Concessoes Rodoviarias 55,150 1,747,420
-------------
3,302,247
Total Common Stocks in Brazil 38,659,580
Chile--0.4%
Water Utilities--0.4%
Inversiones Aguas
Metropolitanas SA (a)(b) 59,339 996,610
Total Common Stocks in Chile 996,610
Mexico--5.3%
Construction & Engineering--0.4%
Empresas ICA Sociedad
Controladora SA de CV (a) 409,050 999,779
Food & Staples Retailing--0.6%
Wal-Mart de Mexico SA de CV 237,914 1,319,551
Household Durables--1.9%
Corp GEO SA de CV Series B (a) 1,321,016 4,656,865
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Latin America (concluded)
Mexico (concluded)
Metals & Mining--0.5%
Grupo Mexico SA de CV 551,000 $ 1,284,569
Wireless Telecommunication
Services--1.9%
America Movil SA de CV (b) 158,703 4,643,650
Total Common Stocks in Mexico 12,904,414
Panama--0.5%
Airlines--0.5%
Copa Holdings SA Class A (a) 43,260 1,180,998
Total Common Stocks in Panama 1,180,998
Total Common Stocks in
Latin America--22.3% 53,741,602
Middle East
Egypt--1.5%
Wireless Telecommunication
Services--1.5%
Vodafone Egypt
Telecommunications Co. SAE 211,780 3,727,623
Total Common Stocks in Egypt 3,727,623
Israel--1.1%
Commercial Banks--0.6%
Bank Hapoalim Ltd. 287,440 1,334,883
Software--0.5%
Check Point Software Technologies (a) 65,936 1,325,314
Total Common Stocks in Israel 2,660,197
Lebanon--0.7%
Wireless Telecommunication
Services--0.7%
Investcom LLC (a)(b) 117,440 1,650,032
Total Common Stocks in Lebanon 1,650,032
Oman--0.5%
Commercial Banks--0.5%
Bank Muscat SAOG (a)(b) 49,280 1,195,040
Total Common Stocks in Oman 1,195,040
Total Common Stocks in the
Middle East--3.8% 9,232,892
Pacific Basin/Asia
China--3.3%
Chemicals--0.3%
Bio-Treat Technology Ltd. 1,245,100 838,653
Diversified Telecommunication
Services--0.9%
China Netcom Group Corp.
Hong Kong Ltd. 1,370,000 2,217,500
Shares
Industry Common Stocks Held Value
Pacific Basin/Asia (continued)
China (concluded)
Food Products--0.7%
People's Food Holdings Ltd. 2,557,500 $ 1,645,733
Oil, Gas & Consumable
Fuels--1.4%
CNOOC Ltd. 4,902,500 3,319,528
Total Common Stocks in China 8,021,414
India--0.4%
Chemicals--0.0%
Reliance Industries Ltd. (Compulsory
Demat Shares) 110 2,174
Commercial Banks--0.0%
State Bank of India Ltd. 200 4,032
Construction & Engineering--0.4%
Nagarjuna Construction Co. (a)(b) 156,464 876,198
Total Common Stocks in India 882,404
Indonesia--2.3%
Automobiles--0.5%
Astra International Tbk PT 1,249,500 1,295,213
Diversified Telecommunication
Services--1.0%
Indosat Tbk PT 4,345,000 2,450,686
Gas Utilities--0.8%
Perusahaan Gas Negara PT 2,538,500 1,780,046
Total Common Stocks in Indonesia 5,525,945
Malaysia--0.5%
Commercial Banks--0.5%
Commerce Asset Holdings BHD 815,810 1,230,352
Total Common Stocks in Malaysia 1,230,352
Philippines--0.5%
Real Estate--0.5%
SM Prime Holdings 7,774,000 1,158,001
Total Common Stocks in the Philippines 1,158,001
South Korea--19.9%
Building Products--0.7%
KCC Corp. 8,539 1,773,943
Commercial Banks--6.0%
Industrial Bank of Korea 256,100 4,446,313
Kookmin Bank 130,751 9,895,090
-------------
14,341,403
Construction & Engineering--2.2%
GS Engineering & Construction Corp. 69,900 3,664,935
Joongang Construction Co. Ltd. 27,080 712,596
Korea Development Corp. 21,090 801,163
-------------
5,178,694
Diversified Financial
Services--0.9%
GS Holdings Corp. 96,484 2,247,809
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Pacific Basin/Asia (continued)
South Korea (concluded)
Diversified Telecommunication
Services--0.4%
KT Corp. 25,500 $ 1,030,494
Oil, Gas & Consumable
Fuels--0.9%
SK Corp. 41,300 2,128,634
Semiconductors & Semiconductor
Equipment--6.3%
Samsung Electronics Co., Ltd. 23,143 15,087,537
Trading Companies
& Distributors--1.7%
Samsung Corp. 195,930 4,186,663
Wireless Telecommunication
Services--0.8%
SK Telecom Co., Ltd. 10,390 1,860,405
Total Common Stocks in
South Korea 47,835,582
Sri Lanka--0.3%
Wireless Telecommunication
Services--0.3%
Dialog Telekom Ltd. (a) 4,610,100 744,985
Total Common Stocks in
Sri Lanka 744,985
Taiwan--17.0%
Communications Equipment--1.1%
D-Link Corp. 2,253,900 2,580,356
Computers & Peripherals--3.8%
Asustek Computer, Inc. 818,000 2,515,544
LITE-ON IT Corp. 2,081,250 2,724,896
Lite-On Technology Corp. 1,813,000 2,470,290
Quanta Computer, Inc. 1,091,540 1,532,138
-------------
9,242,868
Electronic Equipment
& Instruments--6.4%
Chi Mei Optoelectronics Corp. 2,025,000 2,996,529
Delta Electronics, Inc. 1,724,574 3,533,899
Optimax Technology Corp. 1,856,733 3,171,535
Wintek Corp. 3,441,826 5,575,165
-------------
15,277,128
Health Care Equipment
& Supplies--0.3%
Pihsiang Machinery
Manufacturing Co., Ltd. 505,760 774,586
Semiconductors & Semiconductor
Equipment--4.7%
Advanced Semiconductor
Engineering Inc. 4,362,972 3,998,583
MediaTek, Inc. 240,000 2,828,000
Pro Mos Technologies Inc. 11,771,676 4,516,126
-------------
11,342,709
Wireless Telecommunication
Services--0.7%
Taiwan Cellular Corp. 1,855,500 1,621,437
Total Common Stocks in Taiwan 40,839,084
Shares
Industry Common Stocks Held Value
Pacific Basin/Asia (concluded)
Thailand--4.3%
Commercial Banks--2.3%
Bangkok Bank PCL Foreign Shares 906,790 $ 2,543,435
Bank of Ayudhya Pcl 7,513,900 2,950,580
-------------
5,494,015
Diversified Telecommunication
Services--1.1%
True Corp. PCL (a) 11,529,600 2,812,098
Wireless Telecommunication
Services--0.9%
Advanced Info Service PCL
Foreign Shares 835,000 2,158,780
Total Common Stocks in Thailand 10,464,893
Total Common Stocks in the
Pacific Basin/Asia--48.5% 116,702,660
Total Common Stocks
(Cost--$173,322,332)--93.6% 225,614,526
Preferred Stocks
Pacific Basin/Asia
South Korea--1.5%
Household Durables--1.5%
LG Electronics, Inc., 2.61% 60,880 3,583,479
Total Preferred Stocks
(Cost--$2,955,643)--1.5% 3,583,479
Structured Notes
Pacific Basin/Asia
India--4.7%
Capital Markets--2.0%
Deutsche Bank AG (Tata Motors Ltd.),
due 6/18/2007 117,610 1,696,148
Deutsche Bank AG (Voltas Ltd.),
due 11/26/2007 106,109 1,415,929
UBS AG Zero-Coupon Equity-Linked
Note (Jaiprakash Associates Ltd.),
due 2/28/2006 184,280 1,590,336
-------------
4,702,413
Diversified Financial Services--2.7%
Citigroup Global Markets Holdings, Inc.
(Infosys Technologies Ltd.),
due 1/19/2009 47,460 3,139,954
Citigroup Global Markets Holdings, Inc.
(Tata Consultancy Services Ltd.),
due 1/20/2009 68,994 2,591,415
Morgan Stanley (Bharti Tele-Ventures
Ltd.), due 8/10/2007 109,570 839,109
-------------
6,570,478
Total Structured Notes
(Cost--$8,680,123)--4.7% 11,272,891
Total Investments
(Cost--$184,958,098*)--99.8% 240,470,896
Other Assets Less Liabilities--0.2% 412,601
-------------
Net Assets--100.0% $ 240,883,497
=============
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments
as of December 31, 2005, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 185,491,049
=================
Gross unrealized appreciation $ 58,447,323
Gross unrealized depreciation (3,467,476)
-----------------
Net unrealized appreciation $ 54,979,847
=================
(a) Non-income producing security.
(b) Depositary receipts.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Forward foreign exchange contracts as of December 31, 2005 were as follows:
Foreign Currency Settlement Unrealized
Purchased Date Appreciation
SGD 50,061 January 2006 $ 62
------------
Total Unrealized Appreciation on Forward Foreign
Exchange Contracts--Net (USD Commitment--$30,049) $ 62
============
o Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ (3,912,962) $ 23,794
o Currency Abbreviations
SGD Singapore Dollar
USD U.S. Dollar
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Statement of Assets and Liabilities
As of December 31, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$184,958,098) $ 240,470,896
Foreign cash (cost--$809,000) 810,383
Unrealized appreciation on forward foreign exchange contracts 62
Receivables:
Securities sold $ 1,465,114
Dividends 597,805
Capital shares sold 272,615
Interest from affiliates 2,282 2,337,816
---------------
Prepaid expenses 40,093
---------------
Total assets 243,659,250
---------------
Liabilities
Deferred foreign capital gain tax 372
Payables:
Custodian 1,621,656
Securities purchased 404,856
Capital shares redeemed 266,531
Investment adviser 179,649
Other affiliates 110,106
Distributor 59,465 2,642,263
---------------
Accrued expenses 133,118
---------------
Total liabilities 2,775,753
---------------
Net Assets
Net assets $ 240,883,497
===============
Net Assets Consist of
Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized $ 526,028
Class B Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 109,904
Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 105,051
Class I Shares of Common Stock, $.10 par value, 100,000,000 shares authorized 339,863
Paid-in capital in excess of par 207,128,579
Undistributed investment income--net $ 324,862
Accumulated realized capital losses--net (23,164,725)
Unrealized appreciation--net 55,513,935
---------------
Total accumulated earnings--net 32,674,072
---------------
Net Assets $ 240,883,497
===============
Net Asset Value
Class A--Based on net assets of $118,090,887 and 5,260,283 shares outstanding $ 22.45
===============
Class B--Based on net assets of $23,118,028 and 1,099,040 shares outstanding $ 21.03
===============
Class C--Based on net assets of $22,003,455 and 1,050,509 shares outstanding $ 20.95
===============
Class I--Based on net assets of $77,671,127 and 3,398,625 shares outstanding $ 22.85
===============
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Statement of Operations
For the Six Months Ended December 31, 2005
Investment Income
Dividends (net of $451,216 foreign withholding tax) $ 2,566,035
Interest from affiliates 23,794
---------------
Total income 2,589,829
---------------
Expenses
Investment advisory fees $ 1,074,287
Custodian fees 152,088
Account maintenance fees--Class A 128,322
Account maintenance and distribution fees--Class B 118,286
Transfer agent fees--Class I 100,921
Account maintenance and distribution fees--Class C 93,159
Transfer agent fees--Class A 68,756
Accounting services 61,787
Professional fees 33,459
Printing and shareholder reports 29,941
Registration fees 29,879
Transfer agent fees--Class B 27,166
Transfer agent fees--Class C 21,369
Directors' fees and expenses 21,366
Pricing fees 3,299
Other 26,704
---------------
Total expenses 1,990,789
---------------
Investment income--net 599,040
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss)on:
Investments--net 24,697,943
Foreign currency transactions--net (491,106) 24,206,837
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (including $12,268 of deferred foreign capital gain tax) 30,951,248
Foreign currency transactions--net 17,337 30,968,585
--------------- ---------------
Total realized and unrealized gain--net 55,175,422
---------------
Net Increase in Net Assets Resulting from Operations $ 55,774,462
===============
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2005 2005
Operations
Investment income--net $ 599,040 $ 1,609,485
Realized gain--net 24,206,837 29,087,784
Change in unrealized appreciation/depreciation--net 30,968,585 22,512,047
--------------- ---------------
Net increase in net assets resulting from operations 55,774,462 53,209,316
--------------- ---------------
Dividends to Shareholders
Investment income--net:
Class A (327,908) --
Class I (368,168) --
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (696,076) --
--------------- ---------------
Capital Share Transactions
Net decrease in net assets derived from capital share transactions (8,793,701) (46,837,155)
--------------- ---------------
Redemption Fees
Redemption fees 427 7,146
--------------- ---------------
Net Assets
Total increase in net assets 46,285,112 6,379,307
Beginning of period 194,598,385 188,219,078
--------------- ---------------
End of period* $ 240,883,497 $ 194,598,385
=============== ===============
* Undistributed investment income--net $ 324,862 $ 421,898
=============== ===============
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Financial Highlights
Class A
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 17.41 $ 13.16 $ 10.27 $ 10.19 $ 10.35
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .06 .15 .02 .01 (.06)
Realized and unrealized gain (loss)--net 5.04+++ 4.10+++ 2.92 .07 (.10)
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.10 4.25 2.94 .08 (.16)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.06) -- (.05) -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 22.45 $ 17.41 $ 13.16 $ 10.27 $ 10.19
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 29.37%++ 32.29% 28.71% .79% (1.55%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, net of waiver and excluding
reorganization expenses 1.78%* 1.85% 2.12% 2.40% 2.44%
========== ========== ========== ========== ==========
Expenses, net of waiver 1.78%* 1.85% 2.25% 2.40% 2.44%
========== ========== ========== ========== ==========
Expenses 1.78%* 1.88% 2.25% 2.40% 2.44%
========== ========== ========== ========== ==========
Investment income (loss)--net .62%* .94% .17% .07% (.61%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 118,091 $ 91,292 $ 79,383 $ 12,353 $ 11,460
========== ========== ========== ========== ==========
Portfolio turnover 60.78% 110.07% 182.51% 77.68% 114.72%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Includes redemption fees, which are less than $.01 per share.
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Financial Highlights (continued)
Class B
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 16.32 $ 12.44 $ 9.74 $ 9.75 $ 9.98
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** (.01) .02 (.08) (.09) (.14)
Realized and unrealized gain (loss)--net 4.72+++ 3.86+++ 2.78 .08 (.09)
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.71 3.88 2.70 (.01) (.23)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 21.03 $ 16.32 $ 12.44 $ 9.74 $ 9.75
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 28.86%++ 31.19% 27.72% (.10%) (2.30%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, net of waiver and excluding
reorganization expenses 2.56%* 2.65% 2.93% 3.25% 3.25%
========== ========== ========== ========== ==========
Expenses, net of waiver 2.56%* 2.65% 3.06% 3.25% 3.25%
========== ========== ========== ========== ==========
Expenses 2.56%* 2.68% 3.06% 3.25% 3.25%
========== ========== ========== ========== ==========
Investment income (loss)--net (.08%)* .11% (.66%) (.98%) (1.45%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 23,118 $ 24,333 $ 30,102 $ 15,106 $ 25,714
========== ========== ========== ========== ==========
Portfolio turnover 60.78% 110.07% 182.51% 77.68% 114.72%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Includes redemption fees, which are less than $.01 per share.
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Financial Highlights (continued)
Class C
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 16.25 $ 12.38 $ 9.70 $ 9.71 $ 9.94
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** (.02) .02 (.07) (.07) (.14)
Realized and unrealized gain (loss)--net 4.72+++ 3.85+++ 2.75 .06 (.09)
---------- ---------- ---------- ---------- ----------
Total from investment operations 4.70 3.87 2.68 (.01) (.23)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 20.95 $ 16.25 $ 12.38 $ 9.70 $ 9.71
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 28.92%++ 31.26% 27.63% (.10%) (2.31%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, net of waiver and excluding
reorganization expenses 2.56%* 2.65% 2.93% 3.24% 3.26%
========== ========== ========== ========== ==========
Expenses, net of waiver 2.56%* 2.65% 3.07% 3.24% 3.26%
========== ========== ========== ========== ==========
Expenses 2.56%* 2.68% 3.07% 3.24% 3.26%
========== ========== ========== ========== ==========
Investment income (loss)--net (.20%)* .16% (.62%) (.84%) (1.46%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 22,003 $ 15,956 $ 14,903 $ 4,946 $ 5,938
========== ========== ========== ========== ==========
Portfolio turnover 60.78% 110.07% 182.51% 77.68% 114.72%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Includes redemption fees, which are less than $.01 per share.
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Consolidated Financial Highlights (concluded)
Class I
For the Six
Months Ended
The following per share data and ratios have been derived December 31, For the Year Ended June 30,
from information provided in the financial statements. 2005 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 17.74 $ 13.37 $ 10.42 $ 10.33 $ 10.46
---------- ---------- ---------- ---------- ----------
Investment income (loss)--net*** .09 .18 .06 .02 (.04)
Realized and unrealized gain (loss)--net 5.12+++ 4.19+++ 2.96 .07 (.09)
---------- ---------- ---------- ---------- ----------
Total from investment operations 5.21 4.37 3.02 .09 (.13)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.10) -- (.07) -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 22.85 $ 17.74 $ 13.37 $ 10.42 $ 10.33
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 29.49%++ 32.69% 29.11% .87% (1.24%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, net of waiver and excluding
reorganization expenses 1.53%* 1.60% 1.88% 2.15% 2.18%
========== ========== ========== ========== ==========
Expenses, net of waiver 1.53%* 1.60% 2.02% 2.15% 2.18%
========== ========== ========== ========== ==========
Expenses 1.53%* 1.63% 2.02% 2.15% 2.18%
========== ========== ========== ========== ==========
Investment income (loss)--net .88%* 1.18% .43% .24% (.37%)
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 77,671 $ 63,018 $ 63,831 $ 28,786 $ 34,894
========== ========== ========== ========== ==========
Portfolio turnover 60.78% 110.07% 182.51% 77.68% 114.72%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the effect of sales charges. Effective December 28, 2005,
Class I Shares are no longer subject to any front-end sales charge.
*** Based on average shares outstanding.
++ Aggregate total investment return.
+++ Includes redemption fees, which are less than $.01 per share.
See Notes to Consolidated Financial Statements.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Notes to Consolidated Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Developing Capital Markets Fund, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
open-end management investment company. The Fund's financial statements are
prepared in conformity with U.S. generally accepted accounting principles,
which may require the use of management accruals and estimates. Actual results
may differ from these estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to present
a fair statement of the results for the interim period. All such adjustments
are of a normal, recurring nature. The Fund offers multiple classes of shares.
Effective December 28, 2005, Class I Shares are no longer subject to any front-
end sales charge. Class A Shares are sold with a front-end sales charge.
Shares of Class B and Class C may be subject to a contingent deferred sales
charge. Class I Shares are sold only to certain retirement plans and
investment programs. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class A, Class B and Class C Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares also bear
certain expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its account
maintenance and distribution expenditures (except that Class B shareholders
may vote on certain changes to the Class A distribution plan). Income,
expenses (other than expenses attributable to a specific class) and realized
and unrealized gains and losses are allocated daily to each class based on its
relative net assets. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
asked price for short positions. In cases where equity securities are traded
on more than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the Board of
Directors of the Fund. Long positions traded in the over-the-counter ("OTC")
market, Nasdaq Small Cap or Bulletin Board are valued at the last available
bid price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Directors of the Fund. Short positions
traded in the OTC market are valued at the last available asked price.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased are valued at their last sale price in the case
of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Swap agreements are valued based upon quoted fair
valuations received daily by the Fund from a pricing service or counterparty.
Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless the Investment Adviser believes that this method no
longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund
employs pricing services to provide certain securities prices for the Fund.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund, including valuations furnished by the
pricing services retained by the Fund, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are
reviewed by the officers of the Fund under the general supervision of the
Fund's Board of Directors. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities, is
substantially completed each day at various times prior to the close of
business on the New York Stock Exchange ("NYSE"). The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that may not be reflected in the computation of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of
Directors or by the Investment Adviser using a pricing service and/or
procedures approved by the Fund's Board of Directors.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Notes to Consolidated Financial Statements (continued)
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--The Fund may enter into forward foreign
exchange contracts as a hedge against either specific transactions or
portfolio positions. The contract is marked-to-market daily and the change in
market value is recorded by the Fund as an unrealized gain or loss. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value at the time it was opened and the value at the
time it was closed.
* Foreign currency options and futures--The Fund may also purchase or sell
listed or over-the-counter foreign currency options, foreign currency futures
and related options on foreign currency futures as a short or long hedge
against possible variations in foreign exchange rates. Such transactions may
be effected with respect to hedges on non-U.S. dollar-denominated securities
owned by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.
* Options--The Fund may write put and covered call options and purchase call
and put options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid
(or received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security sold.
When an option expires (or the Fund enters into a closing transaction), the
Fund realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the closing
transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts. Futures contracts are
contracts for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into U.S. dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange rates
on investments. The Fund invests in foreign securities, which may involve a
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Dividends from foreign securities where the ex-dividend date may have passed
are subsequently recorded when the Fund has determined the ex-dividend date.
Interest income is recognized on the accrual basis.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Notes to Consolidated Financial Statements (continued)
(f) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(h) Basis of consolidation--The accompanying consolidated financial statements
include the accounts of Inversiones en Marcado Accionario de Valores Chile
Limitada, a wholly-owned subsidiary, which primarily invests in Chilean
securities. Intercompany accounts and transactions have been eliminated.
(i) Custodian--The Fund recorded an amount payable to the custodian reflecting
an overnight overdraft, which resulted from management estimates of available
cash.
(j) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash as collateral, it may invest
such collateral and retain the amount earned on such investment, net of any
amount rebated to the borrower. Loans of securities are terminable at any time
and the borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's, lending
agent, administrative and custodial fees in connection with its loans. In the
event that the borrower defaults on its obligation to return borrowed
securities because of insolvency or for any other reason, the Fund could
experience delays and costs in gaining access to the collateral. The Fund also
could suffer a loss where the value of the collateral falls below the market
value of the borrowed securities, in the event of borrower default or in the
event of losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch
& Co., Inc. ("ML & Co."), which is a limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with FAM
Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLIM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee of 1.0%, on an annual basis, of the average daily value of the
Fund's net assets. MLIM has entered into a Sub-Advisory Agreement with Merrill
Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM,
pursuant to which MLAM U.K. provides investment advisory services to MLIM with
respect to the Fund. There was no increase in aggregate fees paid by the Fund
for these services.
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIM, also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B, Class C and Class R shareholders.
The ongoing distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B and Class C
shareholders.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Notes to Consolidated Financial Statements (continued)
For the six months ended December 31, 2005, FAMD earned underwriting discounts
and direct commissions and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class I Shares as follows:
FAMD MLPF&S
Class A $ 1,046 $ 12,727
Class I $ 188 $ 2,453
For the six months ended December 31, 2005, MLPF&S received contingent
deferred sales charges of $3,939 and $907 relating to transactions in Class B
and Class C Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the
securities lending agent for a fee based on a share of the returns on
investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest
cash collateral received by the Fund for such loans, among other things, in a
private investment company managed by MLIM, LLC or in registered money market
funds advised by MLIM or its affiliates.
In addition, MLPF&S received $7,473 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended December
31, 2005.
For the six months ended December 31, 2005, the Fund reimbursed MLIM $2,064
for certain accounting services.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, MLAM U.K., FDS, FAMD, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
six months ended December 31, 2005 were $128,896,122 and $132,112,106,
respectively.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$8,793,701 and $46,837,155 for the six months ended December 31, 2005 and the
year ended June 30, 2005, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 223,016 $ 4,402,886
Automatic conversion of shares 261,738 5,087,203
Shares issued in reinvestment of
dividends 13,527 258,631
--------------- ---------------
Total issued 498,281 9,748,720
Shares redeemed (482,343) (9,466,145)
--------------- ---------------
Net increase 15,938 $ 282,575
==============- ===============
Class A Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 319,512 $ 5,123,312
Automatic conversion of shares 428,810 6,675,398
--------------- ---------------
Total issued 748,322 11,798,710
Shares redeemed (1,535,542) (23,700,686)
--------------- ---------------
Net decrease (787,220) $ (11,901,976)
==============- ===============
Class B Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 81,893 $ 1,497,475
--------------- ---------------
Automatic conversion of shares (279,077) (5,087,203)
Shares redeemed (194,654) (3,521,671)
--------------- ---------------
Total redeemed (473,731) (8,608,874)
--------------- ---------------
Net decrease (391,838) $ (7,111,399)
==============- ===============
Class B Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 141,966 $ 2,114,601
--------------- ---------------
Automatic conversion of shares (455,567) (6,675,398)
Shares redeemed (615,817) (8,836,600)
--------------- ---------------
Total redeemed (1,071,384) (15,511,998)
--------------- ---------------
Net decrease (929,418) $ (13,397,397)
==============- ===============
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Notes to Consolidated Financial Statements (concluded)
Class C Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 155,557 $ 2,874,069
Shares redeemed (86,823) (1,598,948)
--------------- ---------------
Net increase 68,734 $ 1,275,121
==============- ===============
Class C Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 168,366 $ 2,643,312
Shares redeemed (389,951) (5,585,830)
--------------- ---------------
Net decrease (221,585) $ (2,942,518)
==============- ===============
Class I Shares for the
Six Months Ended Dollar
December 31, 2005 Shares Amount
Shares sold 157,936 $ 3,133,055
Shares issued to shareholders in
reinvestment of dividends 14,968 291,127
--------------- ---------------
Total issued 172,904 3,424,182
Shares redeemed (327,525) (6,664,180)
--------------- ---------------
Net decrease (154,621) $ (3,239,998)
==============- ===============
Class I Shares for the Year Dollar
Ended June 30, 2005 Shares Amount
Shares sold 295,437 $ 4,761,988
Shares redeemed (1,514,878) (23,357,252)
--------------- ---------------
Net decrease (1,219,441) $ (18,595,264)
==============- ===============
The Fund charges a 2% redemption fee on the proceeds (calculated at market
value) of a redemption (either by sale or exchange) of Fund shares made within
30 days of purchase or exchange. The redemption fee is paid to the Fund and is
intended to offset the trading costs, market impact and other costs associated
with short-term trading into and out of the Fund.
5. Short-Term Borrowings:
The Fund, along with certain other funds managed by MLIM and its affiliates,
is a party to a $500,000,000 credit agreement with a group of lenders. The
Fund may borrow under the credit agreement to fund shareholder redemptions and
for other lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus and statement
of additional information, subject to various other legal, regulatory or
contractual limits. The Fund pays a commitment fee of .07% per annum based on
the Fund's pro rata share of the unused portion of the credit agreement.
Amounts borrowed under the credit agreement bear interest at a rate equal to,
at each Fund's election, the federal funds rate plus .50% or a base rate as
defined in the credit agreement. The Fund did not borrow under the credit
agreement during the six months ended December 31, 2005. On November 23, 2005,
the credit agreement was renewed for one year under substantially the same
terms.
6. Capital Loss Carryforward:
On June 30, 2005, the Fund had a net capital loss carryforward of $43,911,834,
of which $10,794,214 expires in 2007, $18,644,500 expires in 2008, $10,854,840
expires in 2010 and $3,618,280 expires in 2011. This amount will be available
to offset like amounts of any future taxable gains.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Merrill Lynch Investment Managers, L.P. (the "Investment
Adviser") or other Merrill Lynch affiliates is as a director of the Fund and
as a trustee or director of certain other funds advised by the Investment
Adviser or its affiliates. The Chairman of the Board is also an independent
director. New director nominees are chosen as nominees by a Nominating
Committee comprised of independent directors. All independent directors also
are members of the Board's Audit Committee and the independent directors meet
in executive session at each in-person Board meeting. The Board and the Audit
Committee meet in person for at least two days each quarter and conduct other
in-person and telephone meetings throughout the year, some of which are formal
Board meetings, and some of which are informational meetings. The independent
counsel to the independent directors attends all in-person Board and Audit
Committee meetings and other meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board also annually
reviews and considers approval of the sub-advisory agreement on behalf of the
Fund between the Investment Adviser and Merrill Lynch Asset Management U.K.
Limited (the "sub-adviser"). The Board assesses the nature, scope and quality
of the services provided to the Fund by the personnel of the Investment
Adviser, the sub-adviser and their affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing
services and assistance in meeting legal and regulatory requirements. The
Board also receives and assesses information regarding the services provided
to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates, including the sub-adviser. Among the
matters considered are: (a) fees (in addition to management fees) paid to the
Investment Adviser and its affiliates by the Fund, such as transfer agency
fees and fees for marketing and distribution; (b) Fund operating expenses
paid to third parties; (c) the resources devoted to and compliance reports
relating to the Fund's investment objective, policies and restrictions, and
its compliance with its Code of Ethics and compliance policies and procedures;
and (d) the nature, cost and character of non-investment management services
provided by the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial
firms. The Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, the Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement and the sub-advisory agreement, the Board requests and
receives materials specifically relating to the Fund's Investment Advisory
Agreement and/or the sub-advisory agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses and
the investment performance of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) sales and redemption data for the Fund; (c)
a discussion by the Fund's portfolio management team of investment strategies
used by the Fund during its most recent fiscal year; (d) information on the
profitability to the Investment Adviser and its affiliates of the Investment
Advisory Agreement, the sub-advisory agreement and other relationships with
the Fund; and (e) information provided by the Investment Adviser concerning
investment advisory fees charged to other clients, such as institutional
funds, under similar investment mandates. Since the sub-advisory services are
provided by an affiliate of the Investment Adviser, and no additional fee is
paid for these services, the Board considered the sub-advisory agreement and
Investment Advisory Agreement together. The Board also considers other matters
it deems important to the approval process such as payments made to the
Investment Adviser or its affiliates relating to the distribution of Fund
shares, services related to the valuation and pricing of Fund portfolio
holdings, allocation of Fund brokerage fees (including the related benefits to
the Investment Adviser of "soft dollars"), the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Investment Adviser and the
sub-adviser and their affiliates from their relationship with the Fund.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement (continued)
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement and the sub-advisory agreement in November 2005, the independent
directors' and Board's review included the following:
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser and the sub-
adviser, including the investment advisory services and the resulting
performance of the Fund. The Board focused primarily on the Investment
Adviser's investment advisory services and the Fund's investment performance.
The Board compared Fund performance - both including and excluding the effects
of the Fund's fees and expenses - to the performance of a comparable group of
mutual funds, and the performance of a relevant index or combination of
indexes. While the Board reviews performance data at least quarterly,
consistent with the Investment Adviser's investment goals, the Board attaches
more importance to performance over relatively long periods of time, typically
three to five years. For the periods ended August 31, 2005, the Fund's
performance after fees and expenses ranked in the third quintile for the one-
year period and in the fifth quintile for the three- and five-year periods.
The Board also noted that management had added more portfolio management
resources since the previous year. The Board considered that the Investment
Adviser had agreed to continue its agreement to waive a portion of the Fund's
management fee if the Fund's performance significantly lagged its peers for a
specified period. Taking into account management's agreement to continue this
waiver arrangement, the Board concluded that the Fund's performance supported
the continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board reviews
at least annually the Fund's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
equity investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considers the size, education and
experience of the Investment Adviser's investment staff, its use of
technology, and the Investment Adviser's approach to training and retaining
portfolio and other research, advisory and management personnel. The Board
noted the additional resources made available by the Investment Adviser. The
Board also reviews the Investment Adviser's compensation policies and
practices with respect to the Fund's portfolio manager. The Board also
considered the experience of the Fund's portfolio manager and noted that Mr.
Moakes, who has been the portfolio manager since 2004, has over thirteen years
of experience in analyzing and investing in equity securities. Messrs.
Landers, Bourrier and Monovski assist Mr. Moakes in managing the Fund, and
each of them has over seven years of experience in analyzing and investing in
equity securities. The Board considered that the Investment Adviser and its
investment staff have extensive experience in analyzing and managing the types
of investments used by the Fund and has added staff focused on risk
management. The Board concluded that the Fund benefits from that expertise.
Management Fees and Other Expenses--The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by the Investment Adviser to other types of
clients with similar investment mandates, such as institutional funds. The
Board noted that the fees charged to the institutional funds were less than
those being charged to the Fund. The Board also noted that MLIM provides a
number of services to mutual funds that are not provided to institutional
funds, including detailed annual and semi-annual shareholder reports;
quarterly portfolio holdings' comprehensive compliance regulations and
procedures; periodic SEC filings; oversight and coordination with other
service providers such as transfer agents; organizing and preparing Board
materials for quarterly and interim meetings as required; and administering
other operations such as tax-reporting. The Fund's contractual management fee
rate and actual management fee rates, as well as the Fund's actual total
expenses, were below the median management fees and total expenses charged by
comparable funds as determined by Lipper. The Board has concluded that the
Fund's management fee rate and overall expense ratio (including the fee waiver
agreement) are acceptable when compared to those of other comparable funds.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Disclosure of Investment Advisory Agreement (concluded)
Profitability--The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its
affiliates' profits relating to the management and distribution of the Fund
and the MLIM/FAM-advised funds. As part of its analysis, the Board reviewed
the Investment Adviser's methodology in allocating its costs to the management
of the Fund and concluded that there was a reasonable basis for the allocation.
The Board also considered federal court decisions discussing an investment
adviser's profitability and profitability levels considered to be reasonable
in those decisions. The Board believes that the profits of the Investment
Adviser and its affiliates are acceptable in relation to the nature and
quality of services provided and given the level of fees and expenses overall.
Economies of Scale--The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable
the Fund to participate in these economies of scale. While there was no
evidence to date that the Fund's assets have reached a level where such
economies are effectively available, the Board will continue to seek
information relating to economies of scale. The Board determined that no
changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement and sub-advisory agreement, concluding
that the advisory fee was reasonable in relation to the services provided and
that a contract renewal was in the best interests of the shareholders.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Officers and Directors
Robert C. Doll, Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Nicholas D. Moakes, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02119-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FUND, INC. DECEMBER 31, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
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.
Merrill Lynch Developing Capital Markets Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Developing Capital Markets Fund, Inc.
Date: February 21, 2006
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.
By: /s/ Robert C. Doll, Jr.
-----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Developing Capital Markets Fund, Inc.
Date: February 21, 2006
By: /s/ Donald C. Burke
-----------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Developing Capital Markets Fund, Inc.
Date: February 21, 2006